Market sentiment towards Auckland International Airport (ASX:AIA) has been impacted by regulatory uncertainty. Another factor has been downgrades to consensus estimates for FY26 and FY27 in light of lower passenger growth assumptions. The latter emerged following the release of interim results in February (1H25).
Accordingly, we consider whether current levels offer value.
About Auckland International Airport
Auckland International Airport is the owner and operator of Auckland Airport, New Zealand’s largest international airport. The Company owns 1,300ha of land, and hosts ancillary commercial services, including retail and duty-free, car parking, hotels, warehouses, and offices. It also has a minority stake in Queenstown Airport.
Revenue is mostly, generated by various aeronautical charges (which are levied on a per passenger, aircraft landing and aircraft basis). Other revenue sources include retail rental income, car parking and property businesses. AIA’s aeronautical revenue is regulated by the New Zealand Commerce Commission (NZCC).
Key Fundamental Drivers
Soft Growth in Passenger Numbers Expected
Seat capacity at AIA remained flat during 1H25 at 89% compared to FY19 levels. Seat capacity was impacted by market competition as well as engine/fleet issues for Air New Zealand. Auckland Airport’s domestic seat capacity lags the growth at other Australia airports (which are at or above pre-COVID levels). This weak seat capacity environment is expected to be a factor over the next 24 months, peaking in 2H25/1H26. Reflecting the weakness in seat capacity, passenger growth assumptions for FY26 and FY27 have been lowered.
Soft passenger growth in 1H25 is now expected to continue for another 18-24 months, with peak weakness from engine/fleet issues for Air New Zealand and capacity constraints expected to occur in 2H25/1H26.
Regulatory Risk
Auckland Airport is subject to the NZ Airport Authorities Act 1966. The Act requires consultation with major airline customers on aeronautical charges at least every five years. The next review – Price Setting Event 4 (PSE4) – covers aeronautical prices for the 5-year period from the 2023 financial year to the 2027 financial year.
In its draft decision, the NZ Commerce Commission (NZCC) determined that its assessment of a Weighted Average Cost of Capital (WACC) for PSE4 was 7.27%-7.51% under two different scenarios. In contrast, AIA was targeting 8.73%. NZCC determined that AIA’s targeted WACC will result in additional cost to consumers over the PSE4 period. However, when benchmarked against other international airports in a 2022 Airport Performance Indicator report, Auckland Airport’s operating cost structure was amongst the lowest; ranking 43rd out of 50 airports on operating costs per passenger.
The NZCC’s final PSE4 pricing decision is expected in the current quarter (3Q25). While it is likely that the NZCC will lift the WACC assessment, the final decision to still not likely to support AIA’s Targeted 8.73% return.
Market estimates are factoring a modest reduction in WACC to ~8%. A key reason for this is that in its draft decision, the NZCC considered AIA’s PSE4 passenger volume forecasts to be reasonable. It is worth noting that actual passenger volume has been weaker than PSE4 forecasts. This is due to unfavourable macroeconomic conditions, airline scheduling and Air New Zealand’s engine issues negatively impacting passenger volumes. Overall, there appears to be limited downside from the final PSE4 pricing decision in the near term, as this may be already factored into consensus forecasts.
Strong Outlook for Non-Aeronautical Businesses
Non-aeronautical revenue in 1H25 was solid, reporting +12% growth reflecting a significant net interest income contribution and strong growth in investment property revenue. Property rental revenue was stronger than expected, reflecting new developments completed in the period and a full-period contribution from earlier developments. A full-period contribution in 2H25 is expected to provide further upside. The challenging macroeconomic conditions, combined with the reduced domestic seat capacity, have resulted in an impact to associated revenue lines (retail and car parking). Notwithstanding, there is a strong outlook for non-aeronautical revenue, underpinned by several factors:
i. The appointment of a new long-term Duty Free operator tender (announced 18 March 2025). The agreement suggests a more balanced share of risk between AIA and the Duty Free operator.
ii. A >50% increase in public car-park capacity, after completion of the transport hub. Importantly, the higher capacity is leveraged to AIA’s recovering passenger volumes towards pre-COVID levels.
iii. Full year impact of investments undertaken over the last two years. This includes increased income from the stabilisation of Manawa Bay outlet shopping centre which opened in September 2024.
Fundamental View
We consider that at current levels, valuation support is emerging, AIA shares are currently trading on a 1-year forward EV/EBITDA multiple of ~21x. This multiple is at the bottom end of the range over the last two years and slight below the implied multiple relative to the broader NZ market. Since 2012, AIA’s EV/EBITDA has traded on a premium ~2x the broader NZ market. Based on the current EV/EBITDA multiple for the NZ market of ~11x, this implies an EV/EBITDA multiple of ~22x.
The shares are also trading at a ~11% discount to the average market valuation of ~$8.16 per share. Further, AIA offers an attractive EPS growth profile of ~13% (in NZ$ terms) over FY24-27 on a CAGR basis.
Upcoming catalysts include: i) Valuation support from US 10-year treasury yields continuing to taper off and ii) The likelihood that the final PSE4 decision is not as bad as the market feared. In particular, the Company can initiate several mitigation strategies in the event that the NZCC’s final WACC outcome represents a larger-than-expected downward revision from AIA’s targeted WACC.
Charting View
For the past few years, AIA has been trading in a range between about $6.50 and $8. At the moment it is in the middle of that range and heading lower. This means that investors can use this short-term volatility in markets to wait for a dip closer to levels under $7 before buying in. The initial stop loss could then be be placed just under $6.50.
Michael Gable is managing director of Fairmont Equities.
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