Foreign investors will soon be able to buy larger stakes in Mexican airlines, after lawmakers voted to amend caps restricting foreign ownership in the aviation sector, although the changes are expected to raise questions about existing substantial ownership provisions contained in bilateral agreements.
Mexico’s General Congress voted to increase existing shareholder restrictions from 25% to 49% on 18 April and has now sent the bill to President Enrique Peña Nieto for confirmation, which is considered to be a formality. The bill is expected to be published in the Federal Official Gazette within the next two weeks, after which the new law will come into effect within one business day.
The changes are being introduced to aid Mexico’s carriers and build on the US-Mexico bilateral aviation agreement, which was signed in December 2015 and came into force last year, effectively establishing an open skies regime.
The proposed change is timely, as Aeroméxico and Delta Air Lines have confirmed publicly that the US carrier will take a 49% stake in the Mexican airline as part of a joint venture agreement, which was announced in 2015 and secured antitrust immunity from the US Department of Transportation in December last year.
Carlos Campillo Labrandero at Alegre Calderón y Márquez Abogados in Mexico City said the new law will also benefit other domestic carriers, such as Interjet and Volaris.
“Aeroméxico will be the first scheduled carrier to benefit, but I think other carriers will do so in future. Although there are no current rumours about potential investment, domestic airlines will be more attractive to foreign investors,” he said.
Certain airlines were rumoured to have lobbied for the removal of the entire cap, but that is unlikely to happen for a while, added Labrandero.
“The cap will not be raised to 100% in the near future. I think that the government and Congress both want to take it one step at a time,” he said.
“Let’s move to 49%, review how the industry behaves under the new cap and take some time to see what are the effects and consequences, both positive and negative. And then I think we’ll be able to discuss an increase to 75% or 100%.”
Although undoubtedly beneficial, the new law poses questions about effective control and substantial ownership terms contained in bilateral aviation agreements, Labrandero said.
“Most bilateral agreements establish that designated carriers of that specific country must have effective control and substantial ownership. What happens if you increase foreign ownership to 49%, but the foreign owners are then the largest stakeholder – the substantial owner exercising effective control? That could affect the designation of those carriers,” he said.
A low-cost carrier that sees a foreign investor becoming the largest stakeholder in an airline may file a complaint to aviation regulators, arguing that the carrier should not be able to operate because of the terms of the bilateral agreement on effective control, Labrandero said.
“We will need to see how this situation can be resolved and see how it will be interpreted by the authorities,” he said.
Notably, the US-Mexico bilateral aviation agreement signed in December 2015 did not include such a clause.
The new law also raises questions about shareholdings that are owned without voting rights, Labrandero said. Under the current regime, foreign ownership is capped at 25%, but an airline is able to apply to the Secretariat of Economy or the aviation regulator for a waiver, allowing a foreign investor to buy out a further 24% of that carrier’s “neutral stock”, without voting rights.
“If an airline had 25% foreign-owned share capital and took an extra 24% of foreign-owned neutral stock, but then increased its foreign-owned shares to 49% with voter rights under the new law, will the additional 24% neutral stock authorisation still be valid? It is important to see how the authority or regulator will review such holdings,” he said
“You could potentially have total foreign ownership at 73%. That completely changes the attractiveness of a company for foreign investors, so questions will arise in the near future once the bill is effective and once companies start filing to the authority to validate the 24% foreign-owned share increase.”
The bill marks the culmination of a six-year campaign to increase existing caps on foreign-owned shareholdings in domestic carriers. Mexico’s Senate began work on the legislation in 2016, which was broadly supported by government, airlines and the unions, according to Labrandero.
“Smaller airlines expressed some opposition and there were some complaints from unions, but it was fast tracked without any important opposition,” he said.
The legislation has been on the government’s agenda for approximately six years, when former President Felipe Calderón first expressed an interest in amending the cap based on rumoured interest from Aeroméxico and other carriers. There was no lobbying of government to increase the caps before then, because Mexico’s carriers were state-owned, Labrandero said.
New aviation-related legislation introducing passenger rights, delay compensation, greater powers for Mexico’s consumer protection agency and changes to the country’s slots regime were also discussed by the Congress on 18 April, but they are not expected to be passed before September.