Interjet and the challenge of rising from the crisis.
The pandemic put on the table a crossroads for Interjet that, at this point, seems to boil down to two options: recovering from a series of financial and operational problems, or disappearing from an industry dramatically hit by the COVID-19 pandemic. And the experts agree on one thing: at worst, this crisis will leave few winners and many losers.
The airline has been dragging along a series of problems since last year, which were accentuated by the pandemic.
The net loss of 516 million pesos (mdp) registered in the first semester of 2019 -the last public financial data of the company-, was followed by cancellations and delays in flights that affected more than 21,000 passengers in the summer, Juan Tolentino Morales of Expansión reported.
Afterwards, the problems escalated to an ESA embargo of 10% of its revenues to settle tax debts between 2013 and 2017, in addition to other air navigation service debts (of $126 million pesos until 2019) and outstanding fuel commitments to ASA.
To this, the pandemic added a collapse of passengers that drove the company to remove 55 aircraft from its fleet, leaving it with only 13 until the end of July, although internal sources state that it only has four aircraft. The lack of income began to affect the payment of wages practically from April, a situation that worsened from September, when several employees stopped receiving wages, which led to a strike call for October 20th, which was postponed to October 30th.
Who gains from the loss of Interjet?
Before the pandemic, Interjet’s importance in the marketplace was no less. In 2019, it concentrated 20% of the national market, a proportion similar to that of Viva Aerobus, and only surpassed by Aeromexico (24%) and Volaris (31%). In the international segment it was the second largest player among Mexican airlines with 29% of the market, only behind Aeroméxico (46%) and followed by Volaris (22%) and Viva Aerobus (3%).
But after the pandemic this changed: during September, Interjet’s share of the national market was reduced to barely 1.8%, while its three main competitors have gained share.
Before COVID-19, Interjet generated competition in the market that put greater price pressure on the other airlines, warns Carlos Ozores, an airline industry analyst with the ICF consulting firm, so a hypothetical exit of the airline would translate into higher prices for consumers.
“A good parallel would be the case of Brazil, where for several years we had four airlines competing for a relatively small market: Gol, LATAM, Azul and Avianca Brazil (…) In Brazil we saw that, as soon as Avianca left the market -in April 2019-, this allowed tariffs to increase and all the large airlines benefited, and went from generating losses to having moderately positive results,” the specialist refers.
The exit from the international segment since April allowed Volaris to more than double its share in this category, while Aeromexico and Viva Aerobus showed significant increases.
In Mexico, the spoils that Interjet would leave behind with its absence is its presence at Mexico City’s International Airport (AICM), where it has around 25% of takeoff and landing schedules – known as slots. It is the second largest airline by slots, only behind Aeroméxico (with approximately 40%) and above Volaris (11%). Now, the competition would seek to take over these schedules, which is already being seen.
To date, the rules for the use of slots -which oblige the use of 80% of the schedules to maintain them between one season and another- have been suspended due to the pandemic, but their allocation is in charge of the airport groups, who will decide on the best bidder, indicates Pablo Casas Lías, director of the National Institute of Aeronautical Legal Research (INIJA).
“Slots belong to airports (…) If Interjet flew to Cancun with a certain slot and is not using it, I as an airport operator can pass it on to Volaris or Viva so that they, besides generating money for me, bring me connectivity (…) Even commercially, it is not the same to sell a night flight to one that leaves at 9:00 in the morning”.
On Interjet’s international routes -mainly to Central, South America and the United States-, in the short term a departure would not be felt due to the low dynamism of this segment, but in the long term, it would bring an adverse effect on users.
Trust will be key to recovery
With this background, building trust will be key to getting Interjet back on its feet.
Among consumers, recovering in this area will be difficult. Flight cancellations and refunds through electronic vouchers have damaged the airline’s image, which could be fought by lowering its prices, considers Roberto Montalvo, an academic from the Universidad Iberoamericana.
“The perception of the market is now very bad. However, being in a low-cost segment – where people buy by price and there is not a very loyal buyer – is a small advantage (…) The segment is very sensitive to price.
The airline will also have the challenge of regaining the trust of its suppliers, specifically from aircraft lessors, who will not overlook Interjet’s problems.
“They have basically lost all their Airbus, and they have also affected their credibility with the lessors. While it is true that this is a favorable environment for launching a new airline – in the sense that leasing costs are super low, and you can refinance with a more competitive cost structure – lessors evaluate an airline’s credit risk, and Interjet in that sense has to give confidence that what has happened will not happen again,” considers Ozores.
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