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Morningstar | Mexicans Vote to Halt Construction of Mexico City’s New Airport in Nonbinding Referendum

In a nonbinding referendum that was run by Andrés Manuel López Obrador’s MORENA political party, Mexicans have voted to scrap a new $14 billion Mexico City airport that was slated to begin operations in late 2020. Specifically, citizens who participated voted to recondition the existing Mexico City airport and build two additional runways at the Santa Lucia air base. Given the high profile nature of the airport project--it was a flagship infrastructure program for the PRI (Institutional Revolutionary Party) and president-elect Obrador announced the results himself--we think the incoming Obrador administration will now attempt to cancel the ongoing construction, which is roughly 30% complete. Terminating construction may cost over $5 billion per estimates from Grupo Aeroportuario de la Ciudad de México, the government-owned corporation handling the project.

We had already curbed our traffic forecasts for the three wide-moat Mexican airport operators we cover (Sureste, Pacifico, and Centro Norte) to account for the delayed capacity growth across the Mexican air travel system due to a possible cancellation of the new airport’s construction. Although we think Obrador’s presidency will not meddle with the airport operator's concessions, we did move to update our valuation model to reflect increased uncertainty around Obrador’s economic policy. In practice, this means we’re explicitly modeling air traffic weakness in 2020, forecasting 0% top line growth due to lower air traffic. We’ve also updated our ADR valuations for the depreciation in the Mexico peso that came on the heels of the referendum announcement. Our new fair values are $42 for Centro Norte (MXN 104 for local shares), $105 for Pacifico (MXN 210), and $184 for Sureste (MXN 368). Out of the group, we continue to prefer Pacifico.

We note that our base-case valuations do not contemplate a crisis in the Mexican economy but rather weakness in air traffic demand linked to slower economic growth stemming from poor (but not disastrous) economic policy. In our view, Centro Norte remains the most exposed to a slowdown in the Mexican given its reliance on domestic air traffic (over 80% of total air traffic for the operator) and lack of tourist destinations in its portfolio that both Pacifico and Sureste enjoy. Indeed, if the U.S. economy remains strong, the weaker peso is likely to attract more Americans to Cancun (Sureste) and Los Cabos and Puerto Vallarta (both Pacifico).