Auckland International Airport Limited (OTCPK:AUKNY) Q4 2023 Results Conference Call August 23, 2023 7:00 PM ET
Company Participants
Carrie Hurihanganui – Chief Executive Officer
Phil Neutze – Chief Financial Officer
Conference Call Participants
Andy Bowley – Forsyth Barr
Marcus Curley – UBS
Wade Gardiner – Craigs Investment Partners
Grant Lowe – Jarden
Rob Koh – Morgan Stanley
Nick Daish – RBC Capital Markets
Roy Harrison – Bank of America
Alexander Prineas – Morningstar
Jason Familton – ACC
Operator
Hello, and thank you for standing by. Welcome to the Auckland Airport Annual Results 2023 Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded.
It is now my pleasure to introduce Chief Executive, Carrie Hurihanganui.
Carrie Hurihanganui
Welcome and good morning to everybody joining the call. With me today is Chief Financial Officer, Phil Neutze, and I am pleased to be able to share the financial results for the 12 months to 30 June 2023, including Auckland Airport’s first dividend and full year underlying profit in 3 years.
Well, it’s been a year marked by the strong return of international travel and the reestablishment of not only many airlines and routes that it operated to Auckland previously, but also new airlines in some new exciting routes. It’s also a year that has seen us getting underway with the most significant upgrade of Auckland Airport in its history. As New Zealand’s main gateway, our infrastructure program reflects this responsibility and is necessary investment that will deliver critical assets that will have decades of ongoing use and deliver the uplift and experience travelers are seeking.
Now, we have lots to cover today. And before we get into Q&A, so I suggest we jump straight into it on Slide 4 to kick things off. It’s certainly been a year of forward momentum towards transformative change. Passenger movements were up 183% on the prior year to 15.9 million, primarily driven and you can see the numbers there that international was up 480%. So, as those borders have opened and recovery was well underway and domestic up 90%, with 25 airlines now operating up to 40 destinations.
Now, the full year revenue increased by 108% from the prior year to $625.9 million, with lifts across aeronautical, retail, commercial and property revenue lines. Operating EBITDAFI of $397 million is up by 175% on the prior year, and this sees a lift in the EBITDAFI margin to 63% from 48% in the prior year. FY ’23 sees a net profit after tax of $43.2 million. Now that is down 77% and earnings per share of $0.0293, with the net underlying profit after tax seeing an uplift from the prior year to $148.1 million and the net underlying profit per share of $0.1006.
Capital expenditure, you’ll see that’s up 156% on the prior year to $647 million, reflecting what has been a record year of capital investment across the precinct and we’re seeing that through an increased and continuing pickup in the run rate. The majority focus of $378 million was on core aeronautical projects and a further $269 million in commercial activities.
Now in June this year, you might recall, we announced our pricing setting event 4 outcomes and a target return of 8.73%, which spans the ’20 to ’23 to 2027 financial years and was the result of 24 months of extensive consultation with major airlines. Now, after freezing prices for 12 months to help airlines rebuild following the borders reopening, the new charges for PSE4 took effect from 1st of July this year. PSE4 will see $5 billion investment in aeronautical infrastructure, which $3.1 billion will be commissioned between now and the end of the 2027 financial year. And of that $2.6 billion is reflected in the new airline charges for the pricing period.
A final dividend of $0.04 per share will be paid and is imputed to 100% for qualifying shareholders, representing a payout of 73% of underlying profit for the second half of the 2023 financial year and is the first dividend to shareholders since 2019, with the dividend payable for FY ’23 shareholders can once again participate in the dividend reinvestment plan at a 2.5% discount.
If we jump to Slide 5, these full year results do reflect improved financial performance across all passenger-driven lines of business combined with continued growth in commercial property. And despite actually the aeronautical prices held at FY ’22 levels for the first year of PSE4, revenue from airfield and passenger services charges lifted a combined 132% to $219 million, reflecting strong passenger growth. Retail revenue was up by 477% on the prior year to $130.9 million with the progressive reopening of the retail stores and significant international passenger number growth and that had an overall positive impact in the international retail space.
Parking income also increased 120% to $57.7 million, and we saw with the reopening of all parking products and the ongoing strong propensity to park continuing. Property continues to be resilient with investment property rental income of $142.9 million, which is an increase up 27% on the prior year. And that growth is primarily driven by new properties leased this year, rental growth from the existing portfolio and park period contributions from new developments.
If we move to Slide 6, Auckland Airport experienced a stronger-than-anticipated rebound in the domestic international aviation markets over this past year. If we look by year’s end, international seat capacity have recovered to 90% of pre-pandemic and domestic to 89%. The return of passenger flight also restored international freight capacity to 95% of pre-pandemic levels. Now, this was enabled by 8 airlines either returning to previous or commencing new services to Auckland compared to FY ’22.
Slide 7. Now that increase in passenger movements drove significant improvement across passenger-driven lines of businesses, which you can see in this comparison of June ’22 to June ’23. For retail, that greater number of stores opened and increased trading hours saw income per passenger lift 57% on the same month last year. If you look from a parking perspective, as I mentioned, that, that revenue is up due to the combined impact of not only the passenger numbers, a rise in the average period of stay, which continued to creep up and also customers trading up to higher value products. Hotels have also seen a step change in occupancy over the prior period. And you can see there that in June, it reached 90% compared to June last year. But from a full year perspective, it was 75% annualized.
Slide 8, please. Now, our sights are set on the future and inspiring as we connect people in place. Our focus is to reconnect New Zealand to the world. And I think over this past year, we have worked very positively along with airlines to rebuild capacity, frequency and those passenger numbers. We know how much our customers enjoy the shopping and dining experience as part of an overseas holiday or trip and have worked very hard to ensure all the relevant travel-related products and services are fully operating to meet our customers’ needs.
I do want to acknowledge the rapid return of aviation has not always been a smooth experience for our customers. We are investing significant effort in addressing this with our partners across the ecosystem. And while we’re seeing some tangible improvements over the last 4 to 5 months, there is absolutely more work to be done and I can assure you it’s a priority for us to get this right. We’ve taken a disciplined approach to our infrastructure program, which is focused on adding the necessary capacity and resilience as well as upgrading the existing assets to deliver to that purpose of connecting people in place and what a gate airport needs.
Now, I’d like to hand over to Phil, who will take us through the financial performance in more detail before coming back to me. Phil?
Phil Neutze
Thanks, Carrie. So, it’s exciting to see the business recovering strongly from COVID-19 and the confidence that’s given us to get cracking on the aeronautical infrastructure development program, which you’ve heard a bit about lately.
We’re now on Slide 10. And you can see that international PAX recovered to 67% of pre-COVID FY ’19 numbers for the full year and that’s up from the 60% recovery that we showed at the half year. Domestic PAX on the other hand, softened slightly to 84% of pre-COVID for the full year, down 1% from the 85% at the half year. And as many of you will have experienced, domestic airfares are still very high, up circa 40% versus pre-COVID. That’s the rise through Auckland International of domestic air fares. But despite this, domestic load factors averaged 86% in FY ’23 versus 84% pre-COVID when air fares were 1/3 lower. So, there’s some very effective yield management going on.
On to Slide 10. I won’t dwell on this slide as it’s self-explanatory, but a couple of things. Aircraft movements and MCTOW recoveries are pretty consistent with the passenger recoveries versus pre-COVID. However, the slightly softer international MCTOW recovery compared with aircraft movements implies that there’s a small reduction in the average international aircraft size in FY ’23 versus before COVID.
Moving now to Slide 12. Finally, we’ve moved back into underlying profit for the full year and that’s the first time since FY ’20. EBITDAFI margin also improved, up to 63% for FY ’23 versus 48% in FY ’22. But if we exclude both the early installment of $5 million of flood-related insurance estates in FY ’23 and the $8.4 million of flood-related expenses that help the P&L. The FY ’23 EBIT margin — EBITDA margin, I should say, was 65%, and this compares with 75% in pre-COVID FY ’19. Despite the net upwards revaluation in PP&E of $203 million this financial year, all of — almost all of which was booked to the revaluation reserve per accounting rules, we incurred a net P&L expense of $15.6 million for some assets that were revalued downwards and it wasn’t sufficient prior period revaluation reserves to offset them.
We also booked a $140 million revaluation loss to the P&L for investment property and that’s up another $46 million from the $94 million loss booked at the half year. This was because of strong increases in discount rates and cap rates and they weren’t quite fully offset by the strong increases we’re also seeing in market rents. I’d just remind you that both of these fixed asset revaluations are reversed from underlying profit.
Moving now to Slide 13, and there’s about head in these numbers that I’m sure the brokering analysts on the call would appreciate me explaining. So first, airfield income only increased by 42% versus aircraft movements up 81% on the prior year. And this was in part — well, in part, reflected the $3.5 million reduction in aircraft parking charges versus PCP. That was owing to them spending more time in the year as the COVID-19 recovery progressed but also reflected a circa $7 million increase in COVID recovery landing charges, discounts to airlines in FY ’23 versus FY ’22. So, this set up circa $88 million for the year.
Second, investment property income grew strongly, up $30 million on PCP, but there’s a bit of noise in there. So, if we give you a breakdown, $5.7 million of that related to straight-lining some leases that we hadn’t previously straight-lined. And that relates to previous years, that won’t be repeated in future years. $5 million relates to ibis Budget Hotel income increases, strong growth owing to the growth in occupancy, that rate of growth will slow significantly next year. $4.9 million relates to the removal of rent abatements from FY ’22. That’s locked in place and will stay in place. $2.7 million relates to current year straight-lining of future lease increases. Again, that’s locked and loaded and will stay. But if you look at the core growth in investment property rental, it boils down to $8.8 million of rental increases on existing property as we’ve done market reviews or recycled properties and another $2.7 million growth from new properties that were either delivered halfway through or partly through last year or sometime during this year.
Turning now to operating costs on Slide 14. We’ve experienced strong cost inflation pressures right across the board, especially rates and insurance, which rose by around $11 million or up 50% versus FY ’22. We also experienced strong volume-related cost growth in the asset management, maintenance and airport operations bucket. It was a lot lower growth than the growth impacts that we experienced, but it was still significant. So, we had $23 million increase in that bucket or up 35% for — versus FY ’22, which compares with PAX up 183% for the year. That comprises a range of sub-components like outsourced operations, things like car parking, bus ops, baggage and trolley services. They were up by 64%. Repairs and maintenance was up by 10%, power gas, water and wastewater up by 30%, cleaning up by 80%, telecoms and IT apps, up by 30%. So, all volume related but somewhat less than the PAX growth we have for the year.
We also lifted marketing by over $5 million or nearly 4x versus FY ’22 to support the recovery and professional services and levies were up by circa $4 million or nearly doubling, with a large chunk of this, the legal and consulting fees relating to the price setting event for aeronautical pricing consultation that we’ve just completed and the commission’s input methodology review and in fact, we’re paying higher levies to the Commerce Commission as well. This resulted in total OpEx growth of $73 million or 47% versus FY ’22. But if you adjust for the $8.4 million of flood expenses, that brings OpEx down to circa $220 million, which I think is around $10 million above the range I guided back in February and that was driven by higher inflation than we expected.
Adjusting also for the $4.3 million wage subsidy that wasn’t repeated in FY ’23, but we got in FY ’22, year-on-year OpEx growth falls to circa 40%. So looking forward, we’re expecting the growth rate of OpEx to fall significantly in FY ’24 compared to what we experienced this year. We think it will fall somewhere to between — sorry, between somewhere between 10% to 15%, which will be well below our expected revenue growth in FY ’22. Carrie will talk to our underlying profit guidance for FY ’24 shortly, but repeating recent tradition, I can also give you some clues around where depreciation and interest might fall in FY ’24. We think depreciation will be between $175 million and $185 million for FY ’24 and interest expense between $75 million to $85 million.
Not long to go now before I hand back to Carrie, but let’s first take a look at the CapEx on Slide 15. And as the chart on this slide shows, we more than doubled the CapEx run rate in FY ’23 versus PCP. So, up to $650 million. We did have a slow start in H1 FY ’23, which prompted us to lower our CapEx guidance versus what we gave this time last year. But in the end, we delivered almost exactly equal to the midpoint of our original CapEx guidance of between $600 million and $700 million.
The text on this slide gives a breakdown of the key CapEx projects undertaken in FY ’23 and I won’t repeat that verbatim. But as you can see, terminal integration enabling works and the new multilevel Transport Hub dominated FY ’23 CapEx. And despite high aeronautical development activity, we also delivered an investment property run rate of around $135 million, close to the midpoint of the $100 million to $200 million cadence that we often speak of for that segment.
Moving now to Slide 16. This slide summarizes the key components of Auckland Airport’s balance sheet as at 30th of June, 2023 and provides a comparison with June 2022. It’s self-explanatory, so I’ll leave you to cruise at your leisure. We’re now on Slide 17 and net borrowings increased by $340 million in FY ’23. This was to fund CapEx. We actually undertook $625 million of debt capital markets borrowings in the year, but we also repaid $300 million of maturing debt capital markets bonds that year. We still have considerable undrawn bank facility headroom that’s sitting at circa $950 million, but we expect to progressively draw down more of our bank capacity during FY ’24.
Our credit metrics are very strong at the moment. However, you look at them versus banking covenants and also versus Standard & Poor’s key thresholds for our A- credit rating. But these will weaken over our 5-year pricing event for a period as we build circa $2.5 billion of aeronautical capital work-in-progress that isn’t yet generating cash returns. The investor presentation that accompanied our PSE4 pricing disclosure last week gave a comprehensive review of our planned aero CapEx over the next 9 years, i.e., to the end of PSE5. But investors should also expect that our non-aeronautical CapEx will continue at around that somewhere in the $100 million, $200 million per annum range over that period.
Moving to my last slide now for now. So, it’s Slide 18. And during this year, we announced a new dividend policy of paying out between 70% to 90% of underlying profit after tax. Covenant restrictions ceased at the end of the first half. So, Directors have declared a $0.04 per share final dividend and that represents 73% of second half underlying profit. We’ve also reinstated the dividend reinvestment plan at a discount to market price of 2.5% and the final couple of bullets on this slide provide details of how shareholders can opt in and the period over which the strike price will be determined.
Back now to Carrie.
Carrie Hurihanganui
Excellent. Thank you, Phil. If we move to Slide 20, it’s fair to say the global recovery is well and truly underway. This slide shows the bidirectional growth for the year compared to the same period to end June 2019 between New Zealand and these markets. Now clearly, we still have a way to go to full recovery, but it does amount to the much needed turnaround for an industry that was somewhat in dire straits 2 years ago.
If you move to Slide 21, progress over the past year has seen New Zealand reconnecting with the world. If I remind you that the worst of the pandemic only 12 airlines operating to 21 destinations and quite honestly, operating pretty infrequently at that. During 2023, there will be 25 airlines to 40 destinations with regional coverage across the Middle East, Asia, the Americas and the Pacific Islands. Now to compare that pre-COVID, there were 29 airlines operating to 43 destinations. So, certainly tracking in the right direction.
Now, it will be a busy summer with current projections showing the capacity between Auckland and North America set to exceed 2019 levels with a forecast 29% increase in flight to North America for the November ’23 to March ’24 period if you compare that to the same period in 2019. There’s also been a promising recovery in capacity to and from China. And we know that obviously, the COVID restrictions were released later there, but we have 5 airlines now flying 4 routes, including some daily services with capacity between China and New Zealand recovered to 78% of 2019 as at 30 June and is forecast to reach 93% of pre-pandemic levels by September this year.
And then there’s also plenty of activity on the Trans-Tasman. It is by far our biggest international market and that has bounced back to 96% of pre-pandemic capacity. You’ve got frequent flyers like Air New Zealand, Qantas and Jetstar, but they’ve also now been joined by AirAsia X flying between Auckland and Sydney and Batik Air starting on the Perth route with their inaugural flight tomorrow morning, 25th of August.
Moving to Slide 22. I won’t get into detail here, but the story is we’re seeing stabilization in some of the long-term fundamentals. Inbound and outbound traveler growth is balanced and we have seen the return of historic profiles for traveler mix across visiting family and friends, holiday and leisure and business. Slide 23. Really, Auckland Airport is committed to delivering an efficient and seamless customer experience. This year, we’ve experienced storm events unlike anything before causing the closure of the international terminal. And then there’s been global aviation staffing shortages that have created ongoing issues across the aviation system, including mishandled bags, longer queues of scheduled flights and delays in the arrivals process.
I mentioned earlier that it’s not where we want it to be and we have been taking a lead role across the ecosystem since the beginning of this year to work collectively to solve the issues alongside border agencies, airlines, ground handlers and other services. Now, there will be some quick wins, which we’ve already implemented, such as New Zealand and Australia separate lanes coming into arrivals and biosecurity and then some things that will take longer to solve, but I certainly can assure you that we will be working at this until we get it right. And I just want to call out, we certainly have appreciated the patience and understandings of both travelers and our airport partners throughout the rebuild of the past year. And I’m certainly very proud of the Auckland Airport team for their tireless efforts in supporting the recovery of the business.
Slide 24. Now, the 10-year road map here lays out the transformation journey of the aviation system in Auckland. As you know, airline consultation concluded in FY ’23, which sees a circa $6.7 billion investment road map over the next 10 years. I’m not going to go into calling out each of the projects because you have had visibility of those in last week’s presentation, but certainly a call out that the international arrivals expansion Stage 2 and the Northern Runway do remain on hold at this stage and are not in the road map. And 10 years is quite a long time. So, the reality is certainly in the back half or back 5 years, that there may be change or deferment to those over time.
Slide 25. The integrated terminal, there’s certainly been significant progress during FY ’23 on the enabling projects that get us towards that end result. Detailed design is on track for completion as planned and the relocation of the airports operations center has been completed and construction of the new Eastern Bag Hall is well advanced and relocation of key Eastern airfield operations such as Checkpoint Charlie have also been completed and are in operation.
Slide 26. Alongside the return of travel, Auckland Airport has ramped up its infrastructure development. We now have 400,000 square meters of aeronautical focused infrastructure under construction. And one of the key projects in that is the 250,000 square meter airfield expansion that is key to both enabling the development of the new domestic terminal to be integrated into the international terminal, but also to ensure we have the quality, resilient and reliable airport infrastructure we need for the future.
Slide 27. The new 2,500 Bay Transport Hub and office development is really taking shape nicely. It will transform how the travelers arrive into the heart of the precinct. This is going to be a world-class covered facility that is U.S. Gold Parksmart Green Standard with a 14,000 square meter rooftop solar array. Now, the Transport Hub will provide for multimode transport access for today and that’s through integrating public transport, pickup and drop off in parking, but also through to corridors set aside for future rapid mass transit. Now, we are on track for the pickup and drop off, we are yet to open in April 2024 and the remainder of the facility at the back end of next calendar year.
Slide 28. Now, reopening the airport retail proposition was certainly a key priority to deliver to the experience our customers expect and what you have seen is the resulting significant lift in retail income versus the prior year. Retail income of just under $131 million was up 477% on prior year. And as at 30 June, all stores across both terminals were opened, which is compared to 90% of domestic and 45% of the international retail stores in the prior period. Income per PAX lifted 105% on the prior year to $8.41, but it does still sit below FY ’19 levels of 10.96%.
Now this year, we’ve made a move to a single duty-free operator with Lagardere-owned Aelia duty-free agreeing to a short-term extension of its contract to mid-2025. Not only is a single operator model in line with most overseas airports, it also creates the opportunity for the introduction of additional retail lines and improved in-store experiences, which we think is key as we go forward. Now, what was a seamless transition, it was also great to see about 90% of the existing duty-free employees transferring across to Aelia duty-free. It’s great for the employees and it’s also great in regards to the knowledge that they carried across with them. We’ve certainly seen a positive first couple of months of operation with average transaction values higher than the pre-COVID equivalent.
Now, through progressive renegotiations of expiring retailer licenses, rental abatements declined in the past year to 35% of what they were in the prior period at $58 million. And finally, it’s really pleasing to see the omnichannel offering continuing to develop alongside the off-airport duty and tax free service via the collection point with both recovering well. The collection point is added new luxury stores from Westfield Newmarket and we are seeing income up to 5x on the prior year.
Looking to Slide 29. Parking also continues to outpace the passenger recovery. And you might recall we talked about this at the interim results. But this higher propensity to drive seems to continue alongside they’re staying longer and they are trading up to premium products. As a result of that, revenue was double the prior period at just under $64 million. Now, domestic parking is in line with pre-COVID levels with international terminal parking constrained currently due to the Transport Hub construction. However, Valet and Park and Ride products are providing alternatives for those who are wanting parking options.
Now, in terms of development activity, I touched on the Transport Hub earlier, so I’m not going to repeat that, but we also have $90 million of new transport projects underway that will bring forward access and amenity to our precinct and create smoother transport connections. These include new parking options with the opening of Park & Ride South to connect southern travelers that will be opening late calendar ’24 and then improved precinct traffic flows with the addition of a new road, Te Ara Korako Drive, which connects George Bolt Memorial with Nixon and a new priority lane on Laurence Stevens Drive for public transport and high occupancy vehicles.
Slide 30 really takes us into the commercial space and commercial property really does remain resilient with development momentum continuing. FY ’23 saw a 15% increase in the rent roll to $147 million and there was a 4.9% decrease in the portfolio value to $2.9 billion due to a decline in market cap rates. Now, rental income was up 27% to $143 million. Phil touched on those earlier. And we also have a solid development pipeline that have continued on both new and existing tenants, including completion of the Healthcare Logistics and Kerry Logistics, which added just under 24,000 square meters of net lettable area and 9 new developments currently under construction, which are expected to add $40 million in rental income once completed.
Construction is well underway on the Manawa Bay premium retail outlet center. Strong interest continues coming in from major international brands for the 100-plus store center with more than 50% net lettable space now leased and the project is on track to complete in the second half of 2024. And finally, in the joint venture with Tainui Group Holdings, the Te Arikinui Pullman Hotel fit-out has progressed with opening now planned before the end of this calendar year, and the Mercure remains on hold in the short term, however, fit-out is ready to reactivate as demand picks up.
Slide 31. Now, as the upgrade of Auckland Airport gets underway, in earnest, we absolutely remain focused on the sustainability goals that we have with investments to progress climate change goals and create a sustainable airport. Now not only are we playing our part in reducing carbon emissions and waste from our own operations, but we are assisting the wider aviation systems sustainability goals. We have developed a clear pathway to reduce our Scope 1 and 2 emissions to reach Net Zero by 2030, aligned with the 1.5-degree trajectory.
And an example of that would be the commencement of our program to phase out gas for heating and cooling from the terminals. Now, the first unit has been replaced and we’re running trials on that to work through all the wrinkles, I guess, you could say. But when that is complete, it will reduce carbon emissions by 1,500 tonnes per annum. Our investment in infrastructure will support the deployment of new lower emission aircraft technology and we already actually have a range of initiatives in play to reduce fuel burn from nonflying activities. That’s from predictive technology that manages pushback timing, things like ground power units available to plug in at the gate and we’ve installed 24 EV chargers on the airfield for ground service equipment.
We’re certainly focused on the customer in delivering wider economic contribution and in being a responsible employer, which includes health, safety and well-being, diversity inclusion and social impact. And examples I’d just call out there is we actually have achieved the 40:40:20 across the Board, Executive and Tier 3 levels of leadership from a gender perspective. And we recently announced enhancing our parental leave policy to offer people a great place to work that supports their family lives too, including when they are transitioning to parenthood.
And finally, being a good neighbor and that includes community and mana whenua involvement and support. When the labor market was tight in June-July last year, sorry, we held a Job Fair for all employees across the precinct and that had a 17% conversion rate, which is not too bad by anyone’s standards. Now working alongside iwi, we are looking at design across the projects we have underway and we also granted almost 385,000 community projects to support learning literacy and life skills in South Auckland.
So with that, we’d like to go to Slide 32, which is my last slide. And as we look ahead to the 2024 financial year, we continue to see positive signs in the market, increased connectivity, interest from airlines and what we’re seeing playing out. So reflecting this, we are providing guidance of underlying profit after tax of between $260 million and $280 million and that is based on anticipated domestic passenger numbers of 8.5 million and international passenger numbers of 10.6 million.
Now, with the significant investment across the airport precinct, we are also providing guidance on capital expenditure of between $1 billion and $1.4 billion in the year. Now as always, the CapEx — the guidance is subject to any material adverse events and other criteria called out on the slide as I’m sure you’re aware. But on that basis, I will round out and I’ll hand back to Phil to walk through the regulatory update. And then post that, I think we’ll go straight into questions.
Phil?
Phil Neutze
Thanks, Carrie. So, we’re now on Slide 34. And as Carrie mentioned, after we do this quick regulatory update, we’re into Q&A. So on 8th of June, we announced the aeronautical price reset for the final 4 years of the 5-year pricing event 4, which concludes in June 2027. And last Thursday, on the 17th of August, we released the detailed price setting event for price setting disclosure documents. And this slide summarizes the key drivers of the significant aeronautical price increases that came into effect on 1st of July this year. The price setting disclosure doc show that throughout PSE4, Auckland Airport’s aeronautical charges will remain very competitive with the main Australasian airports.
Furthermore, the 3 regulated New Zealand airports supported by our industry body, NZ Airports, have recently submitted comprehensive evidence that seriously questions the merits of the Commerce Commission’s dramatic Draft decision change and its approach for determining the airport sector WACC. The final bullet of this page summarizes our expert advisers’ views on this Draft decision. And I’d encourage you to read our hundreds of pages of submissions on the Commission’s website if you wish to learn more.
So Carrie, let’s open up to Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question comes from the line of Andy Bowley with Forsyth Barr.
Andy Bowley
A couple of questions for me to kick things off here. First of all, on the retail side of things, good to see that things are coming back. Now could you wrap the retail piece, please, between PSR for passenger spend rates and the concession yields versus pre-COVID levels, excluding the rent abatements that have been precedent through FY ’23? I guess I recognize here the mix will have an impact given the slow recovery in international versus domestic in FY ’23 and the lag recovery of Chinese inbound. But as much as you can, can you give us an indication of how these metrics are traveling on a like-for-like basis, please versus pre-COVID?
Phil Neutze
So PSR, I don’t have that handy, sorry, Andy. But on income per passenger, we’ve got the figure there. It’s still below where we were pre-COVID. And we’ve been guiding for the last 12 months or so that we should expect as we emerge out of COVID that total retail income per passenger is going to be down somewhere between 15% and 20% on where it was pre-COVID. Duty-free will be down sort of towards the top of that range and perhaps the rest of the portfolio towards the bottom end of that range.
On the — you can also get some clarity if you’d look at the abatements, that remaining figure, you should not assume that, that gets recovered that we claw that back in future financial years as we continue to renew and replace pre-COVID legacy lease arrangements that we’re basically seeing minimum annual guarantee reductions coming through to the sort of levers I outlined that 15% to 20%.
Andy Bowley
So in light of the comments, particularly around the new single duty-free operator in terms of how they’re traveling, I’d assume that the 15% to 20% is more concession yield? And as you just alluded to PAX than PSR?
Phil Neutze
Yes. Yes. When I last looked at PSR, it was getting close to pre-COVID levels. And I imagine it still is pretty close.
Andy Bowley
Yes. Second question around CapEx. The midpoint of the guidance range looks slightly light versus at least my expectations in light of the disclosures last week. Could you give us a sense of what the guidance looks like if we split rather than your segmentals, but more so consistent with, say, last week in terms of regulated versus non-regulated given the allocation aspect of the non-aero pieces, please?
Phil Neutze
Yes. So, we — so the guidance is based off assuming that we deliver the aeronautical pricing forecast. For FY ’24, we have risk-adjusted the non-aeronautical part of the portfolio. Now, how that actually plays out in practice remains to be seen but we’re comfortable in aggregate with that guidance.
Andy Bowley
But also say, the $1billion to $1.4 billion, how much of that is regulated?
Phil Neutze
So that’s set out in the financial commentary to the financial statements. And let’s see if I can find it quickly. Yes. So, you can get a breakdown of that from Page 19 of the financial commentary.
Andy Bowley
But that’s not splitting out the allocation between the various non-aero parts between regulated and non-regulated? Is that how I’m reading that?
Phil Neutze
Pretty much aeronautical infrastructure together you get total aeronautical, that’s probably what you’re missing.
Operator
Our next question comes from the line of Marcus Curley with UBS.
Marcus Curley
Carrie, just a couple for me. Phil, could you just clarify whether any of the COVID discounts on landing charges still exist? Or will FY ’24 be a sort of back to normal year for landing charges?
Phil Neutze
They’re rolling off in FY ’24, but we’re rolling in growth incentives that will pretty much repeat the sort of dollar values that we’ve had in FY ’23.
Marcus Curley
So that’s $8 million of discounts effectively continuing in FY ’24?
Phil Neutze
Yes, that’s landing charges discounts. There’s also some passenger charges discounts. So, in round numbers, you should use a figure of circa $10 million in total.
Marcus Curley
Hence, is that a new approach? Obviously, you’ve got your marketing spend as well. Yes, just I suppose I haven’t come across, I suppose, in previous results as bigger a gap between headline charges and reported revenues.
Phil Neutze
Yes. It has pre-COVID over FY ’19, we rejigged the incentive program. We’ve had a lot of feedback from airlines that they didn’t particularly value the marketing support that we’ve been provided and strongly favored like they’re seeing with airports right across the globe that to flow through to aeronautical charges discounts. So, we implemented a policy back then and then COVID hit. So, there weren’t any discounts paid. So, we’ve only kicked off the practice of having landing charges and passengers charges discounts in relation to the COVID recovery period and then going forward with growth incentives.
Marcus Curley
Would you recommend using $10 million as a percentage of aeronautical revenues as sort of an ongoing guide? So, as the business grows, that $10 million will continue to expand?
Phil Neutze
Yes, I think that’s a good ballpark way to go about it, Marcus.
Marcus Curley
And on the flip side, you wouldn’t expect to see any material changes on the marketing from these levels? Or what are you thinking in terms of marketing spend?
Phil Neutze
Yes, that’s right. There’s — the aeronautical marketing is now a very low number, low single-digit millions versus it was well over $10 million pre-COVID.
Marcus Curley
Duty-free re-tender, no comments around that. Could you just give us an update in terms of your thinking there?
Carrie Hurihanganui
Yes, Marcus, it’s certainly something that, that will kick off in earnest early next year. So, we are on track that the mid-2025 is certainly what we’re aiming for and a lot of the preparatory work is underway. But as far as actually the RFP itself, it will be early calendar ’24 before that kind of rubber hits the road on that.
Marcus Curley
And then the final one for me. Obviously, the property reported revenue this year was relatively complicated relative to history. I just wondered Phil, whether you could provide any guidance in terms of what sort of the level of growth in that sort of total property revenue bucket would be in ’24?
Phil Neutze
No, we don’t guide to that level. But you’re correct. There’s property businesses across the world have been progressively adopting the straight-lining of property rentals where there’s fixed annual increments. And what that means is you don’t report in the P&L annual increments of revenue growth. In fact, you just add up total revenue over the term of the lease and divide it by the number of years to get an average. So, the way that revenue growth shows up going forward is delivering new properties as well as recycling existing properties or that they come up for market reviews that materially move the dial. But the level of annual growth in rental income should normalize back to where it was more pre-COVID than what you’re seeing — well, over recent years, COVID didn’t really impact it too much.
Marcus Curley
And is the current reported number, that is the new base?
Phil Neutze
As I mentioned, just a smidgen of under $6 million of that will fall out next year was a one-off adjustment.
Operator
[Operator Instructions] Our next question comes from the line of Wade Gardiner with Craigs Investment Partners.
Wade Gardiner
Just to follow-up on a couple of those retail and property questions. First of all, on the retail, $58 million of abatement this year. I mean I understand that, that is relative to the old contracts, not the new contracts. What should we assume is going to be in there for FY ’24, if anything?
Phil Neutze
Next to nothing, Wade. We should have renegotiated the lion’s share of the contracts by then.
Wade Gardiner
So therefore, you just assume that 15% to 20% down in the mix?
Phil Neutze
Yes.
Wade Gardiner
Likewise, within the property, I think in the past, you’ve also — within the aero part of the property revenue, you’ve also had rent abatement. Was there any in this result?
Phil Neutze
No, there wasn’t. But in FY ’22, there was $4.9 million.
Wade Gardiner
And on Slide 30, you talked about CapEx projects and $40 million of new rent from those projects. What’s the timing of those being completed?
Carrie Hurihanganui
There’s a bit of variety on that way that there’s 2 more commercial properties that we are expecting to be completed in FY ‘24 and circa $10 million on that space. But I don’t have the other deliveries they are post F ‘24, but sorry, I don’t have those to hand.
Operator
[Operator Instructions] And our next question comes from the line of Grant Lowe with Jarden.
Grant Lowe
Can you hear me okay?
Phil Neutze
Yes.
Grant Lowe
Just coming back to the CapEx guidance, the $1 billion to $1.4 billion. So, if I look at the disclosures that you put out last week and the aeronautical CapEx, that looks to be from interpreting those right, that looks to be $900 million circa. So, it implies quite a big range on the balance, if we are indeed saying that the $900 million is reasonably firm. Can you comment on that range and what the key sort of drivers are of that range, whether I’ve got the $900 million, right?
Phil Neutze
Yes. So, $900 million is the top of the range, by the way. And then at the low end of the range, it’s based on a different approach where we’re looking at our current run rate on CapEx delivery right across the entire portfolio and how that has been stepping up in recent months.
Grant Lowe
So, if I look at that $900 million is the top of the range, that implies up to $500 million on other projects. Is that right?
Phil Neutze
Yes.
Grant Lowe
And can you give us sort of a rough breakdown of how that sort of — that builds up to the top end of that range?
Phil Neutze
Yes. So that’s set out on Page 19. So, if you look at the top of the range, include aeronautical infrastructure [indiscernible], which is basically aeronautical. And then we talk about property and retail and car parking.
Grant Lowe
And then just — sorry, my questions again. Then if we look at your comment, I think you mentioned that a run rate of $100 million to $200 million on top of aeronautical CapEx on the go-forward when things normalize. Obviously, next year, it’s going to be materially higher than that. Can you give us an idea of when you think the $100 million to $200 million of non-aero CapEx starts to apply from, i.e., what’s the profile down to that number? When does that hit?
Phil Neutze
I mean you can regard that as a weighted average across the remaining 9 years of PSE4 and 5, is probably a good way to look at that. Of course, a lot of those projects are yet to be even identified. So, this is based on historical run rates but it is somewhat higher at the moment because we’ve got Manawa Bay. So that’s $200 million-plus projects. We’ve got the Transport Hub, which is $300 million plus, 2/3 of that is non-aeronautical and so that’s elevating near-term CapEx. They will be substantially complete over the next 12 months or so.
Operator
[Operator Instructions] Our next question comes from the line of Rob Koh with Morgan Stanley.
Rob Koh
My first appearance on an Auckland call for a couple of years now. Thank you very much for the results. Can I ask a quick question of Mr. Neutze just on the overall OpEx kind of thoughts for FY ’24. You mentioned we should be looking for maybe 10% to 15% growth there. Is that versus the $220 million base that you’ve talked about?
Phil Neutze
No, versus total $228 million.
Rob Koh
And then my second question, going to the regulatory side. And I must apologize, I could only listen to the replay of your presentation from last week. But you did talk about how you’re viewing the firm’s overall cost of equity at around 3%, inferred from the observed cost from the share price. But I guess within PSE4, you’re targeting a realized cost of equity of 8.08%, if I’m reading the preso correctly. And so I’m just wondering how should we reconcile those 2 things? Surely you’re not saying that your non-aero cost of equity is that much lower.
Phil Neutze
No. So, the way we have based it is there’s been a WACC import methodology that the commission has steadfastly insisted that regulated airports adhere to over the last 13 years has not been prepared to consider any different approach. And so we have applied that approach and updated all the data inputs into it, and that’s the answer we get.
Rob Koh
That makes sense. And then I guess just turning to the relationship with your airline partners and that they obviously have their views. But ultimately, passengers are still going in and out. Do you see any prospect of the disagreement widening? And I guess there’s a precedent over here in Australia where a certain airline just stopped paying the landing charges to Perth Airport. And just any thoughts on how on the ground it’s going?
Carrie Hurihanganui
Rob, listen, I think there’s always — it’s certainly — I’ve been in the airline game for well over 20 years and the conversations and tensions, I guess, the natural tensions that come with the pricing conversations every 5 years. So, it’s not a surprising piece, but we actually also have very constructive dialogue and engagement with the airline. So, there is the pricing conversation. But as far as ongoing relationship and engagement on things, it is very constructive. Yes, there are different perspectives on this. And we’ll work that through as we go in the next 12 months. Obviously, the time line we’d outlined for the Commerce Commission’s feedback on our pricing, which is due circa May next year and then we’ve got the IM methodology. So, I’m confident that we will be able to constructively work our way through it, but there’s still some of the outcomes of those reviews underway as part of it.
Rob Koh
Sounds good. And all the best to the team in that endeavor.
Carrie Hurihanganui
Thanks, Rob.
Phil Neutze
Thanks, Rob.
Operator
[Operator Instructions] And our next question comes from the line of Nick Daish with RBC Capital Markets.
Nick Daish
Carrie, Phil, can you hear me clearly?
Carrie Hurihanganui
We can.
Nick Daish
Just a quick one on the CapEx. I suppose let’s just focus on the actual timing and quantum, more so just on how this is allocated. My understanding is that whatever cost is eventually borne by Auckland Airport, the original cost or risk adjustments will eventually contribute to the RAB. But I just want to understand how the actual contracts themselves work between Auckland and its contractors, please?
Phil Neutze
So, we’re certainly in a new era where with such large and complex construction projects, it’s not possible to kick off the project with all elements being fixed priced. So, as you progress with the contract, we progressively lock in a greater proportion. So, I think with the domestic processor, we’re starting off day 1 with about 1/3 of the cost fixed and over the next year or 2 progressively getting to quite a high proportion fixed.
Nick Daish
And the second one is just around — you mentioned a couple of times the possibility of an equity raise somewhere between $0 billion and $1 billion. I suppose the way I’m thinking about that equity, but it’s really a bridging mechanism between spending that cash on the build and then recouping the returns in PSE5. Is that a fair and reasonable way to think about a possible equity raise? And I guess the key question is really, should we anticipate and understand the long way down track, should we anticipate whatever proceeds come off in equity raise would come back eventually to equity holders? Or is it something that Auckland Airport do you think would prefer to hang on to without knowing what happens in 5, 10 years’ time?
Phil Neutze
So, the last thing we want is an unwanted credit rating upgrade or downgrade. So, if we undertook an equity raise to avoid a downgrade, we would equally take steps to avoid an upgrade in the future if the credit metrics got unreasonably high and the outlook was that they would continue to strengthen. That was the rationale for the capital return that we did back in 2014. I guess the key unknown in this is second runway. So, we — this year, we’ll be doing a lot of work on second runway with the timing. And that could potentially require us holding on to an equity raise that we — that might take place. We don’t know that it will, but might take place to the end of PSE4. If we expect it to be getting cracking on early stages of second runway CapEx than that mix pricing period. But we won’t be able to give any clarity on that until we complete that really detailed analysis to determine timing.
Operator
[Operator Instructions] Our next question comes from the line of Roy Harrison with Bank of America.
Roy Harrison
Just on the traffic mix. In the last couple of months, we’ve seen a lot — a big traffic improvement from Mainland China. Are you expecting that to grow further going into FY ’24? And have you seen that kind of come through into the retail spend for PAX at all? And are you expecting that to improve significantly in FY ’24?
Carrie Hurihanganui
What we’ve certainly seen is the relatively quick scaling up of capacity out of China. And as I said by September this year, based on what we know, it’s 93% and we certainly continue to have positive dialogue with operators out of China. So, we do see that remaining strong through F ’24. In regards to the capacity added, but actually the passenger number themselves, I’m not sure whether Phil’s got insight, last time I looked at the data, we didn’t necessarily have an overt call out in the China space as far as the — what we’re seeing from the returns, it’s still wee a bit early because whilst capacity came on earlier this year and kind of April, the lag of getting the load factors up has really only been in the last couple of months.
But Phil, anything you want to add on that front?
Phil Neutze
Yes. I think the question was, if I understood it correctly, specifically, are we seeing that increase in the proportion of Chinese PAX starting to grow, drive up retail income. And not during FY ’23, particularly because we did the transition to a single operator in May and that caused quite a lot of disruption. So, there’s a bit of noise and there has been for the last couple of months. So, I haven’t seen the most recent data. We would expect it to because the trends pre-COVID was that Chinese direct arrivals, their spend was circa 2.5x our overall average. So, I just haven’t looked at the data, but you would expect to be starting to see that come through.
Roy Harrison
And then just on disruption generally from the terminal integration and domestic processor. Just on the car parks, the number of spaces are down almost 40% due to construction disruptions. Are you expecting any disruptions on the retail side over the next 5 years?
Carrie Hurihanganui
Well, we certainly – I mean, again, if we look forward, for example, on car parking, you would see the kind of overs and unders as things like the Transport Hub come online, those will come back, Park & Ride South, et cetera. From a retail perspective, we had quite a bit of disruption that Phil just referred to as we move to a single duty-free, so not expecting significant in the international space. Obviously, as we do move from the existing domestic terminal into the integrated terminal, but not expecting disruption there because we are going from an existing building into a new building. So, from a domestic perspective, there will be new and additional retail, but we’re not reliant on one overlapping the other. They can’t happen discretely.
Operator
[Operator Instructions] Our next question comes from the line of Alexander Prineas with Morningstar.
Alexander Prineas
Just thinking about the airlines bringing on more capacity and the recovery that we’ve seen there and the outlook. Is there any sort of obvious sort of single big, big hurdles that you’d sort of highlight or comment on that is still preventing airlines from bringing on more capacity? Or is it really more just general economic conditions and solving general kind of logistics problems that the airlines are facing?
Carrie Hurihanganui
Good question. I think if we look backwards looking into FY ’23, I think the industry generally did struggle with resourcing capacity having enough staff to turn aircraft and that was across airlines, ground handlers, you saw it at a system-based approach. All operators in the system are getting on top of that, not quite when certainly when I engage with CEs across those businesses, they’re not back to exactly where they want to be as far as their total numbers, but they’re getting much closer.
So, as far as capacity coming on, there should be — there shouldn’t be a lot of limitations to the ability to facilitate that as the system is running. In particular, as you look at things such as the regional network versus domestic and then you’ve got Trans-Tasman as well. So, I’m not seeing a lot of constraints in that other than the system itself continuing to scale up. And I mentioned earlier on the call, it’s getting there, but we still have work to do as a system in regards to those, but those — I’m confident we will overcome those in the short term.
Operator
[Operator Instructions] And our next question comes from the line of Jason Familton with ACC.
Jason Familton
Just a couple for me. First one, how was — Carrie how is leasing going for Manawa Bay given pretty subdued economic conditions in New Zealand for retail at the moment?
Carrie Hurihanganui
Yes. Actually, very well. It’s — we’ve got 50% of the net lettable area at least already, which is unusual when you look as far as benchmarks of other shopping or outlet centers to be kind of 18 months out or so from opening. To have that level of leasing actually is very positive and very strong. We continue to vet interest through it and agree with you. You’ve got a global market that is softening a bit. But as far as the demand and interest, we’re still seeing that is very strong and remain optimistic of us hitting, obviously, the tenancy that we’re looking for prior to opening.
Jason Familton
And Phil, just — I’m just thinking about interest rate hedging at the moment and plans around that because given uncertain near around CapEx and reasonably wide range, how are you thinking about the level of hedging you’ve got for interest rate risk? And as it plays out over the next couple of years?
Phil Neutze
Yes. So we — while we were progressing the consultation on aeronautical pricing and the aeronautical infrastructure development plan, we had a policy position right at the bottom of our hedging policy at the various time buckets. So, we are lifting that during this financial year. So certainly, not to the middle of the bands, but we’ll be putting in place circa $1 billion of forward starting hedges in relation to new borrowings not yet drawn down.
Jason Familton
And then linked to that, should we think about the capitalized interest component being pretty similar percentage in ’24 is what it’s been in ’23?
Phil Neutze
Yes, I think that’s a decent assumption, ballpark, Jason.
Jason Familton
And one final one, and I know it’s probably being that cheeky this one. But clearly, the larger or longer-term applications from what’s in the input methodology review is for PSE5 and beyond. How are you thinking about that and the regulatory return that you could generate in those periods? And I know we’ve still got to go through a consultation process and it’s just draft and things. But — and I guess the more important one is around the CapEx that you need to spend?
Phil Neutze
Yes. So, we had — I think we had a question along some of the lines last week, actually on that. We have disclosed an aeronautical CapEx program of about $6.7 billion over PSE4 and 5. About $4 billion of that is to do a terminal integration, which we’re getting cracking on. Once we’re committed to that, there’s really no going back. So, that’s about $4 billion. So, that means about $2.7 billion or so of the program is discretionary still and it’s certainly likely if the Commission’s Draft decision was to be finalized that we would be looking very closely at that remaining program.
Jason Familton
And then one final one as someone who is based in Wellington. What plans are there for funneling passengers from the new integrated domestic terminal to regional flights, which will remain at the old domestic terminal? Like a covered walkway, which quite useful given the rains in Auckland from time to time?
Carrie Hurihanganui
Well, I have no idea what you’re talking about. There’s no rain in Auckland. No, certainly, it is – we are working through what that looks like and very much the planning in terms of – and very much need to engage and consult with airlines around everything from how they think about minimum connection times through to, obviously, how we get from one terminal to the other. And also ultimately, you would have seen tagged on the 10-year capital plan, that the view of the future regional solutions. So, I haven’t got the absolute this is what it is going to look like, but it is absolutely on our agenda and we are working through options and we’ll be engaging with airlines on that as well because we do want it to be part of this exercise that we’re investing in infrastructure that’s good for customers and that they do have customer experiences in line with their expectations.
Operator
Thank you. I’ll now hand the call back over for any closing remarks.
Carrie Hurihanganui
Well, thank you. Just I mean in short summary, certainly, I guess, for me, we have seen a strong recovery in financial year ’23 and we are very optimistic about the continued growth in FY ’24 and beyond. As the gateway to New Zealand, it’s a role we take really seriously and we are focused on delivering that customer experience that they expect and ensuring that we are fit for purpose for the future with the right capacity and the right resilience as we go forward. So, thank you for your time today. We do — Phil and I do look forward to catching up with many of you over the coming weeks as we have investor meetings online, both here and in Australia. So, we have a great afternoon.
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