Grupo Aeroportuario del Centro Norte
Moat: 2.5/5
Understandability: 3/5
Balance Sheet Health: 4/5
A Mexican airport operator primarily serving 13 airports in nine states of central and northern Mexico, focusing on passenger traffic and offering commercial and aviation services.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
Business Overview Grupo Aeroportuario del Centro Norte, known as OMA, operates 13 airports in nine states of central and northern Mexico. These airports provide critical infrastructure for air travel, connecting both domestic and international destinations. OMA’s revenue streams are diversified, encompassing:
- Aeronautical Revenue: This segment includes revenues from aircraft landing fees, parking fees, and passenger charges. It’s dependent on the number of flights, passenger traffic, and associated fees.
- Non-Aeronautical Revenue: This encompasses revenues derived from commercial activities within the airports, such as rentals from retail spaces, food and beverage outlets, and advertising. This stream is also affected by passenger traffic and their willingness to spend.
- Construction Services: OMA provides services related to the construction, expansion and maintenance of airport facilities.
The company’s business is intrinsically linked to the economic activity of Mexico and air travel. Passenger traffic volumes are affected by economic conditions, airline industry trends, regulations, and major macro-economic factors such as inflation and interest rates.
Industry Trends and Competitive Landscape The Mexican aviation industry is experiencing growth, with increasing passenger traffic as the population travels more. The rise in tourism and trade is an important catalyst for growth. Competition in the industry, particularly from major international operators, is fairly intense. It is also characterized by high capital expenditures for constant infrastructure improvements, as well as increasing needs for advanced technologies.
OMA competes with other airport operators in Mexico, the major competitors being Grupo Aeroportuario del Pacífico (GAP) and Grupo Aeroportuario del Sureste (ASUR), but in their region, the direct competition comes from airports in larger cities like Guadalajara, Mexico City, and Monterrey. Each of these has its own unique market dynamics and service area.
The airline industry is subject to significant pressure from increased fuel prices, and labor unions. A crucial aspect is keeping operational costs under control while delivering quality services to customers. Competition is increasing, but, this is not necessarily driven by prices, but also by services offered and reliability for passengers. There has also been an increasing trend in air travel and tourism, which is leading to an increase in revenue streams for airports.
What Makes OMA Different? OMA’s primary advantage lies in its geographical positioning and its long-term concessions to operate these airports, which are critical infrastructure for the country’s economy and travel. This also creates some difficulty for new entrants to the area. OMA also focuses a lot on increasing its non-aeronautical revenue streams through better utilization of airport spaces. It also participates in the Mexican government’s initiatives to further improve infrastructure, which means it might have an edge for large public projects.
Moat Analysis
- Intangible Assets (2/5): OMA holds long-term concessions to operate its airports, a sort of regulatory license that is difficult for competitors to obtain. However, these are not permanent assets and can expire and may need to be renewed based on new regulations. Therefore, the moat isn’t as strong compared to a company with a brand advantage.
- Switching Costs (2/5): While travelers could technically choose to use other nearby airports, OMA’s airports have built in infrastructures that cater to airlines making the switch costly. However, these are more indirect switching costs because customers can still fly with the same airlines, just different airports that they operate within. Therefore, they have limited switching costs compared to other companies.
- Network Effect (1/5): Airports, in general, have a weak network effect. The value of an airport for its user doesn’t increase that much due to additional passengers coming to the facility. In some situations, more people may be good for retailers in the airport, however, these aren’t enough to consider the airports as having a significant network effect, and the overall economic value isn’t increased by more passengers. Therefore, this moat is weak.
- Cost Advantages (3/5): OMA benefits from economies of scale due to the large infrastructure and operation that they need to operate their airports. But also a large proportion of the expenses are variable in nature. They also benefit from local monopolies where other airports may not be easily accessible. The company is not as flexible in reducing costs during economic downturns because a large proportion of the expenses are fixed in nature. Therefore, the cost advantage is good, but not great.
Moat Rating: Based on this analysis, OMA’s moat is rated as 2.5 out of 5. It has some limited moats related to regulation and operational scale, however, faces intense competition as well as the inability to have control over the quantity of customers.
Legitimate Risks and Business Resilience Several risks could erode OMA’s moat and affect its business:
- Economic Downturns: The Mexican economy’s health significantly influences passenger traffic. Economic recessions or high inflation can reduce airline demand and passenger’s disposable income and, consequently, airport revenue. Therefore, if an economic downturn occurs in Mexico, OMA’s financial performance will take a hit.
- Increased Competition: Despite long-term concessions, new players may emerge in the market. They may try to attract customers with more modern facilities, better technologies, and even lower fares, thus eroding OMA’s dominance.
- Airline Industry Issues: Airlines are sensitive to oil price fluctuations, which can make them shut down their operations or reduce capacity and frequencies, affecting OMA’s revenue, also labor cost and labor union related issues can affect airlines, and hence, affect OMA’s income.
- Regulatory Changes: Changes in Mexican airport regulations could reduce profitability or the company’s flexibility to operate. Regulatory approvals can also affect expansions and new projects, especially if the Mexican government changes its views on economic growth and airports.
- Pandemic and Related Health Issues: Similar to 2020, any such global health issues can impact OMA’s operations, as they did during the pandemic, reducing flights and impacting revenues. The effect of any such global disease, will be more severe because the company is highly leveraged.
OMA’s business resilience is moderate because of its infrastructure assets, which allows them to be more resilient than other companies, and its geographical diversification in the region it operates in. However, they can be affected severely by a major economic crisis or similar event.
Financials The company’s income statement (in millions of Mexican pesos) and key metrics are as follows:
| Financial Data | 2020 | 2021 | 2022 | 2023 | 2024 |
|---|---|---|---|---|---|
| Revenues | 5,241 | 8,558 | 10,089 | 12,565 | 14,751 |
| Operating income (EBITDA) | 2,138 | 4,912 | 5,609 | 7,324 | 8,704 |
| Net income | 337 | 2,171 | 3,419 | 4,918 | 5,766 |
| Profit margins | 39% | 57.4% | 55.6% | 58.3% | 58.9% |
| Avg. Interest Rate on Loans/Bonds | 5.9% | 6.45% | 9.77% | 10.78% | 10.86% |
| Loans & Bonds | 7,620 | 7,804 | 11,315 | 14,353 | 16,683 |
| Total Capital Investment | 11,283 | 12,228 | 14,342 | 15,463 | 17,405 |
| Equity | 4,714 | 6,409 | 9,590 | 11,838 | 13,069 |
- Revenue: Revenue has shown significant growth since 2020 when they started recovering from pandemic-induced losses. It has nearly tripled from that low of 5,241 million pesos in 2020 to 14,751 million pesos in 2024.
- EBITDA: Similarly, EBITDA has also followed suit, going from 2,138 million pesos in 2020 to 8,704 in 2024. This shows a good recovery as well as management focus on increasing profits.
- Net Income: Net income was abysmal in 2020, mostly due to the effects of the Covid Pandemic. However, it has steadily increased and is now at 5,766 million pesos in 2024.
- Margins: Gross profit margins are strong, showing good revenue management. However, they seem to fluctuate based on the circumstances. They have been consistently in a 55%-60% range, which is also commendable.
- Debt: One worrying trend is that debt has consistently increased from 7,620 million pesos in 2020 to 16,683 in 2024. The increase in debt could be a red flag for shareholders. Interest payments, have also increased over these years and should be a worry as well.
- Investments: Another factor to keep an eye on, is the company’s investments into its capital infrastructure. As a result, its total investments have increased drastically.
OMA’s current results look positive overall, but, the high debt levels, increasing cost of capital, and increasing investment costs could be concerning for investors.
Understandability OMA’s business is moderately complex to understand as their revenue and profits are related to macro-economic conditions in Mexico and the operations of the airline industry. It requires some effort to analyze their complicated financials and the effect that regulations have.
- The nature of revenues for a complex business model, the impact of various market forces on revenue streams, and the different types of capital and operational expenditure can complicate the analysis.
- But the underlying business (airports provide transportation for passengers) is not that hard to understand.
Therefore, the company is given a rating of 3 out of 5 for understandability.
Balance Sheet Health OMA’s balance sheet health is rated as 4 out of 5, as they have a good level of liquidity. The biggest drawback is the increasing debt profile. The company holds around 16,683 million pesos in loans and bonds, this is a massive increase from 2020. Although the company is highly profitable, these debt levels are a big concern and make the company prone to losses if the economy worsens. While the current assets have covered current liabilities, the financial flexibility and debt sustainability needs to be monitored by investors.