Debt to fund Auckland Airport's $2.5b expansion

Auckland International Airport's 30 year expansion plan includes a second runway.

Auckland International Airport, which expects to triple passenger numbers over the next 30 years, plans to use debt to fund a $2.5 billion, 30-year expansion that includes a second runway, says chief executive Adrian Littlewood.

Work on the long slated second runway began in 2007 but was halted when the global financial crisis sapped demand for air travel. The company now expects to complete the work by 2025, according to a strategy paper. The first stage of the plan is a merged domestic and international terminal with more car parking, to be built by 2022 at an estimated cost of $150 million.

"It will have no impact on dividends and no call on equity, this will be purely debt funded," Littlewood told BusinessDesk. "Based on our very high-level estimates, and these are very high level, it's about $2.5 billion in today's dollars."

"But the reality is that number won't be known until we go through every project as it unfolds and is delivered and priced," he said.

Last October, the airport company announced plans to return of $454 million of capital to shareholders, saying it wanted a more "efficient" mix of debt and equity and would still have sufficient flexibility on its balance sheet to fund expansion plans.

Debt to debt plus equity was 31.3 per cent as at Dec. 31, down from 32.4 per cent a year earlier. In February, the company arranged $440 million of bank bridge facilities to fund the capital return.

Watch a fly through of what Auckland International Airport might look like in 30 years here:

The second runway already has approval but the airport said it will probably need to lengthen it by 2044 to cope with bigger planes and increased demand, pushing the tarmac across the existing motorway that links the airport to the city.

The company has asked Auckland City to include the expansion in its long-term unitary plan. It sees total annual passengers rising to 44 million by 2044 and expects to almost double the number of flights by then.

Auckland Airport shares dropped 0.4 per cent to $3.855 on the NZX today, the first opportunity investors had to react to the proposal that was released late on Friday night. The stock has gained 31 per cent in the past year, outperforming the NZX 50 Index's 17 per cent rise. It had an average recommendation of 'hold' according to 10 analysts surveyed by Reuters, with a median price target of $3.57.

"The most interesting question is whether the passenger uplift drives will be sufficient, or whether there will be a significant increase in the fee that's paid by passengers to pay for this plan," said Matthew Goodson, who helps manage $650 million in equities at Salt Fund Management. "There is probably incentive to push the button a little early, given they can pass the cost on to all the airlines and to the customers using the airports."

The airport is partially regulated by the Commerce Commission, and is required to disclose price setting methodology, financial statements and business plans. The disclosure regime is to limit excessive profits at companies that have monopoly characteristics and to promote long-term consumer benefits.

In a review the commission found Auckland Airport was within its target profit range.