Grupo Aeroportuario Del Pacifico's Airport Enhancements Are Starting to Pay Off

Mexican airport operator Grupo Aeroportuario del Pacifico (PAC +0.01%) anticipated slower passenger traffic growth in its airports in 2019 following a vigorous 2018 in which total passenger volume increased by double digits. The first quarter of 2019 confirmed this expectation for GAP (as the company refers to itself), as revealed in its quarterly earnings report released on April 25.

However, airport services revenue rose sharply -- also according to plan -- and this helped offset the normalized volume of customers transiting the company's airports. Note that in the discussion on financial results that follows, all comparative numbers are presented against the prior-year quarter.

Grupo Aeroportuario del Pacifico: The raw numbers

Data source: Grupo Aeroportuario del Pacifico. All dollar figures at 19.39 pesos per dollar.

Image source: Getty Images.

What happened with GAP this quarter?

• Domestic terminal passenger traffic increased by 3.9%, while international terminal traffic rose 6.7%, for overall traffic expansion of 5.2%. After total passenger volume grew by an impressive 10.4% last year, management is expecting 7% passenger volume growth in 2019.
• The moderate first-quarter volume improvement can be attributed to GAP's two biggest airports, Guadalajara and Tijuana, which recorded domestic passenger growth of just 2.2% and 3.6%, respectively. A total of 11.8 million passengers utilized GAP's airports over the last three months.
• Aeronautical revenue, which derives from passenger fees, expanded 11.5% on the traffic volume increase and higher fees in GAP's 12 domestic airports, as well as its international airport in Montego Bay, Jamaica.
• Non-aeronautical revenue rose by a brisk 20.3%. The company attributed this primarily to the opening of commercial spaces at the Guadalajara, Tijuana, and Guanajuato airports -- specifically, duty-free stores, retail stores, car rental outlets, and food and beverage operations. Under a five-year master development plan, GAP has invested heavily in commercial expansion at its airports. Last year, the company allocated $129 million -- more than half of its operating cash flow -- to capital expenditures. Non-aeronautical revenue provided an offset to the tepid airport traffic growth in the first quarter.
• Operating margin improved by 230 basis points, to 56.5%. Excluding a noncash accounting adjustment related to airport concessions construction required under international financial reporting standards (IFRS), operating margin dipped by 50 basis points, to 58.8%.
• EBITDA margin inched up 90 basis points, to 70.8%, after removal of the concessions adjustment.
• GAP continued a recent trend of adding multiple routes at its 13 airports. In the first quarter, the organization introduced nine new domestic routes and seven new international routes, most of which feature two or more weekly frequencies.

Looking forward

Grupo Aeroportuario left its full-year 2019 earnings guidance unchanged. Management's outlook anticipates the following targets, within a band of plus or minus 1 percent:

• Total passenger traffic to rise by 7%
• Aeronautical revenue to increase by 13%
• Non-aeronautical revenue to increase by 20%
• Total revenue to advance by 15%
• Adjusted EBITDA margin to hit a long-term target of 69%

After one quarter, it's clear that passenger traffic is within range of the total-year goal. But if Grupo Aeroportuario is to achieve its aggressive 2019 goal of 15% revenue growth over the prior year, passenger volume will likely need to rise another 2 to 3 percentage points in the following three quarters.

The company will also need to maintain its early momentum in non-aeronautical revenue. Given GAP's newly opened commercial spaces, as well as a bevy of new domestic and international routes introduced over the last few quarters, the full-year top-line target of mid-teens growth should still be attainable.