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Auckland International Airport (NZX:AIA, ASX:AIA) Solid Financials supported by growth potentials

 

AIA[2018-05-06].jpg

My goal is to review and cover the Australian and NZ hospitality and transportation industry. In the first two articles, I have reviewed Qantas (Sell rating) and Air NZ (holding rating), in this article I cover Auckland International Airport (AIA).

Summary

  • AIA has experienced a healthy financial growth in the last period.
  • Diversified revenue streams provide AIA with a safety margin.
  • The only bottleneck is the slow speed of expansion and development.

Airport fundamentals

Airports are not just hubs for flights, they are also mini-cities. Energized by global connection and the consideration of pace by people nowadays, most airports are designed to have hotel complexes, office spaces, restaurants, shopping stores, lodgings inside of the airport, and carparks, traffic controls, and buses outside of the airports. Geographically, airports deeply entwined with those of the nearby cities they serve and sometimes spawn. Spatially, airports broadly linked with those of cities that flights transport around the world. Because of these features, the expansion of airports provides huge growth opportunities for investments.

In terms of ownership structure, airports in most of the countries are owned by the national government or the municipal government (For example, the biggest owner of Auckland International Airport is Auckland Council with 22.15% by April 2018). The advantage of this ownership structure is obliviously the tax reduction, as the projects developed by airports are normally supported by tax-exempt general airport revenue bonds. However, there is a strong recent trend of privatization of airports by issuing government-owned shares to public investors. There are three basic reasons that the government does so. First, like issuing bonds, flotations of equity can also provide finance for the airport development projects. Second, the selling of shares can bring significant returns to the government. And finally, privatization can increase airports’ commercial competitions.

The third reason mentioned above is critical. On the one hand, by providing shopping, lodging and office space, an airport is able to build a brand and reputation that can quickly spread to other cities or countries. On the other hand, according to Airports Council International report, around 67% of the world’s airports operated at a net loss (Source: The 3rd annual ACI-world bank aviation symposium & 9th annual airport economics & finance conference). These losses are primarily concentrated in the 80% of airports handling less than one million passengers a year. Size of passenger flows and geography clearly matter. Moreover, the size of passenger flows is sometimes out of the control of airports, the influencing factor such as political issues between countries and weather conditions can play significant roles.

Financially, airport revenues mainly come from three operations: aviation service for airlines, retailing for passengers and real estates. Among the three categories, the various fees paid by airlines typically account for 40-60% of total airport revenues, including fees for passenger arrivals, landing, ground handling and aircraft parking. Fees paid by passengers typically account for around 40%, including shopping, car parking, and logging and office rents. Real estate revenue account for around 20%, including trade-sales and long-term management contracts. In a trade-sale, an airport’s assets are sold to a trade partner or strategic investor with operational as well as operational capacities. In a long-term management contract, an airport provides a lease to operate airport facilities over a very long period, such as 30-50 years and require payment of a large initial fee followed by annual fees based on the percentage of airport revenues or profits.

The attraction of airports to investors is that competition from other airports and other modes of transportation is usually limited, there are significant barriers to entry. Therefore, airports have potential to benefit from long-term growth of air travel.

Auckland International Airport (AIA)

The airport commenced operations in 1955. Auckland International Airport Limited (AIA) was formed in 1988, when the New Zealand Government corporatized the airport. The Government was AIA’s majority shareholder, the rest being held by the local councils. AIA listed in July 1998 following the sale of the New Zealand Government’s interest of 217 million shares (51.6% of equity), at $1.80 per share. After the listing, and AIA became the fifth airport company in the world to be publicly listed.

Image result for shops in auckland airport Source: NZ retail

After the Government sold its shareholding, the major shareholders were Auckland City Council (25.8 %), Manukau City Council (9.6 %) and North Shore City Council (7.1 %). North Shore City Council sold its shares in 1999 and Auckland City Council sold its share down to 12.8 per cent in 2002. After amalgamation into the Auckland Council, the local authority now owns a 22.15% stake worth $1.72 billion as of April 2018. AIA appears on the New Zealand Stock Exchange (NZX: AIA) and Australian Stock Exchange (ASX: AIA). International shareholders hold around 40 per cent of the shares, domestic approximately 60 per cent. As at 6 May 2018, Auckland Airport is one of the biggest listed companies on the NZX, with a market capitalization of $7.76 Billion NZD.

AIA is the largest and busiest airport in New Zealand. It is one of only two airports in New Zealand (the other being Christchurch) capable of handling Boeing 747 and Airbus A380 aircraft. It is both a domestic and international hub for Air New Zealand, and as the New Zealand hub of Virgin Australia and Jetstar Airways. The airport is the fourth busiest in Australasia after Sydney, Melbourne and Brisbane airports. It has a capacity of about 45 flight movements per hour, using a single runway. In November 2007 work began on a new northern runway, to be built in several stages and to be used mainly by smaller aircraft, freeing up capacity on the main runway. The timing of the recommencement of construction of the second runway will be demand-driven relative to the capacity of the existing runway. The expected completion date for the second runway is now 2025.

http://theregister.co.nz/media/VERSIONS/screen_shot_2016-02-18_at_4.28.50_pm_large.png

Source: NZ retail

Operations

In this section, I incorporate three factors mentioned in Section 1 (aviation service for airlines, retailing for passengers and real estates) to look at the operation of AIA.

Aviation service for airlines

Auckland Airport consists of two terminals; the International Terminal and the Domestic Terminal. The two terminals are located approximately 500m apart and are connected by a free shuttle bus service and a signposted walkway. The airport has 65 gates in total, 21 with Jetbridges and 44 remote stands for aircraft parking. Based on these infrastructures, AIA connects to 26 domestic and 48 international destinations in North and South America, Asia, Oceania, the Middle East and Europe and provides services for the following airlines:

From the above table, it is clear that the most important airlines, apart from Air New Zealand and Jetstar are airline companies operating in the countries around Asia-Pacific. This fact can be further manifested in the following map:

https://upload.wikimedia.org/wikipedia/commons/a/a6/AKL_destinations1.png

Source: Wikipedia

The above map shows that airlines that connect international destinations and New Zealand served from Auckland Airport. Due to the competition between airlines, I believe that the regional hub position of AIA for severing these airlines will be strengthened. The bottleneck, however, is the expansion of AIA. As I mentioned above, the expected completion date for the second runway is now 2025. That is, it is seven years to go. If there is a significant increase in demand in these seven years, AIA may face opportunity costs due to limited capacity.

Retailing for passengers

As I mentioned in the previous section, the size of passenger flows is very crucial for the commercial performance of an airport, the following table lists the top fifteen busiest International routes to and from AIA by 2017:

Rank Airport Passengers Carriers
1 Sydney 1,579,904 Air New Zealand, Jetstar, LATAM, Qantas, Virgin Australia
2 Melbourne 1,229,495 Air New Zealand, Jetstar, Qantas, Virgin Australia
3 Brisbane 965,067 Air New Zealand, China Airlines, Qantas, Virgin Australia
4 Hong Kong 579,701 Air New Zealand, Cathay Pacific, Hong Kong Airlines
5 Gold Coast 500,059 AirAsia X, Air New Zealand, Virgin Australia
6 Los Angeles 430,889 Air New Zealand, American Airlines
7 Nadi 415,950 Air New Zealand, Fiji Airways
8 Singapore 404,506 Air New Zealand, Singapore Airlines
9 Shanghai—Pudong 292,069 Air New Zealand, China Eastern
10 Rarotonga 262,999 Air New Zealand, Jetstar, Virgin Australia
11 Guangzhou 248,809 China Southern
12 San Francisco 229,330 Air New Zealand, United Airlines
13 Tokyo—Narita 218,252 Air New Zealand
14 Apia—Faleolo 200,667 Air New Zealand, Samoa Airways
15 Perth 197,308 Air New Zealand, Qantas

Source: Statistics New Zealand

From this table, it is clear that passengers of AIA mainly from four areas: Australia, the United States, East Asia (Hong Kong, Singapore, China and Japan) and the Pacific islands (Fiji, the Cook Islands, and Samoa). The number of passengers from Europe as well as from China may be underestimated somewhat, as these passengers usually need to make a transfer from Sydney, Singapore or Hong Kong. Nevertheless, the country relations between New Zealand and the four areas mentioned above can be very influential to the operations of AIA (Fortunately, New Zealand has signed free trade agreements with Australia, Hong Kong, Singapore, China, these free trade agreements are very important for sustaining the size of passenger flows. See “Free trade agreements in force”)

Real estate

Due to the high population density of Auckland, the land around AIA is regarded as one of the promising areas around Auckland. This can be seen from the statement of the Auckland Airport Property website:

“A solution to Auckland’s increasingly congested business environment is emerging on the doorstep of New Zealand’s premier transport hub, Auckland Airport. The Landing Business Park, The Quad Office Campus and Cargo Logistics Hub at Auckland Airport combine to make up the country’s newest and most advanced mixed-use business precinct. Both offer world class facilities set amongst a stunningly landscaped environment and rapidly growing commercial and recreational district.”

In fact, the surroundings around AIA had the facilities needed for shopping, resting, entertaining and business. Current tenants include: ibis budget hotel, Szimpla Gastro Bar, Jamaica Blue Cafe, Habitual Fix, Jetts Fitness,Bank of New Zealand, McDonald’s, St Pierre’s Sushi, Dunkin Donuts, Subway, Acorn Cafe, Airport Pharmacy, ASB ATM, ANZ Bank, Countdown Supermarket, Carls Jr, Hollywood Bakery, Icebreaker Outlet, KFC, Postshop Kiwibank, Postie Plus, The Florist, Stationery Warehouse, Sushi Club, The Airport Doctors, TS14 Plus, The Warehouse, The Sharing Shed, Ugly Dumpling, and Unichem Pharmacy, as shown in the following map:

Source: Google map

Meanwhile, AIA also hosts companies such as Coca-Cola and Agility, a leading global logistics provider. Furthermore, AIA also has sufficient land for the future development. As shown in the following map, the location with red coordinate is the place under development.

Source: Google map

In short, because all three areas of AIA can be further expanded, I believe AIA has huge room for the future growth, which is especially beneficial for long-term investors

Financials

Thanks to its business feature, AIA enjoys diverse revenue streams. The diversity in revenue was of benefit during the downturn in international aviation following the events of 11 September 2001, and subsequently the 2002 Bali bombings, the SARS outbreak, and the Iraq War. The airport was able to rely on steady income from the non-aeronautical side of the business, which softened the blow of international events.

In 2017, AIA has experienced a strong growth. As shown in the following figures, the growth is mainly driven by its main business: Aeronautical revenues. In 2017, AIA accommodated seven new airlines and opened eight new routes. With these new airlines and routes, AIA has enjoyed an increased breadth of travel opportunities with an increase to 30 international airlines and direct connections to 46 international destinations, as well as 19 destinations around New Zealand.

Source: AIA 2017 results presentation

As a result, the overall 2017 financial performance of AIA is fairly good, as follows,

Source: AIA 2017 results presentation

AIA also maintained a reasonable debt usage as follows,

Source: AIA 2017 results presentation

This facilitates relatively healthy credit ratings for AIA and its businesses by leading rating agencies:

Source: AIA Websites

The strong growth of AIA continues to the half-year of the financial year, as shown in the report released on 16 February 2018:

Source: AIA 2018 interim results presentation

These results are driven by new routes and airlines opened between New Zealand and China, Japan, the Philippine and nine Pacific islands.

Source: AIA 2018 interim results presentation

With expanding international departures, the further growth of AIA can be expected:

Source: AIA 2018 interim results presentation

Conclusion

To summarize, AIA has a strong financial performance and huge growth potential, which will reward investors with dividend returns and price appreciation. The only bottleneck, is the speed of the expansion. The delay of the second runway may cause a large opportunity cost for AIA that may potentially accommodate more airlines. However, with strategic consideration, this may be understandable if this short-term slowdown can bring an even longer period of benefits in the future.

Air NZ (NZX: AIR, ASX:AIZ) Golden Opportunities with Aggressive Moves

Qantas (ASX: QAN) A fundamental analysis supports a SELL – by John Fan Zhang



Categories: Australian Stocks, Featured, New Zealand Stocks

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2 replies

  1. Great article. It would be good to know what it is your target price? I am tempted to jump in

  2. The company is very interesting and has a strong moat, but looks pricey. Anyone has any idea on the correct valuation?

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