Mexico Puts Airlines on the Auction Block

MEXICO CITY â€”  Seven years after the government seized Mexico’s two largest airlines during an economic crisis, both are back on the auction block despite the slump in the airline industry caused by the Sept. 11 terrorist attacks.

Officials say Mexican investors and several U.S. airlines--including AMR Corp.’s American Airlines, Continental Airlines Inc. and Delta Air Lines Inc.--have expressed interest in buying shares of Mexicana and AeroMexico, which together handle about 80% of domestic air traffic.

Mexico’s antitrust watchdog agency, the Federal Competition Commission, has ruled that the two must be sold separately to preserve competition.

Some analysts question whether Mexico’s market can support two large, independent carriers. Mexican unions and lawmakers say they fear that cutthroat competition could drive one out of business.

Both airlines have been operated by a government-controlled holding company since 1995. With little competition, the two airlines usually offer the same rates for the same routes, and it often costs more to fly within Mexico than to fly to the U.S.

The government first announced plans to sell the airlines in 2000. The sale was delayed by lawmakers, who argued that the companies should be kept together, and later by the effects of the Sept. 11 attacks on the airline industry worldwide.

Officials at Cintra, the holding company that manages both airlines, say the auction could take place by the end of the year. Merrill Lynch & Co. has been hired to oversee the sale.

Both airlines have turbulent histories.

Mexicana, founded in 1921 by two Americans, ran into financial problems in 1982, when the government bought control.

In 1988, a strike forced AeroMexico, Mexico’s state-owned, flagship airline, to file for bankruptcy protection. The airline was then sold to a group of investors for $335 million. Mexicana was sold a year later in an effort to help jump-start Mexico’s sagging economy.

The government was forced to intervene again during Mexico’s 1995 peso crisis, creating Cintra as part of a $100-billion bank bailout.

The government bank savings protection agency controls more than 65% of Cintra. Its stake comes from the airlines’ debt, held by troubled banks that were taken over by the government. Mexican law requires the sale of assets from seized banks to reduce taxpayers’ costs of the bailout.

Both AeroMexico and Mexicana have improved under Cintra’s management, offering better service. Still, Cintra posted operating losses of $40 million in the first quarter of this year.

Most analysts agree it will be difficult to get a good price for both airlines as the industry struggles to recover from the U.S. terrorist attacks. But they add that there may not be a better time in the near future.

Several U.S. airlines, some of which already have business alliances with Mexicana and AeroMexico, have shown interest. Mexican law, however, limits direct foreign ownership to 25%.