Thanks to an improved economy and a stronger internal market demand, expectations for airlines serving Mexican airports have improved. The aviation industry in Mexico is forecast to grow at a rate of 15 percent and an increase in the amount of receivables over 10 percent. Mexico’s aerospace industry is still at an early stage but shows some potential. The main driver behind the migration of aerospace parts and services industries to Mexico is the labor savings. These savings can be as large as $30,000-$40,000 per direct labor employee per year.

      Most companies that make up the aerospace industry in Mexico are foreign owned. The industry is comprised of approximately 60 companies with the largest concentration in the northwest region of Mexico:

      In the Guaymas Industrial Park in Sonora, where precision machined components for aircraft engines are made, there are about 12 aeronautics companies with an important nucleus of capability. The companies are non-competitors and complementary in a positive manufacturing environment.

Market trends

      Aerospace parts manufactured in Mexico include turbine, fuselage and landing gear components, plus harnesses and cables. There are also audio and video systems, heat exchangers, as well as some interior parts such as bathrooms and galleys.

      Most aeronautical parts and components made in Mexico are intended for the U.S. market and export figures provide the best performance measure for this industrial sector. Product sales were flat at about $50 million annually through 1997, but in 1998 exports rose to $144 million. Eventually they reached $350 million by 2003.

      Aerospace components made in Mexico and exported to the United States are expected to top half a billion dollars during 2006. This is a 10-fold increase over the last 10 years and positions Mexico as the 10th largest foreign supplier of aerospace goods to the United States, although it is still far away from more mature suppliers such as Canada, France, United Kingdom and Brazil.

      Mexico manufactures just 2 percent of the approximately $25 billion U.S. import market and growth prospects look promising. Some sub-industries have experienced a growth of over 20 percent in the last business year. An important fact that influences the growth rate is the companies’ ability to undertake the 10-12 month training of machine operators.

      Companies such as ITR in Querétaro conduct turbine maintenance and repair services. Pratt and Whitney in Tijuana repairs high-tech composite materials parts.

      Aerospace design and engineering activities are also taking place in Mexico. In Coahuila there is GE’s Center for Advanced Engineering in Turbo machinery, a place where Mexican engineers are designing control systems for jet engines.

Competition

      Mexico provides advantageous conditions for U.S. aerospace industries. The aerospace manufacturing requirements and Mexico’s conditions are attractive: low-cost manufacturing, in high/mix-low/volume production conditions along with intellectual property protection and near shore logistics advantages.

      However, other countries, such as Canada, may prove to be able to compete as well. Thanks to Canada’s generous Research & Development tax breaks, companies in Canada may deduct 100 percent of their R&D expenses. The program is permanent and the credit is refundable (if the company is not making a profit). Salaries, materials and even equipment qualify. As a hoped-for result, Canada’s aerospace industry invests approximately $700 million a year in R&D.

      Mexico needs a long-term plan to cater to the aerospace industry’s vast potential, and at the same time accommodate its demanding manufacturing conditions. Such a plan requires highly coordinated public and private policies, in addition to sufficient patience to obtain a critical development mass in the aerospace industry such as that of Canada’s and Brazil’s.

      Mexico is currently at the early stage of a hypothetical model for development of the aerospace industry. It manufactures individual parts and components, and could later make progress toward the assembly of systems or structures to stage II (i.e. landing, control). Eventually it could work its way into the full assembly of aircraft in the third stage.

      This process may take between eight and 25 years, depending on the speed and quality of conditions facilitated in a given country. Maturity beyond aircraft assembly is in the design, engineering and manufacturing of key components such as turbines. This is a development stage reached only by a few countries.

Mexico-U.S. agreements

      Under current Federal Aviation Administration rules, manufacturers in Mexico are not able to certify parts as airworthy. Therefore, aerospace parts and components made in Mexico must be shipped to the United States for inspection at a domestic facility before being shipped to U.S. customers. In order to obtain certification rights, a treaty known as a bilateral aviation safety agreement (BASA) between Mexico and the U.S. is required.

      The Mexican government is finalizing an agreement for manufacturers and industry institutional organizations. In order to fully maximize the potential of manufacturing and repairing of aerospace parts in Mexico, the signature of BASA is required. This would not only reduce costs, but it would also strengthen the trust of the sensitive aerospace industry in Mexico.

      Also, even though BASA is the primary need, obtaining access to agreements such as “The Defense Production Sharing Agreement” and the “Defense Development Sharing Arrangement” would provide Mexico access to military projects.

Incentives

      Being a high-risk and strategic industry, aerospace development has always been supported significantly by the governments of the host countries. Be it Embraer in Brazil, Bombardier in Canada, Boeing in the United States or Airbus in Europe, country governments significantly underwrite operations with monetary and non-monetary participation and incentives. These include items like venture capital, tax reductions, preferential loans, academic scholarships and contracts. Mexico must be prepared to provide global competitive support to the aerospace industry if it wishes to reach the integration phase of development and advance to aircraft assembly.

Airports

      In Mexico, airports are perceived as just that, airports. In the United States, and more so in Europe, airports constitute the nucleus of a whole master plan for business, manufacturing and services development. Mexico needs to take its airports a step further by upgrading their site concept, improving their planning and urban development, and fostering other services and activities around them.

      Development of the airports sector has been a priority for Mexico’s federal government. After September 11, the aviation and airport industry worldwide suffered greatly. Nonetheless, from 2003 to 2004, total airport demand for imported equipment and services increased 9.8 percent and U.S. exports grew 9.7 percent. Main competitors are French, British, German and Canadian companies.

      Airports equipment includes:

      •Electronic integrators.

      •Printed circuits.

      •Parts for engines.

      •Electric capacitors.

      •Lamps and airfield lighting.

      •Radar apparatus and navigation systems.

      •Baggage and cargo lifting and handling systems, conveyors and equipment.

      •Air-conditioning,

control, regulation and

energy conversion.

      •Airport security sound and camera systems.

      •Cargo loaders, fork lifters, work trucks and self-propelled passenger carriers.

      •Aircraft launch gear.

      •Management consulting

services.

      On the other hand, the Mexican airport industry size has grown by $800 million between 1998, when it was privatized, and 2002. This is an average growth rate of 10 percent annually, although Mexican government investment in the airport industry suffered major cuts. From 1998 to 1999, government investment declined 48 percent and in 2000 government investment was down to $256.7 million. In 2002, government investment had grown

to $271 million.

      On the services side, Mexico’s international cargo trade by air in 2002 was worth $21.6 billion and in 2003 it declined to $20 billion. During the same period, the inbound and outbound trade cargo with the United States was $9 billion and $7.4 billion respectively.

      During 2002, imports alone of all goods from the U.S. made through the Mexican airport network were $4 billion, which represented 3.8 percent of the total imports made by any mode from the U.S. in that year. In 2003, imports by air from the United States were $3.7 billion, which represented 3.5 percent of total imports by any transportation mode from the United States.

      Freight activity through Mexican airports in 2001 was 107,000 metric tons, of which 10,000 MT were domestic and 97,000 MT were international. In the year 2002 the volume was reduced to 99,000 metric tons (15,000 MT domestic and 84,000 MT international). During 2003, the volume was 86,000 MT with 19,000 MT domestic and 67,000 international. The rapid decline of international air cargo may be compensated by an increase of road and rail traffic.

Special components

      Aircrafts are made of materials, which are not common in Mexico’s industries today. Metals such as titanium, inconel, aluminum, and special alloys are hard to find. In addition, there’s a lack of expertise and skill in the founding, fabrication, forging and machining of specialized metals. Aerospace manufacturers will naturally seek those regions with competitive advantages.