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Taking Off With Mexican Airports

Neal Dihora, CFA

Neal Dihora: Hi. I am Neal Dihora, equity analyst. At Morningstar, we try to focus on companies with sustainable competitive advantages; what we call economic moats. Here with me today is Miguel Aliaga from Grupo Aeroportuario del Pacifico, or we'll call it GAP from here on out.

Hi Miguel, how is it going?

Miguel Aliaga: Very good. Thank you.

Dihora: So, your company operates 12 airports in Mexico, and one of the things that's really interesting is that you have a long-term time frame for the licenses. Can you maybe help us understand how that happened, how you got them, and maybe how long they last, the specific time frames?

Aliaga: Yes. This was started in 1998 when the government decided to privatize the airports after looking at the airports and saw no investment opportunities because of course the government was more focused on putting money in some other areas. So, they decided to privatize the airports. Initially, there were four groups. We are the largest among the private ones, so we would have three groups; there is GAP, which is the company I represent, then there is Grupo Aeroportuario del Sureste, and then there is Grupo Aeroportuario del Centro Norte. Also Mexico City has the largest airport, but it’s still owned and operated by the government. So, since 1998, we have been privatized. We had our IPO February 2006. One of the advantages that we have is of course natural monopolies. We have 12 airports around the Pacific Coast and the Baja California region and some of the central part of Mexico.

Dihora: You have a 50-year license to operate these airports?

Aliaga: It's a 50-year license, and it's reviewed each five years in terms of what we need to invest in the airports, and what’s the traffic expectation, for example.

Dihora: Yes, specifically that five-year thing that you're talking about is called the master development plan, and it allows you to generate around 80% of your revenues. How do you go about negotiating that with the government entity?

Aliaga: Yes, let's say that if, for example, we are running now from January 2010 to December 2014 with these maximum rates that were approved in December 2009, we start working in the middle of 2008, for example. We then finally we released the draft in the beginning of 2009, and by mid-2009, that is when the government has the documents and reviews finally what's there.

What we usually do is, well, we look for the following five years in terms of traffic and then we look for the current facilities we have. So, we say, well with those current facilities, what additional investments do we require in terms of capital expenditures. There's a formula that is included in the law, in the concessions that we have, a formula that never changes. Of course, what changes is only the result, which is the maximum rate.

So, we solve the formula, and then we end up on a maximum rate or at a certain level, which means that we can charge that amount of money at the maximum on a per-passenger basis. This is limited to the per-passenger basis, but this means that if traffic goes beyond the forecast in reality, of course, that's a benefit. Of course, if traffic goes below the forecast, that's part of the risk. And that's only for the analytical side. Of course, for commercial, it's not included there.

Dihora: Right, and I think recently you guys have talked about trying to own companies or airports in other countries. Is there any regulation restrictions from Mexico that doesn't allow you to do that?

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Aliaga: The only restriction we have is we cannot participate or acquire shares from ASUR or OMA, the other public companies. What we can do is, if there is a new airport like Riviera Maya--that was a project that the government started to develop and we went in the bidding process, but we ultimately decided to cancel that process--we can participate in those new airports. And of course we can participate in the area of influence of GAP, is Latin America for example, and that could be easy.

Some of our controlling shareholders have participation in airports in Europe, for example. So, we're not competing with them in Europe because it's going to be even difficult for us and the cost could increase. But Latin America is a good opportunity. We recently participated in the bidding process of Natal Airport in Brazil. But we quit because, of course, the numbers that we were analyzing really were lower than our internal rate of return that we have in our Mexican airports.

Dihora: The other aspect of your business is that none of your 12 airports is really that important to your overall business, whereas, one of your competitors, ASUR, has 70% or 75% of its revenue coming from one airport, Cancun. So, maybe can you help us understand the diversification that you have?

Aliaga: Yes, that's a good point. I believe that we have always valued that we had premium among our peers because of that reason. Guadalajara, which is the largest airport we have, is the third-most-important airport in the country. So, it's Mexico City, then Cancun and then Guadalajara. Guadalajara accounts for about 30% of our traffic and about 30% of our revenues. Then it's followed by Tijuana, which is a border airport; the most border connections in the world are at Tijuana-San Diego. Then we have two others which is Puerto Vallarta and Los Cabos, the second and the third beach destinations in Mexico.

Then we have some smaller airports which usually service migrants that have moved from Mexico to the United States. So, we have that diversification. That helps, not only on the traffic behavior but also when there is issues regarding, for example, hurricanes, that historically have hit some of our areas. I can tell you Manzanillo, a very small airport we have, was hit recently, and we closed the airport for one week. But it's a very small airport. So, that of course didn't affect our operations really. Locally, of course, yes, it had an impact, but in terms of the global figure, it didn't affect it. So, that's important also. The diversification is important because also you have diversification in terms of traffic flows in that you have leisure travelers or business travelers that come to different airports.

Dihora: Great. Thanks a lot Miguel for helping us understanding Grupo Aeroportuario del Pacifico a little bit more.

Aliaga: Thank you very much.