Grupo Aeroportuario del Pacífico

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Grupo Aeroportuario del Pacífico (PAC) operates 12 airports throughout Mexico’s Pacific region, primarily focused on passenger traffic and a variety of aeronautical and non-aeronautical services, making it a crucial part of Mexico’s air travel infrastructure.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Revenue Distribution: PAC’s revenue is categorized into:
    • Aeronautical Revenues: These are the bulk of their operations and represent 70% of total revenue in 2023. These are from landing fees, passenger charges, airport security, and rental income for airport space.
    • Non-Aeronautical Revenues: These are primarily from commercial services in the airports such as car rentals, parking facilities, retail operations, advertising, and other sources including catering, food, beverage sales.
  • Industry Trends: The air travel sector, especially in Mexico, is experiencing growth, particularly in tourist destinations. Both domestic and international traffic is growing, which translates to increased passenger volumes. The rise of low-cost carriers (LCCs) has also intensified the competitive environment. The industry is also going through consolidation.
  • Margins: The company is showing impressive operating margins. 2022 and 2023 saw consistent margin improvement of the company across all segments. For most of the years from 2019 - 2022 the margins have been around 48% to 50%, with 2023 showing 50%+ margins.
  • Competitive Landscape: The main competitors are other major airport operators like ASUR and OMA.
  • What Makes PAC Different? PAC has the following differentiating factors:
    • A diversified network of airports, each catering to different locations in Mexico.
    • A regulated revenue base and a cost base that is well controlled.
    • A focus on high value ancillary streams to boost profits.
    • Strong and well-maintained infrastructure which allows expansion.
    • They have strong control on airport charges.
    • Long term agreements (concessions) with the Mexican government.
  • Financial Highlights:
    • In 2023, the company’s total revenues increased by 17.8% when compared to 2022. The increase is largely attributed to an increase in aeronautical revenue and non aeronautical revenue of 19.8% and 13.1% respectively.
    • 2022 revenues were around 22% higher from 2021, again fueled by an increase in aeronautical and non-aeronautical revenues.
    • Total passengers grew by 19.9% in 2023, with an increase of 21% in domestic and 18.2% in international passengers.
    • Net profit for 2023 reached Ps. 7,411.5 million, which is an increase of 51% compared to 2022.
    • Operating margin is above 50% for the company which shows great control on the cost base.
    • In 2023, PAC has increased it’s capital expenditures by 36.3% to further grow its operations. This includes the building of a new terminal in Guadalajara and the expansion of Tijuana and Puerto Vallarta airports.
    • As of the end of December 2023, there are no outstanding borrowings in debt, thus a low debt-to-equity ratio.

Moat Analysis:

  • Rating: 2/5 (Narrow Moat)

  • PAC’s economic moat is primarily based on a combination of regulatory advantages and the relative difficulty of other competitors entering existing airports.

  • Regulatory Moat:
    • Long-term concessions, which act as a significant barrier to entry. Concessions are contracts given by governments to private entities, authorizing them to operate airports for a predetermined period of time, usually spanning multiple years. It is unlikely for an existing airport to obtain a similar concession or a new airport to built and get all required approvals. While the concession grants the right to the operator, it also subjects the entity to various regulatory standards and oversight.
    • The regulation over Mexican airport charges makes the business stable and protected against competition. The SCT determines the maximum price that can be charged, thereby ensuring profitability and predictability within the region.
  • Switching Costs Although passengers might not be very loyal to certain airports, airlines will face high costs if they switch airports. This ensures a degree of stickiness to the current clientele. This is especially true for domestic airlines that operate out of particular airports, since changing routes might be expensive for them.

  • Geographic Advantage: Most of PACs airports are located in the Pacific region of Mexico and they are hard for any foreign competitor to replicate these conditions. The relative lower cost of land and regulations means that a competitor is less likely to easily enter the same markets.

    • Weaknesses:
      • The lack of a broad moat and the presence of similar concessions with other publicly-traded airport operators like ASUR and OMA limit its strength.
      • Moats in airport operations are generally easier to replicate by another player with better connections to the government or financial capabilities.
      • While they have regulatory protection, they also need to adhere to specific regulations, which can lower the returns.

Risks Related to the Moat:

  • Regulatory Changes: Any changes to Mexican airport regulations, including the ones for maximum prices or for charges may have a large negative effect on the profitability and business operations. Regulatory changes could impact concession agreements or the duration of concession agreements and require further capital expenditures.
  • Increased competition and market share volatility: Any new airport in the region would affect existing airports and may cause loss in traffic or in revenue share. Competition between LCCs may also erode margins and hurt revenue growth.
  • Financial Risk: There is financial risks from an increase in the cost of borrowing, fluctuation in currency exchanges, and volatility in financial markets.
    • Macroeconomic Factors: The company can also be affected by factors such as adverse economic conditions in Mexico or in the USA, which is where most of its travelers come from. Political instability, natural disasters, international events or an increase in terrorist activity and could all negatively affect travel in the region, leading to lower revenues.
    • Exposure to new technology There could be technology disruptions in the future such as automation that would greatly affect revenues and profits for the company. They need to continually adapt.
  • Cybersecurity: The firm has previously been hit with a cybersecurity attack. Any new cyber incidents can have negative consequences including loss of customer data and operational disruptions.

Business Resilience

The company has been relatively resilient over the past years and shows the ability to bounce back from tough economic situations. In 2020, there was a significant drop due to the pandemic and passenger travel being almost impossible, but the company managed to recuperate very quickly over the last 3 years, and the revenues are well above their pre-pandemic levels. This shows a capacity of the business to absorb shocks.

Understandability: 3 / 5

The business model is not overly complex to grasp, primarily revolving around airport operations and concessions. It generates revenues from a combination of aeronautical charges and commercial activities in the airports that they operate. However, some complexities arise due to financial engineering, tax effects and accounting nuances specific to the industry.

Balance Sheet Health: 4 / 5

  • The company has a decent amount of cash and cash equivalents that allows them to navigate difficulties. However, the amount is not significant.
  • They have negligible long term debt and short term debt, which is good.
  • The company is consistently growing its operating revenues and profit margin. This shows good internal financial control and ability to generate money. The return on equity has been above 20% for the past few years, which shows an efficient and high returns business.
    • The company is undertaking large investment and projects into expanding their existing airports. This shows they are focused on long-term profitability. They are also investing into renewable energy to help the company stay cost efficient and to meet the new global requirements.
  • They are not overly leveraged, with high cash flows, high reserves and low debt on the balance sheet.
  • They have had increasing capital expenditures over the years, which shows long-term commitment to the business.

Recent Concerns:

  • The latest earnings call discussed the volatility of interest rates and inflation and their effect on the company.
  • The company has been facing high levels of passenger volume and they are investing to try and meet this demand by expanding capacity. But there may be some disruptions in the near future due to this.
  • The company may be impacted by political and economical situations in Mexico.
  • They also stated that tariffs and aviation regulations in Mexico and in Jamaica may affect operations and profitability.