U.S.–Mexican air services accord opens opportunities for cargo players

If the U.S.–Mexico transportation market were a board game, air freight would be the proverbial square peg in a round hole.

The close proximity of U.S. and Mexican commerce centers has made airfreight services, which are mostly cost-effective in moving goods over longer distances, largely irrelevant. With the notable exception of automotive parts rushed from supply points in the upper Midwest to maquiladoras on the Mexican side of the border for assembly or processing, there is hardly a commodity that can't be shipped cheaper by truck, rail, or vessel and can often be delivered in nearly as timely a manner as by air.

Government numbers confirm air's small slice of the pie. According to data from the U.S. Department of Transportation's Bureau of Transportation Statistics (BTS), air accounted for just $1.3 billion of the nearly $45 billion in product value shipped between the two countries in September, the last month that data was available. By contrast, about $30 billion in product value moved across the border by truck, BTS data showed. The rest of the market was mostly split between rail and vessel, with pipeline handling a smaller amount than air.

No one expects the U.S.–Mexican market to ever shed its truck bias. However, U.S. and Mexican negotiators late last month took a major step to make air services more viable for freight users. On Nov. 21, the countries announced they had reached a tentative agreement to open up the bilateral air market for both passenger and cargo services.

The new compact, scheduled to take effect Jan. 1, 2016, promises significant changes to the cargo side of the aviation house. Currently, there are restrictions on the number of all-cargo airlines that can serve each city-pair, with the exception of carriers serving Mexico City. Under the agreement, those restrictions will be lifted. In addition, carriers and freight forwarders will be free to perform the ground-handling and road-transport portion of the air movement themselves instead of being required to subcontract out those services.

Perhaps most significantly, the agreement permits all-cargo carriers to operate beyond the destination country to other markets anywhere in the world, a practice known in aviation diplomacy as "fifth-freedom" rights. For example, a U.S. carrier would be free to fly to Mexico, off-load freight, and then take on shipments bound for third countries.

The agreement also allows carriers to operate with "sixth-freedom" and "seventh-freedom" rights. Sixth-freedom privileges permit a carrier to fly "behind" its home country, pick up freight, and then fly to the destination point. Under this arrangement, a U.S. carrier could fly to Canada, pick up cargo there, and fly on to Mexico.

Seventh-freedom rights allow a carrier to fly between two points outside of its own country as long as one of the countries is part of the agreement. In this scenario, a U.S. carrier can operate between China and Mexico without the aircraft touching the U.S. market.

The expanded services apply to operators of regularly scheduled all-cargo services as well as cargo charters, which are an important part of the transborder air landscape because of the amount of auto parts shipments moving on charter planes. In all, eight U.S. cargo carriers are currently authorized to serve the U.S.–Mexico market.

The market was last liberalized in 2005, when restrictions were lifted on the number of cargo carriers serving Mexico City, and more than one cargo carrier from each country was allowed to serve other city-pairs.

U.S. Department of Transportation (DOT) officials would not comment publicly on the new agreement beyond a press release announcing its completion. An agency source, however, called the pact a "huge step forward" in aligning U.S.-Mexico aviation relations with similar agreements between other key U.S. trading partners.

The source said the fifth-freedom rights could eventually turn Mexico into a global cargo hub for carriers of both countries. The source cited a large air cargo facility in Merida, located in the state of Yucatan along Mexico's northwest coast, which is badly underutilized because of the absence of so-called beyond services. The new agreement could breathe life into the moribund facility if Mexico becomes a regional or intercontinental cargo hub, the source said.

Several carrier incumbents hailed the news. UPS Inc., which began serving Mexico in 1989 and today operates out of 60 of the country's airports, said in a statement that the pact will "improve the optimization and connectivity of our intermodal network in the region." The Atlanta-based company said the new fifth-freedom rights would help provide customers with "reliable and efficient global distribution solutions."

FedEx Corp. issued a statement praising "government negotiators on both sides for this significant achievement." The agreement will provide "both countries with opportunities to increase connectivity to global markets and provide avenues for increased trade," Memphis-based FedEx said. The company said it is still studying the agreement to determine the specific impact on its operations. DHL Express, the express unit of DHL that flies between the two countries, said it was studying the details of the agreement and declined to comment.

The new pact technically falls short of creating a fully deregulated, or "open-skies" aviation climate. The DOT source said there are still pockets of services that will remain regulated. In addition, there will continue to be bans in each country on "cabotage," a practice that allows a foreign carrier to operate a wholly domestic service in the other's market without an international point involved. The U.S. doesn't allow any foreign airline to perform cabotage services.

The agreement is more than a year away from launch, during which time Mexico is sure to continue evolving as a point for "nearshoring" of foreign manufacturing to serve both North and Latin America and as a growing market for domestic consumption. Given Mexico's expanding relevance to many companies' supply chains, the timing of such a liberalized agreement may never be better for all concerned.

"It may not be a true open-skies agreement," the DOT source said. "But it's pretty darn close."