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Morningstar | Auckland and Sydney Airports’ Slowing Passenger Traffic Not a Surprise; Shares Look Fairly Valued

Wide-moat Auckland Airport's fiscal 2018 passenger movements met our expectations, while narrow-moat Sydney Airport's traffic performance through the first six months of the year tracks our full calendar year forecast. As a reminder, Auckland's year-end is June, Sydney's is December. We maintain our NZD 7.20 (AUD 6.80) and AUD 7.20 fair value estimates for Auckland Airport and Sydney Airport, respectively. Shares in Auckland look more attractive, trading at a 7% discount to our valuation versus a slim 3% for Sydney.

The airports' results track our forecast for slowing, though still robust, growth, as airline capacity is added at a more modest rate. For Auckland, international passengers grew 4.7% in the fiscal year, trailing our 6% forecast and decelerating meaningfully from 11% in fiscal 2017. Offsetting this, domestic travel growth remained solid, at 7.7%, ahead of our 6% projection, but again down from fiscal 2017's 8.8%. Restated transit passenger figures following a data update from Immigration New Zealand added about 2% to consolidated figures as well, which will benefit the firm going forward given the higher base for passenger landing fees. We forecast total passenger growth of about 3.5% annually over the next five years, led by 4% international gains.

At Sydney, both domestic and international passenger traffic growth slowed in the June quarter. Domestic movements ticked up 1.4% versus the prior comparable period, compared with 2.9% in the March quarter, while overseas passengers grew 4%, slowing from 6.2%. Year-to-date, domestic movements have increased 2.1%, tracking our full-year forecast, while international traffic has risen 5.2%, ahead of our 4% projection, although we expect further near-term slowing. Similar to Auckland Airport, we expect the rising middle class in China and new airline routes will drive above-population gains. We see domestic passenger growth of about 2%, and overseas traffic gains of nearly 4% annually through calendar 2023.

Rising international growth at both airports is a core driver of further gains in high-margin, nonregulated retail revenue. In particular, travellers from China tend to spend more than other foreign tourists on duty-free and other retail options, and both Auckland and Sydney Airports enjoy continued solid gains in these passengers. For Auckland, passengers from China leapt 11% in the fiscal year, accelerating in the last six months, and remain a key element of our forecast for retail spending per international passenger to climb at a 7% annual clip over the next five years.

Meanwhile, Sydney's Chinese passenger numbers have ticked up a slimmer 5.1% calendar year-to-date, but we're encouraged gains improved to 11% versus the pcp in June. We expect further acceleration for Sydney, with movements to and from China growing at a high-single-digit clip over the next five years. The recently launched Virgin Australia route to Hong Kong from Sydney is evidence of the continued growth potential, as the new leg adds an incremental 200,000 seats of capacity--or 400,000 movements to and from Sydney--compared with our estimate of nearly 2 million passenger movements between Sydney and China, including Hong Kong, in calendar 2017. We forecast retail spending per international passenger increases 3% per year, trailing Auckland due to the New Zealand airport's ongoing expansion of its international terminal retail floor space.