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Skip Navigation LinksHome :: Back Issues :: Looking forward to US recovery but failing to reform

March 2002

Looking forward to US recovery but failing to reform


Close ties with the US have helped protect Mexico from the problems faced by other countries in the region. However, its future prosperity depends on its being able to learn to stand on its own two feet. President Vicente Fox faces a tough struggle to push through tax reforms.




On a winter evening at the Ciudad Juárez golf club on the US-Mexican border, the champagne corks are popping. At a gathering of travel agents and business executives Mexican airline start-up Lineas Aereas Azteca is celebrating the opening of its route to the northern Mexican city and the unveiling of its fourth aircraft, a Boeing 737-700.
The scene is so lavish you would not know the Mexican airline industry is facing its worst crisis in years or that the Mexican economy is in recession. In the face of plummeting demand, Mexico's airlines have been kept flying largely thanks to a $100 million government aid package. But in a sign of Mexico's economic resilience, Azteca is embarking on a highly ambitious expansion drive, even if at the outset that means half-empty flights.
By as early as the end of next year Azteca aims to increase its share of the 18 million-strong domestic market from 3.6% to 15%, despite passenger loads of just 30% last November. The company plans to be running 40 aircraft by the end of 2006. Azteca says it could become Mexico's number one carrier by the end of the decade, challenging Aeroméxico and Mexicana, which today control 80% of the market.
Azteca chief executive Marcos Shuster is confident of success. "No other airline in Mexico has the ability to offer new planes, unmatchable safety standards, high-quality service, and new destinations," he says.
Azteca expects to buy or lease eight aircraft worth $46 million each from Boeing next year and to begin flights to the US, including El Paso and Dallas in Texas and Albuquerque in New Mexico. Azteca is also planning to fly to Chicago, Puerto Rico, Panama City and Venezuela.
The start-up airline believes its niche market will be the 12 million Mexicans living in the US, as well as business executives and tourists who expect a strong emphasis on safety. Some 800,000 Mexicans from the northern state of Chihuahua work in New Mexico but there are currently no direct flights to the border state from Mexico City.
Azteca has a good chance of marking a mark, largely thanks to the deep pockets of its owner, Mexican tycoon Leonardo Sánchez Avalos. Sánchez, who made his fortune at Mexican oil monopoly Pemex, is footing the bill for expansion, expected to cost hundreds of millions of dollars.
But away from the city's golf club few others are celebrating. Dozens of labourers are returning home in the back of trucks from a fruitless day's search for work, a sharp reminder of the Mexican economy's decline since the September 11 attacks and the economic slump in the US.
Mexico has placed its destiny in the hands of the US, sending almost 90% of its exports north, and enjoyed the good times when the US economy boomed. Mexico posted economic growth of 6.9% in 2000.
Ciudad Juárez and its maquiladora (assembly-for-export) industry were at the centre of that bonanza. The sector's expansion averaged 14% annually from 1983 through most of 2000 and generated 29% of Mexico's manufacturing jobs.
The worry for Mexico is of recession-weary US citizens pocketing their paychecks rather than spending them and US consumption shrinking dramatically. Already major multinational companies in Mexico such as Ford Motor have cut production levels.
The number of workers employed by maquiladora plants has fallen from 1.5 million to 1.3 million across the 2,000 mile US-Mexican border. Five companies have left Mexico, 97 plants have closed and in Ciudad Juárez alone nearly 45,000 out of the city's 257,000 workers have lost their jobs.
Mexico's GDP fell by 0.3% in 2001, according to central bank estimates - the first contraction since the Mexico peso crisis of 1994-95. There are, though, increasing signs that a recovery is on the way, which could mean aggressive companies such as Lineas Aereas Azteca becoming the trend, not the exception. The first signals come from the US, where there are signs of recovery.
US consumer sentiment rose for a fourth straight month to its highest level in a year in January and US Treasury secretary Paul O'Neill said in early February that annualized economic growth could top 5% in the latter part of the year. O'Neill added that the current US downturn was nothing more than "an incredibly shallow and very brief slowdown". In late January, Federal Reserve chairman Alan Greenspan said the US economy was "just at this particular point turning".
In addition, the world's biggest economy grew 0.2% on an inflation-adjusted annual basis in the fourth quarter of 2001, despite market expectations of a decline.
Although the Mexican central bank predicts GDP growth of 1.5% in 2002, economists are more upbeat, predicting 2% in the second quarter of this year and as much as 3.5% in the last six months.
"There will be a three- to six-month lag between a US pick-up and Mexican recovery," says Rafael de la Fuente, Mexican economist at BNP Paribas in New York. "Consumption has suffered but I think we will see the comeback of the Mexican consumer. Real wages remain strong and purchasing power was not hugely affected by the downturn." BNP Paribas' growth expectations remain conservative, however. The bank forecasts second-quarter 2002 growth to come in at 0.5% and 1.5% in the last three months of the year.
Thierry A Wizman, emerging-markets strategist at Bear Stearns, says Mexico's recovery could be simultaneous with, or even outpace, a US upturn. US recovery, he says, will be led by manufacturing - a major benefit to Mexico, which supplies much of US industry with autoparts and electronic components for product assembly lines.
"As the US moves ahead, so too will Mexico, perhaps even faster," says Wizman. "As the rest of the world gets more dangerous, Mexico's proximity to the US will be ever more important. Even in Argentina, Colombia and Venezuela the political arena is bad. Mexico is safe and will continue to attract export-orientated businesses, making up for what has been lost in this brief recession. We predict Mexican growth of 3.5% in the second half of this year."
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