Mexico is an important leisure and business destination for U.S. travelers. Their recent downgrade ... [+]
The Federal Aviation Administration (FAA) has designated Mexico as a “category 2” country for safety purposes. This downgrade has implications both for how Mexican airlines can serve the United States and limits how U.S. partners of Mexican airlines can jointly market. Mexico is an important travel destination for both business and leisure customers from the U.S., so this safety-related concern raises questions about what “category 2” really means.
This change creates risk for some U.S. airlines but also creates opportunities. While Mexican airlines are now not able to add or grow service into the U.S., Mexico has put no such limits on U.S. airlines. This is a complicated set of issues as it also may keep fares higher to Mexico, especially since Mexico’s largest airline, Volaris, keeps fares low and their growth into the U.S. is curtailed during this designation. There are not clear winners and losers and most will want Mexico to fix its issues quickly and return to good standing, meaning placed back into category 1.
What Are FAA Categories?
The FAA has a process called the International Aviation Safety Assessment (IASA). This process evaluates other countries’ oversight processes to ensure safe operations of aircraft into the U.S. or in partnership with U.S. airlines. IASA reviews compliance with eight specific features, collectively determining if the country has effective and appropriate safety oversight as defined by International Civil Aviation Authority (ICAO).
Importantly, this process does not look at specific airlines or operators. It looks at how well the country oversees its aviation infrastructure. A “Category 1” rating means that the country effectively follows the ICAO standards of a safe aviation management structure. “Category 2” is given to a country that fails to meet these standards, and of course some countries could be farther from Category 1 status than others. Mexico has been a Category 2 country before — as recently as 2010 — showing that the IASA process is ongoing and continually reviews how countries oversee aviation safety.
No Mexican Airline Growth For Now
The largest impact of being downgraded to Category 2 is that Mexican airlines cannot add service to the U.S. beyond what they were flying when the category change happened. Mexico’s airlines have changed a lot since 2010. Back then, the two largest Mexican airlines were Mexicana and AeroMexico, both high-cost “legacy” airlines with relatively high fares. Today, Mexico’s second largest airline is Volaris, a very low-cost and well-run airline that keeps fares low and has grown the domestic Mexican market through price stimulation. Volaris also flies many trips into the U.S. and has made it more affordable for citizens from both countries to visit.
Opportunities For U.S. Low-Fare Carriers
With Volaris and other low-cost Mexican airlines unable to grow service into the U.S., this gives near-term opportunity for low-cost U.S. airlines to add more service to Mexico. JetBlue, Spirit, and Frontier already fly to Mexico, so adding flights would not be unrealistic especially as more planes are coming back into service. This could give the U.S. carriers a stronger position when Mexico returns to Category 1, when Volaris and others can start adding service again. There is also opportunity for higher-cost U.S. airlines too, but it is the low-cost carriers that have the most flexibility and can keep the traffic flowing with stimulative low fares.
No Code-Shares For Delta And Others
Another impact of the Category 2 rating is that U.S. airlines cannot place their code onto flights operated by Mexican carriers. Delta Airlines owns part of AeroMexico, Mexico’s largest airline, and has operated many code-share flights with them. With this new designation, Delta does not have to stop any of their own flights to Mexico but cannot place their “DL” code on AeroMexico flights. Delta has appropriately defended their Mexican partner, pointing out that this designation was not about the airline itself but rather about the country’s ability to properly oversee safety. This is another set-back in Delta’s aggressive investments in Latin America. Earlier, their investment into LATAM airlines was pressured when that airline filed for Chapter 11 bankruptcy protection. Code-share relationships extend the network of airlines without needing to add their own airplanes and crews. Without these code-share flights, Delta’s presence in Mexico will shrink for some time and this again creates opportunity for other U.S. airlines.
Likely Higher Fares For Customers
The effect of these two Category 2 restrictions likely means there will be fewer seats between the U.S. and Mexico, and that suggests that fares will go up. Airline prices are highly dependent on capacity offered, so more seats tend to create lower prices but fewer seats means the opposite. If fares rise to important Mexican tourist spots like Cancun, this could give short-term advantage to Caribbean destinations like Punta Cana in the Dominican Republic. Customers have shown a willingness to shift destinations for similar experiences when things happen. Airlines have seen this after hurricane damage or political upheaval.
How Long Will This Last
It is unclear publicly which issues Mexico failed to demonstrate in the IASA audit, so it also is not clear how long it may take for them to mitigate these issues and again be granted Category 1 status. Tourism accounts for almost 10% of Mexico’s economy, so it is reasonable to assume that their government will take this seriously and quickly address the issues of non-compliance. That said, nothing works too quickly in this world and with the Category 2 assessment, also present in countries including Venezuela, Bangladesh, and Pakistan. The FAA did not make this designation quickly or arbitrarily, and they will be just as diligent as Mexico improves and will be sure they are doing things to full ICAO standards before they allow airline growth and code-shares again. In practical terms, this means that the summer leisure travel period will be influenced by this rating and even if U.S. carriers beef up capacity, that would likely miss some of this summer. It’s very possible that Mexico will be back to Category 1 by summer 2022 if they act quickly and work collaboratively. In the meantime, customers should expect some higher fares and fewer flight options but also some airlines may use this as an opportunity to permanently grow their share in the lucrative U.S.-Mexico air market.
