Ms. Jessi Saba
Partner

Jessi is a partner and head of the transactional group. She has over 14 years of experience advising a wide range of lessor and financial institutions in structured financing and leasing matters, organizing complex cross-border asset-finance structures in Mexico and Latin America. Jessi has negotiated transactional documents for commercial and executive aircraft and aircraft equipment assuring the enforceability or Sierra LATAM clients’ rights and remedies.

Mr. Miguel Ruelas
Associate

Miguel is an associate in the transactional group of the firm and currently seconded to the Aviation Working Group. He participates in the legal structuring and counseling of transactional, financing and leasing of aircraft and mobile assets in Mexico and Latin America. Miguel has assisted international entities in the understanding and application of the Cape Town Convention. Miguel participates in the development of various academic projects for the Cape Town Convention and other publications on this matter.

Key Developments & the Latest Trends in Mexico – From a Legal Perspective

Overview

The Mexican aviation industry has shown resilience and growth post-pandemic, marked by increased passenger traffic, significant investments, and regulatory changes aimed at enhancing safety and competitiveness. Key players like Aeroméxico, Volaris, and Viva Aerobus continue to expand their fleets and routes.

Following a significant downturn due to the COVID-19 pandemic, the Mexican aviation industry has seen a robust recovery. By mid-2024, passenger traffic had returned to pre-pandemic levels, with domestic travel rebounding more quickly than international travel. This recovery is driven by increased demand for leisure travel and a resurgence in business travel.

Arguably the biggest issue Mexico faced are the reckless policy decisions made by the Federal administration that have impacted the Mexican Aviation market as a whole. First, with regards to the decision to scrap the construction—on a political basis– of the much-needed New Mexico City mega airport; and the lack of policies and regulations that resulted in the downgrade of Mexico’s FAA assessment.

Below, we will assess these developments from a factual and legal standpoint. Finally, we will note how despite these challenges, the Mexican Aviation market trends are positive, favourable, and ever-growing.

Latest Developments

The Mexico City Airport Dilemma

It’s no secret that the Mexico City Airport (AICM) has been saturated for years. Given this saturation, which has been evident for several years, there was an urgent need to find a viable alternative for the connectivity and infrastructure in Mexico City. Therefore, the previous administration began construction of the New Mexico City International Airport (NAICM), a project that represented the largest infrastructure project in Latin America and the second largest airport in the world. However, the new administration formally announced the cancellation of the NAICM.

Instead, to fix the saturation of the current Mexico City Airport, the government would allow and encourage simultaneous operations of three different airports: AICM, the Felipe Angeles International Airport (AIFA), and the Toluca International Airport (TLC). This was done with a backdrop where there was already existing infrastructure associated with the Metropolitan Airport System, which includes the AICM and TLC. Having 30% of the original NAICM project completed, the Federal Administration decided that the construction of the AIFA airport, rather than continuing with the construction of the NAICM, was the way forward. This political assessment provided the Secretary of National Defense with the construction of the project and cost Mexican taxpayers and investors around 13 billion dollars in cancellation liability, lost infrastructure, and the cost of the new AIFA airport from scratch.

As of June 2024, the AIFA airport is operational, but it has faced challenges in attracting significant airline traffic due to its distance from Mexico City and the preference of airlines and passengers for the more centrally located AICM. Efforts are ongoing to increase the utilisation of AIFA, including improving transportation links and offering incentives to airlines.

The Mexican Airline Situation

The next development in this series of events in the Mexican aviation market was the global stress that the pandemic had on aviation travel. This resulted in financial difficulties that the Aviation Finance market suffered globally. The situation was particularly difficult for two out of the four main carriers in the Mexican market.

The loss of the third-largest airline caused connectivity in Mexico to become extremely reduced. What followed was the repossession of the leased aircraft, with the substantive majority of aircraft being repossessed in a timely manner prior to bankruptcy. The successful repossession of aircraft is testament to the strong and reliable legal system that Mexico provides by assuring creditors property and repossession rights. Compliance with the Cape Town Convention’s declaration in accordance with the Mexican declarations allows expedited remedies, assuring creditors that their rights and property are protected and respected. The legal framework for Aviation Finance in Mexico is not only reliable but has also been stress-tested on multiple occasions.

The death of one of the four major Mexican airlines covering the market was not an isolated incident. Aeromexico, the largest airline in Mexico, had to seek restructuring under Chapter 11 proceedings in June 2020. Aeromexico was able to exit their restructuring process and secure $5 billion for a 5-year fleet expansion plan in March 2022. The property-secured transactions and restructuring regulations in Mexico have granted lessors and financiers the security and trust to recognise their rights in these procedures.

The FAA Category Conundrum

The last piece of the trifecta for a perfect storm of the Mexican aviation industry was the downgrade by the Federal Aviation Administration (FAA) from Category 1 to Category 2. The FAA conducted an excruciating audit on the Mexican Civil Aviation Authority between October 2020 and February 2021. The result of such an audit was devastating, as the U.S. Department of Transportation determined that Mexico had several infractions identified by the International Aviation Safety Assessment process regarding Annexes 17 and 18 of the Convention on International Civil Aviation. Therefore, Mexico’s safety rating according to the FAA was downgraded from category 1 to category 2.

The aviation industry moved swiftly in ensuring open conversations with the government so that they treat this downgrade as a priority; however, the government’s response was practically non-existent. This meant that the industry stakeholders had to deal with the consequences of the downgrade by themselves. Among these consequences are (i) the prohibition for Mexican airlines to add or initiate new services, aircraft, or routes to the US, (ii) maintenance and repair facilities are only authorised to provide services to Mexican-registered aircraft (unless they have a separate FAA certification), and (iii) increased scrutiny on Mexican operators’ flights to the US.

It has been two years since the downgrade, and as a result, US airlines have gained at least 10% of market share due to an increased number of flights and routes to Mexico as Mexican airlines cannot operate more or new flights to meet the demand. Since the downgrade, and in an effort to regain its Category 1, Mexico has been working endlessly in the training of air traffic controllers and aeronautical personnel, as this was one of the reasons for the downgrading, which is caused mainly by the lack of budget by the government. As of June 2024, Mexico has finally regained its Category 1 rating, bringing relief and renewed opportunities for growth in the aviation sector.

Newly Elected President and Aviation Policy Trends¹https://expansion.mx/empresas/2024/03/01/sheinbaum-100-puntos-trenes-de-pasajeros

In June 2024, Mexico elected a new president, Claudia Sheinbaum. While her policies on the matter are yet to be known, she has vaguely outlined the following initiatives that, if enforced, may support the aviation industry:

1. Infrastructure Development: President González has committed to revisiting the feasibility of expanding AICM and enhancing the connectivity between AIFA and central Mexico City. This includes potential investments in high-speed rail and improved road networks to facilitate access to AIFA.
2. Regulatory Reforms: The new administration plans to streamline aviation regulations to make them more investor-friendly. This includes simplifying the processes for obtaining operational licenses and reducing bureaucratic hurdles for new entrants in the market.
3. Support for Domestic Airlines: President González has promised financial support and incentives for Mexican airlines to help them expand their fleets and routes. This includes subsidies for new aircraft purchases and tax breaks for airlines that increase their domestic and international flight offerings.
4. Environmental Initiatives: Recognising the growing importance of sustainability, the new administration aims to implement policies that encourage the adoption of greener technologies in aviation. This includes incentives for airlines to invest in more fuel-efficient aircraft and the development of biofuel infrastructure.
5. International Collaboration: The new president has expressed a strong interest in enhancing Mexico’s aviation ties with international partners, particularly the United States and Canada. This includes negotiating new bilateral agreements to expand market access and improve operational efficiencies.

Trends and Future

Despite the terrible trifecta discussed above, the Mexican aviation industry is growing significantly and is already exceeding pre-COVID traffic and aircraft order numbers as of the date of this article. The Mexican aviation industry currently has the largest commercial fleet it has had since 2018, with Aeromexico having just over 40% of the fleet, followed by Volaris and Viva Aerobus.

Domestic passenger traffic has increased by 23% compared to pre-pandemic levels. Nonetheless, it is important to note that Aeromar, a domestic carrier, ceased operations in February 2023, which was a blow for the Mexican aviation industry but also highlighted the effective repossession mechanisms that are in place for lessors and financiers. This further emphasises Mexican courts’ willingness to honour contracts and the international remedies of the creditors.

Creditors in Mexico can be assured that their leasing and property rights are and have remained secured and will continue to do so even beyond national carriers and Mexican-registered aircraft. The Mexican Civil Aviation Authorities and the Judges have truly honoured the Cape Town Convention obligations and the Mexican law in enforcing remedies in light of the detention of Russian-operated aircraft in Mexican territory. This was highlighted with the repossession of Russian aircraft in Mexico as a result of the imposed sanctions and cancellation of the registration mark. This was a unison effort with international authorities and other governments. The turbulent landscape that Mexico has confronted in the past few years provides certainty for creditors and financiers that their rights will be respected and efficiently enforced.

According to Boeing’s 2023 Commercial Market Outlook (CMO), the Latin American and Caribbean region will need 2,240 new airplanes by 2041, with Mexico being the second-largest market in the region. Seat and passenger growth has seen a 31.8% growth versus 2022 levels and a 14% growth versus 2019 levels prior to the COVID-19 pandemic. Specifically, Mexico is expected to need approximately 480 new aircraft to meet its growing demand over the next two decades.

Mexico is and continues to be a resilient market, and Aircraft Finance will continue to grow strongly.