Analysis-Aeromexico may still hit bumps after bankruptcy exit

By Valentine Hilaire

MEXICO CITY (Reuters) - Aeromexico looks set to emerge from bankruptcy within days, but analysts believe the Mexican airline faces stiff challenges taking on low-cost competitors like Volaris, now the country's busiest airline.

Aeromexico, which filed for bankruptcy in June 2020 as demand cratered in the first months of the pandemic, on Friday won final court approval for a restructuring plan that aims to reduce its debt from $2 billion to more than $1 billion.

But even after slashing its debt load and operating costs under Chapter 11 protection, Aeromexico may struggle to claw back ground lost to low-cost carriers like Volaris, which has surpassed it as Mexico's biggest airline by passenger traffic.

The convalescent airline could have "gone even further to reduce costs", said Rene Armas Maes, Commercial Vice President and Aeronautical Consultant at Jet Link International LLC.

Aeromexico succeeded in lowering the number of employees per plane to 109 in the first months of 2021 from 133 in 2019, but still had about 14 extra full-time employees per aircraft compared to its peers by the end of last year, he said.

The employee-to-aircraft ratio includes all employees from pilots to administrative personnel on the ground.

Aeromexico, which operates more than 120 aircraft, is overstaffed by 1,600 employees, according to Armas' international airline benchmark.

The company's representative declined to comment on the timetable for its exit from bankruptcy and its strategy beyond that milestone.

The comeback plan contains some assumptions that look optimistic, including that it will rebound to pre-pandemic capacity, as measured by Available Seat Kilometers by the end of 2022, whereas industry consensus is that traffic will be at pre-COVID levels by mid-2023 or 2024, he said.

Although capacity has no direct relationship with profitability, it is an important sign of their ability to balance supply and demand, Armas said.

With Apollo Global Management (NYSE:APO) becoming the airline's largest shareholder as a result of a bankruptcy-related debt-to-equity swap, the controlling investors' most likely course of action will be to downsize the company "to make it more efficient," Black Wallstreet Capital Mexico analyst Jacobo Rodriguez said.

Rodriguez also said the new owners could sell parts of the company or certain assets like its fleet or slots in airports to boost profitability and keep business running.

Aeromexico's Chief Executive Andres Conesa - who has held the job since 2005 - expressed his gratitude to his team and the new group of investors for the trust placed on the airline in a statement on Friday.

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Aeromexico would struggle to take on Volaris' lower cost structure even after cutting its expenses, leaving the airline as a legacy carrier more focused on business travelers, who remain sparse as the pandemic rages, said Marco Antonio Montanez, an analyst with Vector brokerage.

"It will be able to recover its market share bit by bit, even if it's clear that recovery will be slow," he said. "Aeromexico must explore ways to lower its costs and compete, but I don't see it becoming a low-cost airline."