Australia and New Zealand Airports

Home , Adelaide Airport, Auckland Airport, Brisbane Airport, Christchurch Airport, Melbourne Airport, Wellington Airport

Parvathy Iyer Senior Director, Infrastructure Ratings Australia and New Meet Vora Associate Director, Infrastructure Ratings Zealand Airports Sonia Agarwal Associate, Infrastructure Ratings Uncertain Recovery Keeps Downward Bias High July 2020 Key Takeaways

Airports’ traffic recovery to hinge on domestic policies and travel, with international traffic key for earnings quality. Sector outlook is negative.

Cash flow squeeze, albeit with sufficient liquidity, over the next 12 months.

Slow and prolonged recovery given second wave of infections, government actions, consumer behavior, and weak economic outlook.

Robust control in operating (opex) and capital expenditure (capex) to continue into calendar 2021, and potentially 2022. Debt covenant waivers for a few airports due to uncertainty.

Traffic Recovery – Best Estimates

3 Airports – Long Haul To Pre-COVID Levels

– Domestic traffic could recover by 2022/2023 and international by 2024/2025

Our Global Recovery Estimates Are Slightly Lower Than IATA's Overlaid with regional factors for rated airports

S&P view -- Total pax IATA -- Domestic IATA -- International 120 120 110 110

100 100 Index:=100 2019 90 90 80 80 70 70 60 60

Index: 2019 = 100 Index: 50 50 40 40 30 30 2019 2020 2021 2022 2023 Calendar year

Pax--Passengers. Source: S&P Global Ratings, International Air Transport Association (IATA) Economics, May 13, 2020. See: Airports Face A Long Haul To Recovery, published May 28, 2020.

4 Recovery Path: Domestic-Led, International In Late 2020

% Mix Of Domestic And International Traffic

Pacific’s robust domestic traffic, unlike for the hub airports of Domestic Hong Kong, Singapore, and Europe. Major capital city airports International Relatively strong domestic airlines—Qantas Airways Ltd. Sydney, Melbourne, Auckland (Australia) and Air New Zealand (NZ), with services from 45% - 70% sovereign-owned Asian or Middle Eastern airlines.

Dampened competition upon rebirth of Virgin Australia as a 30% - 55% smaller airline, but some regional airlines are willing to add Other major airports intrastate capacity. Brisbane, Perth Trans Tasman ‘bubble’ likely first step for international travel. 70% - 75% Airlines’ choice of airports as capacity ramps up to influence recovery trend-line. 25% - 30% Loss of high-spending Chinese tourists due to travel Smaller airports restrictions to disproportionately affect larger gateway Christchurch, Wellington, Adelaide airports. Perth and Brisbane helped by intrastate traffic 75% - 90% driven by mining industry.

10% - 25%

Source: Company data as of 2019, S&P Global Ratings.

5 Rated Pacific Airports: Our Estimated Recovery Path

Major Capital City Airports: Sydney, Melbourne, Brisbane, And Auckland Domestic 50%-60% and international at 20%-30% of pre-COVID levels by June 2021

Sydney Melbourne Brisbane Auckland IATA 120 120

100 100 Index:= 100 2019 80 80

60 60

40 40 Index: 2019 = 100 Index:

20 20

0 0 2019 2020 2021 2022 2023 Calendar year

IATA--International Air Transport Association. Source: S&P Global Ratings.

6 Rated Pacific Airports (2): Our Estimated Recovery Path

Other Capital City Airports: Perth, Adelaide, Christchurch And Wellington Airports Perth influenced by mining traffic; Adelaide, Christchurch, and Wellington by high domestic travel

IATA Perth Adelaide Christchurch Wellington 120 120

100 100 Index:= 100 2019 80 80

60 60

40 40 Index: 2019 = 100 Index:

20 20

0 0 2019 2020 2021 2022 2023 Calendar year

IATA--International Air Transport Association. Source: S&P Global Ratings.

7 Extraneous Risks To Forecast Recovery

– Visibility and stability of the recovery will be key

Second wave: – Extent of fallout from potential second wave can derail recovery Government actions: – Unknown quarantine measures in different countries; restriction on destinations and flights; response to second wave; countries at varying control levels of COVID-19.

Global geopolitical and economic factors: – Global economic weakness, geopolitical tensions, poor business-related travel.

Airline health to dictate available capacity: – Potential reduction in airline capacity into Australia, demise of low cost airlines, slow return of some airline services due to poor demand.

Passenger behavior: – Low propensity to travel amid health concerns; discretionary spending reduced due to weak economic conditions.

8 Airports’ Response To COVID-19 Risks

9 Airports’ Steps To Counter Fallout

Auckland Airport Melbourne Airport Brisbane Airport Sydney Airport

Equity issuance of NZ$1.2 Suspended dividends for Dividend suspension for Additional A$850 million in billion fiscals 2020 and 2021 fiscals 2021 and 2022 bank lines

Dividend suspension until Opex controls and capex Monetization of cross- Opex cuts December 2021 reduction in fiscals 2020 and currency swaps 2021, active management Capex controls, minimum Opex control and substantial Opex reduction; capex plans capex reduction Strong liquidity through reduced or deferred additional bank lines Suspended dividends for Solid liquidity through recent 1H2020; suspension for Australian medium-term note 2H2020 also likely issue

Perth Airport Adelaide Airport Christchurch Airport Wellington Airport

Opex reduction Monetization of cross- Some opex control Opex control and capex currency swaps flexibility Capex reduction and growth Capex control for the next two plan deferred for now Opex and capex controls years No dividends for fiscal 2021 (typically paid in next fiscal Monetization of cross- Suspended dividends for Dividend suspension for year) currency swaps fiscal 2021; moderated for 2HY2020, fiscals 2021 and fiscal 2022 2022 Standby equity support Suspended distributions for 2H2020 and fiscal 2021 Liquidity support through Additional bank lines Additional bank lines additional A$150 million bank lines

10 Liquidity Adequate

Moderate Debt Maturities; 2020 Maturities Largely Covered

6,000 5,000 4,000 3,000

Mil. A$ 2,000 1,000 0 2020 2021 2022 2023 2024 2025 Thereafter* Calendar year *Not to scale. Approximately A$10.8 bil. Source: S&P Global Ratings, Data as of June 30, 2020.

Cash And Committed Undrawn Lines Sufficient To Take Care Of Maturities At Least For Next 12 Months

Strong Strong Strong Strong 2,500 2,500 Cash + undrawn lines 2,000 2,000 FY2022 maturity 1,500 1,500 FY2021 maturity 1,000 1,000 Strong liquidity

Mil. A$ / NZ$ 500 500 0 0 Sydney Melbourne Perth Auckland Brisbane Adelaide Wellington Christchurch Airport Airport Airport Airport Airport Airport Airport Airport Data for fiscal year ending June 30. New Zealand airports represented in mil. NZ$. Source: S&P Global Ratings.

11 Forecast Financials – Broad Assumptions

Focus on the years ending June 30, 2021 and 2022. Assumptions will vary across airports due to their revenue composition (see individual reports published on June 16, 2020 on eight rated airports in Australia and NZ). – All revenues linked to passenger numbers, including retail and car parking. Domestic to ramp up slowly from 3Q2020 and international from 4Q2020. – Minimum guaranteed retail income unlikely to return for one to two years. – Some stress on property income due to either rental waivers or deferrals or potential vacancy levels from economic fallout. – Security charges to remain pass through. – Controlled opex in 2021 and rising slowly in line with traffic. Still, EBITDA margins to be under pressure in 2021 before recovering slowly. – Fiscal 2021 a weak phase supported by liquidity, with sharp recovery in metrics likely from fiscal 2022 in line with ramp-up in traffic. – Further weakness in 2021 and prolonged recovery in international traffic to remain the key risks at this stage.

12 Varied Financial Buffers Across Rated Airports

– Most airports have cut capex and opex for the next 12-24 months at least. – Airports to be covenant compliant or have obtained covenant waivers until at least June 2021. – Dividend reduction/suspension and equity raising are (Auckland) credit positives.

Largely Negative Outlook Reflect Uncertain Recovery And Low Financial Buffers

Forecast range (2020-2022) Last actual year-end (2019) Downside trigger 25 Rating Rating lowered lowered 20

10 FFO / debt (%) / debtFFO 5

0 Sydney Melbourne Auckland Brisbane Perth Adelaide Christchurch Wellington Stable Stable outlook outlook

Source: S&P Global Ratings.

13 Extended Flexibility On Capex/Dividends Possible

– Most airports have cut capex, opex, and dividends for the next 12-24 months at least. – 2020-2023—forecasts.

Capex/Dividend Could Moderate Beyond 2022 In line With Recovery Path

3,500 Pre-COVID Post-COVID 3,000 2,500 2,000 1,500 Mil. A$ 1,000 500 0 2020 2021 2022 2023 2020 2021 2022 2023 Capex Dividend Fiscal years

Note: Year-ending for all airports is June 30, except Sydney Airport which is Dec. 31, and Wellington Airport which is Mar. 31. Source: S&P Global Ratings.

14 Sector Outlook – Negative

– Forecasts will likely be reviewed multiple times due to evolving COVID situation. – Until COVID-19 is under control in major countries, a return to pre-pandemic levels of international travel remains hard to predict. – Changes to sovereign policies on border closure is a variable factor. – Steady ramp-up of domestic travel in NZ since mid May 2020 is an encouraging sign, but trans- Tasman travel could be delayed to late 2020/early 2021 due to recent surge in cases in Australia. – Restart of Australian domestic travel is very slow and delayed due to rise in infection in some states (mainly Victoria). Still, some state borders are open, and Western Australia and Queensland face good intrastate travel.

– Visibility and confidence in the recovery unlikely before the end of 2020 – Weak fiscal 2021 will affect cash flows and metrics, which we factored in the ratings. – Will fiscal 2022 be potentially at risk if rebound is slower than our estimates?

– While airports have cut costs, improved liquidity, and protected against covenant breaches, the next 12 months will tell if this is sufficient or more actions are needed to maintain rating levels.

– Entities with stable outlook: Auckland Airport (large equity raising supports balance sheet) and

Christchurch Airport (linked to its majority government owner).

15 Appendix

16 Rating Action: Australia And New Zealand

Rated Pacific Airports Rating Link to Research Update

Southern Cross Airports Corp. Holdings Ltd. BBB+/Negative/-- Sydney Airport, June 16, 2020

Australia Pacific Airports Corp. Ltd.* BBB+/Negative/-- Melbourne Airport, June 16, 2020

Brisbane Airport Corp. Pty Ltd. BBB/Negative/-- Brisbane Airport, June 16, 2020

Perth Airport Pty Ltd. BBB/Negative/-- Perth Airport, June 16, 2020

Adelaide Airport Ltd. BBB/Negative/-- Adelaide Airport, June 16, 2020

Auckland International Airport Ltd. A-/Stable/A-2 Auckland Airport, June 16, 2020

Christchurch International Airport Ltd. * BBB+/Stable/A-2 Christchurch Airport, June 16, 2020

Wellington International Airport Ltd.* BBB/Negative/A-2 Wellington Airport, June 16, 2020

*Rating change, lowered by one notch in June 2020. Related research: Airport Long Haul, published May 29, 2020.

17 Airport Rating Actions: Europe And Asia

European Rated Airports Rating as of July 28, 2020 Rating in Feb 2020

Aeoports de Paris A/Negative A+/Negative

Aeroporti di Roma * BB+/CreditWatch/B BB+/CreditWatch/B

Avinor AS (Norway) A/Negative/A-1 AA-/Stable/A-1+

Daa PLC (Dublin and Cork airports) A-/ Negative/A-2 A/Stable/A-1

Flughafen Zurich Airport A+/Negative/-- AA-/Stable/--

Gatwick Funding Ltd Senior secured: BBB/WatchNeg Senior secured: BBB+/Negative

Heathrow Funding Ltd Class A: BBB+/WatchNeg Class A: A-/Negative

Heathrow Funding Ltd Class B: BBB- /WatchNeg Class B: BBB/Negative

Royal Schiphol Group N.V. A/Negative/A-1 A+/Stable/A-1

Asian Rated airports Rating as of July 28, 2020 Rating in Feb 2020

Airport Authority of Hong Kong § AA+/Stable AA+/Stable

Taoyuan International Airport (Taiwan) † A+/Stable A+/Stable

GMR Hyderabad International Airport Ltd BB-/Negative BB+/Stable

Delhi International Airport Ltd B+/WatchNeg BB /Negative

* SACP lowered by two notches to 'a' from 'a+'; rating constrained by Parent, Atlantia. § SACP lowered by 3 notches to 'a-' since February 2020. AAHK rating equalised to Hong Kong government. † SACP lowered by one notch to 'bbb+' from 'a-'. Rating incorporates support from the Taiwan government.

18 Related Research: Global And Macroeconomics

– S&P Global Ratings COVID-19 Research Page – Top 10 Investor Questions On Our Ratings Process, June 4, 2020 – Historically Low Ratings in the Run-Up to 2020 Increases Vulnerability to the COVID-19 Crisis, May 28 2020 – Economic Research: Asia-Pacific Losses Near $3 Trillion As Balance Sheet Recession Looms, June 25 2020 – Credit Conditions Asia-Pacific: China First To Recover, June 30, 2020 – The Shape Of Recovery: Uneven, Unequal, Uncharted, July 1, 2020 – Airports Face A Long Haul To Recovery, May 28, 2020 – Three Australian And New Zealand Airports Downgraded, Five Affirmed; Outlook Negative On Six Airports, Stable On Two, June 15, 2020 – Rating Actions Taken On Seven European Airports Due To More Protracted Passenger Recovery, July 15, 2020

19 Analytical Contacts

Richard Langberg Analytical Manager, APAC Infrastructure + 852-2533-3516 richard.langberg @spglobal.com

Richard Timbs Parvathy Iyer Meet Vora Corporate and Senior Director, Associate Director, Infrastructure Sector Lead Infrastructure Ratings Infrastructure Ratings + 61-2-9255-9824 + 61-3-9631-2034 + 61-2-9255-9854 richard.timbs parvathy.iyer meet.vora @spglobal.com @spglobal.com @spglobal.com

Sonia Agarwal Alexander Dunn Harshvardhan Sathe Associate, Infrastructure Associate, Infrastructure Rating Analyst, Ratings Ratings Infrastructure Ratings +61-3-9631-2102 + 61-3-9631-2120 + 61-3-9631-2118 sonia.agarwal alexander.dunn harshvardhan.sathe @spglobal.com @spglobal.com @spglobal.com

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