Monday 10 February 2014 by FIIG Research Company updates

Second Sydney airport of little concern for bond holders

Key points:

  1. Government likely to announce selection of second airport site at Badgerys Creek
  2. Construction time frame takes the airport beyond 2020
  3. Little concern for 2030 bond holders due to the dynamics of demand

Why the concern?

Planning for major infrastructure has a significant lead time. As a perfect example, the current Sydney Airport has a masterplan from 2009 which takes capital works planning out to 2029. Planning for major infrastructure has to be forward looking and the report and all the discussion around the second airport is driven by the need for more capacity by 2045 – not next week. However, with the significant lead time required for planning, approvals, land purchases, corridor planning, construction...the start of the process may need to be sooner rather than later.

With the lead time for planning and construction for major infrastructure, any investor holding the 2020 inflation linked bonds from Sydney Airport may chose to read no further. We will not see a single aircraft land at a second airport before these bonds mature. Brisbane’s AirportLink took four years to construct, for a 6.7km stretch of road. The planning and construction of an airport AND the ancillary infrastructure of road and rail would have little chance of being completed by 2020.

What about 2030 bond holders?

So, if we think the 2020 bond holders are safe on the basis of construction time restraints, what about bondholders with 2030 maturities?

It is here that a dose of reality about the second airport provides confidence that the 2030 bond will be repaid on time and in full given the ongoing, successful and profitable operation of the Kingsford Smith Airport.

Badgerys Creek is just south of Penrith, and in part, the reason why it is first choice is its closeness to the M7 and M4 motorways which improves its attractiveness as a viable freight hub. However, a quick check of the CityRail travel planner website shows that travellers from Penrith take around one hour to make it via train to Martin Place in the CBD holding it back as a viable domestic commuter travel hub for anyone other than those living in the Western suburbs.

Any second Sydney airport would likely service freight flights (which don’t really help the peak hour landing issues at Sydney Airport) and low cost airlines where passengers are prepared to trade off the inconvenience and travel time associated with getting to a distant airport in return for a cheaper airfare. Evidence suggests regional airports have little impact on major city airports. For example, Avalon has not had a major effect on the operations of Melbourne Airport (in fact reports are of flight numbers dropping at Avalon, not Melbourne) and the Gold Coast has not had a major effect on Brisbane Airport. In the UK, Gatwick, Stansted and City haven’t caused the demise of Heathrow. A second satellite airport in Sydney would be of little concern to bond holders. The discussion only begins because planners and governments think the first airport is already approaching capacity.

The major international airlines will not use a remote airport. Qantas, Etihad, Singapore, and Emirates Airlines will not be delivering their international customers to Penrith for an hour’s ride on Sydney Trains. Nor will the airport attract the business commuter market heading to the Sydney CBD. It will service Low Cost Carriers, regionals and freight only.

Finally, the current owners of Sydney Airport maintain first right of refusal over the lease of a second airport. If they feel their asset is threatened and there is an economic option in a second airport, they will no doubt take up the option to construct and own the Badgerys Creek airport themselves.

Conclusion

So, whilst there is once again a heated debate about the second Sydney Airport, something which began before I was born, we remain very comfortable with the bonds of Australia’s largest aeronautical hub. Owners of 2020 maturity bonds will not even see a plane land at a second airport even if it were to be approved this week, and if owners of the 2030 bonds do, it will be because Sydney Airport is already full and the second airport does not represent any competitive threat.

Sydney Airport inflation linked bonds remain one of the best buys in the market and offers 100% protection against inflation for investors.

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