Special Report: Not Just Planes

By Phil Boeyen, ShareChat Business News Editor

Friday 23rd March 2001

People spend money at airports. Travellers heading overseas for a holiday are usually already in shopping mode by the time they reach the airport and, besides, they have to do something with the time between check-in and takeoff.

Duty free helps, but even a quick jaunt within New Zealand offers exposure for a spot of retail therapy, be it a coffee or the latest business magazine.

Nowhere better can the propensity for airport shopping be seen than in revenue figures from Auckland International Airport (NZSE: AIA).

Sure, the company makes money from such things as and landing charges and servicing airlines, but one of its biggest growth areas is the dollars that drop over the counters of the retail stores.

In the year to the end of June 2000 retail revenue at the airport topped $50 million for the first time, up 7.9% on the previous year to $50.6 million. That's more than the $46.4 million earned from airfield charges.

The latest interim result was even better, with retail revenue hitting $28.7 million for the six months ended December 2000 - a rise of 10.7% on the previous period.

No small beer for airport shops, and the company knows it.

How the company earns the money is through a licensing agreement with retailers.

The airport's GM Commercial, Murray Barclay, says under the agreement the airport gets an agreed percentage of each retailers' turnover, which means the more passengers through the airport, the better the stores do - and the more money in the company's coffers.

The international terminal provides the lion's share of the retail revenue.

It has 56 stores from a total of around 80 retailers on airport property, and accounts for about 80% of the retail dollar.

Although the airport hosts a variety of stores the biggest contributors to revenue are the duty-free stores followed by foreign exchange outlets.

Last year, to push its retail business along even further, the company set up a website - airportshoppers.com - where travellers can order their duty free tipple and other goods online.

"At the moment the website is more of a marketing tool where people can browse from home, and it's used a lot by people who are not travelling but want somebody else to buy something for them," says Mr Barclay.

"We're not measuring the success of the site in terms of how many orders we get, because one of its main aims is simply to keep customers informed. By using the website travellers can compare products and prices and then do their shopping when they get to the terminal."

Murray Barclay says the retail side of the airport is obviously an important part of the company's growth strategy and the second half of the year is shaping up to be as good as the first half.

"The figures speak for themselves, and we want to grow this side of the business."

He says the company has plans to open more stores, and every five years takes a look at the retail mix and considers what changes can be made to improve sales. The next review is the middle of next year.

The company is also an active promoter of the retail businesses, and aims its marketing efforts at specific periods, such as Bledisloe Cup matches or school holidays.

"We tend to push our retail business at times when we know there is going to be a large outflow of New Zealanders going through the airport," says Mr Barclay.

Investment property is another sector that the company sees as a core component of future growth.

The airport owns around 1600 hectares of land valued at some $314 million, and at the end of December 2000 its investment properties were valued at just under $70 million.

It spent $9.7 million on investment property development during the first half of the current financial year and Murray Barclay says that will be matched in the second half.

"Generally speaking, we're looking to do development of around $20 million a year."

Commercial tenants pay set rentals, which are not tied to turnover. Revenue from investment property in the latest interim period increased 6.5 per cent to $8.5 million compared to the previous period, and represents about 9% of total revenue.

The company doesn't have a specific target in terms of what kind of percentage of total revenue it wants to see coming from its investment properties, but Mr Barclay says they would at least like to maintain the current ratio.

Currently the airport's portfolio is divided into three main areas - a commercial park, a business park and a retail centre.

The Warehouse (NZSE: WHS) opened a store at the centre last November and Progressive Enterprises plans to open a Foodtown supermarket there later this year, drawn by the 7,500 people who work in the surrounding area and the 8 million passengers who use the airport each year.

Property director at The Warehouse, Glen Inger, says there are a number of advantages to the airport site.

"It gives us penetration into the suburbs surrounding the airport, as well as exposure to the airport's visitor traffic and the local workforce."

Mr Inger says the airport is the biggest payroll site in the country, and with many people doing shift work the store is open extended hours.

He says it has been trading well, particularly at weekends, and should do even better once the supermarket opens.

While most retailers at the shopping centre, and elsewhere on airport land, pay a percentage of turnover to the airport, The Warehouse does not.

Mr Barclay says the company is pushing all three property investments equally, and had a particularly good year last year when it signed several leases within a single month.

Developments completed in the last 12 months range from a project logistics warehouse to a Vehicle Testing Station to an office block for Kiwi Co-operative Dairies.

Another project due to open next month is a warehouse and office facility for 200 staff for courier company DHL, and a July opening is slated for a $3 million office and warehouse project for Federal Express.

All property development is part of a 40-year plan for the airport's land.

The airport retail centre, for example, has been located between the present and future second runway, and adjacent to this is an area set aside for recreation and a future hotel.

Despite the steady improvement in property investment, Murray Barclay says the company is not unrealistic in its growth expectations.

"Property development will never represent 50% of the company's business, but it provides a profitable way of utilising the land that we own."

"And we're not looking at a boom and bust cycle. We don't develop property without a pre-commitment from a tenant. It's not a high risk strategy."

In reality what the property development and the airport's retail revenue does is provide a buffer from a total reliance on such things as landing charges.

Similarly, investors in AIA effectively gain exposure to three sectors - a monopolistic utility, the retail sector and a property company.

That's not to say investors can take their eye off the all-important passenger and cargo statistics at the airport, because it's these that drive the demand and revenue for the other sectors.

But with visitor arrivals to New Zealand continuing to show good heart - for the year ended February the figure rose 11% to more than 1.8 million - the growth story for AIA looks far from over.

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