International passenger growth is a key driver of profits for Australian airports. This article outlines the substantial changes in the composition of international passenger travel through Australia’s major airports.
International passengers are more profitable and, hence, more important for airports. In particular, international passenger landing charges are typically substantially higher than those for domestic passengers. For example, at Sydney airport international passengers are only 38% of total passenger movements but 70% of aeronautical revenues. On top of this, international passengers also spend significantly more while at the airport – providing a substantial proportion of the retail portion of an airport’s revenue streams.
Over the last decade, the greatest contributor to international passenger growth in Australia has come from China. Since Deng’s reforms in 1979, Australia has ridden the coat tails of the Chinese boom. While sales of coal and iron ore are probably what people think of first, there has also been a significant surge on international travel built on an emerging middle class in China. This has seen China/Hong Kong passenger numbers surge from 2.6 million to 6.4 million over the past decade. This growth is all the more extraordinary when you think that the baseline passenger numbers were dominated by Hong Kong and that airport’s role as part of the “Kangaroo” route to Europe.
There are signs that the break neck economic growth in China is slowing, there are also rising geopolitical tensions as China asserts its increasing sway on the global stage. For example, in 2019 we have seen the Chinese Government implement import restrictions on Australian coal as well as turning back an Air New Zealand flight to Shanghai.
We are not geopolitical experts at Infradebt, however we can see that China’s rise is unsettling the existing world order. Australia’s tourism and overseas education sectors – both of which are big drivers of airline travel between Australia and China – could be caught in the cross fire of broader geopolitical tensions.
Across all Australian airports, New Zealand continues to be the highest international country pair but will soon be overtaken by China in the coming years growth remains on trend. China currently is the second largest source and destination of international passengers and is the main driver behind Australia’s international passenger growth numbers. Other major contributors are Singapore and the UAE which act has hubs for passengers travelling from Europe and the broader Asian/Indian region.
How disruptive would it be for Australian airports if Chinese passenger numbers were to fall sharply due to some geopolitical manoeuvring or perhaps due to a sharp slowdown in growth or Yuan devaluation?
One of the great things about airports – from an investor’s perspective – is that history is littered with crises and catastrophes of all sorts. These can be used to understand the potential aggregate impact of an event as well as to provide a sense of how quickly it may take to recover to the underlying trend.
In this context, the SARs epidemic (2002/2003) provides a useful comparator. As can be seen in the chart below, this saw very substantial falls on individual routes (blue bars) – but as you can see (orange bars) the impact of aggregate passenger numbers was pretty modest and recovered quickly.
A further mitigant is the changing nature of international passengers from China to Australia. Overtime we expect that visiting family, friends and relatives (VFFR in industry parlance) will become an increasing share of international travel between the two countries. VFFR travellers are less price sensitive and less volatile than tourist travel. Many Chinese immigrants return to China every year for the Lunar New Year, where an estimated 3 billion people journey to their home towns.
Overall, while the share of passengers to/from China has grown substantially (to 15%), it is still relatively modest and so even a substantial shock to these passengers would be more likely to result in a slowing/flat-lining of aggregate passenger growth rather than anything more substantial. Of greater importance to airport investors is probably the potential for sharply higher interest rates (which doesn’t seem to be a problem in the short-term given the massive rally in bond yields over the past few months) given their high valuation multiples.