BUSINESS SECTION

 

(Bloomberg) – August 4, 2005 - Mexico's domestic airfares, often more expensive than international flights, may plunge as much as 50 percent after new discount carriers begin flying and the government sells two airlines to private investors.

 

Mexican billionaires Carlos Slim and Emilio Azcarraga unveiled plans last week for a low-fare domestic startup, bringing to four the number of such airlines the Transportation Ministry says will offer service by early next year. The government also completed its bidding process for the nation's two state airlines, Aeromexico and Mexicana.

 

``Our main objective is to make air travel affordable for the portion of the population that currently cannot afford to benefit from the efficiency, comfort and safety of flying,'' said Gilberto Lopez Meyer, Mexico's civil aviation director. The competition may cut domestic airfares in half, Lopez Meyer said in a telephone interview from his Mexico City office.

 

Government-controlled Aeromexico, the country's largest carrier, charges 5,584 pesos ($526) for a round-trip flight from Mexico City to the beach resort of Cancun, more than a United Airlines round-trip fare to Washington D.C., which is $492.72. Both fares were for bookings made online for the weekend of Aug. 12 and include taxes. Cancun is 1,300 kilometers (808 miles) from Mexico City; Washington D.C. is 3,029 kilometers.

 

A U.S. tourist could fly to Cancun from Detroit and back for $393.16 on Miramar, Florida-based Spirit Airlines Inc.

 

Mexico is Latin America's second-largest aviation market after Brazil, with 20 million passengers a year.

 

Slim, Azcarraga

 

Mexico's untapped potential for air travel is luring investors such as Slim, Grupo Televisa SA's Chairman Azcarraga, U.S. hedge fund Discovery Fund Services in South Norwalk, Connecticut and former Finance Minister Pedro Aspe. Together with El Salvador's Taca International Airline, they plan to invest $100 million in a new carrier.

 

Gol Linhas Aereas Inteligentes SA, Brazil's third-largest airline, said July 5 it plans to take a 25 percent stake in an airline it will start with Mexican businessman Fernando Chico Pardo. Gol and Chico Pardo would join Slim's Vuela Compania de Aviacion SA, Avolar SA, InterJetABC and Aerolineas Mesoamericanas in seeking permission to start low-fare startup airlines.

 

``The fact that people are asking for new concessions clearly shows the potential that the Mexican aviation market has,'' Andres Conesa, chairman of Cintra SA, the government's holding company for its airlines, said in an interview in Mexico City.

 

Investors are drawn by the example of Sao Paulo-based Gol, a 2001 startup that's now a $3.3 billion company on the Brazilian stock exchange, said Jose Heredia, director of private equity at Grupo Financiero Inbursa SA, Slim's bank.

 

New Customers

 

``If there is a place that low-cost airlines must exist, it is in Latin America because it's a poor continent and people can't afford expensive tickets,'' said Humberto Folegatti, chief executive of Brazilian carrier BRA Transportes Aereos, one of two low-fare carriers that began operations after Gol.

 

Less than 4 percent of Brazil's population of 180 million fly regularly, Folegatti said from a telephone interview on July 18 from Sao Paulo, where BRA is based. In Mexico, Conesa said, airlines could capture 50 million of the country's 2.5 billion bus trips annually by adding low-fare routes.

 

To help reduce airfares, the Mexican government said yesterday it will give airlines discounts of up to 100 percent on service fees at all secondary airports to encourage the introduction of new routes. The biggest discounts will be for the Toluca airport, 69 kilometers from the center of Mexico City, the Transportation Ministry said in an e-mailed statement.

 

Iberia

 

Iberia Lineas Aereas de Espana SA, Spain's largest airline, is considering a bid, with Mexican partners, for government airlines Aeromexico and Mexicana, a spokesman for the Madrid-based company said in a telephone interview on Aug. 3. Aeromexico and Mexicana and their regional units carried two-thirds of the country's domestic passengers in 2004. Cintra, which controls the two companies, has a market capitalization of 7.82 billion pesos.

 

The government will name potential bidders by Aug. 9. Under Mexican law, foreigners are limited to a 25 percent stake in airlines.

 

``The Mexican market is sitting right next door to the biggest market, which is the U.S., and it has tremendous tourism potential,'' Robert Booth, who runs Miami-based consulting firm AvMan Inc. and whose clients include Mexicana and Virgin Atlantic, said in a telephone interview.

 

Conesa, who left the Finance Ministry in December to oversee the sale of Mexicana and Aeromexico, said he's preparing the airlines to compete by purchasing planes that use less fuel and cost less to maintain. As part of a reorganization of Cintra's assets, Conesa rebranded the regional unit of Mexicana as a low- fare carrier that charges about 30 percent less and sells tickets exclusively online.

 

Cintra

 

``We feel we're more than prepared to face the competition because of all we've done recently,'' Conesa said.

 

Cost cutting helped Cintra amass $400 million in cash on hand, the biggest amount since a recession in 1995 forced the government to take over Aeromexico and Mexicana, Conesa said. Cintra lost money in the second quarter as high fuel prices increased expenditures. It narrowed the loss to 295.6 million pesos from 490.5 million a year earlier.

To contact the reporter on this story: Adriana Arai at   aarai1@bloomberg.net

 (In accordance with Title 17 U.S.C. Section 107, this material is distributed by HispanicVista.com (www.hispanicvista.com) without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.)