Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (PAC)

Executive Summary / Key Takeaways

• Tariff Strategy Shows Pricing Power But Faces Headwinds: GAP's sequential tariff increases (15% in March 2025, 7.5% in September 2025) demonstrate strong regulatory moat dynamics, yet peso appreciation and shifting traffic mix are pressuring fulfillment, with management targeting 93-97% of maximum tariff by end of 2026—a critical variable for margin trajectory.

• Non-Aeronautical Diversification Accelerates While Diluting Margins: The cargo and bonded warehouse acquisition contributed MXN 559 million in Q3 2025, driving 30% growth in directly operated businesses, but hotel EBITDA margins around 35% and integration costs are diluting overall margins from the mid-60% range, creating a trade-off between growth and profitability.

• External Shocks Create Multi-Year Capacity Constraints: Pratt & Whitney engine inspections will constrain Volaris (VLRS) and Viva Aerobus capacity through 2027, while U.S. migration policies are depressing VFR traffic (38% of international volume) and Hurricane Melissa devastated Montego Bay operations (73% traffic drop in November 2025), collectively creating a perfect storm that masks underlying demand strength.

• Balance Sheet Strength Provides Strategic Optionality: With MXN 11.7 billion in cash and a net debt-to-EBITDA ratio of 1.8x as of September 2025, GAP has the financial firepower to fund MXN 43.2 billion in committed capex through 2029, pursue potential acquisitions like Motiva Airports, and maintain dividend distributions despite near-term earnings pressure.

• Competitive Position Remains Differentiated: While OMAB (OMAB) achieves higher EBITDA margins (74.8% vs GAP's 64-67%) through domestic focus and ASUR (ASR) benefits from Caribbean diversification, GAP's Pacific coast positioning and cross-border CBX operation create unique exposure to nearshoring trends and California catchment areas that competitors cannot replicate.

Setting the Scene: The Airport Operator's Evolving Model

Grupo Aeroportuario del Pacífico, incorporated in 1998 and headquartered in Mexico, operates 14 airports across Mexico and Jamaica under 50-year government concessions that create regional monopolies. The company makes money through two primary channels: aeronautical services (passenger fees charged to airlines) and non-aeronautical services (commercial activities like retail, food and beverage, car rentals, cargo handling, and hotels). This dual-revenue model is standard for airport concessionaires, but GAP's strategic evolution sets it apart.

The company's history reveals a deliberate pivot from pure airport operator to diversified infrastructure platform. The 2006 dual listing on NYSE and Mexican exchanges provided capital for expansion, but the real inflection came in 2015 with the Jamaican market entry—first Montego Bay, then Kingston—giving GAP Caribbean exposure that domestic-focused competitor OMAB lacks. The 2023 cargo and bonded warehouse acquisition marked another strategic shift, creating a logistics platform beyond passenger traffic. This evolution transforms GAP from a traffic-volume-dependent utility into a multi-service infrastructure provider, fundamentally altering its risk profile and growth drivers.

GAP sits in an industry structure dominated by three Mexican concessionaires, each with distinct geographic footprints. OMAB controls central and northern Mexico's industrial heartland, benefiting from nearshoring manufacturing growth. ASUR dominates southeast Mexico's tourism corridor with Cancun and has expanded into Colombia and Puerto Rico. GAP's Pacific coast positioning creates a unique value proposition: it captures both tourism (Puerto Vallarta, Los Cabos) and cross-border VFR traffic through Tijuana's CBX bridge, which connects directly to San Diego. This dual exposure provides resilience—when U.S. migration policies depress VFR travel, leisure destinations can offset; when tourism softens, domestic routes and cargo provide ballast.

The core strategy centers on maximizing regulated tariff revenue while expanding unregulated commercial activities. The 2025-2029 Master Development Plan commits MXN 43.2 billion to expand terminal capacity by 54% across four key airports, with Guadalajara's second terminal (operational early 2029) and Puerto Vallarta's second terminal (Q1 2027) creating step-change opportunities in both passenger throughput and commercial space. This capex intensity reflects management's conviction that traffic growth will resume once external shocks abate, but it also creates near-term margin pressure and execution risk.

Strategic Differentiation: Concession Moats and Tariff Engineering

GAP's primary competitive advantage stems from its government-granted concessions, which provide 50-year regional monopolies with inflation-linked tariff reviews. This regulatory moat translates into pricing power that few infrastructure assets can match. The current tariff implementation strategy demonstrates this power: a 15% increase in March 2025 followed by a 7.5% adjustment in September 2025, with plans for another increase in early February 2026. Management expects to achieve 93-97% fulfillment of maximum tariff by end of 2026, depending on inflation and exchange rates. Each percentage point of tariff fulfillment translates directly to revenue and EBITDA, making this the single most important operational lever for near-term financial performance.

However, the tariff strategy faces two critical constraints. First, peso appreciation—4.6% in Q3 2025—pressures fulfillment because tariffs are denominated in pesos while many costs are dollar-linked. Second, the traffic mix shift from international to domestic passengers reduces average revenue per passenger, as international routes carry higher fees. This dynamic explains why aeronautical revenue per passenger declined quarter-over-quarter despite tariff increases. GAP's pricing power is real but not absolute; currency and mix effects can partially offset regulatory gains.

The non-aeronautical diversification strategy addresses this vulnerability by creating revenue streams uncorrelated with passenger traffic. The cargo and bonded warehouse business, acquired in late 2023, generated MXN 559 million in Q3 2025, up from MXN 354 million in Q3 2024, and is expected to deliver 2024 revenue 10% above 2023's MXN 1 billion level with EBITDA margins improving from 40% to 50-55%. Cargo revenue is not regulated under the Master Development Program, giving GAP true pricing flexibility. Management plans to replicate this model across airports serving specific markets: Bajío for automotive, Tijuana for cross-border logistics, Puerto Vallarta and Los Cabos for hotel supply chains. This approach enables a gradual shift toward a hybrid regulated/unregulated revenue mix, improving long-term valuation multiples.

Hotel operations represent another diversification vector. The Guadalajara hotel, opened in April 2024, achieved 80% occupancy and MXN 2,500 average tariffs in its first year, while Puerto Vallarta's hotel generated MXN 18.6 million in Q2 2024 with 51% occupancy. With a five-year pipeline of hotel developments, GAP is creating captive demand from stranded passengers and airport workers. The catch: hotel EBITDA margins around 35% dilute the corporate average, explaining part of the margin compression from 67% in Q2 2024 to 64.3% in Q3 2025. Accepting lower margins for revenue diversification defines GAP's current strategic calculus.

Financial Performance: Evidence of Strategy Under Stress

GAP's Q3 2025 results reveal a company executing its strategy while battling external headwinds. Total revenue grew 17.4% year-over-year to MXN 8.0 billion, driven by 18.3% aeronautical growth and 15.6% non-aeronautical growth. This top-line performance is impressive given that total passenger traffic increased just 2.5% to 15.8 million passengers, with international traffic declining due to U.S. migration policy impacts on VFR passengers. Tariff increases, not volume growth, are driving revenue—a precarious position if traffic continues softening.

Segment dynamics show the diversification strategy working but creating margin tension. Directly operated businesses (cargo, hotels) grew 30.1% in Q3 2025, while third-party operated businesses (retail, food and beverage) grew 4.7%. The cargo acquisition contributed MXN 559 million, representing 7% of total revenue. Food and beverage, retail, duty-free, ground transportation, and timeshares performed strongly, but the overall non-aeronautical revenue per passenger metric is distorted by the cargo consolidation. Investors must parse organic passenger-driven growth from acquisition-driven growth; the former indicates operational health, while the latter shows strategic execution but masks underlying traffic weakness.

EBITDA grew 12.8% to MXN 5.1 billion, but the margin compressed to 64.3% from 67% in Q3 2024. Three factors explain this compression. First, concession fees for Mexican airports increased from 5% to 9% in 2024, with the P&L impact hitting 2025. Second, operating jet bridges and airport buses directly due to regulatory changes increased costs. Third, integrating lower-margin cargo and hotel businesses diluted corporate margins. The cost of services rose 14.1% in Q3 2025, but excluding the direct operation of jet bridges and buses, the increase would have been just 4.8%. Core operational cost inflation is manageable, and margin pressure is primarily from strategic initiatives and regulatory changes rather than operational inefficiency.

The balance sheet remains a source of strength. Cash and equivalents stood at MXN 11.7 billion as of September 2025, down from MXN 15.8 billion at year-end 2024 due to MXN 7 billion in capex and dividend payments. Net debt-to-EBITDA is 1.8x, well within covenant limits. In Q3 2025, GAP issued MXN 8.5 billion in new bonds to fund capex and refinance bank debt, while extending a USD 40 million credit line to 2030. This financial flexibility enables GAP to maintain its MXN 43.2 billion MDP commitment despite near-term earnings pressure, a strategic advantage over less-capitalized competitors.

Comparing GAP to peers highlights its unique position. OMAB's Q3 2025 revenue grew 9.8% with 74.8% EBITDA margins, reflecting its domestic industrial focus and lower capex intensity. ASR's Q3 revenue grew 17.1% with margins around 70%, benefiting from Caribbean tourism diversification. GAP's 16.3% revenue growth is competitive, but its 64-67% margins trail both peers. This margin gap reflects GAP's heavier investment in capacity expansion and diversification—strategic choices that create long-term optionality but near-term profitability drag. The market appears to be pricing GAP between OMAB's efficiency and ASR's diversification, with its Pacific coast positioning providing a unique geographic moat that neither competitor can replicate.

Outlook, Management Guidance, and Execution Risk

Management's guidance reveals cautious optimism tempered by realistic assessment of external constraints. For 2025, GAP expects traffic growth close to 5%, a target that seems ambitious given the 2.5% Q3 growth rate and ongoing engine capacity constraints. The Pratt & Whitney inspections, which began in late 2023, will continue pressuring capacity through 2027, with full fleet recovery not expected until that year. GAP's revenue growth must come almost entirely from tariff increases and non-aeronautical expansion rather than volume, a more difficult and less sustainable path.

The tariff implementation timeline is critical. After the September 2025 7.5% increase, management plans another adjustment in early February 2026, creating three distinct tariff levels in effect during 2026. The goal is 93-97% fulfillment of maximum tariff by end of 2026, up from approximately 90% targeted for 2025. Each tariff bump provides a step-up in revenue, but fulfillment depends on factors outside GAP's control: inflation, exchange rates, and traffic mix. The 4.6% peso appreciation in Q3 2025 demonstrates how currency can partially neutralize tariff gains, creating a key variable for investors to monitor.

Non-aeronautical revenue guidance is more bullish. Management expects "double-digit growth" to be sustainable for 3-4 years, driven by new commercial space openings and cargo expansion. The Guadalajara Terminal 2 commercial areas will reach their first full year of operation in August 2025, while Puerto Vallarta's second terminal (Q1 2027), Tijuana's expansion (2028), and Los Cabos Terminal 2 expansion (2027) will provide step-change opportunities. GAP can generate organic growth independent of passenger traffic, but the timing means benefits are back-loaded, requiring investors to maintain conviction through near-term headwinds.

The VFR market recovery timeline is uncertain. Management estimates U.S. migration policy impacts affect 38% of international traffic, with deceleration expected "for the coming months" but optimism for recovery "from the coming year" based on airline capacity announcements. This hedged guidance acknowledges that policy uncertainty, not economic fundamentals, is driving demand weakness. The risk is that restrictive policies persist longer than expected, turning a temporary headwind into a structural shift.

Execution risk centers on capex management and acquisition integration. The MXN 43.2 billion MDP represents 87% investment in four key airports, with Guadalajara's second terminal requiring complex phasing to avoid operational disruption. The potential Motiva Airports acquisition, reportedly valued around $2 billion for 20 Latin American airports, would significantly diversify GAP's geographic footprint but strain management bandwidth and financial resources. Management insists any deal would be funded through leverage without equity injection, but adding debt while margins are compressing requires precise execution.

Risks and Asymmetries: What Could Break the Thesis

The Pratt & Whitney engine issue represents the most persistent operational risk. With Volaris and Viva Aerobus fleet recovery not expected until 2027, GAP faces three years of artificially constrained capacity on its core Mexican routes. This limits GAP's ability to benefit from any demand recovery; even if VFR policies ease, there simply won't be enough aircraft seats to capture the upside. The asymmetry is negative: engine resolution provides upside, but further delays create downside with no mitigation.

U.S. migration policy changes create political risk that GAP cannot hedge. The 38% exposure to VFR traffic means any escalation in enforcement or rhetoric can immediately impact bookings. Management's comment that the deceleration stems from "lack of information" among VFR passengers suggests the impact is psychological rather than legal, but this actually increases risk—sentiment can shift rapidly and unpredictably. The asymmetry here is also negative: policy easing would help, but further tightening could depress a core segment for an extended period.

Hurricane Melissa's impact on Montego Bay reveals geographic concentration risk. While the airport resumed operations quickly, 70% of hotel capacity remains affected, limiting demand recovery. November's 73.4% traffic drop demonstrates the binary nature of tourism exposure. Insurance and reconstruction will restore capacity, but the timeline remains uncertain, and GAP's Jamaican operations represent a meaningful portion of international diversification.

Currency risk is structural and underappreciated. The 4.6% peso appreciation in Q3 2025 directly reduced aeronautical revenue per passenger despite tariff increases. With the Fed's policy trajectory uncertain, further peso strength could pressure 2026 tariff fulfillment targets. This creates a natural hedge: peso strength helps GAP's dollar-denominated debt service but hurts revenue translation. The net effect is margin compression, a headwind that management can only partially offset through cost controls.

The concession fee increase from 5% to 9% is a permanent margin drag. While this was known and capitalized into tariff calculations, the 400 basis point impact is substantial, explaining roughly half of the EBITDA margin compression. This represents a permanent reduction in profitability that must be overcome through higher tariffs or cost efficiency—a structural challenge that peers OMAB and ASR face to lesser degrees.

On the positive side, tariff fulfillment offers meaningful upside asymmetry. If peso depreciation resumes or international traffic mix recovers, GAP could exceed its 93-97% target, delivering revenue upside not reflected in consensus. Similarly, the cargo business's 50-55% EBITDA margin target (up from 40%) suggests operational leverage as integration costs fade. GAP's diversification investments could compound into a more resilient, higher-multiple business model, but this requires 3-5 years of execution without major external shocks.

Valuation Context

Trading at $237.37 per share, GAP's valuation reflects a market grappling with near-term headwinds against long-term moat strength. The trailing P/E ratio of 21.64 sits between OMAB's 16.79 and ASR's 12.27, suggesting investors price GAP's Pacific coast positioning and cross-border exposure at a premium to more domestic or Caribbean-focused peers. This relative valuation indicates the market acknowledges GAP's unique geographic advantages but demands proof that external shocks are temporary.

Cash flow multiples tell a more nuanced story. The price-to-operating cash flow ratio of 12.77 is comparable to OMAB's 11.83 but well above ASR's implied multiple, reflecting GAP's higher growth rate (16.3% vs ASR's 17.1% and OMAB's 9.8%).

The price-to-free cash flow ratio of 27.54 appears elevated, but this reflects heavy capex investment in the MDP; as expansion projects complete and cash conversion improves, this multiple should compress. The dividend yield of 3.88% is lower than OMAB's 4.82% and ASR's 8.54%, consistent with GAP's growth-oriented capital allocation.

Enterprise value metrics show GAP trades at 12.50x EBITDA, a premium to OMAB's 10.03x and ASR's 8.42x. This premium is justified if GAP's tariff strategy delivers 93-97% fulfillment and non-aeronautical growth sustains double-digit rates. The risk is that external shocks persist, margins compress further, and the premium erodes. The debt-to-equity ratio of 2.28x is higher than OMAB's 1.33x and ASR's 0.48x, reflecting GAP's active leverage to fund expansion—a strategy that amplifies returns in good times but increases risk in challenging environments.

Return on equity of 46.27% is strong but below OMAB's 54.33%, consistent with GAP's margin compression. The key valuation question is whether investors should pay a premium for GAP's transformation story or demand a discount for execution risk. Current pricing suggests the market is splitting the difference, requiring management to deliver on its 2026 tariff targets and demonstrate that margin dilution from diversification is temporary, not permanent.

Conclusion

GAP's investment thesis hinges on whether its regulatory moat and strategic diversification can overcome a rare confluence of external shocks. The tariff strategy demonstrates genuine pricing power, with sequential increases creating a clear path to 93-97% fulfillment by end of 2026. The non-aeronautical expansion, led by the cargo acquisition's MXN 559 million quarterly contribution, is building a more resilient revenue base less dependent on passenger traffic cycles. The balance sheet, with MXN 11.7 billion in cash and manageable 1.8x net debt-to-EBITDA, provides the financial flexibility to execute the MXN 43.2 billion MDP while pursuing strategic acquisitions.

However, the severity and duration of headwinds cannot be dismissed. Pratt & Whitney engine issues constrain capacity through 2027, limiting GAP's ability to capture any demand recovery. U.S. migration policies depress 38% of international traffic with uncertain resolution timing. Hurricane Melissa's devastation of Montego Bay shows how quickly tourism assets can deteriorate. These shocks are temporary but overlapping, creating a multi-year earnings drag that tests investor patience.

The competitive context reinforces GAP's unique position. OMAB's domestic focus delivers higher margins but less growth; ASR's Caribbean diversification provides stability but lacks GAP's cross-border CBX advantage. GAP's Pacific coast positioning and nearshoring exposure create a differentiated growth profile that justifies a valuation premium—if execution delivers. The critical variables to monitor are tariff fulfillment progress, cargo margin expansion, and VFR traffic recovery. If GAP can demonstrate by mid-2026 that margins have stabilized and tariff gains are sustainable, the current valuation will appear well-supported. If external shocks persist and margin dilution proves structural, the premium will compress. For now, the concession moat remains intact, but its value depends entirely on management's ability to navigate challenges that are largely outside its control.