Airports or airlines?
02 May, 2016
With the strong growth in tourists coming into New Zealand recently (not to mention healthy net migration as well), what is the best way to capture this growth in a portfolio — through owning shares in the airport, or in the airlines themselves? Auckland Airport or Air New Zealand?
Over the last two years, the share prices of both Auckland Airport and Air New Zealand have been buoyant, matching the surge in tourist flows. Auckland Airport has recorded 24 straight months of increases in international passenger numbers, with double-digit increases in tourists from many markets. Air New Zealand has expanded its route network and seat capacity over this same period, and has been able to fill these seats with additional passengers. The profitability of both Auckland Airport and Air New Zealand are at record highs.
The share price of Auckland Airport has outperformed Air New Zealand over this time frame and in fact, over almost any 3-5 year period (our investment time horizon). We believe most of this comes down to business models and is reflected in our STEEPP scores for each. Airports tend to have little competition, and earn revenue from multiple sources (airport charges, parking, retail and property rentals). Generally, the more airlines that travel to and within New Zealand, the better.
The converse is true for Air New Zealand — it earns its revenue predominantly from one source (airfares) and the fewer number of competing airlines that fly into and within New Zealand, the better it is for the company's profitability.
While airlines can be very good short term share price performers, our preference is to own shares in the airport (the same goes for our Property & Infrastructure Fund). Our view is that they have superior business models, their earnings tend to be less volatile and forecasting earnings is easier — resulting in a higher STEEPP score. Auckland Airport wins in our view.