Swine Flu Hurts Mexican Airline Sector

Grupo Aeroportuario del Centro Norte S.A. de C.V. (OMA) (OMAB), a Mexican airline company, has reported a 17.7% and 39.7% decrease in total passenger traffic in April and May 2009 respectively. Decrease in passenger traffic was mainly attributable to the recent outbreak of swine flu in Mexico. It has not only affected business travelers, but also local travelers.

The airline industry faced its worst downturn in 2008, as oil prices shot up in the first half of the year and the global credit crisis deepened in the second half. The Mexican airline industry is still reeling from the effects of swine flu. The flu has forced major airlines to cancel and reduce flight frequencies to Mexico. The Mexican tourist industry has also suffered as hotel-occupancy rates have fallen.

At this point, it is not certain how long it will take for the situation to improve. However, the damage has already been done and second quarter of 2009 will certainly be very difficult for the Mexican airport operators. However, we are encouraged by the fact that the Mexican Government decreased energy prices on average by 17% last January, which will decrease oil prices in Mexico.

Furthermore, it is important to remember that the company offers high dividend yield and a strong balance sheet, key strengths in a financial crisis. Recently, the company approved the dividend payment of MXN$400 million for the full year 2008. In the medium term, we expect international tourism in Mexico to expand as a result of a weak peso.

Thus, we continue to rate the shares of OMA, Grupo Aeroportuario del Pacifico (PAC), and Grupo Aeroportuario del Sureste S.A. de C.V. (ASR) a Hold.

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