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, 2007
Accounting Basis: Mexican Financial Reporting Standards (Mexican FRS), with U.S. GAAP reconciliations provided.
Operations: The company holds 50-year concessions to operate, maintain, and develop 13 airports in Mexico's central and northern regions. Key airports include Monterrey (44.4% of 2007 revenue), Acapulco, Mazatlán, and Culiacán. Approximately 81.7% of revenues are derived from regulated aeronautical services, while 18.3% come from non-aeronautical commercial activities.

Key Financial Metrics (2007)

Note: U.S. dollar amounts are translated at the period-end rate of Ps. 10.92 to U.S.$1.00. Significant differences between Mexican FRS and U.S. GAAP net income are primarily due to the treatment of deferred taxes and the valuation of concession assets.

Material Changes vs. Prior Period (2006)

• Revenue Growth: Total revenues increased 12.4% to Ps. 1,897.4 million, driven by a 13.0% increase in aeronautical revenue and a 9.9% increase in non-aeronautical revenue. This was primarily due to a 20.6% increase in terminal passengers (14.2 million in 2007 vs. 11.8 million in 2006).
• Profitability Decline: Despite strong operating income growth (16.3% increase to Ps. 727.9 million), Consolidated Net Income under Mexican FRS plummeted 93.4% to Ps. 31.2 million. Under U.S. GAAP, the company reported a net loss of Ps. 118.3 million.
• Tax Impact: The drastic reduction in net income was caused by a 299.7% increase in income tax expense (to Ps. 785.4 million). This was due to the enactment of the new "Business Flat Tax" (IETU) in October 2007, which resulted in a significant deferred tax liability charge of Ps. 1,073.9 million, offsetting a reduction in deferred regular income tax.
• Capital Expenditures: Investing activities used Ps. 658.0 million in 2007, a 49.5% increase from 2006, reflecting heavy investment in terminal expansions (notably Monterrey Terminal B) and runway improvements.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Strategy: Management continues to focus on increasing passenger traffic and commercial revenue per passenger. Incentives were offered to low-cost carriers (e.g., VivaAerobus) to establish new routes, which increased volume but reduced aeronautical revenue per workload unit.
• Accounting Changes: Effective January 1, 2008, the company adopted new Mexican FRS standards (NIF B-10) which eliminate the recognition of inflation effects in financial statements in a non-inflationary environment. Future statements will be expressed in nominal pesos rather than constant pesos.
• Dividends: The company maintains a policy of distributing available cash as quarterly dividends. However, the parent company's (Aeroinvest) refinancing agreements require the company to distribute a minimum amount of dividends to avoid default.

Key Risks and Contingencies

• Regulatory Risk: Approximately 81.7% of revenues are subject to price regulation (maximum rates) set by the Ministry of Communications and Transportation. The company cannot unilaterally increase rates to cover cost increases or inflation unless specific conditions are met.
• Concession Termination: The company faces litigation regarding land ownership at Ciudad Juárez International Airport. An adverse ruling could lead to the termination of that specific concession (5.8% of 2007 revenue) and potentially all other concessions.
• Customer Concentration: The company relies heavily on a few major airlines. In 2007, Aeroméxico (25.1%), Mexicana (14.0%), and Aviacsa (9.4%) accounted for nearly 50% of aeronautical revenues. Insolvency or suspension of these carriers poses a significant risk.
• Security and Crime: High incidences of crime and drug trafficking in Mexico, particularly in border regions, could deter tourism and reduce passenger traffic. Additionally, the company faces potential liability for security screening of checked baggage.
• Parent Company Debt: Aeroinvest's refinancing agreements impose covenants on the company, restricting its ability to incur debt, create liens, or make capital expenditures outside of master development plans without waivers.

Important Facts for Investor Verification

• Tax Reform Impact: Verify the long-term cash flow implications of the new IETU (Business Flat Tax) and whether the 2007 deferred tax charge represents a one-time non-cash event or a structural change in effective tax rates.
• Concession Litigation: Monitor the status of the land ownership dispute at Ciudad Juárez International Airport, as a loss could trigger a chain reaction of concession terminations.
• Airline Solvency: Assess the financial health of major customers (Aeroméxico, Mexicana, Aviacsa) given the industry-wide pressure from high fuel prices and the risk of airline insolvency.
• Regulatory Rate Adjustments: Review the upcoming negotiations for maximum rates for the 2011-2015 period, as the current rates expire in 2010. The outcome will significantly impact future profitability.
• Parent Company Covenants: Confirm that the company remains in compliance with Aeroinvest's refinancing covenants, particularly regarding dividend distributions and capital expenditure limits.