Could the airline evaluate a new mixed business model? Launching its own low-cost "basic service" product with more optimized costs and focused on ancillary services as operated by Copa Airlines/Wingo, WestJet/Swoop, Iberia (IAG)/Vueling, Lufthansa/Eurowings and Singapore Airlines/Scoot, could be a strategy. However, the first two key questions that Aeroméxico must ask itself are: A) If the new mixed business model will generate synergies with the mainline service and b) If the airline can operate with a double managerial and brand management. If this is a viable option for the airline in its new basic service model, it should aim for more competitive salaries, greater efficiency in labor productivity and between 40 and 50 full-time employees (FTE) per plane instead of 133 before the pandemic.

If this option is not viable and expecting the airline to maintain a brand status quo, what strategies should be followed? Regarding cost reduction, I believe that the pertinent measures have been taken and the fact that the airline has reduced its unit cost per chair kilometer (CASK) is a good sign. However, it seems that costs could still be cut further. When performing some analysis, the CASK ex-fuel of the airline at the end of 2021 was estimated at US$ 4.5 cents and at the end of 2022 it would be reduced to US$ 4.1 cents.

On the other hand, LATAM Airlines has already reduced its ex-fuel CASK to US$4.5 cents at the end of 2019 (before the pandemic), while Copa Airlines and GOL stood at US$4.1 and US$ 3.7 cents respectively. This would indicate that Aeroméxico could still further reduce its CASK ex-fuel in 2022, seeking a higher target than the 8% outlined in the restructuring plan. If the airline is looking to further reduce its CASK ex-fuel, its focus must be on two key points: wages and benefits as well as its selling expenses.

Regarding sales expenses and commission expenses of travel agencies, Aeroméxico needs to reduce them even more, renegotiating long-term contracts with travel agencies and promoting more direct sales channels (website).

Similarly, you should design a business strategy to compete directly with online travel agencies, while seeking to optimize revenue per passenger including throughout the travel chain and beyond.

In my opinion, it should also look for improvements in labor productivity, long-term concessions and move some components of wages and benefits to a more flexible variable base, among other measures.

Additionally, Aeroméxico has reduced the number of employees per plane. At the end of the first half of 2021, the airline had 12,868 employees and 118 aircraft or 109 FTEs per aircraft. However, as the fleet will expand by 7 aircraft to 125 by the end of the year, the number of FTEs per aircraft may increase. This reduction to 109 FTEs per plane is important, since at the end of 2019, Aeroméxico had 133 FTEs per plane.

However, a recently run benchmark of full-service airlines such as Aeroméxico shows an average FTE per plane of 95. Therefore, this would indicate that the airline appears to have 14 more employees per plane compared to its benchmarked peers or which would represent 1,650 additional employees.

Regarding its fleet and according to its submitted restructuring plan, the airline plans to replace older and more fuel-efficient aircraft (Boeing 737-700 and regional jets) with Boeing 737 MAX aircraft, which will allow it to increase the number of seats by takeoff, reduce your CASK and save on fuel consumption. Likewise, it would allow you to offer a differentiated product with respect to the competition, helping you to increase loyalty among your target market.

On the other hand, the airline estimates in its restructuring plan that it will not execute fuel hedges. Typically, airlines use a fuel hedging strategy to reduce their exposure to fuel prices, especially when fuel prices are observed or estimated to exceed US$75 p./bbl.

For the week of November 15 and according to the Platts source, the global price of jet fuel was above US$90 p./barrel or US$2.2 p./gallon. Therefore and from my point of view, it seems prudent and important that the airline considers including a fuel coverage of at least one third of its annual fuel needs in its 2022 projections. This would help it reduce costs and compete with the low cost on a more balanced battlefield (or costs).

Likewise, and during the period projected in its restructuring plan (2021-2025), PRASK (revenue per passenger per available seat kilometer) and TRASK (total revenue per available seat kilometer) grow at an average annual accumulated rate of 3.7%. and 3.4% respectively. In my opinion and to increase their PRASK, the airline may need to optimize load factors and reduce seat supply.

However, the low growth of the PRASK could be attributed to the low average fares due to the growing competition and penetration of low cost airlines. On the other hand, the airline must seek a strategy to optimize its TRASK through other revenue verticals such as Cathay Pacific, Singapore Airlines and even the low-cost airline Air Asia through digitization solutions, e-commerce and opportunities of income beyond the air ticket and complementary income.

Similarly, the airline should consider expanding its cargo operation as LATAM Airlines is doing with a dedicated fleet that will reach 21 aircraft in 2023.

Ultimately, the solution during the crisis and possibly beyond it is to redesign the route network at the lowest cost of operation and seek low capital investment partnerships and codeshare agreements that help lower costs and optimize revenues. Likewise, the densification of the cabin will allow it to operate at a lower unit cost, compete in a more balanced field with the low cost and be able to generate positive margins, especially when the average rates have been affected and traffic needs to be stimulated.

René Armas Maes, Commercial Vice President and aeronautical consultant. The projects he leads focus on business restructuring, strategic planning, business development and cost reduction. Likewise, René is an airline management and airport management instructor. René recently gave online talks at Embry-Riddle Aeronautical University, the American firm OAG, and the University of Barcelona in Spain. You can reach Rene through his LinkedIn page.