Mexico's commercial aviation industry began its transformation back in 2005 when the first low-cost airlines appeared in the market and over the past five years three low-cost operators - Interjet, Volaris and VivaAerobus - have each gained a significant market share. Now, with industry consolidation gaining pace globally, it seems as if Interjet and Volaris may be considering tying their own low-cost knot.

Despite the legacy carriers, Mexicana and Aeromexico, continuing to dominate the Mexican market in terms of seat capacity, the low-carriers have made great strides in firmly establishing themselves as important players in the market, with the three major low cost players now accounting for 24% of the market. (illustrated below).

Source: Flightbase September 14-20, 2010

Interjet and Volaris are primarily focused on five markets in Mexico (below):

Source Flightbase September 14-20, 2010

Interjet's main focus is on Mexico City where it operates 31% of its total network, followed by Toluca, the capital's secondary airport. Volaris' main base is in Tijuana where it operates 25% of its total network, followed by Toluca and Guadalajara. Compared with Interjet, Volaris is a minnow in the Mexico City market, with just seven weekly frequencies.

WHAT ARE THE BENEFITS OF A COMBINED CARRIER?

Merging two different airline cultures is notoriously tough and there would be big challenges in trying to bring two aggressive low-cost carriers together in the fast-moving Mexican market.

However, if the management managed to pull it off, a combined Volaris/Interjet entity operating under a single brand would result in a 19% share of seat capacity and a carrier that could compete more effectively with Aeromexico and Mexicana.

Plus, the combined network would result in good reach across Mexico, a strong presence in Mexico City and a greater geographical coverage with a northern base in Tijuana, with eastern and western bases in Monterrey and Guadalajara. It would also be the dominant carrier in Toluca.

Looking at the two networks, there are many complimentary areas. Mexico City is undoubtably the key market in Mexico, but growth would be difficult at Benito Juarez due to slot constraints and the dominance of Aeromexico and Mexicana. However, Interjet already operates 181 weekly services from Mexico City, where it is the fourth largest carrier so it is already in a relatively strong position there. Plus, Interjet and Volaris already dominate Toluca, Mexico City's secondary airport, where the combined carrier would have a 97% share of the market and compete on five city pairs (Cancun, Chihuahua, Guadalajara Monterrey and Los Cabos). Toluca is therefore vital as it offers the potential combined carrier access to one of the world's biggest cities, with over 24 million people, plus no slot constraints and a position to challenge Aeromexico and Mexicana.

Looking North of the Border

While Volaris and Interjet are primarily domestic operators, the former now has 49 weekly cross-border flights to Los Angeles, Oakland and San Jose from four markets in Mexico. Of these flights, 35 originate from Guadalajara. Volaris has been clear on its intentions to grow its US network with new destinations planned for 2011 and 2012, and possible new routes to the Caribbean in 2012. (For an in-depth interview with Volaris CEO Enrique Beltranena from earlier this year, see the first edition of Routes News 2010 - click here: https://www.routesonline.com/news/33/routes-news/63963/routes-news-issue-2010-1/)

In comparison, Interjet recently launched its first (and only) route to the US, with a weekly service from Monterrey to Orlando.

Both Volaris and Interjet are strong brands in Mexico and each already have some cross-border service to California, so this would be an area where the merged airline would be looking to expand. Traffic flows between the US and Mexico are strong, with 15.3 million O&D passengers travelling across the border between April 09-10. According to IATA BSP data. Continental leads the way in terms of passengers with 18% of the travellers, followed by Mexicana (16%), American Airlines 16%, US Airways (10%) and Delta Air Lines (8%).

The temptation to get a firmer grip on the large, growing low-cost Mexican domestic market, together with the chance to grab more cross-border traffic to the US and creating another mega Mexican airline brand could well prove too strong for Volaris and Interjet to resist.

While the merger would be challenging in some areas, integration on a technical and operational level should be less complex as both carriers operate A320 and A319 aircraft. A merger would see cost synergies being leveraged and network rationalisation would benefit both Volaris and Interjet.