Business Context and Reporting Period
Company: Southeast Airport Group (Grupo Aeroportuario del Sureste, S.A.B. de C.V. or ASUR)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: ASUR operates nine airports in the southeast region of Mexico under 50-year concessions. The portfolio is heavily concentrated in Cancún International Airport, which generated 77.1% of total revenues in 2008. The company derives revenue from aeronautical services (regulated) and non-aeronautical services (commercial activities like retail and parking).
Accounting Basis: Financial statements are prepared under Mexican Financial Reporting Standards (Mexican FRS). The company ceased recognizing inflationary effects in its financial statements as of January 1, 2008, due to cumulative inflation falling below the 26% threshold.
Key Financial Metrics (2008)
| Metric | 2008 (Mexican FRS) | 2008 (U.S. GAAP) |
|---|---|---|
| Total Revenues | Ps. 3,168.7 million ($229.9 million) | Ps. 3,174.9 million ($230.4 million) |
| Net Income | Ps. 1,049.5 million ($76.2 million) | Ps. 1,219.6 million ($88.5 million) |
| Operating Income | Ps. 1,383.7 million | Ps. 1,587.2 million |
| Operating Margin | 43.7% | 50.0% |
| Net Margin | 33.1% | 38.4% |
| Cash Flow from Operations | Ps. 1,555.2 million ($112.8 million) | Ps. 1,694.8 million ($123.0 million) |
| Cash and Marketable Securities | Ps. 1,733.5 million ($125.8 million) | Ps. 1,733.5 million ($125.8 million) |
| Total Liabilities | Ps. 2,419.6 million ($175.6 million) | Ps. 1,056.1 million ($76.6 million) |
| Stockholders' Equity | Ps. 14,955.0 million ($1,081.2 million) | Ps. 8,653.3 million ($627.9 million) |
Note: U.S. Dollar amounts are translated at the rate of Ps. 13.7815 per U.S.$1.00 (January 2, 2009 rate). Significant differences between Mexican FRS and U.S. GAAP exist regarding the amortization of airport concessions and deferred taxes.
Material Changes vs. Prior Period (2007)
- Revenue Growth: Total revenues increased 13.7% to Ps. 3,168.7 million, driven by a 9.3% increase in passenger volume (17.8 million passengers in 2008 vs. 16.2 million in 2007). Aeronautical revenues rose 11.2%, while non-aeronautical revenues grew 19.2%.
- Profitability Surge: Net income under Mexican FRS more than doubled to Ps. 1,049.5 million from Ps. 522.4 million in 2007. This was primarily due to a significant decrease in the provision for income taxes following the elimination of the Asset Tax and the introduction of the Flat Rate Business Tax (IETU) in 2008, as well as the cessation of inflationary accounting adjustments.
- Operating Expenses: Total operating expenses increased 10.2% to Ps. 1,785.0 million. Depreciation and amortization rose 11.2% due to new investments, and technical assistance fees increased 13.6%.
- Passenger Mix: International passengers represented 56.8% of total traffic in 2008, an increase from 55.8% in 2007. Domestic traffic growth slowed due to economic conditions in Mexico.
Guidance, Outlook, Risks, and Unusual Items
Recent Developments and Outlook
- Influenza A/H1N1: The outbreak in Mexico (starting March 2009) caused significant travel restrictions and a sharp decline in passenger traffic (down 31.7% internationally and 39.9% domestically in late April/early May 2009 compared to 2008). Management expects continued adverse effects on revenues until the outbreak abates.
- Economic Downturn: Both the U.S. and Mexican economies entered recessions in late 2008/early 2009. While international traffic to Cancún may benefit from a "substitution effect" (travelers choosing Mexico over more expensive destinations), domestic traffic is expected to remain flat or decrease.
- Capital Projects: Construction of a second runway at Cancún Airport is underway, expected to be completed in Q4 2009. A new Terminal 3 opened in May 2007, increasing capacity and commercial revenue.
Key Risks
- Regulatory Risk: Revenues are subject to a "dual-till" price regulation system with maximum rates set by the Ministry of Communications and Transportation. Exceeding these rates can result in penalties or concession termination. Depreciation of the peso increases the risk of exceeding these peso-denominated maximum rates.
- Concentration Risk: Cancún International Airport accounts for over 70% of passenger traffic and 77% of revenues. The company is also highly dependent on the U.S. economy (64.4% of international passengers in 2008).
- Competition: The Mexican government plans to bid out a concession for a new airport in the Mayan Riviera, which could compete with Cancún.
- Exchange Rate Risk: Significant depreciation of the peso (29.4% from Sept 2008 to March 2009) impacts the dollar value of dividends and creates volatility in regulated revenue calculations.
Unusual Items
- Tax Reform: The transition from the Asset Tax to the IETU in 2008 resulted in a net write-off of Ps. 150 million in deferred income taxes in 2007 and a lower effective tax rate in 2008.
- Non-Ordinary Items: Included Ps. 9.7 million in losses related to restructuring and natural disasters in 2008.
Investor Verification Checklist
- Accounting Differences: Verify the reconciliation between Mexican FRS and U.S. GAAP, specifically regarding the amortization of airport concessions (which are amortized over the concession life under Mexican FRS but treated differently under U.S. GAAP) and deferred tax liabilities.
- Regulatory Compliance: Monitor the company's ability to stay within the maximum revenue rates per workload unit set by the Ministry of Communications and Transportation, especially given peso volatility.
- H1N1 Impact: Assess the duration and severity of the Influenza A/H1N1 impact on Q2 and Q3 2009 traffic and revenues, as the 2008 annual report predates the full impact of the pandemic.
- Debt Covenants: Review the new credit facilities executed in May 2009 (Ps. 600 million total) and ensure compliance with liquidity and interest coverage ratios.
- Concentration: Evaluate the risk exposure related to the potential opening of the new Mayan Riviera airport and its impact on Cancún's traffic dominance.