Haikou Meilan Airport, the primary airport operated by Hainan Meilan International Airports Ltd. (0357.hk, $8.22), had released preliminary details of the winter 2013-spring 2014 flight schedule on November 1st, 2013. The view is for passenger throughput of 5.9 million persons during the 154 day season. With an anticipated 51,688 aircraft movements, management guides towards an average aircraft load of 114.1 passengers.
Management has set the bar sufficiently low as to be irrelevant.
In the prior 2012-2113 winter/spring interval, total passenger throughput was 5.781 million persons, on 42233 aircraft movements. The average load was 136.9 passengers for that peak season.
In calendar 2012 the passenger load had averaged 122.6 persons per aircraft. 2011 data indicated a passenger load of 122.4 persons per aircraft. The 2010 figures stated passenger load of 118.8 persons per aircraft. 2009 data reported passenger load of 121.3 persons per aircraft. 2008 data reported passenger load of 123.8 persons per aircraft. 2007 data indicated an average passenger load of 127.7 persons per aircraft.
Over the previous six years of operation, the total annual load had averaged 122.6 persons per aircraft. We will soon be entering peak season. At no time in the previous six fiscal years was the average aircraft load 114.1 passengers.
Providing that weather related issues do not greatly impact travel, Hainan Meilan Airport passenger counts should continue to surprise on the upside.
The completion of the new terminal in Q3, 2013 removed a structural bottleneck. 35 new routes have been subsequently added for the 2013-2014 winter season.
It may be realistic to build in an appropriate period of time for new routes to mature. It would also be prudent to assume that a portion of the new routes will fail and be discontinued. As an offset, passenger load factors have continued to improve steadily on established lines.
By my estimates, in order for the average aircraft load to fall to record low levels, there would have to be industry wide reductions in the size of the aircraft flying to Haikou Meilan airport. Taking into account the high load factors, the opposite is far more likely.
Expectations for throughput of 5.9 million passengers in the coming winter season may, accordingly, be understated by .436 million-.810 million persons. This suggests the potential for a very strong close to the 2012 fiscal year and attendant tailwinds going into fiscal 2014. When one considers the fact that total passenger traffic in 2012 was 10.7 million, the potential for a revenue and EBITDA beat of some consequence, based upon the recent increase in routes to Haikou airport, appears quite likely.
A new terminal will ultimately be required to accommodate burgeoning economic development in and around Haikou.
The August 13th 2013 expansion brings rated capacity at Haikou Meilan airport to 15 million passengers annually; this capacity may be tested sooner than originally envisioned. Over the last six years, a 7.8% annual growth rate in passenger traffic was experienced. The proposed start of the space launch theme park in 2014 as well as other multi-billion dollar regional attractions, in varying stages of development, may accelerate tourist travel to the island. Accordingly, Hainan Meilan airports envisions building a third terminal capable of handling an additional 18 million passengers per annum.
Financing for a major expansion looks to be available at competitive rates.
A $200 million US proposed loan facility is presently under evaluation by a Taiwanese consortium of banks.
Pricing of 330bp over dollar Libor is intended to raise as much as $250 million with the exercise of a greenshoe option. Hainan Meilan airport present debts are $53.99 million US in long term bank loans with a weighted average yield of 3.7% and 800 million RMB in corporate bonds with an average yield of 7.8%.
Taking into account the financial rewards that accrue to any airport operator on Hainan Island with retail floor space, I view additional development of square footage, for duty free shopping, in a positive light.
Some will argue that a large scale development of any new airport terminal creates risks of cost overruns and scheduling delays. If so, it might impact the financial status and future profit growth of Hainan Meilan International Airports. Perhaps this is credible push-back; then again it may be an unwarranted worry. Prior expansions of Haikou airport were uneventful and highly accretive to top and bottom lines. In light of the island’s booming duty free retail sales, the most recently completed expansion seems timely. Being in the right place, at the right time, on the cusp of a secular trend, generally affords a company the luxury of an occasional misstep.