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Morningstar | March-Ending Traffic at Sydney and Auckland Airports Shows Considerable Weakness; Shares Overvalued

Publicly traded Australasian airports saw continued traffic challenges in the first calendar quarter of 2019, highlighted by declines in movements to and from China and weak domestic Australian performance. We continue to think both wide-moat Auckland Airport and narrow-moat Sydney Airport enjoy long-term competitive advantages, but see no margin of safety to account for near-term risk at current prices. We maintain our AUD 7.30 fair value estimate for Sydney and NZD 7.40 (AUD 7.00) estimate for Auckland.

Both Sydney and Auckland felt the impact from a shift in the Easter and Chinese New Year timing through the quarter-ending March 2019 versus 2018, making monthly comparisons difficult, but quarterly traffic in the period reflected weakness in aggregate. At Auckland, international traffic grew at 1.1% in its third fiscal quarter, a sharp drop from 3.5% in the first half. Fiscal year to date, international traffic has risen 2.6%, trailing our prior full-year forecast for 3.9% growth. While much of this weakness stems from falling transit traffic, which garner a lower fee for the airport, international departures and arrivals have increased only 3.3%. China remains a weak point, down 6.6% on the year after falling 13.4% in the quarter. We now see international traffic growing at 2.3% in fiscal 2019. Nonetheless, we still expect this growth to average about 4% longer-term as New Zealand remains a strong tourism choice for China’s rising middle class.

Sydney Airport saw similar weakness in its traffic movements. International passenger traffic rose 0.7% in the March quarter, trailing our 2019 forecast for 3.6% and 2018’s 4.7% rate. Like Auckland, we expect Sydney to benefit from China’s economic development, leading to 4% annual international traffic increases in the long run, but we see considerable short-term risk.

Domestic traffic remains a positive at Auckland, rising 3.2% in the quarter and 3.7% fiscal year-to-date. This is ahead of our full-year 3% projection given new airline seat capacity additions to the airport. We’ve adjusted our full-year forecast to 3.5% from 3.0% to reflect this performance, but note that, like transit movements, domestic passengers offer a sharply lower revenue opportunity versus international traffic. As such, the impact to our valuation from this change is minimal.

Meanwhile, Sydney’s domestic traffic was down 2% in the quarter versus the prior comparable period, owing to less-frequent flights as Australian carriers have remained disciplined on capacity in light of the recent rebound in fuel prices. We forecast a low but solid 1.5% increase in domestic traffic for the year, and while it’s still too early to determine whether the first quarter’s trend is likely to continue through the remainder of 2019, we see downside risk to our outlook if capacity remains muted or the Australian economic situation slows.