OMAB

Business Context and Reporting Period

Company: Central North Airport Group (Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Accounting Standards: Mexican Financial Reporting Standards (MFRS) with reconciliation to U.S. GAAP.
Business Overview: The Company holds 50-year concessions to operate, maintain, and develop 13 airports in Mexico's central and northern regions. Key assets include Monterrey International Airport (the group's largest revenue generator), as well as tourist destinations (Acapulco, Mazatlán, Zihuatanejo) and regional hubs. The Company also operates a hotel and commercial space in Terminal 2 of Mexico City International Airport.

Key Financial Metrics (2010)

Note: U.S. Dollar amounts are translated at the rate of Ps. 12.38 to U.S.$ 1.00 (Dec 30, 2010). MFRS includes "Construction Services" revenue and costs which are excluded from U.S. GAAP revenue, significantly impacting margin calculations.

Material Changes vs. Prior Period (2009)

• Revenue Growth: Total revenues increased 4.5% to Ps. 2,651.4 million. This was driven by an 8.2% increase in aeronautical revenues (due to higher passenger charges and traffic) and a 10.7% increase in non-aeronautical revenues (driven by retail, advertising, and parking). Hotel services revenue surged 552% due to a full year of operations for the Terminal 2 NH Hotel.
• Operating Income Decline: Despite revenue growth, operating income decreased 15.8% to Ps. 471.2 million. This was primarily caused by a 50.5% increase in the cost of services, largely due to a significant increase in the allowance for doubtful accounts (Ps. 174.5 million) related to airline bankruptcies.
• Net Income Increase: Consolidated net income increased 17.6% to Ps. 552.0 million. This increase was largely attributable to a Ps. 152.2 million income tax benefit (compared to a Ps. 77.8 million expense in 2009) resulting from the amortization of tax loss carryforwards and reductions in valuation allowances.
• Passenger Traffic: Total terminal passengers increased slightly by 0.6% to 11.6 million. Domestic traffic decreased 0.5%, while international traffic increased 6.7%.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Regulatory Framework: In December 2010, the Ministry of Communications and Transportation approved new five-year Master Development Programs and maximum rates for 2011–2015. The Company expects these rates to support future profitability.
• Strategic Focus: Initiatives focus on maximizing aeronautical revenues through route optimization, improving commercial offerings (e.g., Terminal B at Monterrey), and expanding non-aeronautical businesses like the Terminal 2 NH Hotel.
• Capital Expenditures: 2010 capital expenditures totaled Ps. 695.5 million, funded by operating cash flows and debt. Future investments are committed under the 2011–2015 Master Development Plans.

Material Risks and Contingencies

• Airline Insolvencies: The suspension of operations by Grupo Mexicana (Mexicana, Click Mexicana, Mexicana Link) in August 2010 and Aviacsa in 2009 created significant receivable risks. As of Dec 31, 2010, the Company had reserved 100% of Ps. 143.1 million owed by Grupo Mexicana and Ps. 19.8 million owed by Aviacsa within the allowance for doubtful accounts.
• Regulatory Risk: Approximately 62.3% of revenues are subject to price regulation (maximum rates). The Company cannot unilaterally adjust rates if traffic assumptions change, and future rate renegotiations (due in 2015) carry uncertainty.
• Security and Crime: High incidences of crime, drug trafficking, and violence in northern Mexico (including Monterrey and Ciudad Juárez) pose risks to passenger traffic and operations. The U.S. State Department has issued travel alerts for these regions.
• Accounting Changes: The Company adopted INIF 17 ("Service Concession Contracts") in 2010, requiring the recognition of construction revenues and costs equal to the value of improvements made to concessioned assets. This increased reported revenue but had no impact on operating income or net income.
• Legal Proceedings: Ongoing disputes regarding property tax claims from various municipalities (e.g., Reynosa, Ciudad Juárez) totaling approximately Ps. 133 million (as of early 2011) remain pending.

Key Facts for Investor Verification

• Receivable Quality: Verify the recoverability of the Ps. 143.1 million receivable from the bankrupt Grupo Mexicana, which was fully reserved but remains a significant contingent asset.
• Regulatory Rate Setting: Monitor the implementation of the 2011–2015 maximum rates and the Company's ability to collect 99.2% of entitled revenues without exceeding caps.
• Accounting Reconciliation: Understand the significant difference between MFRS and U.S. GAAP revenue figures (Ps. 2,651M vs. Ps. 2,144M) caused by the inclusion of "Construction Services" in MFRS, which inflates revenue without adding profit.
• Customer Concentration: Note that Grupo Aeroméxico and Grupo Mexicana (prior to suspension) represented a large portion of aeronautical revenue; monitor the shift toward low-cost carriers like VivaAerobus and Interjet.
• Security Environment: Assess the impact of ongoing security alerts and violence in key operating regions (Monterrey, Ciudad Juárez) on future passenger traffic forecasts.