Grupo Aeroportuario Del Pacifico's Second Quarter Shakes Out According to Plan

The economic conditions that helped Grupo Aeroportuario del Pacifico (PAC +0.01%) average double-digit annual revenue growth over the past three years are showing signs of deterioration. Mexico's economy posted 0% year-over-year growth in gross domestic product (GDP) in the first quarter of 2019, and preliminary numbers show a 0.2% year-over-year decline in GDP in the second quarter. Weaker activity in both the service and manufacturing sectors, exacerbated by trade tensions, has also cut into the country's forward prospects: This month, International Monetary Fund (IMF) cut Mexico's full-year 2019 GDP growth forecast from 1.6% to 0.9%.

Despite the abrupt deceleration in the Mexican economy, "GAP," as Grupo Aeroportuario refers to itself, appears on track to meet the full-year outlook management provided to investors in January. The operator of 12 Mexican airports and one international airport managed decent growth in the second quarter of 2019. 

Let's zero in on key metrics and details from the last three months. Note that all comparative numbers that follow are presented against those of the prior-year quarter.

Grupo Aeroportuario del Pacifico: The raw numbers

Data source: Grupo Aeroportuario del Pacifico. All dollar figures at 19.125 pesos per dollar.

What happened with GAP this quarter?

• After overall passenger traffic expansion of just 5.2% in the first quarter of 2019, total traffic increased by 9.8% in the second quarter, to 12.2 million passengers. This brings traffic growth in the first half of 2019 to roughly 7.5%, slightly ahead of management's full-year forecast of 7% growth. 
• Second-quarter passenger volume was evenly divided between domestic traffic and international traffic, as domestic passenger volume improved by 10.1% and international passenger traffic climbed by 9.3%.
• GAP's revenue advance was much stronger than the reported numbers indicate on first glance. A noncash accounting adjustment required under international financial reporting standards, which tracks airport concessions construction revenue, plunged by 61.7% during the quarter. This recurring revenue entry is a wash on GAP's books, as it has a complete offset on the cost side. Removing the effect of this adjustment, GAP's revenue jumped by 13.2% during the quarter.
• Aeronautical services revenue, based mostly on passenger fees, rose 10.6% to 2.6 billion pesos, thanks to higher traffic as well as inflationary-based fee adjustments.
• Non-aeronautical services advanced 20.8% to 957 million pesos. The company saw a robust increase in revenue from third-party operations at the Guadalajara, Tijuana, and Puerto Vallarta airports. Revenue from businesses operated directly by GAP also exhibited momentum. Management pointed specifically to an increase in car parking revenues, the opening of two new VIP lounges at the La Paz and Puerto Vallarta airports, and the opening of seven new convenience stores at the Tijuana, Puerto Vallarta, Mexicali, and Guanajuato airports.
• Excluding the noncash construction concessions adjustment, operating margin improved by 30 basis points, to 56.7%. 
• EBITDA margin was roughly flat at 68.8% after removal of the concessions adjustment.
• The company confirmed that it's on track to take over the operation of Norman Manley International airport in Kingston, Jamaica, in late 2019, after winning the airport concession in September 2018 through a competitive bid process. The Kingston airport will represent the second international airport in GAP's portfolio, as well as its second Jamaican operation, accompanying Sangster International Airport in Montego Bay.

Looking forward

Management left Grupo Aeroportuario's full-year 2019 outlook untouched as the organization heads into the back half of the year. In addition to the aforementioned targeted total passenger traffic increase of 7%, GAP's 2109 outlook anticipates growth in aeronautical and non-aeronautical revenues of 13% and 20%, respectively. The company foresees a total revenue advance of 15% and expects to hit adjusted EBITDA margin of 69% in 2019.

Even as Mexican economic output falters, GAP continues to exploit opportunities in the country's relatively vibrant tourism and business travel sectors by widening its own capacity. The company opened 11 new domestic routes and seven new international routes during the quarter, most of which sport between two and four weekly frequencies. Despite tepid underlying conditions, GAP is bent on proactively expanding passenger traffic, which is the key to its long-term growth strategy.