Auckland Airport profit risk says Forsyth Barr as passenger growth dips

Auckland Airport is undergoing a major rebuild. Photo / Jason Oxenham.

The cloudy outlook for aviation is laid bare in an analyst's report forecasting recently relentless growth at Auckland Airport will slow this year and next year will be weaker still, affecting earnings.

Forsyth Barr analyst Andy Bowley says the airport would experience ''low single digit'' passenger growth in the 2020 financial year, down from 3 per cent this year and an average of 7 per cent during the past five years.

In a wide ranging research note he also outlines how the more challenging aviation sector is hitting airlines.

''While fuel prices are supportive to a rebound in growth the softening global economy is weighing on passenger demand,'' he says.

Based on all airline schedule data and guidance from its biggest single customer, Air New Zealand, the airport would experience zero growth or just 1 per cent international capacity growth in the 2020 year.

While Air New Zealand had committed to increase international capacity, other airlines, especially Asian based are cutting overall capacity, Bowley says.

In the year to May the airport handled 10.49 million international passengers, excluding transit passengers of just over 1 million.

Forsyth Barr has reiterated its underperform rating on the company.

''AIA has enjoyed a share price surge from bond rate compression in recent months, however we believe the uplift has been excessive, particularly in light of earnings momentum turning negative. ''

The airport's share price hit a record high of $9.85 late last month and closed Tuesday at $9.49.

Net profit is forecast to rise from $263 million in the past financial year to $274m in the current year before dipping to $268m in the 2020 financial year.

The 2020 year forecast had been cut by 4 per cent because of a slower passenger growth outlook although this could be partly offset by lower interest and depreciation costs as it was expected the company would under-spend relative to previous guidance and projections on its capital expenditure programme.

Forsyth Barr's forecasts are in line with the airport's long term growth predicitions. Image / Supplied

Bowley raises the possibility of slowing passenger growth affecting the timing of the Northern Runway development (scheduled for completion within the next decade) and this in turn would affect collecting of a new charge that would rake in about $25m in the 2021 financial year.

Tail winds ahead

While there is some near-term weakness, the longer outlook is better with a modest pick up in 2021, he says.

Long term passenger growth of 3.5 per cent a year was forecast, broadly in line with the company's 30-year master plan forecasts which imply growth of 3.8 per cent.

Long term growth would be driven by continued improvements to aircraft technology providing cheaper and more convenient travel to consumers, travellers, especially those in Asia getting wealthier and regulatory reform paving the way for more open skies.

Air New Zealand is Auckland Airport's biggest customer. Photo / Greg Bowker

There is also some good news on fuel prices. Rising fuel prices had acted as a headwind for much of the past 18 months, coinciding with a slowdown in passenger growth, Bowley says.

''The impact of more stable fuel prices will be positive for airlines over the next 12 months.''

Not only were fuel prices reasonably stable, the crack spread (the price difference between jet fuel and crude oil) had been narrowing.

''Given the lagged impact on fuel prices on capacity and therefore passenger numbers, the outlook for the next six to nine months would appear positive, assuming the relationship holds.''

What the airlines are doing

Air New Zealand will lift capacity measured by available seat kilometres (ASK) in the coming financial year by about 6 per cent driven by new or expanded long haul routes including Seoul, Taipei and Chicago and increasing frequency within its short haul international network; Australia and the Pacific Islands. Air New Zealand accounts for about 45 per cent of international passengers at Auckland Airport.

Bowley says there is risk to the airline's capacity growth with potential to cut existing underperforming routes. Domestic seat capacity will fall by 2 per cent. in the coming year

Chinese airlines; Air China, China Southern, China Eastern, Hainan Airlines and Sichuan Airlines now account for 5.6 per cent of capacity at Auckland Airport. This is well down from 9.5 per cent in 2018 although the exit of Hong Kong Airlines contributed to that decline. Near-term the grounding of the Boeing 737Max after two crashes may hit Chinese capacity, Bowley says. ''These carriers have since re-allocated aircraft from international routes including New Zealand to cover for domestic services.''
Chinese local and regional governments were removing subsidies on routes where yields were low, impacting the viability of long haul routes and this could have implications for Hainan and Sichuan's operations.

China Southern was the first airline to run regular Dreamliner services to Auckland. Photo / Greg Bowker

Qantas and American Airlines

have had a joint venture signed off covering routes between the United States and Australia. Bowley said he expected new schedule announcements over the next two to three months and Auckland was likely to benefit from a year round daily service, up from seasonal at present, and this would add 115,000 seats between this country and Los Angeles.

Middle Eastern carriers

Emirates and Qatar at their peak in 2017 accounted for 11 per cent of seat capacity. With Emirates' withdrawal from transtasman services, this had fallen to 6 per cent now. Air New Zealand this month announced it would double capacity to Bali next winter, adding 30,000 seats, and this would add pressure to Emirates' Bali services. ''We see this route as a key exit risk for AIA over the next 12 months,'' says Bowley