Sydney Airport: Regulatory pressures ease

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
23 October 2019, 5:24 PM
Sectors Covered:
Infrastructure, Utilities

  • The Productivity Commission's final report was benign for Sydney Airport (ASX:SYD), if not helpful.
  • We view the event as de-risking the investment case, and should contribute to the gap closing between the share price and our 12 month target price.
  • Our forecast and ADD rating remain unchanged (Morgans clients can login to view detailed reports and price targets).
  • Next key events are monthly pax releases and investor day (6 December).

Continuation of light-handed regulation key to investment case

The final report by the Productivity Commission (PC) told government that Sydney Airport (ASX:SYD) has not systematically exercised market power in commercial negotiations, aeronautical services or car parking.

It saw ongoing regulatory oversight as justified, but there was no justification for significant change to the current light-handed approach to economic regulation.

In addition, the PC viewed the level of return on SYD's aero assets as reflective of its limited investment opportunities, pax growth in excess of asset base growth, and regulatory constraints.

It also notes that with scarce capacity, increasing charges could be an efficient way to ration access to services, so increasing returns is not necessarily indicative of SYD exercising market power.

At the very least, this PC view means regulatory pressure should not be a headwind during SYD's aero price negotiations with airlines.

Increased information disclosure

The PC thinks information disclosure should be stepped up, recommending that SYD be required to report to the ACCC (for its annual airport monitoring report) its revenues and costs from providing domestic and international aero services to airlines (currently this is reported on a combined basis instead of separately).

From an analyst perspective, this increased disclosure will be helpful. The PC also recommended that SYD provide more information on the terms of landside access.

Recommendations to increase operational flexibility

The PC suggested the 80 aircraft movements per hour cap should be policed on a per hour basis instead of the 20 movements per 15 minutes currently. This would increase SYD's flexibility in processing passengers.

The bull case was for the curfew to be reduced (politically unlikely) and/or the cap to be measured on a daily or weekly basis (or even annual like Heathrow), so not quite there but an improvement nonetheless.

Alternative types of freight aircraft (vs only BAe-146) should be allowed to operate during the curfew hours of 11pm-6am, provided current noise and movement cap is not breached.

While positive, freight makes up a small part of SYD's earnings.

A rebuttal of the proposed negotiate-arbitrate regime

The PC recommended against implementing the negotiate-arbitrate regime being lobbied for by the airlines and the ACCC, noting it bypassed the safeguards in the National Access Regime and viewing it as inherently unbalanced in favour of the airlines.

The PC also suggested anti-competitive contract clauses between airports and airlines should be removed.

SYD says it is happy to remove these clauses (we understand they were favourable to key airlines).

More information

Morgans clients can login to view our detailed report and updated share price target for Sydney Airport (SYD). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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