Grupo Aeroportuario del Pacifico Profits as Revenue Outpaces Rising Costs

In its fourth-quarter 2016 earnings filed on Feb. 23, Grupo Aeroportuario del Pacifico SAB de CV (PAC 0.16%) capped a year of growth across several important metrics. The Mexican airport operator, which abbreviates its name to GAP, reported increases in revenue, profits, and domestic and international passenger traffic.  

Grupo Aeroportuario del Pacifico: The raw numbers

Data source: Grupo Aeroportuario del Pacifico. All figures in thousands of Mexican pesos. At an exchange rate of 20.73 pesos per U.S. dollar on Dec. 30, 2016, Q4 2016 revenue, operating income, and net income convert to $133.3 million, $68.6 million, and $47.1 million, respectively.

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What happened with GAP this quarter?

• Terminal traffic within the thirteen airports operated by GAP improved by 16.5% versus Q4 2015, matching the 16.2% pace of the previous sequential quarter. GAP's domestic terminal traffic rose 21.5%, while international traffic rose 9.7%.
• Aeronautical services revenue at GAP's airports advanced 27.4%, while non-aeronautical services revenue expanded by 28.6%.
• Non-aeronautical services revenue was impacted by a loss of 11.4 million pesos at GAP's Guadalajara airport, due to a blockade of the airport by ejido (communal farmland) members, who were protesting the 1975 government appropriation of land to build the airport. The blockade lasted from late September to early November.
• A change in GAP's strategy for convenience store management also dampened non-aeronautical services revenue. The company outsourced convenience store management at Guadalajara, Hermosillo, La Paz, Los Cabos, and Manzanillo airports to a third party, while continuing to manage convenience stores at Aguascalientes, Guanajuato, and Puerto Vallarta airports.
• Convenience store revenue thus plunged 51% during the quarter. According to management, "This strategy change led to a decline in revenues, but maintains the overall value generation at EBITDA levels that the Company generated through direct operations, achieving a greater overall level of operational efficiency with the same profitability." Translation: A third party can manage the convenience stores at these particular airports with less hassle to us and an ultimately equal impact to profit margins.
• After the removal of a non-cash accounting adjustment required by International Financial Reporting Standards (IFRS) related to GAP's ongoing enhancement of airport concessions facilities, the company achieved an operating income margin of 56.3%, an improvement of roughly 4 percentage points over the prior year quarter.
• EBITDA margin, after exclusion of the concessions accounting adjustment, improved 2 percentage points to 69.7%.
• As the company experiences vigorous growth at its domestic airports, its costs are rising. For example, labor, GAP's largest operating cost outside of non-cash depreciation and amortization, climbed over 16% during 2016. Other major costs such as security, maintenance, and utilities also experienced mid-teens growth rates. But GAP is currently enjoying significant operating leverage. Its total revenue expansion rate of 29.7% (excluding the IFRS concessions adjustment) easily outran cost expansion during the year.
• GAP continued to add new airline routes at its airports, opening three domestic and 10 international routes during the quarter. 
• As in Q3 2016, weakness in the Mexican peso benefited the company's single non-Mexican airport, Sangster International Airport in Montego Bay, Jamaica. Despite a relatively anemic 6.2% increase in terminal passenger traffic, Montego Bay recorded a 25.3% increase in revenue, due to the peso's depreciation of over 18% against the greenback. Montego Bay is now the fourth-largest contributor to GAP revenue, after the airports of Guadalajara, Tijuana, and Los Cabos.
• Acquired in 2015, Montego Bay has apparently whetted management's appetite for foreign airport purchases. In its earnings release, GAP disclosed that it had participated in the bidding process for a package of four Brazilian airports in 2016. Company management revealed that it dropped out due to the "conclusions of the analysis and based on Mexico's current business environment."  

Looking forward 

GAP's full-year traffic and revenue expansion will slow in 2017 as it laps the final favorable comparison quarter (Q1 2016) after its April 1, 2015 acquisition of Montego Bay and its otherwise torrid growth cools a bit. Management expects a traffic bump in the neighborhood of 9%, revenue expansion of close to 14%, and EBITDA margin of 68% during 2017.

Also of note: International passenger volume may prove an fruitful theme to watch this year, and not simply because of management's designs on broadening the airport operator's reach outside of Mexico. Global network airlines are showing renewed interest in Mexico as a tourist destination, courtesy of the weak peso. Major North American carriers Air Canada, Delta, American Airlines, and Southwest Airlines provided six of the 10 new international routes added to GAP's rolls in Q4 2016. It will be quite interesting to see if this activity intensifies in the months ahead.