Grupo Aeroportuario del Pacifico S.A.B. de C.V. (PAC -1.27%), Mexico's largest private airport operator, completed the first half of 2018 with a modest surge in growth that allowed it to raise its full-year 2018 earnings outlook. The company, which refers to itself in shorthand as "GAP," operates 12 Mexican airports, as well as Sangster International Airport in Montego Bay, Jamaica. The overarching numbers from GAP's second-quarter 2018 report are as follows:
Grupo Aeroportuario del Pacifico: The raw numbers
| Metric |
Q2 2018 |
Q2 2017 |
Year-Over-Year Growth |
|---|---|---|---|
|
Revenue |
3,442,793 |
3,095,038 |
11.2% |
|
Operating income |
1,758,374 |
1,608,723 |
9.3% |
|
Net income attributable to controlling interest |
1,189,018 |
1,132,665 |
5% |
Data source: Grupo Aeroportuario del Pacifico. All figures in thousands of Mexican pesos. At an exchange rate of 19.65 pesos per U.S. dollar on June 29, 2018: Q2 2018 revenue, operating income, and net income convert to $175.2 million, $89.5 million, and $60.5 million, respectively.
What happened with GAP this quarter?
View of Puerto Vallarta Bay. Image source: Getty Images.
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GAP recorded a jump in domestic passenger volume of 14.6% over the prior-year quarter, to 6.5 million passengers. This advance paced total terminal traffic, which rose 10.8% in the aggregate, to 11.1 million passengers. International passenger traffic grew by 5.8%, to 4.6 million.
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The vigorous domestic traffic was led by double-digit growth at three of GAP's four largest Mexican airports: Guadalajara, Los Cabos, and Puerto Vallarta, which achieved expansion rates of 18.1%, 14.7%, and 13.5%, respectively. The mid-tier cities of Guanajuato and Mexicali scored huge domestic traffic increases of 29.9% and 53.7%, respectively. Together, these two airports accounted for nearly 23% of the company's second-quarter domestic passenger traffic gains.
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The expansion rate of international terminal traffic was noticeably softer in 2018. Global passenger volume increased 7.4% in the first half of the current year, versus expansion of 15.6% in domestic traffic. At this point last year, first-half international traffic growth had advanced nearly 15% against the first two quarters of 2016.
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The international weakness appears to be at least partially related to recent travel warnings issued by the U.S. State Department, and other governments, regarding popular Mexican resort areas. Crime related to the drug trade has seeped into tourist hot spots, most notably in the resorts of Acapulco and Cancun (neither of which are GAP-operated airport cities), and this has dampened overall international tourist enthusiasm. Major U.S. carriers have started to reduce capacity to Mexican resort destinations for the upcoming fall season.
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The cautiousness around Mexican beach areas is reflected in uncharacteristically slim volume increases in GAP's Puerto Vallarta and Los Cabos airports during the second quarter. Puerto Vallarta's international traffic grew by 0.7%, and Los Cabos' international traffic improved by just 0.4%.
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Despite the concerns above, total revenue remained healthy. Passenger fee-based "aeronautical" revenue, tied directly to passenger traffic, increased 13% over the prior-year quarter.
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Non-aeronautical revenue improved by 14%. GAP attributed growth in non-aeronautical revenue to services operated directly by the company, and specifically, to the effects of a 45% increase in visitors to VIP lounges. Non-aeronautical services operated by third parties benefited from the opening of new retail operations in the airports of Guadalajara, Hermosillo, and Mexicali.
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Operating margin dipped 230 basis points to 56.3%, after the removal of an accounting adjustment tied to GAP's airport concessions renovations, required under international financial reporting standards (IFRS).
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EBITDA margin, after removing the concessions adjustment, dipped by 270 basis points to 68.7% in the second quarter. Both operating margin and EBITDA margin were pressured by higher airport maintenance costs, greater headcount at GAP's airports, and salary increases throughout the organization.
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The company is still in the running within a bidding process to operate the Norman Manley International Airport in Kingston, Jamaica. Management relayed that the government of Jamaica will announce the winning bid at the end of September.
- Airlines added four new domestic routes and two new international routes at the company's Mexican airports in the second quarter.
Looking forward
Image source: Getty Images.
After wrapping up a second quarter in which overall revenue growth accelerated from the first quarter's mere 7.6% growth rate, GAP's management revised full-year 2018 guidance. Below are the company's current 2018 targets, each in the range of plus or minus 1 percentage point, including changes versus previous guidance:
- Aeronautical revenue: 15% higher (revised upward by 3 percentage points)
- Non-aeronautical revenue: 15% higher (trimmed by 1 percentage point)
- Total revenue: 15% higher (revised upward by 2 percentage points)
- EBITDA margin: approximately 69% (unchanged)
Investors should note that despite the deterioration in international traffic to resort areas, GAP's overall business from both aeronautical and non-aeronautical revenue streams remains in growth mode. Domestic passenger visits to GAP's resort airports continue to swell. A steady rise in domestic travel, new airport routes, and the relative health of the Mexican economy should mitigate resort traffic weakness in what management surely hopes is a short-term issue.
