On Dec 18, the US Department of Transportation announced the signing of a new air transport deal between the U.S. and the Mexican government. The treaty, inked by the transportation ministers of both the countries, follows more than two years of negotiations on the issue. The liberalized deal has already won approval from the U.S. government but needs to be ratified by the Mexican senate before it goes into effect.
What's the Deal About?
The new aviation treaty, inked in Washington, is designed to remove the restrictions on the two countries, existing as per the current deal. This will allow freedom to the carriers to operate on any route (with limitless frequency) of their choice between the neighboring countries. The liberalized deal, once operational, will do away with the existing framework that allows only a handful of carriers from each country on about 30 specified routes between the nations.
With competition likely to intensify across the cross-border routes, once operational, the deal should help make airfares across the routes more pocket friendly. This is reason enough for fliers to welcome the deal with open arms. Carriers will have the liberty to set prices for flights connecting cities in the U.S. and Mexico, as per the new deal.
The enhanced freedom under the new deal will allow both countries to designate at least two or three airlines to operate on a particular route. Traffic should get a boost once the deal becomes operational.
Needless to say, the landmark deal, once effective, should prove highly beneficial for U.S. and Mexican carriers, and find favor with flyers as well. We believe this will also help strengthen the commercial and economic relationship between the two countries. We note, in this regard, that Mexico was one of the few countries with which the U.S. did not have a modernized air treaty.
Deal Unlikely to be Operational from New Year’s Day?
The new deal, which was originally scheduled to come into effect from Jan 1, 2016, is unlikely to be ratified by the Mexican senate so soon, according to a report appearing in ATW. The report suggests that the Mexican clearance, however, should be in place by Mar 31, 2016.
The report highlights that certain mismatch between the Spanish translated version of the deal and the original English one is one of the main reasons for the delay. Reconciliation across the versions, which is necessary for the deal to see the light of the day, was in progress between both the governments for multiple months, which ate up a lot of time. A report appearing in the Wall Street Journal (WSJ) suggests that the Mexican senate might ratify the new aviation treaty in February when the legislators are scheduled to deliberate on the issue.
Although the new deal promises carriers to ample operational freedom across the border, some hurdles remain, according to the WSJ report. The report suggests that certain airports like the Benito Juárez International Airport in Mexico City are already very congested and do not have the required number of additional slots (appointments pertaining to takeoff and landing) to allow for such unrestricted travel.
Consequently, airports with limited number of slots might still remain inaccessible for carriers who do not currently operate on the concerned route. It would be interesting to see how the concerned airports tackle the issue pertaining to the availability of slots once the deal becomes operational.
Carriers to Benefit
The deal has been warmly welcomed by carriers in both the countries. Carriers like JetBlue Airways JBLU, United Continental Holdings UAL, American Airlines Group AAL, Aeromexico and Controladora Vuela Compañía de Aviación, S.A.B. de C.V. or Volaris VLRS hold the tentative deal in positive light.
Long Island City, NY-based low-cost carrier JetBlue Airways has an extensive Latin American presence and has been offering air service to Mexico since 2006. The carrier currently operates flights connecting Cancún and Mexico City with various U.S. destinations like Boston, Fort Lauderdale-Hollywood, New York-JFK and Orlando. No wonder the carrier is so enthusiastic about the deal, as it will open up avenues for it to enter Mexican cities that were previously prohibited.
According to WSJ report, Fort Worth, TX-based American Airlines is the leading U.S. carrier to Latin America. The carrier aims to improve its service to Mexico further following the materialization of the deal. United Continental, another carrier to welcome the deal, too has a sound Mexican presence.
The liberalized air treaty has also found favor with Atlanta, GA-based Delta Air Lines, Inc. DAL. Last month, the carrier announced its intention to increase its stake in Mexico’s largest airline, Grupo Aeromexico S.A.B. de C.V. Delta aims to more than double its current holding in the Mexican carrier.
We note that the timing of the deal too is favorable given that carriers in both nations are witnessing good times, courtesy of the weak oil environment. In such a favorable backdrop, all eyes will remain on when the treaty actually comes into effect and its resultant benefits for carriers.
US-Cuba Deal Also in Focus
The U.S.-Mexico treaty comes close on the heels of the former’s deal with Cuba. According to a Reuters report, the U.S. signed an aviation deal with Cuba to allow 110 scheduled flights on a daily basis to the island. Diplomatic ties between the two countries were severed by the U.S. in 1961. We note that President Obama had called for the restoration of diplomatic ties with Cuba, a favorite tourist spot for Americans prior to the embargo, exactly a year-ago.
Direct flights between the two nations won’t resume immediately; however, the concerned parties are working to get the deal operational next year.
We expect investor focus to remain on updates pertaining to both the Cuba and Mexico deals, going forward.
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