Business Context and Reporting Period
Company: Central North Airport Group (Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. or "OMA")
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Accounting Standards: Mexican Financial Reporting Standards (MFRS) with reconciliation to U.S. GAAP.
Business Overview: OMA holds 50-year concessions to operate, maintain, and develop 13 airports in Mexico's central and northern regions. The company's primary revenue source is aeronautical services (regulated), supplemented by non-aeronautical commercial activities (unregulated). The 2008 period was significantly impacted by the global financial crisis, high fuel prices, and the exit of several Mexican airlines from the market.
Key Financial Metrics (2008)
| Metric | 2008 (MFRS) | 2008 (U.S. GAAP) | 2007 (MFRS) |
|---|---|---|---|
| Total Revenues | Ps. 1,988,476,000 | Ps. 1,988,476,000 | Ps. 1,897,353,000 |
| Income from Operations | Ps. 687,368,000 | Ps. 804,380,000 | Ps. 727,921,000 |
| Consolidated Net Income | Ps. 541,803,000 | Ps. 1,013,454,000 | Ps. 31,192,000 |
| Operating Margin (MFRS) | 34.6% | N/A | 38.4% |
| Net Margin (MFRS) | 27.2% | N/A | 1.6% |
| Cash and Cash Equivalents | Ps. 257,420,000 | Ps. 257,420,000 | Ps. 1,756,704,000 |
| Total Liabilities | Ps. 2,333,522,000 | Ps. 1,204,791,000 | Ps. 1,660,046,000 |
| Terminal Passengers | 14.06 million | N/A | 14.21 million |
Note: 2008 financial data is expressed in nominal pesos. 2007 data is expressed in constant pesos as of Dec 31, 2007. Exchange rate used for USD translation: Ps. 13.83 = $1.00.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 4.8% to Ps. 1.99 billion, driven by a 4.3% increase in aeronautical revenue and a 6.8% increase in non-aeronautical revenue. This growth occurred despite a 1.1% decline in total terminal passengers.
- Profitability Surge: MFRS Net Income increased 1,637% to Ps. 541.8 million compared to Ps. 31.2 million in 2007. This dramatic increase was primarily due to a significant reduction in income tax expense (down 69.6%) following the adoption of the new Business Flat Tax (IETU) in 2008, which reversed the massive deferred tax liability recognized in 2007.
- Operating Income Decline: Despite revenue growth, Income from Operations decreased 5.6% to Ps. 687.4 million. This was caused by an 11.3% increase in total operating costs, particularly a 24.0% rise in General and Administrative expenses due to provisions for doubtful accounts (notably from the airline Alma) and corporate reorganization costs.
- Liquidity Contraction: Cash and cash equivalents dropped significantly from Ps. 1.76 billion in 2007 to Ps. 257.4 million in 2008. This was driven by heavy investing activities (Ps. 1.88 billion) for capital expenditures and financing activities (Ps. 352.1 million) for dividends and share repurchases.
- Passenger Traffic: Total terminal passengers decreased slightly by 1.1% to 14.06 million. International traffic fell 5.8% due to the U.S. economic recession and route cancellations, while domestic traffic remained relatively stable despite airline exits.
Guidance, Outlook, and Risks
- Economic Outlook: Management expects international and domestic passenger traffic levels to continue decreasing until economic conditions improve in the U.S. and Mexico. The global financial crisis and high fuel prices continue to pressure the aviation industry.
- Strategic Initiatives:
- Terminal 2 Mexico City: OMA acquired a 90% stake in a consortium to develop a 287-room hotel and commercial space in Terminal 2 of Mexico City International Airport. The hotel is expected to open in Q3 2009, with commercial areas in 2010.
- Monterrey Expansion: Construction of Terminal B at Monterrey International Airport is underway, expected to begin operations in late 2009.
- Key Risks:
- Regulatory Risk: Approximately 81.3% of revenues are subject to price regulation (maximum rates). Changes in regulation or failure to collect full authorized rates could materially impact results.
- Airline Insolvency: The exit of airlines (Alma, Aladia, Avolar) and the suspension of others (Aerocalifornia, Aviacsa) in 2008 highlighted the risk of customer concentration and insolvency. OMA has significant exposure to Aeroméxico (24.6% of aeronautical revenue) and Mexicana (14.6%).
- Security and Crime: High incidences of crime and drug trafficking in Mexico, particularly in border regions, pose a risk to passenger traffic and safety.
- Exchange Rate: The depreciation of the Mexican peso (26.7% in 2008) created foreign exchange losses on USD-denominated liabilities, though it positively impacted the peso value of USD-denominated passenger charges.
Important Facts for Investor Verification
- Tax Reform Impact: Verify the sustainability of the 2008 net income surge, which was largely driven by the reversal of deferred tax liabilities related to the IETU law enacted in 2007. The effective tax rate dropped from 96.2% in 2007 to 30.6% in 2008.
- Customer Concentration: Confirm the financial stability of top airline customers (Aeroméxico, Mexicana, VivaAerobus), which collectively represent a significant portion of aeronautical revenue.
- Capital Expenditures: Review the Ps. 2.23 billion in capital expenditures for 2008, ensuring alignment with Master Development Program commitments and the funding sources (cash flow vs. debt).
- Concession Termination Risk: Assess the legal proceedings regarding land ownership at Ciudad Juárez International Airport, which could potentially lead to the termination of that specific concession.
- Accounting Differences: Note the significant difference between MFRS and U.S. GAAP net income (Ps. 542M vs. Ps. 1.01B) due to the treatment of concession assets and deferred taxes.