Monopoly and Competition in Mexico

Carlos Slim is proud to be the third richest person in the world. Mexico should be ashamed of him. He bought the national telecomm company from the government in a sale conditional on there being competition. But he fought every change and succeeded in maintaining the monopoly. He has recently been in the news looking down on Bill Gates and Warren Buffett for donating huge amounts to charity; he is so smart that he will keep all of his gains for himself. (Mexican Billionaire Carlos Slim Slams Bill Gates & Warren Buffet’s “Santa Clause” Routine)

But there is good news in the retail and airline markets in Mexico. From the Wall Street Journal (requires paid subscription):

For decades Mexicans had only two choices for domestic air travel, AeroMéxico and Mexicana Airlines. Both companies, once state-owned, were privatized in the 1990s, failed and were reabsorbed by the government. Mexicana has been privatized again.

Privatization did nothing to bring down sky-high airfares. Flying from Mexico City to Tijuana ran about $250, far above what most Mexicans could afford. Taking the bus costs about $80 and in 2005 bus companies carried some 250,000 passengers on the 33-hour trip.

So some businessmen took the risk of starting a low-fare airline, Volaris.

Competition drives innovation and Volaris proves the rule. The company came up with a number of creative solutions to problems that probably would not even been considered in a protected market.

Mr. Kriete told me by telephone from San Salvador that the economies of scale come from the decision to purchase identical planes. Volaris saves money because its mechanics and pilots are qualified to handle all planes and sourcing parts is uniform.

Mr. Aspe expanded on that point when I interviewed him in Mexico City two weeks ago, stressing the advantages of the brand-new Airbus A-319 fleet, which is more reliable and more fuel efficient than the industry average. The company also gains competitiveness, he said, with labor contracts that tie 50% of compensation to productivity. Another cost saver is the Toluca hub. Passengers traveling from Mexico City check in at what Mr. Aspe calls "the virtual terminal" in the northern suburb of Santa Fe and then travel 35 miles by bus, courtesy of Volaris, to Toluca's lower cost airport. Overhead costs are held down because 65% of reservations are made over the Internet and 20% are made through call centers.

It's still small but growing.

The beauty of Volaris is the beauty of the market. Both the airline and its customers are happy and business is booming. Last year Volaris carried more than 922,000 passengers on almost 8,700 flights at less than half the price that the traditional carriers were charging prior to competition. Bus passengers bound for Tijuana from Mexico City who switched to Volaris paid $100 and shaved 30 hours off their travel time.

A number of other low-cost carriers such as Avolar, Interjet and Alma have also entered the field. According to airport operator OMA, domestic air travel was up 22% at its 13 airports last year thanks to the low-cost carrier business.