"Mexican airport operators sag under fuel prices"

Friday, June 27, 2008

ANALYSIS-Mexican airport operators sag under fuel prices
By Veronica Gomez Sparrowe


MEXICO CITY, (Reuters) - Mexico's three airport operators are starting to
suffer from the global airline crisis amid skyrocketing jet fuel prices, and
investors have already dumped their stocks.

But some analysts believe the shares of Asur, GAP and OMA have been whipped
too hard as passenger growth has remained largely positive to date and the
fallout from one grounded carrier has been minimal.

Shares of Asur, GAP and OMA have dropped more than 20 percent so far this
year while global valuations for airport operators have only slipped about
half that amount.

Santander Investment, which has a buy rating on all three operators,
estimates there is an upside price potential of 35 percent for Asur, 34
percent for OMA and 40 percent for GAP.

"Even though we still see some weakness in the sector near term from
lower-than-expected traffic growth, we continue to see value due to high
margins and strong cash flow generation," said Santander analyst Gonzalo
Fernandez.

"We think the market has overly punished Mexican airport stocks,"
BBVA-Bancomer said in a note.

Yet passenger traffic growth has started to wane as airlines cancel flights
and dump higher costs onto ticket prices with jet fuel prices up 46 percent
from the start of 2008 as world crude oil prices have doubled in a year.

GAP, which runs 12 airports in Mexico's Pacific region, had a 0.5 percent
decline in total passenger numbers in May.

Asur, which runs nine airports in southern Mexico, and OMA reported positive
passenger traffic growth in May, up 13.2 percent and 5.8 percent
respectively, largely because air travel is in its infancy in Mexico and
airlines fight with long-distance buses for travelers.

But still, investors have started to cut outlooks for the entire sector
given the uncertain times.

SCALING BACK ROUTES

Santander has reduced its 2008 passenger growth for all three operators to
an average of 6.8 percent from a previous level of 10.7 percent after years
of high double-digit growth.

"We believe that airlines, particularly low-cost carriers, will continue to
scale back their routes and frequency and delay their expansion plans," said
BBVA-Bancomer.

"We also believe passengers, particularly tourists, may fly less because of
rising ticket prices," it added.

Other analysts say that there could be further turbulence in the future for
Mexican airport operators if other airlines stumble like Magnicharters,
whose 16 domestic routes were suspended on June 10 on safety grounds.

Mexico has 14 airlines, two traditional large carriers Aeromexico and
Mexicana, which are privately owned but unlisted, six low-cost operators and
a handful of regional players. All are fighting to survive in a highly
competitive field and with major cost pressures.

The impact of the Magnicharters grounding was minimal. OMA said the airline
accounted for only 1.8 percent of its total passenger traffic. But if more
or larger airlines get suspended that could increase the impact on airport
operators.

That is weighing on the minds of some investors alongside the question of
fuel.

"We believe the outlook for fuel prices remains highly uncertain, as does
their final impact on the Mexican airline industry and the airport groups'
passenger traffic," said Credit Suisse analyst Vanessa Quiroga. "Negative
news flow is also expected to continue."

But Asur, GAP and OMA, which operates 13 airports in northern and central
Mexico, are looking like sweet picks in pure value terms. BBVA-Bancomer,
Mexico's largest banking group, has a "buy" recommendation on all three
operators.

"Still, the current oil price climate being what it is, we do not expect a
swift revaluation," BBVA-Bancomer said.

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