Last week Federal Transport Minister Anthony Albanese again raised the topic of the need for a second airport in the Sydney basin. NSW Premier Barry O’Farrell shot back with a ‘not on my watch’ call, and the most politicised infrastructure decision got kicked around again for the next few days. In this article I will look at the key issues in the context of Sydney Airport’s bonds with maturities in 2020 and 2030.
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.
However, a suitable site for the airport has not yet been decided on, and on this basis, 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 (currently Australia’s largest infrastructure project) has or is planned to take, four years to construct, for a 6.7km stretch of road. The planning and construction of an airport AND the ancilliary infrastructure of road and rail would have no chance of being completed by 2020.
Against the argument for the need for a second runway is the owners of Sydney Airport who believe there is sufficient capacity available at the current facility to meet passenger projections through to 2050. More efficient use of facilities and larger aircraft help overcome the need for a new airport in their view, however, the owners of Sydney Airport, under the terms of its long term lease have the first right of refusal for the ownership of any airport within 100km of their Kingsford Smith facility.
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 gives us confidence for 2030 bond holders. Personally, I have my doubts that a second airport will be operating by 2030 (a second airport for Sydney is not currently one of the preferred infrastructure projects of Infrastructure Australia), but if it is, it will be completed closer to 2030 than 2020, and again, the current owners of Sydney Airport maintain first right of refusal, if they feel their asset is threatened, and that there is an economic option in a second airport, they will no doubt take up the option.
But there are some more fundamental issues at play here for Sydney Airport (and its bondholders) which give rise to confidence in the ongoing, successful and profitable operation of the Kingsford Smith airport.
Currently, there are three options being considered (or at least debated) by the key protagonists. Mr Albanese has a preference for a second airport to be constructed at Wilton, south west of the Sydney CBD. The independent report he commissioned has a preferred option at Badgery’s Creek, while Premier O’Farrell wants a fast train connection to Canberra airport.
Badgery’s Creek has long been the preferred option and the Hawke/Keating governments purchased land for this purpose. Politically it cost the Labor government and when John Howard was voted in it effectively got placed on permanent hold. This is effectively an albatross for the Labor party and why Mr Albanese has ignored the first choice of his independent report. Badgery’s 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 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.
Wilton, Mr Albanese’s preferred choice is south-west of the CBD and is just west of Woolongong. Again, a quick review of CityRail’s website shows a travel time of around 90 minutes, so again, not much of an option for domestic commuter travelling, and Wilton doesn’t service the large population of Western Sydney as well as Badgery’s Creek does.
At best, these two airports would likely service freight flights (which don’t really help the peak hour landing issues at Sydney Airport which would drive a second 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. Avalon has not had a major effect on the operations of Melbourne Airport and the Gold Coast has not had a major effect on Brisbane Airport, and 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 (or equity even owners), after all, the discussion only begins because they think the first airport is already full.
Premier O’Farrell’s option of a fast train to Canberra looks like a non-starter. Whilst The Greens are keen on fast train expansion, and Labor may have acquiesced enough to pay for a study, fast trains have a long way to go before they prove they are economically viable in the Australian context, and Premier O’Farrell is keen to suggest a project which will be funded entirely by the Federal Government, something they may not be so keen about.
Politics, politics and more politics
Above I have discussed, in very basic terms, some political issues with Badgery’s Creek, and whilst I rarely feel it appropriate to delve too far into politics, they are some of the key drivers of the discussion regarding the second Sydney airport.
Firstly, part of the drive for a second airport is due to restrictions in place over Sydney Airport. These restrictions are both curfews and hourly movements. Removal of these would stop the debate over a second airport before it even started. However Mr Albanese’s electorate takes in a significant number of suburbs affected by the flight path. Ditto for Messrs Carr and Hockey.
Premier O’Farrell went to the recent NSW election on a platform that included no second airport, despite airports being a Federal Government remit, and having seen what happened to former Premier of Queensland Anna Bligh (with her electoral defeat in part blamed on going back on an election promise of privatisation), he is unlikely to be too helpful to the cause of a second airport at least in this electoral term.
So who’s paying?
The cost of a second airport would be significant. Even assuming Sydney Airport actually constructed the airport, there would be significant funding coming and/or required by governments at all levels. With the Federal Government committed to a surplus, there’s unlikely to be any funding much beyond yet another study in the foreseeable future. With an election also due, no doubt any completed study would be scrapped (should a change of government occur) with a new study undertaken adding further delay to any decision.
Beyond the airport, the cost of ancillary infrastructure would be significant with the need for rail line extensions and significant road infrastructure etc. This would take both federal and state money, and whilst the Federal Government is promising a surplus, the State Government is promising a return to a AAA rating – neither look like offering funding in the short term. And the cost will be huge. Infrastructure costs are constantly under upward pressure due to significant projects in the mining states, and the financial failure of a number of recent infrastructure projects – such as Brisbane’s AirportLink –ensuring the sweet deals (for governments) signed up prior to the GFC will be a thing of the past.
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, 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 offer the only true protection against inflation for investors. Currently the Sydney Airport 2020 ILBs are offering retail investors a real return of 485bps over CPI whilst the 2030 ILBs are offering 525bps over CPI (so around 8% returns including CPI ).