Airports

Australian airports have been very attractive infrastructure investments. The core of their strong investment returns has been the long-term growth in passenger numbers. Higher passenger numbers drive both higher direct aeronautical revenue (landing charges) as well as higher retail and property revenues (through higher rents, more parking revenue, etc).


While much of the focus tends to be on international passenger growth (as they are more profitable for airports – with higher landing charges), domestic passenger travel has shown positive growth on the back of population growth as well as trends towards cheaper airfares over the long-term (e.g. the rise of low cost airlines). The annual growth rate since 1984 is 4.5% domestic passenger growth per annum.


Currently, domestic passenger growth is running significantly below trend, with roughly zero growth on a total domestic passenger basis. For example, the table below shows annual growth for the five largest domestic city pairs in Australia.


We would expect this weakness is domestic passenger growth to continue. One way of getting a handle on likely near-term trends for domestic passenger travel is to review the earnings announcements of Qantas and Virgin for intended domestic fleet changes.

These airlines dominate domestic passenger travel in Australia. To the extent they increase the size of their fleets, this creates additional capacity that will, on average, be filled. That is, growth in the fleet is associated with increased discounting and, hence, greater travel and more passengers for airports. Conversely, if they shrink their fleets, there will tend to be fewer discounted fares available – fares will tend to rise faster than inflation – and passenger growth for airports will moderate.


In its most recent earnings releases, Qantas announced that they forecast domestic capacity to be flat to down. In addition, Virgin has announced that domestic capacity will be reduced 1.5%.


On this basis, it would be reasonable to expect the weakness in domestic passenger growth that has been experienced over the last year to continue in the near-term. This will be a headwind for airports – particularly those with a high domestic passenger share (eg regional airports).

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