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Morningstar | Pacifico Selected to Operate Kingston Airport, Solidifying Monopoly Position in Jamaica

Grupo Aeroportunario del Pacifico, or Pacifico, has been designated as the provisional preferred bidder for the Norman Manley International Airport in Kingston, Jamaica. Eight companies were approved by the Development Bank of Jamaica--the entity administering the process--as viable bidders for the Kingston concession but only three responded to the request for proposal. Transaction details have yet to be finalized, which means we’re leaving our $116 fair value estimate per ADR (MEX 217 for local shares) unchanged.

It's our understanding that negotiations between Pacifico and the government should conclude during October–-noting that the government is running a few weeks behind its initial schedule--and that these discussions will finalize the terms and conditions for the concession, including the price, the regulatory regime, the provisions for penalties (or outright termination), and the future development plan for the airport, among many other elements. We plan to update our valuation once specifics emerge. However, we don't anticipate a significant change in our fair value estimate because the 1.7 million passengers who move through Kingston annually will represent less than 4% of passengers for Pacifico. Growth at Kingston has also been sluggish with the airport servicing the same number of passengers currently that it did in 2008. We estimate that there are over 25 concessionaires at Kingston--companies with commercial activities at the airport--and depending on the final regulatory regime, this could lead to growth in higher-margin nonaeronautical revenue.

We also expect to retain our wide-moat rating on Pacifico because Kingston would bolster the company's already strong position in Jamaica, which is underpinned by its operations at the Sangster International Airport in Montego Bay. Indeed, 100% of the passenger air traffic in Jamaica will be passing through Pacifco's hands for the next 25 years should it gain control of the Kingston concession.

We know that if Pacifico comes to terms with the government, it will have the right to operate Kingston for the next 25 years and we believe this will include an option to extend the concession agreement for five years. In contrast to the Montego Bay airport, which Pacifico operates under a joint venture with the Vantage Airport Group, we understand that Pacifico bid for Kingston without a partner. Like Montego Bay, the Kingston airport's traffic originates primarily from the U.S. and Canada (70% of Kingston traffic), but our sense is that Kingston air traffic is less focused on tourism than Montego Bay. We think that the ongoing expansion at the airport, which should be completed by early next decade, would continue under Pacifico and that the government will seek improvements not only to passenger operations but also expansion of the airport’s logistics capabilities.