Auckland Airport major project costs rise as construction, tourism boom ramp up

Auckland International Airport [NZX: AIA] says competition for labour and resources due to the city's multi-billion dollar construction boom means the cost of major capital projects may be higher than originally planned, although it stopped short of providing details on any cost over-runs.

Capital expenditure for the 2017 financial year is expected to be the highest in a decade at between $330-370 million , including about $232 million on aeronautical projects, as it expands to cope with an increased number of passengers and airlines coming into the country's largest airport.

Auckland Airport is paying about 250 of its 350 fulltime staff that don't participate in the short-term incentive scheme a $1500 one-off performance bonus after delivering strong full-year growth, a move that mirrors the $2500 one-off staff bonus Air New Zealand announced last week.

The airport's net profit for the year ended June 30 year rose 17% to $262 million while underlying profit rose 21% to $213 million. Revenue rose 13% to $574 million.

The company declared a 9c per share fully imputed final dividend to be paid on October 13, taking total dividends for the year to 17.5c per share, a 19.9% rise on the prior year.

The airport celebrates its 50th year this year, with passenger movements up from 700,000 in 1966 to 17.3 million in 2016, a rise of 9.1% on the previous year. That represents a 6.5% compound passenger growth rate over the half century.

The tourism uplift led to eight new international airlines adding capacity during 2016 and 15 new routes established with flight frequencies increased on existing routes. Domestically, Jetstar's entry on regional routes to compete against Air New Zealand has also increased flight capacity and grown the market. Littlewood said Qantas had indicated this week the move had "gone very well."

Key infrastructure projects this financial year include work continuing on the upgrade of the international terminal departure area, which will significantly expand the airport's core processing and retail footprint including dutyfree areas and work starting on the extension of the international terminal Pier B to add an additional 10,000 sqm of footprint, gates, and air bridges. Completion of the new serviced remote and contact stands for the international terminal is due this year, faster than originally planned, to provide more flexibility to move aircraft between gates, and construction will begin this financial year on its third hotel, with planning already under way on a fourth hotel.

The international terminal departure upgrade is being delivered in three stages with the first due for completion in the early part of next year and final completion in 2018. Chief executive Adrian Littlewood said it was initially costed at $180 million but was starting to "trend up."

"We're putting a lot of interest and focus on pricing of these projects and looking for any over-charging," he said but the airport was "right in the thick" of reassessing the project costs and didn't yet have a revised price.

There has been careful planning to minimise disruption for retailers and passengers during the international terminal expansion and the biggest impact was likely to be mid next-year, Mr Littlewood said.

Auckland's new Unitary Plan also provides for adjusted noise contours for the development of a second runway and improved land designations to allow for flexible airport development within the airport precinct. Some $100 million of capex in 2017 will be on its investment property business where a number of new projects are planned including a 17,000sq m integrated office, warehouse and dog handling facility for the Ministry of Primary Industries and an 11,000sq m distribution centre for Fonterra.

Retail income grew twice as fast as the airport's passenger growth in the 2016 financial year, up 19.3% to $157.5 million. Mr Littlewood said the two new dutyfree retailers introduced last year, Paris-based LS Travel Retail Pacific and Ireland's Aer Rianta International, had conducted detailed analysis of what provides the highest margins per square metre of retail space and increased sales in core categories, including cosmetics and skincare up 40% and confectionery sales up 20%. Specialty and destination store categories also increased sales by over 25%.

The biggest spenders are the Chinese and a breakdown of the various travel markets showed China also had the highest capacity and passenger growth in 2016, up 34% to 750,000 seats and 30% respectively. Based on current wider tourism trends, by the end of this year, half of Chinese visas are expected to be free, independent travellers, who tend to stay longer and spend more.

Some 11 countries had passenger growth of over 10% and five countries over 20%.

The company's continued strong growth and performance meant the board was confident of similar results in the next financial year, with forecast underlying net profit after tax (excluding any fair value changes and other one-off items) for 2017 to be between $230-240 million.

Mr Littlewood said they were also expecting double-digit passenger growth again in the coming year though it may take "time to settle" as demand catches up with the influx of additional capacity.

"We'll see how summer goes when arrivals tend to increase and frequency and gauge through that period how loads follow," he said.

Auckland Airport's shares are trading up 1.25% at $7.29.

(BusinessDesk)

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