Thursday, January 17, 2013

Stansted Airport and why I feel weird

Now that we know Malaysia Airport is officially one of the bidder for Stansted Airport in London. What we do not know is that whether YTL is a party to it. Let's assume anyway it is and Malaysia Airport will be taking a 20% stake. This bid is competing against 2 other bidders - the Manchester Airport group and another Australian group which has Sydney Airport as its assets. Hence, to say that nobody wants Stansted is not true as there are 3 bidders.

Where does Stansted stands among the airports in London

We know that there are 3 main airports in London and Stansted is the smallest among the three. Among airports in UK, Stansted is No.4 along the pecking order of Heathrow, Gatwick, Manchester. BAA who is the owner of Stansted is being forced to relinquish Stansted due to anti-competitive ruling by the regulators. Few years ago, BAA (which used to own as well) sold Gatwick to another consortium, hence Gatwick is a direct competitor to Heathrow now.

Based on the below statistics which I managed to gather from each airports' reported numbers, we can see that the passenger growth is not particularly outstanding. One must remember 2012 was the London Olympics year, hence we can take a few percentage from the 2012 numbers.
Passenger traffic between 2005 - 2012
Of course UK as in all other parts of Europe is facing severe economic troubles and passenger traffic is a subset to that problem the continent faces. Stansted actually consists of less than 10% of total London passengers traffic - hence the swing can be substantial to the airport depending on the execution. And if you look at the numbers in detail again, Stansted's numbers actually shrunk from 22 million in 2005 to 17.5 million in 2012.  What is the major cause to that?

BAA few years ago actually had greater plans for Stansted. It in fact wanted to invest more by upgrading the facilities in Stansted with another runway in the plan. That sort of halted when it ran into issues where it cannot own more than 1 airport in London, hence this plan was shelved. That issue with the regulators caused BAA to concentrate on Heathrow being the largest international airport by far and it was in fact presented in its report to the shareholders for many years that it was going to focus on Heathrow.

That was probably the reason why Stansted is facing deterioration in passenger numbers. Another thing that we know is that Ryanair is the main customer for Stansted accounting for 70% of the load. In fact, Ryanair was one of the interested party which wanted to put in a bid but was blocked from doing so. Another main customer to Stansted is EasyJet, the other successful low costs airline in Europe.

Stansted being an airport for leisure, low costs airlines has always felt the pressure from its main customers, the low costs airlines themselves. Low costs airlines thrive from their size - negotiation power, high turnaround time and pressure on prices to all their suppliers. The fact that it is 70% Ryanair is one red flag by itself. If you look at the highly successful operator, if the CEO can sort of threaten Boeing to reduce its aircraft prices, and commercial aircraft manufacturing is a duopoly industry - tell me how much he can threaten Stansted. He in fact has done before (by pulling some of the flights away from Stansted to other airports, hence the lower traffic) and will continue to do so. Anytime, he sees Stansted making higher profits, he will put pressure on pricing - that's I think how powerful they are.

That characteristic smacks similarities to our own LCCT in Malaysia where Airasia is the main traffic creator to LCCT. In fact, I dare to say without Airasia, LCCT is probably not needed and there's no KLIA2. We also know that Malaysia Airport is backed by the government (and in fact majority owned) - Malaysia Airport despite the war of words with Tony Fernandez, nothing much Airasia can do as all airports surrounding are managed by one single company. Airasia had one time threatened to build another airport with Sime Darby if you can remember. I felt that Malaysia Airport did not handle the Airasia issue too well and definitely it may not be able to handle Micheal O'Leary who thrives on that. Can YTL handle that being the 80% consortium holder? Probably not, this CEO of Ryanair whom even had the guts to reduce air traffic to his own country, Ireland due to what he claims unfair practices - he can do a lot to the air traffic industry in Europe. He can increase and reduce traffic to parts of Europe if he wants to - as he has planes, strong pricing power, reach and ultimately negotiation power. I would not want to handle someone like him...but may want to look at his shares.

Now - this is what I think YTL and Malaysia Airport wanted to do if they win the Stansted bid. Expansion. Reducing costs as BAA probably did not do too well with that. Reduce the dependence on a single airline like Ryanair. Or work well with them. Can they do that is the question?

British Pound is getting cheaper relative to other currencies could also be a factor. And we also know that YTL has been parking assets out of Malaysia...hmmm...but why Malaysia Airport? Fees paid for managing the airport? Is YTL paying a good fee?

For shareholders of YTL, if the company has assets mostly overseas, I can see possibilities of reduction in dividends as most companies do not want to repatriate money back here to pay dividends. Sometimes, there are tax implications - not all the times though. Have to question the management.


Gark said...

Interesting analysis. The only way YTL & MAHB cab turnaround Stansted is to upgrade it's facilities and that requires further cash injection.

However YTL have a knack to turn around distressed asset, that is what they do best. The purchase of money losing Perak-Hanjoong cement plant and turned it around in a short time. Same with wessex water which Azurix screwed up it badly before selling to YTL.

For the Stansted airport, it is happy to let MAHB run the airport. It is more interested to develop the lands around the airport which BAA has spent >200 mil pounds to buy for the runway expansion.

Also Stansted cost has been overstated by BAA as it lumps cost from other airport into Stansted cost base in order to raise landing fees. This cause Rynaair to protest and divert traffic elsewhere. Passenger traffic is expected to return to 24 mil in 2019 at least that's is what analyst reports.

I will not be surprised that YTL, MAHB and Rynaair has already formed an informal agreement prior to YTL/MAHB's bid.

Anyway paying PE 20-21x for a regulated airport @ 1x BV is a fair price to pay.

Gark said...

Further reading indicates that Ryanair and BAA is not on good terms.

Ryanair diverted all the traffic since 2008 due to protest on BAA landing rights raise. BAA in return blocked Ryanair to bid or join with consortium to buy the airport.

They really have a bone to pick with each other...

ET said...


you must kidding yourself by saying YTL is more interested to develop the lands around the airport.

For the god sake, what kind of development can be done next to a airport?

Anonymous said...


Surround area can develop into Hotel, shopping mall like what KLIA2 did, the Gateway shopping mall is going to open in June

Gark said...


BAA bought existing residential & commercial land and building worth about 200 mil pounds for the 2nd runway nearby Stanstead since 2006-2007. Subsequently the additional runway project and the plan is abandoned, in favor of additional runway at Heathrow partly due to government not approving the land to be changed into airport runway.

The land are mostly zoned for residential & commercial (about 8km2 or 800 ha)within a existing township. So what kind of development do you think YTL can be built there?

Gark said...

The reason Stansted got those land at a low price is because of the compulsory land purchase approved by the government. Just like PLUS buy your land to build toll, you don't have much say in it.

Now that the permit is no longer there to develop the land for airport runway. It also depends if the government decide to release the land acquired for development.

"Compulsory Purchase Orders made by Stansted Airport for a second runway and mitigation works have been made under Section 59(1) of the Airports Act 1986."

ET said...


pls look at the 2nd runaway map here

now, pls look at stansted airport in google map. You can notice that the 2nd runaway is located on a farmland.

Gark said...

Do you know the distance from Stanstead to centre of London? It is less than 70km.

If fact Stansted is nearer to london than Gatwick which is located near Crawley.

The 800 ha of 'farmland' which you mention is prime for development with the direct access via rail system (Stansted express) and connect via Victoria line underground. Also it is just off M11.

Well we both see differently on this issue, so we agree to disagree. Lets just see what YTL does with this land...:)

felicity said...

Great to see that. :) I think the Stansted airport's future will depend on whether it can get expansion plan underway - London itself is relooking at the airport planning for the entire area as it is currently facing capacity problem. If approvals for Stansted to expand is obtained, I would think this is positive for the winner.

Market Watcher said...

Malaysia tax code does not tax foreign derived income except for a few activities e.g. shipping, insurance & banking.

So in our case here, no tax penalty for foreign sourced income.

This contrast with US, with taxable rate for repatriated profit.

Other than that, I will assume that YTLP will go into slow steady and boring business.

Little known facts is that Wessex Water is undertaking some small scale development in UK right now - may have some synergistic effect with this bid. Don't know - can only speculate.

But the management's track record speak for itself - they are not stupid people.

Buy the company, get the management for free.

ET said...

Recently, the mayor of London has proposed to expand Stansted into a four run way airport. He suggested to replace the congested heathrow airport with stansted airport.

David said...

Manchester Airport wins Stansted auction.

Ironman said...

Good to hear MAHB failed to Stansted auction. If MAHB/YTL won the stansted auction, it only benefit to YTL, not MAHB.
Good New to me.