Grupo Aeroportuario del Pacifico SAB de CV
BMV:GAPB
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Grupo Aeroportuario del Pacifico SAB de CV
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Good morning, and welcome to GAP's Third Quarter 2020 Conference Call. [Operator Instructions]
It is now my pleasure to turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead.
Thank you, and welcome to the Grupo Aeroportuario -- thank you.
Thank you, Maria, and good morning, everyone.
Thank you for joining us today to discuss GAP's third quarter financial and operating results. I hope you and your family are healthy and safe.
Today, I will review the development of our business in the current scenario and its impact in the third quarter results. While this period of time has continued to be challenging for GAP, with this experience, we are gradually recovering during the third quarter, to reach 6 million passengers, resulting in a decline of around 51% in passenger traffic compared to the third quarter of 2019. This was also a strong recovery compared to [ 84% ] decreased passenger traffic during the second quarter of 2020.
This improvement was a product of the economic reactivation in the Mexican region as well as the lifting of the travel restrictions [ in America ], driven by our very diversified portfolio that includes metropolitan cities, industrial cities and tourist destinations.
The best performing airport was Tijuana, reaching a decrease of only 30% in passenger traffic, [indiscernible] in our domestic airports network. We are predicting a recovery in [indiscernible] and relatives as well as the business passengers that travel to and from this airport.
Our efforts remain focused on ensuring the well-being of our passengers and in restoring their confidence in traveling. [ A list of some of the ] health and safety actions we instituted for employees and passengers, [ which we discussed ] in our last conference call.
I'm proud to share with you that the implementation of this strategy has led us to certification by the ACI Airport Health Accreditation program. This program recognizes our commitment to the health and well-being of passengers and airport staff as it is related to the COVID-19 pandemic. To be accredited, GAP airports were reviewed for cleaning and disinfecting, physical distancing standards, the staff rotation, physical layouts, passengers communications and overall passenger facilities. GAP was also granted [indiscernible] certification at all our 14 airports [indiscernible].
In the costs side, strict cost controls continue to be at top of mind for GAP. The temporary closure of the nonpriority areas at the beginning of the pandemic helped us to reduce energy consumption as well as costs for maintenance, security and cleaning services. While we expect to continue benefiting from these efficiencies in the upcoming quarters, we also expect to see increase in [ certain costs as certain areas ] reopen in accordance with passenger traffic recovery trends.
I want to mention that during the third quarter of 2020 we launched an early-retirement program as an option for the employees, resulting in a headcount decrease of around [ 13% ], which represents MXN 20 million for severance payments that are recognized in the [ operating cost line area ]. But in the long term, these benefits will result in a lower overall cash burn.
During the quarter, our cost of operations decreased by 12%, without the consolidation of Kingston airport, which was integrated since October 2019.
We also started installing solar panels over carports in 11 of the airports in Mexico. This is a part of our goal to generate our own energy. We expect to conclude this project in January 2021. It is important to mention that installation will bring savings of around 25% in the energy cost for 2021.
In Montego Bay, we [ also concluded ] the first phase of the solar panel installation and expect a decrease in energy cost of around 11% in 2021. Once the second phase concludes [indiscernible], we will start generating around 30% of the total energy consumption. This [ is expected to ] bring us closer towards our clean energy goals, and we intend to continue looking for different sources and ways to increase capacity of clean energy in all of our airports.
In terms of liquidity, operating cash burns were slowed down to breakeven levels due to the passenger traffic recovery, our cost reduction actions and cash preservation initiatives. Additionally, these savings have allowed us to accumulate cash in August and September.
Our balance sheet has remained strong throughout the pandemic, reaching a cash position of [ MXN 15 billion ] at September. This is more than enough to address our operating expenses and committed investments.
We closed the quarter with total debt of MXN 25 billion (sic) [ MXN 29 billion ], of which 23% is in U.S. dollars denominated. We have some maturity payments due next year; the first one, of $191 million [indiscernible], due in January and February. [ We are already signing the -- ] we are working on [indiscernible] these maturities for an additional 36 months. Additionally, we have MXN 2.5 billion due in July. [ At the end of this year ], we will review our cash positions to see if it is necessary to refinance [ debt ].
As we mentioned during the second quarter conference call, the concession agreement in Mexico states that if the Mexican GDP decreased by 5%, or more, in the last 12 months GAP has the right to request the reopening and rebalancing of the [ entire MDP ] and tariff determination. Due to the pandemic, the [ economy reached these conditions ] in the second quarter, which allowed us to formally submit our request to the authorities. At this point, we are working with them to define which projects [ must be sustained ] under the current MDP and which ones should be delayed for the next one, in accordance with the new capacity needs and passer traffic trends.
Our proposal consists of deferring the program for [ 34 months, in average ], in order to provide enough support to balance this passenger traffic decline. This allows us to [indiscernible], going forward, that are aligned with the current economic situation and will put us on the right path towards a recovery with the certainty about the CapEx commitment.
There is not a specific deadline for this process. However, we are expecting to reach a final determination at the end of this year. In a less likely scenario, we will receive the results of the process in first quarter of 2021. [indiscernible] continues communication with the authorities, reviewing our proposal and making the proper adjustments. In the event we do not obtain a final result by the end of this year, we will have to request a waiver to the authorities to comply with the investments that we make under the current MDP until the end of the extraordinary review.
In the case of Jamaica, we do not have to wait for a specific [indiscernible]. The contracts allow us revisions at any time in the event of a force majeure or if exceptional circumstances arise during a 5-year period which may justify reconsideration of tariffs and CapEx commitments. As such, we requested a rebalance of [indiscernible] in the mandatory CapEx to the Jamaican government and are awaiting a response.
In order to support our tenants during these difficult times, we established an incentive plan for all our whole network, which includes discounts over the minimal rental fee in accordance with passenger traffic decline at each airport. These discounts will continue throughout the year, and it's important to mention that for them to take advantage of these discounts [indiscernible]. The benefit for GAP is not only a roster of solid tenants, but also a stronger overall accounts receivable coverage.
In terms of the airlines, we launched a [indiscernible] ramping incentive according to the reopenings of routes and additional [indiscernible]. It is worth mentioning that we are seeing a reconfiguration of the market after COVID-19 effects.
As of September, our passenger traffic was carried mainly by Volaris, with a passenger share of 45%; VivaAerobus, with 13%; Aeromexico, with 10%; and American Airlines, in fourth place, with 6%.
We are revising our accounts receivables and decided to recognize a provision of doubtful accounts for MXN 113 million; [ 35% ] of these reserves arise from airlines.
I would like to conclude, emphasizing that we remain confident in the underlying fundamentals of [ our view ]. This has been, for sure, one of the worst crises for our sectors, but we know that with each crisis comes an opportunity to [ do better ], an opportunity to rise above the challenge, an opportunity to be successful again. COVID-19 has forced us to make decisions more quickly to preserve our company and protect our passengers, which have made us adapt more [indiscernible] as well as to work in conjunction with all our stakeholders. I am confident that when this pandemic is behind us, we will be a stronger and better company for the [ growth ] of all stakeholders. Thank you.
I will now ask the Operator to please open the floor for your questions.
[Operator Instructions] We'll take our first question from Alejandro Zamacona of Credit Suisse.
2 questions for us. The first one, on the renegotiation of the MDP. I'm curious on which airports are being included. As I understand, it's a negotiation on an individual basis to airport. So I'm curious on which airports are being included. And also, what's your initial expected outcome, taking into consideration your assumptions for traffic, discount rate and CapEx?
My second question is on the commercial business. For this quarter, we saw the nonaeronautical revenues roughly in line with traffic, although we know that there are [indiscernible] contracts protecting supposedly between 80% and 90% of the revenue. So in this context, can you please provide more color on the status of the contracts and additional discounts, going forward, if we can expect that these contracts will remain in place going into the future or the contracts on a [indiscernible] basis is going to be modified?
Alejandro, thank you for the questions. This is Raul. In terms of the renegotiation of the MDP, we included in the filing all the 12 airports of Mexico. In general terms, what we are expecting is that the size of the CapEx that we originally have committed for this MDP will be put in place not in 5 years, but in 7 years. So what we asked in terms of the change, the filing for the change of the MDP will be a delay on the CapEx for around 33%.
In terms of commercial revenues, for sure you need to first understand that in this quarter we have, in one hand, some of the business, directly operated business by GAP, that were closed part of the quarter. This is the case of the VIP lounges and some of the convenience stores. They were closed because at the end of the day, for generate profit we need to have [indiscernible] volume of passengers to make sense to open, for instance, a VIP lounge. So for today, I would say that 100% of the VIP lounges that operate GAP are already open, and also almost 85% of the stores, of the Aeromarket convenience stores, operated by GAP are also open.
Talking about the incentives for the commercial revenues. As we spoke on the last conference call, we [indiscernible] incentive policies for all the aeronautical, for the non-aeronautical revenues. The idea is try and support in the most difficult part of the crisis to our tenants. So in general terms, our policy is that we made discounts to the minimal rents, aligned with the decrease of the passengers. We expect to continue with this policy for this year and [indiscernible] the first quarter of the coming year. I would say that today, talking with related with the possible second wave of disease on Mexico, we don't have complete clarity about if the incentive plan will continue in the coming year for more than the first quarter.
Okay. And just on the first question, on the MDP, assuming all these factors, what's your initial expectations for the outcome of the airport fees?
What we are expecting is a decrease of the commitments of investments for at least 30% of this past year period and a result of flat tariffs.
We'll take our next question from Mauricio Martinez of GBM.
My question would be on CapEx for the fourth quarter of this year. Maybe if you can give us some color on how much you expect to deploy CapEx for the fourth quarter. That will be my first question.
And the second question is regarding the provision of the MXN 113 million that you recognized in this quarter. Well, my question is if this MXN 100 million were recognized specifically in the quarter? Or is it accumulated for the whole year? And maybe if you can give us more color on which client is causing this increment in the provision.
Mauricio, this is Saul. Well, regarding the CapEx for the fourth quarter, we are estimating the amount to be spent according to our proposal with the government of Mexico and Jamaica. So far, we have spent around MXN 2 billion, and the idea is to reach around MXN 1 billion; more, MXN 1.2 billion. But it depends how is the final negotiation with the government. In any case, we will continue with our proposal in that sense.
Well, regarding the provision, it is MXN 113 million. It's for the aggregate of the 9 months, as of September. We are struggling with the airlines and with our tenants in order to try to receive as much as possible, [ in part to ] negotiate deferral payments. And in some cases, that's almost impossible. We cannot break out the details, the clients, obviously. But we believe that this provision is enough for the entire year.
We will continue working with the airlines and with the tenants in order to reach an agreement for deferral payments. In any case if they are not able to continue with the operation in the airports and in any case if they decide to leave these spaces, probably it will have to go into a legal process in order to recover these amounts. But for now, this provision, we believe, is enough for the entire year.
Perfect. And just -- well, let me see if I understood correctly. So the CapEx for the fourth quarter is compromised MXN 2 billion, but you expect to reach an agreement to only spend MXN 1.2 billion?
No. We have spent for the first 9 months $2 billion. We are planning to deploy another MXN 1 billion, MXN 1.2 billion, but with our proposal, in line with the proposal we sent to the government. So it's something that, in the end, we will have to finalize the review process with the authorities. But for now, our target is to reach the CapEx proposal we sent.
And do you think -- well, maybe if you can give us a sense on how you are feeling during this negotiation with the authorities. Is it that the talks and the negotiation has been quite positive, constructive? And you see this MXN 1 billion CapEx for the fourth quarter and the MDP negotiation underway, it would be your personal view will be a positive outcome?
Mauricio, this is Raul. I would say in general terms, I would say, as always, the negotiation with the Minister of Communication and Transportation has been a really open, clear and technical negotiation. So in general terms, the authorities are reviewing all the needs of CapEx for the coming period, taking in account the reality that has changed in the demand and the forecast for passengers for the coming year. So I would say that in general terms, I could say that the authorities are completely open, that understand perfectly the really hard time and the structural change of the demand for the coming years. So I would say that we are still expecting a flat result in terms of tariffs and a decrease around 30% in terms of committed CapEx for the coming 5 years.
We'll take our next question from Pablo Monsivais of Barclays.
Just out of curiosity, what is the estimate that you are using for this new MDP in terms of traffic for the next 5 years? And if this estimate incorporates somehow a potential second wave on COVID cases? That will be my first question.
And my second question, and I know this is kind of long term right now, but do you have any update on the Terminal Processing Facility in Tijuana? Have you obtained the approval from the U.S. government to use that airport as well for domestic passengers? Or what's the status on that?
[indiscernible]. In some way, the reality is changing really, really fast. What we have, for sure, is, first, at least in the short term, we know the decreasing number of seats of the Mexican fleet in terms of the number of planes that [ link ] the country from Interjet and Aeromexico that give us a really good sense about the size of the offer that we have today in Mexico.
Second, that is also interesting and in some way help us to have some, in some way, accurate forecasting for the really coming months, is that, for instance, one of the things that we saw in the first wave was related with the closing of, some foreclosure of some countries that affect directly the long-haul services. For the case of GAP, we have just a couple of long-haul services; I would say Tijuana to Shanghai, Vallarta to London and Manchester and Cabos to London. So I would say that we are expected that the second wave will have a bigger impact on the long haul. And in the case of GAP, we would not be really as impacted as other airports in the area.
The other part that we are seeing and is the most, I would say, difficult part for forecast is related with the services to the U.S. If the policy or the treatment of the crisis, of the health crisis, in the U.S. and in Mexico continues in the same way, what I'm trying to say is that if not additional closure of the economy of some states of the United States or in Mexico, we are not foreseeing on the coming months a big decrease or a change in the trends of the passengers growth for the coming months.
In terms of the [ progress ] in Tijuana of the new building, first, in terms of the construction, we are aligned with the original plan. We think that in the last quarter of the coming year this new building will be fully operated, in full operation. In terms of the different permits with the U.S. government and the Mexico government, I would say that we are still working on those permits.
For sure, the COVID crisis has made all this process slower than we originally expected. But I would say that we continue talking with the authorities, and we don't foresee, at least in the moment, any kind of a bigger change on the positive authorization for the operation of this facility.
So do you think that the permit of that would be granted in the first half of next year or the second half year, just for timing-wise?
I would think that we could expect to have all the permits on the second half of the next year. I would say that we are still working with the government and we don't foresee any problems. So the permits would need to be ready just before or a couple of months before the opening.
Our next question is from Rogerio Araujo of UBS.
So one question here on our side. If you could speak a little bit about the outperformance of [indiscernible] of GAP versus the other Mexican airports, what are the main reasons for that in your view and what you expect in upcoming quarters as well if this may continue. And if you can also state your current expectations on when [indiscernible] will come back to '19 levels, I think we would be very appreciated, even though we know it's quite difficult to know at this moment. But what is your current expectations on that?
And just a confirmation as well on the MDP timing. You mentioned in the release end of this year. So just confirming, is this for the conclusion of the MDP? So we should already have a new CapEx and a new tariff by the year-end?
Thank you, Rogerio. This is Raul. First, one of the things that we are seeing, the big triggers that are helping us to have a better performance of other airports in the region, is related first with the portfolio of GAP. As you know, we have this mix of leisure, BFRs and business travelers.
So one of the things that we are seeing is that Tijuana has outperformed all the other airports in their region. And we have a part of the explanation related with the BRFs, with the migrant market, Mexico-America market, that are going, flying back and forward between the U.S. and Mexico. That is a first part of that explains the outperformance of Tijuana. Also it's happening the same kind of process on Morelia.
The other part of it that we are seeing in Tijuana is, at least in the South California, as we know, for the Mexico market the Southern California is the biggest market in terms of international passengers for Mexico. So one of the things that we saw is that part of the services that used to be directly operated by different airlines from Los Angeles, from Ontario, from San Diego, were canceled.
And in some way, Tijuana is absorbing part of this market because, in general terms, Tijuana keep the same amount of frequencies and almost the same amount of routes. They have less cancellations. So the strategy of some of the airlines, mainly Volaris in Tijuana, was to keep all their routes and trying to capture this market of Southern California. So I would say that that is helping us a lot.
Also in terms of, like, Cabos, for instance, we are seeing that the market of South California, also Los Angeles market, for instance, that is the biggest [indiscernible] of those both airports, Vallarta and Cabos, for instance, we are seeing that the leisure market is growing or is in some way roughly recovering from the crisis.
What we see is the strength of our leisure passengers, that they feel in some way really close from home. At the end of the day, a flight from Los Angeles to Los Cabos is less than 2 hours. So in some ways, they feel really close and really safe to come back to home in the case of any kind of emergency.
So for me, that is the second part. In some way the regional market for leisure will be stronger, at least in the coming months. And the biggest part of the market that GAP has is that specific market, a regional market of less of 3 hours of flying to come to our airport.
And the third part is related with the long haul. We really don't have -- we have just a small number of routes of long haul that have been the most affected on this crisis.
So in general terms, I would say that the trend of recovery in traffic will continue in the coming months if there is no big change of the policies on the U.S. or Mexico for the treatment of this health crisis.
I would say that in terms of the recovery of the market, it's really hard to say, because we are having a structural change in the number of seats on the [indiscernible] on Mexico carriers, but also the U.S. carriers. So I would say that it's difficult, but the numbers with the picture that we are seeing today, we think that, depending on the airport, we will see airports in 2023 that will be the same numbers as [ 2019 ]. And other airports will be around 2024 and 2025 in the smallest, some of the smallest airports in our [ network ].
In terms of the timing for the MDP, we are expecting to have a full answer from the authority. That means new master plans at the end of this year. For sure, it's also difficult to really know the exact time. Because at the end of the day, also due to the crisis, it's in some way part of the work is the [ daily validation ] that used to be in the talks with the federal government. So we expect to happen all the new master plans, that you have the complete answer on this from the last quarter of the year. In the worst of our scenarios, it would happen on the first quarter of the coming year.
We'll go next to Marcos Barreto of Citi.
First, I just was wondering, are you taking any specific measures with airlines that might be under financial distress and are making them pay in advance or something else?
And my second question is if you could give us any color on your thoughts regarding the airport projects in Santa Lucia and Tulum.
Marcos, this is Saul. Well, the measures that we are taking with the airlines, we have been trying to support them according to the situation. More than measures, we are providing some specific programs for incentives. But also, we want to give them some additional time for due payments to try to be up to date and try to give them the opportunity to recover the specific markets they have.
So we are specifically providing some support in terms of a different size of bonds, with smaller bonds in terms of the time they have for the accounts receivables and some additional time for the past-due payments. But in general, we have been trying to support them. Obviously, there are some --
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Marcos?
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Okay. Thank you. Well, I was saying -- sorry for this interruption. So those are the specific measures that we are taking with the airlines. In the end, we want to support them and try to deal with the current situation. That's part of the program that we are providing to the airlines.
In the case of Santa Lucia and Tulum, specifically regarding the Tulum airport that was announced by the government, we don't have any specific detail about this project. But in any case, we could be interested. In case the government could be launching an RFP for this airport or an action for this airport, we could be interested. For the Santa Lucia airport, what we know is that this is still on the works, and they are going to continue with the works. We don't have more specific detail. The army will be operating this airport with the Mexican airport system that they announced, and we don't know more about this project.
And we'll take our next question from Francisco Suarez of Scotiabank.
The question that I have is a follow-up on how you have been successful to post better-than-average passenger traffic and to what extent that is not only explained by unique assets, like Tijuana, but also to your initiatives in creating this set of incentives for carriers to reopen their routes or add new frequencies. And on that sense, so the first question, if you think that the overall performance of passenger traffic is linked to your incentive programs.
And the second question is actually on your incentive programs, as such. What can you tell us about the underwriting risk? How do you handle those underwriting risks on this, without going to the specifics? Do you differentiate the potential credit quality on the counterparty, on the carrier? How do you deal with that? Is that something that actually -- has it helped you 10 years ago when Mexicana went bust and you were actually far much better compared to your peers precisely because of your sound underwriting standards that you had at the time? Can you walk us a little bit on how to prevent that those incentives wouldn't be affecting or creating more provisions in the future?
Thank you, Paco. This is Raul. I would say that, first, about our incentive policy, for the past we have always analyzed for the past crisis, for instance, the one in 2008 and '09, where almost 40% of the Mexican carriers lost their fleets. First, we understand perfectly that the recovery of the smaller markets are more difficult than the recovery of the biggest markets. For instance, we know that a Mexico-Guadalajara route, the biggest domestic market for GAP, for instance, would recover really fast in the coming months or years. And for instance, Guadalajara-Los Mochis, with regional jets, would be more difficult to recovery.
So first part of our incentive policy is trying to give some additional incentive for the markets that we know that are strongly more. So we published a number of specific routes for all the airlines that they could participate for receive the incentive. The idea is to protect the smaller markets, because at the end of the day, it will be harder to recover in the coming months.
So I think that part has been really successful. And for sure, the specific characteristic of our market and our portfolio helps us a lot, but the incentive policies give us some additional push to bring back the airlines to our airports.
The second part for us that is really important on this policy is that we also thought that the manage of the risk has been always the DNA of GAP. So for any airline to participate of this policy, we need to give the airlines who don't have any kind of receivables, first. And second, to have all the guarantees, the deeds of guarantees, to avoid any additional risk for the future of GAP.
So in general terms, I would resume that our policy is related to incentivize the smaller markets. And second, in the same support, trying to manage the risk of GAP, always trying to have the more defensive view of this business.
[Operator Instructions] We'll go next to Gabriel Himelfarb of Scotiabank.
Just a quick follow-up question. Have you seen a worsening in collections from carriers or tenants? Because I see accounts receivable increasing during this quarter. Can you give us a bit of color about how collection or receivables has been?
Gabriel, this is Saul. Well, the collections have been very good, according to the circumstances. It's not the same situation in the pre-COVID scenario. But we have been trying to dealing with the airlines and giving them the opportunity to be up to date with their collections.
Our idea is to defer some of the payments. Indeed, we have some of the due payments in a deferral program, and that will allow the airline to have enough liquidity to continue their operation. So probably that's why you can see a little delay in the collections. But so far, we only have problems with 5 airlines, from 27 that we have in our 14 airports. And we are trying to deal with this situation, trying to help them and give them the opportunity to update their accounts payable.
So in general, we have a very good collection level.
Okay. And in the case of tenants, have you seen any worsening in collection of rent?
Well, with the tenants, we are working also supporting them. We don't have too many problems with them. Obviously, we are very close working and touching base with them about the level of discounts they can receive. A part of the discount program we provide for the minimum guarantee fee is that they have to be up to date in the receivables. So it's part of the negotiation, and that's working very good. We have more than 1,000 contracts with the tenants, and we have only around 6 or 7 spaces that they have left the airport. So it's minimum the effect. And obviously, the idea is to try to provide enough support to continue their operation. Once we see more recovery in the passenger traffic, we can see also the recovery of our tenants.
And this concludes our question-and-answer session. I'd be happy to return the call to our management for any concluding remarks.
Thank you, everyone, again for joining us today in our third quarter results conference. We want to remind you that we are always open and available to answer your questions.
And also, I would like to remember that all the team of GAP will work really hard from these difficult times for make the best possible results for the company and to keep all the safe procedures for our passengers. We will keep a really close eye on what's happening on the coming weeks and months with the COVID. Keep safe, and we wish you a great day. Goodbye.
This does conclude GAP's third quarter 2020 conference call. You may now disconnect your lines. And everyone, have a good day.