Sydney’s monopoly airport is about to get some competition – how will that affect shareholders?
Anyone who has been to a Sydney Airport (ASX: SYD) annual meeting knows the deal. We all sit there silently listening to management, glancing at each other, until one of us brings it up: is the proposed second airport a threat?
Sydney Airport shareholders often stand a little taller than most, with the confident knowledge that they own one of Australia’s best assets – the country’s main gateway, and a lightly regulated monopoly with a stable, growing dividend.
But then a couple of years ago the Government threw a spanner in the works by approving the construction of a second airport at Badgerys Creek. We often get questions from concerned shareholders wondering, rightly, whether the second airport will upend Sydney Airport’s monopoly and destroy the stock’s value.
Long story short: No.
For starters, the new airport isn’t going to be operational for at least a decade. An environmental impact study has only just been published in September and a detailed construction plan, including complex flight paths, is still on the drawing board. Then there’s the issue of infrastructure, roads and rail to support the airport. A new pipeline to carry jet fuel from the coast, for example, will need to be in place before the airport can be built. All this will take years to complete, so the first flight isn’t expected to touch down until the mid- to late-2020s.
When the second airport is eventually up and running, we still wouldn’t expect it to cannibalise much of Sydney Airport’s high-margin international traffic, which accounts for 70% of passenger-driven revenues.
In many cases, bilateral air services agreements cap the number of flights airlines can make between countries. Air Canada, for example, is only permitted 6,000 seats per week to any of the major airports. The airline, in effect, is forced to choose just a couple of destinations it wants to fly to (it picked Sydney and Brisbane).
So, airports aren’t quite the monopolies they seem: they have to compete for airlines and, naturally, airlines want to service the most popular airports. The Western Sydney Airport may increase competition for local travel, but Sydney Airport will always be the main hub as it sits on the CBD’s doorstep, rather than 50km away. That competitive advantage shouldn’t be underestimated.
Finally, Sydney Airport has a first right of refusal to build and operate the second airport. Whether or not the company takes up this right is the important question and management says it’s still evaluating the investment merit.
The biggest threat for Sydney Airport isn’t that a second airport is built, which destroys its profitability. It’s that Sydney Airport takes up its first right of refusal and then costs blow out during construction or traffic to the new airport comes in below forecast.
In any case, Sydney Airport currently uses only 330,000 of its 500,000 allowed flights per year and – thanks to larger plane sizes, such as the A380 – it has room to at least double passenger numbers to more than 70m. There’s more than enough capacity at Sydney Airport for several decades, making this a growth stock worthy of your watchlist.