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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Transport Titbits — A Second Airport for Auckland?</h2>
Air New Zealand (AIR) has reopened the Whenuapai&nbsp;airport debate, one that has been closed for the past decade or so. Whenuapai&nbsp;is RNZAF’s largest air base situated north west of Auckland’s CBD. Auckland Airport (AIA) is the city’s only commercial airport currently. AIR’s public comments around Whenuapai&nbsp;reflect a combination of (1) its dissatisfaction with AIA’s under-investment in recent years, (2) the heavy cost of new infrastructure at AIA, and (3) AIA’s aeronautical pricing which includes the prospect of a runway land charge from FY21.
We consider AIR’s comments as more than a parting shot at AIA from departing CEO Christopher Luxon. It has already undertaken a body of work which suggests it could operate limited commercial flights by the end of next year.
Whenuapai has two runways, the longer of which is 2,031m long, similar to the length of Wellington’s runway. It could comfortably facilitate both domestic jet and twin prop services.
&nbsp;Why it may happen?
First, AIA plans to spend more than NZ$1bn on a new runway over the next 10 years. This may not be necessary if Whenuapai was opened up to commercial traffic. AIA’s need for a new runway is due to its peak capacity constraints. Whenuapai already has a runway and could operate a budget commercial passenger terminal.
Second, AIR would be motivated to use the airport (as could Jetstar) given the likelihood of lower aeronautical charges. Whenuapai would be in a similar regulatory position to regional airports in New Zealand.
Third, the location of the airport would be popular with passengers originating from, or destined for, Auckland’s North Shore. &nbsp;
&nbsp;Why might it not?
&nbsp;First, the Government would need to support the proposal given it owns the air base and controls the air space. It would become a heated political issue, like it did more than a decade ago, both at a local and national level. &nbsp;
&nbsp;Second, in recent years residential housing developments have popped up adjacent to the air base. More residential housing will be built in future. These residents may be subject to increased noise pollution.
&nbsp;Third, transport links would be limited adding to traffic congestion, albeit the existing links to AIA are far from optimal.
&nbsp;Implications for Auckland Airport if it did
Whenuapai would act as a domestic point-to-point airport competing directly with AIA for peak traffic. AIA would remain AIR’s core hub-airport in New Zealand. However, over time Whenuapai could take more domestic traffic away from AIA. This wouldn’t have a significant impact on AIA’s current earnings stream given domestic passengers generate substantially less income on a unit basis than international passengers. However, it would seriously question AIA’s need for its planned Northern runway. This would remove a large chunk of AIA’s capex programme over the next 10-15 years, which would impact its ability to leverage growth in its regulated asset base (RAB) for aeronautical pricing and valuation (as we believe its share price incorporates a material multiple of RAB). &nbsp;
We think the likelihood of Whenuapai becoming a commercial reality is low. However, we wouldn’t totally rule it out as there is some logic to AIR’s arguments.
Andy Bowley
Head of Research&nbsp;
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Transport Titbits — A Second Airport for Auckland?
Air New Zealand (AIR) has reopened the Whenuapai&nbsp;airport debate, one that has been closed for the past decade or so. Whenuapai&nbsp;is RNZAF’s largest air base situated north west of Auckland’s CBD. Auckland Airport (AIA) is the city’s only commercial airport currently. AIR’s public comments around Whenuapai&nbsp;reflect a combination of (1) its dissatisfaction with AIA’s under-investment in recent years, (2) the heavy cost of new infrastructure at AIA, and (3) AIA’s aeronautical pricing which includes the prospect of a runway land charge from FY21.
We consider AIR’s comments as more than a parting shot at AIA from departing CEO Christopher Luxon. It has already undertaken a body of work which suggests it could operate limited commercial flights by the end of next year.
Whenuapai has two runways, the longer of which is 2,031m long, similar to the length of Wellington’s runway. It could comfortably facilitate both domestic jet and twin prop services.
&nbsp;Why it may happen?
First, AIA plans to spend more than NZ$1bn on a new runway over the next 10 years. This may not be necessary if Whenuapai was opened up to commercial traffic. AIA’s need for a new runway is due to its peak capacity constraints. Whenuapai already has a runway and could operate a budget commercial passenger terminal.
Second, AIR would be motivated to use the airport (as could Jetstar) given the likelihood of lower aeronautical charges. Whenuapai would be in a similar regulatory position to regional airports in New Zealand.
Third, the location of the airport would be popular with passengers originating from, or destined for, Auckland’s North Shore. &nbsp;
&nbsp;Why might it not?
&nbsp;First, the Government would need to support the proposal given it owns the air base and controls the air space. It would become a heated political issue, like it did more than a decade ago, both at a local and national level. &nbsp;
&nbsp;Second, in recent years residential housing developments have popped up adjacent to the air base. More residential housing will be built in future. These residents may be subject to increased noise pollution.
&nbsp;Third, transport links would be limited adding to traffic congestion, albeit the existing links to AIA are far from optimal.
&nbsp;Implications for Auckland Airport if it did
Whenuapai would act as a domestic point-to-point airport competing directly with AIA for peak traffic. AIA would remain AIR’s core hub-airport in New Zealand. However, over time Whenuapai could take more domestic traffic away from AIA. This wouldn’t have a significant impact on AIA’s current earnings stream given domestic passengers generate substantially less income on a unit basis than international passengers. However, it would seriously question AIA’s need for its planned Northern runway. This would remove a large chunk of AIA’s capex programme over the next 10-15 years, which would impact its ability to leverage growth in its regulated asset base (RAB) for aeronautical pricing and valuation (as we believe its share price incorporates a material multiple of RAB). &nbsp;
We think the likelihood of Whenuapai becoming a commercial reality is low. However, we wouldn’t totally rule it out as there is some logic to AIR’s arguments.
Andy Bowley
Head of Research&nbsp;




T:


+64 4 495 8246




M:


+64 21 338 941




TF:


0800 367 227




F:


+64 4 495 8193




P:


PO Box: 5266, Wellington 6145








W:


www.forsythbarr.co.nz



Twitter:

@forsythbarr





Transport Titbits — A Second Airport for Auckland?