Maintenance, Repair and Overhaul (MRO)Market and Business Opportunities for CanadianCompanies in Mexico’s Aerospace Indust...
Table of ContentsEXECUTIVE SUMMARY 3INTRODUCTION 41. The Aerospace Industry in Mexico 51.1 Statistical overview 52. Mexico...
Executive SummaryThe aerospace sector is the fastest growing manufacturing industry in Mexico. It offersbusiness opportuni...
IntroductionThe aerospace industry in Mexico has been one of the most dynamic sectors. In the last fiveyears, the number o...
51. THE AEROSPACE INDUSTRY IN MEXICO1.1 Statistical overviewRecent evolution. The first aerospace company, WAS, set up a p...
6Coverings, corrosion and protectionInterior arrangement and redesign1.Two thirds of companies in the Mexican aerospace in...
7helicopters, aluminum parts for aircraft, air & space navigation instruments & equipment,aircraft circuit selectors, airc...
8Other advantages offered by Mexico are low-cost manufacturing in high-mix/low-volumeproduction conditions, along with int...
9New investments could reach between USD$5 billion and USD$6 billion in the next ten years.Most recent examples of such tr...
10Manufacturing activity continues to drive Mexico’s economic recovery. There is aconsensus that the worst of the contract...
11Recovery in tax revenues but fall in oil income. Thanks to revenue from the oil industry,Mexico’s governments have tradi...
12opposition to the PRI. But as The Economist noted, this vote opened up new possibilities in apreviously paralyzed system...
132.3 BASA, NAFTA and other FTAs – how they impact on companies doing MRO inMexico (ex: labor, import of parts, etc.).BASA...
14of steps involved with the process. In addition, the two aviation authorities exchangedletters confirming the intent to ...
15Table 4Mexico’s Ranking in the Global Aerospace IndustryRanking Country Revenue(USD)1 USA $2042 France $50.43 UK $32.74 ...
16Charts 3 and 4: Global Aerospace Investments in Manufacturing and EngineeringSource: Management Consulting, “Aerospace G...
17Within the global value chain of North American and European OEMs, Mexico has a clearcomparative advantage as an MRO ser...
18Table 5Mexico’s Leading MRO Service ProvidersCompany Countryof OriginLocation Opening Work-forceKey Customers1.Aeroméxic...
19MRO services sector in Mexico has had a gradual development. In a first stage, it involvedmainly the overhaul of narrowb...
20Following is a brief description of the main MRO companies operating in Mexico.1) Empresa de Mantenimiento Aéreo, Aeromé...
21Painting hangar with 49,503 sq. ft. that operated in accordance with Mexicanenvironmental standards and with a maximum c...
22While Mexicana overhauled nine aircraft types and planed to add three more by mid-2010, thefocus was to have one family ...
23stay afloat. It could sell shop shares to other companies and it could also gain businessas aircraft from the old Mexica...
24employees performs overhauls and component repair services on DHC8, CRJ, Airbus A330/A340, A300/A310 and the Airbus A320...
25GovernmentSeveral Mexican agencies with airplanes of their own have their MRO facilities operating underpermit by the DG...
26The main new projects underway are:The primary project to increase infrastructure in aviation is to construct 3 newcomme...
27o Monterrey Jet Center (Apodaca)o Honeywell Aerospace (Monterrey) Machining and systems integrationo GE Aviation (Monter...
28Even though investment in R&D by Mexican industry is relatively low, there has been asignificant increase in recent year...
29ProMexico. In June 2007, President Calderon created ProMexico, a federal entity charged withpromoting Mexican exports ar...
30Private industryMexican Federation of Aerospace Industry (FEMIA). Non-profit association of privateaerospace companies e...
31water services connections and up to 30 percent discount on water utility fees, depending on thetype of water treatment ...
32Other important drivers of the growth of MRO activities in Mexico are as follows:Airlines are revitalizing their fleets,...
33b) submit an organizational chart of the repair station and the names and titles of managingand supervisory personnel;c)...
3411. Monterrey Jet Center FAA U.S.A.12. Hanhausen-Varcacia FAA U.S.A.13. Turborreactores FAA U.S.A.14. Turborreactores FA...
35complete, giving it an average aircraft age of only 6½ years, it will be able to pursue third-partywork outside Delta26....
36for training that will host a fixed simulator, they portray themselves as the number 2 keysupplier of MRO services after...
375.2 Challenges and Trends for New Entrants to the SectorNew companies seeking to enter the sector in Mexico may face the...
38Executive – Rapid growth of niche markets (e.g. helicopter MRO), new entrants inregional airports (Los Cabos)Military – ...
39Chart 5: Registered aircraft in MexicoMexico: Number of Registered Aircraft1990-2009500055006000650070007500800085001989...
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
Mro market opportunities for canadian firms in mexico 2011
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Mro market opportunities for canadian firms in mexico 2011

  1. 1. Maintenance, Repair and Overhaul (MRO)Market and Business Opportunities for CanadianCompanies in Mexico’s Aerospace IndustryReport Prepared forthe Canadian Embassy in MexicoMexico City, MexicoFebruary, 2011This document may not be fully accessible. For an accessible version, pleasevisit http://www.tradecommissioner.gc.ca/eng/document.jsp?did=119898
  2. 2. Table of ContentsEXECUTIVE SUMMARY 3INTRODUCTION 41. The Aerospace Industry in Mexico 51.1 Statistical overview 52. Mexico, a place to do business 92.1 Economic overview and political outlook 92.2 Foreign companies with MRO agreements in Mexico 122.3 BASA, NAFTA and other FTAs and their impacts on companies doingMRO in Mexico 133. Mexico’s air services sector 143.1 Global aerospace sector: where does Mexico fit? 143.2 Key MRO players in Mexico; key competitors in other countries 173.3 Airports and MRO clusters throughout Mexico and future developments 253.4 R&D and innovations in related MRO sectors 274. Mexico’s policies and investment incentives 284.1 Mexico’s policies for the aerospace sector: SCT, Ministry of Economy,ProMexico, National Council on Science and Technology, State governments 284.2 Federal and State Government incentives for attracting MRO companies toMexico 305. Business opportunities 315.1 Repair stations (DGAC and FAA certification); key players(competitors and potential partners) and their client structure 315.2 Challenges and trends for new entrants to the sector 375.3 Business opportunities in the MRO sector in Mexico 385.4 Segments/niches where there is a need for MRO companies 415.5 Future development of the aerospace sector in Mexico as linked to businessopportunities 435.6 Key contacts with potential partners by type of MRO 445.7 MRO procurement for government, civil, commercial and military MRO 446. How to do business in the MRO sector in Mexico 446.1 Main access strategies 446.2 Preferred business processes 486.3 Do’s and don’ts when participating in bids 49ANNEX 1. Key contacts with potential partners by type of MRO 51ANNEX 2. Key contacts related to commercial, military and large corporate /private fleets 53ANNEX 3. Bankruptcy of Mexicana de Aviación 56ANNEX 4. Selected Bibliography 57ANNEX 5. Survey 59
  3. 3. Executive SummaryThe aerospace sector is the fastest growing manufacturing industry in Mexico. It offersbusiness opportunities to foreign MRO services companies. This Report is intended to informCanadian companies interested in developing or expanding their MRO business in Mexico.1. THE AEROSPACE INDUSTRY IN MEXICO. Between 2005 and 2010, the number ofaerospace companies in Mexico increased by almost 400 percent, from 61 to 241. Currently,there are 23 certified MRO companies operating in the country. Mexico’s biggest competitiveadvantages are its location and lower wages for aviation technicians. Mexico offers an excellentopportunity niche for MRO projects with current and future airlines’ fleets. Three factors pointto a good outlook for the sector in 2011: the restoration of the Category 1 in the FAA’s safetyrating in December 2010, the eventual return of Mexicana airline to the skies, and significantinvestments announced by several Mexican airlines in the expansion of their fleets.2. MEXICO – A PLACE TO DO BUSINESS. MRO companies from the U.S., Canada, Spainand France are already doing business in Mexico. The Bilateral Aviation Safety Agreement(BASA) in place since 2007 permits Mexico’s aeronautical authority to certify parts,components, aeronautical systems and even complete aircraft manufactured and assembled inMexico destined to the U.S. and other markets. In accordance with NAFTA, Mexico allows theduty free import of raw materials and inputs when the companies involved have the Certificateof Approval for Production issued by the Ministry of Communications and Transportation.3. MEXICO’S AIR SERVICES SECTOR. Mexico is considered to be one of the mostpromissory emerging MRO hubs in the world as heavy airframe maintenance, a labor intensiveactivity, is being developed by major OEMs. There are 5 main MRO players in Mexico: 2linked to local airlines Aeroméxico and Mexicana* and 3 independent (ITR, Snecma andMessier Services) with operations in eight states throughout the country. Innovation andtechnology activities in the MRO sector are highly concentrated in Mexico City, Guadalajara,Monterrey, Querétaro and Tijuana.* Mexicana de Aviación file for bankruptcy in August 2010 and is presently underrestructuration which may lead to the return of the company into the market in 2011.4. MEXICO’S POLICIES AND INVESTMENT INCENTIVES. Mexico offers fiscal, R&D,certification, labor training and other types of incentives to attract FDI to the MRO sector.5. BUSINESS OPPORTUNITIES. Canadian MRO companies could work with local airlinesplanning to expand their fleets and outsourcing required MRO services, and with internationalairlines formerly served by Mexicana MRO Services. They may also expand MRO services tothe private aircraft fleet since only a handful of local MRO repair stations have internationalcertifications. Public sector (federal agencies and state governments) as well as the militarysector are also important potential markets for MRO services in Mexico that will grow in thefuture. Possible opportunities to explore include, among others, partnerships or alliancesbetween Canadian companies and Canadian and/or U.S. companies dedicated to aircraftinventory management and services, to offer integrated packages to repair stations.6. HOW TO DO BUSINESS IN MEXICO. Alternative entry strategies for Canadian MROcompanies are: local partnering, JV with regional companies and going it alone. Whenparticipating in government procurement the main do’s include preparation, lobbying, emphasison innovation, access to local networks and local partnerships. Canadian companies mustevaluate their core competencies and choose their segments carefully.
  4. 4. IntroductionThe aerospace industry in Mexico has been one of the most dynamic sectors. In the last fiveyears, the number of companies operating in the sector increased by almost 400 per cent toreach 241. Some key international aviation firms have a presence in the Mexican marketplacesuch as Bombardier. From 2002 to 2009, exports increased at an annual rate of 14 per cent, toreach around USD$4 billion in 2010. Mexico has rapidly developed its capacity for aerospacemanufacturing including the development of engineering and design capabilities for militaryand civil applications. Also, it has launched several large infrastructure projects for airportdevelopment and airport expansion which will sustain the growth of the aviation industry overthe next years. According to the Mexican Aerospace Federation (FEMIA), Mexico is the 10thlargest supplier of aviation equipment to the U.S, ahead of China, Singapore, Taiwan andMalaysia, and has the second largest fleet of private aircraft after the U.S.In 2007, Mexico and the U.S. signed a Bilateral Aviation Safety Agreement (BASA) whichfully certified Mexican parts production and components of aeronautical systems and evenassembly of complete aircraft. As a result of the BASA, Mexico is attracting the interest offoreign aerospace companies including Canadian companies, which are expected to invest in thecountry to establish their production bases to provide for the North American and Europeanmarkets. In addition to the fact that labor costs in Mexico are lower than in Canada, benefits inthe procurement of parts and components and the export of finished products given by the NorthAmerican Free Trade Agreement (NAFTA) are also drivers for Canadian interest in investing inMexico since exports of aerospace components enjoy duty free access to Canada and the U.S.The sector offers growing business possibilities for companies interested, particularly in theareas of aircraft parts and spare parts, aviation services (including MRO services), airportsystems, and airport ground equipment.The Canadian Embassy commissioned Americompass to prepare a Report on the MRO Marketand Business Opportunities for Canadian Companies in Mexico’s Aerospace Industry. A firstversion and its PPT presentation were delivered on August 2010 when the Mexican aviationsector was going through important changes, including the bankruptcy of Mexicana deAviación* and the downgrade of its aviation safety rating by the FAA. Now that this sectorseems to enter a period of recovery and increasing growth, the documents have been updated inorder to better inform Canadian companies interested in exploring, developing or expandingMRO business in Mexico.____________________________* Mexicana de Aviación file for bankruptcy in August 2010 and is presently underrestructuration which may lead to the return of the company into the market in 2011.
  5. 5. 51. THE AEROSPACE INDUSTRY IN MEXICO1.1 Statistical overviewRecent evolution. The first aerospace company, WAS, set up a plant in Mexicali, BajaCalifornia in 1969. A few small and medium companies followed the trend in the 80’s and 90’s.After the signing of NAFTA in 1994, the Mexican aerospace industry experienced anaccelerated development. In a first stage (mid-90’s to 2005), the Mexican industry did simpleassembly and manufacturing of individual parts and components. In the last five years, itevolved toward a second stage with the production of fuselages and landing-gear systems.Domestic production. The aerospace sector is the fastest growing manufacturing industry inMexico. Between 2005 and 2010, the number of aerospace companies in Mexico increased byalmost 400 percent, from 61 to 241, 80 percent in manufacturing operations, 10 percent inengineering, design and education and 10 percent to MRO. Major Tier 1 suppliers and OEMsare Bombardier, Aernnova and ITR. Most firms are Tier 2 suppliers in the following sub-sectors:Manufacturing and assembly (192 companies):Machining: 3-5 axis, milling, turning, grinding, EDMSheet metal fabrication: CNC punching, bending, tube bending, hydroforming,welding-fusion/spot, assemblyComposite: Insulation blanker, pre-preg/hand layer composites and compressionmoldedElectrical/Electronic: Harnesses, PCB, connectorsEngineered raw materials: Investment castings, ring, forgingCoatings: Tin plating, anodizing (chromic, sulfuric and hard coat), Chem fil,passivation NDT: FPI, MPI, X-ray; Heat treat - Induction, vacuum annealing.Engineering services and R&D (24 companies):Assembly: Fuselages and structuresDesign of aeronautical components, both for military and civil applicationsElectronics: testing and prototype development and designSystems integrationSoftware development services.MRO services (23 certified companies):Airfold repairsTurbines and enginesAuxiliary power units (APU)AirframesElectric and electronic systemsLanding systemsDynamic componentsPropellers
  6. 6. 6Coverings, corrosion and protectionInterior arrangement and redesign1.Two thirds of companies in the Mexican aerospace industry are foreign owned (U.S., Canadianand European).Location. There are five aerospace regional clusters in the country encompassing 16 states:Northwest: Baja California (50 companies), Sonora (39), Chihuahua (17)Northeast: Coahuila (6), Nuevo León (21), Tamaulipas (10)West: Aguascalientes (2), Jalisco (8), Zacatecas (1)Center: Distrito Federal (7), Estado de México (5), Querétaro (19), San Luis Potosí(6), Puebla (3)South-Southeast: Yucatán (3), Guerrero (1)2.Employment. Aerospace companies employ around 30,000 people (2009e) and offer around81,000 indirect jobs. 15 companies have over 500 employees: 8 in Baja California, 2 inChihuahua, 3 in Querétaro, 1 in Coahuila and 1 in Tamaulipas.Foreign Trade. As shown in Table 1, since 2002 Mexico has been a net exporter of aerospacegoods and services with a surplus of USD$1.1 billion estimated for 2010.Table 1Mexico – Trade Aerospace Industry(Million USD)Source: FEMIA and BombardierExports. Total Mexican exports of aeronautical components and engineering designs werevalued at USD$1.2 billion in 2002 and grew to USD$3.4 billion in 2008 (60% increase over theperiod). Exports increased to over USD$4 billion in 2010. Most aeronautical parts andcomponents made in Mexico are intended for the U.S. market (81%), followed by France andGermany (with 2.8% each), and Canada and the UK (with a share of 2.6% each).Imports. Total Mexican imports in the aerospace industry reached close to USD$ 2.8 billion in2009. The U.S. exported 72.5% of this total to Mexico. Mexico is the 10thlargest export marketfor the U.S. Mexican aerospace imports are spread evenly between aircraft and aircraft parts,aero-engines and avionics. According to FEMIA, the total Mexican market for spare parts isestimated at USD$ 1.8 billion. In 2009, the top 9 Mexican imports of aircraft and aircraft partswere: general merchandise to manufacture aircraft, turbo-reactors, reactor jet planes,1Proméxico, Mexico Landing for Success, 2009-2010 Edition2Miguel Horcasitas, “Aerospace Clusters in Mexico: Choosing the Right Location”, April 7 2010,available at www.americanindustriesgroup.com2002 2003 2004 2005 2006 2007 2008 2009 2010eExports 1266 1342 1299 1674 2029 2728 3300 3400 4050Imports 1051 961 1055 923 1271 1924 2425 2378 2894Balance 215 381 244 751 758 804 875 1022 1156
  7. 7. 7helicopters, aluminum parts for aircraft, air & space navigation instruments & equipment,aircraft circuit selectors, aircraft switchboards and single engine aircraft3.Canada-Mexico trade. According to Statistics Canada, total aerospace exports to Mexicoamounted to USD$4.6 billion in 2007, while statistics from the Ministry of Economy show thatMexico’s imports from Canada were USD$7.9 billion in the same year4. Imports by Mexicofrom Canada are mainly aircraft and spare parts. See Charts 1 and 2 below.Charts 1 and 2: Canada-Mexico Aerospace TradeSources: Statistics Canada and Ministry of the Economy, MexicoInvestmentFor foreign investors in the aviation sector, Mexico’s biggest competitive advantage is itslocation. For years, major aerospace manufacturers used to send a growing share of their workto suppliers in Japan, China and elsewhere. But these arrangements made it a challenge to getfinished components back to the companies. Many U.S. aerospace companies decided to buildcapacity in Mexico to feed the industry’s production hub in Southern California. Mexico’scloseness to the largest market in the aerospace industry – 7 out of 10 aircraft are manufacturedin the U.S. – allows for rapid adaptations of products and parts and delivery to North Americancustomers in less than a week as well as easy reach at a time when aerospace giants are underpressure to hit deadlines and deliver new aircraft to customers.3FEMIA-SCT, “Consulta Abierta para Definir la Nueva Política Aeronáutica Nacional”, October 2010,and Promexico “Mexican Aerospace Industry: Reaching Higher Altitude”, Negocios, October 20104The main reason for the large difference in trade figures between Canada and Mexico in both directionsof trade is transshipment. Canadian goods shipped to Mexico via the U.S. are often recorded as exports tothe U.S. in Canadian trade statistics, while in Mexican statistics these imports are correctly recorded asoriginating in Canada. Frequently, Canadian goods en route to Mexico are shipped through the UnitedStates and consolidated in U.S. destinations before onward shipping to Mexico. These goods areidentified as having the U.S. as their final destination and are therefore not recorded by Statistics Canadaas Canadian exports to Mexico. Mexico, however, records these goods as imports from Canada.CANADA: AEROSPACE EXPORTS TOMEXICO (HS 88, USD$Million)0204060801001201401602003 2004 2005 2006 2007 2008Parts Other 88 Pwred aircraft,SpcraMEXICO: AEROSPACE IMPORTS FROMCANADA (HS 88, USD$Million)01002003004002003 2004 2005 2006 2007 2008Parts Other 88 Pwred aircraft,Spcra
  8. 8. 8Other advantages offered by Mexico are low-cost manufacturing in high-mix/low-volumeproduction conditions, along with intellectual property protection and near-shore logisticsadvantages. In Mexico, wages in manufacturing are a fraction of what workers in other parts ofthe developed world earn. Besides, skills burnished through servicing the automotive sectorhave been successfully transferred to the aerospace industry.Safety ratingOn July 2010, following an assessment of the country’s civil aviation authority, the FAAannounced that Mexico was not in compliance with international safety standards set by theInternational Civil Aviation Organization (ICAO). As a result, the U.S. downgraded Mexicofrom a Category 1 to Category 2 rating5.The action did not stop flights between the two countries, but it prevented Mexican airlines likeAeroméxico and Mexicana de Aviación from expanding service to the U.S. Thereon, Mexicanairlines would not be able to carry passengers to or from the U.S. in so-called code-sharingagreements with U.S. airlines. Mexicos Communications and Transport Ministry said in astatement that the demotion was due "exclusively to administrative and organizational matters"— a shortage of flight inspectors — and not a lapse in flight safety itself. It clarified that theFAA measure did not imply any decline in the safety of civil aviation in Mexico and thatMexicos airlines were safe and would continue to offer high quality service, comparable to thehighest international standards. Nonetheless, the downgrading was a very negative signal sinceonly few countries in the world had been given this low category. It portrayed the image thatMexico was not able to comply with international aviation standards.Mexican authorities reacted to this measure by allocating a budget of around $500 million pesosin new equipment and recruitment and training of new inspectors. In December 3, 2010, Mexicowas returned to Category 1 and became the first country to be upgraded in only four monthsafter losing its rating, behind South Korea which was upgraded six months later. Mexico’s civilaviation authorities emphasized their country’s commitment to recognizing IATA’s OperationalSafety Audit (IOSA) in its auditing processes. The FAA stated that Mexico had complied withICAO standards and had made significant progress in terms of the number and capabilities offlight inspectors.Expected development in the next five yearsAlthough it is foreseeable that aircraft sales to airlines around the world will decrease in 2010and 2011, the airline industry will demand around 15 thousand new aircraft globally. Thisrepresents a significant business opportunity for the Mexican aerospace industry. In particular,Mexico has an excellent opportunity niche in the aftermarket sector, for major MRO projects ofthe airlines’ current and future fleets.5A Category 1 rating means the country’s civil aviation authority complies with ICAO standards. ACategory 2 rating means a country either lacks laws or regulations necessary to oversee air carriers inaccordance with international standards, or that its civil aviation authority – equivalent to the FAA foraviation safety matters – is deficient in one or more areas, such as technical expertise, trained personnel,record-keeping or inspection procedures. Source: www.faa.gov/about/initiatives/iasa/
  9. 9. 9New investments could reach between USD$5 billion and USD$6 billion in the next ten years.Most recent examples of such trends include the agreement between Mitsubishi HeavyIndustries and Bombardier to transfer the manufacturing of certain Q400 aircraft modelcomponents (rudder, elevator and horizontal stabilizer) to Bombardier’s facility in Mexico. As aresult, Mexican exports in this sector could grow from less than 1 percent of the U.S. aerospacemarket today to around 6 percent of the U.S. market, or USD$2.8 billion by 2017. Employmentin the sector could reach 37,000 people in the next 5 years.6Mexico has identified two strategic innovation sites for the aerospace industry – Querétaro andBaja California – that will meet the capacities of the two manufacturing corridors in the country:the Pacific Corridor and the Center/Northeast Corridor. The Pacific corridor will specialize inthe manufacturing of complex components (avionics) to optimize the supply chain linked to theCalifornia-Seattle corridor. The Center-Northeast corridor will be associated with the super-corridors of Texas-New England-Montreal where some of the large OEMs already are locatedor will establish themselves, to develop highly complex assemblies and ultimately an aircraftmanufactured in Mexico with a high national content.Querétaro is home to the prime aerospace cluster in Mexico and to the first and only NationalAeronautical University and Aerospace Industrial Park inside an international airport. Theaerospace cluster has flourished in Querétaro for five reasons: its privileged location, qualifiedworkforce, quality of life, infrastructure, and its productive integration with more than 600industries with foreign investment. Aernova, General Electric and Bombardier are among the 12companies operating in the cluster.Baja California has more than 40 years of experience in aerospace. The state has the largestconcentration of aerospace companies nationwide. This is due mainly to the supply chainproximity to California and Arizona and the availability of high quality labor force. The statealso has a strong competitive advantage in terms of infrastructure (highways connecting theMexican to the U.S. market, major cargo seaports, international airports, railway services anddirect border crossing sites with six ports of entry to the U.S.) The most emblematic aerospacefirms in BC include Honeywell, Lockheed Martin, and Gulfstream, among others.2. MEXICO – A PLACE TO DO BUSINESS2.1 Economic OverviewEconomic recovery enters Phase III: improved domestic demand. Mexico’s recenteconomic recovery has gone through three phases. Back in 2008/2009, Mexico experienced asharp decline in manufacturing activity—similar to what was experienced in the US. This led toa massive loss of jobs that eventually (two quarters subsequently) hurt domestic demand. In2009, Mexico saw a rebound of manufacturing activity (Phase I) that strengthened the labormarket and helped stabilize domestic conditions (Phase II). Now it is expected that domesticdemand will gain momentum, particularly in 2011-2012 (Phase III).6“Industria Aeroespacial, el Reto que Sigue”, Informe Especial, El Financiero, December 10, 2010, p. 24
  10. 10. 10Manufacturing activity continues to drive Mexico’s economic recovery. There is aconsensus that the worst of the contraction is over. As shown in Table 2, Mexico’s economicactivity is now trending upward and the consensus among analysts is that it reached a yearlygrowth rate of 4.7 percent in 2010. The auto industry is believed to be the key to Mexico’semergence from the recession in 2009, particularly as several automakers across the world havereallocated part of their production to Mexico to benefit from a weaker peso, skilled Mexicanlabor, and the country’s strategic geographic location. Despite the rebound of manufacturingactivity since 2H09 and the fact that this has improved labor market conditions, domesticdemand is picking up slowly and growth is mostly externally driven. It is expected thatmanufacturing activity will maintain an upward trend, boosting job creation, and permeatinginto domestic consumption during 2011.Table 2Mexico: Main Economic Indicators2003-2007 2008 2009 2010 2011eReal GDP, % change 3.4 1.5 -6.5 4.78 3.9Consumption 3.1 1.1 -5.7 2.8 3.9Investment 0.6 1.4 -2.6 2.1 1.5Net trade -0.3 -1 1.7 -0.3 -1.9Consumer prices, % Dec/Dec 4.1 6.5 3.6 4.26 3.88Government balance, % of GDP -1.4 -2 -2.3 -2.8 -2.2Exchange rate (units MXN/USD) 10.93 13.84 13.06 12.25 12.50Merchandise trade balance (US$bn) -7.7 -17.3 -4.7 -10 -18.9Exports 217.8 291.3 220.7 258.4 281.7Imports 225.4 308.6 234.4 268.4 300.6Current account balance -5.9 -15.8 -5.9 -8.3 -14.8% of GDP -0.7 -1.5 -0.7 0.8 -1.5International reserves 66.7 85.4 98.7 107.7 112.7Total external debt, (US$ bn) 175.6 195.7 193.7 188.7 188.7Total external debt, % of GDP 20.4 17.5 22.8 19.1 18.5Total external debt, % of exports 66.9 55.5 72.3 62.6 56.6Interest payments, % of exports 4.9 4.2 5.9 5.4 4.7Source: Banxico, JP MorganGrowth without inflation. Inflation increased to 4.26% percent level in 2010, from 3.57% ayear earlier, due to implementation of the tax reform and rises in administered prices, and adecrease to 3.8% is expected in 2011. The expectation is for the Central Bank to keep interestrates unchanged probably throughout 2011.Limited effects of the Euro area sovereign crisis. There is not much concern about thepotential impact of slower demand from Eurozone countries, as they just account for slightlymore than 5% of Mexico’s total exports.
  11. 11. 11Recovery in tax revenues but fall in oil income. Thanks to revenue from the oil industry,Mexico’s governments have traditionally collected little tax. Despite recent fiscal reforms,federal tax revenue amounts to only 11% of GDP, among the lowest in the world. But oil outputis falling rapidly, mainly because of an accelerated depletion of the Cantarell oilfield and aconstitutional ban on private investment in energy; oil income will probably continue falling in2011. Even though the public debt is only 30.2% of GDP, the budget is tightening the belt byraising taxes by 1% of GDP and cutting spending. The Secretariat of Finance estimates thatincome per head will not recover its level of 2008 until 2012.Strengthening of the peso ahead. The Mexican peso appreciated by 7.87% against the dollarin 2010 mainly by increasing exports to its largest trading partner and larger inflows of foreigncapital. The trend is expected to continue in 2011 as a result of stronger U.S. growth, increase inpublic infrastructure investment and rebounding of domestic consumer spending.Political OutlookPresident Calderon’s agenda for the remainder of his administration. President FelipeCalderon’s agenda for the remainder of his six-year term that ends in 2012 includes morecomprehensive structural reforms. After mid-term elections in 2009, when the oppositionInstitutional Revolutionary Party (PRI) regained a congressional majority, an ambitious 10-point agenda for reform was announced by the president. The downside is that his power toachieve it has waned: with only 143 of the 500 seats in the lower house, his party, the NationalAction Party (PAN), cannot even sustain a presidential veto.Ever since 2000, when Vicente Fox and the PAN ended seven decades of rule by the PRI, therehas been a broad consensus that Mexico needs a thorough reform of its corporatist institutionsand its oligopolistic economy if it is to create a vigorous, prosperous democracy. But theopposition has been reluctant to forfeit short-term advantage or anger privileged insiders – fromteachers to television companies – by helping the government pass legislation. PresidentCalderón has tried to push through deep reforms – of the state oil company, the tax system, thelabor law and education, among others – but in most cases they ended up as diluted reforms.The last cabinet changes seeked to cement his authority. For instance, the current head ofPemex, who was appointed in September, 2009, has a private-sector background but also ties toa different PRI faction, which suggests that Mr Calderón tried to stretch the limited scope forprivate investment in oil contemplated by the energy reform.National security. Mr Calderón’s crusade against Mexico’s powerful drug gangs has promptedvicious turf wars in cities throughout Mexico. Although most of around 30,000 killed since2006 appear to have been gangsters slaughtered by their rivals and some innocent people,partisan squabbling between the president and the PRI has been on the rise and public supportfor the crusade against drug traffic has waned.Elections 2010. The PRI was expecting a clean sweep in the July 4 2010 elections. But insteadof winning the 12 governorships at stake, the PRI lost in three of the most important states inplay (Puebla, Oaxaca and Sinaloa), where its rule was marked by corruption and cronyism. Theresult seemed to have justified Mr Calderón’s decision to forge local alliances with the left-of-centre Party of the Democratic Revolution, with which he agrees about little else except
  12. 12. 12opposition to the PRI. But as The Economist noted, this vote opened up new possibilities in apreviously paralyzed system7.The PRI’s priority is to win back the presidency in 2012 and this requires walking a politicaltightrope. Unconditional support for Mr Calderón’s programme would both strengthen thepresident and burden the PRI with the cost of unpopular reforms. But uniform opposition wouldexpose the party to the charge of putting partisan advantage ahead of the national interest at adifficult time for the country. The PRI’s attitude toward substantive reforms, such as anotherenergy law or modernising the political system, will depend in part on the battle inside the partyfor its presidential candidacy.Elections 2012. The challenge for the upcoming presidential elections in 2012 is for all threeparties, but especially the PRI and the PAN, to hammer out a set of political reforms whichwould give the next president a reasonable chance of carrying out his mandate. OtherwiseMexico risks continued gridlock, deeper disillusion with democracy and more violence.In an effort to tighten the grip in the fight against violence and the promotion of a strongerdomestic market, immediately after the July 4th2010 elections President Calderon replaced hiscabinet chief as well as the interior and the economy ministers. There is little doubt that thisreshuffle, as well as additional cabinet changes in January 2011, were aimed at improving hisrelations with the parties in Congress, increase the chances of passing reforms, and consolidateeconomic recovery.2.2 Foreign companies with MRO agreements in MexicoTable 3 includes some examples of foreign companies with facilities in Mexico which haveMRO agreements in place and the companies which MRO their planes in Mexico.Table 3Companies with MRO agreements in MexicoCountry Company w/facilities in Mexicoinvolved in MRO agreementCompany that MRO theirplanes in MexicoCanada Pratt&Whitney-ITR International Aero Engines,GE, Rolls-Royce, CFMI (JVbetween GE Aviation &Snecma)Spain ITR Airbus & BoeingFrance Snecma Airbus & BoeingFrance Messier Services Boeing & BombardierSource: Own research7“As you were”, The Economist, July 5 2010
  13. 13. 132.3 BASA, NAFTA and other FTAs – how they impact on companies doing MRO inMexico (ex: labor, import of parts, etc.).BASAIn September 2007, Mexico and the U.S. signed a Bilateral Aviation Safety Agreement(BASA). With the BASA in place, Mexico’s aeronautical authority (Dirección General deAeronáutica Civil, DGAC) is able to certify parts, components, aeronautical systems and evencomplete aircraft manufactured and assembled in Mexico destined for the U.S. and othermarkets, in accordance with U.S. standards and in compliance with Federal AviationAdministration (FAA) regulation.Some implications of the U.S.-Mexico BASA have been the following:1) both countries accept each other’s approvals and monitoring of maintenance andmodification of facilities, training of personnel, flight crew members, aviationtraining establishments and flight operations;2) there is reciprocal acceptance of airworthiness certification between Mexico andother countries with BASA certification;3) there is a significant cost reduction, especially for companies importing parts andcomponents to be converted into systems or aircraft sections;4) BASA helps to streamline production and avoid costly secondary reviews.The signing of BASA became an incentive for more foreign companies to set up shop inMexico. Some of the Tier 2-3 companies (e.g. MD Helicopters) have been able to obtainAS9100 as well as NADCAP certification. In October 2009, ITR certified the first product inMexico under BASA and obtained the Letter of Approval of Design which allows the companyto export its product to the U.S.The DGAC and the FAA are currently working on the procedures for implementation of theBASA in the following cases:Air Worthiness (IPA) – To comply with the certification of products designed andmanufactured in Mexico in accordance with U.S. standardsMaintenance Implementation Procedures (MIP) – To certify labsSimulators certification (SIP) – To certify simulatorsEnvironmental approvals and scenarios (EIP) – To certify environmental proceduresTraining Implementation Program (TIP) – To set up centers for the training andcertification of personnelCurrently, such an agreement does not exist with Canada. A Technical Arrangement(TA), described below, is being negotiated which will allow for a more efficient transferof products and components manufactured in Mexico.In 2010, Transport Canada Civil Aviation (TCCA) officials met with the MexicoDGAC (Dirección General de Aeronáutica Civil) officials on three occasions resultingin agreement to proceed with work towards an aviation agreement and discussion
  14. 14. 14of steps involved with the process. In addition, the two aviation authorities exchangedletters confirming the intent to move forward with a Technical Arrangement (TA). Thescope of the TA is anticipated to include maintenance organizations and parts designand manufacturing approvals. Traditionally, TCCAs approach has been to start with anaviation authority level TA with a long term goal to negotiate a BASA (treaty). The nextstep, now in progress, involves information exchange which will allow completion of agap analysis of each authorities regulations and supporting infrastructure. This will befollowed by a face-to-face meeting to discuss any discrepancies. TCCA officials willmeet with DGAC officials in March 2011 to continue discussions on this initiative.NAFTASigned in 1994, NAFTA allowed Canadian and Mexican companies open access to each other’smarket. The main purpose of the agreement was the elimination of quotas and the gradualdecrease in import taxes on non-oil exports from Mexico in a maximum period of 15 years.In order to deal with the vast amounts of raw materials and inputs required by the aeronauticand airspace industries, Mexico introduced the tariffs 9806.00.05 and 9806.00.06 in Chapter 98of Special Operations of the Tariff of General Import and Export Taxes (LTGIE), entitled"Merchandises for the Assembly and Manufacturing of Aircraft and Aircraft parts". Thesetariffs allow the duty free import of said raw materials and inputs when the companies involvedhave the Certificate of Approval for Production issued by the Ministry of Communications andTransportation.Other FTAsMexico has the world’s largest network of free trade agreements: including NAFTA, Mexicohas reached 12 agreements with 44 countries including the European Union and Japan.3. MEXICO’S AIR SERVICES SECTOR3.1 Global aerospace sector: where does Mexico fit?According to recent estimates included in Table 4 below, the global aerospace industry is worthan estimated USD$450 billion. Mexico ranks 15thoverall in industry size, being also the 14thlargest economy as measured by GDP. Based on an industry revenue estimated at aroundUSD$3 billion, Mexico has a share of 0.67 percent of the global aerospace industry, comparedto 5 percent in the case of Canada.
  15. 15. 15Table 4Mexico’s Ranking in the Global Aerospace IndustryRanking Country Revenue(USD)1 USA $2042 France $50.43 UK $32.74 Germany $32.15 Canada $22.36 Japan $14.17 China $12.08 Russia $10.09 Italy $9.910 Brasil $7.611 Spain $6.112 Singapore $4.313 India $4.014 Netherlands $3.415 Mexico $3.016 Others $4.2TOTAL $450Source: Aerospace Globalization 2.0: Implications for Canada’s Aerospace Industry,A Discussion Paper, November 2009According to a report by AeroStrategy Management Consulting in 20098, Mexico was amongthe top 9 countries in terms of aerospace total investments but first in manufacturinginvestments (USD $33 billion in the last 20 years), ahead of the U.S. and the BRICs and 6th inengineering – Russia and India have deep engineering pools. In 2008, estimated investment innew plants amounted to USD$867 million, and between USD$1.2 and $1.5 billion in 2009 and2010. For Deloitte, this industry has a great potential in Mexico. Such is its importance: "Thissector (aviation) will receive USD$200 million in loans in 2010, according to the financingprogram of the National Bank of Foreign Trade for aeronautical sector"9.8AeroStrategy Management Consulting, “Aerospace Globalization 2.0: The Next Stage”, September2009, available at http://www.aerostrategy.com/downloads/commentaries/commentary_sept09.pdf9Deloitte, "Manteniéndose firme: Perspectiva de mitad de año 2010 para el sector global aeroespacial yde defensa", cited by www.CNNEXPANSION.com, July 26, 2010.
  16. 16. 16Charts 3 and 4: Global Aerospace Investments in Manufacturing and EngineeringSource: Management Consulting, “Aerospace Globalization 2.0: The Next Stage”, September 2009Figure 1: Global MRO Aviation ClustersSource: AerospaceIn MRO, Mexico is considered to be one of the most promissory emerging hubs as airframeheavy maintenance, a labor intensive activity, is being developed there by major OEMs (SeeFigure 1 above). The Mexican MRO cluster complements existing MRO clusters in SouthernCalifornia, the Central U.S., South Florida and Quebec.Out of total Latin MRO demand of USD$2.2 billion in 2009, Mexico is estimated to representaround 23% (USD$506 million)10, behind Brazil with 29% (USD$638 million).10Bill Bihlman, Latin America Air Transport MRO An Update and Forecast, Latin America & CaribbeanAirline Maintenance & Purchasing Conference, Mexico City, December 8 2010, p. 8AEROSPACE INVESTMENTS - MANUFACTURING(USD$Billion)05101520253035MexicoChinaUSARussiaIndiaPolandMalaysiaJapanMoroccoAEROSPACE INVESTMENTS - ENGINEERING -R&D (USD$Bilion)05101520RussiaUSAIndiaSingapurKoreaMexicoChinaJapanBrazil
  17. 17. 17Within the global value chain of North American and European OEMs, Mexico has a clearcomparative advantage as an MRO service provider, mainly for airframe heavy maintenance forseveral reasons:Location. The proximity to U.S. and Canadian aerospace supply chains facilitatesreliable, low-cost ground transportation. Mexico’s closeness to the largest market inthe aerospace industry – 7 out of 10 aircrafts that are sold in the markets aremanufactured there – allows for rapid adaptations of products and parts and deliveryto North American customers in less than a week.Competitive costs. According to a recent comparison of the current industryleaders, companies established in Mexico can save up to 30 percent in operationcosts11.Qualified labor force. Mexico has a good supply of skilled and experiencedaviation technicians and a low-cost, dependable, and skilled labor force, asevidenced by Mexico’s strong record in the automotive and consumer electronicsindustries.Experience. The performance and credibility of Mexican repair stations has beenclearly demonstrated by the experiences in which maintenance works have migratedfrom the U.S. to Mexico such as the Aeroméxico facility which supports the fleet ofMDs80 of Delta Airlines or Messier-Dowty which repairs the landing gear inQuerétaro, among others.12Completion of the United States–Mexico BASA which lets manufacturers tocertify and ship components directly from Mexican factories.Confidence in Mexico’s willingness to protect intellectual property. Since thesigning of NAFTA, Mexico has made a strong commitment to protect intellectualproperty rights.Mexico’s elimination of duties for aeronautic components.3.2 Key MRO players in Mexico, key competitors in other countriesCommercialThe following table lists the key MRO players that can provide services to third-parties inMexico:11KPMG, “Competitive Alternatives 2010”, available at www.competitivealternatives.com12See Navarro Jesús, “Retos y Oportunidades para los Talleres Aeronáuticos en México”, Academia deIngeniería México, México, December 2, 2010, p. 13
  18. 18. 18Table 5Mexico’s Leading MRO Service ProvidersCompany Countryof OriginLocation Opening Work-forceKey Customers1.Aeroméxico Mexico MexicoCity,Monterrey2006 n.d. Exclusive heavyairframe for DeltaMD88s2. Mexicana MROServices*Mexico Mexico C.Guadalajara1997 1700 Air France, Air Jamaica3. ITRTurboreactoresSpain Querétaro 1998 400 Aeroméxico, MexicanaSAS4. SAFRANGroup(Snecma AmericaEngines Services)France Querétaro 2007 70 Mexicana de Aviación(20 years exclusivecontract), US Airways5. SAFRANGroup(Messier Services)France Querétaro 2008 240 Mexicana de Aviación,Interjet, US Airways,MESA, LAN* Prior to bankruptcySource: Company brochures & Company presentations at AeroExpo Acapulco, 2009The Map below shows the location of the main repair stations in Mexico that can provide MROservices to third-parties in commercial aviation.Map. 1. Location of the main Mexican repair stations able to provide MRO services tothird-parties in commercial aviationSource: Navarro Jesús, “Retos y Oportunidades para los Talleres Aeronáuticos en México”, Academia de Ingeniería,Mexico, December 2, 2010, p. 13
  19. 19. 19MRO services sector in Mexico has had a gradual development. In a first stage, it involvedmainly the overhaul of narrowbody planes operated in the U.S. Mexico’s relatively small MROplayers were focused on maintaining in-house fleets, with a small amount of ad hoc third-partywork on the side. In a second stage, as a growing number of companies invested in the industry,Mexico was able to develop every segment of MRO services. Examples of recent investments inthe Mexican MRO market include the following:Snecma Services and ITR–Pratt / Whitney: CFM56 maintenanceHoneywell: Machining and Systems IntegrationMessier–Bombardier: Landing gear ShopRockwell Collins–IFE Manufacturing: Pratt & Whitney–Thrust Reverser RepairShop.13In the third and most recent stage, Mexican MRO providers have been looking to increase theirthird-party business as they add capacity and begin to target more aggressively potential U.S.customers.The main capabilities of MRO services providers operating in Mexico are listed in Table 6below. ITR–Pratt / Whitney is the only player in the engine MRO market segment. Aeroméxicoand Mexicana (the latter prior to its bankruptcy) focus on airframes since they consider thatinvestment to expand into engine and components is too high.Table 6Mexico: Capabilities of Key MRO companiesCompany CapabilitiesAeroméxico Empresade MantenimientoNarrowbody airframeDC-9, DC-10, MD-80, 727, 737, 757, 767Mexicana MROServices** Prior to bankruptcyNarrowbody airframeAircraft: A320 (A318, A319, A320 & A320)B737 (B737 & B 737NG)Equipment: A330, B717,727,757 & 767, Bombardier CRJ200,Fokker 100, McDonnell Douglas DC-9 & MD-80ITR JT8D-STD, JT8D-200, TPE731, CFM56Messier ServicesAmerica (SAFRAN)MRO activity for landing gear and associated hydromechanicalsystems with Airbus (A300,310,318,319,320 and 321),Bombardier (CRJ, Dash 8 and Challenger) and Boeing(B737NGB)Component services approved by parent OEMsMaintenance tooling & turnkey servicesSpare parts for military landing gearTechnical Assistance and unscheduled supportSnecma AmericaEngine Services(SAFRAN-ITR) OEM shop for CFM56 engines (-5A,-5B)Source: Companies websites13See http://www.sh-e.com/presentations/berger_feb07.pdf
  20. 20. 20Following is a brief description of the main MRO companies operating in Mexico.1) Empresa de Mantenimiento Aéreo, AeroméxicoIn 2006, Aeroméxico established a separate maintenance company within Grupo Aeroméxicocalled EMA, which stands for Empresa de Mantenimiento Aéreo, to provide maintenance tothird parties.In 2008, Aeroméxico opened a new two-line hangar in Guadalajara to offset the return of thehangar leased from Mexicana de Aviación. The new $10 million “state of the art” hangar gaveEMA the same overall capacity which includes three lines in Guadalajara and three in MexicoCity. Two of the Guadalajara lines are dedicated to Delta Air Lines Boeing MD-80s under a 10-year arrangement that began in 2006 and involved Aeroméxico overhauling all of Delta’s MD80s in exchange for Delta TechOps overhauling all of Aeroméxico’s CFM56 engines. As part ofthe partnership, Delta TechOps is supposed to help Aeroméxico market its excess airframecapacity to other third-party customers. Delta TechOps will eventually take an active role inhelping Aeroméxico secure more third-party air frame business. In recent years, Delta MD-80shave accounted for all of Aeroméxico third-party capacity because its other four airframemaintenance lines have been eaten up by in-house requirements. But this will change afterAeroméxico retires the last of its 60 Boeing MD-80s. Boeing MD-80 pre-return heavy checkshave eaten up a significant amount of Aeroméxicos maintenance capacity over the last fouryears, but once its fleet renewal program is complete, giving it an average aircraft age of only6½ years, it will be able to pursue third-party work outside Delta.2) Mexicana MRO ServicesFollowing is a description of the company as it existed and operated until August 2010 when itfiled for bankruptcy protection under Mexico’s insolvency law.Mexicana MRO Services was a division of Grupo Mexicana de Aviación with its headquarterslocated at the International airport in Mexico City. This division was founded in 1997 due to theexperience of providing integrated maintenance services for the first airline in Latin Americaand the fourth oldest in the world. Mexicana MRO Services received aeronautics and ecologiccertification recognized in the industry, such as: DGAC, EASA and SEMARNAT / PROFEPA.Since privatization in 2005, the company invested substantially in its service offerings. In thesummer of 2010, it aimed to grow third-party work via aircraft overhauls and component workat a new facility in Guadalajara, and finished implementing an Oracle enterprise resourceplanning software suite.The company had operations in two locations: Mexico City and Guadalajara. In Mexico City,within a total area of 1,730,139 sq. ft. and 1500 employees, Mexicana MRO Services offeredinstallations for the following:Main hangar with 92,505 sq. ft. and a capacity for four positions. This permited totallyindependent simultaneous operations with the following configurations: (a) 3 NarrowBody & 1 Wide Body Aircrafts; and (b) 4 Narrow Body Aircrafts.
  21. 21. 21Painting hangar with 49,503 sq. ft. that operated in accordance with Mexicanenvironmental standards and with a maximum capacity to receive an aircraft with thedimensions of a Boeing 767-300.Totally illuminated platform with 1,568,288 sq. ft. and a capacity for 40 positions, thelargest of which was equipped with external electrical facilities and jet blast defectors.Aircraft services included Airbus A320 family and A330 aircraft and Boeing 717, 727,737, 757 and 767 aircraft.In Guadalajara, within a total area of 1,055,853 sq. ft. and about 200 employees, MexicanaMRO Services offered installations for the following:Main hangar with 53,206 sq. ft. and a capacity for two positions. This permited totallyindependent simultaneous operations for two narrow body aircraft.Totally illuminated platform with 1,002,647 sq. ft. and a capacity for more than 10positions, the largest of which was equipped with external electrical facilities and jetblast defectors.A 22,605 sq. ft. warehouse of components and spare materials, an infrastructure basedon planning, buying, logistics and warehousing, which allowed the optimization of timein repairs.The two-line base maintained only Mexicana de Aviación aircraft: Airbus A320 familyaircraft, Fokker 100s of domestic operator MexicanaClick and Bombardier CRJ200soperated by new regional MexicanaLink. Most of it served as the head office andoperational base of MexicanaLink.Operating under the philosophy of “One Stop Shop”, Mexicana MRO Services offered servicessuch as: line maintenance (transit services, daily and overnight checks, parking services andground handling); base maintenance (A & B checks, unscheduled maintenance); heavymaintenance (C,D,E, etc. checks, structural & major modifications and repairs); and paintingservices (full aircraft pre-paint configuration, strip & paint, scuff / sand & paint, polish,finishing and detailing, interior painting, customized exterior paint scheme logo design andapplication).Mexicana MRO Services had workshops for total and partial separation and testing ofcomponents for the families of A320, B727 and Fokker 100 for the specialties of avionics,composites, among others.In Mexico City, Mexicana had four overhaul lines: two were used for Mexicana and two forthird party customers, but after the second line opened in Guadalajara, most of the capacity inMexico City had been available for third-party customers. The Guadalajara facility – whichMexicana had been leasing to Aeroméxico since 1992 –, had one maintenance line, with asecond opened in September 2009. It had been used to maintain Mexicana’s A320 aircraft andits new fleet of Bombardier CRJ200s, freeing capacity in Mexico City for third-party work.Mexicana’s third-party business already accounted for about half of Mexicana MRO’s revenues,but this was expected to grow following the reopening of a maintenance base in Guadalajara.Mexicana also joined the Airbus MRO Network, which the carrier hoped would position it towin more maintenance work from Airbus operators.
  22. 22. 22While Mexicana overhauled nine aircraft types and planed to add three more by mid-2010, thefocus was to have one family of aircraft for third party work, or a maximum of two. A320swould have continued to be Mexicana’s main third-party product as well as Boeing 737s,although Mexicana did not operate the latter.Mexicana MRO used to do 100% of Mexicanas airframe and 60% of its componentmaintenance, work accounting for 60-70% of its overall load. Third-party work used to be about30-40% of its activities, depending on the year. Mexicana MRO’s largest customers were AirJamaica (it had been doing all of the airlines work for the last two years), CIT Group, BoeingCapital Corp., Pegasus Aviation, AWAS Aviation Services and Tame of Ecuador. It alsosupported the fleet of Mexicos police force (Policía Federal Preventiva)14. In March 2009,Mexicana MRO Services joined the Airbus MRO network.15Bankruptcy of Mexicana MRO ServicesFollowing is a description of the situation and outlook of the bankruptcy process of MexicanaMRO Services.In August 2010, Mexicana MRO filed for bankruptcy in Mexico and cancelled all itsmaintenance contracts, including those with Air France and Air Jamaica. In December, thecompany was granted bankruptcy protection by a Mexican judge and started the process ofrestructuring a total debt of $185.5 million pesos using Mexico’s insolvency law. What thisbankruptcy would mean for Mexicana MRO Services is still unclear. In the meantime, there aremore questions than answers, for example, it is not certain what will happen to its formercustomers. For example LAN Chile could be required to send more aircraft to TAM.16The future of Mexicana’s MRO unit depends on what happens to Mexicana’s fleet. Becausenearly half of Mexicana MRO Services’ work is for other subsidiaries, any downsizing mightresult in subsequent cuts to its workload and workforce. Downsizing also would leave routesand maintenance business with several major carriers such as Air Jamaica, Alaska Airlines andUS Airways open to competitors at a time when Latin America is growing as a center forcommercial aircraft maintenance.Analysts consider that the most likely scenarios for Mexicana MRO Services in the near future,once the bankruptcy procedure is over and the debt is restructured, are as follows:1) Mexicana MRO stays afloat as the maintenance arm of Mexicana de Aviación. In thiscase, it could be assumed that Mexicana is able to continue air operations but on a muchsmaller scale and keep a few mainline aircraft. As a result, Mexicana MRO would haveto scale down its workforce. The company would have to find ways to raise money and14Seehttp://www.aviationweek.com/aw/jsp_includes/articlePrint.jsp?storyID=news/om1009cvr.xml&headLine=Latin%20American%20MRO15See http://www.mronewsfocus.com/downloads/pdfs/mronewsfocus_mar_09.pdf16See Aerostrategy, Latin America Air Transport MRO, an Update and Forecast, December 2010
  23. 23. 23stay afloat. It could sell shop shares to other companies and it could also gain businessas aircraft from the old Mexicana de Aviación are sold or leased to new operators. Thefinal outcome would be determined to a large extent by the unions. If the company andthe unions are not able to cooperate, it is unlikely that Mexicana MRO will be able tostay afloat.2) Mexicana MRO winds up on its own. In this case, the company could seek stabilitywithin a diversified parent company, as Sabena did with TAT Group and SR Technicshas done more recently with Mubadala.In any case, it seems unlikely that Mexicana MRO will end up with its original size andcapacity. If it is structured at a smaller scale, Canadian MRO companies can step in to cover theneeds of those clients that Mexicana MRO Services would not be able to serve. If the companysurvives as a stand alone company, Canadian companies may explore the possibility ofalliances-partnerships.173) ITR TurborreactoresITR Turborreactores is a subsidiary of the Spanish company ITP and a JV with Rolls-Royce.Incorporated in 1988 and with cumulative investments for USD$48 million to date, ITR hasyearly sales of up to USD$ 78 million. In 2008, ITR and Snecma Services opened a jointventure within ITRs Querétaro facility known as Snecma America Engine Services (SAMES)dedicated to the overhaul of CFM-56-5. ITR has specialized on JT8D engines, of which it hasrepaired more than 1,000 units. The company has conducted over 3000 internal repairs. 32repairs have been approved by the OEM and FAA’s DER (Pratt Source approved for NiCdapplication on HPC disks). Engines repaired by ITR are currently operating in four continents.The company is poised towards the integration of design, manufacturing and repair of gasturbine engines.Among the MRO capabilities ITR has the following can be cited: complete engine repair andoverhaul, in-house repair of modules, individual components and accessories, overhaul for maincomponents JT8D-200 & STD, technical assistance in the field and on line, and repairdevelopment.4) SAFRAN GroupThe SAFRAN Group, one of the world’s foremost aerospace companies with four corebusinesses of aerospace propulsion, defense security, aerospace equipment and communication,is the largest aeronautic employer in Mexico and the largest French investor in the country.In the MRO sector, the Group has two facilities. The Querétaro facility of Messier Services wascompleted in January 2007 and provides support for landing gear and hydraulic unitsmanufactured by its parent companies, Messier-Dowty and Messier-Bugatti and other leadingmanufacturers. The purpose-built, self-contained 100,000 square-feet facility with 24017See:http://www.aviationweek.com/aw/generic/story_channel.jsp?channel=mro&id=news/awst/2010/08/16/AW_08_16_2010_p14-246621.xml
  24. 24. 24employees performs overhauls and component repair services on DHC8, CRJ, Airbus A330/A340, A300/A310 and the Airbus A320 family and Boeing 737NG aircraft. During thedevelopment phase, the Querétaro facility received support and training from the MessierServices global network. The DGAC Mexico, FAA and EASA regulatory authorities haveapproved the facility to perform landing gear overhaul and hydraulic repair.The second SAFRAN facility, also in Querétaro, is Snecma Americas Engine Services(SAMES). This company was incorporated in 2008 as a JV with ITR with 70 employees and isthe OEM shop for CFM56 engines. The company has an exclusive contract with Mexicana, butalso works for Northwest, US Airways. SAMES has capacity to overhaul about 30 enginesannually, but aims to eventually overhaul as many as 200 CFM56s a year. There is ample spaceto expand the CFM56 line as demand for ITR’s core product, the JT8D, decreases.185) OtherInterjet. The company, which was incorporated in late 2005, opened a maintenance facility inMay 2007 at Mexico Citys alternative airport in Toluca with a surface of 100,000 square metersfor repair services and painting of Airbus A320 and A340. The workshop can provide thefollowing MRO services to third parties: structural services, prevention of corrosion, agingprogram, improvement of interiors, repair of landing gear, painting and structural changes tonavigation systems.Interjet’s maintenance operation secured FAA approval in 2008, authorising it to work on U.S.-registered A320 family aircraft. Until 2008 it only did work on its own A320 fleet. On August2009, Interjet completed the first heavy maintenance check for a third party customer. Thecompany re-delivered an A320 registered to U.S. low-cost carrier Frontier Airlines, an aircraftowned by Aviation Capital Group and formerly operated by U.S. leisure carrier USA 3000.19BusinessThe MRO sector has failed to keep pace with the growth of the business aviation fleet inMexico, and the lack of capacity and technical expertise is a frequent complaint of localoperators. Business jet MRO differs from its commercial counterparts because there are moretypes, in much smaller numbers and the ways the aircraft are cycled is different. The mainairline-based MRO houses, Mexicana and Aeroméxico, tend to leave business jet maintenanceto specialists because of the low volumes involved and the expertise required rarely justify theinvestment. Mexico’s private fleet takes often MRO services in the U.S., mainly in Houston.Local MRO capability is concentrated in the surroundings of the international airports ofMexico City, Toluca and Monterrey International Airports. Key players include companies suchas Monterrey Jet Center.18See www.safran-group.com19See http://www.aeronewsline.biz/t173-mro-actualites
  25. 25. 25GovernmentSeveral Mexican agencies with airplanes of their own have their MRO facilities operating underpermit by the DGAC. According to interviews with Aeropuertos y Servicios Auxiliares (ASA),these agencies send most of their aircraft to MRO abroad. However, the most importantworkshops and their respective location are: PGR - Cuernavaca, Morelos; Banco de Mexico -Mexico City; Comisión Nacional del Agua - Mexico City; Secretaría de Seguridad Pública -Mexico City; Consejo de Recursos Minerales - Pachuca, Hidalgo; Gobierno del Estado deHidalgo - Pachuca, Hgo.; SAGARPA - México D.F.; Policía Federal Preventiva - Mexico City.MilitaryBetween January and June 2009, the Mexican Air Force (FAM) spent around MXP$ 6.5 millionin the maintenance, disassembly and overhaul, repair and calibration of 11 aircraft in order tokeep the fleet operating. These aircraft included 3 air surveillance platforms Embraer EMB-CRJ145, as well as 2 C-26 Fairchild for drug detection.FAM purchased parts to keep operating the only Jet Star T- 33 that it still has from the originalfleet of 50 aircraft purchased in 1961. Until 2006, FAM had 13 T-33, but 12 were discontinuedbecause their maintenance became unsustainable.Between 1972 and 2005, there were 190 air accidents that implied the total or partial loss of theaircraft of the FAM. FAM’s budget for 2009 included, in the chapter classified with number2000, that the aircraft Aermacchi, the Helicopters Bell type 212, 206 y 412, the aircraft Aravá,as well as the Boeing 727 and 737 and the Bonanza, would be sent to MRO services. TheMexican Navy operates an MRO facility in El Zalate, Los Cabos.3.3 Airports and MRO clusters throughout Mexico and future developmentsMexico has the most developed airport infrastructure in Latin America. Every city of more than50,000 inhabitants benefits from airport services. Mexico City airport is the largest in LatinAmerica in number of passengers and operations.Mexico’s infrastructure:85 airports (59 international and 26 domestic)1,736 runways4 holding companies: ASUR (9 airports), GAP (7 airports), OMA (7 airports), ASA(58 airports)7 airports concentrate 73% of the passenger flow per yearMexico City airport handles 46% of passengers who travel every year in Mexicoand 59% of total cargoIn 2010, 65 million passengers traveled through Mexican airports, 4% less than in2009.2020DGAC, La Aviación Mexicana en Cifras, 1989-2009, available at http://www.sct.gob.mx
  26. 26. 26The main new projects underway are:The primary project to increase infrastructure in aviation is to construct 3 newcommercial airports in the Mayan Riviera, Mar de Cortes and Ensenada.31 existing airports will be substantially expanded, including Toluca, Puebla,Cancún, San Jose del Cabo, Loreto, Nuevo León, Monterrey, Guadalajara andPuerto Vallarta.Two additional expansion projects and a new airport plan (in Merida) are currentlyunder study. Of the investment required (USD $5.5 billion) by the aviation portionof the plan, over 45% will come from private sector and the remainder from theMexican government.Following is a description of the eight Mexican states (including the capital, Mexico City orDistrito Federal) where most of MRO establishments are located:1) Querétaro3 MRO companies:o Industria de Turboreactores (ITR)o Messier Services Americas (SAFRAN Group) Landing gear shopo SAMES (Snecma Ameritas Engine Services) CFM56 maintenanceIndustrial experience from metal mechanic & autopartsClose proximity to Mexico City and Central MexicoIts airport has the longest runway in MexicoThe National Aerospace University is located in Querétaro and was formallyinaugurated on March 2009Supplier base is being developed, mostly related to Bombardier2) Mexico City6 MRO related companies:o Mexicana MRO Serviceso Eurocoptero Partes Aereas Concordeo GIMA Aerospaceo Navair de México (Spain)o European Aeronautic Defense and Space Company, EADS (France)Location of the largest and most important international airport in Mexico3) State of Mexico6 MRO related companies:o Representaciones, Asesoría, Mantenimiento y Servicios Anexos (CiudadNezahualcoyotl)o Llantas y Artefactos de Hule (Cuautitlán)o Aerovics (Toluca)o Centro de Servicio Avemex (Toluca)o Raytheon Aircraft Services Mexico (Toluca)o Interjet (Toluca)4) Nuevo León6 MRO related companies:
  27. 27. 27o Monterrey Jet Center (Apodaca)o Honeywell Aerospace (Monterrey) Machining and systems integrationo GE Aviation (Monterrey)o United Technologies Corporation (Monterrey)o Aerodiesel Engines (Santa Catarina)o Protexa (Santa Catarina)Created on August 2009, the Monterrey Aero Cluster intends to transformMonterrey into one of the largest locations for turbine and aerospace components by2010. Still pursuing a key project to detonate the cluster.Local universities are developing programs related to the aeronautical industry.5) Coahuila1 MRO related company (Saltillo Jet Center – Ramos Arizpe)6) Baja California3 MRO related companies (Chromalloy and Rockwell Collins – MexicaliPratt&Whitney - Tijuana)Mature aerospace environment with companies established in the city over 40 yearsago.Supports primarily the U.S. state of California due to geographic proximity.Good aerospace educational programs provided by local universities linked to theindustry.7) Tamaulipas1 MRO related company (Chromalloy Dallas Mexico – Nuevo Laredo)8) Guerrero1 MRO related company (Turbinas de Zihuatanejo – Zihuatanejo)3.4 R&D and innovations in related MRO sectorsAt federal level, CONACYT (Consejo Nacional de Ciencia y Tecnología) and the Ministry ofthe Economy are promoting private investment in innovations in the aerospace sector throughfiscal incentives and programs such as INNOVAPYME, PROINNOVA e INNOVATEC. Theseagencies also manage the Fund for Technological Innovation, a trust that was set up to supportSMEs and that seeks the technological participation of at least 10 SMEs in order to increasetheir competitiveness through the development of new products, manufacturing processes,materials or services. At the state level, governments are setting up industrial clusters topromote linkages between industry and universities. For example, Baja California andQuerétaro have a very large and effective educational structure which is greatly focused on theaerospace business.Several institutions in Mexico have reached levels of excellence in the development ofmanufacturing technologies. Examples include CIATEQ, ITESM, CeDIAM, UANL (CIIDIT),UNAM, CIMAV, CIDETEQ, CIDESI and IPN (CIDETI, CICATA) with projects linked to theaerospace industry in areas such as electromechanical design, robotics, mechatronics,nanotechnology, metallurgy and new materials, among others.
  28. 28. 28Even though investment in R&D by Mexican industry is relatively low, there has been asignificant increase in recent years. Local policies and strategies are now better aligned tointernational recommendations in the field of innovation, particularly from the OCDE.Innovation and technology activities in the aerospace sector in Mexico are highly concentratedin Mexico City, Guadalajara, Monterrey, Querétaro and Baja California regions. Thecapabilities of companies involve the design, innovation and engineering services such as:systems design, engineering design, manufacturing design and systems integration, to cite a fewexamples.4. MEXICO’S POLICIES AND INVESTMENT INCENTIVES4.1 Mexico’s policies for the aerospace sector: SCT, Ministry of Economy, ProMexico,National Council on Science and Technology, state governments – impact and role of eachof these players.Following is a brief description of the main agencies involved in the development of theaerospace sector in Mexico from public, private and academic sectors.Government agenciesMinistry of the Economy. The Secretariat of Economy (SE) designs and implements programsto increase the competitiveness of economic sectors with high aggregate value and technologicalcontent in sectors such as the aerospace. It maintains a bilingual website(www.economia.gob.mx) offering an array of information, forms, links and transactions.Among other options, interested parties can download import/export permit applications, makeon-line tax payments, and chat with on-line advisors who can answer specific investment andtrade related questions.Ministry of Communications and Transportation (SCT). The General Direction of CivilAeronautics (DGAC) of SCT is the authority in Mexico for the aerospace and aeronauticalsector. Every company operating in the sector should be registered with this authority, either tooperate as a communication service or for the manufacturing, assembly of aerospace productsand MRO, engineering, R&D services, etc. With BASA in place, the DGAC is directlyresponsible for approving the design and manufacturing in Mexico of civil aeronauticalproducts, and oversees these parts and products under a BASA’s airworthiness procedurescheme. The Federal Aviation Administration (FAA) recognizes the DGAC as the agency withfull capacity to certify products and services of any corporation, and such certification is fullyrecognized by the FAA.Ministry of Finance (SHCP). Authority responsible for setting customs tariffs to parts andcomponents for manufacturers or assemblers of aircraft.National Council on Science and Technology (CONACYT). This agency is responsible forscience & technology policies in Mexico. This agency acted as the leader Working Group of theAerospace Route Map, the 5-year strategic development plan for the sector.2121Available at www.ProMexico.gob.mx/.../ProMexico/.../PlanVueloNacional.pdf
  29. 29. 29ProMexico. In June 2007, President Calderon created ProMexico, a federal entity charged withpromoting Mexican exports around the world and attracting foreign direct investment toMexico. ProMexico coordinates federal and state government efforts, as well as related privatesector activities, with a goal of harmonizing programs, strategies and resources aimed atcommon objectives and priorities while supporting the globalization of Mexicos economy.ProMexico maintains an extensive network of offices abroad as well as a multi-lingual website(http://www.ProMexico.gob.mx) which provides information on establishing a corporation,rules of origin, labor issues, owning real estate in Mexico, the maquiladora industry, andsectoral promotion plans, among other topics. Currently, in Canada ProMexico has offices inMontreal, Toronto and Vancouver.Table 7 below summarizes the main actions taken by the federal agencies to promote thedevelopment of the aerospace sector:Table 7Role of main Federal Agencies in the Development of the Mexican Aerospace SectorSE SCT SHCP CONACYT PROMEXICOCertificationSupportProgramResponsible forimplementation ofBASAEASATransportCanadaOne Tariff for allAerospaceIndustry ExportsLeader in thedevelopment of the5-year Strategic Planfor the AerospaceIndustryFDI andDomesticInvestmentSupport ProgramsDevelopmentof SuppliersProgramCertifications forManufacturingMROVAT return in 20daysIncentive Programs Trade Missions(Japan,September 2009)InvestmentSupport forCompanies(DirecciónGeneral deOfertaExportable)Participation in theLegal IssuesCommittee (Under-secretariat ofTransportation)Recognition of aFEMIACertificationINNOVAPYMEPROINNOVAINNOVATECFONCYTFONCICYTIDTIAerospaceevents:Farnborough(July 2010)AerospaceMeetings,Guadalajara(October 2010)Source: FEMIAState governments of Baja California, Sonora, Chihuahua, Coahuila, Nuevo León andTamaulipas in the North; San Luis Potosi, Aguascalientes, Querétaro, Jalisco, State of Mexico,Mexico City, Puebla and Guerrero in the center of Mexico; and Yucatán in the Southeast, areactively promoting the development of aerospace clusters, and competing against each other toattract FDI in this sector. For MRO, the most successful to this date in achieving their goalshave been Mexico City, State of Mexico, Querétaro and Nuevo León.
  30. 30. 30Private industryMexican Federation of Aerospace Industry (FEMIA). Non-profit association of privateaerospace companies established in 2007 with currently 50 members. FEMIA’s objectives maybe summarized as follows: “increase the size of the sector, in order to improve competitivenessthrough programs of large value added; develop broader supply chains; convince membercompanies to be selective on R&D investment; gain advantage during governmental purchasesin order to acquire technology and consider offsets; achieve equal opportunities for companiesestablished in Mexico with those established in foreign countries at the time of governmentalsearch for aeronautical services; take advantage of Mexico working for the U.S. defenseindustry, since other countries are not able to do so.”22During the 2010 Farnborough Air Show, ProMexico presided over the signing of memoranda ofunderstanding to strengthen cooperation between FEMIA and the Flemish Aerospace Group, aswell as with the UK’s aerospace agency ADS.Mexican Chamber for the Electronics, Telecommunications and Information TechnologiesIndustries (CANIETI): Private association for the promotion of the electronics, IT andtelecommunications industries. CANIETI co-sponsored the “Aerospace Meetings” event inGuadalajara in October 2010 aimed at strengthening the capabilities of design andmanufacturing of centers in Jalisco, as well as the national supply chain for the aerospaceindustry in the area.Academic sectorMexican Aerospace Education Council (COMEA): Association of 12 academic institutionsset up in 2007 and based in Querétaro which seeks to develop human capital, R&D andtechnology transfer. One of their active participants is the Technological University of Jalisco(Universidad Tecnológica de Jalisco) which recently set up a 2-year program with Aeroméxicoto prepare aeronautical technicians.4.2 Federal and State Government incentives for attracting MRO companies toMexicoFollowing is a list of the most relevant fiscal and non-fiscal incentives offered to MROcompanies:1) Fiscal. The most important tax incentive that Mexico offers to FDI in all sectors of theaerospace industry, including MRO, is no import duties on all raw materials and equipment.There is also an immediate tax credit on capital investment as well as special grants for strategicprojects. Bombardier is one of the companies that has benefited the most from fiscal incentivesto install a plant to manufacture aeronautical components in 2005 in Querétaro.Several Mexican state governments also offer additional incentives such as land donation and/orlower property tax, which reduces the cost of leasing land in industrial parks. A case in point isBaja California that offers 100 percent payroll tax exemption, 20 to 50 percent discounts on22Emilio Otero, “The Mexican Aerospace Industry”, PPT Presentation at the Aeroexpo Acapulco 2009.
  31. 31. 31water services connections and up to 30 percent discount on water utility fees, depending on thetype of water treatment and recycling systems that the companies use.232) R&D. The most relevant incentive is the fiscal credit on income tax to projects involvingR&D and design of processes and products. Also, CONACYT manages the Science andTechnology Fund for R&D to promote the development of technology or transfer of technology.In addition, Mexico implements the Program “AVANCE” to promote the creation of businesseswith high value added based on scientific and technological developments.3) Certification. A further budget of USD$6 million is available to help companies secure theforeign certification, in particular NADCAP standards that are required by overseas OEMs.4) Labor training. Mexico offers various labor training support programs. Usually, in theirefforts to attract FDI, federal states compete with each other offering different kinds of trainingprograms with support of local universities.5) Other. There are also state and local incentives for example in infrastructure, offering lowcost land in industrial parks, etc.What SE is at federal level, the Ministry of Economic Development (Secretaría de DesarrolloEconómico) is at state level – the authority responsible for promoting the aerospace investmentsand providing guidance and information to potential investors.5. BUSINESS OPPORTUNITIES5.1 Repair stations (DGAC and FAA certification); key players (competitors andpotential partners) and their client structureIn the last 10 years, the total number of MRO establishments in Mexico has gradually increasedas shown in Table 8 below:Table 8Number of Repair Stations in Mexico2000 2001 2002 2003 2004 2005 2006 2007 2008 2009# ofRepairStations203 217 224 243 250 260 275 286 298 249Source: SCT/DGAC, La Aviación Mexicana en Cifras 1989-2009The recent growth of the MRO sector can be attributed to two main factors: a) with globaleconomic downturn, airlines have had to concentrate in their core business, flying aircraft, andthey increasingly prefer to outsource their MRO operations in an effort to lower costs; b) forlocal airlines the cost of hiring external MRO personnel is lower than that of internal staffbecause the latter generally implies higher wages, benefits, etc., and this can make internalMRO unprofitable.23Jesús Estrada Cortés, “Cruising Altitude in the Aerospace Industry”, Negocios, Oct. 2009, p. 22-26.
  32. 32. 32Other important drivers of the growth of MRO activities in Mexico are as follows:Airlines are revitalizing their fleets, making noisy and polluting aircraft less attractive.The increasing environmental awareness leads to stricter recycling legislation as well,following the trends in the automotive sector in the nineties.Due to high fuel prices, the demand for fuel efficient aircraft increases, resulting in anearly phase out of inefficient aircraft.Due to the competitive environment more and more airlines are focusing on their core-activity. As a result they outsource their MRO activities and rely on independent thirdparties to do their maintenance work.The dip in air traffic after influenza crises resulted in an overcapacity on the market.Airlines reacted by withdrawing aircraft from service and parking them. Now that theglobal and local economies have recovered and are growing, demand for air traffic is onthe rise as well. Consequently, stored aircraft return into service, giving rise to anincrease in MRO demand required to redeploy stored aircraft.Following the GDP growth, the demand for passenger traffic is growing as well,consequently leading to an increase in aircraft demand. Increase in the number ofaircraft results in an increase in MRO-activities.The DGAC is the authority responsible in Mexico for the granting of certifications to repairstations who wish to do repairs or maintenance of Mexican aircraft. In order to be certified inMexico, foreign repair stations need to comply with the following requirements: 1) submit arepair station manual approved by the Civil Aviation Authority in its country of origin; and 2)pay the corresponding fees.Once the foreign repair station obtains the certification of the DGAC it will have to comply withthe following main requirements: 1) perform only the services and functions specified in thecertificate granted by its civil aviation authorities; 2) ensure that the concessionaire or operatorof the aircraft is authorized to repair the aircraft abroad by the DGAC; and 3) present to theDGAC a report every semester of the works done. Certification of a foreign repair station has avalidity of 2 years24.The main problem faced by local repair stations is that, as indicated in Table 9 below, out of 249MRO establishments in Mexico in 2009, only 23 (9.2 percent) are licensed by internationalauthorities, mostly the FAA of the U.S. Two repair stations (Mexicana de Aviación andTurboreactores) are licensed by the European Union. Eurocopter is the sole MRO provideroperating in Mexico that is certified by France.To be certified by the FAA, a Mexican repair station must comply, among others, with thefollowing requirements:a) submit a repair station manual as well as a quality control manual;24SCT, “Requisitos para la Convalidación y Certificación de Talleres Aeronauticos Extranjeros”,available athttp://www.sct.gob.mx/fileadmin/DireccionesGrales/DGAC/Marco%20Jurdico%20y%20Regulatorio%20Normativo/Normativo/Circulares%20Obligatorias/CO%20AV-04-05.pdf
  33. 33. 33b) submit an organizational chart of the repair station and the names and titles of managingand supervisory personnel;c) submit a description of the housing and facilities, including the physical address;d) submit a list of the maintenance functions, for approval by the FAA, to be performedfor the repair station under contract by another person;e) submit a training program. In addition, the equipment, personnel, technical data, andhousing and facilities required for the certificate and rating must be in place forinspection at the time of certification or rating approval by the FAA.In addition to meeting the other applicable requirements for a repair station certificate andrating, an applicant for a repair station certificate and rating located outside the U.S. must meetthe following requirements:a) Applicant must show that the repair station certificate and/or rating is necessary formaintaining or altering U.S.-registered aircraft and articles for use on U.S.-registeredaircraft, or foreign-registered aircraft;b) Applicant must show that the fee prescribed by the FAA has been paid. If the person islocated in a country with which the United States has a BASA, the FAA may find thatthe person meets the requirements based on a certification from the civil aviationauthority of that country. Before a repair station certificate can be issued for a repairstation that is located outside the United States, the applicant shall certify in writing thatall employees for the repair station, its contractors, or subcontractors performing a jobfunction concerning the transport of dangerous goods (hazardous material) are trainedas outlined in the most current edition of the International Civil Aviation OrganizationTechnical Instructions for the Safe Transport of Dangerous Goods by Air. A certificateor rating issued to a repair station located in the United States is effective from the dateof issue until the repair station surrenders it or the FAA suspends or revokes it. Acertificate or rating issued to a repair station located outside the United States iseffective from the date of issue until the last day of the 12th month after the date ofissue unless the repair station surrenders it or the FAA suspends or revokes it25.c)Table 9Repair stations in Mexico with International CertificationName Certifying Authority Country1. Aerovías de México FAA U.S.A.2. Mexicana de Aviación* FAA U.S.A.3. Mexicana de Aviación* JAA European Union4. Eurocopter DGAC France5. Aeroelectrónica FAA U.S.A.6. Llantas y Artefactos de Hule FAA U.S.A.7. Aerovic’s FAA U.S.A.8. Centro de Servicio Avemex FAA U.S.A.9. Oxígeno V.C. FAA U.S.A.10. Chromalloy FAA U.S.A.25Source: http://www.airlineinfo.com/public/repair%20stations%20oversight.pdf
  34. 34. 3411. Monterrey Jet Center FAA U.S.A.12. Hanhausen-Varcacia FAA U.S.A.13. Turborreactores FAA U.S.A.14. Turborreactores FAA European Union15. Messier Services America FAA U.S.A.16. Saltillo Jet Center FAA U.S.A.17. Consorcio Aviacsa FAA U.S.A.18. Compañía de Aviación FAA U.S.A.19. ANBC Aerolíneas FAA U.S.A.20. Ametek Lamb de México FAA U.S.A.21. Hawker Beechcraft Services FAA U.S.A.22. Honeywell Aerospace de México FAA U.S.A.23. Snecma America Engine Services FAA U.S.A.* Prior to bankruptcySource: SCT/DGAC, La Aviación Mexicana en Cifras 1989-2009In Table 10 below, we identify the key players in the MRO market and the main types ofservices they provide:Table 10Main Types of Services* provided by Key MRO players in Mexico* Prior to bankruptcyAFR:Airframe maintenance; ENG: Engine maintenance; COM: Component / systems maintenance;AVI: Avionics maintenance; REP: Repair services; INT: Aircraft interiors.Source: Companies’ websitesThe client structure of the main key players is as follows:Aeroméxico. In 2006, the company signed a 10-year arrangement with Delta that involved theoverhaul of all of Delta’s MD-80s in exchange for Delta TechOps overhauling all ofAeroméxicos CFM56 engines. This very important contract represents half a million man hoursa year. Until now, Boeing MD-80 pre-return heavy checks have eaten up a significant amount ofAeroméxicos maintenance capacity over the last four years. Once its fleet renewal program isCompany Location AFR ENG COM AVI REP INTAEROMÉXICO Mexico City X X X X X XITRTURBOREACTORESQuerétaro X X XMESSIER SERVICESAMERICASQuerétaro XMEXICANA MRO* Mexico CityGuadalajaraX X X XSNECMA AMERICAENGINE SERVICESQuerétaro X
  35. 35. 35complete, giving it an average aircraft age of only 6½ years, it will be able to pursue third-partywork outside Delta26. Aeroméxico’s client structure is as follows:International carriers – Air France, Alaska Airlines, Allegiant Air, LLC, AM Connect,American Airlines, APB Aviation Partners Boeing, Atlas Air Inc., Avianca, Awas,Boeing Capital Corporation, Continental Airlines, Iberia, International Lease FinanceCorp., LAN Chile, Pegasus Aviation Inc., Polar Air, Spirit Airlines , US Airways;International couriers: UPS;Private – GE Commercial Finance Aviation Services;Local charter companies – Aero Charter de Mexico, Aerotransportes Mas de Carga,Grupo Aéreo Monterrey, Centro de Capacitación Alas de América, Mexicana deAviación;Government – Office of the President of Mexico, Office of the Attorney General.ITR. Its facility has been dedicated to the maintenance of CFM56 engines for clients mainlyfrom commercial airlines.Messier Services Americas. Since its opening in 2007, the facility has been operating asBombardier’s landing gear shop. In 2007, US Airways signed a 5-year contract with MessierServices to provide complete overhaul of landing gear for their whole fleet of A320 family (100aircrafts) and 9 A330 aircrafts. In 2009, the company agreed to supply landing gear overhaulsfor a fleet of 68 LAN Airlines Airbus A320 series jets. The French MRO also agreed to performexchange and overhaul for the South America’s carrier fleet of A340s.Mexicana MRO Services. As part of the bankruptcy procedure, the contracts that the companyhad were temporarily suspended, pending the reinscription of Mexicana and its subsidiaries inIATA.During the negotiations related to the insolvency procedure of Mexicana, the new probableowner of Mexicana, PC Capital, announced that ground workers of the company would not beaffected because the company had the intention of maintaining Mexicana’s MRO operations.Snecma Services. In 2006, Mexicana and Snecma reached an agreement on an exclusive 20-year contact covering MRO services for the CFM56-5B engines powering the Airbus A320fleet.OtherInterjet. The company was the last important MRO establishment in Mexico to achievecertification from FAA three years ago, and since then it has successfully approved all auditsfrom this agency. So far they have provided MRO services mainly to the fleet of the company,but in an interview at the site they showed us letters of recognition for repairs to third partyaircraft. With the enlargement of the current facility and the conclusion of the ongoing building26See: http://www.flightglobal.com/articles/2009/03/16/323782/mexico-seeks-to-expand-third-party-maintenance.html
  36. 36. 36for training that will host a fixed simulator, they portray themselves as the number 2 keysupplier of MRO services after Mexicana.Aeromar, which claims to be the worlds first airline to perform a 36,000-cycles check on anATR 42, is now preparing to add capability for the ATR 72. While Aeromars Mexico CityMRO base has capacity to overhaul four aircraft simultaneously, it has no plans to grow itsthird-party business beyond the two or three ATR 42 it now maintains annually.Although Aviacsa suspended operations, it is worth noting that it also had MRO ambitions. Ithad a large MRO facility in Mexico City with limited third-party business and was planning toopen a new facility in Saltillo that would be 10 times the size. Aviacsa was not looking topartner a foreign MRO company as it had secured financial support from the state governmentof Coahuila. They were planning to make an investment in Saltillo since there is a lot of helpcoming from the local government as they want to develop a local aerospace industry. InJanuary 2011, it was announced that Aviacsa was getting ready to fly again given the progressachieved in the restructuring of its debt and the recertification of its aircraft and crews27.Key foreign competitors of local MRO firmsIn search of lower costs, and due to the lack of capacity in Mexico, several Mexican airlinecompanies send their planes to MRO abroad. For example, in 2006 Volaris signed a 10-yearcontract with Aeroman in El Salvador for the MRO of its fleet. In 2008, this same companyselected TRAX Maintenance to fulfill the airline’s MRO requirements.In 2005, Mexicana de Aviación awarded a 10-year maintenance contract to GE Engine Servicesfor support of its 20 CFM56-5B/P engines that powered the airlines 10 Airbus A318 aircraft.This maintenance contract built upon GE Engine Services existing relationship with MexicanaAirlines. Before its bankruptcy, the airline had a five-year maintenance agreement with GE forits Airbus A319 fleet powered by CFM56-5B/P engines. CFM56 engines are a product of CFMInternational, a 50/50 joint company between Snecma Moteurs and General Electric Company.On the other hand, last June, 2010, Aeroméxico signed with AFI KLM E&M by extending thecontract to maintain its fleet of B777s for a further two years. The first agreement, initialed in2008, convinced Aeroméxico –an AIR FRANCE KLM partner within the SkyTeam Alliance–to maintain the cooperation. It has accordingly decided to renew the partnership by entrustingthe maintenance of its four B777s to AFI KLM E&M. All four aircraft will undergo a C-checkat the start of the IATA year.In December 2010, Bombardier Aerospace added three AOG line maintenance facilities (LMF)in Monterrey. Aerovitro of Monterrey was named an AOG LMF for the Challenger and Global.This was the second Bombardier–approved maintenance facility in Mexico.2827See “Aviacsa reestructura y alista despegue” in Expansión, January 11, 201128See “David A. Lombardo, “Hot Section; Bombardier Adds 60thService Center” in AIN Online,December 1, 2010, available at http://www.ainonline.com/news/single-news-page/article/hot-section-bombardier-adds-60th-service-center-27743/
  37. 37. 375.2 Challenges and Trends for New Entrants to the SectorNew companies seeking to enter the sector in Mexico may face the following challenges:Need to pay a cost for the late entry to the market. Since there are a good number ofMRO companies, both local and international, already doing business in Mexico, anynew entrant will have to go through the “learning curve” of getting to know the localbusiness environment, establish contacts, etc. This will take some time and probablyincrease the cost of doing business locally.Face increasing competition. Any new entrant will also have to face the increasingcompetition of local and international firms who are already settled in the Mexicanmarketplace or that are planning to do so. It is likely that several airline companies thatdo not have their own MRO facilities look either to set them as subsidiaries or as JVwith local or foreign partners.The most relevant trends that will affect the entrance of new companies to the marketplace are:Rapid growth of the MRO market. As the global and Mexican aviation industriesrecover in 2011 and beyond, the local MRO market will continue to grow supported bylow labor rates, proximity to large North American market looking to outsource,continued growth of the Mexican airline industry, stable and high quality workforce anddemonstrated performance and credibility.Entry of European (possibly Asian) competitors. If Mexico is able to sign an agreementsimilar to BASA with the European Union, this would undoubtedly become a veryimportant incentive for European firms to enter the Mexican marketplace, to benefitfrom the access to the largest aircraft market in the world.While the economic downturn has affected MRO development in Mexico as it has inthe rest of Latin America, to a degree – some projects delayed, others not come tofruition yet – the pause is not expected to last. The need for additional MRO capabilityand capacity in the region, favorable government actions to encourage development andemployee training, and the cost advantages offered will assure continued MRO growthin the future.Local airlines with MRO facilities will continue to bet on their third-party maintenancebusiness to make the entire company grow (case of Aeroméxico, Interjet).Local airlines (Aeroméxico) and low-cost carriers (VivaAerobus, Interjet, Volaris) planto expand their investments in new aircraft in order to keep their tariffs low and be ableto compete.By segment, newcomers will face the following trends:Government – Trend to outsource MRO servicesCommercial – Consolidation of LCCs (Interjet and Volaris)
  38. 38. 38Executive – Rapid growth of niche markets (e.g. helicopter MRO), new entrants inregional airports (Los Cabos)Military – Need to renew the fleet, especially for anticrime purposes5.3 Business opportunities in the MRO sector in MexicoDomestic DemandIn 2008, Mexico had the largest aircraft fleet in Latin America, both in commercial andexecutive aviation.29As shown in Table 11 below, in 2009 the fleet was composed of 7,952aircrafts (1,742 commercial, 5,858 private and 352 governmental).Table 11Total Number of Registered AircraftAircraft 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Commercial 1173 1170 1158 1213 1398 1406 1489 1646 1723 1742Business 4786 4798 4761 4885 5281 5331 5403 5561 5735 5858Government 517 567 433 440 393 435 324 365 352 352Total 6476 6533 6352 6538 7072 7172 7216 7572 7810 7952Source, DGAC, La Aviación Mexicana en Cifras 1989-2009Currently, Mexican and Brazilian operators have the largest fleets in Latin America, followedby Chile, Colombia and Venezuela. The Mexican fleet is between 13 to 17 years old. The fleetof approximately 1742 active commercial jet aircraft in 2009 is dispersed among 8 operatorsand around 30 aircraft families. The most important type of aircraft is the A318, 319, 320 and321, followed by the 737-6/7/8/900.30Chart 5 below illustrates the growth in the number of registered aircraft in Mexico in the last 20years, considering the commercial, business and government segments.29US Commercial Service, available at www.buyusa.gob/mexico/en/airport_aviation.html30See Jonathan M. Berger “Latin American MRO Market Overview & Forecast, Dec. 4 2007, available atwww.sh-e.com/presentations/berger-04Dec07.pdf
  39. 39. 39Chart 5: Registered aircraft in MexicoMexico: Number of Registered Aircraft1990-20095000550060006500700075008000850019891991199319951997199920012003200520072009#RegisteredAircraftSource: DGAC, La Aviación en CifrasPotential clientsCommercial. In recent years, this segment of the industry has had to operate in a highlychallenging and consolidating marketplace in Mexico and in Latin America. In 2009, Mexicancommercial aviation was badly hit by the global financial and influenza crises and ensuingdecrease in tourism. Several low-cost carriers (LCC) suspended activities. Still, the Mexican airfleet was the 5th largest in the world.Table 12 shows the type of equipment operated by the Mexican airlines in 2009. The mostcommon are the AIRBUS A319-100 and A320-214, B737-700, B737-200.Table 12Mexico: Aircraft Operated by Mexican Airlines, 2010OPERATOR FLEET SIZE TYPE OF AIRCRAFTAVERAGEFLEET AGEAeromexico50aircraft+1stored+4onorder/plannedBoeing 737 (39) Boeing 767 (6)Boeing 777 (4) MD-80 (1) 8.1Mexicana 8 aircraft stored* Airbus A320 19.1Volaris 26 aircraft Airbus A319 and Airbus A320 4Interjet22 aircraft+2 onorder/planned Airbus A320 6.2Viva Aerobus11 aircraft+3 onorder/planned Boeing 737 22.8Aviacsa 2 aircraft Boeing 737 28.3Magnicharters 8 aircraft Boeing 737 23.3Aeromar 16 aircraftATR 42/72 and Canadair CRJ-100series 15.5* As of February 17, 2011Source: WWW.PLANESPOTTERS.COM

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