Image source: Getty Images.
In its third-quarter 2016 results filed on Oct. 24, Mexican airport operator Grupo Aeroportuario del Pacifico SAB de CV (PAC -1.29%) revealed continued healthy passenger terminal traffic, as well as higher income from non-aeronautical services. Grupo Aeroportuario, or "GAP," as it often refers to itself, also raised full-year guidance for 2016. Below, let's examine results in a nutshell, followed by important highlights from the quarter:
Grupo Aeroportuario del Pacifico : The raw numbers
| Metric |
Q3 2016 Actual |
Q3 2015 Actual |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
2,853,825 |
2,159,305 |
32.2.% |
|
Operating income |
1,317,190 |
1,178,014 |
11.8% |
|
Net income attributable to controlling interest |
839,471 |
635,684 |
32.1% |
Data source: Company SEC filing dated Oct. 24, 2016. All figures in thousands of Mexican pesos. At an exchange rate of 19.34 pesos per U.S. dollar on Sept. 30, 2016, Q3 2016 revenue, operating income, and net income convert to $147.6 million, $68.1 million, and $43.4 million, respectively. YOY = year over year.
What happened with GAP this quarter?
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GAP's thirteen airports recorded terminal traffic of 5.9 million passengers, an increase of 16.2% compared to Q3 2015. As in the last sequential quarter (Q2 2016), this advance was led by the company's four largest Mexican airports: Guadalajara, Tijuana, Los Cabos, and Puerto Vallarta, with gains of 17.7%, 27.53%, 15.4%, and 15.5%, respectively. La Paz airport, though appreciably smaller than the four above, notably achieved a traffic increase of 30.1%.
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The Mexican peso, mired in a downtrend against the U.S. dollar, boosted GAP's international terminal traffic, as well as domestic traffic from international tourists traveling within Mexico, as it has all year. Below is a one-year chart of the dollar versus the peso, i.e., the number of pesos a single greenback buys on the spot currency market. The rising trend line represents the peso's depreciation:
Image source: Bloomberg Markets. Time frame: Oct. 30, 2015, through Oct. 20, 2016.
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Peso weakness also benefited results in Sangster International Airport in Montego Bay, Jamaica, GAP's first non-Mexican airport, which it acquired in April of 2015. Terminal passenger traffic at Montego Bay in the third quarter rose by only 4.5%, a much lower rate than its Mexican counterparts. Yet this slight bump in traffic was enough to send Montego Bay's aeronautical services revenue up 15.2%, and non-aeronautical services revenue up 24.1%, due to a 14.1% year-over-year currency lift, as Montego Bay's revenue is denominated in U.S. dollars, and translated back to pesos for reporting purposes.
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Overall, aeronautical services revenue improved by 24.6%, to 1.7 billion pesos. This was the result of the climbing terminal passenger traffic, as well as higher, inflation-driven tariff revenue.
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Non-areonautical services revenue expanded by 23.7%, to 611 million pesos. Third-party operations, particularly food and beverage, retail, and duty-free operations, along with GAP's own advertising, VIP lounge, and convenience store operations, were all key drivers of non-aeronautical income.
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During the third quarter, Grupo Aeroportuario opened seven new domestic routes and three new international routes at its Mexican airports. Three of the domestic routes and all of the international routes were inaugurated out of the company's largest airport, Gaudalajara.
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The third quarter's 10 route openings marked the most this year, followed closely by the second quarter, in which nine new routes were launched. Mexican airline operators AeroMexico and Volaris (VLRS 2.36%) have been particularly active this year in tacking on routes at GAP's airports.
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Operating income margin for the third quarter declined 15.4%, after the removal of a non-cash accounting adjustment required by International Financial Reporting Standards (IFRS), which was related to GAP's ongoing enhancement of airport concessions facilities.
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The company's EBITDA margin (earnings before interest, taxes, depreciation, and amortization), after exclusion of the concessions accounting adjustment, fell 10.6%, to 69.9%.
Looking forward
As we discussed in last quarter's earnings recap, GAP issued full-year revenue and earnings guidance in July, which assumed that revenue growth would ease to the mid to high teens for the back half of the year, after accounting for the IFRS concessions adjustment. In the third quarter, however, revenue expanded by 24.4%, even after this adjustment.
Management thus appears to have more conviction in GAP's full-year performance potential, and accordingly, raised 2016 guidance this quarter, in a band of plus or minus 1 percentage point for each earnings item, as follows:
| Full-Year 2016 Increase by Item: | July | October |
|---|---|---|
| Traffic | 13% | 15% |
| Aeronautical revenue | 18% | 22% |
| Non-aeronautical revenue | 20% | 22% |
| Total revenue | 19% | 22% |
| EBITDA | 19% | 23% |
| EBITDA margin | 68% | 69% |
Data source: Grupo Aeroportuario 6-K earnings guidance filings, July 28, 2016, and Oct. 24, 2016.
Grupo Aeroportuario is reaping benefits from a vibrant Mexican economy and, more specifically, the aggressive route expansion of Mexican airlines. While last year the purchase of Montego Bay airport provided an acquisition-centered narrative for top-line improvement, investors have seen convincing organic growth from domestic operations this year. The company will need to sustain its momentum for another quarter to meet its raised estimates, but the plethora of new routes opened in the second and third quarters may point to continued traffic growth in 2017.
