Finding funding when all your passengers fly away
Auckland International Airport has seen a 95 percent drop in passengers passing through its doors, and that could drop still further. In the latest of his interviews with key industry leaders, Rod Oram talks to the airport's CEO Adrian Littlewood about coping with Covid.
As an exercise in working from home, Auckland International Airport’s recent equity capital raising will take some beating.
Management, board, staff and their advisers tapped share market investors for $1.2 billion to bolster the company’s balance sheet to see it through the Covid-19 crisis.
They called their homework Project Falcon. Given such raptors feed mainly on live prey, what were they signalling? After all, it set an New Zealand record for secondary market offers.
“I don’t know who came up with that name. It had no special meaning,” assures Adrian Littlewood, the airport’s chief executive.
Still, it is a worthy metaphor. The airport’s recent flight path follows a falcon’s – plunging earthwards in pursuit of its next meal, grabbing it with both talons just in the nick of time, soaring to new heights, then consuming the sustenance at its leisure.
Last year, some 21.5 million passengers used the airport, broadly half domestic and half international. But in recent weeks the daily flow has fallen by 95 percent, and it could get even quieter as repatriation flights dwindle.
"I’d like to see the Tasman coming on relatively quickly to extend our country bubble to an Anzac bubble."
In response, the capital raising was based “on a very conservative view of the future,” says Littlewood. “But I wouldn't want that to become the default scenario. It was just a balance sheet test to make sure we had the capacity to get through a range of recovery scenarios. We genuinely don’t know what recovery will look like. But I don’t think our stress test scenario will be the outcome.”
The Government will give us a sense of the first phase with its decisions next Monday on when and how it will start to ease the lockdown. While this might allow more domestic travel, any increase in international travel will be much later.
“Very likely we’ll see a staggered recovery progressing from domestic first,” Littlewood says. “I’d like to see the Tasman coming on relatively quickly to extend our country bubble to an Anzac bubble. About 55 percent of international traffic is trans-Tasman. For tourism’s recovery, standing up the Tasman flows should be a priority.”
Given its connections with China, the airport was one of the first New Zealand businesses to be hit by the outbreak of the Covid-19 virus in Wuhan. Initially in January, the outbound travel restraints applied only to the city and its province of Hubei while flights from other centres continued.
In the same period last year, Auckland airport was handling almost 50 Chinese return services a week. But as the restrictions expanded, the number of Chinese arrivals in New Zealand fell 90 percent in February.
At its interim results presentation on February 20, the airport was still likening the impact to that of the relatively contained Sars epidemic in 2002-04. But within a month the virulent spread of Covid-19 was forcing countries to close their borders, air traffic all but disappeared and the airport cancelled its interim dividend. Soon after it put most of its $2 billion of redevelopment projects on hold, made redundant some 100 staff who were working on them, and put the other 400 or so staff on 80 percent pay.
Earlier, as the severity of the epidemic became apparent, the airport had split up all its key operating teams into multiple small units. If a person in one team succumbs to the virus the other units can keep operating.
Meanwhile, work practices changed rapidly as border and health protocols were tightened. “They’ve done an excellent job. I’m very proud of them,” Littlewood says. In addition to Auckland Airport's own staff, employees of the government, airlines and other service providers are still attending to the minimal flow of passengers.
To help retail businesses in the terminals survive the near-absence of customers, the airport has temporarily shifted their lease payments to a percentage of their now non-existent turnover. “When this is over, we’ll have a grown up conversation with them” about what the gradual recovery means to them and the airport.
“To make sure we have enough gas in the tank to get right through to the end of 2021, we asked our debt and equity funders to support us through these very unusual times. We decided to go once and go early. We don't want to leave a view we’d need to come back again,” Littlewood says.
But given the airport company paid $300m in dividends last year and its payouts over the past decade or so totalled more than the $1.2b it has just raised in new equity, might the company in the future pay smaller dividends so it can retain more earnings?
“I don't think anyone could have planned for this. Often there is a bit of undue attention of dividends. But the reality is our investment program is largely debt funded. We were fortunate that we have very wide access to debt markets around the world,” Littlewood replies.
“We’re not stretched at all. We were actually conservatively geared compared to our peer group. We were A minus rated with a positive outlook, and we intend to maintain that rating.”
Meanwhile, it will still spend some $275m on capex between now and the end of next year, albeit down sharply from the $400m-$600m a year it would have under the full redevelopment programme.
“We’ve got to take our time to understand what this recovery looks like and what changes we need to make in our master plan. Its principles are still correct but we have to figure out how to fund and execute that plan.”
Improving the northern entrance to the airport is the main work still underway. This includes adding mass transit lanes, upgrading utilities, and beginning to realign the road network so it will serve the new domestic terminal when it is built as an integral part of the existing international terminal.
Through turbulent times like these, “you really are relying on great people working hard and playing ‘out of position’. You're giving them a new task and a new role; and they're applying their judgement and experience to it…and really embracing it,” Littlewood says.
“Business-as-usual disappeared overnight. Our new version of business-as-usual has formed pretty quickly and pretty well.”
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