ASR - Grupo Aeroportuario Del Sureste: New Tulum Airport Isn't A Major Competitive Threat

2023-09-07 06:05:03 ET

Summary

• Grupo Aeroportuario del Sureste's Cancun airport faces a new competitive threat from the forthcoming opening of the Tulum airport.
• The Tulum airport is situated far down the coast and is unlikely to be more convenient than Cancun for many of the beaches in the area.
• The Tulum airport is tied to the Mexican president's Mayan Train tourist project, but I don't expect this to move the needle long-term.

Grupo Aeroportuario del Sureste (ASR), is one of Mexico's three publicly traded airport operators. Of the three, it is the most tourism-based of the bunch, as its flagship Cancun airport relies almost entirely on tourism and hospitality to drive traffic. Sureste has also diversified internationally with its airports in Colombia and Puerto Rico. However, Cancun is still the main attraction for ASR stock, and as such, it is worth monitoring any competitive threat to Cancun closely.

In my most recent article about Sureste from May 2023, I downgraded my outlook from buy to hold based on the potential slowing of tourism growth along with major disruptions in the Colombian airline market. Since that point, ASR stock has underperformed the S&P 500 by about 15%, and I'd refer readers there for my views on Sureste more broadly.

In this article, however, I'd like to zoom in on the specific competitive threat that has arisen to Sureste's Cancun airport, namely, the forthcoming opening of a new airport in Tulum.

Context For Tulum's New Airport

Back in May 2016, in my article Should You Invest In Cancun's Airport? , I highlighted the potential for a new Tulum airport as a competitive risk to the company. Seven years later, that potential has finally become reality.

It all began in 2010, when a prior Mexican government opened bidding for a potential new airport to serve the Mayan Riviera, which is commonly thought of as the beaches and jungle destinations south of Cancun. At the time, it was expected that private airport operators such as Sureste or rival Grupo Aeroportuario del Pacifico (PAC) would be the eventual winner of the concession.

However, nothing came to pass of this concessions process, and the onset of COVID-19 would have seemingly further put this on the back burner.

But, Mexican tourism came roaring back faster than just about anywhere else in the world, and Cancun in particular is serving far more people today than prior to the pandemic. Specifically, Cancun's airport handled 25.5 million people in 2019 and that jumped to 30.3 million for full-year 2022. Traffic appears likely to be up mid-to-high single-digits on top of that for Cancun for full-year 2023 as well.

With this in mind, there was understandable interest in restarting the Tulum airport project.

Courtesy of Google Maps and some author annotations, here is an overview of the region in question:

The red box is the stretch of Caribbean beaches south of Cancun anchored by Playa del Carmen. The Mexican government invested heavily in tourism in Playa del Carmen in recent decades and as a result, Playa del Carmen has grown from a small town to a city of more than 300,000 people today.

Sureste operates both the Cancun Airport and the Cozumel Airport out on the island across from the mainland beaches. However, Cozumel has never become much of a traffic draw in its own right, likely due to not having a road connection to the mainland.

At the bottom left part of the map, you can see the pin on the map where the new Tulum airport is situated. The problem should become clear from the jump -- it is well to the south and west of even Tulum and past most of the major attractions and beaches in the area.

I believe an airport closer to Playa del Carmen or Puerto Aventuras in the center of the region would have been a larger competitive threat to Cancun's existing airport. The new Tulum airport is simply so far down the coast (more than 100 kilometers from Cancun) that it isn't going to be more convenient than the existing airport for many of the beaches in the area.

It's also worth considering the history of this airport project. Initially, it was expected that a private operator such as Sureste or Pacifico would win the concession. Instead, the Mexican government ended up developing the project itself and is tying it in closely with President Andrés Manuel López Obrador's "AMLO" Mayan Train tourist project for Southern Mexico.

I, along with many other analysts, am skeptical of the long-term demand for a passenger train in this part of Mexico and see this as an expensive and likely unproductive investment. AMLO is set to leave office next year, as Mexico has term limits for presidents, and I expect the Mayan Train to receive less government promotion/attention once the next president is in power. As the Tulum Airport is tied into this overall tourism strategy, I expect interest in the project to fade in time.

I'd also point out that AMLO blocked the construction of the planned massive new international airport in Mexico City. Instead, he had the government turn a small military airport far outside of the city into a secondary airport for the region. It has been a commercial flop, with fairly minimal usage from airlines so far. I believe the Tulum Airport will follow a similar path, as it was designed in part with political rather than economic aims at heart.

To that point, airlines have started announcing routes for the new Tulum Airport, with service scheduled to start in December. As of this writing, discount carrier Viva Aerobus is planning a respectable five routes to the airport and leading discount carrier Volaris ( VLRS ) has expressed potential interest in the airport but has not made any concrete plans to start service. By comparison, Viva Aerobus and Volaris fly 27 and 28 unique routes to Cancun's airport, respectively. AeroMexico has announced one permanent route to Tulum along with some seasonal winter service.

One potential strategy for the Tulum Airport to gain traffic is by using the new national airline. That's because AMLO announced that he will be reviving the Mexicana brand as a government-run airline intended to provide additional coverage beyond what the discount carriers offer. Industry experts are skeptical about how this will go, but Mexicana has said that it may use Tulum as a focus city for its operations, which could lead to Tulum getting a decent bump in traffic. That said, I do not expect a government-run airline to have much long-term success in Mexico.

At the end of the day, Tulum, as a city, is merely about 50,000 people. It has grown more slowly than, say, nearby Playa del Carmen. As much of the growth in the area is near Playa del Carmen and Puerto Aventuras and this new airport is not meaningfully closer to those locations than the existing Cancun airport, I see little reason to think the Tulum Airport will siphon off much traffic anytime soon. Current signs indicate this is more of a political project than a serious economic competitor to the existing status quo in the Yucatan.

ASR Stock Bottom Line

I remain at a hold rating on ASR stock due to various intermediate-term headwinds. The Colombian airline market remains greatly unsettled after two significant discount carriers ceased operations earlier this year. Puerto Rico is struggling to bounce back from hurricanes and a weak economy. And the Cancun area has rising pollution and crime issues it needs to address to keep its long-term growth trajectory on track. All this makes me more cautious about Sureste shares today as opposed to Pacifico or Grupo Aeroportuario del Centro Norte (OMAB). Overall, Sureste's August 2023 passenger report showed just 6% year-over-year growth, with the 13% decline in Colombian passengers offsetting gains elsewhere.

However, one thing that doesn't have me particularly concerned is the new Tulum Airport. I believe this is not an especially well-planned out project, and that interest in the property will fade once AMLO leaves office. Long-term, there will be some demand for flights serving Tulum and the southern bit of the Mayan Riviera. However, I'd expect Cancun to continue to handle the overwhelming amount of capacity for many years to come. If I had to guess, Tulum ultimately ends up in the 2-3 million passengers a year range, or something akin to 10% of Cancun's business today. That's a marginal impact, rather than any thesis-breaking development for ASR stock owners.

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