Volume 10 | Issue 4 | Year 2007

It’s an experiment on a grand scale: What if a country were to take its 34 largest airports, divide them into three groups, and auction off their concessions (and administration) to private companies? In 1998, Mexico did just that, inviting private companies to operate its airports, and sold at the very first stage a 15 percent stake. Then the government sold its participation and gave the opportunity for any investor worldwide to acquire a portion of this profitable business. Of course, there were plenty of conditions attached to the sale – the goal, after all, was to serve the public good.

The jury is still out on whether the experiment will be a success. Nine years isn’t nearly enough time to tell in such a situation. Yet a more sanguine observer might say that things so far are turning out just fine, even after the terrorist attacks in 2001 that devastated the aviation transportation industry.

Take Grupo Aeroportuario del Pacifico S.A. de C.V. (or GAP) for example, the group in charge of 12 airports on Mexico’s Pacific side. One of the three groups into which Mexico divided its airports (apart from the Mexico City Airport which is still in the hands of the federal government and other few small and medium airports), GAP went 100 percent private in February of last year when the Mexican government sold its 85 percent stake on the Mexican and New York stock exchanges. With a 15 percent stake still in the hands of three controlling share holders, GAP has seen its revenues rise an average of 10 percent in the last few years, and the recent opening of six new low-cost airlines in Mexico mean traffic is only going up. Although still a green company – not even quite a decade old – GAP’s clear mandate and solid market position make it a good bet for the future of Mexico’s transportation infrastructure.

The investors
For over 20 years now the Mexican government has been undergoing an aggressive regimen of privatization. Big fish have included the telecoms and airlines, and in 1998, Mexico took it a step further than even its neighbors to the North dared to go by deciding to privatize the operations of its 34 largest airports. Some governments in Europe have taken similar steps, which is why it made sense that one of the three concerns that ended up with a portion of the 15 percent controlling stake in the airports was Aeropuertos Españoles y Navigación Aérea (AENA), a Spanish company with experience operating dozens of airports in Spain.

Also joining the merry band of private investors was a company called Dragados S.A. de C.V. (another Spanish company, with decades of experience in concessions, construction, and bidding) as well as a group of Mexican investors with the requisite political connections and experience doing business in Mexico. All three concerns brought important experience to the table for what would be the complicated task of managing the concessions, maintenance, and administration of a dozen major airports. Though the government warily maintained ownership of 85 percent of the group, the decision to place the airports in private hands made a lot of sense, said Miguel Aliaga, director of investor relations for GAP.

“The case of the airports is important,” he said. “Instead of concentrating resources on the administration and the management of concessions… [the government can] direct those resources toward different types of works that are much more beneficial for society and leave the operation of the airports in the hands of people or groups that already have proven experience. On the other hand it assures infrastructure growth thanks to the Master development program formulas for always during the life of the concession invest in those assets to finally give the benefit to the passengers.”

The benefits
And so Grupo Aeroportuario del Pacifico was born, along with its smaller competitors Aeropuertos del Sureste and Grupo Centro Norte (the Mexico City international airport, the biggest in the country, remains in government hands). The privatization meant two things. First, it meant that GAP got the benefits of concessions at all of the 12 airports under its administration. It would get to collect passenger fees, landing and departure fees for each airplane, parking fees, complementary services, as well as concessions charged to the on-site companies that service the airplanes but also the benefit on leasing all the commercial spaces to several types of companies such as fast food, car rentals, ATMs, and parking lots, among others.

The catch is that, according to the privatization agreement, GAP can’t just charge whatever it wants for the services: the fees are capped by the government, which is why it’s known as the regulated revenue. “The government wants our rates to be competitive and economical,” Aliaga said, “and we don’t have the option of charging whatever we want.” Although given that airports these days are turning into malls, and GAP earns a decent amount of its revenue through royalty fees charged to the restaurants and retailers located in the airports, regulated revenue makes up about 80 percent of GAP’s total revenue.

The strings
This begins to hint at the other thing privatization has meant for GAP: there are, most certainly, strings attached. The privatization agreement came with many caveats; for example, that none of the principle investors could own greater than a 5 percent stake in any airline. GAP’s level of investment in the airport facilities is required to mirror any growth in traffic. And GAP isn’t just operating the lucrative, busy international airport in Guadalajara, through which pass more than six million passengers every year. According to the privatization agreement, it has to operate all 12 of the airports in the group, which includes the lonely outpost in Manzanillo that doesn’t see 300,000 passengers annually. “There are some very good airports, but there are also some very small ones,” Aliaga said.

Still, Aliaga and GAP are not complaining about the strings. Every five years, GAP can renegotiate the terms of the deal, including the price caps on the regulated revenue fees. In many ways, the way the Mexican government has dealt with privatization has provided an ideal environment for investors. “The Mexican airport system was privatized with many regulations,” Aliaga said, “which assures that the operation is very transparent, is very open for everyone, is very clear, is easy to predict in the future, and because of that the private financial markets are very attracted to the airport sector.”

Clear skies ahead
That’s one of the reasons why, in February of 2006 when the Mexican government sold its 85 percent share in GAP on the New York and Mexican stock exchanges, it was snapped right up. But it’s certainly not the only reason. Notwithstanding 9/11, it’s a fortuitous moment to be investing in airport concessions in Mexico for one reason: low cost carriers. Of the 80 percent of its income that comes from regulated revenue, 80 percent of that comes from passenger fees, which means the absolute best way to increase revenues for a company like GAP is to increase passenger traffic.
Enter the low-cost carriers. Mexico has seen no fewer that six budget airlines pop up in the last few years: Avolar, Alma, Interjet, Volaris, Click Mexicana, and VivaAeroBus. That means traveling around Mexico just got a lot cheaper, which means a lot more people can afford to fly, which means, potentially, more passenger fees for GAP. Last year 20.5 million people passed through the halls of GAP’s airports, and traffic has been steadily increasing at an annual rate of 6 to 8 percent. GAP has seen its revenues climb by 10 percent annually and closed 2006 with total revenue of $270 million.

Airport politics
The political climate (which, for a company in the position of GAP, is almost as important as the economic one) is healthy as well. With the recent election of Felipe Calderón as Mexico’s president for the next six years, GAP can be sure that there will be no drastic changes in the current privatization arrangement. Not only that, but Calderón has declared that his presidency will be the presidency of infrastructure development, meaning that GAP is sure to get plenty of moral (if not financial) support from Mexico’s government. “Today it is very positive,” Aliaga said. “I couldn’t have told you before, but today things are very positive with the current president being focused on developing our infrastructure.”

Not everything is coming up roses for GAP. It still has the monumental task of keeping 12 airports upgraded and standardized. It has to keep up with increasing traffic and do what airports are supposed to do, which is not become a bottleneck for the country’s transportation system. But with international tourism going up, and two of the country’s most popular tourist destinations – Puerto Vallarta and Los Cabos – among its 12 airports, GAP looks to be headed for smooth sailing. It just initiated a $70 million project at Los Cabos to expand the runways and upgrade the terminals, and investment projects are underway at most of its 12 airports.

“We’re at an important moment,” Aliaga said. “It’s a good model, and our primary customers – passengers and airlines – are growing and that’s important for our stock price, our bottom line, and how people perceive us.”