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Morningstar | September-Quarter Traffic at Sydney and Auckland Airport Tracks Our Expectations

Passenger traffic during the September quarter at narrow-moat Sydney Airport and wide-moat Auckland Airport tracked our full-year expectations, with solid, but slowing international movements. As a reminder, Auckland's year-end is June, Sydney's is December. Our fair value estimates remain at AUD 7.30 per security for Sydney and NZD 7.40 for Auckland’s New Zealand shares, but increases to AUD 6.90 per share for Auckland’s Australian listing given a strengthening New Zealand dollar. Sydney’s security trades at about a 12% discount to our valuation, compared with a slimmer 8% for Auckland.

International traffic movements remain the airports’ key profit driver, as these passengers garner a higher fee from airlines and typically spend more at high-margin retail stores throughout the airport. While Sydney’s year-to-date growth of 4.8% is ahead of our 4% full-year assumption, traffic gains slowed to 4% in the quarter from 5.2% in the first half of the year. Similarly, international growth at Auckland Airport slowed to 4.2% in the quarter, versus 4.7% in fiscal 2018, in line with our 4% forecast for the year. We have long expected lower international gains as airline capacity is added at a more-modest rate, but expect Sydney and Auckland can continue to drive 4% growth annually for the next several years, supporting further retail spending gains and profit margin expansion.

However, we caution that inbound travellers from China into Sydney have slowed even more sharply, growing only 0.2% in the month of September, and just 4.2% year to date. This rate has fallen from 10% in June 2018, and from 17% in calendar 2017. Our international passenger growth forecasts for Sydney include an acceleration of passenger growth to and from China to high-single digits, but if this fails to materialise, the airport would not only face lower passenger revenue, but also a disproportionate impact to retail spending given Chinese travellers’ higher propensity to buy goods at the airport.

Auckland Airport’s Chinese traveller performance has similarly slowed, to about 4% in the quarter versus nearly 11% in the prior fiscal year. Nonetheless, we’re encouraged growth improved to 5.7% in the month of September versus a decline of 1.8% in July. Similar to our view for Sydney, we expect continued steady growth performance on routes between China and Auckland as underlying demand for travel increases alongside a burgeoning Chinese middle class, and new, larger, and more fuel-efficient aircraft keep these long-haul routes economical in the face of recently rising oil prices.

Domestic traffic at Auckland Airport grew at more than 5% in the quarter, tracking ahead of our full-year 3% forecast. Conversely, Sydney’s intra-Australia passenger movements have grown at 1.8% year-to-date versus the previous corresponding period, a bit behind our 2% full-year outlook. However, we note domestic passengers are less impactful to the airports’ financial performance versus international traffic, given a much lower per-passenger landing fee and more-limited retail spending. We expect the airports will see domestic passenger growth of about 2% to 3% per year over the medium term.

Outside of the latest traffic figures, Sydney Airport took steps to reduce its balance sheet risk during the quarter. The company issued U.S. bonds totalling about AUD 400 million, ranging in maturity from 15 years to 30 years, to pay off all drawn shorter-term bank debt. While this action doesn’t change the total amount of debt on the airport’s balance sheet, it pushes out the next maturity to calendar 2020 and the average maturity to early 2025. Although Sydney’s balance sheet remains more-highly geared than Auckland Airport’s--at about 6.7 net debt/adjusted EBITDA as at June 30, 2018 compared with 3.9 times for Auckland--we believe the firm can manage its high amount of leverage given relatively predictable traffic performance and strong profitability.