AIA flies through financial crisis

As the global financial crisis's storm clouds gathered and darkened, causing planes to be grounded and flights reduced around the world, changes were afoot at Auckland International Airport.

Simon Moutter was appointed in mid-2008 as its third chief executive since the company was listed in 1998.

Fonterra chairman Sir Henry van der Heyden, Craigs Investment Partners executive director James Miller and Infratil chief executive Marko Bogoievski were added to the board.

The company which controls the most important gateway to New Zealand was in flux.

It had just spent half a billion dollars on new infrastructure and more was on its books - work had begun on the new northern runway and plans were being drawn up for a new domestic terminal.

Questions were asked, perhaps because of the financial crisis or the personnel change at the top, or both, whether it was the right time to spend more money.

Wasn't it time to tighten the belt, do more with what it already had and diversify? Whatever the reason, the focus changed.

What followed was commercial deals with airlines to grow passenger numbers, investments in North Queensland and Queenstown airports, as well as slashing planned capital spending and internal tweaks to get the best out of the existing runway and ageing domestic terminal.

The benefits are now clear. Underlying profit after tax rose from $105 million in 2010 to $121m last year, and the share price has grown from $1.83 in May 2010 (just above the 1998 float price of $1.80) to $2.57 on Friday.

In 2011, retail income was a standout, leaping to $111.2m from $95.8m the previous year. Income from airfield activities and passenger services charges also jumped by millions of dollars over the same period.

However, the challenges are far from over. Mr Moutter is departing the job which earned him $936,000 last year, and decisions are yet to be made on a new domestic terminal and when to resume work on the northern runway.

All of that is set against the background of financial stormclouds again forming over Europe.

GFC? No worries!

Former AIA chairman Tony Frankham, who left in September 2010, paints a bullish picture of discussions in 2008 and 2009. He takes some time to ponder if there was nervousness around the board table.

Eventually, he says a decline in passenger numbers, while troubling, is cyclical and fundamentally the airport needs to keep operating.

"It wasn't something that was of great concern, [it was not like] the very being of the airport operation was going to be threatened in any way."

He seems to have greater pause when talking about the then Manukau City and Auckland City councils "flexing their muscles" by appointing board members, which led to "a collection of strong individuals with no immediate cohesion" around the table.

AIA chief financial officer Simon Robertson says profitability in 2009 was flat and that had to change. The board and company, with newly-arrived Mr Moutter at the helm, revisited their business strategy.

"One of the key aspects back in 2009 was trying to change the focus of the business from being an infrastructure builder to more of a sales-led organisation trying to drive economic growth."

In that vein, AIA sales people hopped on planes to convince airlines to fly into Auckland.

"The reality of our business at the bottom of the South Pacific is that we're not always the first thought for airlines globally about where they might put planes on different routes," Mr Robertson says.

"Putting that business proposition in front of them, that we believe they can make good business case for operating to New Zealand and to Auckland was a key aspect to try and lift the aeronautical activity at Auckland for both our company's benefit but also very closely aligned with New Zealand's benefit."

Several new services have launched, including those from China Airlines and China Southern Airlines and Jetstar flying into Singapore.

Other recent wins include a memorandum of understanding signed with Garuda Indonesia, Emirates upgrading its daily service from Melbourne from B777-300 to A 380 from October and Air New Zealand's seasonal services to Bali.

Qantas has recently pulled its Auckland-Los Angeles flights, but United Airlines have signalled interest in an Auckland-Houston service.

International passenger movements to Auckland increased 6.6% in the first half of the 2012 financial year, particularly out of Singapore, Guangzhou in China and Australia.

According to Forsyth Barr, AIA was the eighth-best performing stock on the NZX-50 in 2011.

Forsyth Barr research director Jeremy Simpson says investors see AIA as reasonably low-risk and a rare chance to invest in tourism.

It has proved reasonably resilient despite the 2011 terrorism attacks on New York and the global financial crisis, he says, helped by diversifying into commercial property development and improving retail offerings.

An aviation industry expert, who didn't wish to be named, is also complimentary of the airport's commercial focus.

"This approach has been largely successful in a time when long-haul operators worldwide are suffering from the combined effects of weak demand, yield pressure and rising input costs."

Same direction, different focus

Mr Robertson credits the new focus to his chief executive, who took a look at the business soon after he arrived and asked questions without wanting to know the final answers.

Former chairman Mr Frankham is adamant Mr Moutter has not turned the airport around - the direction hasn't changed. The change of focus was enabled by the large infrastructural spend, he says, and whoever the new CEO was the same thing would have happened.

Mr Frankham says the outgoing chief executive's strength was to recognise the role of people at the airport - from travellers, other users, to airlines and staff.

"His skills are to understand the levers that make the business work - the issues that are important to concentrate on," he says.

"He achieves things through people and he expects a lot of his direct reports and the people that report to them, and if they don't perform they soon find out that they've let him down - but he gives them great scope to achieve."

Mr Frankham says one of Mr Moutter's favourite phrases is "people not aircraft". Basically, getting bums on seats (the higher-spending bums, if possible) and the money will flow.

But it goes deeper and wider than that. Travel wholesalers told potential airline partners where they wanted to take their passengers, beyond Auckland.

Mr Moutter also had a strong vision about the role the airport plays in tourism and the wider economy.

The flow of people through the terminal was important, too. If people moved more quickly, that increases the capacity of the terminal. Smartgates popped up as an easier way to clear passport control, as well as self check-in terminals for departures.

More broadly, a small commercial property empire has arisen around the airport as it better utilised its land.

In January 2010, AIA bought a 24.55% stake in North Queensland Airports, which runs Cairns and Mackay airports. Six months later it spent $27.7m buying a 25% stake in Queensland Airport. 

This year AIA has set its profit guidance in the upper $130 millions.

AIA's latest disclosure information, posted on the NZX on Thursday, says with growth in passenger and freight transport, Auckland is "now confronting capacity constraints, particularly in the domestic terminal".

An announcement from AIA on the timing of a new terminal was expected this month but nothing has yet been forthcoming. 

Mr Robertson told NBR ONLINE it still hasn't settled on the best solution for a new domestic terminal, which will have to last 40 years.

"We're working on what might be some further enhancements we can do in the current terminal to give it a bit more life, but ultimately we want to make the right decision."

Asked if physical work might start in the next financial year, he says: "That all depends on when we get to the decision, but there could be some physical work starting."

Construction work on a northern runway began in 2007 and was halted in 2009. That pause was extended in July 2010.

Mr Robertson says Auckland's main runway does approach capacity at the morning peak, but further innovations to ease congestion are possible.

"I think it'll be a few more years yet before we're starting to dig soil again up to the north of the airport."

Earnings from North Queensland Airport has been strong than expected and Mr Robertson says the company would happily invest further if the opportunity arose, "but there's nothing there currently".

Direct return on investment 'pretty reasonable'

One of the airport's biggest shareholders, Auckland Council, seems happy. It owns more than 22% of AIA shares, ultimately through Auckland Council Investments Ltd.

Councillor Richard Northey, chair of the accountability and performance committee, says the airport's development has boosted jobs in hospitality, construction and retailing.

"There's the direct return on investment, which has been pretty reasonable. And then there's the fact that we own a significant share of the airport because of its significance to overall economic development to Auckland and they've been playing a more proactive role with their land in recent years and we're very pleased about that."

Of Mr Moutter's departure, he says: "We certainly were very pleased with his energy and creativity, and hope the airport can maintain that. I wouldn't say it's a worry but there was a particularly good period under his stewardship and we hope that direction continues."

Mr Robertson - whose only no-comment in the interview was over if he was applying for Mr Moutter's job - says Mr Moutter will be missed but given the company's strategic success over last few years, the core strategic themes don't need to change substantially.

The leadership team has been settled and is able to carry on.

"We all know what we have to do to achieve, the board are very clear on what we need to achieve, and that's exactly what we're striving to do as a team." 

It hasn't all been plain sailing at AIA. Mr Frankham says the market didn't understand Mr Moutter when he first started and it was "curious and suspicious".

"He recognised that and changed the approach. He's a man who understands a business, gets to the essence of it and works that."

The board of "individuals" has now righted itself. Mr Frankham describes the Joan Withers-led board as "an extremely strong, cohesive, unified group of directors, as good as any I'm aware of".

While he doesn't claim it's all his doing, it's still an achievement he's proud of.

He says the airport's biggest challenge is one of its age-old problems - matching infrastructure spending with demand.

"Unless you get that right, you're overspending. If you get that wrong you're underspending and can't meet the demand.

"I think that's a very big, important balancing act for those that run the airport is to ensure that the expenditure enables the company to meet the demands of the airlines and the travellers at the time it arises and not fall short of that.

"And that's one of the things Auckland Airport has been able to do over its total existence."