Pacific Airport Group Q1 FY2021 Earnings Call

Thank you and welcome to the Grupo Aeroportuario del Pacifico's first quarter 2021 conference call. Presenting for the company today, we welcome Mr. Raul Revuelta, GAP's Chief Executive Officer; and Mr. Saul Villarreal, the Chief Financial Officer. Please be advised that forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the company's future performance or financial results. As such statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued Wednesday. Please note that unless stated otherwise, all comparisons in this call will be versus GAP's results for the comparable period of 2020.

Thank you. Good morning, everyone and welcome to GAP's first quarter 2021 conference call. In today's call, I will be briefly reviewing operational and financial figures for the first quarter of 2021 prior to taking your questions. GAP's results remain impacted by the pandemic. However, there are important changes in the landscape that I will discuss. During the first three months of 2021, we did see a continuing recovery of traffic with a 37% decline year-over-year or a 38% decline versus 2019. Keep in mind that on March 31 of 2020 the Mexican government suspended all non-essential travelers for two full months. Therefore, the main effect of the pandemic will not be fully reflected until the second quarter of 2021. The recovery trends we saw in the first quarter of '21 were driven mainly by stronger domestic traffic. As a sample, the airport of Tijuana experienced extraordinary recovery following a negative 9% in the first quarter of 2021 versus the first quarter of 2019. However, in the case of Guadalajara, their recovery was at a slower pace, we saw a 36% decrease versus the first quarter of 2019. On a concentrated basis, we believe that the recovery of Guadalajara is a key element to bring us back to 2019 figures. On the other hand, international passenger traffic continued to be impacted by the US-imposed travel restrictions that were implemented on the 25th of January. There were also bans of travel to Mexico and the Caribbean imposed by the governments of Canada and the United Kingdom in an effort to reduce the spread of COVID. Looking ahead, however, we fully expect a continued recovery of domestic traffic and we are also optimistic about international recovery as we see declining COVID cases together with the rise of vaccination rates. It's important to mention that this summer will be a good indicator of the recovery we hope to achieve, not only in terms of the ratio of destinations but also of the Metropolitan airports, such as Guadalajara. It's important to mention that Aeromexico recently announced the addition of eight and 28 new planes in the near future respectively. In addition, JetBlue just announced the start of operations in Puerto Vallarta during the first quarter of 2022, with the opening of Los Angeles and JFK New York routes. Additionally, they announced new routes to Bahia, Las Vegas, Morelia, Sacramento, and Portland, which is a good sign for market recovery and is also faster than expected.

Thank you. Hi, Raul. Thank you for the call. Thank you for taking my questions. I have two questions actually. The first one is on the traffic recovery. Can you remind us what was the traffic recovery period of assumption in the last 10, I guess, for their competitors, was three years, give or take? But I just want to confirm what was the traffic recovery for you. And from the recent data that we have seen regarding traffic, do you believe there is some upside to this scenario by means of a shorter recovery?

Thank you, Alex. In terms of what we originally expected for the recovery, we saw that we would have the same amount of passengers that we used to have in 2019, by the end of this period of five years. To date, we have seen great news regarding additional fleets from Mexican companies and the new announcements of openings that we saw in the last month, we are expecting to have a recovery much earlier, really more in 2023. It is important to mention that this will depend on each airport. For instance, Tijuana is going to be the first of our airports to have a full recovery of traffic, even it could happen in the first quarter of the coming year. We expect to see various different paces of recovery. We are optimistic about the recovery of leisure airports such as Los Cabos, because in the coming months we are seeing a greater opportunity for capturing passengers that may prefer shorter flights rather than long-hauls, as they might feel more comfortable or safe flying to Los Cabos, which has a direct flight from Southern California. So, in general terms, I would say that we are more optimistic about the pace of recovery, and we see that there is room for upside compared to the original projections of the master plan.

Okay, thank you, that was really clear. And my second question, if I may, is on the domestic airlines. Interjet was a relevant airline for GAP in some way, but they are stating now that they intend to restart operations by the year-end, although they are starting a formal Chapter 11 process. Have you had any discussions with them about restarting operations in GAP's airports?

I would say that during the peak operation time, Interjet used to have around 10% of the total share of passengers at GAP. It's important to mention that all the routes that Interjet used to operate were routes where more than one competitor also operates. So Interjet didn’t have any exclusive routes in GAP's network, which is an important point because the remaining capacity from other companies in Mexico can somewhat cover the routes that Interjet left in our network. As for the Chapter 11 process, we are still in communication with the legal team of Interjet but I do not have any additional information about a possible restart of operations.

Hello, guys. Good morning. Thanks for taking my questions. I have two quick questions, and one is kind of a follow-up to what Raul was saying in the remarks. My first question is on the tariff strategy that you have for this year? Are you already planning to be very close to the maximum tariff or what's the pace of increase that we might see in the next couple of years, and this year, for instance? And my second question is a follow-up to Alejandro's questions on the Mexican airlines. We know that Aeromexico announced they are increasing their fleet. Have you talked to them in terms of the potential opening of new routes or increasing frequencies? How has the conversation been with Aeromexico in order for you to have more traffic in your network? Thank you.

Thank you, Pablo. The first part regarding the maximum tariffs, we expect that this year we will be gradually closer to fulfilling the common process fulfillment of the tariff. We expect that by the last quarter of the year, as soon as the international traffic begins to recover more clearly, we expect to be really close to approximately 98% fulfillment, and for the coming year, we expect to achieve 100%. For the coming years, we expect that we will continue to achieve 100% fulfillment. In terms of Aeromexico, we are also in important contact with them, discussing with their planning department specifically these new planes that they announced. As you know, Aeromexico is one of our largest operators at Guadalajara airport, comprising almost 50% of our passengers. We are seeing the recovery of operations on the routes they used to operate, and whether they can reach 100% capacity depends on various factors. We can definitely capture some of this additional capacity in our airports.

Perfect, many thanks, and just do you have a sense of whether those additional partners will be more leisure-driven or BFR-driven just to gauge the potential increase in commercial revenues? Thank you.

I would say that we are clearly seeing an important shift towards the leisure markets. The patterns we have observed from California and Texas are quite interesting. We also expect new routes for Los Cabos airport coming from New York with JetBlue and American Airlines, so we are seeing a significant increase in passengers in the leisure market. We also expect an additional increase in passenger traffic driven by some fiscal supports that the US government will bring to the economy. Historically, as the US economy recovers, we see more BFR markets returning to Mexico and the various destinations we have in the country. While the recovery we see now is steady, business-related routes like Guadalajara to Mexico City or Guadalajara to Monterrey still need improvement. Overall, we anticipate a significant recovery in the leisure market. In the case of Puerto Vallarta, we need to watch the opening of the Canadian border, as capturing the winter season in November could greatly enhance both leisure and BFR travel, given that the VFR market was quite resilient during the pandemic.

Hi, Raul, Saul. Good morning, thanks for taking my question. I have two questions. The first one is regarding the potential rebalancing with Jamaica, just wondering about the timing and the potential outcome of that negotiation. The second one is related to the discount programs that have been implemented for the commercial tenants and the airlines. Just wondering how long these programs will last and what the average level of discounts has been for airlines. Thank you.

Hi, this is Saul. Thank you for your questions. Regarding the negotiation of rebalancing with the Jamaican government, we are currently working with a team to analyze our proposals. There are two different proposals, one for Montego Bay and another for Kingston. The idea is that the final outcome will be by the end of this year, as we will need to start conversations with this new committee that is not yet integrated. It could take around six months of conversations, so we will have to wait. The potential outcome of our request involves adjustments in CapEx, a review of the concession timeline, and some other adjustments related to expenses. We are not adjusting tariffs at this time because we believe the current tariffs are sufficient to recover the level of investment.

Regarding the discounts on tariff fees, as we discussed in the last conference call, we will continue our policy of incentivizing new route openings and the recovery of frequencies through discounts. This will not apply as a general discount across the board; it will be targeted towards specific routes that are beginning operations again or that are increasing their frequencies. The second part regarding commercial revenues is that we will maintain at least for this year our discount policy, which is based on the minimal rents. This is calculated by comparing the traffic results of 2019 against those of 2021. The size of the discount is determined by the difference in passenger numbers between the same month in 2019 and the same month in 2021. We expect to see some normalization in the variable part of the rent fee. As we look ahead to the next quarter, it’s likely that some specific business lines will return to pre-COVID sales levels at airports such as Tijuana.

Good morning. Thank you, Raul and Saul, for taking my questions. I have two questions. My first is about your perspectives for traffic in Guadalajara. I know you mentioned the strong outlook in Tijuana for BFR markets, but what are you seeing in Guadalajara? What are your expectations considering it's a tougher airport to categorize in terms of leisure or business? What do you see as the drivers there?

Perfect. There is, Rodolfo. As you mentioned, Guadalajara has a significant mix of leisure, BFR, and business. For BFR, we are seeing continued recovery particularly with routes to Southern California, such as Sacramento and Oakland. The recovery in these routes is directly related to the performance of the California economy. We are confident that it will recover quickly. Guadalajara, being the second largest airport in Mexico, serves a diverse mix of passengers, including those traveling for leisure to destinations like Cancun and Los Cabos. We noticed recently that many passengers who previously traveled for leisure to the US are now choosing to vacation on Mexican beaches instead. While we are optimistic about the potential for recovery in business-related routes, such as Guadalajara to Mexico City and Guadalajara to Monterrey, we will keep a close eye on how those routes perform, especially with the recent announcements about reopening corporate offices.

And just a follow-up on that. How much of the traffic between Monterrey and Mexico City is shared with Guadalajara? If you have that figure handy.

Yes, in general terms, before the pandemic, these two routes accounted for around 17% of the total domestic passengers. However, this number has changed dramatically since COVID, as we are now seeing more seats allocated to leisure destinations. Overall, we expect a reconfiguration of the market, which in part will be influenced by the economic recovery in the US driving BFR traffic, and also by shifts towards domestic leisure destinations among the Guadalajara population. That will help us understand how the business market evolves.

Thank you, Raul. My second question concerns the potential impacts from the outsourcing bill. Could you provide insight into how this might impact your labor costs since you may have specialized roles affected?

Hi, Rodolfo. This is Saul. We have done some analysis regarding this potential effect. The new rule about the insurance for employees could affect our resources by around Ps. 60 million - Ps. 70 million, and we are in the process of analyzing this. The effect is not very relevant; it will be less than 1% of our costs. While it's important to note that this could have a higher effect in some of our companies, according to our current structure, the impact is quite minimal.

Yes, hi, thank you for taking my question. It's actually Brian Roberts on for Steve. Just a quick one here on growth planning into the recovery. Aside from the airport in Barbados, are you considering any other acquisitions? Any thoughts on specific regions that appear most attractive? Thank you.

Thank you, Brian. Currently, we don't have any acquisition opportunities under review, except for Barbados as you mentioned. However, in the coming months or even years, we expect to gain additional clarity about regions we wish to explore, particularly in the Caribbean and Central America.

Hi. Thank you for taking my question. I have two questions regarding the MBT investment. How is the construction of the second runway at Guadalajara progressing? When should we expect it to be ready? And how does this couple with your expectations for traffic recovery? Will there be immediate investment channels to commercial spaces, and could this potentially trigger higher commercial revenue in the future? Thank you.

Regarding the second runway at Guadalajara, we have just begun the construction phase for that area. We expect to complete this infrastructure by 2023. The construction process is challenging, given its proximity to the existing runway, but we are preparing to open this new infrastructure in 2023. Regarding commercial revenues, we are still working on developing new business lines. This will include hotels, not only in Guadalajara but also in Tijuana. We are also looking to expand our cargo facilities due to the increasing demand driven by e-commerce. Overall, while making forecasts is difficult given the changing circumstances, we anticipate traffic in 2021 to grow between 27% and 30%, potentially leading to passenger numbers around 33 to 35 million. However, we are cautious about operations from Canada to Jamaica and Canada to Puerto Vallarta. If all goes well, capturing the winter season in the last quarter could significantly influence those numbers.

Hi, thank you for the call. All my questions have already been answered.

Thank you, Nikki. We have a question for Saul. Can you just comment and clarify the number of shares that you've repurchased to date?

Hi, Melanie. Yes, we have purchased around 2.4 million shares during this report.

Excellent. And Saul, I believe we have a question from the webcast.

Yes, thank you, Melanie. This question is from Juan Ponce from Bradesco. The first one is about the bill relating to outsourcing. We already answered that question. The second question relates to your outlook on the recovery of passenger traffic. Raul, would you like to respond?

Yes, regarding the recovery of passenger traffic, we have highlighted our robust expectations for BFR and leisure markets, particularly in Guadalajara. We expect significant recovery starting this summer, and certainly in the last quarter of the year, we anticipate much improved numbers.

There appear to be no further questions over the phone. At this time, I would like to turn the call over to Revuelta for any closing remarks.

Thank you, everyone, again for joining us today for our first quarter results conference. We want to remind you that we are always open and available to answer any and all of your questions. On behalf of GAP, we wish you a great day. Thank you.

This does conclude today's conference. Thank you for your participation. You may disconnect at any time.