It’s not the 98% plunge in traffic through Australia’s once-bustling airport that will be keeping shareholders in Sydney Airport Holdings Pty Ltd (ASX: SYD) on edge.
It’s the battle between state premiers on boarder restrictions that will be a bigger sentiment driver for the airport as investors grapple with the fact that the company’s income isn’t as diversified as management claims it to be.
I’ll explain more of this later.
Clipped wings
The near-total freeze on domestic and international air travel due to the COVID-19 pandemic meant that only 92,000 passengers moved through Sydney Airport in April this year.
In contrast, 3.7 million flowed through its terminals during the same month in 2019.
Of the total numbers last month, 49,000 were domestic travellers, representing a 98% drop from April 2019.
Caught in the crossfire
The pressure is building on state premiers to allow Australian visitors from beyond their borders to return. This could happen in June although Queensland is the holdout.
Businesses and the federal government are pressuring Queensland Premier Annastacia Palaszczuk. She’s warning against restarting the tourism industry while our two most populous states of Victoria and New South Wales continue to report cases of community transmission, reported the Australian Financial Review.
The sunshine state indicated it may not welcome travellers from the southern states until at least September.
Meanwhile, NSW will allow its residents to holiday anywhere within the state from June 1, although that isn’t going to help Sydney airport or airlines like Qantas Airways Limited (ASX: QAN).
“New normal” for travel stocks
The airlines have flagged their own “new normal” for when services eventually resume. As a safety precaution, Qantas and Virgin Australia Holdings Limited will issue masks to passengers but won’t make wearing them compulsory.
The airlines will also stagger boarding and disembarkation (sounds like more bad news for cattle class passengers!), do more cleaning and have hand sanitisers in readily accessible places.
What they won’t do is leave empty seats for social distancing as Qantas’ boss Alan Joyce warned this will force ticket prices to surge nine-fold.
“L” not “V” shape recovery
It will be a long time before things go back to anything resembling pre-coronavirus, especially for Sydney Airport.
I am not even talking about the return of international travellers either as that will take many more months through a multi-stage comeback.
Eggs in different baskets but same trolley
Airport management boasted about its diverse income streams during its February results. Passenger traffic was flat but underlying earnings before interest tax depreciation and amortisation (EBITDA) jumped 4%.
This was due to rents it collects from retail, hotel and car hire companies. But even as domestic traveller return, the airport may have to contend with a second battle front.
Retailers are gearing up for a bitter fight with shopping centre landlords and structural change is in the air!
If retailers manage to secure significantly lower rents and change how mega malls charge for space, as I suspect, then I believe tenants at the airport will expect a similar treatment.
Talking about stocks that are better placed to outperform in the COVID-19 recovery…
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More reading
- 5 things to watch on the ASX 200 on Wednesday
- ASX 200 climbs 1% in positive start to the week
- 2 high yield ASX dividend shares to buy for 2021
- 3 industries that may never recover from COVID-19
- Virgin narrows its shortlist down to 4 suitors
Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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