Mexicana: “financial and labor situation is no longer sustainable” (files for protection)

August 3, 2010

Mexicana Boeing 767-3P6 XA-MXE (msn 23764) MEX (AirSpeed), originally uploaded by Airliners Gallery.

Compania Mexicana de Aviacion (CMA/Mexicana Airlines) (Mexico City, a subsidiary of Nuevo Grupo Aeronautico (NGA), informed the media and general public that the company’s financial and labor situation is no longer sustainable. Here is the full statement:

NGA’s CEO Manuel Borja called a press conference and gave several interviews informing the public of the situation CMA is facing and reassured passengers that it has not and will in no way affect the operations, flights or itineraries of MexicanaClick and MexicanaLink. Although they are also subsidiaries of NGA, these airlines operate under completely different business models; CMA is focused on the international market, while MexicanaClick and MexicanaLink cover the domestic market, said Borja.

The situation has forced CMA to make some minor adjustments to its international flight schedules.

Despite of investments of over US$300 million in credit lines and resources put up by NGA and its subsidiaries, MexicanaClick and MexicanaLink, CMA explained that its current financial situation is no longer tenable. Concerted efforts have been made over the last four and a half years to restructure costs, efforts that have translated into savings of some US$800 million as a direct result of investment in IT systems, new routes and more efficient aircraft, but have not been sufficient to offset its crew costs.

Although the airline’s operating costs excluding crew labor costs are 30% lower than the average of legacy airlines in the United States, these non competitive labor costs are the main reason why the company has continued to suffer losses, to the extent that it is now financially non-viable. According to company sources, CMA’s pilots earn 49% more than the average wage paid by legacy airlines in the United States and 185% more than the average pilots flying Airbus A320s for other Mexican low cost airlines like Volaris or Interjet. Likewise, Mexicana Airlines flight attendants earn 32% more than the U.S. average and 165% more than their Mexican counterparts employed by the same airlines.

Numbers confirm, that if the CMA’s collective contracts had been more competitive, instead of registering losses of US$350 million from 2007 to date, the company would have posted profits of US$350 million, illustrating that CMA does indeed have the potential to be a profitable, financially viable carrier.

However, in light of the current situation, CMA has presented its pilots’ and flight attendants’ unions with two alternatives.

The first is the option to enter into a new collective contract to secure the CMA’s long-term financial viability. This would imply accepting cuts of 41% and 39% in wages and fringe benefits for pilots and flight attendants, respectively. This alternative also calls for additional cost-cutting measures, including downsizing 40% of the airline’s pilots and flight attendants. On the upside, it incorporates a profit-sharing plan whereby the unions would get a percentage of any operating profits that exceed 5% of the company’s total revenues.

As a second alternative, stockholders have offered to sell CMA to its unions for the token sum of $1 peso, proving them convinced of the vital role these labor organizations will play in the future of the company. As the only entities capable of turning the situation around, CMA’s management have stated that it would be willing to transfer control of the airline to its unions. The transaction would require further and more detailed negotiations with the unions, but in broad terms would require NGA to assume liabilities of US$120 million in bank credit lines, while the unions would have the option of retaining a BANCOMEXT loan for US$80 million or transferring this credit line and its respective sureties to NGA. The unions would also be given a six-month permit for the use of the Mexicana Airlines brand name, among other measures designed to allow for a smooth transition.

In response to statements by representatives of the pilots union (ASPA) to the effect that both proposals outlined by CMA would be rejected, the company said that it is time to acknowledge reality, that the paradigm of commercial aviation has changed worldwide and that only airlines that operate at competitive costs can hope to survive and continue flying. CMA will continue to negotiate with its unions.

As a result, Mexicana filed for creditor protection on August 2 in both Mexico (Concurso Mercantil) and the USA (Chapter 15) after the company and the unions failed to agree on wage and staff cuts to keep the debt-ridden airline flying.

Copyright Photo: AirSpeed. Boeing 767-3P6 XA-MXE (msn 23764) of Mexicana arrives at the MEX base.