Gaynor: Flying high with defensive shares

By BRIAN GAYNOR

Airports are hot. While airline companies are struggling, airports are in fashion because they have strong defensive qualities and generally do well, both from an investment and operations point of view, when economic growth slows.

In New Zealand, Auckland International Airport (AIA) and Infratil, which owns 66 per cent of Wellington International Airport and 67 per cent of Glasgow's Prestwick Airport, have recorded sharemarket returns of 24.2 and 49.1 per cent respectively since the beginning of the year. AIA announced another excellent result on Thursday.

In Australia, AMP Henderson is trying to capitalise on the popularity of airports by raising $A500 million through a new airport fund and Macquarie Bank is attempting to raise $A1 billion ($1.2 billion) through a private equity airport investment fund.

AMP Henderson's initial investment will be a 39 per cent interest in Melbourne Airport and 90 per cent of Launceston Airport while Macquarie's first purchase will be 50 per cent of Bristol International Airport.

Outside Australasia the remaining stand-alone listed airport companies, BAA (118 million passengers a year through Heathrow, Gatwick and others), Malaysia Airports (29 million through Kuala Lumpur and others), Zurich (23 million), Beijing (22 million), Copenhagen (19 million), Vienna (11 million), TBI (Belfast, Cardiff, Luton and others, 11 million), Cancun, Mexico (10 million) and Florence, Italy (1 million) have generally outperformed their respective sharemarkets this year.

Although Auckland International Airport, with 8.4 million passengers, is one of the smallest listed airport companies, it ranks at the top or near the top in terms of operating margins, earnings per share growth and market risk. This week's excellent profit announcement clearly demonstrates that AIA remains one of the world's best performing airports.

Auckland Airport was listed on the Stock Exchange on July 28, 1998 following the sale of 216.8 million shares (51.6 per cent) by the Government at $1.80 per share.

The remaining shares were owned by the Auckland City Council (25.7 per cent), Manukau City Council (9.6 per cent), North Shore City Council (7.2 per cent), Waitakere City Council (3.7 per cent), Franklin District Council (1.2 per cent) and Infratil (1 per cent).

North Shore, Waitakere, Franklin and Infratil have sold out, with North Shore City selling its stake to Singapore Changi Airport at $2.90 a share.

The main objective of AIA is to diversify its earnings so it becomes less dependent on politically sensitive landing charges. This strategy has been highly successful, particularly as far as retailing is concerned.

AIA's retail income is based on the greater of a minimum base rental or a percentage of its retailers' gross turnover. This revenue is highly dependent on retail outlets in the international terminal, particularly the two big duty-free outlets.

The international terminal is undergoing a $20 million redevelopment that will add 11 shops and raise the visitor retail floor space from 2400 to 3500 square metres. The development, which will be finished in November, will not be as lucrative as the duty-free area because it is not specifically aimed at departing passengers.

But leases on most of the existing retail space terminate at the end of next year and the airport will be in a strong position to renegotiate these on more favourable terms.

Revenue from the development charge (the $22 departure fee paid by international passengers) has risen from $12.6 million to $30.9 million since 1991 because of two fee increases and a substantial increase in passenger numbers. The airport retains a substantial proportion of the departure fee, whereas in many other countries the fees go to the Governments.

Airfield income is derived from landing fees based on the maximum certified takeoff weights of planes landing at the airport. AIA landing charges increased by 8.5 per cent on September 1 last year and will rise by a further 5 per cent from today and 5 per cent a year later. All airlines, with the exception of Air New Zealand, have paid the 8.5 per cent increase from September 1 last year. The two parties are going to court to resolve this dispute.

AIA's landing fee income is under threat because the Commerce Commission has indicated it may introduce price controls on the company's airfield activities. The preliminary decision is the subject of a public hearing in Wellington over the next two weeks.

The issue is extremely complex and AIA claims that the commission's preliminary findings were based on incorrect financial data and a number of calculation errors.

The initial sharemarket response to the commission's report was negative but investors have shrugged off their concerns after senior executives and analysts claimed the threat of price controls was unwarranted.

Shareholders had plenty to cheer about when AIA unveiled its June year result on Thursday. Net profit for the year was $59.1 million, a 15.7 per cent increase on the previous year. All areas, with the exception of car parking, reported a strong increase in revenue and managing director John Goulter painted an optimistic picture for the 2002 year.

The most impressive feature of the result was the ebitd (earnings before interest, tax and depreciation) margin of 73.4 per cent. This places AIA at the top of the international airport table as far as operating performance is concerned and the company still has plenty of scope for improvement if it can continue to grow its non-airfield activities.

Infratil's two airport holdings, Wellington International Airport and Glasgow Prestwick, represented 23.7 and 10 per cent of group assets respectively as at March 31. Infratil's other major holdings are TrustPower (26.4 per cent shareholding), Port of Tauranga (24.6 per cent) and Tranz Rail (6.7 per cent).

Wellington Airport is a domestic-oriented operation with only 12.8 per cent of its passengers flying international. Although it has less growth potential it has performed well since Infratil acquired control in March 1999. According to figures published by Infratil, Wellington Airport produced a net profit to shareholders of $8.2 million in the March 2001 year on revenues of $35.8 million. Its ebitd margin was an impressive 65.9 per cent but less than AIA's 73.4 per cent.



Because of new services introduced by Ryanair, Glasgow Prestwick has experienced phenomenal growth this year with monthly passenger figures running between 20 and 50 per cent ahead of the same months last year.

The next big milestone for the Australasian airport sector will be the trade sale of 100 per cent of Sydney Airport by the Australian Government.

Tenders close on September 17 and a sale price in excess of $A4 billion is anticipated.

Sydney Airport handled nearly 25 million passengers in the past year. Thirty-five per cent were international, but its financial performance is less impressive than that of Auckland.

A sale price in the region of $A4 billion may convince a number of analysts to upgrade their AIA valuations.

AIA and Infratil offer excellent long-term prospects and their share prices have risen by 24.2 and 50 per cent respectively since the beginning of the year. Investors have recognised that their airport activities are a very good defensive investment but both companies are probably fully priced short-term. Disclosure of interests: none

* bgaynor@xtra.co.nz