Mexican Airports: Industry Overview & Outlook (Sept. 2024)

The only guide you'll need for the Mexican airport sector.

Sep 08, 2024

A guide to the Mexican airport industry covering its history, structure, and profitability drivers.
Why Mexican airport stocks have sold off in recent months; I separate the actual headwinds from the irrelevant noise.
Breaking down the Pratt & Whitney engine recalls' impact on traffic, how it is impacting OMAB, PAC, and ASR individually and forecasting the rate at which traffic recovers.
My top picks for Mexican aviation both over the next 12 months and in the longer-run.

I’ve been getting a ton of reader mail about the Mexican airports. About half of these are saying: "Wow, they look really cheap again. Must be a strong buy here!" and the other half saying: "Wow, this market volatility is scary. Has something gone wrong with the airport thesis?"

Given strong feelings on both sides at the moment, it’s a good time to update on the Mexican airport thesis in general and most recent master development program "MDP" update from Pacific Airports (NYSE:PAC) in particular.

For a bit of context, I have owned the Mexican airports since 2016, specifically Pacifico and Centro Norte Airports (NASDAQ:OMAB). And then I bought Sureste Airports (NYSE:ASR) several years later when they expanded their airport holdings into Colombia.

Additionally, I made Pacifico stock my top pick for 2017, after the stock dumped 30% following Donald Trump's election win in November 2016. I was living in Queretaro, Mexico at the time, and it was clear from being on the ground that nothing had changed/would change with the Mexican economy once Trump took over. That call indeed worked out nicely, with PAC stock rising 50% in the first half of 2017. I've ridden the Mexican political risk rodeo before.

Next up, the Mexican airports -- as a combined holding -- were my largest position at the onset of the COVID-19 pandemic. The Mexican airports proceeded to drop 70% in three weeks when the world shut down. This led to some sleepless nights for me, as I was running my portfolio with an ample degree of portfolio leverage and having your largest position drop 70% virtually overnight is not great for a portfolio that is on margin. In any case, the Mexican airports remained profitable -- even in 2020 -- and the stocks returned to record highs in short order.

Fast forward to October 2023 and we endured another 50% overnight drawdown on the airport stocks. That came about from headlines that Mexico's government was unilaterally changing the concession terms for the airports. Foreign investors being prone to a "shoot first, ask questions later" approach to emerging markets, this resulted in OMAB stock going from $100 to $50 in a heartbeat.

Once cooler heads prevailed, it became clear that the contract adjustment was simply rolling back excess profitability that had come about due to relief the airports received for COVID-19. To further clarify, the Mexican airports have typically earned 65-70% EBITDA margins for many years. (When calculating EBITDA margins, exclude construction revenues, what you see charted on financial sites often doesn't adjust for this and looks lumpy as a result)

During the pandemic, the airports earned higher than usual profits thanks to cost-cutting combined with regulatory relief. This led EBITDA margins to spike to as high as 77% for OMAB. This was well above the average historical profitability of the airport sector and above what the government felt was in the spirit of the concession contract. This was adjusted back to pre-pandemic levels, which in my view was fine -- poorly communicated to be sure, but the actual action was reasonable. Mexican airport shares recovered, with ASR stock in particular blasting off to fresh all-time highs:

Note that the "government renegotiating the contracts" panic was back in October 2023 and has fully resolved itself. The people citing that as reason for why the airport stocks are down in September 2024 simply aren't following the story closely enough.

Before we get into the recent price action and opportunity for the sector going forward, however, let's set the stage for how these companies operate and why they are an attractive asset class.

Mexico: A Pioneer In Airport Privatization

Back in the late 1990s, Mexico decided to privatize most of its commercial airports. These were sold to four distinct private airport groups. Three of these are publicly traded on the New York and Mexican stock exchanges and the other one -- which operates the Mexico City Airport -- is not publicly-traded.

The airport operators have 50-year operating leases, running from 1998 through to 2048. These contracts also have the right to be renewed out to 2098, and I expect them to ultimately be renewed, though my understanding is that there is unlikely to be any news on that front until we get far closer to 2048.

The contracts are not just "set-and-forget" for 50 years, however. Every five years, the airport operators meet with Mexico's federal civil aviation agency "AFAC" to establish a new intermediate-term investment plan, known as the MDP.

In these negotiations, the airport operators agree to invest a fixed sum of money on CAPEX to upgrade and modernize their facilities. This can be a variety of things such as: Expanding a terminal, building a new runway, constructing more parking, building logistics and cargo facilities, and what not.

In return for making these upgrades to the facilities, AFAC gives the airport operators the right to raise the fees they charge for each passenger that lands at the airports. Generally speaking, the more an airport operator puts into a property, the more it is allowed to raise the fee to earn an adequate return on these growth investments.

This process is beneficial for both stakeholders. The airport operator has to pony up considerable cash at the outset, but in return earns higher fees and also attract more passengers to its larger and more welcoming airport facilities. Meanwhile, the Mexican government gets to collect more taxes off the aviation sector directly as traffic rises and it also profits from more economic activity at hotels, restaurants, and other such businesses that benefit when more foreign travelers come to Mexico.

Recall that the Mexican government remains the ultimate owner of the airport (and will retake operational control of the airports in either 2048 or 2098). So, it gets both more tax revenues now and a better asset for when the airports ultimately return to its control. At the same time, the airport operators get to charge large (and rapidly increasing) passenger fees on the airports in return for these investments in larger airport facilities.

The privatization of Mexican aviation has been a boon for the country:

(Data is monthly, and not seasonly-adjusted.)

They country's monthly tourist arrivals are up from about 800,000 monthly at the time of airport privatization to more than 2.5 million today. Traffic particularly inflected higher starting in 2014 as Mexico's discount airline carriers really took off and a much wider range of budget airfares on U.S.-Mexican routes became available. The airport operators, with their profit-driven motive, played an integral part in this by helping promote and market new routes and creating a hospitable environment for discount carriers to expand.

Why Mexican Aviation Has Grown So Quickly

That, in turn, creates a virtuous cycle where the presence of cheap direct flights makes it easier for people to become repeat visitors in Mexico. Particularly among American and Canadian passengers, the strong air connections between Mexico and North America have fostered a large expat retirement community in beach cities like Cancun and Puerto Vallarta.

Additionally, the ease of traveling to Mexico has brought in a lot of remote workers since 2020. This is particularly great for the airports, as these remote workers tend to have good salaries and use the airport a lot to visit friends and family back home and take care of various business matters in other cities.

To that point, Mexico's tourism boom has accelerated in recent years; as the chart above shows, Mexico is now far above pre-pandemic levels of tourist arrivals, whereas much of LatAm is merely back at 2019 levels today.

Airport operators can increase per passenger use fees at the airport. That plus organic passenger traffic growth leads to nice growth on its own, and my sense is that's how most investors view the opportunity. But that's actually missing a key piece of the picture.

---

Since their IPOs, the Mexican airport operators have grown non-aeronautical revenues about twice as fast as the aviation-related revenues.

Non-aeronautical is anything that isn't directly linked to delivering aviation services, so think primarily of: Restaurants and concessions, car rentals, advertising, hotels, cargo and logistics, industrial parks, etc.

Airports enjoy scale benefits as they increase capacity. You get much better advertising contracts. Higher quality luxury brands will fill your retail stores. Better-quality restaurants will want to operate at your airport. And so on. Also, as overall traffic increases, oftentimes, the city will build a metro line or other transit out to the airport which increases the connectivity for the airport and increases the amount of demand originating at that airport from its local catchment area. That's especially true for discount airlines with rock bottom fares that can attract a wider audience if it is cheap and hassle-free to get to the airport using public transit.

Soaring Profitability, Huge Shareholder Returns

Back to the bigger point. Traditionally, non-aeronautical revenues grow twice as fast as aeronautical. Let's run through some numbers. If you’re seeing 5-7% annualized topline passenger growth, for example, you’re probably getting closer to 10-12% annualized increases in aeronautical revenues (thanks to increases in tariffs every year linked to CPI plus the jumps you get with every new 5-year MDP). From there, non-aeronautical revenues tend to grow at double aeronautical, so that rate of revenue growth could easily translate to 20%+ on your restaurants/hotels/shops/industrial parks/etc.

EBITDA margins (ex-construction revenues) have been remarkably strong and consistent since IPO running from the mid-60s to the low 70s. That only changed with COVID-19, where margins temporarily went up even more until the October 2023 contract readjustment.

In any case, you can traditionally pencil in 70% of the airport operators' fast-growing revenues turning into EBITDA and free cash flow. And then, at Centro Norte and Pacifico in particular, virtually 100% of free cash flow is, in turn, distributed to shareholders via dividends.

This creates a tremendous dividend growth story. In the case of Pacifico (shown below), the annual dividend per share has risen from around $2 in the early 2010s to more than $8 per share per year today:

And yes, that's a 5% starting dividend yield today, which is nice in its own right. But what's really impressive is that Pacifico can more than triple the dividend in a decade, which creates an absolutely massive yield over time as the business continues to grow.

I spoke to Pacifico's CFO, and he emphasized the company's goal in being one of the best dividend growth equities on offer on the Mexican stock exchange, and I'd argue the chart above shows they are doing a very good job at this.

Of the three Mexican airport operators, the exception is with Sureste. It invests more for growth rather than paying out most of its cash flow in dividends. Sureste operates the San Juan (Puerto Rico) airport and more recently made a big move in Colombia, buying six airports including Medellin's international one for about $240 million.

The Colombian investment required significant funding for those properties. The prior owners were absentee owners and left the airports in a less than ideal state. Sureste has invested nicely to improve the food and retail offerings at these properties along with other modernization efforts, which explains the somewhat lesser focus on dividends at Sureste. Regardless, all three have a solid track record of paying sharply increasing dividends over time, with OMAB and PAC being particularly lucrative on the income front.

Mexican Economic Boom Adds To Airports' Appeal

I'm also optimistic on airports due to my favorable outlook for the Mexican economy. I’ve covered that extensively elsewhere, both in my writing and on recent podcast appearances, so I won't lay out that whole argument today.

In summary, however, the reshoring boom is driving more manufacturing to Mexico, particularly northern Mexico. This is helpful to Pacifico (particularly at its Tijuana airport) and exceptionally good for Centro Norte. Centro Norte's flagship airport is Monterrey, which is the hub for the Mexican manufacturing boom, and Centro Norte has a bunch of other airports along the U.S./Mexican border (like Juarez) which are boomtowns riding the manufacturing wave.

The Juarez/El Paso, TX border. Juarez's population has more than doubled since the NAFTA trade pact went into effect. More people = more airport passengers, all else equal.

In my view, it's nearly inevitable that Mexico will continue to grow its manufacturing sector. Mexico already overtook China as America's leading trade partner in 2023, and 2024 is shaping up as another banner year.

Given how toxic relations are between China and the U.S., Mexico should continue scooping up more auto, aerospace, and medical manufacturing companies, among other sectors. Perhaps most notably, Mexico is starting to attract higher value-add electronics and semiconductor manufacturing, suggesting that the country won't be stuck as just a low-to-mid range product assembler but can move up the value chain too.

I'm Contractually Obligated To Discuss Currency Risk When Writing About A Mexican Stock, So Here You Go

An underappreciated piece of the Mexican bull thesis is that the country has a strong independent central bank that has a strong track record for fighting inflation and has maintained an incredibly stable value of its currency. Here's the Mexican Peso dating back to 2016, when the Trump era of U.S./Mexican relations began:

The Peso dropped from 18.50 to 21 to the U.S. Dollar following Trump's win but then quickly recovered its losses once Trump softened his tone and rolled out the USMCA (the updated version of the NAFTA free trade deal).

After sitting at 19 for years, the Peso plunged to 24 at the onset of the pandemic as traders went risk off on everything. However, the Peso quickly recovered as 1) The country was flooded with tourists due to not having stringent COVID-19 restrictions and 2) Mexico's manufacturing sector ramped up activity in the wake of shipping disruptions that made it hard/impossible to import vital goods from Asia. The Peso recovered its losses by year-end 2020. By 2023, the Peso began to strengthen sharply against the U.S. Dollar amid Mexico's accelerating manufacturing and tourism boom. It recently got as high as 16.50, which was rather surprising and made Mexico one of the more expensive countries (on a purchasing power parity basis) in the Western Hemisphere.

As the above chart shows, however, the Peso has dipped back to 19.50 recently (its long-term median level) thanks primarily to the Japanese carry trade drama. The very brief explanation of that is people bought high-yielding Mexican bonds, shorted Japanese Yen against that trade, and were making bushels of money (35% annualized IRR from COVID lows). As with any highly profitable trade, people levered it up excessively and thus we got a sharp pullback when Japan raised interest rates and provoked margin calls. Normal FX market shenanigans here, not important to the long-term Mexico thesis.

The funny thing is that the Mexican Peso pullback is quite bullish for airports, specifically. Keep in mind airport traffic has been booming because Mexico is 1) a relatively cheap place to manufacture goods for the N. American market and 2) A cheap tourist destination.

If the Peso appreciates too much in value, Mexico stops having nearly as much competitive advantage on both counts. And at 16.50, that was becoming a real headwind, particularly on the tourism front. When currencies such as the Colombian Peso have lost half their value (compared to the Dollar) over the past decade, and the Mexican Peso was outright rallying against the Dollar, that made Mexico quite expensive compared to, say, a Colombian, Peruvian, or Chilean vacation. A breather in the Peso rally is great news for tourism.

I don't worry about currency much with the Mexican airports. It's self-balancing to the extent that a stronger Peso makes the airport operators' profits (and thus dividends paid to us) go up in the near-term, as quoted in U.S. Dollar terms. On the other hand, if the Peso drops, that induces more demand, particularly for tourism. And thanks to Mexico's excellent central bank (one of the best managed out of all emerging markets) Mexico has established a long track record of monetary stability and low inflation. If something changed here, I would discuss FX more, but for now, it's not a major concern to the thesis, and the recent Japan carry trade-induced dip is a nice buying opportunity.

On Sheinbaum & The Political Situation

A big chunk of the recent weakness in all Mexican assets is due to the drop in the Mexican Peso as compared to the U.S. Dollar and Japanese Yen. We've seen strong selling across a variety of LatAm and other emerging market currencies as people are trimming their exposure to higher-yielding credits and covering short bets against the Yen (and other low-yielders like the Swiss Franc).

It's deeply unfortunate that this currency market volatility coincided with the recent Mexican election because people are confounding the selloff happening across all emerging market equities with the specific situation in Mexico i.e. Mexican stocks are down therefore the new president-elect is a communist or so the thinking goes.

The Real Headwind: The Jet Engine Recalls -- Especially Bad For OMAB

The actual problem for airport operators at the moment has nothing to do with Mexican politics. Instead, the issue is jet engines -- Pratt & Whitney jet engines.

That manufacturer had a defect in a large number of their jet engines, which has led to more than a thousand planes being grounded worldwide. Unfortunately, it has disproportionately impacted the Mexican market.

Flying Mexico's Low Cost Airline Volaris: Worth It or Budget Bust? - Trips With Tykes

Discount airline Volaris (NYSE:VLRS) is the largest air carrier in Mexico, with approximately 40% market share. It operates a ton of planes with P&W engines and thus is in a world of pain right now. Last quarter, Volaris reported that its year-over-year seat mile capacity plunged 17%. Approximately one out of every six flights Volaris was offering last year no longer exists thanks to these bum engines.

It takes about nine months on average for these defective engines to be overhauled and these planes to return to service. Volaris simply doesn’t have the spare fleet capacity to make up for dozens of their planes being sidelined at the same time.

Volaris is hardly the only airline with reduced capacity at the moment, either. VivaAerobus is the other major discounter in Mexico, with a fleet of more than 100 planes. 20% of its fleet was affected by the P&W problems, causing a major reduction in its available flights as well. That’s before discussing international airlines with Mexican service that also use the affected engines. You also have the issues with the Boeing 737 MAX jets that have also hampered supply.

Airlines, particularly Volaris, are having to make the most of the planes they do have.

What do you do when you lose a bunch of your jets? You shift your working planes to your highest yielding routes. That is typically international routes, where the plane can spend more time cruising in the air (rather than at a terminal or taking off/landing) and where airlines tend to have more pricing power compared to short domestic hops.

So you’re seeing Volaris cut route frequencies (and in some cases suspending service altogether) on domestic Mexican routes while maintaining its higher-yielding international routes. If you are having to cut your flight offerings, the Mexico City to New York or Chicago route stays, while something like Tijuana to Hermosillo or Chihuahua is less likely to survive an airline-wide capacity reduction.

The problem there? A Mexico City to New York flight involves zero publicly-traded Mexican airport operator properties and thus generates us investors no revenue. Whereas that Tijuana (Pacifico) to Chihuahua (Centro Norte) route pays fees to both PAC and OMAB. Due to the capacity restraints, the airport operators simply don't have as many planes showing up at their airports this year as they did in 2023. There's no actual economic reason for this, but because P&W made a defective product, we are enduring a temporary drop in passenger traffic.

---To reiterate, these flights are not being suspended due to a lack of passengers. It’s simply the lack of supply.

We can see this by looking at load factors, which is how many seats an airline sells on a flight compared to its capacity. Generally, airlines like to run around 80 to 85% range. You don’t want a load factor of, say, 50% because that doesn’t maximize your revenue. One out of every two seats on your plane being empty is a financial disaster for an airline.

The counterintuitive thing, however, is you also don't want a load factor of 100%. For one thing, a 100% load factor is risky. That's because airlines oversell tickets. If a plane has 200 seats, for example, an airline will typically sell up to 210 tickets for that 200 person flight. The airline assumes some people just won’t show up, they'll get sick, they'll miss a connection from a different flight or something like that. If all the people actually show up, then the flight will be overbooked and the airline will have to pay hefty compensation to some folks to get them to switch to a later flight. Not ideal.

Additionally, if a flight is canceled for weather conditions or mechanical issue, then you need to put those people onto another flight to get them to their final destination. If all of your flights are 100% full, you have no excess capacity in the system, and have no way to make up for any flights which happen to get cancelled.

A load factor of around 80% (four out of every five seats on a plane are full) tends to be around the sweet spot for the industry. That creates sufficient profitability for the airline while avoiding bumping passengers and having wiggle room to reschedule passengers when flights get delayed/cancelled.

Back to Volaris and Mexican aviation. Load factors have risen in recent quarters as availability has dropped but passenger demand remains elevated. In fact, Volaris hit a 90% load factor in one recent month, which is far above what you'd typically see in the airline industry. Even with higher prices to compensate for the current situation, Mexican airplanes are teeming with passengers now. (This is also reflected in the fact that Volaris and VivaAerobus are down nearly 20% in terms of capacity but the airport operators are only down single digits in terms of traffic year-over-year).

All this to say that the Mexican aviation market has a healthy and robust demand picture. The problem is entirely on the supply side. Unfortunately, it appears the engine issue won't really be resolved overall until mid-to-back half of 2025. So, there will be softness in the traffic numbers for another few quarters.

Playing The Upside: My Favorite Airport Stock Now & The Timeline For When They Rally

This airplane capacity problem has especially hammered OMAB because it relies so much on domestic traffic. Its flagship airport, Monterrey, is not a big tourist city -- rather it's a gritty 5 million person metropolitan area whose leading employers are firms like Johnson Controls, John Deere, Pepsico, General Motors, Whirlpool, Caterpillar (and soon Tesla). Monterrey is a place people go to manufacture heavy objects and get paid well for doing so, it's not a tourist hub. And OMAB's other leading airports, like Juarez, Culiacan, and Chihuahua have virtually no international tourism whatsoever. So OMAB is getting crushed as folks like Volaris drop domestic service to maintain their international routes.

By contrast, Sureste is faring best since 75% of its Mexican traffic is at Cancun, which is 100% driven by tourism. Airlines are maintaining their Cancun flights even as they cut from their other Mexican frequencies. Pacifico is in the middle as it has airports like Tijuana and Leon driven by industry but also tourist hotspots like Cabos and Puerto Vallarta.

The key point, however, is that this is not a permanent switch in the market. It's not even an intermediate-term factor. It's simply Pratt & Whitney having a major blunder which has kneecapped Volaris and VivaAerobus for a year. Once that's over, all the capacity comes back and Pacifico and OMAB (especially OMAB) will see a huge jump in their traffic and profitability.

A year or a year-and-a-half from now, we'll see Volaris reporting 25-30% year-over-year capacity growth (we recover the minus 17% lost this year + additional new plane orders getting delivered) and we'll see absolutely skyrocketing passenger numbers for the Mexican airports.

Despite this major short-term headwind, as mentioned above, all three Mexican airport operators have outperformed the Mexican equity market year-to-date. Even amid a downturn, the airports are still fundamentally such good businesses (did I mention the 70% EBITDA margins?) that they can outperform the telcos, banks, and other stodgy stuff that fills up the Mexican ETF.

Mexican stocks are down sharply this year for mostly unimportant (Japanese carry trade) or poorly misunderstood (Claudia Sheinbaum) factors. The airports are performing alright in comparison to the Mexican index. And, as Mexico continues to widen its lead over China as the leading manufacturing partner for United States Inc., it's only a matter of time until the Mexican equity bull market reasserts itself. As always, the airport operators will be leading the way higher.

So, what's my pick today?

The Upside Kicker: PAC Secures A Wonderful New 5-Year Development Plan

For the next six months, my favorite airport name (in Mexico) is Pacifico. That's for two reasons. One, its traffic mix isn't as negatively impacted by the engine recall as OMAB while its valuation is more attractive than ASR's.

The other is that Pacifico secured its new 5-year MDP last week. Here are Pacifico's airports with the old maximum rate they were allowed to charge per workload unit and the new rate with the approval of the new MDP:

Guadalajara: 212 Mexican Pesos increased to 349 Mexican Pesos
Tijuana: 162 to 266
Los Cabos: 299 to 524
Puerto Vallarta: 297 to 522
Guanajuato: 222 to 350
Hermosillo: 166 to 261
Mexicali: 159 to 252
La Paz: 183 to 287
Morelia: 260 to 412
Aguascalientes: 172 to 270
Los Mochis: 189 to 296
Manzanillo: 227 to 357

The exchange rate is just shy of 20:1 today so a 350 Peso rate -- where flagship Guadalajara is today -- is about $17.50 U.S.

Stop and look at the table for a minute. These are huge increases! About 55% across the board in nominal terms, and about +20% in real terms after adjusting for inflation in the Peso since the prior rates were set. This coming from the AMLO government which the media would have told you was ripping up the contracts last year. Again, I feel bad for the folks that sold at the bottom of last year's airport sector flash crash -- there were some really irresponsible hot takes on Twitter at the time. Instead, nothing fundamentally changed and Pacifico just got regulatory approval from this supposedly anti-business left-wing government for big rate increases at its airports. Better luck next time, bears!

PAC stock popped 10% on this news, which is nice. I'm certainly not complaining. But obviously it should be up a lot more given that it further confirms that the airports are back to business as usual. And also, just stop and consider the firm's profitability at the new tariff rates along with the inevitably traffic recovery once Volaris gets its planes back.

We could potentially get 20-25% year-over-year traffic growth at PAC and OMAB in the back half of 2025, which translates to at least 30% profit growth (remember nonaeronautical revenues rise much faster than PAX traffic) based on existing passenger tariff levels. Plug in the new fee structure and it gets even better.

And yet, the airport stocks remain at deeply depressed valuations, with EV/EBITDA levels not far above the COVID-19 lows.

Throw in 40% EBITDA growth over the next two years, and these valuations look absolutely stupid cheap.

As a reminder, here's Pacifico's EBITDA over the years:

That's a quintuple since the financial crisis, and it has already doubled from pre-pandemic levels. And the market, in its infinite wisdom, is now giving us this growth machine at less than 8x EBITDA.

Prior to the Trump/AMLO worries starting up in the late 2010s, these stocks usually sold for around 15x EV/EBITDA on average, suggesting the shares should double from here, not accounting for any future growth whatsoever. We get closer to a triple when accounting for expected traffic recovery once the grounded planes get back to work, along with the natural organic growth in the market.

Like I said, PAC is my most timely pick now due to securing the new MDP and having a better traffic mix. That said, OMAB is my favorite longer-term of the three. I don't see any catalyst to turn its traffic picture more positive within the next few quarters, and it won't secure its next MDP until late 2025. So the stock could continue to lag until next year given these factors. Thus, PAC is my most timely pick, and OMAB is the one to beef up positioning in once we see the light at the end of the tunnel for the engine recalls.

I do own ASR as well, but in much less size than PAC or OMAB. For one, the stock has outperformed the other two recently, and I'm not inclined to chase recent performance. ASR is more tourism driven (75% of its Mexican traffic is at Cancun) so it won the first round of economic reopening which was all tourism and leisure travel. OMAB will win more heavily going forward as tourism growth cools off while manufacturing/industrial activity in OMAB cities continues to accelerate.

Furthermore, I believe Cancun is near maximum possible demand with it hitting more than 32 million passengers last year. That made it the 34th busiest airport in the entire world, on par with Minneapolis, Munich, Istanbul, and London Gatwick for some comparables. This is a rather remarkable figure for a pure tourist destination (there is no actual city or economy of note at Cancun, rather the Mexican government created Cancun out of pure jungle to serve as the Yucatan's Disneyland. Development started in 1970 when Cancun had a population of fewer than 100 people).

My fear is that Cancun, not having any real heritage, culture, or independent economy of its own, will eventually plateau as tourists move on to the next big thing (quite possibly either Tulum -- where the AMLO government opened a public airport to compete with Cancun -- or Cabos which is operated by Pacifico). Recall that at one point Acapulco was Mexico's pristine tourist hub and now it is a run-down dangerous city that barely receives any international tourists at all. I worry about placing so much of my bet on a pure tourist city.

That said, Sureste has wisely diversified. It operates the San Juan (Puerto Rico) airport, making it intriguing for folks that are optimistic that Puerto Rico can make an economic comeback. Sureste also controls Medellin (Colombia) and five other airports in that country, further diversifying its revenue streams away from Cancun.

Still, as an expression of the long Mexican economy bet, I much prefer PAC and OMAB shares.

I like PAC to hit new all-time highs over the next 12 months (unless the world economy goes into a significant recession, in which case PAC's new highs will be delayed to '26) and from there, it will be time to rotate most aggressively into OMAB to ride the next five years of the Mexican manufacturing supercycle.

Ian’s Insider Corner

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