Mexicana - Two Steps back and Teetering

In my last post on Mexicana: Bringing Mexicana Back from the Brink - Step 1
ended with: but the future looks brighter than it did when I posted Will Mexicana Survive? on the 5th August.

Unfortunately the brightness I saw was a false dawn. The Darkness began to descend again on Mexicana when Tenedora K, the new owners of the holding company Nuevo Grupo Aeronautico attempted to lay off 1,366 Cabin Staff at below normal severance pay and then rehire some on new contracts. This was, perhaps unsurprisingly blocked by the Government.

Whilst this was a blow to the restructuring plan, it appears the fundamental problem was when the fast tracked 'Due Diligence' revealed exactly how bad the financial situation really was. This resulted in Tenedora K backing away from any new investment.

Result was inevitable, Mexicana began an orderly shutdown of operations starting on Friday the 27th August and completely ceased operations by midday Saturday the 28th August. This shutdown also included the two budget Carriers owned by Nuevo Grupo Aeronautico, Click and Link, but these are expected to return to operation. But where does this leave Mexicana?

Well in normal circumstances this would be the end of the line for the Company. But this isn't just another Airline; it is Mexico's National Carrier and a major employer and so frantic efforts will continue to resuscitate it.

Whilst objectively it is time to perhaps build a new National Carrier without the baggage of Mexicana's past, part of me hopes they do find a way of reviving Mexicana and returning it to when it was staffed by people determined to make it work as a company, not as a company to be milked by its workers.

Previous Posts on Mexicana:
Bringing Mexicana Back from the Brink - Step 1 25th August 2010
Will Mexicana Survive? - 05th August 2010

Bringing Mexicana Back from the Brink - Step 1

A Mexican Consortium has stepped to take a controlling interest in Mexicana. The consortium named Tenedora K has been formed specifically to buy a 95% Shareholding in Nuevo Grupo Aeronautico which is the holding company for Mexicana and its domestic operations offshoots Mexicana Click and Mexicana Link. The remaining 5% of the shares remains with the Pilots Union, who through their leader Fernando Perfecto, have been involved in attempts to find a buyer.

However before the deal can be finalised it still has to go through the due diligence processes and the urgently required Capital Injection is subject to investment conditions being favourable. However there has already been one casualty as Manuel Borja Mexicana's now former CEO left his post on the 20th August. Meanwhile the legal proceedings on the Mexicana Insolvency continue through the Mexican Courts.

The formation of the Tenedora K consortium has been carried out with impressive speed, with the assistance of Advent International, and assuming that the result of fast tracking 'Due diligence' falls within what is acceptable to the Consortium, then the completing the first step in saving Mexicana will depend on the Consortium making a massive Capital injection.

But completing this first step just provides a 'life support system' and the very real challenge for the new owners is the total restructuring of the Airline. This restructuring is going to have to be at all levels of the Business and I am sorry to say will have a major impact not just on staffing levels, but pay, benefits and conditions for those still employed. This will bring the new team into the same conflicts with the Unions (including the 5% Shareholding Pilots Union) as the previous Management. But whilst the Labour situation will headline, all other elements of the Business including Fleet and Route Structure, plus Ground Handling services and Back office functions including IT will need to be reviewed and where necessary pruned.

Mexicana's survival will require hard decisions, with a heavy human cost and it will be a painful journey, but the future looks brighter than it did when I posted Will Mexicana Survive? on the 5th August.

See Update: Mexicana - Two Steps back and Teetering 31st August 2010

Will Mexicana Survive?

The Airline Industry is a really tough competitive environment with no room for sentiment. But I have been watching with considerable sadness the rapid and accelerating decline of Mexicana. The 89 year old Airline has been in serious financial straits for a long while and to turn this into a potentially fatal crisis needed a trigger to be pulled and on the 29th July it was: Canada cancels 2 flights on creditor request. This was followed by a further seizing of an Aircraft in Chicago by the leasing company AerCap.

The Company has been struggling with the Unions to persuade them to accept further Job and Benefit cuts. This is a major issue for the Airline as if labour costs are removed, and then Mexicana has a 30% advantage over similar US Operators. But put the labour costs back in and suddenly that advantage not only disappears, but immediately puts Mexicana at a disadvantage. For example: Mexicana Pilots earn 49% more that their US Equivalents, but more telling is their 185% salary advantage over Pilots for other Mexican Airlines such as Volaris or Interjet. For Cabin Staff the situation is similar with salaries 32% above US Equivalents and a 165% above the Mexican Airlines mentioned earlier. Despite this the Unions having already seen a major cut in Benefits back in 2006 are resisting any further changes.

On 3rd August the Airline announced its latest Restructuring Plan a major part of which would be the cutting of Aircrew Salaries: For Pilots 41% cut in Combined Salary and Benefits, or Cabin Staff 39%, but in addition major redundancies of the order of 40% in both categories. As an alternative the Company offered to sell the Airline and its massive Debt to the Unions for 1 Peso!

The Unions reacted swiftly by rejecting both options (A Shorter article here: Mexicana Workers, Management at Impasse).

The Airline began cancelling services on a relatively wide scale with a statement on its website reporting that Mexicana "financially non-viable" and this was reported by ABTN amongst others.

On the 2nd August the Airline filed for Bankruptcy Protection in both Mexico and the USA and on the 4th further announced it had suspended Ticket Sales and to add insult to injury the FAA announced it was downgrading Mexico's Air Safety rating from 1 to 2, nothing to do with Mexicana Woes, but not something to inspire confidence.

The Pilot's Union responded to the Bankruptcy Filing by a demand that the Airline open its books for inspection. Already the impact of the situation is being felt as Mexico's Airports begin to calculate the implications.

Mexicana is part of the OneWorld Airline Alliance and the 5th August, the OneWorld Cockpit Crew Coalition (made up of Flightdeck Crew from all the member airlines) issued a Press Release Voicing Support for Mexicana Pilots.

Meanwgile three Leasing Companies are attempting to recover their Aircraft via a US Court: Creditors Seek to Get Their Planes Back from Mexicana. In the view of AerCap (who aren't involved in the Court Case) there is a ready demand for Mexicana Aircraft

So can Mexicana find a way out this, well I was wrong about Alitalia whose situation back in 2008 had many similarities and although still making losses showing signs of recovery , however going further back in the past, Sabena was in destroyed by Union intransigence and very high costs and in part by the failure of the Swissair Investment. My head tells me that Mexicana it on the point of becoming History, but in my heart I hope it not only makes its 90th year, is still in business for its centenary!

In this Blog see:
A (belated) Happy Birthday Alitalia which has links back to my 'doom and gloom' posts.

External:
What Goes Up Must come down - Economist 5th August

The EU is Sinking - Republished from Doug Carswell's Blog

The Following from the MP for Clacton -Doug Carswell's Blog

The EU is sinking

Allister Heath, one of our top economic commentators, reminds us in
today’s City AM of the speed with which industrial production has moved from the West;

“In 2008 ... China produced more steel than the USA, the EU and Japan put together. ... China is now also by far the world’s leading car producer, turning out 13.8m units in 2009 .... [Her] share of world car production rose from 3.6 per cent in 2000 to 8.6 per cent in 2005 and 22.6 per cent in 2009. From 2000 to 2009, India’s production of motor vehicles rose more than threefold while Brazil’s doubled.”

And they manage all that without being part of the EU.

I used to assume de-industrialisation was an inevitable, organic process – a consequence of free trade and the free market. We’d shift from being an industrial economy to a tertiary economy, I thought, much as we once changed from being an agrarian economy.

I’ve changed my mind. Deindustrialisation is not the consequence of advanced development, but of the growth of big government.

Western wealth creators generally, and EU one's in particular, in almost every economic sector need official permission and quangocrat approval to produce. It is sobering to reflect on the fact that communist China’s provinces and special economic zones have greater autonomy from Beijing over regulatory and economic matters than EU member states have from Brussels.

EU wealth creators must pay high rates of tax to carry the burden of quangocrat salaries and pensions.

At the same time, successive Western governments have pursued monetary policies since 1971 that in their various ways put the interests of debtors and consumers ahead of savers and producers.

The result is that fewer and fewer people in the West produce things.

Posted on 5 August 2010 by Douglas Carswell

I tend to agree with a lot of the above, but what do you think?