Ladies and
gentlemen, thank you for standing by, and welcome to the Auckland Airport Interim Results 2021 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, CEO, Mr.
Adrian Littlewood. Thank you. Please go ahead.
Good morning, everyone, and great to have you on the call for the results for the first half of FY 'twenty one. I'm joined by Phil Neutze, our CFO, and Phil and I We'll be working our way through our results presentation. I think it's pretty obvious to say this is Unlike any other result previously and have some information in here that will A milestone for us in terms of the first time we've made an underlying loss in a period since 1998, but also reflects the wide and Significant impact of COVID on our business. We'll touch on various elements throughout the results and then we'll have time for questions at the end. So let's start again on Page 4.
Some of this is a matter of record in many ways for those who don't have a chance to listen to the webcast. But It's been a real period of adjustments in a very dynamic way day to day as well as month to month as we've dealt with COVID, our team are at the front line dealing with the very ongoing changes to managing the border. And so our team has Done a stunning job of managing that as well as keeping on with core business around infrastructure upgrades and taking care of issues there. We've also managed to keep the business ticking on other fronts where it has been misaffected, for example, our commercial property business And the team played an important role in connecting our country through cargo and other things. And we are still spending a lot of our time resetting our business for the COVID environment, Keeping on with some of those projects that matter for the long term, roads, fuel lines, airfields as well as taking care of other projects in our commercial development area.
So we'll touch on those highlights as we go through, but I think it's important to stay out with a big thanks to our team for the incredible hard work over this last year and this last half. So with that intro, I'll turn to Page 5 and just on
some of the results and none of this will
be a surprise to you, heavily impacted by the production and passenger numbers flowing through to our results. So revenue down 65% odd in the period. Under loan earnings, Just a click over that, it's 68% down in the period and leaving us with an underlying loss for the first time, as I said before, of about 10,500,000 And it compares with the corresponding period last year at about £140,000,000 underlying profit. So quite And change for us in the period. As you know, passenger movements down about 74% to 2,800,000 and as that flow through.
So unsurprisingly and as signals prior, no dividends obviously will be paid in this Just turning to Page 6 and getting into a bit more detail. And again, some of these And not as meaningful as they usually are in terms of segment breakdowns and probably what's more of interest is the difference between the performance across the different segments. So Aeronautical revenue down, as I said, 74%, tracking reasonably close to passengers. Retail, obviously, has been more effective, And that is a function of the exposure to international travel and the dominant impact there. And we've adopted a supportive model with our particularly our tenant retailers to try and keep them stable in this intervening period.
Transport has performed a bit better. It's 63% down as domestic travel has recovered. And hotels have been supported by some of the MiQ Managed isolation and quarantine facility support they have had there, but also some impact on the other hotel, Leivas, that hasn't been part of that program. Property has been, again, a real highlight and continued its very strong performance. And really, as I'll touch on later, reflects the underlying quality Of the asset and the team's performance there, we have about $220,000,000 odd under construction, and our portfolio valuation continues to grow.
Finally, on associates, Queenstown has had a tough year like we have in Auckland, with bringing you down near 53 odd percent. So that's the highlights from a segment point of view. If I just touch on Page 7 just into a bit more detail on passengers, and this just Showing the layup of passenger, ebbs and flows over the period. But at a high level, we've gone from having 43 destinations across our network pre COVID, we've got about 30 airlines. We're now down to about 13 Airlines with about half of those destinations suspended.
So that's obviously hit our international hard, and we're running at only about sort of 2% or 3% of normal international volumes in that period. So for a whole half, we only had about 150,000 National passengers and that compares in the previous half, dollars 5,500,000 Domestic It's been pleasant to see that recovery come back, and the team have worked hard to get domestic traveling fully operational at level 2 And you can see in that chart on the right hand side of Page 7 the impact that had in terms of passenger volumes once We managed to work with the government to remove some of those travel restrictions at level 2 there. Cargo It has continued to be an important part of keeping New Zealand connected. The cargo has still been down about 11% in terms of tonnage carried from 91,000 in the previous period to 81,000 in this period. So quite a dramatic change from our normal operations, if you call it that.
And on Page 8, I just wanted to call out the work that our teams have done. So while we've been living with the Management of COVID at the border, we work really hard with our partners in travel and tourism and aviation to try and play our part to help Figure out how we work in this new environment. So as I said, we help resolve level 2 domestic travel, but we also work with our partners to propose Models for transtasmin, we developed a risk based border model with medical peer review process to Suggest a model that could be applied to reopen to safe zones like Australia. We split our terminal into 2 operating models to allow safe zone travel to occur, and we've been a launch partner for a new saliva PCR test to help our staff have a less invasive and more rapid testing protocol to protect them and New Zealand as well. So So we've been hard at work on that.
But I think what we really need to look at is say, well, what's the path out of this current model? And I think There are many things that we think need to happen, but a lot of those are in train, which is good, but needs to be turned from concepts into operation. And so again, operationalizing that risk based border model, I think, is important. Confirming what are the tech required around authority Fly Technologies and how to travel path is one of those ideas that strong support from the airlines. We need to be clear, I think, around the Thresholds, the metrics, vaccine rollout targets, etcetera, that is required to safely restart countries like Australia.
And then we need to restart those when it is safe to do so. And that's all furnished by the ongoing development of our domestic health Security around testing, tracing and new technology. And I think those things are all quite important. And I think for us, I think that's about Building some clarity, we know certainty is hard to achieve in these times. But getting clarity on what are the things that matter and what's the path that business in New Zealand needs to work through, I think, Will be really important in the coming months.
And I think that's the path to restart safe markets like Australia and the Pacific Islands And for us, in the tourism industry in particular, and particularly also for friends and family who are heavily connected with Australia and the Pacific Islands, That's very important. And for our business, it's really material in terms of the recovery part. So So with that, I'll hand to Phil, who will take us through some of the detail on the financial performance. So Phil, over to you.
Thanks, Adrian. So now on Slide 10. It's fair to say that pre COVID, I never expected to be announcing an underlying loss for Auckland Airport, but our world has changed for now, And it's unlikely that we'll report an underlying profit after tax until quarantine free international travel resumes in part, at least with Australia. So we did, however, report a GAAP compliant after tax profit for the half year for December 2020. And as said out in Slide 32 on the appendix to this presentation, reported profit benefited from a couple of items.
There was a circa $30,000,000 upward revaluation in our investment property portfolio, and that was due to development margins achieved on 2 We completed developments and also benefited from the circa $15,000,000 reversal of previously accrued CapEx project termination costs and that reflected successful contract termination negotiations with construction companies. So turning now to Slide 11. As Adrian mentioned, thank goodness for our investment property portfolio. And that's continues to trade strongly, and that's despite us providing just under $3,000,000 of rent abatements to our tenants most adversely impacted by COVID-nineteen during the period, and all other revenue streams were down on PCPs, with retail income and aeronautical passenger charges most impacted and that's owing to the reliance on international passengers, which were down 97% as a result of COVID-nineteen. Airfield income, on the other hand, and that comprises landing and aircraft parking charges, held up better, was down by, in quotation marks, only 50 Defense, if owing to strong international cargo and traffic and aircraft parking.
Car parking also performed comparatively strongly, and that's owing to the contribution from domestic passengers, which were down by 45% in the period versus International down 97%. And also because domestic car parking outperformed domestic passenger numbers, decreasing by only 25%. And we think this reflects the preference to use our own vehicles rather than taxis, rideshare and public transport during the pandemic. So moving to Slide 12. As we guided at the full year results announcement last August, We've pretty much delivered on our target of reducing core operating expenses by 35% compared with pre COVID levels, with a $33,000,000 or 34 percent reduction in the period.
And this excludes some one off benefits that were also booked in the period relating to partial Reduces of the prior provisions for project termination costs, don't try to say that too quickly, and credit losses. So these took the total OpEx reduction to 55% versus PCP. Our main savings in core OpEx were through staff cost Reductions, reduced marketing expenditure, lower consultancy spend, that's the professional services line and reduced the outsourced operations And that's all within the Asset Management Maintenance and Airport Operations expense line. These are savings included outsourced Cara parking operations, bus operations, VIP lounges, baggage and trolley services and clean costs. I'll actually skip Slide 13.
This shows pictorially what I've just explained on the prior slide and a little bit more information to So now on Slide 14. And this provides a breakdown of the circa $100,000,000,000 Capital expenditure carried out in the first half of FY 'twenty one. This is around 50% of the FY 'twenty CapEx run rate, And it reflects the brakes that we put on our CapEx program this year in response to COVID-nineteen. So in addition To completing or initiating construction of the 5 investment properties mentioned on this slide, the majority of the CapEx undertaken this half was on the Essential Airfield and Raving Projects. Restarting the rest of our suspended aeronautical infrastructure program will depend on a resumption of quarantine through international Travel between New Zealand and Australia.
And at this stage, the timing of our Alibaba remains unclear. So before I hand back to Adrian to give a bit more color on how we are positioning for the COVID recovery, I wanted to touch briefly on our financial liquidity, and that's it on Slide 15. So in a nutshell, we had a lot of liquidity, and this could see us Through an extended period of border restrictions, just over $900,000,000 of that $1,600,000,000 of liquidity That is in the form of undrawn bank facilities and the remaining nearly $700,000,000 is in cash. We've got waivers in place For our interest coverage and gearing covenants until 31st December 2021, and as you can see on this page, gearing is very unlikely to The breach, but interest coverage is now negative, and that's versus the 1.5 times coverage that would have been required, barring waivers that we've put in place. Dividends remain suspended while the waiters are in place and Standard And Paul is comfortable with our A-two room.
So I'll hand back to Adrian now.
Thank you, Phil. It's given a good overview of some of those core numbers. So So as I said earlier, some of this following page is just a bit of a function of record, just to record what's happened in the period, but it's important to note it Given the significant work put in by the team. So Page 17, look, we've continued to work really hard to respond to the operational requirements right throughout the business. It's mainly been through proceeds, protocol and people that we have managed that, but there have been additional things that we've had to do.
For example, We've created an off-site facility for repatriation of passengers and with bags under the terminal Split model, Terminal B model that we announced late last year and has been some modest investment required there, but the team has done a stunning job on managing with that. We also Successfully achieved the Equal Council International Health Accreditation for COVID-nineteen Management. So that has Very welcome, and the team are ready and willing to respond to whatever happens in the next little while in terms of managing COVID. Turning on to Page 18. As I highlighted earlier and as Phil mentioned, we have continued on with some of that core infrastructure where the opportunity has So obviously, we did the runway, east and west upgrade.
Those are very significant and operationally complex with shortening of runway. So both of those in the runway have now been done, and we've actually pulled forward a bit of extra work announced last month around taxiways and apron, while the volume of movements remain slow, and we're continuing to do that as we look out to the coming years. We've also done some work on fuel lines, and we'll look to see how we can continue that work while the opportunity is there. On transport, we started to gradually To reignite some of the project components we initially suspended, one of those was the new integrated terminal exit road That we had paused, we've restarted that, so that will be an important part of the future terminal transport system that is going As well as the north to the city route connection upgrade and the south with NZTA, Wokakatahi to the Puonui interchange. So both of those are getting a significant upgrade, mass transit lanes, new intersections and the like, which will mean both our north and south entry points significantly upgraded for the future.
So we'll continue to pick our way through those, both small and modest or medium where we think those are justified for operating requirements, but it's still said, and I'll come back to this later, the big moves will be subject to recovery. Just moving on 'nineteen. In terms of our consumer business across retail and transport, look, it's been a super tough period. As I said, it's been in management mode Really trying to support the retailers as much as we can to keep their businesses either in hibernation or in Low turnover models, and so that's flowed through our results. The growth that domestic has returned and as level 2 and level 1 travel has grown, We see no reluctance to engage in retail.
In fact, we've been trying some things with our duty free operators, getting some end of line stock out down there. We've also launched the domestic mall business, so it's an online channel with pickup in the domestic terminal. Look, not big business, but we're still trying and testing ideas out And importantly, we do that. Phil touched on domestic parking before, and that chart on the right there just shows the return of domestic Tracking volumes has been good, and we've been trying to use excess capacity where possible to support that. On Page 20, as I talked Before and Phil touched on as well, Investment Property has continued to do a great job in terms of providing an underpinned for our business, while our core travel business has been tough.
And the team have concluded the foodstuffs development as well as the spec warehouse, which is now being leased out, As we have done in the past, been very successful in getting that spec leasing away. Street stuff Development on the right hand side there, you can see both the DC and the head office there, a fantastic development, enormous development and a real mark of the team's performance, and Our clients are very, very pleased with that. And we've got a pipeline of about 172,000,000 of new developments coming down the line. That's done to show up in the key metrics. Occupancy has remained high despite COVID, and it seems we've worked very closely just to take a very tailored approach to managing any arrangements With that, it's been more about abatement rather than forgivement of lease terms.
Walt has now clicked over Which has been great, and we still have 180, hectares available for development. Just a quick comment on hotels. And if you travel to the airport, you would Seeing the hotels, the 415 hotels, we're continuing. Look, we've said earlier, that's really focusing on getting the structure and facades And closing those buildings, set out is really a trigger based arrangement that won't continue unless markets, Potential markets are going ahead. So a great result from the Property division.
Just Thank you again, our B2 recovery, and we touched on this. Look, the outlook is still uncertain around international travel. We're drilling into Australia as being the most obvious and Pacific Islands example of the path on recovery. It is it does make a significant difference to our business. How much of the difference, it's hard to say other than that it is almost a switch for us.
But what we wanted to highlight is, Obviously, the Aussie outbound market is very significant and that 11,000,000 outbound trips internationally a year, which is Yes, significantly more than they ever came to New Zealand. So I think, as I said earlier, the feedback from airlines has been very positive in terms of Two way travel can occur. There will be no shortage of capacity available on Tasman for people to go and visit their friends and family. So and particularly so Australians are limited And where else they can travel to? So that represents a very strong opportunity, and certain surveys that we've seen Suggest that New Zealand has always been a place of interest for Australians.
The issue has always been why now? There is no better reason than now if That two way flow can't be opened up. So we're really looking forward to that happening when it's safe to do so. Just on infrastructure, more generally, outside of the core Resilience, we're doing. Obviously, the big question is the infrastructure upgrade program that we had underway.
That was a very significant multibillion dollar program. Appropriately, we put that on hold, and we've been retesting that with airlines and border agencies and others through their program. And the key headlines here is that the Big 8 programs, as I said, are on hold, but that the master plan still remains appropriate for our long term future. The way we get about executing on that master plan and the structure of some of those Projects may look different to where we were before, and I think that is the appropriate response to the post COVID world. We can't just carry on the way we were.
It was very different conditions, and we need to reset that plan. So we're going through that In detail, the fundamental strategy about getting to integration still remains important, but also supports a hub strategy, which has been our focus, but we are looking at different ways to get after that goal. Also, I just wanted to note that we are engaging with Airways New Zealand, in terms of the possibility of purchasing their local EBITDA assets as they make a proposal to exit that service at various airports around the country. So to the final few slides on 23 and 24, One of the hardest things we've had to figure out is how do we set our business in the broader sense for this new world And not let go of things that mean a lot to us in our local community. So we have worked really hard to hold on to things that we think are important for the long term or where we have I've been supporting local organizations for a long time.
So pleased we've kept up with our community trust work, supporting local organizations. We've kicked up with our community support through the 12 days of Christmas program. Our ARR Jobs and Skills Hub, Obviously, the volume of jobs we were targeting has suddenly dropped away, but we are working with the government agencies to try and figure out how can we use Our capacity and our resources in a different way to support kids getting training locally here, building apprenticeships and skills here Because we will be restarting at some stage, and we want to maintain that as an important role for our support for the community for the long term As well as support for the leukemia, blood and cancer, New Zealand team through the Skype, Taos Deer Challenge and Life Education Trust. So these things are continuing, and we just have to narrow our 5% to the ones that we've been supporting for a long time. Finally, on Page 24, since the other view, we have done a lot of work in this last period around looking at We're in a long term sustainability plan.
We're not new to this radio. We've been at this for a long time, and we set a whole bunch of targets For our business around waste, carbon and water, and the good news is we Smoked on with some of those targets and really beat them comfortably, but didn't hit our water target, and it was partly because we hadn't accounted for the water use around our construction activities. But Having beaten those primary targets in waste and carbon and looking at our Water 1, we want to reset for the next Couple of years, 10 years. So we're going through that process at the moment, and we've got a longer term view about our role around those 4 pillars of purpose: people, community and place, and we'll be talking about that more in the future. So that's on the overview of the business.
I just want to now turn to the outlook and guidance. It's no surprise there is Significant uncertainty more so than ever before in our outlook. And obviously, the recovery of international very much affects that outlook. So we have decided to seek guidance, and we had a long discussion about this. But we felt, given where we are in the year, as much as we can Give guidance, we would.
And so we've set guidance for this year of an underlying loss of €35,000,000 to €55,000,000 Now there's some Key assumptions on that, mate. I just wanted to stress, we don't have any special insight into the restart of trans Tasman Travel. So we do note the government still has and still is clear that restarting two way travel on the Tasman is a priority. And But we have, for the sake of this, assume that, that doesn't materially start inside the balance of this financial year. And we're also assuming no further lockdowns of an extended period.
Again, we don't have any special insight into that timing. And if that Transurban Travel does start in that period. That would obviously be very beneficial for us, but we've just taken a more conservative position for the pieces of setting guidance. So the CapEx, we've just clipped that down from $250,000,000 to $300,000,000 to $230,000,000 range, and that covers a range of different projects completing in that period. Obviously, no dividend will be paid for FY 'twenty one, which we talked about before.
And obviously, the guidance, as I said before, is subject to any material adverse change, significant minor expenses and other qualifications laid out So before I hand for questions, I just wanted to, again, start out with this, but I wanted to conclude again with a sincere thanks To all our team, literally the team have been through the meat grinder, have worked incredibly hard and taking on additional duties and work in a very, very fluid environment. They've done a superb job, and I think they can all feel proud of the role they've played in both supporting protection of New Zealand's border as well as trying to plan and help support a path out of to listen to a new environment post COVID. So with that, I'll finish and hand back for questions.
Excellent. Ladies and gentlemen, we'll now begin the question and answer session. We have multiple questions in the queue. Our first telephone question is from Andy Bowling from Paul South Bar. Please ask your question, Andy.
Thanks, moderator. Good morning, Adrian. Good morning, Phil. I've got a couple of questions for you. And the first around just your comments Dear Adrian around Trans Tasman, Barbara.
Now I appreciate the opportunity is still there for two way quarantine travel. We're hopeful it will happen. You're clearly very hopeful. The government has suggested that it's a priority. But my question to you is really how realistic is a trans Tasman bubble now In light of everything we've been through, what Australia has been through, ahead of a complete vaccination program.
Look, Andy, and congratulations for getting first again. Look, we just don't know. I think all the work, As I understand it, it has been done in the background. So I think it's the both political and sort of Health advice around when it is safe to do so that will guide us. As you know, as I said earlier, we've done a lot of work at our end.
We're in close regular contact with our colleagues in the airports and the airlines across the Tasman. So I think many of the elements are there, but It's a judgment for the leaders of the 2 countries and their advisers to make their final call. So if I can't going into Christmas, I was actually quite hopeful that Q1 of this calendar year would be operating. Obviously, conditions have changed. So look, as I said before, it's So a little bit why we're calling for clarity.
Uncertainty is really hard to give, and there will always be new information coming out of the tubes. But Clarity and understanding what are those metrics, what are those thresholds, I think, would be incredibly valuable. And I think we can look across and see in October last year, the Aussie federal government Sort of laid out a plan for the national reopening framework. I think that would be really valuable just to really hone in on that. And I don't mind if there's uncertainty in certain areas, as I said, but where we can start to drill into things that matter and things to focus on.
I think that's what's important. So
Andy, I can't give
you any more than that, unfortunately.
Great. Albeit in terms of your government engagement, Adrian, When you ask those kind of questions to the government, what's the response that you get back?
Yes. Look, I think it's really, it's a cabinet call. I think there are many dimensions they have to weigh up. We are not close to all that detail they have to consider. And so I can't I'll give you more than that other than to say that we're doing our part and we're trying to propose answers and models that can be applied.
Look, I think as the government has said publicly, the Willis is absolutely there, but they're judging many different factors at the same time. It's really a call for government. We can only play our part in supporting that reopening when it's safe to do so.
Okay, Nala. I appreciate that. The second question around the retail concessions and the 3 prongs to this question. And it's actually called 3 different questions. But which concessions have exited the international terminal over the past 6 months will be the first one.
The second would be What's the timetable for concession renewal, retender processes, particularly for duty free? And then thirdly, at what Staged you made the decision to go to a single duty free operator.
Yes. So just on the first one, I'm done, but I think we've had any exits Yes. And again, I think that reflects our approach has been to very much allow these retailers to go on hibernation. There's tons of people involved, and they've had to move once the late subsidy came off to terminate a lot of those staff, which is a real disappointment. But We haven't had any formal exits yet, which has been great.
In terms of the timetable on the relicensing, that time line hasn't changed from what we indicated earlier. I I think we're broadly a couple of years plus away from its cycle, but they aren't exactly the same in terms of time line. It's going to be interesting to see how Plays out post pandemic in travel retail. I still think that, as I alluded to before, New Zealand As a destination, we'll have a characteristic of being quite an attractive and safe place to travel to, where people may be uncertain. And that's just the time we're getting from airlines when we do our channel checks.
So that will be attractive. It's still a very attractive channel and will continue to be so, I believe. So yes, a few views being applied from that. And then on single operator, as we said before, that remains An area of focus for us, of real interest, it seems that there's an anachronism to operate a model when the world Completely changed from the 2,007, 2008 period when that last came up. So look, we'll work our way through that.
I think timing, We'll be working back from when a sensible concessioning process works for the duty free to work out when that formal decision needs to be made. But I don't have a formal date for you, Andy.
Great. I appreciate that. Thanks, Adrian.
Thank you.
Our next telephone question is from Rob Koh from NMS. Please ask your question, Rob. Hello, Mr. Robko, your line is open to ask a question. Since there's no response from Rob, we'll go to Adrian Orborn from Paribas.
Please ask your question, Adrian.
Good morning, Tim. Two questions principally. The first one can maybe and maybe this is for Phil. Are you able to just give us a bit more sort of depth on why you expect to get the second half loss at the underlying impact level to deepen What are your outlook kind of assumptions here?
Yes. Yes, I can respond to the high level on that. So Looking at interest and depreciation, we expect that to be $6,000,000 to $7,000,000 higher in the second half than the first half As a result of recently commissioned assets, we had a tailwind from A reversal of about $4,000,000 of expected credit losses, doubtful debt. Don't expect that to repeat. And we're also not factoring in any further wage subsidy receipts, and we had about $2,000,000 of those in the first half.
So that adds up to roughly $10,000,000 after tax impact. And also, we've allowed potentially for some forward starting swap closeouts at the end of this financial year if we don't refinancing We financed an upcoming $150,000,000 bond issue, and that would have a hit This financial year of $3,000,000 to $10,000,000 but then you'll get the benefit of that equal amount over the next 5 years. So there, that adds up to about a $20,000,000 deterioration from H1, which would give you a result of around about $41,000,000 underlying loss and the midpoint of our guidance Range is $45,000,000
Okay. That's clear. So if we sort of took your 2nd quarter EBITDA, I guess, per month, that's a sort of operating assumption that sort of just vary across the second half. And most of the sort of most of the geographies of the elements you just described?
Yes. That will be a feasible approach, yes.
Okay. Thank you. The second question, like the presentation, I guess, has light On markers as
to how you kind of approach the next regulatory period, can you give us
a little bit of detail around the expected timing of that And what you're sort of thinking or process steps as we sort of move through the middle of this year?
Sorry, you're talking about the timing of the next aeronautical price reset?
Yes, sorry.
Yes. So that is uncertain at the moment. Currently, we're expected to reset As it's 1st July, 2022, so for FY 'twenty three onwards, But there's a lot of uncertainty out there at the moment. And as we touched on, our aeronautical infrastructure program, To a large extent, it's on hold at the moment until we get some quarantine free travel up and running with Australia And the timing of that is uncertain. So we wouldn't go ahead and reprice until we had more certainty around the infrastructure development program.
And so like just sort of reflecting on what Adrian was sort of saying earlier, Would the key market in terms of the process really be certainty on when a trans Tasman bubble would potentially operate? Clearly, your bigger items are sort of ticketed to that event as well?
Yes, that's correct. Okay.
So we are literally there's sort of nothing really to do at the moment until you get into your clarity on those features?
Yes, that's right. I think we'll have a clearer view by the end of this financial year. In fact, If we wanted to go ahead and reprice as of 1st July 2022, we'd have to get cracking very quickly at the start of FY 'twenty two. So we'll be making that call round about the end of this financial year.
Okay. Thank you.
I will try the line of Mr. Rob Koh again from MS. Please ask your question, Rob.
Thank you. Can you hear me, guys?
Yes, I can.
Great. Okay. Can I just ask a Follow on question about the price resetting? If, heaven forbid, we have no certainty heading into FY 'twenty three, What are the kind of fallback arrangements?
Most likely that well, in fact, It would be inevitable that pricing would remain unchanged from today because we haven't undertaken a formal price reset. And there will be a holding pattern until we have confidence around quarantine free travel, certainly with Australia.
Yes. Okay. That makes sense. And then just, I guess, a more, I don't know, third order type issue, but Previously, you had an interest rate hedging strategy, which
focused on
the near term. Given that rates are actually moving, How are you evolving your rate hedging strategy?
Good question. So at the moment, we're fully hedged. Firstly, it's treasury policy. So our level of fixed rate borrowing, including hedges, is right at the top of the range, and that's because we have slowed down our borrowing program compared to what we expected when we put in those hedges. So we don't have any headroom really to lock in more at the moment Under policy?
So yes, we're I think it's off the top of my head, circa 60% hedged at the moment.
Okay. And I guess, I know you've got a loan to pay, but is there any Thought about reviewing the treasury policy in view of the rents environment, I guess?
Yes, we are looking at it. In fact, We've made the conscious decision not to rectify the treasury policy breach. I'm being over hedged at the moment, and the next step As per discussed at our Treasury Management Committee and then at the Board, should we light up on more hedging Given that there's a bit of inflation pressure coming through now and potential for that feed through to interest rates.
Yes, yes. Okay, okay. All right. Thanks very much, Phil. That's all for me.
Our next telephone question is from Wade Gardiner from Craig Investment Partners. Please ask your question, Wade.
Hi, guys. A couple of quick questions from me. First of all,
You've made a lot of operating cost savings over the last 6 months. Looking forward, do you think some of those will be Permanent savings, if we go forward into back into normal operations in a couple of years' time? And if so, would you like to provide some Quantitative around that?
White, Adrian here. I'll start and Phil might jump in. Look, I think we've peeled back Reasonably firmly. We don't carry a lot of overhead normally. So I think as we add back, We will need to grow again.
We've always had that sort of general target of that gross operating margin of that 75% mark, That's probably the best guide we can give. And I think if we're not investing in that way, we're not investing in the rebuild of the business, particularly if I'm thinking about marketing and other costs, Consumer growth, spend growth. So but having said that, there'll always be some things that we've managed through this period to improve on. And so net net, there will probably be enough at a similar level, but there will be some benefits around the traps, I think so I know it's not specific, but that's a broad guide, I think.
That's right. And in that, On a short term basis, with these safe zones that you've added, what does that do to operating costs? Is there a lot of extra costs involved in that?
Not significant. There are some costs. We've managed that pretty well. A lot of those extra costs actually fall to border agencies and others in my queue. So we've tried to focus on enabling infrastructure, But there are some modest additional costs for us.
But manageable, I think. A lot of those are falling to agencies. Okay.
In regards to the USPP waivers,
you made
the comment in the presentation that I think you sort of assumed 31 December 2021 in terms of Board is reopening. If let's say it extends for another 6 months beyond that, maybe even longer, What's the do we when do you run into an issue with those waivers again? And what's the process?
Yes. So ballpark to comply with that 1.5 times interest coverage covenant, we would need Tasman and Pacific back to 50% of pre COVID levels on average in FY 'twenty two. So What that means is if we're into FY 'twenty two by the end of Q1 and we don't have a testing bubble, That's when we need to pick up the phone and start our conversations with the banks and USPP lenders.
Okay. And The next telephone question is from Marcus Curley from UBS. Please ask your question, Marcus.
Good morning. Just 2 from me. Adrian, I just wondered if you could talk to, if you can, your views about Whether the borders or how quickly the borders reopen when our vaccination program is finished, do you think that's a fait accompli?
When the vaccination program is finished, this is I've got to be careful because I'm not a medical expert at all, but Yes. Clearly, that's a mark that matters. But I think it's quite clear there's some critical questions to be answered longer term around Health vaccination take up rights and everything plays through in effectiveness. So I think this is the unknown, and this is why The call for clarity is important because we need to be able to plot a path through. I think part of the other perspective we've been bringing is a what is the Risk appetite, there is, as the Minister, Hopkins, has said, there is no risk free option.
So it's how do you judge that risk from a public point of view, and that's really the call. But vaccines are not our play, a big part of that. And we're just on the eve of Our work is getting vaccinated starts this weekend, so that's really, really positive. And as that happens, as those vulnerable people Received that vaccine. That obviously must, by implication, change the risk parameters, but we just don't have that answer right now.
Okay.
And then secondly, just on the domestic terminal, that's obviously one part of the business that's going Okay. Can you talk about whether you've come to any landing on what you're going to do with the You had a new domestic terminal project at this stage?
Yes. I can't speak in detail on that. We are looking at options and particularly considering What our previous development plan was and what are different ways to get after it, as I said, those are the conversations that are in detailed discussion with the airlines, Agency and others at the moment. So we're working that through. We'd like to sort of share some of that as soon as we can.
It's still set probably towards the end of this financial year before We're able to talk about that, but that work's going on in detail at the moment.
Okay. Do you think there's a possibility Even if your let's say your aeronautical pricing gets deferred, that you could put
in extra charges Yes, for
a domestic terminal? Or would that yes, that would have to be complete before you would sort of be able to do anything on that front?
All still to be read through, Marcus. Wouldn't want to yield on that too early.
Okay. No problem. Thank you. Thank you.
Our next telephone question is from Owen Birrell from Goldman Sachs.
Just a couple of questions, same things that everyone else is talking about, but The rate resets coming up over the next few years, you guys have traditionally although the regulators traditionally looked at offshore Examples and comparables to as a means to, I guess, benchmark your rates. And I'm just wondering in this Post COVID world, post low interest rate world, what is your expectations for global aeronautical rates as the world comes out of COVID.
Okay. So I think there's a couple of Alan, it's for that. Are you thinking specifically on interest rates, Alan, on that question?
Yes. I was talking about interest rates, yes.
Okay. Yes. So they've already started to move at the long end. And of course, The world is awash with liquidity at the moment and there's some green shoots of inflation. So It's hard to say is that fully priced in right now or not, certainly moved by 75, 80 basis points over the last 3 or 4 months.
I think the long term direction is upwards, we would say. And that, yes, We'll indeed feed through into that calculations and our target return that is based off there. The other thing to bear in mind is system ag risk, asset beta. There is some emerging evidence that For airport companies globally, that has increased post COVID. And I think there's an argument that Australasia might be higher yet again Own to higher international traffic, but more volatile and more of a correlation with what's been happening in the share So there's a few angles that we think that the Commerce Commission would be receptive to that Could potentially flow through to higher target return that we've been prepared for.
And just further on that, and while every ePort regulatory environment is slightly different. You'll have time to see pricing adjustments coming through on the up aside as airports are reflecting some of those elements and the various pricing models through into the business side. In We have a little bit of benefit of time to observe how that unfolds, which will be helpful and instructive for when we get into our own process.
Yes, that's very useful. Just a second question, I guess, again on trans Tasman bubble. And I guess a bit of I just wanted to get your thoughts on this. We, in Australia, the different states, effectively all open to Chabarm, but it does open up the risk of more domestic infections. And The states have been locking down more readily in response to these infections, particularly the U.
K. Stream. If we consider that the trans Tasman bubble opens up between Australia and New Zealand, I would imagine that there would be a higher likelihood of Ongoing, I guess, statewide shutdowns in New Zealand. Would you be more comfortable having an open Trans Tasman border and increase the likelihood of shutdowns domestically?
Look, it's not our decision, obviously. It's a decision for governments and their health advisers. I think this is, again, our theme on this has been It's just understanding the risk. And is the risk that different? I think as we've said before, the strategies of Australia and New Zealand have effectively converged over time.
New Zealand started out very strict and still has an elimination strategy, But how they manage that risk, and we've seen it with the quick and short lockdown and the exit out of that in the last day, Heads actually got closer to how Australia is effectively managing it as Australia has come closer to New Zealand. So that's kind of met in the middle. So that would suggest is the risk that materially different between the stakes as it is to New Zealand and some cases for WA, Queensland, Tasmania, others Not. And I do think, as I said earlier, I think the path out on this is going to be clunky and a But messy and complicated. But I do think travelers and particularly friends and family who have been separated for over a year now We'll put up with some disruption.
And particularly if those disruptions are short and sharp, as we've seen, this may be the path out And so people will put up with a bit of disruption for that to occur, I believe. But it's, again, not our call, Government call, when it is safe to do so. That's great. Thanks guys. Our
Our next telephone question is from Adam Fleck from Morningstar. Please ask your question, Adam.
Hi, good morning, Adrian and Phil. Thanks so much. Adrian, I wanted to follow-up on your point on airline capacity. I appreciate that airlines have been supported should the trans Tasman open up. And you, of course, cited New Zealand as an attractive destination in conversations with international airlines.
But in those conversations, Are items like jet fuel prices starting to come up? I'm just curious how those
are going. Yes. Look, that hasn't in terms of the feedback I've had, It's been more so let me sort of wind it back a little bit. We were, as we did previously, pre covered, Already a high quality, high value and profitable destination from any of those carriers, and I've sort of called out Airlines like American and some of the Chinese carriers and others sort of describing it as one of their most high performing routes internationally. So I don't think that changes.
Some of the parameters inside that might change. But jet fuel is important, but We're a high commitment destination, and I think there will be a bit of less price sensitivity, let's call it that, in the restart Travel period. So I think if you're an airline looking to deploy fleet on destinations you perceive to be More reliable or more likely to succeed, our position has been in our proposals back in for when it's safe to do so, here's what a restart plan looks like, Has been to call out the prior performance of some of those routes, and that's what I've sort of been reflecting on has been positively received. I I think the Tasman and Pacific Island is slightly different because I'd focus more of that on the fact that people are Quite keen to go traveling when the government sees it's safe to do so and that there's a park capacity sitting around the tarmac not doing anything. So I think there will be a strong desire to get traveling again.
And so that will be a different dynamic, particularly if those borders are closed to other destinations. So Two parts of that story, and I think both look reasonably positive for our point of view. But again, I caution it's not going to be a Switch that turns everything back on, it's going to be a gradual path.
Yes. No, that makes sense. Thanks, Adrian. And then maybe just to your earlier point on margin and cost, thinking out Medium term, once quarantine free travel starts to reopen, should we expect a big push perhaps On the marketing expense, on your P and L to try to reinvigorate some of that travel?
Look, we will certainly be back in and doing it. I think we've highlighted to various sort of partners, if I think about tourism, New Zealand and others, that We're going to still be in recovery phase. So we will be careful about how we deploy that and be judicious about where that it's put. And we are looking for Tourism New Zealand government to play an important part in that recovery. And I think our point has been you get a double banger from both Air cargo as well as passenger connectivity, everyone, you open up.
So there's a significant and widespread benefit to our country if it's safe to connect to new markets. So look, I think every country in the world will be In this mode, so we don't want our country to be late to that party and not bringing the tools it needs. So yes, We will be investing, but I wouldn't expect us to outsize our previous commitment. It's more about how we deploy it and how we partner. Okay.
That's clear.
Thank you.
Our next telephone question is from Jason Hamilton from ACC.
First of all, what I'm doing, you're doing a good job of managing this business completely what's been from typically 6 months or 12 months or so. Just a couple of questions. This one just on Australia. Can you talk to Well, of the $3,900,000 pre COVID, what was the mix between sort of VFR, holiday business? And how do you think that might impact demand coming back?
And then sort of linked to that, the servo you've done, where do the Aussies actually want Go and gentlemen, do you want to go to Waikiki Island and Trusson Reid?
Or do you want to
go set on ski fields? Or what sort of Activities or interests are there. I'm just trying to get a gauge of how much demand could come back, if the transient business bubble was delayed.
Yes, yes, for sure. So just and these are sort of broad numbers, Jason. And part of the problem is people can tick multiple boxes, so that Doesn't always add up to 100, but broadly, holidays would be 40%, maybe 50% of that normal Therefore, visiting friends and relatives around about the same and business at about 20%. So And some other education other bits around the year. So that's rough numbers.
It's quite hard to, though, track that back To what will happen post COVID given I think normal doesn't exist. So I think you could see a real And visiting friends and relatives, I think that will be the first out of the blocks. Just anecdotally, I'm sure you've all heard it, the stories About the 600,000 Kiwis in Aussie and the disconnection with their friends and family in New Zealand, so and vice versa and people separated. So there's some really big pent up demand there, so that may Come out hard out of the blocks. From a holiday point of view, I mean, the benefit about New Zealand is it's relatively very accessible.
It is easy to access, and there's a wide variety of experiences to go for. So for example, I know research I think throughout New Zealand, they've suggested urban breaks, short breaks, really attractive, so 3 or 4 days, a bit of adventure, sort of land here, Could be a Waiakee, wine tour sort of theme or it could be a down to the big woods in Rotorua with a cycle and kayaking kind of It could be down to Queenstown for a ski and outdoor experience. So I think New Zealand has a wide range of products, which is why it will appeal to Australians significantly. And then you've got the broader long stay road to it category, And that's sort of the retirees, the Silver Surfer kind of category, which will go very, very well if I judge by local behavior. So I think that will be very strong and very positive and bounce back hard.
And again, the airlines are quite excited by that opportunity when it is safe to do so.
Okay. A second question just on probably the hardest thing around stock at the moment is just I know since I'm sitting around pets, Your volumes. But the CapEx outlook, I'm trying to understand exactly what your CapEx is going to look like. Still a little bit scary. You'd hope to get something more in the full year.
Is that when you'd like to get more on what CapEx would look like beyond this year?
Yes. I think that's fair. I mean, we'll certainly continue some of the investment in our core infrastructure for resilience and other purposes Commercial Properties, we talked about the bigger LUX, as Phil described, we called it trigger based. So Doing all the hard work now with the airlines and agencies around sort of reframing some of those projects and trying to Reset that for the post pandemic environment and then being clear on what those triggers are. And some of those will be Capacity system capacity issues, some of those will be passenger related, some of those will be road related.
So or some of those may be Structured sequencing related. So all of those things are being worked through at the moment. So we're hopeful that in the full year, we can lay that out And a bit more resolution, acknowledging that we may still be in a period where exactly when those triggers will be struck will still be unclear.
Okay. And just one more, sort of, linked to that. Obviously, no dividend this year, potentially depending on what happens with Boards are out then for 'twenty two. Where are we on reviewing the dividend policy? And potentially how that may sit with the CapEx program you may not have with yourselves?
Yes. So we formally review the dividend policy Every June, typically, given the dividend paid for this financial year, they'll probably get cut off to the end of this Calendar year? And it might be a slightly surprising answer. Actually, When we get quarantine free travel going with Tasman and Pacific Islands, because of our equity raise, we will Very strong credit metrics. So longer term, our problem is more likely to be stronger than Required credit metrics for stable A minus crude rating over the long term rather than weaker than required, But it all depends on the shape of the recovery, so we'll be monitoring that closely and we'll be at least annually.
Okay. Thank you.
Our next telephone question is from Andy Boehly from Paul Software. Please ask your question, Andy.
Thanks, moderator. And just a quick follow-up, guys, in a couple of areas. 1, around aero repricing. I just want to the answer that you provided, Phil, in the previous question in the context of suggesting pricing may remain unchanged From 1st July 2022, I recognize there's no wash up for the current under earning In the current price setting period, how would that play out then in the next price setting period? Would it still be NPV 0?
Would that allow some flexibility thereafter to be able to ensure that you get a fair return over the time frame involved?
Yes. So I think the overall View in the aviation sector, and particularly from the regulator, is that the airports take Most of the upside and downside risk, particularly around traffic flows, We have some ability to influence what happens there. So Where we have a pricing period that was set in advance of the pandemic like we have, PSC III, the premise is dated to June 2022. The general expectation is airports will bear their risk. And I think it would be difficult for us to look to Achieve an over return in PSC IV to make up losses during PSC III.
Now that's a bit different to some other regulated entities. You'll be aware that Wellington Airport is still working through its POC4 pricing, which And retrospect, it's probably advantageous because they actually haven't set the pricing for PC4, and so it will encompass the period from before The pandemic arise, so there might be some opportunity for under recovery in the early years to be made Bio recovering later is possibly a bit different for Auckland Airport.
But would that happen for you From 1 July 2022 though? Or does that effectively fall under an extended PSE
It would so if the conditions continue to be soft and we were achieving Under a back return from the 1st July 2022, yes, it's likely that PSN 4, the period that we reset, would look to average the return From 1st July, 2022 onwards. NPV.
So NPV or 0? Yes. Okay. Great. And final question for me.
Just in terms of CapEx, The highlight, as you pointed out in the preso, was around property development in this result. Can you talk to the CapEx expectations for property They're a bit soft in the first half in terms of total dollar spent. So what's that likely to look like over the next few years?
Yes. Look, I think we'll be selective and careful about where we invest. I think we've got the luxury of having a high quality asset With great clients and covenants, so that will be kind of the model we'll continue with in the next period. And we'll just pick out our partners carefully on that front. And I think that's paid dividends in terms of the outcomes The team has achieved in the last few years until it will be the plan down forward, but it will crack market and our appetite for different clients, different opportunities.
In terms of dollar value, do we get back to $100,000,000 plus per annum? Or should we be thinking lower or higher?
I think that will depend on where we're tracking and what's coming down to choose, Andy. I think we'll be careful about how we deploy that On which ones we like and which ones we don't like, we're just not chasing every deal, and that's always been our strategy.
Okay. Great. Thanks, guys.
And the final question for today comes from Suraj Mahbani from Citigroup. Please ask your question, Suraj.
Thanks. All the questions
have been answered. But just wanted to clarify the comment, Phil, you made on the dividend. So is it like I think what you're saying is that once that bubble starts, the metrics The credit metrics might be better than an A- rating. So, is it fair to say that the payout policy that was applicable previously Is it likely to be reviewed and potentially even increased from where it was?
So our long term capital structure strategy Really, it's based around a stable credit rating. So A minus credit rating is what we target long term. And the strength of the credit metrics will depend entirely on the strength of the recovery in international passenger flows. But let's take a very optimistic view. If within a couple of years we're back to pre COVID levels, We would rapidly be achieving credit metrics well above what's appropriate for A minus credit rating.
Now that obviously gives us a lot of fire card to the infrastructure program that we'll be looking to restart. As soon as we get Tazenbala underway, and so that would challenge at some extent. But there is the potential that there could be more strength in the balance sheet than what is required. And what we wouldn't want is an unwanted credit rating upgrade. So if that positive scenario was to arise, then we might look at something similar to what we did in 2014, where there was a capital return Certainly to avoid a credit rating upgrade.
Okay. That makes sense.
There are no further questions
at this time. I'd like to hand the call back to
the speakers for closing remarks. Please continue.
Well, thank you, everyone, for your questions today and for your We look forward to catching up with some of you over the next coming days and look forward to speaking to you then. Thanks again.