Although the core infrastructure market has performed well over the past year, the Transport sector, which is influenced by economic growth, has lagged the broader infrastructure market. The recent underperformance of this sector suggests there may be opportunities for investors who are willing to move against the market cycle, and invest in assets which are available at attractive prices. Within the Transport sector, Airports have special characteristics which make them particularly attractive to investors. We spoke to Greg Maclean, Head of Research – Infrastructure, to understand the benefits of investing in airports and the factors that are likely to underpin investment returns in the period ahead.
Head of Research - Infrastructure
What are the benefits of investing in airports?
Limited direct competition can provide a reliable income stream: Unlike other modes of transport, the high economic and social cost of developing an airport limits the emergence of direct competition. This may lead to formal or informal asset base linked pricing regulation of aviation services. This, in turn, provides a component of income which is relatively fixed and does not fall if passenger volumes decline.
Hedge against the impacts of local economic cycles: Airport revenues are strongly leveraged to passenger volumes which, in comparison to conventional transport assets, may be more influenced by global growth. When economies and their currencies are strong, local residents tend to travel overseas. By comparison, when currencies are weaker, that country may be an attractive destination for foreign travellers. This means that an airport with a significant exposure to regions of high growth in international travel may be partially hedged against the impacts of local economic cycles.
Ability to diversify revenue base: Non-aviation services, such as car parking, hotels and retail, can add significantly to revenues. In some cases, these services can exceed the revenues generated by aviation services. If the airport has a significant landbank, this can also provide a source of revenue through the development of logistics facilities and commercial aviation related industries.
Yield and growth opportunities: The level of economic development in the host country will be a determinant of whether the asset is regarded as a yield or growth opportunity. In rapidly developing economies, where free cash flows are generally ploughed back into the development of new facilities, investor returns will largely comprise capital growth. In developed economies, however, lower capital development requirements enable a significant component of free cash flows to be returned to investors. One of the major challenges for airport managers is to defer capital expenditure for as long as possible while still providing a high level of service for passengers and airlines. In this regard, these airports are often early adopters of new technology designed to maximise existing capital assets.
Consequently, these airports can offer a balance between yield and growth.
Are there any risks an investor should consider?
Competition from alternative modes of transport: One potential threat is the emergence of high speed rail as a viable alternative to air travel. Analysis suggests that high speed rail is most effective in attracting market share on relatively short trips. On longer routes, however, the time saving associated with air travel gives it a decisive edge.
Competition from other airports: This occurs mostly in densely populated areas such as Europe and the United Kingdom where a large airport may dominate the local area, and smaller airports operate as satellites. In these circumstances, the large airport may consume passenger volumes from smaller airports when demand is low.
Airline mix may erode revenues: The rise of discount airlines in the United Kingdom and Europe has had a significant impact on the viability of particular airports. As a discount airline may shop around for the lowest cost service provider, especially where there is significant competition from other airports, this can lead to a fall in airport revenues.
What do you expect to be the drivers of growth in the period ahead?
Over the next 10 years, we believe that the major emerging economies will be the drivers of high growth in air travel demand. Initially, growth will be generated from China and India but, increasingly, demand will come from Brazil, Russia (and the former Soviet Union) and Indonesia.
Currently, India and China are experiencing double digit growth in the volumes of domestic passengers, and a similar trend is being seen in international travel, according to CAC and the International Air Travel Association. There is good reason to believe that these growth rates will continue even if their domestic economies slow. Due to the low income per capita in emerging economies, demand for travel is currently low relative to the population. So, as individual wealth grows, so should the demand for travel. As highlighted in the graph opposite, for an economy that is still developing, it is not unusual for demand for travel to reach levels two or three times the rate of economic growth.
What are the golden rules for investing in airports?
Although there does appear to be value in this sector, it is important that each transaction is considered on its own merits. Not all airports are created equal, and a case-by-case assessment of an airport’s strengths and weaknesses is necessary to arrive at an informed view on value. In particular, airports in different regions have vastly different characteristics and it is important to understand these in order to accurately assess investment opportunities. Proactive management through the asset’s life cycle, such as in the above case study, and strong connections to the local community are also essential to maximise value.
Before investing in an airport, an analysis of the passenger routes and airline mix should be undertaken as part of the due diligence process. Factors to consider include:
Where does local transport demand lie on the saturation curve?
This will help determine whether the investment should be identified as a potential growth or yield opportunity.
Does the airport provide a good balance between domestic and international travel?
This will provide exposure to both local and global growth opportunities.
Do route lengths generally exceed 500 kilometers?
This will minimise the risk of competition from alternative modes of travel.
Does the airport demonstrate good local monopoly characteristics?
This will minimise the risk of competition from other airports.
Finding the right investment
A case study of Melbourne Airport
Since privatisation in 1997, passenger volumes have more than doubled at Melbourne Airport and now exceed 28 million per annum. Below are some of the initiatives undertaken by Melbourne Airport that have contributed to the airport’s success:
Strategic promotion of the airport has been undertaken in full consultation and with the support of the Victorian State Government and local business interests.
A targeted programme including special staff training, multilingual signage and announcements have seen a 26% growth in Chinese traffic and a 16% growth in traffic from Singapore and Malaysia over the past two years. New technology, including the introduction of the Boeing 787 Dreamliner, is expected to make Melbourne an even more attractive destination for Asian travellers.
Despite its high reliance on domestic passengers (approximately 80%), the average stage length for flights is around 800 kilometers. This means that competition from competing transport modes is likely to remain low in the absence of a viable high speed rail alternative.
Competition to Melbourne Airport is provided by two small local airports, but these perform satellite roles.
Non-aviation revenues have grown from less than 20% of total revenues when the airport was privatised to almost 60% of revenues in the financial year 2012. There are now four distinct revenue streams consisting of aeronautical services, retail, car parking and property development.
AMP Capital manages a 41.8% stake in Australia Pacific Airports Corporation, the holding company of Melbourne Airport.
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