5 Airlines Are Competing to Grow in Mexico City

Late last year, Delta Air Lines and Aeromexico agreed to divest up to 24 slot pairs at Mexico City's highly congested airport as a condition of forming a joint venture in the U.S.-Mexico market. (They will also give up as many as four slot pairs at New York's JFK Airport.)

The U.S. Department of Transportation will allocate 14 of these Mexico City slot pairs to low-fare airlines this year. Those carriers will also be able to apply for up to 10 additional slot pairs in 2018, if they can show that they have made reasonable efforts to apply for slots from the airport authority and have failed.

Delta Air Lines and Aeromexico will have to give up some slots in Mexico City. Image source: The Motley Fool.

Last week, Alaska Air (NYSE: ALK), JetBlue Airways (NASDAQ: JBLU), Southwest Airlines (NYSE: LUV), VivaAerobus, and Volaris (NYSE: VLRS) applied to the DOT for Mexico City slots. While there aren't quite enough slots to go around, each of those five airlines will be able to get at least some of what they want.

Not a cutthroat battle

When the DOT allocated route authorities to Havana, Cuba, last year, it was overwhelmed with applications. U.S. airlines wanted to operate more than twice as many flights as the DOT was allowed to allocate.

That's not the case here. For the first round of slot allocations, the five airlines combined have requested 18 daily slot pairs, just four more than the DOT can allocate. That means none of the airlines will be left out in the cold.

The U.S. airlines

Among the U.S. carriers, Alaska Air and JetBlue each requested four slot pairs this year, while Southwest requested two.

Alaska Air doesn't currently fly to Mexico City. It has proposed flying twice a day to Mexico City from Los Angeles and once a day from San Francisco and San Diego. The first daily Los Angeles flight and the San Francisco flight are almost certain to be approved. Alaska will operate those routes with 178-seat 737-900ER aircraft.

By contrast, Alaska wants to use 76-seat regional jets for the other two daily flights. That part of Alaska's request is likely to be denied. Every other airline wants to use planes with at least 143 seats, and the DOT has a clear preference for applications that promise to add the most seats to the market and thus boost competition the most.

Alaska Air may get just two of the four slots it has requested. Image source: The Motley Fool.

Southwest Airlines currently flies three times a day between Mexico City and Houston. It has requested two slots in the 2017 allocation to move one of those three existing flights to a more convenient time while adding a fourth daily flight. Given Southwest's ability to offer connections to dozens of other cities, it should get at least one and perhaps both of its requested slot pairs.

JetBlue also serves the Mexico City market today, offering daily flights to Fort Lauderdale and Orlando. However, those flights have the lowest unit revenue of any routes in JetBlue's network on a stage-length-adjusted basis, because both of the departures from Mexico City are before 6 a.m. Very few travelers want to fly at that hour.

JetBlue wants four slot pairs so it can move its existing daily service to more convenient times and then add a second daily flight on each route. It will probably get all four requested slots, but the second daily Fort Lauderdale flight could be vulnerable.

The Mexican airlines

Aeromexico has three major competitors in Mexico: Interjet, VivaAerobus, and Volaris. Interjet was not allowed to request slots in Mexico City, because it is already the second-largest carrier there by a sizable margin. But ultra-low-cost carriers VivaAerobus and Volaris both requested several slots in Mexico City to grow their transborder route networks.

VivaAerobus requested three slot pairs in the first round of the slot allocation. It wants to fly once a day to Los Angeles and Las Vegas. The third slot pair would be split, with four flights a week to San Antonio and three per week to Oakland. All three requests are likely to be honored.

Lastly, Volaris requested five slot pairs, to be used for daily flights to New York, San Antonio, Washington, D.C., Chicago, and Los Angeles. The San Antonio and Washington D.C. routes would be new, while Volaris would be adding additional flights on the other three routes.

Volaris wants to grow its transborder route network this year. Image source: The Motley Fool.

Volaris will most likely receive its first four requests. However, the DOT will probably deny its request to get an extra slot pair for Los Angeles service, since Volaris already serves the route twice a day and Alaska Air and VivaAerobus both want to enter that market.

What it means for the airlines

To recap, the DOT has to reject four of the 18 route proposals it has received. It will almost certainly reject the two Alaska Air regional jet proposals as well as Volaris' request to operate a third daily flight from Mexico City to Los Angeles. It will probably also reject Southwest's fourth Houston slot, although it could choose to nix JetBlue's second daily Fort Lauderdale flight instead.

For Southwest Airlines and Alaska Air, the results of this slot allocation won't matter much. The potential revenue at stake is tiny compared to Southwest Airlines' size. Even for Alaska Air, service to Mexico City represents an attractive but small growth opportunity.

The stakes are somewhat higher for JetBlue. While four daily round trips to Mexico City would only represent about 1% of JetBlue's capacity, the company would be turning its two worst routes into solid performers.

For VivaAerobus and Volaris, getting additional Mexico City slots is even more important. The sharp depreciation of the peso against the dollar is driving up the cost of dollar-denominated items such as jet fuel and aircraft rent. By adding flights to the U.S., VivaAerobus and Volaris will be able to hedge their foreign exchange risk by growing their dollar-denominated revenues.

Indeed, both Mexican ultra-low cost carriers have ambitious growth plans for the next few years. However, the weak peso will force them to raise fares on domestic routes, which could cut into demand. Trans-border flights thus represent a critical outlet for profitable near-term growth.

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Adam Levine-Weinberg owns shares of Alaska Air Group, Volaris, Delta Air Lines, and JetBlue Airways and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy.