Domestic Airport Traffic Lifts Grupo Aeroportuario del Pacifico

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An increase of 1.1 million passengers, primarily through the airports of Guadalajara, Tijuana, Los Cabos, and Puerto Vallarta, paved the way for another profitable quarter for Grupo Aeroportuario del Pacifico SAB de CV (PAC -1.29%). The Mexican airport operator, which refers to itself in shorthand as GAP, posted robust financial metrics, creating conditions for a successful back half of 2016. After sifting through key highlights from the report below, I'll review the company's forward guidance, issued separately alongside earnings on July 28.   

Grupo Aeroportuario del Pacifico : The raw numbers

Data source: Company SEC filing dated July 28, 2016. All figures in thousands of Mexican pesos. At an exchange rate of 18.49 pesos per U.S. dollar on June 30, 2016, Q2 2016 revenue, operating income, and net income convert to $147.4 million, $65.9 million, and $31.4 million, respectively.

What happened with GAP this quarter?

• The four domestic terminals mentioned above took in roughly 80% of GAP's higher passenger traffic during the quarter, through a mix of domestic and international travelers. 
• GAP's management pointed to the success of the new "Cross Border Xpress" as one the more significant factors behind Q2 results. This pedestrian walkway, completed in December 2015, connects the company's second largest airport by traffic, Tijuana, with the city of San Diego, and functions as a border crossing. More than 500,000 passengers have used the crossing this year. Due to the strong U.S. dollar, a domestic flight within Mexico to Tijuana, coupled with a border crossing on foot, is often cheaper for Mexican travelers than booking an international flight into the U.S. And of course, greenback strength incentivizes U.S. tourism into Mexico, thus benefiting all of GAP's 12 domestic Mexican airports. 
• Mexican air-fleet expansion, particularly from carriers Volaris and VivaAerobus, also contributed to higher passenger traffic.
• Both aeronautical services (e.g., passenger fees) and non-aeronautical services (e.g., advertising, VIP lounges, and car parking charges, as well as third-party revenue from car rentals, food and retail sales, etc.) increased approximately 19% over Q2 2015.
• VIP lounges are turning out to be a value driver for the airport operator. The company cited its VIP network as the fastest-growing business during the quarter, with traffic to its lounges increasing 35%, to 153,000, and revenue increasing 71%, to 26.2 million pesos. GAP will add or expand VIP lounges at Guanajuato, Hermosillo, and Puerto Vallarta airports by the end of the year.
• Management discussed commercial opportunities in leisure destinations such as Puerto Vallarta and Los Cabos. The company is focusing on optimizing ground transportation revenue, and bidding out short-term (two-year) car-rental contracts to third parties, as a way to increase non-aeronautical services revenue in tourist hot spots.
• After backing out a non-cash accounting adjustment required by International Financial Reporting Standards (IFRS), which is related to the company's ongoing improvement of airport concessions facilities, operating margin for the quarter was essentially flat, at 54.3%.
• GAP's EBITDA margin (earnings before interest, taxes, depreciation, and amortization), excluding the concessions accounting adjustment, dropped 80 basis points during the quarter, from 69.9% to 69.1%.

Looking forward 

Grupo Aeroportuario's full-year 2016 guidance, also issued on July 28, stipulates the following, plus or minus 1 percentage point: a traffic increase of 13%; total revenue growth of 19%; and EBITDA margin, excluding the IFRS concessions adjustment, of 68%. 

The revenue increase, which is based on a projected full-year rise in aeronautical services of 18% and non-aeronautical revenue of 20%, will decelerate from the pace through the first half of the year, in which aeronautical and non-aeronautical services expanded by 24% and 21%, respectively, for a total top-line improvement (excluding the IFRS adjustment) of 23%. The implication is that total revenue growth will ease to the mid- to high teens for the remainder of the year.

Profits, however, should remain steady. In the first two quarters of 2016, GAP has achieved an EBITDA margin of 69.8%, exclusive of the IFRS adjustment. A probable full-year EBITDA margin of approximately 68% means that shareholders looking ahead to Q3 should expect EBITDA margin to fall between 68% and 70%. And if passenger traffic trends continue to climb aggressively, the projected margin, not to mention revenue, could exceed management's outlook for the balance of the year.