Auckland Airport is buying a stake in two Queensland airports, in a move signalled in early 2009 to diversify from its core business.The $166 million, 24.55% stake in North Queensland Airports (NQA), which operates Cairns and Mackay airports, is part of a
Auckland Airport is buying a stake in two Queensland airports, in a move signalled in early 2009 to diversify from its core business.
The $166 million, 24.55% stake in North Queensland Airports (NQA), which operates Cairns and Mackay airports, is part of a strategy to purse “carefully selected step outs” according to Auckland Airport’s chief executive Simon Moutter.
The listed company, (NZX: AIA) hopes to drive growth in international passenger volumes through key Asian markets, using Cairns as a stepping stone.
It estimates the potential benefit for about 100,000 additional passengers a year through Auckland Airport, delivering an incremental ebitda of about $2 million to $2.3 million a year and more than $100 million a year to the New Zealand economy.
Australia’s forecasted growth rate for the Asian tourism market was 7% over the next eight years, relative to New Zealand’s 3.8% forecast and New Zealand needed to do more to significantly raise its performance to the same level as Australia’s, Mr Moutter said.
“New Zealand has underperformed against Australia in gaining a share of Asian tourism, so we have decided to take a position in the Australian market in an effort to get better connected and lift our market share.”
He said Auckland Airport had been raising the issue for some time and indicated an interest and willingness to support a more strategic focus on the Asian markets in improving tourism growth.
He said there were 16 international airlines stopping on Australia’s eastern seaboard and not flying on to New Zealand. Auckland Airport could play its part by focusing on air services development and “co-tail” expected growth from the Asian market.
It was important to get talking to the airlines and give them a powerful rationale to include New Zealand in their destination imprint, he said.
“At the end of the day financial incentives are relatively irrelevant. The real issue is, will an airline see sufficient market potential, will it back itself to build it’s brand and position and can they get the support they need from governments and agencies.”
Mr Moutter said direct Asian connections with Auckland was the primary focus, but other strategically located airports were important stepping stones.
Cairns Airport, Australia’s seventh busiest airport with about 3.7 million passengers in the year to June 2009, fitted the bill in terms of location, scale, focus on Asian tourism and market diversification opportunities.
The closest international airport to Asia on Australia’s eastern coast, Cairns Airport is promoted as the gateway to Tropical North Queensland.
Although underperforming after a decline in key markets including Japan, Cairns Airport was positioned for growth, Mr Moutter said.
“…We believe it is poised for a strong rebound, driven by improving tourism demand, recently announced new air services, new Federal Government initiatives to encourage foreign airlines to fly to and beyond regional international airports such as Cairns, and more than $A45 million of committed government tourism support.”
Mackay Airport, with almost 1 million passengers in the year to June 2009, is important domestically as the main airport servicing the Bowen Basin.
Mr Moutter said the investment represented only 5% of the Airport’s total assets and Auckland remained its core business.
“This is certainly not a bet-your-business deal for us.”
It was not considering any other “step out” opportunities at this time, he said.
Auckland Airport expects a “small dilutive effect” on its earnings per share, due to NQA’s significant investment in infrastructure.
Mr Moutter declined to say how much this effect would be, but he said improvement depended on getting international passenger levels back up to the millions.
Cairns Airport saw a drop in international passengers from more than 1 million in 2007 to about 500,000 in the 2010 financial year, representing a decline in Japanese visitors.
But Mr Moutter was confident about its cash flow position and low future capex requirements.
The deal:
• The investment represents ¼ share in NQA (which was privatised a year ago)
• Funding strategy includes a mixture of equity and debt consistent with AIA’s capital structure
• Expected equity internal rate of return in the mid teens percentages
• Other shareholders include JP Morgan Infrastructure Investment Fund, the Infrastructure Fund (managed by Australia’s largest airports fund manager, Hastings Fund Management) and Perron Investments
• As the only shareholder that is an airport operator, AIA hopes to contribute expertise in route development, retail and property development
• Cairns Airport represents ¾ of the purchase price
• AIA says the purchase will not affect the company’s earlier forecast and will have no material impact on dividends
• Investment represents 5% of the airport’s total assets
