Good afternoon and welcome to the GAP Second Quarter 2017 Conference Call. All lines have been placed on mute prevent any background noise. After the presentation we will open the floor for questions. And at that time instructions will be given if you would like to ask a question.

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 Grupo Aeroportuario del Pacifico's second-quarter conference call. Today from the company we have Mr. Fernando Bosque, Chief Executive Officer; and Mr. Saul Villarreal, 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 yesterday. At this point, I would like to turn the call over to Mr. Bosque for his opening remarks. Mr. Bosque, please begin, sir..

Hello, everyone, and thank you very much for accompanying us today. I will get started with the traffic performance review right away, then move on to the other topics before the question-and-answer session. As you saw in the report, traffic figures for the quarter remained stable, unabridged level 14% for international as well as domestic traffic.

This growth was fueled by performance improvement in Guadalajara, Tijuana, and Los Cabos, amounting 71% of the total passenger increase for this quarter. Mainly it was the ultra-low-cost carrier drove the growth, with Volaris and VivaAerobus representing over half of the increase.

There was also significant network expansion from the airlines in our network this quarter. Interjet and Volaris, for example, were among the most active in new domestic route launchings internationally. Several new routes were launched by Swift Air out of Montego Bay, and Southwest and Alaska ran new routes out of Los Cabos.

Domestically, traffic rose by 14%. That is over 700,000 added passengers during the quarter. Almost half of these grown was driven mainly by the Guadalajara airport, followed by Tijuana and Los Cabos. Internationally, growth reached 14%, or over 551,000 added passenger versus the same quarter of the last year.

A significant portion of these routes stemmed from the Los Cabos airport and Tijuana, considering the CBX users.

It is worth mentioning that total load factor improvement went from 80% during the second quarter 2016 to roughly 84% for 2000 – for the second quarter of the current year; mainly as a result of the renewal day length leads for the domestic carriers.

The tendency in the past few years has been to sweep the fleets from the smaller to larger aircraft, enhancing capacity significantly. Let me turn now to the individual airport, starting with the Guadalajara airport, which continued to drive new passenger growth for the Company, reaching a total of 413,000 new passenger during the second quarter.

Assuming this trend continue, this have put us on this way to reach 13 million passenger by the end of the year. I do have team from my previous comment. Domestical rev, mainly Volaris, Interjet and VivaAerobus, keep reaching double-digit growth. During the quarter, for example, Volaris added 151,000 new seats for the Guadalajara market.

Interjet opening six new routes, adding nearly 100,000 seats. And VivaAerobus added 75,000 new seats. Moving on to Tijuana, at this airport Volaris added 162,000 new passengers, followed by Aeromexico with 31,000, Interjet with 27,000, and VivaAerobus with 25,000.

Route to Mexico City and Guadalajara continue to be at I must focus on this particular airport. As such, these cities represented 46% of the total number of new passenger for the quarter.

The total number of user for CBX facility increased by 49% during the second quarter, which is one of the main factor that contribute to the passenger traffic growth to the airport. That means one-fourth of Tijuana's total passenger used the bridge during the three months under discussion.

Moving onto Los Cabos airport, which so far this year has been our best performing airport in terms of traffic growth. This airport has seen significantly increases in both the domestic and international markets. On the domestic side, VivaAerobus and Volaris added 32,000 and 19,000 new seats, respectively, to the total seat offered at the airport.

On the international side, Southwest continued to generate the largest amount of new passenger during 2017, mainly due to new routes on several cities in California. In Puerto Vallarta, domestic traffic continue growing. This city currently report having a very competitive 22,000 total room inventory.

Internationally, American and Southwest both increased their seat or provide 32,000 new seats, which for the most part was produced by the new bilateral aviation agreement between Mexico and the US, enabling more routes from high-density markets. The Montego Bay airport has surpassed its usual growth of 1% to 4%.

During this quarter, traffic grow by 7% for several reasons. The first, the Canadian market seems to be recovering from its two years' economic downturn. Sunwing, for example, increases its total seat offer by 40,000 during this quarter.

Then Southwest entered the South Florida market with a new daily route from Fort Lauderdale to Montego Bay, which added to increases in other markets made Southwest the fastest growing and landed in the second quarter of the year.

Finally, in terms of our perspective of the total network looking towards the end of the year, we expect traffic to continue growing at a double-digit rate. During the summer months, July and August, aligns with at roughly 800,000 additional seats, which represent 10% growth compared to the summer of 2016.

Volaris and Interjet will generate the largest amount of additional seats for this period, with 309,000 and 380,000 new seats, respectively. Now, in terms of commercial revenue, these have grown certainly above of our expectation due to the high growth traffic environment, especially at some of the leisure and metropolitan destination.

For instance, in the Puerto Vallarta, Los Cabos, and Montego Bay airports, commercial revenue growth 30%, 27%, and 11%, respectively; and in metropolitan cities like Guadalajara and Tijuana, by 18% and 19% during the second quarter of 2017.

During 2017 the plan is to undergo major renovation at the Guadalajara and Tijuana airports in order to expand the commercial areas by around 20%. Unfortunately, some commercial spaces have been affect by temporary closure, but we expect to open them at various spaces through 2018.

This renovation has been a main challenge for us in terms of increasing commercial revenue for passengers in this quarter. Finally, current traffic levels have pushed VIP launch activity, attracting 245,000 users compared to the 170,000 users for the same period of 2016.

Since initiating VIP lounge business at GAP, we have reached over 1.3 million passenger in our VIP lounge network as a whole. As a result, this business line reports 51% revenue increase. GAP expect to add new and larger facilities in Hermosillo and Puerto Vallarta by the end of the year. Now moving on to CapEx.

We recently published new guidance figures in which we include expected CapEx growth of MXN420 million compared to the previous expectation. This was due to additional investment for the airports of Tijuana, Guadalajara, Guanajuato, Puerto Vallarta and Los Cabos.

Our objective with this investment is to rise the scope of the expansion that are currently taking place, of which nearly MXN380 million was not considered in the master development program.

However, they are important, as they will add higher commercial value at the terminals; and that will translate into better services for the passenger and airlines, with upgrade facilities for the current and future growth. In Guadalajara, we continue expanding terminal one. This construction is expected to be complete at the end of the current year.

Also, the opening of a new security checkpoint, which will include up to five inspection areas and will conclude in the third quarter of the year. Thusly, we continue looking at reopening the access road at the airport, which includes separate lanes for passenger cars and public transportation takers. This part is expected to conclude this month.

In the case of Tijuana, we're also looking of remodeling an expansion of the terminal, which we expect will be complete by the second half of the next year. The runway and taxiway rehabilitation will conclude during the fourth quarter of the current year.

In this quarter, the Hermosillo airport concluded terminal building expansion, adding to it a total of 4,800 square feet. This included new boarding gates and two jetways, platform expansion; and expected to conclude in the third quarter of the current year.

In the Guanajuato airport, we expect to finalize the renovation of the runway during the third quarter of 2017, as well as the improvement and expansion of the terminal building in the second quarter of next year.

And finally, in the case of Montego Bay, the MXN500 million that will be invested during the rest of the year will be allocated – updating of taxiways and improvement of the terminal building. Regarding the Grupo Mexico situation at this point, their stake in GAP is 13.9% as per CHC filings of May 2017.

There is no further news about any legal proceeding with this company, and we'll keep you informed as we have further details. That is all for me for right now. I will now turn the call over to Saul for the financial presentation..

Thank you, Fernando. Good afternoon, everyone. This quarter we report a total increase in aeronautical and non-aeronautical revenues of MXN498 million, or 22% increase. Individually, aeronautical revenues increased by MXN391 million, or 24%.

This was mainly due to 26% higher revenues from the Mexican airports due to the higher passenger traffic, as well as higher passenger fees from inflation effects. Additionally, in Montego Bay, the revenues increased by MXN28 million, or 10%, due to the 7% increase in passenger traffic and 3% average peso depreciation.

Aeronautical revenue per passenger arose from MXN189 in second-quarter 2016 to MXN205 in second-quarter 2017. The non-aeronautical revenues is continue growing. The GAP strategy is to continue increasing the revenue per passenger, which increased 4% from MXN66 during second-quarter 2016 to MXN69 in second-quarter 2017.

During this quarter, non-aeronautical revenue increased by MXN107 million, or 18%. MXN91 million of this increase was from the Mexican airports, which was driven by higher revenues from third parties, which increased by MXN83 million.

Food and beverage, retail, and car rental are the business lines with the best performance, increasing by 46%, 37%, and 31% in the Guadalajara airport; and 47%, 58%, and 47% in the Los Cabos airport, respectively.

As a result, these translated into higher commercial revenues of MXN64 million at Los Cabos, and MXN46 million in Guadalajara due to the passenger traffic growth mainly. On the other hand, revenues from business lines operated actually by us rose MXN30 million, or roughly 9%, mainly in the BAP launches in carpark.

This positive effect was offset by the decrease in convenience stores' revenues of MXN4 million, or 15%. This is a change of strategy to a mixed operation structure since October 2016. However, the EBITDA margin of this business line has improved, passing from 38% in second quarter of 2016 to 62% in this quarter.

As such, our strategy is in line with our expectations. The Montego Bay airport report a revenue increase of MXN16 million compared to second quarter of 2016, driven by an average 3% depreciation of the Mexican peso versus US dollar.

In terms of the total operating cost, this decreased by MXN20 million or 1.3% compared to the second quarter of 2016 due to a decrease in cost of improvements to concession assets of 27%, which was mainly offset by an increase in costs of services of MXN34 million due to higher personal expenses, utilities, security and maintenance costs.

The cost of service per passenger decreased from MXN50 during the second quarter of 2016 to MXN47 in this quarter. This decrease was mainly driven by the Mexican airport, which went from MXN45 in second quarter of 2016 to MXN43 in this quarter, as a result of an increase in passenger traffic increase.

However, this decrease was offset by higher cost of services per passenger in Montego Bay, passing from MXN87 in second-quarter 2016 to MXN88 in second-quarter 2017. The main increase in this airport was in utilities and other costs.

In prior quarters, we mentioned that we expected higher cost of services towards the end of 2017, which will affect margins. However, maintenance and improvement projects have been delayed to third-quarter 2017, as well as certain contract negotiation for cleaning and security services.

Thus, higher cost of services won't be reflected until fourth-quarter 2017. As a result of our EBITDA grew MXN406 million in second quarter 2017 or 26%, excluding the effect of IFRIC 12. On the other hand, EBITDA margin for the quarter rose by 203 basis points excluding IFRIC 12, shifting from 69.1% in last year to 71.4% in this quarter.

The EBITDA margin in this quarter for the Mexican airports was 74.8%, excluding the effects of IFRIC 12. And for the Montego Bay airport, it was 52.7%. EBITDA per passenger increased from MXN177 to MXN195, driven by the increase in the aeronautical and non-aeronautical revenues.

Financial result was MXN330 million higher than in second-quarter 2016, mainly due to an 8% depreciation of the Mexican peso against the US dollar, representing a foreign exchange gain of MXN360 million in this quarter.

However, this effect was offset by a net foreign exchange loss due to the currency translation effect of MXN481 million compared to second-quarter 2016. Moreover, financial costs rose by MXN93 million due to higher interest expenses drift from an increase in interest rates as well as due to an increase in total debt.

It is important to highlight that during third-quarter 2017 we are expecting to carry out a bond issue for MXN1 billion in order to finance the remaining CapEx in Mexico. We are also reviewing debt options for capital investments in Montego Bay through bank loans.

Before I move to the Q&A session, I would like to quickly review the last guidance figures that was released last week. The traffic is moving to 11%. Aeronautical revenue, we are expecting a 17% increase. Non-aeronautical and total revenue will be increasing around 17%. The EBITDA will be around 16%, more or less 1%.

The EBITDA margin will be around 69%, and the CapEx will be of MXN2.5 billion. That concludes my remarks, and now I ask the operator to please open the floor for your questions..

[Operator Instructions]. Our first question comes from Marco Montanez with Vector..

Hi, good afternoon gentlemen and congratulations on the results. Thank you for taking my question.

Just to confirm, the recent guidance you just published already includes the new guidance for Volaris? I mean the decrease – their plan to increase between 15% and 17% capacity to a new one of between 13% and 14%? And the second one, if I may, could you share with us what is actually the exchange rate you are considering in the new guidance? Thank you..

Thank you, Marco. I will answer the first question related to Volaris. As you realize about our steady-state traffic information, in the case of GAP, the network of our receipt is that the main line is Volaris. The increase during the half of the year, the six months of the year, was close to 15%. The load factor also was increased.

Some kind of a reorganization of the fleet and the routes is given as more increase in traffic that any other group of operators in Mexico, and also over the average of Mexico City airport. So we are not looking, for the second half of the year, a reduction in the increase in the capacity and in the load factor and the total seats in our network.

And Saul could answer the question about the --.

Yes. At the beginning of the year, in our guidance we considered a higher level of exchange rates. However, due to this appreciation of the peso during the last month, we have considered the new projection of Mexican banks, an average of the Mexican banks, and our own view of the average that will be considered in the results.

At the end, answering your questions, yes; in our guidance, we are considering the new level of the peso against the U.S. dollar..

Okay. Thanks so much..

Thank you, Marco..

Thank you. Our next question comes from Rogerio Araujo with UBS..

Hello, good afternoon. Thanks for the opportunity. So I have a couple of questions. First one is on aeronautical tariffs, which increased by a high single digit this quarter. This was more than what other airport operators showed in the quarter.

So I want to know, in your view, is it purely explained by the high PPI, ex-oil, for the quarter? Or in other words, is this a sustainable level for the coming quarters, or GAP you would have to decrease the tariffs by the second half of the year to be with seeing the airports' tariff caps? That's my first question. Thank you..

Thank you, Rogerio. Our expectation for the tariff, we have a maximum tariff that was approved an update every year with inflection. So currently, the inflection in Mexico is going higher than was in our expectation at the end of the last year.

And now the adjustment in the inflection is – will continue to the end of the year; could be some minimum adjustment to the low level. But we are not considering that the maximum tariff will be going down over the figures that we have at this moment. So, it's very stable, and we are not doing any reduction in the maximum tariff..

Okay, that's clear. Thank you. And second question is regarding other operating expenses, which dropped by 10% this quarter. So could you please give a little bit more color on that? And if this is also sustainable for your upcoming quarters? Thank you..

Saul, could you please answer this question of Rogerio?.

Yes. The other operating expenses that you refer is the increase in the concession taxes. I mean, because the cost of services is increasing around 9% in this quarter, the concession tax and technical system fees are increasing around 28% and 19%, respectively. So I believe that you referred to this.

It is current to our view, our expectation, is something that will be normalized during the year. But it's according to our expectation. I don't know if you referred to these lines, because the cost of service is 9% increase only..

Okay. Okay, that's clear. So if I may, I'll ask a last question here on passenger growth. So GAP has been outperforming the other player that is less, let's say, less related to service as well.

So if you could speak a little bit about your view on passenger growth, why you are growing more; and if you expected this to remain in the upcoming quarters as well. Thank you very much..

more fleet, restriction in Mexico City, tourism expansion. And all this is the element that show how is the value of the portfolio of GAP..

Thank you..

Rogerio, I would like to complete my answer regarding your question about the operating expenses. The operating expenses is included in the total cost of the cost of services that I mentioned before; that increase could be around – or in this quarter was around 9%.

And as part of that – of the guidance that we released, we did an increase in the EBITDA. But in our prior guidance, we have 11% increase, and the current guidance is 16% increase..

Okay. Thanks for the color..

Thank you, Rogerio.

Thank you. Our next question comes from Leandro Fontanesi with Bradesco..

I have two questions. The first one is a regarding CBX. So today, 26% of your passengers have been using it. What percentage of total passengers do you expect this level to reach, let's say, when growth stabilizes for CBX? And also, by the end of the year, you'll be almost reaching 2 million users.

Can you talk a bit – what's that capacity of CBX? Can you grow more? And if you reach certain capacity utilization, could you potentially increase even more the capacity of CBX? That's the first question..

Okay, Leandro. Thank you for your question. Of course, CBX is one of the main reason of the important increase in the traffic in Tijuana airport. In the quarter was 26% a portion of passenger – users of the airport, that is, using the CBX facility. Our expectation for the end of the year is moving from this 26% to close to the 30%. It's growing.

At the condition that the passenger is knowing how is the advantage of that. But also at the end of August, the current year, we will open a facility, is drop-off area especially dedicated for the traffic that is moving – using the CBX.

Because that is the reason because the important increase in demand of this airport, we are in the process to develop this special facility for all these passenger that come in from the US side and to have an easy access to the area of the gates of the airport.

So that will be opened in the end of August of the current year, and also will provide better use of the total airport terminal for all the passengers, giving more capacity in total for everybody. So I think it's – when the passenger is knowing this and using this facility, at the end is comment to the friends, family.

And at the end that is one of the element that is trigger an important increase.

And so, the promotion for the airlines to use of these facility, to use Tijuana to go to the tourist destination – mainly in the west side of the country, that is Cabos and Vallarta – because it's easy to go in Mexico using this facility and arriving in the domestic side, in the domestic terminal, in these two airports.

So that is the element that we are looking. So the penetration that is moving now to close to the 2 million at the end of the year. If we are looking last 12 months, we are now just practically reaching this figure.

And if that will be stable, that will be continue growing, I think is in the medium-term at least one-third of the total users of the Tijuana airport will be users of the CBX. And I think as with that, I answered your question, Leandro..

Sure, sure. And just a second question. So your financial leverage still at a low level and you have a strong cash position. So are there any opportunities, apart from the Kingston airport profits, that you foresee that you could use this cash position? Or do you intend to maintain the financial leverage at the current levels? Thank you very much..

Thank you, Leandro. Yes, our financial leverage is low. Part of our strategy in the medium and long term is to continue financing and leverage all our CapEx in the coming years. We have a strategy of dividend distribution and capital revolutions too. We are very active in M&A. We are looking opportunities all the time.

Right now we have – we're in middle of the process for Kingston. We are looking some other private process. We are analyzing if there is some opportunity. We cannot talk too much about this because it's very early. But the main point is that we are very active looking for some other opportunities..

Leandro, my congratulations for your first report about the Mexican airport industry. Thank you. It's very useful for everybody..

Thank you very much..

Thank you. Our next question comes from Pedro Balcao with Santander..

Hello, good morning everybody. The first one is a follow-up on the traffic. Taking into account that traffic grew almost 13% in the first half, and you expect 11% for the full year, I think it's clear that you expect a deceleration in the second half.

My question is really if we should expect that deceleration to take place already in the third quarter; or if we should expect still double-digit growth in the third quarter, and actually a more significant deceleration in the fourth quarter? That will be the first question. Thank you..

Hi, Pedro. So of course 11% is plus less 1%, so we are talking a range, 10% to 12%. That is the range of the traffic. The reason is because last year, the third and the fourth quarter was very important increase in the fleet and in the seats capacity.

So when you compare the current quarter, the third quarter and the four between years, you will realize that the traffic will be not at a level that we are looking for the first half of the year. That is the reason, because we are looking – that, at the end of the year, we will be close more to the 11% to 12% instead to the level of 14%..

Okay, thank you. My other question was about costs. I understood that the cost increase will actually probably take place only in the fourth quarter, still not in the third quarter. So my question is if we can expect a similar EBITDA margin in the third quarter than the one we just had in the second quarter..

Thank you, Pedro. Due to the – has been delayed some works in the airports, and that we had planned at the beginning of the year, just imagine that our guidance was released in January. So we have some expectation of the works, and the works have been delayed a little. So the expenses have been delayed, too.

So for the third quarter and the fourth quarter, we will see an increase in the expenses – in the level of expenses that will represent that EBITDA that we were expecting in our first guidance – will be – or was lower than we have seen in the first and second quarter of this year.

However, for the third and the fourth quarter, we'll be a little – we'll have a little more stress in the EBITDA margin. At the end, according to our current guidance, our EBITDA margin will be around 69%..

security, maintenance, cleanage, energy, or any others..

Thank you very much, Fernando and Saul.

So could we have some pressure from those costs falling into the beginning of next year because of those delays?.

That will be the – the only question is you are obtaining apparently savings during the current year, because you are some late in the putting operations somewhat the facilities. However, for the effect of the first months for the next year of any other will be the same.

Is that not will increase permanently in the differences that we have in the current year. It's only temporary..

Yes, and you have to consider, Pedro, that for the next year we will add more commercial capacity due to the expansion in our terminal. So, probably we will have an additional expenses. But we will have an additional revenues due to this additional commercial space. So the margin (multiple speakers). Okay..

Yes, yes.

So the margin will not be that affected, right?.

Yes..

Yes, correct..

Thank you..

Welcome..

Thank you. Our next question comes from Ramon Obeso from Scotiabank..

Just one question. Could you share with us the payback of the new commercial scheme for convenience stores versus the previous one? And could this new scheme of mixed revenue be also implemented in the expansions of Guadalajara and Tijuana and Hermosillo? Thank you..

The payback of the investment that we are doing in the commercial is usually – the investment is a minimum. This is in the growth of the construction of the buildings. And the furnitures and the finishing of the shelf usually is put in by the operator, for the commercial operator.

And so really the payback of the commercial for us is more involved in the total investment that we are using for the improvement in the terminals. No, we have not done a specific analysis of the payback of the portion that contribute to the commercial side.

For example, if you have a MXN100 million expansion in Hermosillo airport, and you have a section that will be dedicated for the commercial, and who do the investment for this commercial side and fit out and the furnitures – it's doing by the operator, the commercial operator – that not affect to us.

And the payback of a specific investment in the growth construction in this area is no less than two years to be. But we are not doing this analysis..

Okay. Okay, understood. Perfect. Thank you..

Any other questions, Ramon? No?.

No, I mean – could this new scheme also be implemented in the new expansions?.

The new expansion is very – usually it's a bidding process. We are doing to invite to the brands and the operators that as they scheme that we are looking for the different areas is not for the same domestic or in internationally. And the formula will be that we have now. A portion date of the sales with a minimum brand per month.

And the terms of the contract is between 3 to 5 years, with an option to expand one or two more, depending if it's intensive an investment in CapEx, or it is less intensive. And the most important is how will be the areas that we will be dedicating.

In Guadalajara, the commercial areas will be very, very impressive in terms of a slow pace over the total expansion of the terminal. We are talking more than 3,000 square meters for – dedicated for the food and beverage, retail, and many other activities. And that is the most significant effort to us, to provide more as VIP of the product.

And especially in the food and beverage. That is a higher consumption rate that we have..

Okay, perfect. Thank you, and congratulations..

Thank you, Ramon..

Thank you [Operator Instructions]. Our next question comes from Magdalena Santana from Citi..

Hi guys, thank you for taking my questions. I have three questions. The first one is about the margin expansion. There is a little, small gain of MXN2 million.

I want to know, can you remind me what's behind that small value? And also I want to know what are your thoughts regarding potential CapEx during the next master development plan period?.

Sorry, Magda, I cannot understand well what is exactly what is your question that you are asking..

Okay. Give me a moment.

Is this better now?.

Yes..

Yes, better..

Perfect, perfect.

Can you remind me what was behind that small MXN10 million gain in operating expenses over this quarter?.

Yes. We have some recoveries and in – from the insurance company, in some specific issues that we have. And we some recovery cost due to in some expenses from the other years that we are receiving now. But this is not – it's one-time. It's not constant..

Okay, it's only one time. Perfect.

And I have another question that what are your thoughts regarding the potential CapEx during the next master development plan period that is in 2019, I guess?.

Yes. Well, next planning period will be for 2020 up to for 15 years. The works for that will be prepared in 2018 and 2019. As you probably know, the negotiation of the presentation to the authorities at different levels will be during the first half of the next year. And solid. And the second half of the next year and during the first half of 2019.

Now we are working, indeed. We have very advanced in some of the airports because we realize that they are under important increase in the demand in the airports, that is Guadalajara, Cabos, Vallarta, Tijuana. So we are preparing now as the planning, how will be the needs of expansion in these airports.

Our expectation for this period plan is that will be a very important increase in the level of the CapEx that will be required to attain to address the needs of the airlines and the passengers. We have not currently the total figures, the global figures, of course.

But, however, it is clear that in the case of Tijuana, is moving in the current year very – in the range of the 7 million passengers. However, the planning during the previous period was looking for a very – below this figure. So of course we need to prepare an important expansion in the terminal.

And important expansion, that means that to provide at least extra – adding 5 million to 6 million passenger capacity more that we have now. So in this airport will be an important increase in the CapEx. Also is looking Vallarta and Cabos and Guadalajara, a similar thing has happened.

And we know that at the end of 2019, we will present to the authorities an important increase in the CapEx requirement..

Okay, perfect. And I have my last question, is do you have any concerns about the share raising? Obviously it's in the state of Baja California Sur. I guess that there was some – that they found 14 bodies near a marine preserve in June.

And do you have confidence that the authorities are taking steps to improve public safety there?.

We know that there are some difficulties for the government of the Baja California Sur. However, commonly I think is that the figures that you are looking in the terms of the demand, they are increasing the hotel rooms development that they are doing.

And the purser that we have in the load factor of the planes and the use of the hotel rooms facilities is showing a different idea about how it will be stable, the demand for this destination. I think is the main economic source for this state, for Baja California Sur, is the tourism.

And the authorities will prevent, will protect, and will be do all that they have to do in order to keep the interest of the – as a tourist destination..

Okay. Thank you very much, and congratulations..

Thank you, Magda..

Thank you. Our next question comes from Ricardo Alves with Morgan Stanley..

Hi gentlemen thanks for the time. The first one really is just actually a clarification from the question of – from Rogerio. So, going back to the aeronautical revenues, just to make sure I understood correctly, you said you expect it to remain relatively stable for the next couple of quarters. And we actually do assume that.

But in our numbers, if we assume that it's going to remain stable, the average tariff number, it does mean a significant slowdown in terms of growth, in terms of year-over-year comparison. So just wanted to make sure that that was indeed your message. And then the second question is really just a quick one on the VIP lounges.

We were positively surprised again. So just wanted to hear what you guys had to say about the VIP lounges' growth going forward in the third and the fourth quarter. When we might see a deceleration, or even if we are going to see a deceleration at this point. Thank you..

Thank you, Ricardo, for your question. Yes, regarding the question of Rogerio, I think he referred to the tariff, the maximum tariff and the inflation of the tariffs. We saw an inflation for the tariff in 2016 of around 10% increase. So for this year, we are expecting a 6% of inflation for the tariffs.

So we will have a different comp in the tariff of the last year to this year. That's why we mentioned that we will be stable than the inflation that we have now. And the revenue, the aeronautical revenue, will be affected by this different comparative between the tariff of 2016 and the tariff of 2017 due to the inflation.

But due to the traffic, we will see a better aeronautical revenue..

And about the VIP, clearly they are not deceleration. The question in the VIP is that we have in the process to end the construction of the VIP in Hermosillo; that during the previous year we see more than 25,000 passengers per year. However, we have closed because we're start of the expansion of the terminal that was closed in December.

And we will be reopened with a higher, more quality VIP lounge in December. So 12 months without traffic or users and this service in Tijuana – sorry, in Hermosillo. In the case of Vallarta, we have only a small VIP lounge in the domestic side.

And we are in the process to develop on a big one in two floors, a facility for – in the international area, in the international terminal. This facility will have in the close to 300 square meters, with capacity four times higher than we have now in the small VIP lounge.

So, that will be opened in November, and that will provide an extra growth with these two facilities, an important volume of passengers for the next year. Also there are other expansion under the opening during the current year that will have a very important impact for the next.

And so graphically realist, the figure that we are looking to in this quarter is less that we expect, because we have not, at this time, opened these two facilities..

Understood. That's clear. So it will remain strong. Very helpful. Thank you, everyone..

Thank you, Ricardo..

[Operator Instructions] At this time, there are no further questions. Okay. We have one last question from Mauricio Martinez with GBM..

Hey, good morning everyone and thanks for taking my question and congratulations on the results.

I was wondering if you can just confirm to us, how much would be the expansion in commercial areas in Guadalajara and Tijuana?.

Thank you, Mauricio. The expansion in the commercial side of these two airport is completely related to the time of the works is performing. So currently we are preparing a bid process for Guadalajara. That has been initial for the expansion of the national, the domestic side. It will happen during the next two, three months.

Another two have their openings, full opening of this facility, in the – around October. And it's a very important expansion in terms of the space or the surface, and also in terms of the variety of the business. And that will increase approximately 20% to 30% of the total space that we half before the works.

In the case of Tijuana, the expansion of both docks – the gate area – is also very important in terms of the space distribution, the way that the passengers flow up to the gate. And also, we provide 40%, 50% more capacity than where in the commercial in the previous layout of the airport.

How will be also the increase in terms of the commercial revenue? It's not only the space or the surface; it's also a condition of the contract. The contract and the case of Tijuana was very old, with the participation of the sales very low for the airport.

With the renew – with the new builders, we expect that – only for this way, the increase will be probably more than 40% of the increases that was just some time ago. So three main reasons that will be give us under their positive expectation for the commercial side in these two airports.

The first is more space, better layout, different agreement with the operators with more participation over their sales. And also more traffic, because we are doing these expansions and these two terminals because we expect to receive more and more passengers.

So these three element is to point out how will be the expectation for the next year, and also more specifically for 2019 when all these facilities will be complete..

Great. Very helpful. And also I was wondering if you can share with us if there is any update with conflict in Guadalajara with the ejidatarios. I don't know if there is something new there..

The last news that was issued by the media, and was clear. The position of the ejidatarios was that they are the owner of the land that the airport is using for the operation. That was wrong. That is not true. That is the property – it is federal property was put in for the operation of the airport many years ago. And that was confirmed by the court.

So that is the last one. However, they will continue doing protests and doing declaration and a statement that they are the owner of the land. That is a closed issue for us..

Great. Perfect. Thank you very much for the answer. Very helpful..

Thank you. At this time, there are no more further questions. Mr. Bosque, you may proceed with your closing remarks..

Thank you so much for your attention. Thank you for joining us and have a good day..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..