Airport business

Recently we’ve been hearing lots of airport news.

Beijing is building a new airport, called Beijing Daxing International Airport, with a capacity to handle 100 million passengers a year. It’s estimated to cost nearly USD 12.9bn, be completed in 2019, and will have the world’s largest passenger terminal.

Guangzhou International airport is opening its Terminal 2 soon and is planning to build its Terminal 3 building before 2025.

Bangkok‘s Suvarnabhumi airport is spending USD 3.5bn on upgrades, including to a third runway.

South Korea‘s Incheon International airport is spending USD 4.5bn on a second terminal.

Sydney is planning its second airport, and its current airport operator declined the government’s offer to build the second airport.

Hong Kong‘s airport is planning a third runway at a cost of HKD 141.5bn.

Singapore‘s Changi Airport is opening its Terminal 4 in next few months, which cost SGD 985m. It’s building terminal 5 with capacity of 50 million passengers, bringing total capacity to 135 million passengers when completed in late 2020s.

The airlines are also making record orders for new planes. Even Warren Buffett started investing in airlines, an industry he once hated.

There are simply lots of news on airport and airlines out there. We will not repeat them here. We’ll go directly to what most investors are interested in. Stock price.

Over the past 5 years, excluding dividends, Sydney Airport made 115% return, Beijing airport 141%, Shanghai airport 200%, Xiamen airport 108%, Guangzhou airport 210%.

Sydney Airport - Price 5Y - 2017-07-31
Source: Google Finance.
Bejing Airport - Price 5Y - 2017-07-31
Source: Google Finance.
Shanghai Airport - Price 5Y - 2017-07-31
Source: Google Finance.
Xiamen Airport - Price 5Y - 2017-07-31
Source: Google Finance.

 

Guangzhou Airport - Price 5Y - 2017-07-31
Source: Bloomberg

(If you wonder why Guangzhou airport’s price chart is different from the rest, it’s because Google Finance does not adjust the price chart for the recent stock split.)

I won’t make comparison on their financial performance here. Lately, I don’t have much spare time to do that. But I can tell you that most of them are experiencing rising revenue and net profit while maintaining a decent ROE. Therefore, the doubling or tripling of the share price is due to both rising earnings and valuation multiple (more of the latter). If we can see Changi airport’s financial result, I’m sure we’ll see rising revenue and net profit too. It’s one of my favorite places in Singapore.

Airlines are notoriously competitive. The bad ones can survive on the support of government because of nation pride. Looking at all the airport investment above, we know it’s getting more competitive too. Every airport wants to attract more airlines/passengers to use itself.

But airport business is different from airlines business. In a city, usually there is only one or two airports. It’s mostly monopoly (or duopoly for those cities with two airports) within that city itself. If the city itself is doing great, you can expect the airport to be doing great too. Example, Tier-1 city in China, such as Beijing and Shanghai, will only see growing flight passengers.  The growth is coming from rising middle-class in China’s huge population, more frequent business travels in these big cities and tourists from other countries. Airlines can have price-war and be subjected to fluctuation in fuel cost, while airports experience little of those. Of course, if the airlines are bleeding financially, they are likely to negotiate for reduced airport fees, but the impacts to the airports are much less.

Looking at the price charts above, you’ll notice that the airports’ valuation multiple are not cheap at all. Many of them are currently at or near record high share price. I too noticed the airport business quite late. I bought Guangzhou Baiyun International airport’s share only few months ago.

But if you extend the price chart to over 15-20 years, you will see some cyclicality in their share prices. So, if you have missed the boat now and are not willing to pay at current price level to participate in the business, just keep airport business at the back of your mind and re-visit during recession.

 

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3 thoughts on “Airport business

    1. Hi Clement

      I did not study their businesses.
      Just looking at the financial performances, Malaysia airports has been growing its revenue and profit at low return of capital. Probably poor management or underutilized capacity in the airports. At market cap of MYR 14bn while earnings net profit of just few hundred millions, I find it expensive and the business not attractive.

      Airports of Thailand, on the other hand, has been growing the business with superb margin and expanding return on capital, and that’s reflected in its rising share price. The business looks attractive to me, but the share price is expensive at 35x P/E. I don’t think it can grow its earnings at the rate of 20-30% per year for next 2-3 years given that operating margin is nearly 50% now and revenue not likely to grow that fast going forward. Having said that, I don’t know what kind of capacity utilization they have at the moment.

      Like

  1. Hi,

    Thanks alot for the reply. Agree that airports of thailand is overvalued though the past growth is impressive.

    Also noticed that these airport companies have alot of revenue listed under other income which makes it tough to find the ‘real’ profit.

    Like

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