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Operator
Good morning, my name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the ASUR's third quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Adolfo Castro, Chief Financial Officer.
Adolfo Castro - CFO
Thank you, Kimberly. Good morning, everybody. This is Adolfo Castro, Chief Financial Officer of ASUR. Welcome to the discussion of our results for the third quarter 2007.
Allow me to remind you that certain statements made here in the course of our discussion today may constitute forward-looking statements, which are based on management's current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to differ materially including risks that may be beyond our company's control.
For an explanation of these risks please refer to ASUR's filings with the Securities and Exchange Commission and the Mexican Stock Exchange.
Moving on to the discussion of results, I am pleased to report a very strong quarter. Once again, we saw a strong passenger traffic growth up by 13.78% during the quarter. The Mexican passengers rose by 28.28% and international passenger was up by 2.17%. Passenger traffic for the quarter at Cancun and Cozumel Airport was up by 9.3% compared with a 2.1% increase in the third quarter last year.
Traffic also benefited from the growth of 44.68% at Veracruz Airport reflecting the new routes operated by local carriers. Traffic at Merida and Villahermosa also benefited from new routes by local carriers, especially those coming from low cost.
Total passenger traffic grew year-over-year by 2.3% for the month of July; decreased by 0.5% for the month of August; and grew year-over-year by 6% for the month of September for passengers to and from the United States.
International passenger traffic accounted for 49.9% of the total traffic for the quarter compared with the 55.5 during the third quarter of 2006, and 60.1 in the second quarter this year. What happened here is that the domestic traffic is growing more than the international traffic because of the low-cost carriers in Mexico, and the weakening of the traffic from the United States.
Passenger traffic between Mexico, Canada, and the United States represents 87.5% of the total traffic. Total revenues rose by 19.54% this quarter mainly driven by the 53.75% increase in non-aeronautical revenues.
Commercial revenues during the quarter rose by 59.54% with revenues from direct operations up by 50.70%, mainly resulting from the opening of Terminal 3 at Cancun Airport.
Keep in mind that once most of international passengers have been moved to the new terminal. The old Terminal 2 will no longer be congested and will be more efficient, which again confirms that passenger service is a very important element in the equation.
Commercial revenues per passenger rose by 40% excluding the impact of the discontinuation of direct commercial operation, revenue per passenger rose 41.75% to 41.93 pesos. This is above the 29.58 posted in the third quarter last year and the 34.14 pesos record in the second quarter this year.
This improvement clearly reflects the opening of Cancun's airport new terminal opening. In fact, this is the first quarter where we can appreciate the full impact of the new terminal with 88 check-in counters, state-of-the-art technology, we have been able to reduce congestion in our terminal buildings and improve our service. This leaves our passengers with more time to enjoy the 10 new food and beverage spaces as well as the nine retail locations.
Operating margin for the quarter rose to 41.32% from 33.48% in the third quarter of 2006, driven mainly by the strong increasing revenue, which more than offset the 5.46% rising operating cost and expense.
The declining cost of services by 2.9% observed during the quarter was driven by the increasing maintenance. The increasing administrative expenses was the result of marketing efforts to attract airlines to our airports. Just to give you an example, as a result of our participation at the [Estacon Sur], we attracted new routes to our airports, including Raleigh Cancun and Orlando Cancun.
As we saw in the previous quarter, the absolute increasing cost mostly resulted in a higher insurance premium expense required to comply with Sarbanes-Oxley requirements, higher concession and technical assistance fee, and, of course, the result of opening Cancun Airport Terminal 3.
As a percentage of revenues, however, operating costs and expenses for the quarter declined to 58.7% from 66.5% in the year-ago quarter, but still this was higher than the 56.2% recorded in the second quarter this year. As this quarter reflects the full impact of Terminal 3, which was opened last May.
Net income rose 73.1% to 702 million pesos during the quarter. During the quarter, the Mexican Congress approved a tax reform that in accordance with our estimates, it will have, in the long run, a minor negative effect.
Finally, during the quarter, we have made investments of 76.7 million pesos. Now let me open the floor for questions. Please, Kimberly, go ahead.
Operator
(Operator Instructions) Nick Sebrell, Morgan Stanley.
Nick Sebrell - Analyst
I was wondering if you could talk a little bit more about the commercial revenue. For us, it was a surprise to the upside. What kind of amount per passenger do you think we can plan on, going forward, and have we seen as much growth from Terminal 3 in commercial as we're likely to get, so far? If you could talk a little bit about that, it would be great.
Adolfo Castro - CFO
Okay. Well, first of all, it is also a surprise for us. We have been able to increase this commercial revenue per passenger really fast. Of course, it's the combination of the two effects. The first is Terminal 3, of course, but what we are seeing now is that Terminal 2 is working much better. Why? Because it's not congested.
What we can expect for the future, I really don't know. What I can say to you is that we still believe that we can do better of what we are doing today. Remember that during this quarter, we do not have the high-spender passengers that we have, let's say, in December or in January or in March.
During the third quarter, normally, what we have is families coming with his children, and they don't spend the same. So we are very happy to see that increase, and we are expecting more for the future.
Nick Sebrell - Analyst
And then just a quick question on international versus domestic mix -- when do you think you might see, if you can see at all, the rebound of international in terms of growth, year-over-year?
Adolfo Castro - CFO
Well, that's also a surprise. What I am seeing is a weakening from the passenger traffic from the United States. I don't know exactly why. It could be the passport thing. You can see also an increase in cruise ships, which are not requesting a passport for the U.S. people.
In terms of the Europeans, we are not seeing also an increase even if we are seeing a very strong euro against the U.S. dollar and, of course, against the peso. For the next year, what I can expect is a rebound in the case of the European and probably small growth for the U.S. passenger traffic.
Operator
Esteban Polidura, Merrill Lynch.
Esteban Polidura - Analyst
Good morning, Adolfo, congratulations for the very good results. A quick question -- is the commercial area in Terminal 3 already completely leased?
Adolfo Castro - CFO
I would say yes and no. Of course, every single space is being used now, and it's under a lease agreement. But, of course, in the case of commercial activities you cannot say that you have finished with the terminal, because you can always find a space that you can take advantage or even if you use additional things for marketing.
But in terms of the original design, I would say, yes, it's completely completed.
Operator
Thomas Lahaise, UBS.
Thomas Lahaise - Analyst
One question is on aeronautical revenues per passenger. This seems to have dropped somewhat in the quarter. Could you talk a little bit about that?
Adolfo Castro - CFO
Yes, of course. This is dropping on a per-passenger basis because the passenger mix is changing significantly, and it's changing because of, of course, you are seeing that the domestic traffic is growing really fast, and international traffic is growing just a little bit.
Why is this? Because we are charging -- or we normally charge more to the international passengers. We charge 29% more for the international compared with the domestic. Why is this? Because we have to assign some additional spaces for them like migration and customs. So that's why the aeronautical revenue is decreasing on a per-passenger basis.
Thomas Lahaise - Analyst
The other question would be on margins. The margin posted in the quarter was very impressive, particularly with the opening of Terminal 3. Can you talk a little bit about costs and what we can expect in the future, having seen what happened with T3?
Adolfo Castro - CFO
Well, basically, I can say to you that we have been working very hard in order to try to minimize the impact of the increasing costs resulted from Terminal 3 during this quarter. We have less maintenance as what we had last year. For the future, I don't know if we are going to be able to control that, as we have done in this quarter. That's what I can say to you.
Operator
[Alexander Gray], Citi.
Alexander Gray - Analyst
Just two quick questions -- one, first, what was the driver behind the low tax rate?
Adolfo Castro - CFO
Well, that is together with something that we did this quarter in terms of charging something to Cancun Airport, and the other airports are making money in order to help the underperforming airports. As a result of this, some of the underperforming airports received money from the holding company, and we decided to report less deferred taxes, and that's why you are seeing a reduced amount compared to what you expected.
Alexander Gray - Analyst
Okay, great, thank you. And then the second question -- do we have any update on the proposed light rail system connecting Cancun and (inaudible).
Adolfo Castro - CFO
Well, this is a project that has been there for many years, and we are still working on that. We are working, I would say, hard on that, trying to find someone to help us on that process. You know that we are not going to do this project at 100% on it we're on. So we are working with someone else to find how to start the construction of this project.
Alexander Gray - Analyst
One more -- and Chetumal, have you heard anything about the new resort infrastructure being planned there?
Adolfo Castro - CFO
Sorry, the first part of your question?
Alexander Gray - Analyst
There is apparently a new resort infrastructure being planned for Chetumal? Have you heard anything on that or --?
Adolfo Castro - CFO
No, I have not heard anything about it.
Operator
Gonzalo Fernandez, Santander.
Gonzalo Fernandez - Analyst
Good morning, Adolfo, and congratulations on very good results. One question about international traffic -- do you think that this weakness in international traffic could continue in the high season of winter? And the other question is that we saw InterJet announcing flights from Merida and Cancun to Guatemala. Do you think -- do you have any news that there yet will be more aggressive on international flights, and could that have a significant impact on your operations? Thank you.
Adolfo Castro - CFO
Okay, the first one -- international traffic -- we are expecting, I would say, a normal winter season, nothing -- I would say nothing spectacular, because as I said before, we are seeing weak traffic from the United States. I don't know what to say about next year.
In terms of InterJet and probably the other local [skyvers] in Mexico, some of them are planning international flights now. I know some of the plans that they have, and they will start with Guatemala right now, but then they will go to the United States.
It's important to think that next year we will have maybe between 20 to 30 new aircrafts in Mexico, and they will need somewhere to place them. So it's great that they are starting with these new ventures, trying to go up growth.
Gonzalo Fernandez - Analyst
And a follow-on -- do you expect that the with the sale of Aeromexico, will you expect more pressure from them in terms of tariffs and on the positive side probably a more competitive tariff? What's your take on the sale of Aeromexico?
Adolfo Castro - CFO
Well, next year is going to be, as I said, very tough for them because this addition is aircraft. They will have to compete more, and they will fight furiously for the market -- for the domestic market. So let's see what will be the final result. I don't see major change in the case of the sale of Aeromexico.
Operator
Dan McGoey, Deutsche Bank.
Dan McGoey - Analyst
My question is also regarding taxes. I was wondering if you could talk a little bit about any estimated implications from fiscal reform, how your tax situation or effective tax rate might change for next year?
Adolfo Castro - CFO
As I said during the initial remarks, in the long run with this new tax reform, in the long run it will generate more taxes for us as for most of the companies in Mexico. You know that this tax reform was created in order to collect more taxes to support the economy.
In the medium term, I would say that could be a positive for us, because this new tax could be less than what we were paying in the small airports as asset tax. You know that this new tax is a substitution of the asset tax, so in the short term, medium short term, I would say it could be a positive effect for us. And in the long run, it's going to be negative. In the net present value, in the total picture and using net present values and negative for us, what I'm saying is nevertheless it's a minor effect.
Dan McGoey - Analyst
Okay, and for next year specifically, though, do you have an estimate of where your effective tax rate may come in?
Adolfo Castro - CFO
Well, what I believe is that next year we will pay less cash taxes compared with this year.
Dan McGoey - Analyst
Okay, great, and then one additional question, if I may, just on the current balance sheet and cash position, the company's cash position is obviously quite high. Are there any plans for -- to pay a dividend, an additional dividend, or is that your marked for investment.
Adolfo Castro - CFO
Well, I cannot speak for the moment about dividends. Normally, what we do is wait until the end of the year, and then we prepare our proposal to the operations committee, which goes to the board of directors and then they should hold this assembly. That's what I can say for the moment. The only condition in that sense is keep in mind what we have for next year in terms of possibility of the second effort in the Riviera Maya region, and the conclusion, or the huge investment that we are doing right now for the second runway of Cancun Airport.
Operator
(Operator Instructions) Vanessa Quiroga, Credit Suisse.
Vanessa Quiroga - Analyst
My question is regarding the bilateral agreement between Mexico and the U.S. where Cancun was included within the locations that could -- within this bilateral agreement -- that allows for the same airlines to have more routes to Cancun, for instance, so my question is do you think that this bilateral agreement has benefited Cancun already as completely, or do you think there are -- there is potential for more routes to be added?
Adolfo Castro - CFO
Yes, we have seen some benefits from these new bilateral agreements where we can place three legacy carriers from every single pair of cities. So let me give you one example. We will have a new flight from Continental from Cleveland to Cancun, and this was the result of these bilateral agreements because the other two spaces were occupied by other two legacy carriers.
In terms of potential, of course, there's always a potential for this because in the case of choosing destinations, in my opinion, it should be open skies. Probably these bilateral agreements have the intention to support the domestic aviation and to protect the domestic aviation against international ligation in the cases where the traffic can be in two directions.
In the case of Cancun, where we have destination airport, I think that open skies should be the best option. Best, as I said before, yes, we have seen some benefits from this one, as I mentioned, was Cleveland/Cancun.
Vanessa Quiroga - Analyst
And the question is regarding this transfer of funds from the holding to some smaller airport -- where in the income statement can we see that?
Adolfo Castro - CFO
Well, you can see that when you see the individual financial statements. You will not be able to see that in the consolidated way because all of this is intercompany. You can see in individuals because Cancun has been charged in order to support, I would say, the little brothers. This charge is the result that we have to create nine airports, and if one dies, then nine will do so. So Cancun has to support them and the best way that we have found is to charge something to Cancun through the holding company and then through the holding company support the minor airports in order that they can fund their requirements with (inaudible) like the Master Settlement Plan and their own expense.
Operator
Mauricio Santos, GBM.
Mauricio Santos - Analyst
I do have a question regarding taxes. Do you expect the taxes for the fourth quarter will be higher considering the appropriation for the current quarter was a low estimate?
Adolfo Castro - CFO
No, I would not say that. I think that it should be more or less in line of what we had last year.
Operator
(Operator Instructions) I would now like to turn the call back over to Adolfo Castro for final remarks.
Adolfo Castro - CFO
Okay, I just want to say thank you for your attention, and let's talk on the next conference call. Thank you, everybody, and have a good day.
Operator
Ladies and gentlemen, this concludes today's conference. You may now disconnect.