Wanted: Buyer To Pull Airline Out Of Deep Dive

Two years ago, Aeromexico was poised to become Latin America's dominant airline. It had just taken control of its main domestic competitor, Mexicana, and was advancing in the southern hemisphere. But the airline has been brought to the brink of collapse by the combination of Mexico's economic crisis and the ambitions of its former chairman, Gerardo de Prevoisin, who has fled the country amid charges that he misappropriated funds.

Now the airlines' creditors, owed $1.5 billion, are campaigning to unload the two carriers. Their hope is to entice a foreign airline to inject needed cash and upgrade operations. But first the banks have to clean up the airlines' debt-ridden books. For starters, they plan to swap the roughly $500 million in debt they hold in Aeromexico for new equity that will bring their stakes in that carrier up to around 90%. Their plan cleared a major hurdle on July 10, when bondholders agreed to the restructuring of $137.5 million in debt.

BACK ON TRACK. After this financial face-lift, a foreign carrier might be tempted to buy in. While both airlines need new aircraft, they offer long-term growth potential once Mexico's economy gets back on track. And they have brought down operating costs to levels comparable to those of U.S. airlines.

But for now, both airlines are reeling. The peso devaluation has been a killer. It jacked up the costs of their dollar debt as well as dollar-denominated expenses. Aeromexico reported losses of $100 million in the first quarter, on sales of $170 million. Mexicana, in which the government still holds 34%, lost $150 million, on revenues of $146 million.

These problems haven't discouraged window shoppers. British Airways, Air Canada, and Continental all have expressed interest, says Eduardo Garca-Lecuona, financial planning director at Grupo Financiero Serfn, which holds $140 million in airline debt. Although British Airways PLC won't comment en reports that it is holding talks with Mexican investors, sources say BA wants to get into Mexico so it can funnel Latin American passengers to its transatlantic flights from U.S. cities.

Because a foreign airline can hold only 25% of a Mexican carrier, international players probably will enter the bidding through a Mexican-led investor group. Among such groups, the one with the most operating experience is headed by Guillermo Heredia, a former director general of Aeromexico, and former Mexicana CEO Ricardo Garca Sainz.

Heredia would bring a solid track record to any management team. As director general in the early '90s under de Prevoisin, he achieved a 96% on-time record, one of the world's best. Aeromexico overtook Mexicana to become the country's top carrier, and it now claims 40% of the market, compared with Mexicana's 29%. De Prevoisin, an insurance magnate, had bought the then bankrupt airline in 1988 as part of the government's privatization endeavors.

A fare war with discount airline Taesa, launched in 1988, was a disaster for all three. But Mexicana was worst hit. Meanwhile, such U.S. lines as Continental Airlines Inc. and United Airlines Inc. expanded aggressively into Mexico, dominating the routes between the two countries. De Prevoisin bought a controlling stake in flagging Mexicana in 1993. He further extended himself when he paid $15 million for AeroperPound the same year. That deal brought a nonexistent fleet and labor problems.

"NO PROOF." Last September, the banks ousted de Prevoisin when he failed to come up with cash to save Mexicana. He quickly fled, probably to France, where he holds citizenship. The banks filed suit against him, alleging that he put up Aeromexico cash for loans to himself and used them to increase his stake in the airline. In December, Mexican authorities issued an arrest warrant for de Prevoisin on fraud charges. His lawyers say the charges are a plot by the banks to get control of Aeromexico. "They are demonizing him," says Juan Salas, a de Prevoisin lawyer. "There's no proof that he has broken the law."

Despite the furor over its former boss, analysts think Aeromexico's dominant position will bring it a suitor. "My own bet--assuming that the balance sheet has really been cleaned up--is that Aeromexico ought to be an attractive acquisition for a major airline," says Robert Booth, a Latin aviation consultant in Miami. That is what the beleaguered banks and would-be airline brokers hope.



Sold by the government to an investor group led by Gerardo de



Gets control of competitor Mexicana and buys 47% of AeroperPound for $15 million.


Taken over by creditor banks, which force de Prevoisin to resign and accuse him of embezzlement.


Plans to convert $500 million of debt to equity and seeks investor.


    Before it's here, it's on the Bloomberg Terminal.