Grupo Aeroportuario Del Sureste (ASR-NYSE, $262.64) Regulated Tariff Rate Base Determination for Coming 4 Years is Not Nearly as Bad as Was Feared.

ASUR, the operator of Mexican airports, best known as the manager of the Cancun International Airport, received a Mexican rate determination that should be less punitive on the bottom line than was anticipated back in August.

The outgoing president of Mexico, railing at the profitability of the sector, unilaterally changed the terms of the concession contract several months ago by raising the Mexican revenue base from 5% of gross revenues to 9.5%. Extrapolating the almost doubling of the base payment, coupled with the rhetoric offered up by AMLO, led investors, myself included, to assume a worse case scenario of a potentially similar cut to the regulated tariff rates on passenger fees. Were the tariff schedule to change in line with the revenue base payments, profitability could have almost fallen in half in Mexico and Mexican airport operations account for the majority of profits earned by ASUR as a whole.

The operator of the Cancun Airport chose to not offer up any confrontational tones in public, but worked diligently behind the scenes to come up with a payment structure that would be satisfactory to both the outgoing administration (providing the perception of a “win” for populist AMLO) while attempting to preserve, to whatever extent is possible under a leftist regime, core profitability.

The new regulated rate structure announced does not seem a significant departure from the prior terms.

Tariffs at the Cancun International Airport will fall in the coming years, but only in the mid single digits. Regulated fees represent about 2/3 of the gross revenue base and Mexican airport operations account for roughly 62% of the total passenger volumes. Overall, the combination of the higher annual concession fee and the new base rate determination provides more clarity on investment revenue modeling in the coming years. Net revenues to be generated via regulated payments, on a per passenger basis through Cancun might only decline by 7%-10% in the first year of the new schedule. Providing passenger traffic continues to grow in the year ahead, the net hit to income could theoretically be overcome within one year, before returning to a positive profit change again in 2025.

The remaining wild-cards in ASUR business modeling for 2024 and beyond comes via potential impacts to growth of volumes in Cancun International Airport flows, based upon the opening of the new Tulum International Airport, offset by new airline capacity in Columbia to be brought to market by existing operators.

The new Tulum International Airport is located several hours south of Cancun, but will draw off passengers seeking to visit resorts south of Playa Del Carmen that currently utilize Cancun Intl. A largely undeveloped, until now, region of Mexico featuring pristine beaches known as “Costa Maya” remains relatively untouched by resort operators and is fairly novel to the tourist industry. Now that an airport exists in the area to cut down the commute times, I fully expect this region to obtain similar economic expansion as was evidenced in the Playa Del Carmen area over the past two decades. The Tulum airport has a single runway and is rated for about 5.5 million passengers annually, but could readily be expanded. This airport will effectively limit passenger growth at Cancun Intl. for incremental volumes going forward. Any passenger seeking to visit the Mayan Riviera more than 30 KM south of Playa Del Carmen will naturally prefer to access the region via the new Tulum airport. However, there is a very large development of tourist properties underway north of Cancun. This should, to some extent, offset the loss of upside on the Tulum based volumes.

https://www.patreon.com/posts/93142363?pr=true

Effectively, the opening of the Tulum airport will, geographically, result in the ceding of several millions of passengers annually in the near term. They will opt for the closer choice of airport to their preferred region and that will end modeling of growth rates, in forecasts, that would occur as Costa Maya development takes place. Costa Maya has downplayed tourism to a great extent and current zoning only permits small scale resorts, but that will change the minute a large operator greases the appropriate palms. Now, the boom begins, but even with the loss of the Costa Maya upside, there is still a lot of incremental real estate to be developed, in areas better covered by Cancun Intl. than Tulum Intl. airports.

Offsetting this volume hit in Mexico, a considerable amount of new airport passenger capacity is on the horizon in 2024 for Columbia. 2023 featured the early bankruptcies, and complete cessation of operations, of two very large domestic operators in that country (Viva and Ultra). This negatively impacted passenger volumes by as much as 20% this year. Existing airlines in the region lacked the surplus staffing and jets to instantly replace the capacity of the failed airlines, so the Bogota airport run by ASUR experienced a significant decline in passenger volumes in 2023.

For 2024, a Chilean operator, LATAM has determined that they can replace most of the routes left open in the wake of the bankruptcies and have added more then 21 jets for Columbian routes. To that, Delta and other international and regional operators have also stepped up and added new routes as feasible. The Columbian airport authorities have now transferred the bulk of Viva and Ultra slots to LATAM and others, so look towards a resumption of volume growth at Columbian airports in 2024. The terms of the Columbia airport concessions are not nearly as lucrative as that of Mexico, even under the revised schedule, but one can, more or less, determine that a 4 million person incremental throughput at Columbian airports is needed to offset a loss of 2 million passengers moving through Cancun International.