06-Mar-2015 11:22 PM

Attractive airport infrastructure deals in Latin America. Part 2 - Mexico City Airport at Texcoco

Analysis

Of all the big new airport projects throughout the world (Beijing, Chengdu, Istanbul, Sydney, Manila, Berlin etc) it is the one at Mexico City that it eliciting the greatest excitement. The international director of the Mitre Corporation, a US research organisation, referred to it as "probably the most advanced modern airport project worldwide," pointing to its capability to handle simultaneous traffic flows off multiple runways. More mundanely but of at least equal importance it will relieve the transport bottleneck that threatens Mexico's economy.

The history of the attempts to secure a new airport in Mexico City have been well documented by CAPA over the years, involving as they have economic uncertainty, environmental concern, political intrigue and even riots. A previous plan for a new airport in the same region was scrapped in the early 2000s following intense protests.

The inertia stood in contrast to the successful privatisations of many of Mexico's other main airports in three main groups, Mexico City's Benito Juarez International remaining under the control of the state operator ASA. (The city's Toluca Airport though was part-privatised).

Technically advanced multi-runway to relieve national transport bottleneck

As recently as Jul-2013 Mexico's President Enrique Pena Nieto had made no commitment for a new Mexico City airport in announcing the country's "Programme for Investment in Transport and Communications Infrastructure 2013-2018."

What seems to have swung opinion in its favour is when the Juarez International Airport announced new slot restrictions effective Oct-2013, capping operations during peak times at 58 per hour and prioritising commercial aviation, while announcing that operations "exceeded the maximum number that can be served per hour" on "more than 52 occasions" in 2012. The management claimed this compromised competitiveness, the Mexican tourist industry, which contributes 3.4% to Mexico's GDP, and security.

Even as 2014 dawned though the Mexican government was seemingly unable to decide whether or not to build a new airport for Mexico City (probably at Texcoco in the northwest of the urban region but possibly somewhere else), somehow to squeeze even more use out of Juarez International Airport, the second busiest in Latin America and capacity constrained until the pips squeak, or to expand Toluca Airport, which, frankly, had quite a lot going for it. Expanding Juarez Airport even involved a proposal for extending the two runways and applying mixed mode operations, which is one of the remaining short-listed proposals for London Heathrow Airport, while another alternative to Texcoco was Tizayuca, outside the Mexico City boundaries. Yet another proposal called for the capital region to avail itself of all of the infrastructure in the region, including airports at Toluca, Cuernavaca, Puebla and Queretaro. Ironically, as a consequence of the final decision any, or all, of those airports might now even close.

At that time the government was expected to take the lead in the project but it was known that it had attracted the interest of private sector investors such as one of the Macquarie investment funds.

Eventually, in Sep-2014 and after many false dawns, a decision was taken. It was confirmed by President Enrique Pena Nieto that a new Mexico City International Airport would be constructed adjacent to Juarez International. It would have capacity for 120 million passengers per annum and feature six runways upon completion of its second phase, quadrupling Juarez's capacity. Mr Pena Nieto noted that the airport would be one of the biggest infrastructure projects ever undertaken in Mexico. The price tag was given as MXN120 billion (USD9.1 billion). That tag has risen over the past six months to MXP169 billion (USD11.3 billion) but that might be a conservative figure. US engineering firm Parsons, which has had an involvement with the project since mid-2014 ventured that it might end up costing MXN662 billion (USD50.3 billion) in total construction, operating and maintenance costs by 2069, when the final phase is expected to be complete.

In Feb-2015 IATA signed an agreement with Mexico's Secretariat of Communications and Transportation (SCT) to support the development of the airport. As part of the agreement IATA will provide supervision and advice on technical and operational aspects of the project as well as best-practice guidance on airspace and slot management. This is not an unusual development; IATA frequently undertakes such a role and is possibly best remembered for its impact on the Bangkok Suvarnabhumi airport project in 2005-6.

Grupo Aeroportuario de la Ciudad de México (Airport Group of Mexico City) has been given the concession to build, manage and operate the new airport. The agreement is valid for 50 years from the beginning of operations. Grupo Aeroportuario de la Ciudad de México owns the existing Juarez International Airport. It is a branch of government with private financing.

The government sees the value of (and need for) the private sector to play its part

Project funding, most of it in the period 2014-20 will come from public and private sources in the ratio 58%:42%.

The government initially insisted it would remain in state hands upon completion, the project being financed through a combination of current cash flow and bonds and the initial construction work being financed by excess cash flows from the operation of Juarez International Airport, which will the government believed would be sufficient to cover initial costs. The issuance of 30-year bonds has also been under consideration to finance later phases of the project though specific financing programmes would be created to fund different elements of the project. With the private sector so heavily involved in Mexico (GAP, OMA, ASUR, OHL etc) it was difficult to imagine they would not be involved with this huge project as well even despite the fact it has always been the intention to operate ASA out-with the clutches of the private sector.

While up to MXP33 million (USD2 million) has already been made available for 2015 from the public sector to fund initial works there is little clarity so far as to who the private sector participants are, or will be, or what the precise timescale is for them to come onboard. However, it is understood that the publicly listed operator GAP (Grupo Aeroportuario del Pacifico), which has 12 airports, anchored on Guadalajara, is raising MXP15 million (USD1 million) in the first instance to invest in the project while ICA (Empresas ICA S.A.B de C.V), which holds a majority stake in the publicly listed Grupo Aeroportuario del Centro Norte (OMA), will also participate having already abandoned a consortium with nine other companies to do so on its own terms.

Mexican law is strict on how the private sector can participate in the first stage of this enterprise.

The government's advice for any prospective foreign investors, suppliers or construction sub-contractors is simple: network with Mexican companies and Mexican-led consortiums on the basis of technical experience and/or financial strength and devise a PR strategy that majors on transparency and public information regulation. Source: Presentation by the Central Citizen and Consumer Council. (See later for the importance of 'transparency').

Even so, and while by Oct-2014 30 Mexican companies such as Grupo ICA, Grupo Corso, Coconal, Gia, La Peninsular, Marhnos, Teya and Tredeco had expressed interest in bidding for the new airport tender, international contractors were expected to enter the bidding war.

This is how the funding will be allocated as it comes in.

Lake Texcoco draining budget required to ensure it is not a floating airport

75% goes to the fundamental airport infrastructure with 3% allocated to 'social works,' which could embrace anything from an environmental clean-up to noise insulation. There is a bigger budget (10%) for a separate environmental project, which is the completion of draining activities and land stabilisation of the old Lake Texcoco. Design, Engineering and Project Management accounts for the remaining 12%.

Allocation of expenditure (MXP million)

Budget Spending by Year MXP

So budget expenditure peaks in the period 2015-2018.

Technical details of the project are as follows.

In stage 1, the existing Juarez Airport, which has two runways with non-simultaneous operations and 32 million ppa, is to be replaced with one having three 4000-5000m runways with simultaneous operations to handle 550,000 movements each year and up to 50 million passengers. Stage 1 operations will be from 2020 to 2028.

Other highlights include:

A 555,000sqm single terminal building with 95 gates "enclosed within a continuous lightweight gridshell, embracing walls and roof in a single, flowing form, evocative of flight" and designed for Mexico City's "challenging" soil conditions;
No internal trains or underground tunnels;
Designed to be the "world's most sustainable airport" and only airport in the world certified LEED Platinum, with design works featuring rainwater collection, daylight direction and temperatures to be maintained with almost 100% outside air, leaving "little or no" need for additional heating or air conditioning;
Built on a "monumental scale" with three times the span of conventional airports and a maximum internal span of 170m;
No ducts or pipes in roofing allowing "environmental skin" to be revealed, terminal instead serviced from beneath.

In stage 2, a further three runways are added (there is no word yet as to whether simultaneous operations will be possible on all six) to handle one million movements each year and up to 120 million ppa, which would put this airport on par with the very biggest being built or designed presently, such as Dubai World Central, Istanbul Grand and Beijing Daxing. This stage is a protracted one, through to 2069 at current estimates, which is the longest completion date of any airport project the CAPA Construction and Cap Ex Database is currently aware of.

Cargo and logistics are expected to play a central role

The airport could become the largest logistics hub in Latin America with 1.2 million tonnes per annum of cargo being handled by 2030, although this would depend on logistics services developing alongside the infrastructure. Guadalajara Airport is currently the only Mexican airport with cold storage facilities and therefore the only airport with the ability to handle 'produce' exports in the country.

The architectural project has been handed to a consortium of Norman Foster Associates and Fernando Romero, a Mexican architect with offices in Mexico City and New York.

Foster, the architect behind London Stansted Airport's "reinvention" of the conventional terminal in the 1990s, is reported to have said that Texcoco "breaks with that model for the first time". The airport "pioneers a new concept for a large-span, single airport enclosure, which should achieve new levels of efficiency and flexibility… and its design provides for the most flexible enclosure possible to accommodate internal change and an increase in capacity".

This architectural project is organised in five phases.

The first is the fundamental acquisition of land, 4,300 hectares (44sq km), which is in government ownership, so should in theory not be an issue. But while the existing Juarez airport is within the boundaries of Mexico City the new one, despite its proximity (5 km), is in the State of Mexico. This state of affairs also has implications for the provision of public transport links.

The planning and design phase (2) involves dialogue with airlines, customs agents, commercial companies and civil engineering organisations.

Phase 3 is the appointment of a Chief Engineer and Project Manager and the initiation of studies into airspace utilisation, arrival and departure routes, and runway/taxiway/apron utilisation.

Phase 4 is the preparation of an environmental impact report and Phase 5 the commencement of construction works.

The Infrastructure Planning contract was won by Netherlands Airport Consultants (NACO) together with Royal HaskoningDHV and the Mexican engineering consultancies SACMAG de Mexico SA de CV and TADCO Constructora. Collectively they are responsible for the runways, taxiways, navigational aids and associated facilities. The contract was won with a bid of MXP1,252 million (USD83.6 million), based on the lowest price principle. There were four bidders.

This is NACO's second big assignment for this airport after winning the design for the airport's passenger terminal with Foster & Partners and FR-EE in 2014. NACO will be designing three runways capable of accommodating the A380. Airbus expects Mexico City to see an increasing number of A380 services over the next 20 years (assuming, of course, that aircraft continues in production), while both Lufthansa and Air France have expressed interest in deploying the type to the Mexican capital.

A Master Plan will be prepared by the end of 1Q2015. 35 bids are expected for this part of the project as in the table below.

Master Plan

Before Project				During Project
Earth Moving	Hydraulic Works	Drainage	Surface Improvements	Airport Services	Land Services	Commercial Services

Transparency is critical to the success of the deal

The government has allocated time and energy to assuage fears about potential corruption, clearly mindful of allegations that have been made from time to time in Latin America concerning privatisation activities in different parts of the continent.

Questions have already been asked in the Mexican media about best practices in both public and private sectors and how they apply in this instance.

And separately, in Nov-2014, Mexico's Federal Institute for Access to Information and Data Protection (IFAI) requested the Airport Group in Mexico City (CMAG) provide information regarding the airport project, having received a complaint from the Mexico City Government, citing the airport group was withholding information from the city about the project. The City had requested the airport group to deliver information on environmental impact measures, scheduling, stages of construction, method of recruitment as well as its overall project plan.

One of the ways in which the government has tackled the subject is through the appointment by the President of a new Secretary in charge both of the regulation of bids and government procurement activities. This 'Minister of Public Function' as he is known is a civil servant with in-depth knowledge of procedural transparency. Furthermore the government has agreed transparency policies with the OECD. Other public agencies and 'Transparency Mexico,' the agency that oversees Mexico's 2014 transparency reforms are involved. (In 2013 Mexico scored just 34 out of 100 in Transparency International's tables).

Now an antitrust agency is involved in the definition of bidding terms and design.

The government is at pains to point out though that the relationship between the new airport and 'national airlines' (i.e. Aeromexico) is as yet undefined.

Cutbacks on other transport projects spawn lingering doubts about Texcoco

The sharp drop in GDP growth in 2013-14 is a major cause of budgetary cutbacks that were announced in Jan-2015 by the government. At the moment the main casualties in the transport sector are railway projects at Queretaro (MXP40 million) and the 'Transpeninsular' line (MXP22 million). The government insists the airport project will proceed as planned. However, such cutbacks may well mean that the envisaged rail connection between the downtown/central business district and the new airport is at best put on hold. It is uncertain just how important that is in a country that is so enamoured with the private motor vehicle and the bus.

Concern is being shown in the government however with regard to the negative effects of the new airport on others at Toluca, Cuernavaca, Puebla, and Queretaro. Traffic is expected to diminish considerably at these facilities, putting at risk the infrastructures and the stakeholders alike.

The new airport's construction is reported to be supported by a majority of the capital's population, and the greatest preference for the future of the current Juarez Airport site is for it to become an ecological green space, according to surveys. Its use as a convention centre or national tourism centre is also possible though the examples of Berlin Templehof and Athens Hellinikon airports suggest that parks and green spaces do often win out in these cases.

Rising costs, declining public revenues and environmental issues are all lingering issues

Mindful of the claim that the airport will proceed "as planned" there are still a number of factors that could yet affect it adversely. Two of them are rising costs and falling revenues. Already the price tag is more than double the MXP80 billion (USD6 billion) estimate by the Secretary of Transport and Communications, Gerardo Ruiz Esparza, only a year ago.

Mexico, the world's 10th largest oil producer, is one of many countries where cutbacks in state infrastructure spending may have to made if there is a consistent reduction in oil prices over a protracted period of time. There is plenty of fiscal ammunition for remaining opponents of the airport to use.

Secondly, and in common with so many other new airport undertakings around the world, there are environmental issues to contend with, despite the insistence it will be the world's 'most sustainable airport'. In Apr-2014 the National Water Commission (Conagua) expressed opposition to the prospect of expanding Juarez International Airport on federal lands east of the facility over Lake Texcoco, due to the risk of "catastrophic flooding" which could "jeopardise the safety of airport users" as the region is constitutionally designated as a flood zone. It was this issue specifically that prompted the suggestion of Tizayuca, in neighbouring Hidalgo State, as an alternative and more suitable alternative for environmental reasons. The allocation of 10% of initial financing to hydraulic works recognises the potential impact of this environmental issue.

Moreover, the same organisation has warned that an airport at Texcoco would be "ecological suicide and a threat to urban development," citing a 1995 study by the National Autonomous University of Mexico which said construction on the site would have "significantly adverse" environmental impacts and would threaten 120 native bird species with extinction. The government response was to promise that the airport will "contribute to the restoration of the surrounding area via rehabilitation of surrounding lands and construction of lagoons that will harvest rain water to avoid flooding". Six man-made lakes will also be constructed.

Airline prospects good in the long run

As for the country's airlines, and demand for them, prospects are generally positive despite the bankruptcy of Mexicana de Aviacion and the poor performance last year of Grupo Aeromexico, which made both operating and net profits in FY2014 but experienced declines of -30% and -27.5% respectively as increased costs outstripped revenues. (That should change for the better if the oil price continues to be low). Aeromexico remains bullish about prospects, having ordered more than 100 aircraft including B737 MAX 8s and B787-9s just over two years ago. As of 16-Feb-2015 Aeromexico has 66 aircraft in service and 71 on order according to the CAPA fleet database. The delivery schedule is outlined below.

Aeromexico projected delivery dates for aircraft hulls on order purchased from OEMs and leased from lessors' new aircraft order pipelines as at 16-Feb-2015

Aeromexico's competitors are all LCCs and some of those, too, have substantial aircraft orders, such as Volaris, which has 46 A320s on order, and Viva Aerobus, which has 52 of the same type on order, more than double its present fleet size, both these airlines reviving after two tough years

Airbus judges that Mexico will require 634 new aircraft over the next 20 years to meet demand which is expected to grow by 4.9% per annum and that it will become the main destination in Latin America after Brazil. The increase in demand will be driven by a growing middle class that will increase consumer and tourism spending. However, congestion and lack of adequate airport infrastructure may hold it back. The new Mexico City airport will help counter concern over infrastructure.

In 2014 international passenger air traffic rose by 6.1%. That statistic was skewed at either end by a 13% rise in the Middle East but just 3.1% in North America. Latin America's growth rate was 5.8%, the same as Asia's and 1.1 percentage points above capacity growth in the region while average load factor topped 80%.

It can be expected that, allowing for replacement and retirement, the total national fleet should reach over 350 within the next ten years. This represents the considerable and growing optimism within the industry for the next few years. Indeed if air travel in Mexico were to reach global average for an economy of the size of Mexico the number of trips per capita could rise by a factor of nearly four.

So airline prospects are good both regionally and locally.

Any potential investor considering the merits of the Mexico City airport will take into account the performance of the Juarez airport. Selecting the same criteria as those used for Santiago, they are:

Mexico City Juarez International Airport Network Summary (at 16-Feb-2015)

Total Airlines	34
Domestic only	2
International	32
Total non-stop passenger destinations	98
Domestic	51
Africa	0
Asia Pacific	1
Europe	6
Latin America	15
Middle East	0
North America	25
Total non-stop freight destinations	28
Domestic	6
Africa	0
Asia Pacific	0
Europe	8
Latin America	7
Middle East	0
North America	7

Mexico City Juarez International Airport capacity seats, per week, by carrier (16-Feb-2015 to 22-Feb-2015)

Mexico City Juarez International Airport international capacity, seats by region (16-Feb-2015 to 22-Feb-2015)

Mexico City Juarez International Airport capacity seats share by carrier type (16-Feb-2015 to 22-Feb-2015)

Mexico City Juarez International Airport capacity seats share by alliance (16-Feb-2015 to 22-Feb-2015)

Mexico City Juarez International Airport movements by hour for typical day (Monday) (16-Feb-2015 to 22-Feb-2015)

Comparing these charts with those of Santiago Airport the following observations may be made:

Lesser degree of dominance by any one carrier; carrier type; or alliance at Juarez Airport (a better mix)
A stable balance of aircraft movements per hour between 0600 and 2359. Some potential for development of night flights, regulations permitting

In conclusion:

The economic importance of Chile is growing rapidly both regionally and throughout the world;
Mexico continues to benefit from membership of NAFTA and, latterly, other trade groups;
Both countries are attractive infrastructure investment prospects;
Santiago's airport has many advantages for its operators but AdP, Vinci and Astaldi have collectively paid a high price to gain access to it;
The new Mexico City airport has met with violent protests in the past. There is a calmer acceptance of its inevitability now but some important cost, funding and environmental questions still remain.