Sydney Airport’s costs take off

Sydney Airport has recorded its strongest passenger growth in 12 years, but its costs increased steeply.

Sydney Airport chief executive Kerrie Mather.

Sydney Airport recorded its strongest passenger growth in 12 years in 2016, but revenue growth was more than offset by steep cost increases across the board.

Investors overlooked the passenger and earnings growth and hammered the company’s share price, which closed yesterday down 2 per cent. The stock dropped 13c to $6.08, down 23 per cent on the high of $7.54 in ­August last year.

The business, which owns Australia’s biggest terminal cash-cow, looks to be maintaining a very healthy operating margin — perhaps one of the best in corporate Australia — yet it repeated calls for federal support to build the second airport in western Sydney.

Overall operating expenses rose 14.3 per cent while property and maintenance costs jumped 29 per cent. Service costs rose 22 per cent and salaries 15.6 per cent.

Sydney Airport blamed the cost increases on extra cleaning costs and the full year of operation of an additional terminal. It also blamed higher electricity prices.

While total revenue increased by 11 per cent to $1.364 billion, and EBITA 10.3 per cent to $1.1bn, the company’s numbers were less impressive when looked at on a per-passenger basis. EBITA per capita rose 2.5 per cent.

Sydney Airport benefits from an earnings margin that most businesses can only dream about. Last year its EBITA to revenue came in at 80 per cent, and it has maintained a margin of close to that level for the past seven years.

Chief executive Kerrie Mather said international traffic in particular had risen strongly, with double-digit growth in many of the company’s major markets such as China, the US, India, Korea and Japan.

“International passenger growth was the strongest in 12 years, with Sydney Airport welcoming 1.2 million additional passengers,” she said in a statement.

Ms Mather said her confidence in the future of the business was reflected in the decision to increase the earnings distribution in 2017 by 2.5c to 33.5c.

Sydney Airport in 2002 was granted a first right of refusal to build the second Sydney airport at Badgerys Creek, now known as Western Sydney Airport, as part of its privatisation sweetener.

In December last year, the government issued a notice of intention to Sydney Airport Group that set out the commonwealth’s contractual terms for developing and operating the airport at Badgerys Creek — a requirement of the right of first refusal provided to Sydney Airport Group.

The NOI is an offer to develop and operate the Western Sydney Airport that Sydney Airport is now considering.

Announcing the NOI, the government said the new airport would cost $5bn-$6bn and would be open by 2026, regardless of whether Sydney Airport exercised its right to operate the facility.

In the statement yesterday, Sydney Airport repeated its demand for “material support from the commonwealth to make it commercially viable”.

But it said it was continuing to evaluate the project. “We are continuing to adopt our rigorous approach to the evaluation process,” the statement said.