The Costs of Mexicana’s Bankruptcy


Here’s a link to my AQBlog article “The Costs of Mexicana’s Bankruptcy”, published on October 13th, 2010.

Here is a copy of it:


On August 2, Mexicana de Aviación wrote the first pages of its version of Gabriel García Márquez’ Crónica de una muerte anunciada (Chronicle of a Foretold Death) as it successfully filed for bankruptcy. Mexicana argued that rising energy costs and the effects of H1N1 on air travel became too much for the company to bear. However the airline’s business practices have also been questionable for a long time.

Just like in García’s novel, the end result (the death of Santiago Nasar, the main character) became apparent immediately after the bankruptcy announcement. Anyone who had access to a newspaper, TV, radio, or the Internet knew this was the beginning of the end for Mexicana. What we did not know was the amount of time, and more importantly, government resources, this operation and its fallout would require.

Pilot and staff layoffs, air travel chaos, rising prices from Aeroméxico (its main competitor and now the only truly reliable source for national air transportation) and a myriad of customer complaints characterized the weeks that followed the bankruptcy declaration. On October 12, the Senate even announced the creation of a bicameral committee to deal with the break up, acquisition and restructuring of this business mammoth. As Andrew Ross Sorkin would put it, the government decided that Mexicana de Aviación was just too big to fail.

Unfortunately, this situation comes at a time when all major events in Mexicoare being politicized and used by the parties as a means to strengthen their positions ahead of the 2012 presidential election. Such is the case with the recent populist statements by the Partido Revolucionario Institucional (PRI) regarding lowering the value added tax back to 15 percent from last year’s 1 percent increase. This would force the Partido Acción Nacional (PAN) and the federal government to publicly announce that it would veto such a proposal as it would result in an unsustainable hit to the government’s budget.

The newest bit to come out of the political turmoil surrounding Mexicana is an agreement being discussed in the PRI-led Senate (to be voted on October 19) , which would effectively request that the Ministry of Economy reimburse all unfulfilled travel costs to customers. PRI member and President of the Senate Communications and Transportation Committee Fernando Castro Trenti recently said that the current situation is the result of the federal government not stepping in and doing things properly earlier on. “The truth is that someone is paying for this [government] negligence and that someone is every person who paid three, five thousand pesos [for unused tickets]. It seems appropriate that we create a legislative determination which can solve this situation,” according to Castro yesterday.

The senator’s proposed solution will make the affected customers happy. It will probably give a boost to the Senate and specifically to the PRI for stepping in for the lay man. The problem is that the PRI’s solution actually sets a terrible precedent for the relationship between private business and government, in the end, making civil society pay for the failure of companies too large to be left to their own demise.

It doesn’t take a genius to figure out that asking the Ministry of Economy to pick up the tab is an indirect way of prorating the airline’s liabilities to all tax-paying Mexicans. After all, where does the money from the Ministry of Economy’s budget come from?

In late 2008, the laser hair removal company Neoskin went bankrupt, leaving thousands of women who had paid for lifelong treatments in the mud. Should we all pay for their losses? It’s not a popular point of view, but the Mexican people have no more an obligation to cover the losses from unused plane tickets then they do for hairy legs.

If this agreement does go through, the costs for the funeral of Mexicana’s foretold death will come out of our taxes.

*Arjan Shahani is a contributing blogger to He lives in Monterrey, Mexico, and is an MBA graduate from Thunderbird University and Tecnológico de Monterrey and a member of the International Advisory Board of Global Majority—an international non-profit organization dedicated to the promotion of non-violent conflict resolution.

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