Dr Patrick Strange
| Chief Executive
We completed important terminal and transport-specific projects as well as making significant progress on the design, planning and procurement phases of our infrastructure programme. Passenger numbers in the period continued to grow despite a very dynamic aviation market, and we recorded another strong financial performance for the half year.
Total passenger numbers were 10.6 million, up 3.7%. International travellers (excluding transit) reached 5.3 million (up 4.4% on the first half of FY18), predominantly driven by additional capacity on Asian, Pacific Island and North American routes. International transit travellers were down 5.2% to 0.5 million. Domestic travellers increased by 4.0% to 4.8 million, primarily driven by additional capacity on main trunk routes.
It is also pleasing to see the growing cultural, social, economic and environmental contribution Auckland Airport is generating through a broad range of community, regional and national initiatives, leveraging off our multi-billion dollar investment programme.
Total revenue was $370.6 million, up 11.5% and earnings before interest expense, taxation, depreciation, fair value adjustments and investments in associates (EBITDAFI) increased by 10.8% to $277.1 million. Reported profit after tax was $147.2 million with an underlying net profit increase of 2.9% to $136.9 million.
Retail income totalled $110.8 million (up 24.6 %), reflecting the completion of the significantly expanded floor space in the international terminal and the new retail, food and beverage options that this project has delivered for our customers.
Strong investment property development supported by strong pre-leasing and rental activity translated into an annualised rent roll of $94.0 million, up 4.4% against the prior corresponding period.
Queenstown Airport also saw strong passenger growth in the period, with total passenger numbers growing by 9.3% to 1.2 million. International travellers reached 356,000 (up 6.7% on the first half of FY18) driven by increased capacity across the Tasman, and domestic travellers increased 10.5% to 830,000 – also driven by increased capacity, particularly on the Auckland to Queenstown route.
The underlying profit share from Queenstown Airport decreased 4.5% to $2.1 million due to one-off expenses relating to long-term master planning, as well as increased depreciation and amortisation costs. While occupancy at the Novotel Hotel remained strong during the period, higher operating costs have resulted in a decrease in Auckland Airport’s share of underlying profit by 4.5% to $2.1 million. Our total share of the underlying profit from associates was significantly down on the prior period, which is largely attributable to the sale of our interest in North Queensland Airports in 2018.
Airport of the future programme
In June 2017, we set prices for the current five-year pricing period and announced our corresponding five-year investment plan and forecast capital expenditure envelope at that time, along with high-level guidance about the following five-year period (2023-2027). As market conditions have changed over the last two years and as we have transitioned into more detailed design and planning stages for a number of major projects, we now have greater clarity about the complexity of the development programme in our live operating environment and the challenges associated with New Zealand’s construction market.
We have made considerable progress over the past six months, working closely with our airline partners to understand their requirements for the new domestic jet facility and international arrivals projects in particular. These deeper design insights will deliver improved project outcomes in the future including planning certainty, improved cost control and a realistic and achievable build programme.
This process has necessarily led to some scope and sequencing changes for individual projects within the airport of the future programme. However, we remain committed to the overall investment programme.
Further reviews of project scope, system capacity and execution has led to changes in sequencing for our key aeronautical projects that will form the foundation of our airport of the future developments through to 2027. Several anchor projects are now into procurement stages – including work on our northern stands and taxiways and the northern road network, and these are critical enabling or capacity projects that support the wider airport terminal development programme.
Connected with these airfield and roading projects we have also identified a new location for a new air cargo terminal allowing us to initiate a staged relocation of current cargo facilities away from the terminal precinct, creating new capacity for terminal construction staging and removing transport demands on the central terminal precinct areas.
We will continue to work with customers, stakeholders and the construction industry to understand market capacity and ensure we align our programme appropriately.
Building momentum and delivering benefits
As one of New Zealand’s busiest hubs for tourism, trade and travel, the early stages of our multi-billion, inter-generational aeronautical infrastructure programme are already delivering substantial benefits, through significant new capacity, resilience and choice for our customers, airlines and operational partners.
During the period a significant milestone was the completion of the second of two major terminal expansion projects delivering a combined 55,000m2 of newly built or refurbished terminal infrastructure in the international terminal building.
The international terminal building departures upgrade now offers increased choice for travellers through expanded and more diverse retail, food and beverage services – and a truly contemporary, New Zealand experience for our international guests.
We also started work on a multi-year programme to rejuvenate the existing domestic terminal, with changes to the retail layout and improvements in bathrooms and security screening areas.
During the period several projects delivered steady improvements to the airport experience for our customers, including: doubling the number of self-service kiosks (to 120); rolling out 4,000 new complimentary braked baggage trolleys, procuring four new Avi ramps to provide customers a safer, more comfortable and faster disembarkation experience and continuing to invest in the Auckland Airport app (downloaded more than 34,500 times). In addition, we are launching a trial WeChat shopping mall for Chinese tourists together with airline partners; expanding our online retail channel (The Mall), and developing plans to expand and enhance the Strata Club.
Through the Auckland Airport led Airport Capacity Enhancement working group, which includes Airways and our airline partners, we have agreed a pathway to increase peak hour air traffic movements in a staged manner, with a targeted capacity of 47 movements per hour in 2020 and 50 movements by 2022.
In the first half of the financial year, we also completed important transport-specific projects, including the Landing Road intersection upgrade in conjunction with NZTA and the Nixon Road bypass.
We are aware that our travellers and airlines rely on us to provide safe, timely and efficient services every day, and we take that responsibility seriously. This will remain at the forefront of our planning and operations as our investment journey continues.
Tourism and trade markets performed in line with expectations despite a dynamic aviation market: North America and New Zealand outbound tourism remained strong, the Chinese market continued to moderate while being offset by emerging Asian markets outside China – notably a quadrupling in passenger numbers on services from Indonesia and services from the Philippines. We also saw new capacity added to the network in the period with Singapore Airlines adding a new daily flight to Singapore, Air New Zealand launching new direct services to Chicago and Taipei, and United Airlines returning to year-round services.
Regulatory and aeronautical pricing update
In November 2018 the Commerce Commission issued its review of our prices for the 2018-2022 financial years, and in that review it concluded our target return was not fully justified.
Estimating a target return is not an exact science and the Commission acknowledged that Auckland Airport could justify a slightly higher return than the Commission’s benchmark estimate.
We carefully considered the Commerce Commission’s final report on pricing and have decided to reduce our charges to airlines by $33 million over the five year period to 2022 in net present value terms, or an equivalent of 31c per passenger. This reflects a reduction in our aeronautical target return from 6.99% to 6.62%.
In our view the earlier prices we set for airlines were fair, competitive and in line with international standards, however we acknowledge the Commission reached a different view on target return. We have recognised the Commission’s feedback in making this reduction and believe our position is justified based on Auckland Airport specific risks and our multi-billion dollar 30-year infrastructure programme.
The reductions, to be implemented by way of discount on landing and passenger charges, will take effect from July 1, 2019.
Effective average charges per passenger to airlines have already been falling this pricing period in real terms and these changes will lower real prices further.
Our profit outlook for the 2019 financial year remains unchanged. We expect underlying net profit after tax (excluding any fair value changes and other one-off items) to be between $265 million and $275 million. This would deliver growth in the underlying earnings per share of up to 4.5% in 2019, with slower growth than in recent years reflecting:
- the second year of lower international passenger charges of the new five-year aeronautical pricing period
- increasing interest and depreciation expenses associated with the recent step up in our infrastructure build.
As noted above, the additional time invested in these formative stages has led to lower capital expenditure than planned for the first half of the 2019 financial year. We now expect total capital expenditure for the 2019 financial year to be between $280 million and $330 million, down from the previously indicated range of $450 million to $550 million.
We are still forecasting that the total value of commissioned aeronautical assets for the 2018-2022 financial years will be broadly consistent with the five-year forecast envelope released to the market in mid-2017.
This outlook remains subject to factors such as material adverse events, significant one-off expenses, non-cash fair value changes to property, and deterioration as a result of global market conditions or other unforeseeable circumstances.
In closing, we wish to thank all our people, communities and customers for their hard work, patience and understanding during this period of airport transformation.
We look forward to updating you on our continued progress at the 2019 full year result, later this year.
Dr Patrick Strange,
The directors and management of Auckland Airport understand the importance of reported profits meeting accounting standards. However, due to the complexity of accounting standards, it may be difficult for investors to compare one financial year’s results with another. Therefore, we also provide an underlying profit measure to help investors compare profits between years and to make comparisons between different companies with confidence. We also believe that an underlying profit measure can assist investors in understanding what is happening in a business such as Auckland Airport where revaluation changes can distort short-term financial results or where one-off transactions, both positive and negative, can occur.
For several years, Auckland Airport has referred to underlying profits alongside reported results. We do so not only when we report our results but also when we give our market guidance (where we exclude fair value changes and other one-off items) or when we consider dividends and our policy to pay 100% of underlying net profit after tax, excluding unrealised gains and losses arising from revaluation of property or treasury instruments and other one-off items. However, in referring to underlying profits, we acknowledge our obligation to show investors how such results have been derived. The reconciliation for the current period can be found on the financial summary page.