Grupo Aeroportuario del Pacific S.A.B (ADR) (PAC)

Say Adios to Mexican Airport Stocks

As a former shareholder of both Grupo Aeroportuario del Centro Norte (OMAB) and Grupo Aeroportuario Del Pacifico (PAC), I got to know both companies fairly well. I love the concept of investing in a company that has a toll bridge-like model, essentially being granted a monopoly by the Mexican government to charge every single passenger that flies into and out of the country money. However, I finally decided to part ways with both of them in late February because I noticed a disturbing pattern in their passenger traffic (a key metric when determining how profitable airports will be).

Here is a list of its changes in monthly passenger traffic that I independently compiled from OMAB’s press releases (I have continued to update since my sales):

April 2008: +5.9%

March 2008: +7.7%

February 2008: +16.4% (artificially inflated by leap year)

January 2008: +11.3%

December 2007: +12.9%

November 2007: +20.6%

October 2007: +20.9%

September 2007: +23.8%

August 2007: +27.1%

July 2007: +31.0%

June 2007: +24.5%

May 2007: +25.8%

April 2007: +17.8%

March 2007: +16.8%

February 2007: +12.1%

January 2007: +14.1%

December 2006: +17.8%

All of 2006: +11.2%

See the trend? Slowing passenger traffic growth means slowing revenue and earnings growth for these companies. I suspect that this trend will continue to get worse as the economic slowdown that we are experiencing here in the United States both hampers U.S. citizens’ ability to afford Mexican vacations and trickles down into Mexico’s own economy hurting domestic traffic as well.

As an added bonus, the price of oil has exploded over the past six months. This means tough for airlines. It is very possible that another low cost carrier in Mexico could go bankrupt, hurting the traffic at Mexican airports. Even if one doesn't go bankrupt, higher oil prices generally lead to more expensive plane tickets, which could have a negative impact upon the traffic at Mexican airports as well.

I did some research to see how the rising price of oil over the past several years has impacted the price of plane tickets. According to the Business Travel Monitor, the industry's pricing benchmark, international airfare rates have steadily risen over the past several years as a result of tight global supply and the rapidly rising price of oil. In 2007, the cost of international airfare rose to its highest level since it began tracking the data in 1999. Since 2004, the average price of international has risen by 21% (source).

Average international airfare **:

2001 - $1,461

2002 - $1,473

2003 - $1,469

2004 - $1,514

2005 - $1,614

2006 - $1,707

2007 - $1,836

I expect to see this trend continue to accelerate as we see more consolidation in the industry and the price of oil explodes. Again, higher prices for plane tickets could ultimately lead to reduced traffic for airport operators like OMAB. Inflation is going to be a real problem for the airlines. Not only does the fuel for their planes cost more, but higher food and gas prices cause consumers to cut back on discretionary spending on things like vacations and plane tickets. Even businesses tighten their belts and cut back on business travel during lean times.

It appears as though the Mexican airports themselves are beginning that things will not be great for them this year. OMAB recently published a press release on its "2008 Outlook." In it, the company stated that it expects its passenger traffic and revenue to increase between 6% and 10% for the year, which is obviously a lot less than it saw in 2007. Here is a less than optimistic quote from the press release:

"The Company noted that a number of factors has increased uncertainty with respect to rates of growth of traffic and revenues in 2008; these included the extent and duration of a U.S. economic recession and the spillover effects on Mexico's economy; the impact on airlines of high fuel costs and delays in the delivery of new airplanes; changes in airline business strategies; and the impact on international tourist traffic of competition with other tourist destinations."

Unfortunately, that's what I was afraid of when I sold my shares.

Here are a couple more articles that I came across yesterday that reinforce my argument:

- Three of the largest U.S. airlines raise ticket prices for the second time in two weeks; fuel surcharges for some flights now cost more than the airfare (link)

- Grupo Aeroportuario del Pacifico Reports Passenger Traffic Decrease of 5.3% for April 2008 (link). This is the first monthly decline in traffic that I recall ever seeing at a Mexican airport.

One final note, Grupo Aeroportuario del Sureste (ASR) is a third publicly traded Mexican airport operator that I am aware of, but have done no research on. It very likely will be in the same boat as OMAB and PAC.


Deej
No position in PAC, OMAB, or ASR