Airport Fundamentals
Airlines tango while airports
take the cash
Cameron McDonald
Research Analyst
(61) 3 9270 4235
cameron.mcdonald@db.com
Raju Ahmed
Research Analyst
(61) 3 9270 4165
raju.ahmed@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research's Investment Policy Committee has deemed
this work F.I.T.T. for investors seeking differentiated ideas. This report examines
the aviation sector and concludes that airlines lower prices to stimulate demand.
These moves by airlines individually in fact ensures traffic loss is minimized
collectively at airports. Our research explores these themes further and concludes
that investors should play the aviation sector by being long airports, short airlines.
Deutsche Bank AG/Sydney
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LOCATED IN APPENDIX 1.
FITT Research
Top picks
Macquarie Airports (MAP.AX),AUD2.07 Buy
Aust. Infrastructure Fund (AIX.AX),AUD1.58 Buy
Companies featured
Macquarie Airports (MAP.AX),AUD2.07 Buy
Aust. Infrastructure Fund (AIX.AX),AUD1.58 Buy
Qantas Airways (QAN.AX),AUD2.40 Sell
Virgin Blue (VBA.AX),AUD0.30 Hold
Related recent research Date
Australasian Transport Conference
25 Nov 2008
Fundamental: The hard work is done by airlines, but airports reap the
benefit
We have explored the models for airlines in various stages of the global economic
cycle as well as what airlines do typically in response to industry downturns. A
clear take-away is the propensity of airlines to price-stimulate demand with the
objective of retaining their traffic market share. This model, while individually
inefficient for airlines, collectively minimizes traffic risks for airports.
Industry: Airlines maximize seat factors not yield in a slowdown
It is important for airlines, particularly the full service ones to ensure capacity
supply so as not to lose market share (possibly permanently) to competitors in an
industry that does not operate on a level regulatory, financial & competitive playing
field. Thus, airlines need to maximize seat factors and at the expense of yield
growth to ensure market share retention during times of economic slowdown to
position for long run growth. This plays to the advantage of airports.
Thematic: Airline efficiency gains & lower travel costs equal airport growth
In addition to the retention of capacity & protecting traffic market share for airlines,
price-stimulation leads to lowering of the “total cost of air travel” for passengers.
Airlines also seek cost efficiencies such as automation, e.g. automated airport
check-in processes are being implemented by airlines globally with the aim of
reducing the check-in time per passenger. The combination of increased notional
travel cost savings for passengers, plus an increased exposure at the airport retail
precinct due to speed of check-in can lead to improvements in airport retail sales
conversion with our analysis indicating 1 extra minute could add 35bps in growth.
Thought Leading: Airport share prices imply no Australian airlines in
2012/13
Airports suffer passenger number falls when there are shocks such as disease,
terrorism or war. Financial crises have not had a significant impact on the
observable long term passenger growth rate. After allowing for 4 years of
depressed growth the airport valuations are implying the existing Australian airline
industry would cease to exist in 2012/13. We believe this is un-realistic. We do
however expect that the global industry will face a dramatic upheaval &
consolidation over the next few years.
Conclusion: Play aviation growth via long airports but short airlines strategy
We envisage that price stimulation of demand by airlines as well as continued cost
efficiencies, including at the airports will ultimately be beneficial for airports. Our
BUY rating on MAP & AIX reflects high total shareholder return potential, as well
as latent revenue growth & EBITDA margin expansion that airline market share
retention & cost improvement strategies bring for airports. Our revised SELL rating
on QAN & HOLD rating on VBA reflects the short airlines strategy. Industry risks:
capacity changes, global economic conditions, financing & execution challenges.

Table of Contents
Summary............................................................................................ 3
Research hypothesis.................................................................................................................3
Research approach ...................................................................................................................3
A key revelation ........................................................................................................................3
The action items - Long airports and short airlines ...................................................................3
The Differing Drivers ......................................................................... 4
Basic airline-airport operational link...........................................................................................4
Growth considerations in a downturn.......................................................................................5
History Is On Airports’ Side.............................................................. 6
Global aviation growth theme ...................................................................................................6
Australian aviation growth theme .............................................................................................6
Uneven playing field creates a market share challenge ............................................................8
Traffic Outlook Favors Airports...................................................... 11
The growth models.................................................................................................................11
Domestic growth largely stimulated by LCC...........................................................................11
Near term international capacity growth being executed .......................................................12
Long run international capacity outlook is promising ..............................................................13
With Traffic Comes Retail ............................................................... 14
Retail revenue case study .......................................................................................................15
The basic airport retail model..................................................................................................17
Next generation customer service facilitates airport retail ......................................................18
Retail could benefit from behavioral & process changes........................................................20
Airport Share Prices Imply Aussie Airlines Face Bankruptcy ...... 21
Scenario 1: Implied long run traffic growth for MAP & AIX.....................................................21
Scenario 2: Implied 4-year traffic growth for MAP & AIX........................................................23
Implied QAN & VBA impact using scenario 2 .........................................................................24
Action - Long Airports Short Airlines............................................. 26
MAP & AIX valuations attractive below recent multiples........................................................26
QANTAS on a relative basis is the most expensive its ever been...........................................28
Virgin Blue – Better positioned but not immune .....................................................................30
Action Summary .....................................................................................................................30
Stock Specific Outlook.................................................................... 31