by Josh Lew
Last updated: 4:30 PM ET, Tue May 3, 2016
Aeromexico has announced that its joint venture deal with Delta Air Lines has been conditionally approved. The federal commission in charge of assuring fair economic competition in Mexico, Cofece, had been looking closely at the $1.5 billion joint venture between the two airlines.
The parent companies of the two airlines, Grupo Aeromexico SAB de CV and Delta Air Lines Inc, had asked for immunity from Mexican antitrust laws. To take full advantage of the joint venture, they need to be able to control capacity, coordinate schedules and set advantageous fares.
U.S. regulators still have to approve the deal, but getting approval from Mexican regulators was seen as the bigger hurdle.
Conditions
There are some conditions that the airlines need to meet if they want the approval process to move forward. First of all, Aeromexico would have to give up eight of its slots at Mexico City's main airport. The airline announced this requirement in a brief to investors at Mexico City's stock exchange.
The commission also said that one airline would have to drop their service on routes that were served by both carriers. This requirement is meant to protect against price fixing strategies. This should not be a problem from Delta's perspective. The airline's new CEO, Ed Bastian, mentioned that his company would be looking at cutting some international routes if oil prices continued to rise. Code-sharing on Aeromexico's routes would be a way to do this while still earning profits.
READ MORE: How You Can Save Money on Airfare (By Walking to Mexico)
Cross-border competition
The joint venture has been in the planning stages for some time now, but it was only set in motion recently. Last week, Mexico's legislature voted to approve an air travel deal with the United States that will allow carriers from both countries to fly an unlimited number of cross-border routes and to create alliances such as the one Delta and Aeromexico are now moving forward with.
Aeromexico has already announced the conditional approval, but Delta has held off on doing the same until Cofece removes the "conditional" label from the deal.
Delta will acquire an 8 percent share in Aeromexico as part of the agreement. This won't give it control of the Mexican flag carrier, but it will give some small say in how the company is run.
Airlines ready to expand U.S.-Mexico offerings
The air travel treaty between the U.S. and Mexico will open up the world's second busiest cross-border market to a greater number of airlines. Delta and Aeromexico are combining forces not only to deal with competition from other major airlines, but also so that they can work together to compete with smaller airlines and low-cost carriers, who will also be able to benefit from the air travel agreement between the two countries.
Low-cost carriers in the U.S. have showed a strong interest in expanding their Latin American operations. Mexican LCCs like Volaris, Interjet and VivaAerobus stand to gain a lot from the deal too because they will be free to open new routes between Mexico and the U.S.
READ MORE:Mexican Airlines Soar
Delta and Aeromexico are well aware that the agreement will also lead to a higher level of competition from all airlines who fly U.S.-Mexico routes. The joint venture will put both carriers in a much better position to deal with any airline that would try to establish new routes or to undercut the new partners' fares.
More joint ventures of this type could be announced in the coming months as airlines try to take advantage of the new freedoms they now have because of the air travel agreement between the U.S. and Mexico.
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