Up and Away for MAp
Up and Away for MAp
Back when I worked on the Sydney Airport bid for Macquarie, I picked up an interesting nugget of information about traffic growth. There are going to be ups and downs, the traffic gurus told me, but once the slump is over, passenger numbers will line back up with the original trend line. So, if you expect passenger numbers to grow at 4% per year, and you have a year where there is no growth, the next year will show 8% growth to compensate. If there are two years of no growth, you'll get 12% growth out of the slump to compensate (yes, I know compounding doesn't work exactly like that, but it's close enough).
December figures for Sydney Airport show this effect playing out in practice. There is a very strong correlation between passenger growth and GDP growth; passenger numbers grow at 1-1.5 times GDP. It's historically been higher than GDP growth because disposable income has grown faster than the overall economy and air travel has become cheaper. I expect both trends to continue and, therefore, long-term passenger growth of 3-5% at Sydney Airport.
In December 2008, at the height of the global economic meltdown, international passenger numbers were down 2.6% on the previous December and domestics grew only 0.6%. Roll forward 12 months and international is up 11.4% and domestic passenger numbers are up 6.5%, giving an average growth rate from two years ago of 4.9% and 3.5% per year.
That's almost exactly what the gurus would have predicted and very good news for MAp securityholders (MAp, the old Macquarie Airports now with its own internal management team, owns 74% of Sydney Airport). More people means more landing charges, but it also means more retail spend and more car parking fees. With a mostly fixed cost base and a leveraged balance sheet, earnings growth should substantialy exceed passenger growth and mean a lot more cash available for distributions.
The European airports, Brussels and Copenhagen, are still a worry for MAp. But my downgrade from Long Term Buy to Hold, one of the last pieces of research I wrote for The Intelligent Investor before starting the Value Fund, is going to be a mistake.
If you want to understand the airport business better, I'd suggest Treasure MAp, a research piece I wrote back in February 09. And to the member who issued me with the 'please explain', you were right.
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Steve, If Sydney passenger numbers are rebounding, I'd be interested to hear your thoughts on what passenger numbers at other Australian airports should be looking like. Would you be expecting Australian Infrastructure Fund which owns parts of airports in NT, WA, QLD and Vic to be performing as well or even better than MAp in 2010?
Cheers
Tony
Yes, I'd expect them to be performing just as well with regards domestic traffic at least. International is a bit more dependant on where airlines choose to land, but I'd expect them all to be strong.
The big difference is that MAp has a controlling stake in Sydney Airport and has done a great job of capitalising on the retail opportunities. AIX owns small minorities in most cases and they don't seem to have done as good a job as they should have. I've been through both Perth and Melbourne recently - there are opportunities galore to be making more money.
I've bought both stocks on behalf of the Value Fund but have a bigger weighting towards MAp.
I'm not sure who owns Brisbane Airport Corporation, but on my last trip through there just before Christmas I noticed that they seem to finally be waking up to the commercial potential of the area near the domestic boarding gates.
There are a lot more retail and food stores up there than there used to be and some of the major fast food outlets now have a presence as well.
The analysis about passenger numbers sticking to a trend line looks like a great example of a heuristic that works unfailingly until the day it doesn't. IMO, what matters far more is the postulated logic behind why this phenomenon has occurred in the past.
Can you explain what the underlying logical reason for this is?
It’s historically been higher than GDP growth because disposable income has grown faster than the overall economy and air travel has become cheaper. I expect both trends to continue and, therefore, long-term passenger growth of 3-5% at Sydney Airport.
That sums up my argument - I don't think it's a random correlation; it makes perfect sense to me. You only need to compare your own travel habbits with those of your parents. I'll try and dig out some disposable income versus average cost of a flight to Europe stats but I can assure you it has changed dramatically.
This is a nice succinct argument. There is nothing more appealing than reversion to the mean stories in near certain growth opportunities. You get the reversion for free plus the remaining growth at a fair price.
The heuristic bias Shum refers to is that of representativeness which is not a bias if there is empirical evidence supporting the fact.
Also an advantage MAP has (& FLT and a few others) is that when flight travel stalls as happened over the GFC the airlines stimulate traffic by dropping their own prices hence encouraging people to fly again. This puts more planes on tarmacs and people through airports. There are not too many businesses where someone else is motivated or fored to cut their own margins (neck) and your business gets the full benefits of their stimulus.
Perhaps it's a similar phenomenon with the electronics retail business. Goods become vastly cheaper over time, and intense competition between manufacturers (comparable to airlines in the travel world) encourages more product through the (largest) retailers - who are the only ones that end up with any competitive advantage. The product becomes a more and more 'essential' part of peoples lives. Though I guess an airport, all else being equal, has more appeal than a retailer - as it's vastly more difficult to set a cempeting one next door.
That makes sense, but in that case, what we're talking about is a leveraged play on GDP growth; the fact that GDP growth has historically been relatively stable at a level that has resulted in a 4%pa growth in passenger numbers is what has caused the historical "trend".
What if a large portion of this GDP growth was in turn built on something that has been steadily growing over the past thirty years, but is ultimately unsustainable?
I think you know where I'm going with this...
Hi Steve,
A while back I queried why MAp had gone from a LONG term buy near $3 to a hold at $3. I was disappointed that the only reason for why Map was now a hold was the price had moved up a lot from $1.58 (when we were all catatonic at the height of the stock market falls). Then why recommend it at $3 as a long term buy?
Your response was the cost of debt in MAp's case (and I assume Westfield) had gone up and hence this is why it was downgraded. In your response to me, I don't think any reference was made to passenger numbers. I had accepted that things would be tough on the passenger front due to the GFC, hence the buying opportunity. That debt concern is not discussed in your argument above. Has the cost of debt stayed the same or dropped?
Finally, I don't quite get this growth in passenger numbers story. Let me explain my confusion...
1. Yes, I get the bit about disposable income now versus when I was a twinkle in my parents eye.
2. It kinda makes sense that passenger numbers will grow in some relationship with GDP, I suspect toll roads and ports have a similar sort of relationship. (Please correct me if I am wrong).
3. However, how can passenger numbers be growing in relationship with GDP at 4.9% per year (domestic) when last in the last two years GDP growth has been poor. I don't know what GDP was but it would appear to me that the multiplier with GDP now is alot higher (normally 1-1.5).
If it is related to GDP then I would expect passenger numbers to drop in the future, otherwise the relationship with GDP is untrue... and the relationship is really with something else.
Maybe the reduction in airline price-cutting could be the trigger for things returning to normal, i.e. 1-1.5xGDP?
If you could help answer my queries above it would be appreciated.
Cheers
Sid
I think Shum makes an important point. At some point train travel was growing to infinitum, and people thought the trend would continue - which it did... until it stopped.
In a way it is for sure, but the electronic retailers (no matter what size) suffer some flow through effects of the products price deflation/price stimulus as well. It is harder to make the same margin on a $1500 item that used to be $2500 meanwhile operating costs don’t depreciate when the gross margins do i.e. the same to warehouse/admin etc. Gerry Harvey spoke of this a few years ago when LCD and Plasma TV's really started to fall in price. Obviously volume increases are meant to offset everything so for the other reasons you mention the lower price effect is important for retailers.
One could argue the price stimulus effect works better for MAP and MAP’s mainly food tenants (and therefore Map again) as they don’t get effected by the discounted price which is stimulating their demand. It slips past them. I don’t know how important this effect is for MAP but I would rather have it than not.
I get to answer the question I put to you the other day....
AIX Australian Infrastructure Fund just announced growth in passenger numbers for its Australian airports in the December quarter.
Numbers are total growth in passenger numbers for the quarter, compared to total passenger numbers for the prior corresponding period;
Perth = 6%
APAC (the owner of Melbourne and Launceston Airports) = 4.7%
Queensland Airports = 9.3%
NT Airports = 9.1%
Sydney Airport = 7.3%
AIX weighted growth = 6.9%
76% of AIX's portfolio is airports. Is it time to upgrade AIX?
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