Toluca Plans a NAICM Strategy

Q: What is OHL’s involvement with the administration of AIT?

A: OHL Mexico’s core experience is in toll road infrastructure but the company saw this project as an extremely interesting opportunity due to the saturation of AICM. Within this structure we are not in control of the airport’s operations but we are active participants through daily discussions with the other two stake holders, the State of Mexico Government and the Airports and Auxiliary Services (ASA), and the Toluca International Airport State of Mexico Administrator (AMAIT) administration. This public-private association has been highly successful even during the airport’s lean times because each partner is fully aware of the needs of the other two and all parties work to achieve our common interests.

As a private party, OHL complements the administrator’s efforts in processes such as financial analysis and the development of the airport's commercial strategy.

Q: How is OHL supporting the development and growth of the airport?

A: Toluca’s airport is in direct competition with AICM, a unique situation as most cities in Mexico have a single airport within proximity. Since AICM is the largest airport in the country, transporting almost 40 million passengers, Toluca must generate a series of processes to become more attractive to airlines and passengers, such as incentives for airlines based on operating volume and route development.

We have to work closely with airlines to address their growth strategies. Airlines work with high volumes but low margins, which means that it is only possible for them to increase profits by using economies of scale and increasing operators' efficiency.

Airlines may prefer AICM due to its high passenger volume, which puts Toluca at a disadvantage. AIT has had to become much more efficient and cost-effective for airlines. The first step for our company was to thoroughlyanalyze and understand each airline’s business model, be it a legacy airline or a low-cost carrier.

Q: How do the main airlines and private aviation companies contribute to AIT?

A: AIT has four main commercial airlines in operation: Interjet, Aeroméxico, TAR Aerolíneas and Volaris. In terms of volume, the largest airling is Interjet, which transported 60 percent of the almost 800,000 passengers that used AIT in 2015. The second is Aeroméxico, working in the AIT through its Aeroméxico Connect division. TAR is in third place operating a unique regional airline business model with a 50-passenger fleet of Embraer's ERJ 145 aircraft. Volaris is also a key player in Toluca’s commercial offer.

The airport also has a substantial number of private aviation operations that moved from the AICM in 1994. These operations are overseen by the General Aviation Operator (OAG), which is in charge of the hangers and FBOs for these airlines, while we support them during takeoff, landing and other platform services.

By number of operations, the Toluca airport is stronger in private aviation. This sector represents about 80,000 operations a year or 90 percent of the total volume of operations. We foresee even greater executive travel operations because private aviation is expected to grow by about 3.5 percent on an annual basis.

Q: In which ways will the new airport to be constructed in Mexico City impact AIT's operations?

A: The number of passengers using the airport in Toluca has gone through many variations over time. It grew from a small base of 100,000 commercial passengers in 2005 to over 4 million in 2008. Mexicana’s bankruptcy dealt a heavy blow to AIT as it freed up close to 30 percent of the highly valuable time slots at AICM. Many of the companies that were working in AIT at the time Mexicana closed moved back to AICM and we returned to 1 million passengers. Our passenger traffic has remained around that number ever since.

TOLUCA PLANS A NAICM STRATEGY

Airlines’ growth will be tempered at the AICM in the near future, but they will certainly continue to grow in Monterrey, Guadalajara, Tijuana and many other cities, particularly for passengers needing connecting flights. For passengers departing or arriving in Mexico City as their final destination, airports close to AICM such as Toluca, Queretaro, Cuernavaca and Puebla, will start receiving airlines and passengers who could not enter the capital’s airport. Toluca’s proximity to the capital city and having superior connectivity puts us in a great position to attract these airlines and passengers.

Following the construction of NAICM we predict a similar situation to what arose after Mexicana’s bankruptcy. We expect to continue growing steadily until the NAICM is completed, following which we will begin to shrink as operations move back to Mexico City. By that time we expect to have developed a volume of operations that is large enough to be attractive on its own.

We have seen that the west side of Mexico City, particularly around Santa Fe, is growing as a business hub and Toluca has become very attractive to this location. AIT is easier to access than to cross the entire city to reach either the existing or new airport to the east of the city.

Q: What competitive advantages does AIT possess to compete against AICM and NAICM in the future?

A: Since 2006 the AIT has invested over MX$4 billion in infrastructure, including a passenger terminal of 28,000m2 that can serve to up to 7 million passengers annually, a runway that can manage up to 180,000 annual operations and a four-level parking lot with 2,000 spaces. Additionally, we plan to invest in passenger jet ways and in a new VIP lounge to provide an even better experience for our passengers.

Toluca also has much more competitive Airport Usage Tariffs (TUAs) than Mexico City. Our TUA is about 50 percent cheaper than the AICM. This makes us much more cost competitive, especially for low-cost airlines, which normally have high utilization rates.

At this point our aerial connectivity is somewhat limited. In the past, we had considered it necessary to cover a large number of destinations but we may be unable to follow this strategy, because we recognise that we must adapt to the changing needs of airlines. Many are starting to increase the number of international flights from Guadalajara and Monterrey among others and our goal is to increase our flights to those cities.

OHL must make flights more attractive from Toluca, including those that involve a stop at another hub. We expect to increase the number of national destinations to medium-sized cities offered from Toluca alongside TAR Aerolíneas. We started working with TAR for connections with Guadalajara and expanded our destinations to include Tuxtla, Oaxaca, Huatulco, Culiacan and Veracruz.

Q: What are the next steps for the airport to consolidate its position in the market?

A: AMAIT’s concession grant will last until 2055 and we are certain the investment we have made thus far will yield excellent results. The airport and the city will continue to grow, thanks to the Mexico-Toluca highway expansion that was finished in July 2016. There is also a new highway connecting Naucalpan and Toluca, which will increase connections with the city from several areas with high demand for air transportation. The construction of the Mexico-Toluca train will contribute and will be supported by very efficient coach routes from the capital city.

Our main challenge is to make sure that all the airlines have AIT at the very forefront of their mind. We must convince them that Toluca is their best option to grow in the center of the country. Many airlines are focusing on maximizing their time slots in Mexico City by using larger aircraft for those slots. We must make airlines aware of the possibility of creating a second hub in Toluca to utilize the smaller aircraft they already own and operate.

Nonetheless, to measure our growth we are much more interested in the number of seats than the number of flights because some airlines may use smaller airplanes at AIT, especially considering its penetration in the executive aviation sector. Our market revolves around two and three-hour flights, primarily domestic flights within Mexico, to the US and to certain destinations in Central America.