Grupo Aeroportuario del Pacífico (GAP) paints a rosy picture. Record EBITDA, booming commercial revenues, and ambitious expansion projects – the company seems to be riding the crest of a wave. But beneath the surface, a hidden engine crisis threatens to send GAP's soaring growth plummeting back to earth.

While analysts focus on the obvious – the Pratt & Whitney engine inspections and their impact on passenger traffic – a more subtle issue lurks in the Q1 2024 earnings call transcript: GAP's aggressive push into non-aeronautical revenue. While diversification is generally a positive strategy, GAP's reliance on non-aero revenue during a time of constrained capacity might be a risky bet.

Here's the critical point: GAP's impressive non-aero revenue growth is partially fueled by a shift in passenger mix – more international travelers and fewer domestic passengers. International travelers, typically with higher disposable income, are more likely to spend on food, beverage, and duty-free items, driving up per-passenger spending.

The transcript reveals that Guadalajara Airport, for instance, saw a significant 20.5% jump in international passengers in January. This surge, coupled with a new commercial layout, likely contributed to the company's record non-aero revenue.

But what happens when the grounded planes return to service and domestic travel rebounds? Will GAP's non-aero revenue continue its impressive growth?

Let's analyze the numbers. GAP expects a 12% to 14% growth in non-aero revenue for 2024, despite a 3% to 5% projected decrease in passenger traffic. This ambitious projection heavily relies on the success of new ventures like the mixed-use building in Guadalajara, which includes a hotel, corporate offices, and commercial spaces.

However, the hotel only began operating in late March, meaning its contribution to the first quarter is negligible. Similarly, revenue recognition from the office building and food and beverage areas within the mixed-use complex is expected to begin in the third quarter.

This leaves GAP heavily reliant on existing commercial areas, like the new food and beverage terrace in Guadalajara, to drive non-aero revenue in the first half of the year. The key question is whether these areas can sustain the necessary growth, especially as a recovery in domestic traffic could dilute per-passenger spending.

Potential Scenario: Domestic Traffic Rebound and its Impact on Non-Aero Revenue

If domestic passenger traffic rebounds faster than anticipated, diluting the high-spending international traveler mix, GAP's non-aero revenue growth could fall short of expectations. The company's overall revenue might stagnate or even decline, especially if aeronautical revenue takes a hit due to the ongoing engine inspections.

This hidden engine crisis, the potential over-reliance on a skewed passenger mix for non-aero revenue, could have a domino effect. It could impact GAP's EBITDA margin, which is already under pressure from increased concession fees and labor costs. It could also influence the upcoming MDP negotiations, making it harder to secure favorable tariffs and CapEx approvals.

GAP's future hinges on a delicate balance. Can the company successfully navigate the return of domestic traffic while maintaining its non-aero revenue growth? Will its new ventures, like the mixed-use building, live up to their potential?

While the future remains uncertain, one thing is clear: GAP's aggressive push into non-aero revenue, during a period of constrained capacity and shifting passenger mix, presents a hidden risk that investors can't afford to ignore.

GAP Financials and Key Data Points

"Fun Fact: GAP operates 12 airports in Mexico and 2 in Jamaica, handling over 64 million passengers annually. That's roughly equivalent to the entire population of the United Kingdom passing through their airports each year!"

Source: https://www.aeropuertosgap.com.mx