- The fallout from the coronavirus outbreak will weigh on the earnings of Australian and New Zealand airports, amid softer economic conditions in Asia-Pacific and the Australian bushfires.
- We believe the rated airports have adequate financial buffer to support the ratings over the next six to 18 months.
- If the fallout prolongs, traffic through airports will take a longer time to recover, requiring greater prudence on their capital investments and dividend payouts.
Tough conditions for Australian and New Zealand (ANZ) airports are set to escalate. S&P Global Ratings believes the new coronavirus outbreak will buffet ANZ airports over the next six to 12 months. We expected lackluster economic conditions in Asia-Pacific to dent growth in international passenger traffic across ANZ. In addition, Australian airports are yet to face the full brunt of the bushfires on passenger numbers. Still, we believe ANZ airports we rate have the financial buffer to withstand the impact of these threats over the next six to 18 months at least.
Among rated airports, Melbourne airport has the lowest financial headroom for the rating, followed by Perth, Adelaide, and Wellington airports (see section on individual airports).
In our view, the ANZ airports face a short-term disruption. Nevertheless, the combination of the above factors and severe measures in place to control the virus threat will possibly mean a longer recovery phase. A sharp drop in China's international travel (16% of international arrivals to the region) will drag down demand at ANZ airports. Therefore, the recent ban on group travel by China for at least the next two months, restrictions on passenger arrivals from China by some countries, and dampened travel sentiment for tourism and business across the Asia-Pacific will affect passenger numbers and hurt the earnings and cash flows of rated airports.
As such, traffic growth across most rated airports will likely be sluggish, recording flat or low negative growth rates in fiscal 2020. High-value international traffic will likely see a negative growth rate, a downturn compared with our previous expectation of a small positive growth rate. Domestic traffic, too, has been muted over the past two years, and is likely to continue so into another year with no sign of increase in airlines' capacity. We expect a recovery to historical growth rates of 3%-5% over the 12-24 months thereafter, which is slower compared to six to nine months after the severe acute respiratory syndrome (SARS) crisis in 2003. The new virus is a member of the coronavirus family that's a close cousin to the SARS and MERS (Middle East respiratory syndrome) viruses that have caused outbreaks in the past.
Nevertheless, all rated ANZ airports have a good track record of managing such short-term external shocks. These include the SARS period in 2003, Bali bombings (2002), and avian flu (2004) (see "SARS 2.0? Aviation Faces Risk From Coronavirus," published Jan. 30, 2020). We expect the airports to control operating costs, as well as adjust the timing of their uncommitted capital investments and amount of planned dividends over the next 12 months as the situation evolves. Any risk of a very slow recovery or prolonged impact will call for further reviews by airports over the next few years.
Tough Times: Fewer China Travelers, And Bushfire Effects
The fallout from the coronavirus will suppress passenger numbers at airports relative to our expectations. We have already factored in lower growth rates in our rating analysis due to softness in travel patterns from mid-2019 on the back of slowing Asia-Pacific economies.
While international leisure and business travel will be affected, domestic travel, too, would suffer. This is because international tourists, particularly Chinese travelers, contribute to at least two to three legs of domestic travel during their visits in Australia/New Zealand. The risk is higher now because of the rapid increase in short-term arrivals from China over the past 10 years. In 2008-2009, arrivals from China were only 6%. Over 2009-2019, however, short-term term visitors from China quadrupled, while overall short-term international arrivals to Australia increased 1.5x over the same period (see charts 1 and 2). The trend is not dissimilar in New Zealand.
Further, the full impact of the Australian bushfires has yet to play out. Regional communities and small businesses are severely affected, and travel warnings issued by some countries over December-January will crimp passenger numbers.
Downside risk will differ across airports because they have varied exposures to Chinese tourism and international traffic. For example, international traffic comprises less than 15% for Adelaide Airport Ltd. and Wellington International Airport Ltd. In addition, some airports have larger financial buffers and differing capital investments. Meanwhile, Brisbane Airport Corp. Pty Ltd. and Perth Airport Pty Ltd. airports are benefitting from a slow recovery in the mining sector.
Wider Impact Of Outbreak And Likely Slow Recovery
The extent of the impact of the coronavirus outbreak on the Asia-Pacific will determine how quickly passenger traffic recovers in ANZ over the next year. In the past, international traffic across all rated ANZ airports returned to long-term trend lines (3%-5%) within six to nine months of an external shock (see chart 3).
In our view, several factors may prolong the recovery of international traffic to normal trends this time. These include the: (a) impact and severity of the coronavirus on China's economy; (b) contagion effect on the regional economies (c) multiplier effect on consumer spending habits; (d) uncertain geopolitical climate and its impact on the region; (e) potential intensification of the unrest in Hong Kong; (f) economic harm to Australia due to drought and bushfires.
Apart from Chinese travelers, other Asian markets (such as Hong Kong, Singapore, India, Japan, and Korea) also make up a substantial (30%) and steady proportion of inbound travel to Australia or New Zealand. Hence, the speed at which Chinese and other Asian travelers return to the region will be important to supporting the recovery.
Non-Aero Revenues Partly Exposed To Passenger Trends
Although the revenue diversity of airports mitigates risk to earnings, about 70%-75% of airport revenues are somewhat linked to traffic and passenger spending rates. Approximately 50% of rated airports revenues are aeronautical, with 20%-25% coming from retail, 15%-20% from car park, and 10%-20% from property income.
Retail revenues at airports will suffer, in particular, duty free and food and beverage shops. A drop in high-spending Chinese travelers is a risk to airport retailers. Economic conditions could also suppress consumer spending rates at the airports. However, the impact could be limited because retail revenues are fixed to a large extent or indexed to inflation with some proportion tied to retail sales.
Car park/ride share-related revenues will also be affected, although not linearly correlated with traffic. Property revenues will remain steady, but growth may stall if airports defer related capital spending.
Airports' Resilience Varies
Rated ANZ airports have varying capital spending commitments and willingness to defer dividends, which drives the buffer in the ratings (see chart 4). All airports have adequate liquidity and we see no threat to this position.
Melbourne airport (rated entity Australia Pacific Airports Corp. Pty Ltd.), Adelaide Airport Ltd., and Auckland International Airport Ltd. have high planned capital expenditure over the next three years. Chart 5 shows the upper and lower boundary of capex we have factored into our forecasts. Even so, the discrete nature of the projects, the linking of investments to growth forecasts, and discretionary spending on car parks and property would provide flexibility to manage the investment timing.
For example, while Melbourne airport has a planned spending rate of A$600 million to A$750 million per year over 2020-2022, not all of this is committed and it includes growth-related investments. Likewise, Auckland airport can unwind some programs if required. Adelaide airport is in the midst of a terminal expansion, but some aspects of the project are linked to growth and airline agreements. We will monitor the spending rate and funding approach as the operating environment recovers.
We believe airports can preserve liquidity, if needed, through managing their dividend payouts. The payouts have been high in recent years on the back of strong traffic performance (see chart 5). The nature of the airports' shareholding base and the size of their financial buffer may dictate how soon airports would exercise this flexibility.
Melbourne airport has the lowest financial headroom for the rating, followed by Perth, Adelaide, and Wellington. Melbourne, Perth, Sydney (rated entity Southern Cross Airports Corp. Holdings Ltd.), and Auckland airports have active dividend policies. Melbourne airport recently moved to an aggressive policy of up to 100% of debt funding of capital works, which has narrowed the rating buffer. Perth airport had a dividend holiday in 2019 and is likely to restart dividends from 2020, although at a modest level. Given that Sydney and Auckland airports are listed entities, we see dividend curtailment is an option only if the industry stress prolongs.
At this stage, we do not believe that airports will restrain dividends due or announced in the first half of 2020, but we believe shareholders and boards may re-evaluate the payouts for the next six to 12 months.
Airports' Recent Performance And Stress Analysis For The Next 12 Months
Adelaide Airport Ltd. (BBB/Stable/--)
- 8.5 million passengers in fiscal 2019, 12.5% international
Analyst: Meet Vora
We expect the coronavirus outbreak to have a lower impact on international passenger traffic at Adelaide Airport compared with that at Sydney and Melbourne airports. This is because international passenger traffic forms about 12% of its total passenger base, compared with about 35% at Sydney and about 30% at Melbourne. In addition, Chinese nationals form about 8% of the total international arrivals, which is quite small, and therefore, the overall pressure on passenger traffic should be comparatively lower.
Under our current assumption of total passenger growth of about 1.5%-2.5%, we expect Adelaide Airport to maintain its funds from operations (FFO) to debt at about 10% for year-end June 30, 2020. Given the current travel ban, pressure on international passenger growth rate is likely, although over the short term. Assuming a flat growth for fiscal 2020, we expect Adelaide Airport's FFO-to-debt ratio to remain above 9%. If the pressure on traffic was more severe or longer, we could see some restraint on its capital expenditure (capex) program and shareholder distributions. That said, half of Adelaide Airport's planned spending in fiscal 2020 is related to its terminal expansion program, which has limited flexibility.
Auckland International Airport Ltd. (A-/Stable/A-2)
- 21.1 million passengers in fiscal 2019, 55% international
Analyst: Meet Vora
Following softer passenger growth for fiscal year-end June 30, 2019, Auckland Airport's total passenger growth for the rolling 12 months November 2019 has been around 1.1%. This rate is low compared with our expectations of growth of about 2.5%-3.5%. This sluggish growth has been primarily driven by lower passenger arrivals from China. When combined with the potential impact from the coronavirus outbreak, this could lead to a decline in total passenger growth (including domestic, given that each passenger from China generally would also take at least one to two domestic flights). Still, Auckland Airport has the largest financial headroom among our rated portfolio to withstand a dip in passenger traffic.
Under a stress scenario of a decline in international passengers by about 5% and a flat domestic passenger growth for fiscal 2020, we believe Auckland Airport could still sustain FFO to debt at about 14%. The airport has a large capex program over the next few years related to its aeronautical operations. The airport expects to debt fund the majority of the spending, specifically in the range of NZ$450 million to NZ$550 million for fiscal 2020. As such, a prolonged or sustained decline in passenger traffic will need appropriate management and funding of capital expenditures beyond 2021.
Australia Pacific Airports Corp. Ltd (APAC or Melbourne Airport, A-/Stable/--)
- 37.4 million passengers in fiscal 2019, 30% international
Analyst: Parvathy Iyer
There is no immediate risk to the rating. Capex and dividend management over the next few years will be critical given APAC's low financial headroom. We expect control on operating expense and capex for the year ending June 30, 2020, in the first instance. If the operating environment remains difficult, management has not ruled out evaluating forward dividends in addition to capex.
Passenger numbers for the first-half ended Dec. 31, 2019, marginally fell short of our expectations and capex is also lower than our projections. We had forecast total passenger growth of about 1% in 2020, before improving to 2.5% in 2021, and annual capex of A$600 million to A$750 million over 2020-2022. Currently, however, domestic traffic is subdued. With the coronavirus outbreak and greater exposure to Chinese travelers (about 10% of international passengers), a decline in total passenger numbers in fiscal 2020 is likely.
We believe APAC could absorb a severe stress scenario of a 4% to 4.5% drop in total passengers in fiscal 2020 (including 10% drop in international passengers) at the current rating level, given that management expects lower capital spending of about mid A$500 million. While this scenario could mean an FFO to debt of 9.5%-10% in fiscal 2020, rating headroom will be thin. Hence, restraining capital investment alone may not be sufficient to preserve the current rating if the impact is more severe or prolonged, affecting recovery in 2021 and beyond.
Brisbane Airport Corp. Pty. Ltd (BBB/Stable/--)
- 23.8 million passengers in fiscal 2019, 26% international
Analyst: Alexander Dunn
We do not anticipate immediate rating pressure due to the current headroom in Brisbane Airport's metrics. In addition, the airport's significant capex pipeline is modular, offering flexibility in terms of timing and spending. Moreover, Chinese travelers represent about 6% of international passengers, lower than its peers', reducing Brisbane Airport's exposure. In the event of a prolonged and substantial downturn in international traffic, management has indicated that it would manage the company's capex and dividends to support the ratings.
International traffic is exposed to the coronavirus risk and we anticipate flat growth in fiscal 2020, despite strong growth (4.8%) during the first half ended Dec. 31, 2019. The fall in international passengers will dampen domestic traffic in the second half (despite 2% growth in the first half), which could record flat growth.
We believe Brisbane Airport can withstand a stress scenario of a decline in total passenger growth to around 0.5% in fiscal 2020 followed by total growth of about 1% in fiscal 2021, even if capex were to remain in line with current plans. This scenario would result in a weakening in FFO to debt over the next two or three years, but not below our downside trigger of 9%.
Christchurch International Airport Ltd. (CIAL, A-/Stable/A-2)
- 6.9 million passengers in fiscal 2019, 25% international
Analyst: Alexander Dunn
As a tourist hub, CIAL is exposed to the coronavirus crisis. Chinese travelers currently account for 7% of CIAL's international arrivals. Under a stress scenario, CIAL is positioned to accommodate a 3.5% decline in total passengers in 2020 (including a 5% decline in total international passengers) followed by subdued 1% total passenger growth in 2021 (including no growth in total international passengers). This includes the assumption that the airport carries out its existing capex and dividend plans.
Under such a scenario, FFO to debt over the next two to three years will weaken but remain above our downside trigger of 15%. Management has indicated that if the crisis was protracted, it would have the option of flexibly managing its capex and dividends to support its metrics. It should be noted that historically CIAL's passenger numbers have recovered reasonably quickly in the years immediately following crisis-like events, such as the 2011 Christchurch earthquake.
Perth Airport Pty Ltd. (BBB/Stable/--)
- 14 million passengers in fiscal 2019, 31% international
Analyst: Meet Vora
Perth Airport receives the lowest proportion of Chinese national arrivals in the country (at about 3%) of its total international passenger base among our rated portfolio. Therefore, the impact on Perth Airport should not be material over the short term. That said, the general cautious approach of international travelers could result in some pressure on international traffic through the airport over the next few months.
Under a stress scenario of flat overall traffic growth for year-end June 30, 2020, we believe Perth Airport can sustain FFO-to-debt of about 9%, assuming capex remains as planned. However, this could put pressure in subsequent years if the slowdown is prolonged and the management does not take active steps to conserve capital such as reducing or deferring capex. Perth Airport has limited flexibility from a distributions perspective, given that the airport did not pay any dividends for the past year-end. We expect only a modest amount of distributions in the current fiscal year.
Southern Cross Airport Holdings Pty Ltd. (Sydney Airport, BBB+/Stable/--)
- 44.4 million passengers in fiscal 2018, 38% international
Analyst: Meet Vora
We believe that international passenger traffic will decline over the next 2-3 months at least due to the coronavirus outbreak. The Australian government has announced a ban on arrivals of Chinese nationals (which forms about 16% of international arrivals or about 8% of total international passengers for Sydney Airport) due to the outbreak.
However, we believe that Sydney Airport has a modest buffer in its financial metrics to withstand some pressure on passenger traffic. For example, assuming a severe stress of a 5% decline in international passenger traffic and flat growth in domestic passengers for the year-end December 2020, Sydney Airport would still sustain an FFO-to-debt ratio of about 8.5%, which is adequate for its current ratings.
Over the short term, however, we believe that the airport would exercise flexibility in its operating costs to mitigate the impact of the lower traffic. In addition, Sydney Airport has a significant amount of flexibility in its capex program (expected to be about A$300 million–A$350 million each for 2020 and 2021), which could also be deferred or modified depending on traffic trends.
For year-end December 2019, total passenger growth was 0.1%, compared with our expectations of 1.5%-2.5%. This slowdown reflected a challenging global environment, some consolidation following above-trend international passenger growth over the past few years, as well as softer economic activities on the domestic front. That said, Sydney Airport is in the middle of renegotiating the majority of its aeronautical agreements, which should provide an opportunity to rebalance its traffic numbers and secure the return on its investments over the next several years.
Wellington International Airport Ltd. (WIAL, BBB+/Stable/A-2)
- 6.4 million passengers in fiscal 2019, 15% international
Analyst: Sonia Agarwal
While WIAL's capital spending remains in line with our forecasts, Air New Zealand and Jetstar Airways' reductions in domestic capacity have contributed to lower passengers than we expect. Passenger numbers are likely to be flat or decline by 1% in 2020 and 2021 (fiscal year ending March 31). This would lead to a one-off decline in FFO to debt to below 13% in fiscal 2020, which we have factored in the rating. However, the level remains above our downside threshold of 13% in subsequent years.
Largely a domestic airport, WIAL is indirectly exposed to the coronavirus threat. Domestic traffic could suffer due to a hit to international inbound travel. In a scenario of an overall decline of 2%-3% in total passengers in 2021, we believe that WIAL is well positioned to handle this short-term weakness while keeping its capex plans. However, the drop could strain the company's financial metrics in subsequent years if the slowdown is prolonged and the management does not take steps to preserve capital such as reducing capex or dividends.
- SARS 2.0? Aviation Faces Risks From Coronavirus, Jan. 30, 2020
- Asia-Pacific Sovereign Rating Trends 2020, Jan. 29, 2020
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
|Primary Credit Analyst:||Parvathy Iyer, Melbourne (61) 3-9631-2034;|
|Secondary Contacts:||Sonia Agarwal, Melbourne (61) 3-9631-2102;|
|Alexander Dunn, Melbourne (61) 3-9631-2120;|
|Meet N Vora, Sydney (61) 2-9255-9854;|
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