Airport Operator Soars Above Competition
GAP's focus on organic growth takes advantage of its wide moat.
Grupo Aeroportuario del Pacifico (PAC) owns the rights to operate a geographic monopoly of airports in Mexico, allowing it to extract high economic profits from its customers. Our wide Morningstar Economic Moat Rating is based on intangibles (rights given by the Mexican government) and efficient scale (opening nearby airports would probably decrease profits for all parties involved). Within Mexico, 35 airports handle more than 95% of the total traffic. GAP has rights to operate 12 of these airports, which collectively generate around 27% of Mexico's total air passenger traffic. Airlines and their passengers have no other choice but to use GAP's airports for certain destinations such as Guadalajara, Los Cabos, Puerto Vallarta, and Tijuana. These factors allow GAP to earn strong returns on invested capital, excluding the value of the airport concessions that it received "free" from the government. We would not have excluded this item had the company been required to pay the designated amount to receive the concession.
GAP turns more than 50% of revenue into operating cash flow, easily covering the required annual capital expenditures that represent 15%-20% of revenue. The power of its wide moat is evident in the resilience of its margins: During the plunge in travelers from 2007 to 2009, GAP's EBITDA margin narrowed just 200 basis points, to 65% from 67%. The company posted a 68% EBITDA margin for 2013, and we believe that could serve as a ceiling as GAP invests for top-line growth.
Neal Dihora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.