Rising fuel prices could end low-cost air travel to Mexico

MEXICO CITY - Skyrocketing fuel prices are rocking the Mexican airline industry, leading to steep fare increases, the slashing of routes and what some analysts fear could be the end of low cost air travel south of the border.

Experts say the current woes could lead to the disappearance of several Mexican airlines and an era of consolidation that could see just a handful of Mexico's 14 carriers survive. At greatest risk, they say, are Mexico's fledgling low-cost carriers, which entered the market in 2005 and had a profound effect, causing traditional airlines to lower ticket prices and bringing thousands of first-time fliers into the skies.

"We are returning to the time of (expensive tickets)," said Juan Antonio Jose, an independent airline analyst in Mexico City. "Cheap tickets are history. Forget about them."

With jet fuel costs up more than 70 percent in the last year, Mexican airlines have raised prices about 25 percent since the beginning of the year, and Jose expects price hikes to hit 50 percent by the end of 2008. Most sensitive to the fare increases are the legion of fliers who were lured from buses by the low cost carriers. According to low cost carrier Volaris, about one-third of passengers are first-time fliers.

But an extended period of higher fares could drive that demographic away. "They could migrate back (to bus travel)," said Francisco Guzman, an airline analyst with Scotia Capital in Mexico City. "But it depends on how long this lasts. If it's prolonged, say two years, that would be very bad for aviation and good for buses."

The burgeoning crisis has already had an impact on international flights to Mexico. International prices on legacy airlines Mexicana and Aeromexico have risen sharply. A round-trip flight on Mexicana between San Antonio and Mexico City is about $600, a far cry from the $100 one-way tickets the airline was selling in the spring of 2006.

Delta Airlines, like other American airlines, has cut or suspended several Mexico routes in the last year, including flights between Atlanta and Leon and Merida.

Among the reasons international airlines have cut flights to such secondary markets is the slowdown in migrants flying, analysts say. Migrants returning to the border had also fueled the success of some of Mexico's low-cost carriers. But because of stricter border enforcement, fewer migrants are making frequent visits home, adding to the malaise.

In all, Mexican airlines have cut about 15 percent of their routes, according to the Secretary of Communications and Transportation. As in the U.S., several airlines have grounded their planes, preferring to not fly at all than risk losses on unprofitable routes. Discount airlines Avolar and Aviacsa have reportedly grounded about half their fleets in recent months, according to Mexican press reports.

Most low-cost airlines have targeted former bus riders and offered prices slightly higher than those of Mexico's luxury bus lines. But that may be harder to do as bus companies attempt to take advantage of the airline crisis.

In recent weeks, several Mexican bus companies have announced dramatic drops in prices, which they are able to do in part because the Mexican government subsidizes gasoline (diesel goes for about $2.20 per gallon). Mexican airlines have asked for a similar subsidy for jet fuel, but so far the Mexican government has opposed such help for the airlines.

Source: dallasnews.com