Auckland International Airport AIA is recovering strongly. In line with our forecasts, fiscal 2024 underlying net profit lifted 87% to NZD 277 million on the back of 43% revenue growth. International travelers are returning, and domestic passenger numbers continue to climb. Total passenger numbers were up 17% on the prior year to 19 million, which is about 88% of pre-covid-19 fiscal 2019 levels.

Fiscal 2024 was also the first year of the new aeronautical price regime, with a big step-up in per-passenger airport charges. Aeronautical revenue lifted 73% to NZD 450. Retail revenue, primarily driven by passenger numbers, lifted 37% to NZD 267 million on the back of 21% higher spend-per-passenger and car park revenue.

Fiscal 2025 net profit guidance of NZD 280 million to NZD 320 million is better than we expected. We increase our fiscal 2025 forecast by 7% to NZD 305 million—mostly due to a lower expensed, rather than capitalized, interest expense. Borrowing costs directly attributable to activities like major capital expenditure on the airport can be capitalized as part of the asset's cost. The impact is immaterial to our unchanged NZD 8.00 fair value estimate. We lift our fair value estimate for Australian-listed securities by 1% to AUD 7.30 on foreign currency movements.

Shares in Auckland Airport screen as undervalued. Despite the looming capital expenditure bill, most of the company’s investments are completed under a regulated scheme, allowing it to generate suitable returns on invested capital. Thanks to its near-monopoly position in a stable regulatory environment, the airport is protected from direct competition, underpinning its wide economic moat.

Business strategy and outlook

As the primary gateway to New Zealand, Auckland Airport is set to benefit from rising air travel to the island nation. Auckland Airport is the largest airport in New Zealand, and Auckland is by far New Zealand’s most populous city. No other airport in the country is likely to outdo Auckland as an international hub.

We expect the airport to capture good medium-term growth from further airline capacity expansion to and from New Zealand. We forecast total passengers handled by Auckland to grow to more than 25% above pre-covid levels over the next decade.

Auckland Airport has carved a wide economic moat, thanks to its near-monopoly position in a stable regulatory environment. We don’t think a second major airport is likely to emerge anytime soon, given Auckland Airport’s expansion potential to accommodate continued growth in passenger numbers, protecting its position for decades to come.

Aeronautical and nonaeronautical operations each contribute about half of revenue, with profitability typically higher in the nonaeronautical business. The aeronautical business is regulated. The regulator allows Auckland Airport to earn a suitable return on its “regulated asset base”, which includes prior capital expenditures and some revaluations.

Landing fees and per passenger charges are set with airlines every five years, and independently reviewed to ensure Auckland Airport isn’t abusing its monopolistic power. But this structure presents near-term earnings risk—passenger fees are set up to five years ahead, lower-than-expected traffic could weigh on returns on invested capital. Nevertheless, capital investments are typically structured with some flexibility should lower traffic eventuate, reducing the risk of extended overcapacity.

The nonaeronautical business is unregulated, but still principally driven by passenger traffic. Retail operations are the biggest part of the nonaeronautical business—notably duty-free, which relies heavily on international passengers, who far outspend domestic travelers. The property business is about half the size of retail, but has grown faster, driven by new developments and rent reviews. Car parking rounds out the bulk of unregulated earnings.

Economic moat rating

Auckland International Airport enjoys a wide economic moat, underpinned by efficient scale and intangible assets as New Zealand’s primary airport. Its license, and more than 1,500 hectares of land that house the airport and developable landbank around Auckland, are unlikely to be replicated by rivals.

We don’t think a second major airport is likely to emerge anytime soon, given Auckland Airport’s expansion potential to accommodate continued growth in passenger numbers and a stable regulatory environment, protecting Auckland’s position for decades to come. With sizable capital projects underway—much of them multidecade investments in a new terminal, ground transport facility, car park extension, and other airfield infrastructure—ROICs are set to lag weighted average cost of capital over the medium term. But we expect returns to exceed WACC by the end of the next decade (and beyond) as large expansion projects come online.

The firm enjoys efficient scale as Auckland’s only international airport, and the sole major jet airliner hub in New Zealand. Auckland has long been the primary gateway for international travel in New Zealand, handling about 21 million passengers in pre-covid-19, and we don’t expect any of the country’s next three largest airports (Christchurch: 7 million passengers, Wellington: 6 million passengers, Queenstown: 2 million passengers) to catch up in the foreseeable future. This is mainly due to Auckland’s large relative size, accounting for more than a third of New Zealand’s population, and function as the country’s primary business hub.

The city of Auckland is already more than four times larger than the next largest city, Christchurch. We expect population growth in the Auckland region to match or outpace other cities, given the forces of agglomeration, supporting Auckland’s entrenched position. Long-term growth drivers include New Zealand’s expanding population, increased economic and tourism links with the globe, and shorter travel times making it easier to reach the relatively remote island nation.

While airports are regulated assets, regulation in New Zealand is relatively accommodative. Auckland Airport is free to set fees with airlines for passenger movements, aircraft landings, aircraft parking, check-in facility usage, and security expenses, to earn a suitable return on its “regulated asset base”, which includes prior capital expenditures and some revaluations. Price-setting events occur approximately every five years, creating a lag in generating returns as new capital projects are added to the aeronautical asset base and priced into fees starting at the next pricing reset.

Despite this timing drag on returns, we expect Auckland Airport to enjoy returns above its cost of capital for its regulated asset base over the long term. But we don’t see material upside to ROICs for the regulated business either as government regulation will likely keep a lid on returns. Price-setting is independently reviewed to determine whether returns are “reasonable” in relation to Auckland Airport’s WACC. While the company is under no obligation to follow the independent review, lifting returns past an acceptable point would elevate the risk of the government stepping in with tighter regulation.

Auckland Airport can benefit from its dominant position through its unregulated businesses, notably retail (including duty-free), car parking, hotels, and industrial property and land development. The company contracts out most of its retail store space, and collects minimum guaranteed rent, much of which is on an annual escalator. Profitability in the retail and property segments is typically higher than in the aeronautical segment.

While not contributing to the moat, Auckland Airport is also likely to benefit from the limited land availability in Auckland. Property investments should yield good returns as the company capitalizes on its landbank and gradually develops it into a business district catering to a wide variety of organizations in the retail, industrial, and commercial sectors—in particular, businesses wanting to establish operations near the airport (like hotels, warehouses, and commercial offerings).

Auckland airport bulls say

  • Auckland Airport provides exposure to rising incomes in the region, and population growth in New Zealand.
  • Auckland Airport has a wide range of attractive development projects on the horizon, with undeveloped land providing optionality.
  • Auckland Airport should enjoy a meaningful increase in regulated passenger fees, to compensate the firm for its likely sizable capital spending over the next decade.

Auckland airport bears say

  • A slowdown in the global economy, a deterioration in international relations, or climate challenges could affect tourist inflow to New Zealand, limiting passenger fees and retail spending at the airport.
  • A more onerous regulatory environment could curtail Auckland Airport’s ability to generate economic profit from its aeronautical business.
  • The firm’s bottom line and expansion plans are sensitive to interest rates, which have increased substantially from their all-time lows during the pandemic.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.