Activity is picking up at Grupo Aeroportuario del Pacifico SAB de CV (NYSE:PAC) as the Mexican airport operator heads into the homestretch of the 2018 fiscal year. GAP, as the company refers to itself, revealed healthy financial and operating numbers in its third-quarter results released on Oct. 25.

Current brisk business will be undergirded with network expansion in the fourth quarter, alongside preparations for the takeover of a new international airport next year. Before walking through the highlights, let's review the quarter's headline numbers: 

Grupo Aeroportuario del Pacifico: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Growth

Revenue

3,532,434

3,033,630

16.4%

Operating income

1,779,580

1,524,939

16.7%

Net income attributable to controlling interest

1,324,866

1,084,538

22.5%

Data source: Grupo Aeroportuario del Pacifico. All figures in thousands of Mexican pesos. At an exchange rate of 18.71 pesos per U.S. dollar on Sept. 28, Q3 2018 revenue, operating income, and net income convert to $188.8 million, $95.1 million, and $70.8 million, respectively.  

What happened with GAP this quarter?

A female traveler in an airport terminal with luggage stares at a plane through large glass window.

Image source: Getty Images.

  • Domestic passenger traffic at GAP's 13 airports increased by 11.8% against the prior-year quarter to 6.8 million passengers. International passenger volume rose by 5.1% to 4.3 million passengers, and overall, total terminal traffic improved by 9.1% to 11.1 million passengers.

  • GAP's revenue is broken into two components: aeronautical and nonaeronautical services. Aeronautical revenue, consisting primarily of passenger fees, increased 17.2% during the quarter as a result of the higher traffic trends and inflation-based fee adjustments.

  • Nonaeronautical revenue rose by 15.7% year over year due to a variety of factors cited by management. The company's Mexican airports benefited from a 36% jump in passenger visits to VIP lounges and higher car-parking revenue. In addition, the categories of food and beverage, retail, car rentals, and duty-free stores achieved a 10% combined increase in sales over the prior year.

  • Sangster International Airport, in Montego Bay, Jamaica, booked a 14% increase in nonaeronautical revenue. The airport benefited from higher revenue from leased spaces, duty-free stores, and retail operations, as well as from the depreciation of the Mexico peso (GAP's home reporting currency) against the U.S. dollar during the quarter.

  • Nonaeronautical services should continue to derive a lift from new construction projects soon slated for completion. GAP will add 4,000 square feet of commercial space to its Mexican airport portfolio in the fourth quarter, and another 2,000 square feet of commercial space in 2019.

  • Total operating costs rose 16.2%, roughly in tandem with revenue. Major drivers included higher compensation expense due to personnel increases and salary raises, as well as higher utility, professional services, and climbing safety, security, and insurance costs at Mexican airports.

  • GAP's operating margin slipped 10 basis points to 50.4% versus Q3 2017. Adjusted operating margin was flat against the prior year at 56.8% after the removal a non-cash accounting adjustment related to the company's airport concession renovations, which is required under international financial reporting standards (IFRS).

  • After normalizing for the concessions adjustment, EBITDA margin decreased by 50 basis points year over year to 69.3%.

  • Following a competitive bidding process, GAP was awarded a 25-year concession contract on Oct. 10 to operate, modernize, and expand Norman Manley International Airport in Kingston, Jamaica. This is the company's second award by the Jamaican government and will function as its second international airport operation. Grupo Aeroportuario will take over operations at Manley International in October 2019, and per management, the concession is expected to enhance GAP's passenger traffic by 3.5%, while adding revenue growth of 6% and EBITDA growth of 1.5% to overall annual results.

  • GAP opened just two new airport routes during the last three months. But during the fourth quarter, the organization plans to open 20 new routes, a vigorous schedule nearly equal to the current year-to-date tally of 22 routes launched. 

  • These are set to be active flights, averaging two to three frequencies weekly. Network route expansion has been key to the company's double-digit revenue growth over the past few years, so a healthy fourth-quarter addition of new domestic and international flights within GAP's core Mexican airports should provide support for continued revenue expansion next year.

Looking forward

Company management left current-year guidance unchanged after bumping up GAP's earnings outlook last quarter. The targets, in a range of plus or minus 1 percentage point, include both aeronautical and nonaeronautical revenue growth of at least 15%, and full-year EBITDA margin of approximately 69%.

Through the first nine months of 2018, aeronautical revenue has expanded 14.6%. Nonaeronautical revenue, however, has improved by only 11%, and will need a strong fourth quarter to boost its full-year total by at least 3 percentage points to meet the plus/minus range of stated guidance. GAP has generated EBITDA margin (excluding the IFRS concessions adjustment) of 69.9% through the first three quarters, so with one quarter to go, profitability is already squarely within management's projections. 

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Grupo Aeroportuario del Pacifico. The Motley Fool has a disclosure policy.