Auckland International Airport Limited (AIA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Auckland Airport annual results presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Auckland Airport's Chief Executive, Carrie Hurihanganui. Please go ahead.

[Foreign Language] Welcome, and good morning to everyone joining the call. As outlined, I'm Carrie Hurihanganui, Chief Executive of Auckland Airport. And today, I am joined by Chief Financial Officer, Phil Neutze. I'm really pleased to be able to share the financial results from FY '22 with you, particularly as we look at after more than 750 days since COVID began, FY '22 was definitely a year of 2 halves with the majority of the first half constrained, as you know, by lockdowns and travel restrictions both at the borders as well as domestic borders and then the second half starting to see the easing of those travel restrictions and most notably the border reopening to Australians from April. Now with that, we have seen a steady and gradual return of long-awaited domestic and international travel. Our teams have been working hard to ensure that New Zealand is on the radars of international airlines and supporting them with their relaunches. It is a competitive market globally with travel volumes skyrocketing in some markets. And key for us and what's on our mind is as we attract travelers back to New Zealand, ensuring that we, and that is the royal we from a New Zealand perspective, can deliver on the quality of experience that they expect, which will be vital from an embedding brand perspective, word of mouth and return visitations. Now we've got quite a bit we'd like to cover with you today before we do get into the Q&A session, so let's jump into Slide 3 to kick things off. And these pictures represent that recovery has been driven by the desire for reconnections, families and friends, business partners that had been apart for over 2 years. And that drive to come together has been aptly named revenge travel. And that has certainly been in play with international capacity increasing quickly to 40% of pre-COVID levels just over those 2 short months from April through to June. That jumped again in July to over 50%. So we are seeing that desire to reconnect well and truly. If we move to Slide 5 and start to look at the results themselves. Again, the full year results do reflect a year that continued to feel the impacts of the pandemic in the first half and the net recovery starting with real meaning as we headed into quarter 4. Now passenger movements really starts to lay that game of 2 halves that I've talked about before. It declined overall by 13% to 5.6 million. Now that was primarily driven by the decrease in domestic pack. That was 27% down from the previous period or previous year. Now that was partially offset by the increase in international travelers or passengers. That includes transit of an increase of 123%, but it wasn't quite enough to offset from a net perspective that domestic decline. That then plays through as we look at the financial year revenue. It did increase by 7% to just over $300 million, and that has played through with lifts across aeronautical, retail and property revenue lines. Operating EBITDAFI declined from that previous year by 16% to the $144.5 million. Now FY '22 will be Auckland Airport's second ever annual result of underlying loss at $11.6 million. That is up $27.8 million or 71% from FY '21. Total reported profit after tax was $191.6 million, that is down 59%, and no dividend will be paid. Aircraft movements, much like passengers, that was down 13%, again, driven by the drop in domestic movements in the first half. That drop was 19% due to the domestic lockdown and travel restrictions. But what we did see in the gradual reopening of borders, that international movements were up 21%. And finally, from a capital expenditure, again, we saw a lift from FY '21, an increase of 29% to just over $253 million. And that really was reflecting the increased core aeronautical investment in renewal activity that we took, particularly when there was lower activity in traffic. And that was across airfield and roading networks. It also included expenditure on the planning and enabling works to support the future development of the integrated international and domestic terminal, alongside some property development such as the Hellmann Worldwide Logistics and the works that have commenced on the transport hub. As we move to Slide 6. The second half of FY '22 started to see that recovery really beginning to show in key business lines. Aero revenue lifted 7% to $94.7 million, and that was driven by those borders starting to open and more international passengers. Again, the domestic offset, without sounding like a broken record, I suspect, that is going to be the theme that you're going to hear throughout this. From a retail revenue perspective, that was up 28% on prior year. And while domestic retail did suffer relative to FY '21, the opening of borders really has led to a positive injection or impact into that international retail performance as that starts to gain some momentum. Car parking income decreased by 9%. Again, those elevated alert levels associated with Delta and Omicron outbreaks played out there. However, with things now returning to, and I hesitate to say, a level of normality, but the new normal, we are seeing domestic car parking demand outpacing passenger recovery. I will pick this up in a little bit more detail later in the presentation. Property continues to be resilient as it has and was in FY '21 as well. Rental income was $112.9 million, which was an increase of 12%. Now the income growth in the year was primarily driven by new properties leased this year. So that is Hellmann and Geodis Wilson, rental growth from the existing portfolio and the full year effect of properties leased last year. When we look at hotels, the underlying performance was supported. If you'll remember, the Novotel was in use as a Ministry of Health quarantine facility throughout the majority of the period. And if we look across both ibis and the Novotel, the average occupancy for the year was 40%. Then if we look at Queenstown, again, similar stories. The decline in overall performance and passenger numbers was related to that first half of the year with domestic passengers decreased by 16% but also saw a lift in international PAX volumes of 50% with a large proportion of this coming through in quarter 4. If we move to Slide 7. Key message here is Auckland is open for business. Now while passenger numbers were impacted in the first half, there have been clear signals of the desire to return to travel in the second half as borders have been opening. International air travel now is the strongest it has been since COVID first closed our borders. It hit close to 40% as at June and then domestic reaching over 80% by that point in time. If we move to Slide 8, please. Our focus really is about setting up for the future. With borders open, our focus is to reconnect New Zealand to each other in the world. And to do this, we are working with airlines to rebuild capacity frequency and passenger numbers. Now we know how much our customers enjoy shopping and the dining experience that really is part of that overseas holiday or work trip, and we're working incredibly hard to make it the best experience possible. And that means ensuring that all relevant travel-related products and services in retail are up and running to meet the increased activity and dwell time that comes with that. In line with this recovery, we are also now focused on reestablishing the key aeronautical infrastructure developments that had been put on hold when COVID took hold, alongside continued investment in commercial property developments that make sense. Now I'd like to hand over to Phil to take us through the financial performance in detail before coming back to talk a little bit about that forward look. So Phil, can I hand it to you?

Thanks, Carrie, and welcome to your first full year results webcast. So it was great to finally see a strong rebound happening in both domestic and international PAX over May, June and July this year. We're on Slide 10 now. And even though the last 2 months of FY '22 were much stronger than FY '21 in terms of international PAX, total PAX volumes were down 13% on FY '21, as Carrie mentioned. And this was because of the devastating impact of Auckland's regional lockdown on domestic PAX, especially over September, October and November last year, cast your minds back, and we're calling this the 107-day lockdown. Hopefully, we've got the number right. Domestic PAX were, therefore, down 27% versus FY '21. On to Slide 11. International flight movements and MCTOW were up approximately 20% on pcp, and this reflected the progressive loosening of border restrictions from the end of February this year. But this was way less than the 124% increase in international PAX that we enjoyed in FY '2022, admittedly off a low base. And it reflects that international flight movements and seat capacity have been supported since March 2020. And that was first by the International Airfreight Capacity scheme, and that was replaced by the Maintaining International Air Connectivity or MIAC scheme on May 2021. So there's been a significant surplus of international seat capacity until quite recently. That dynamic has obviously changed recently, and this facilitated the more than doubling of international PAX that we saw in FY '22 with only 20% more flight movements. Moving now to Slide 12. So the revenue picture is pretty clean in FY '22. We had a 7% increase on pcp to circa $300 million, but expenses are much more complicated. Sorry about that, guys. But ladies and gentlemen, pcp expenses benefited from just over $21 million of reversals of over-accrued expenses in FY '20, and these related to CapEx project write-offs and termination costs and expected credit losses. FY '22 expenses, on the other hand, include another $6.9 million of CapEx project impairments. And these mainly relate to some changes we expect to the Park & Ride South project when that gets going, the domestic Strata Lounge and the northern runway design cost. These projects were paused and, as I mentioned, will likely be rescoped when they recommence. Adjusting for these abnormal expenses and credits as well as changes in government wage subsidies received over both years, normalized OpEx was up by 16% in FY '22. And we set this out, the normalized analysis, on Slide 37, so take a look at that. FY depreciation of $113.1 million came in a smidgen below the bottom of the $115 million to $120 million guidance that I gave back at the interim results announcement in February, and FY '22 interest of $53.7 million was similarly just below the bottom of my $55 million to $60 million guidance. We're now on Slide 13. Passenger services charges increased by 40% in FY '22, and this was because of the doubling of international PAX versus pcp and was despite domestic PAX being down 27% and total PAX being down 13%. And the reason why that all adds up is because international passenger charges are roughly 5x domestic charges on a per PAX basis. Similar story for retail income. It lifted by nearly 30% in FY '22, again, despite total PAX being down by 13%, and it's for the same reason. It was very pleasing to see yet another solid lift in investment property rental income. It was up $12.4 million or 12% for the year. 3/4 of this increase was from new properties added to the portfolio either in FY '22 or partway through FY '21. And the balance came from existing property rent increases, partly offset by the $1 million increase in investment property rent abatements that we provided to a small number of tenants that are still struggling under the impacts of COVID-19. As I mentioned earlier, despite, Slide 14, which we're now on, showing a 42% lift in OpEx in FY '22 versus pcp, after adjusting for the big swings in CapEx project impairments, expected credit losses and government wage subsidies, normalized OpEx was up by 16%. And that reflect the planned ramp-up in head count and operational activity to ensure that we were well placed for the international PAX ramp-up that we expected in the second half of FY '22. And we're pretty pleased with how that panned out. I don't think we saw quite the level of congestion issues that have been experienced in other airports globally. So our philosophy there is to get the resources on board slightly ahead of the curve so that we can continue to focus on customer experience. But back to the numbers. To add to the noise in the FY '22 expenditure figures, FY '22 depreciation expense reduced by $4.2 million. That was after we restated the FY '21 results to expense software as a service investment that had previously been capitalized. So once that was expensed, that lowered our depreciation by that $4.2 million I mentioned. And interest expense reduced dramatically in FY '22. This reflected the significant reduction in average debt balance over FY '22, following the repayment of USD 400 million of USPP borrowings over that financial year of FY '21. It also reflected the one-off USPP prepayment and swap closeout costs of nearly $24 million that adversely impacted FY '21. So on to Slide 15 now. I've already talked about the OpEx noise across FY '21 and FY '22. And after we adjust for that, there was a $20.7 million increase in normalized OpEx in FY '22. And this -- the main components of this increase was just over $9 million increase in staff costs, a nearly $4 million increase in outsourced operations. So that funds the likes of the car parking activities, trolley services, bus operations and the like and a circa $10 million increase in repairs and maintenance. And we took advantage of the low PAX numbers to accelerate some proactive maintenance during the year. And these increases were partly offset by $1.9 million of reductions across some other expense categories. We're now on Slide 16. So this is pretty self-explanatory, and it lists the key projects comprising our circa $250 million net CapEx in FY '22. That's after $6.9 million of impairments. This was at the low end of the $250 million to $300 million CapEx guidance that we gave for FY '22. So moving to Slide 17. This shows that total drawn debt increased by circa $84 million to just under $1.5 billion as at 30th of June 2020. This is more than $700 million below Auckland Airport's peak borrowings that we had of $2.19 billion that was in 30th of June 2019. And obviously, this debt repayment was financed by the $1.2 billion equity raise that we completed in early April 2020. Also, during the FY '22 financial year, we went back to the debt capital markets for the first time in approximately 2 years, and we successfully raised $150 million in the New Zealand debt capital markets, and that was November 2021. And we also refinanced nearly $230 million of bank facilities that would otherwise have matured over the upcoming financial year. And we agreed new EBITDA-based interest coverage covenants with our banking group in February 2020. This was a next step from the agreement that we reached back in July. So this was in February 2021, I should say -- no, 2022. Let me get that right. Sorry, guys and girls. We -- yes. So we've agreed a new EBITDA-based interest coverage covenants with our banking group in February this year, that's 2022, next step from back in July 2021. And this was a prudent step given the uncertainty at the start of this financial year about how the remainder of FY '22 would play out. But in the end, we delivered interest coverage of 2.58x in FY '22, and that was versus the previous EBITDA-based interest coverage covenant of 2x. So it was an abundance of caution. So now on to Slide 18. And this is really just an FYI on our balance sheet. There's not a lot I need to say about this one, and perhaps I'll just call out that the equity book value increased by 3% in -- versus pcp. And this increase was driven mainly by the $204.4 million investment property revaluation that went straight to retained earnings and the net $74.4 million revaluation increase in the property, plant and equipment asset class, and that went to revaluation reserves. And that's back to Carrie.

Fantastic. Thank you, Phil. Came to talk a little bit about -- so the where to from here, the journey ahead. And if we move to Slide 20 on that, I think we can say that the recovery is well and truly underway. I think if we look back to March, we were sitting at about 20% of international capacity compared to 2019. And that is looking to grow to be anticipated at 70% by the end of this calendar year. So international seat capacity has continued to show positive growth. Now I do need to call out, these numbers are based on slot filings. So that is what we anticipate to operate and what our airlines are telling us they're going to operate. We do know and we do see sometimes that what's filed versus what's operated can have a little bit of variability in that, but the restarting of previous routes has gained momentum since borders have started opening meaningfully from March and April. We've seen a significant step-up in July following the end of the financial year with Air New Zealand restarting over 8 more of its key routes in July. Hawaiian restarted to Honolulu, Air Tahiti Nui going to LA via Papeete. And Qantas saw a step-up from 55% capacity in June to 64% in July. So we have been seeing that continue. Also, incredibly positive to see some new routes also being announced as part of this recovery. Air New Zealand launched to New York from September, American Airlines flights to Dallas Fort Worth from October this year and then the most recent, AirAsia X operating Kuala Lumpur via Sydney from November this year. If we move to Slide 21, please. A little bit -- reconnecting New Zealand a little bit of back to the future. And that's based on -- if we look at a pre-COVID environment, there were 29 airlines operating to 43 destinations. At the worst of the pandemic, there was only 12 airlines operating to 21 destinations and to be honest, somewhat infrequently at that point in time. Now by the end of financial year '22, there were 18 airlines to 26 destinations. So it was starting to tick up again. As we sit here today, there are 18 airlines to 34 destinations. So even from the closure of the financial year, we are seeing that continue to build. And again, if we look at what slot filings are telling us, by the end of this calendar year, there will be 23 airlines to 37 destinations. And that starts to get us back to a reasonable regional coverage across the Middle East, Asia, the Americas and the Pacific. Moving to Slide 22. One of the key pieces when we look -- we are clearly in recovery, but Auckland Airport's long-term fundamentals remain strong, although that is not without some challenges throughout recovery, which at the point when Phil starts to talk about outlook, we'll talk a little bit more about that. But the drivers of growth are positive. I've just captured and talked about those airlines that are returning to New Zealand. New Zealand does remain an attractive destination both for its experience and landscapes and all of those things, but also the perception of being a "safe destination in a COVID world." So there's upside in that, we believe. The downside challenges, I don't think, are news to anyone. Labor shortages, inflation, supply chain challenges, they continue to plague the industry and to be honest, not just aviation, to be fair. But the risk of slowing recovery in some markets as a result is something that we are just cognizant of. Finally, we often get asked about the view of, is there a risk of any future lockdowns? Listen, I think that future government positions on that, you can never say never, but you get a sense that, that is a lower downside risk than it certainly was 12 months ago as we looked at that. If we can move to Slide 23, please. Auckland Airport is entering a period of investment, and we really need to be positioning ourselves for the future and transforming Auckland Airport into a world-class travel experience. Improvements to domestic travel are our first priority. The domestic terminal is now more than half a century old. And while we've continued to reinvest in that facility to support growth in domestic travel and the needs of travelers, this infrastructure is now nearing the end of its life. It's vitally important that Auckland and New Zealand's economy is supported that we invest for that future in creating a domestic travel experience that Kiwis can be proud of. Our priority project is creating a combined domestic and international jet terminal at the eastern end of the existing international terminal. And this is a pathway that last year we gained support by Air New Zealand and the Board of Airline Representatives. Now we've taken -- undertaken some significant work over financial year '22 on the design, enabling of the new integrated domestic and international terminal. And that was really to capture on the fact that we had lower activity and lower traffic. And when you are looking clearly in the airfield, that's the ideal time to start to look at that. Design and enabling works are well advanced for the relocation of the eastern truck dock, demolition of the eastern bag hall, which is underway as we speak, and the planned relocation of the eastern airfield operations. Now we are currently in consultation with airlines on our detailed capital plan and look forward to sharing more with you in the coming months as that rounds out. If we can move to Slide 24, please. Now what comes with an increase in activity clearly is the reopening of the airport proposition. And that is a key focus for us that, again, the experience our customers expect is when they return to travel to reconnect with family and friends, they are expecting to have the full airport experience. We did see, as Phil had outlined, the upside of retail income on the prior year. And again, that was primarily driven through the opening of borders and international retail offering return. As at the 30th of June, 90% of the domestic and 45% of the international retail offering was open. Duty free is a key component of our retail strategy, and we are currently in discussions with the existing duty-free operators regarding extensions to the current contracts, while a full retender is planned for the end of FY '24. One of the things that we do know is our retailers are captive to fall through the terminal, and we continued our support to retailers over FY '22 as part of that with $173 million of rent reductions and abatements as part of that. We are really pleased in regards to the broader proposition in the international terminal to also reopen the Auckland Airport Strata Lounge in the international terminal from the 1st of July and have been very pleased with the demand that we saw -- have seen coming through but particularly from that first week of opening. So there is clearly a desire. If we move to Slide 25, please. Earlier in the presentation, I talked about parking and how it had recovered. What we are seeing is it's recovered a slightly different profile than pre-COVID. While revenue was down by 9%, which did reflect the lower passenger numbers, particularly in that domestic side, once the full suite of products was open and on sale from quarter 4, we did see a considerable uptick with an 11% higher quarter 4 in FY '22 than we did in FY '21. What we have been seeing, particularly kicking off from July, is the recovery in domestic parking outpacing the passenger recovery with a higher propensity to drive. In the conversations I'm having with other airports such as Dallas Fort Worth, LAX, that is a common phenomenon, if that's what you'd like to call it. And I guess the question we have is whether is that a structural change or a transitionary change, which remains to be seen. If we move to Slide 26, please, the transport hub. We closed car park A in June this year to make way for construction on the new 2,500-bay transport hub and office development to get that underway. We're really excited about this development and the fact that we'll provide a world-class covered facility that will provide multi-mode transport access for today, and that would be through integrating public transport, pickup/drop-off and parking. But it also sets us up beautifully through to the future and whatever rapid mass transit looks like in our future state. We are on track for the pickup/drop-off area to open at the end of 2023 and the remainder of the facility in the office block of that in 2024. If we can move to Slide 27, please. Commercial property, I mentioned before, it's remained resilient, and we have seen continued income growth and diversification through that. Solid development pipelines continue, both new and existing tenants, including the completion of [ Geodis Wilson ] and Hellmann. There's 5 new industrial developments that are currently under construction and expected to add $9 million in rental income once completed. We've -- you can see the figures there on the slide that we've seen an increase in the rent roll to $127.5 million, an increase in the portfolio value for the investment property to $2.9 billion. Weighted average lease term is looking good at 9.4 years and an occupancy rate of 99%. So all around, a very strong and solid performance. Earthworks are underway. The new retail outlet center and design continues in that space. We are now underway in leasing conversation for that 24,000-square meter area that will have retail shops and space available with really strong interest coming from major international brands for that 100-plus store center. And finally, in conjunction with Tainui Group Holdings, we recommenced the fit-out construction on the Te Arikinui Auckland Airport Hotel with expected completion in first half FY -- first half '24, sorry. And the Mercure remains on hold in the short term. How -- we are ready to push go on that as demand picks up again. Moving to Slide 28. We remain incredibly focused on delivering to our sustainability agenda, and never has it actually been more important. Now we've got the 4 key pillars of purpose, place, people and community and how we are tackling some of the material issues we see there. We are focused on the customer and also how we deliver to wider economic contribution. We are defining our pathway to achieve our Net Zero carbon objectives, and we have set a pathway to be Net Zero on scope 1 and 2 by 2030. We are focused on being a responsible employer, which includes health, safety and well-being, diversity and inclusion and our social impact. And finally, we want to be a good neighbor, including the community and mana whenua involvement and support is incredibly important as part of South Auckland. And we've had some great initiatives underway that we're really delighted to be picking up momentum in as recovery starts to grab hold. Moving to Slide 29, please. We are on a mission to drive down our emissions, particularly as we look at climate change. We recently signed up to the latest version of the Climate Leaders Coalition Statement of Ambition, that pathway I talked about before, our scope 1 and 2 emissions and reducing that to reach Net Zero by 2030, and that is aligned with the 1.5-degree trajectory. And we are committed to minimizing scope 3 emissions within our control and really starting to explore more in that place. But one of the key roles we know that we can play is ensuring that the right infrastructure is in place to support the wider decarbonization of the aviation sector as aircraft operations make up a significant portion of scope 3 emissions. From our perspective, we need to ensure that infrastructure is in place that allows airlines to adopt low-emission aircraft technologies and fuels as they become widely available. And our master planning is taking this into account. And moving to Slide 30, please. I guess in rounding that out, from my perspective, Auckland Airport continues to take a long-term view and remains optimistic about the future, and we are well positioned for long-term recovery. To achieve that, however, we are focused in on the year ahead as recovery needs to continue to gain pace. The airport is part of a broader aviation ecosystem. What that means is to move forward positively together, it's critical to ensure we have a stable recovery. That means reestablishing the network and leading the recovery in travel and the visitor economy. It means ensuring our products, services such as retail, transport, hotels and the like are on offer and able to stay ahead of the demand profile that we see. And as this recovery gains momentum, we will also look to pick up the pace of the investment in our own infrastructure and commercial development. So in summary, we are progressing our capital pathway to build a stronger Auckland Airport. We are focused on delivering a world-class customer experience and fueling our future success. With that, I'd like to hand back to Phil to walk us through the outlook and looking ahead to FY '23. And then we'll look to open up from questions -- for questions at that point. Phil?

Thanks, Carrie. And as Carrie mentioned, not long before we open up to Q&A, just a couple of slides, and we're now on Slide 32. So the Price Setting Event 4, price reset, will be determined once we finish airline consultation on all elements of the building block's model, and this will conclude by June next year at the latest. As we discussed back in February, FY '23 prices were frozen at FY '22 levels, but we've also excluded the $2 plus GST RRI charge that applied last financial year from October to June. The shortfall versus our target return in FY '23 will be recovered by higher prices over the remainder of PSE4, so FY '24 to '27. And at the moment, the Commerce Commission is reviewing the input methodologies. These underpin the aeronautical information disclosure regime. And our main argument in our submissions is that the commission should repeat the exercise that's done the last couple of times and update asset beta estimates using the last 10 years of data. And we've looked at that. That would lift asset beta WACC and target return quite appreciably. And so finally, before we open up to Q&A, looking at Slide 33, this is our guidance for underlying profit after tax and CapEx for FY '23. So we're forecasting underlying profit to be somewhere between $50 million and $100 million in FY '23. This assumes at the midpoint that the domestic PAX averaged 80%, circa 80% of FY '19 levels over the year and international PAX averaged to 60% of FY '19 levels. Now this admittedly is starting to look perhaps a bit conservative with July domestic PAX at 85% and international at 50%. And as Carrie mentioned earlier, we're seeing that the airlines are filing circa 70% of international capacity over the Christmas break. This guidance also assumes a big lift in depreciation expense in FY '23 to somewhere between $145 million and $150 million, and this is mainly due to the significant uplift in our buildings revaluation. As at 30th of June, there was a $460 million uplift. So that does flow through to depreciation going forward. Of course, that's a noncash expense. It also assumes a significant lift in interest expense as we undertake the CapEx and begin to rebuild our debt portfolio, somewhere between $65 million and $75 million for FY '23. We're also guiding FY '23 CapEx of between $600 million and $700 million. The expected composition of this CapEx is set out in some detail on Page 19 of the financial report for 2022. So with that, Carrie and I are happy to respond now to any questions from listeners.

[Operator Instructions] Our first question comes from the line of Andy Bowley from Forsyth Barr.

Now a couple of questions from me, the first of which is around the demand outlook. And appreciate the comments you just made, Phil, in terms of potentially being slightly conservative on your guidance but also conscious of the slot filings comments you made earlier, Carrie. So keen to hear what the slot filings and conversations that you've had with airlines are telling you about early calendar year 2023. In essence, on Slide 20, does that blue line continue to rise through calendar 2023? Or do we see a kind of a flattening of the -- or plateauing of that recovery through late summer before picking up again later on in the year?

Thanks, Andy, and lovely to speak with you again. Absolutely. So we saw the uptick in July. It then kind of slowed down, another uptick in October as we head into the peak season. What we are seeing through to June next year based again on slot filings, and I do reinforce that caution, it's potentially getting somewhere to -- it could be 80% to 85% in terms of that. And the reason I caution that is, again, it's only based on what we're seeing in slot filings. It is based on anecdotal conversations, but airlines generally are keen to return to New Zealand. But there is this capacity piece, which is a little bit, I think Phil was alluding to, in the conservatism as well as there isn't necessarily a shortage of demand at this stage, but there is potentially the challenge of the capacity to meet that, whether it be aircraft, whether it be pilot, cabin crew resourcing or otherwise. But as we sit here, there is the potential to be 80% to 85% by the end of this financial year.

And that's for international PAX or international capacity?

That is international capacity, yes, sorry. And on the domestic front, again, relatively flat, it kind of climbs to the December number and then at this point, based on what we're seeing, holding there. But again, whether there's any upside on that remains to be seen.

And maybe then if we could just reconcile that to the guidance assumption of 6.2 million PAX international, how do we get to that? I recognize this is quite fluid in terms of the underlying environment currently. But how do you get to 6.2 million?

Yes. I'll jump in there, Andy. So that's 60% of pre-COVID international PAX. So we're starting the year at 50%. That's where July was. And if we get to, let's say, 80% by the end of the year, that's 130% divided by 2 gives you 65% recovery. So yes, it's a bit conservative but only to the extent of circa 5%.

And one of the elements -- sorry, Andy. You're getting both of us have a go on it. And this was also the element we are seeing play out globally. You're seeing it in the U.S. and otherwise as airlines, again, put capacity in and then potentially are pulling it out. You're seeing that playing out considerably in the U.S. as well as Australia and Europe. And so again, that conservatism is -- there's a whole bunch of unknowns there, but what we have seen play out in the last 3 months is something that wasn't lost on us.

Great. Appreciate that. Now the second area of question is around CapEx. So we've got the guidance of $600 million to $700 million. I recognize that's quite a step-up in terms of what we've historically spent here. I think the peak in recent times or ever is around $400 million. I guess the question here is, do you have the capacity in terms of your own internal resources and external contracts just to spend that level of CapEx? And how confident are you in terms of that guidance?

Yes. Thanks, Andy. From my perspective, so on a planning basis, we are confident in that a lot of planning has gone in, as you recall. Some of the work was actually starting to gain momentum prior to COVID, and we needed to push pause on that. So understanding size and scale and what was required to do that, so the planning has been in on that front. And of course, we also have the split across what would be aero activity as opposed to nonaero activity as part of it. So we're entering on -- in on the basis that we're feeling relatively comfortable in that space.

Our next question comes from the line of Wade Gardiner from Craigs Investment Partners.

A couple of questions from me. Just in relation to the guidance, can you give a bit of color in 2 areas there? One, what you have sort of -- what you're envisaging or what you agreed with the retailers in terms of ongoing rent relief? And secondly, just in terms of the OpEx recovery. I mean, I think it was last year or maybe it was the year before, you'd given an OpEx number of sort of around $170-odd million. I mean, is that number still valid? Or are we going to build to something like that over time? Or is that affected by inflation and, therefore, potentially higher?

Wade, nice to speak with you. So I'll kick it in regards to the question on -- it was capacity, was it?

Retail.

Retail, sorry.

Retail.

It was retail, yes. Those conversations, very much in line with -- so it's twofold. One, obviously, I alluded earlier to the conversation we're having with duty free of around potential extensions for those that didn't go for the full retenders. So that is in play. As far as relief, we are talking very much in line with PAX recovery. It's kind of, from our perspective, not a 0 to 60% game on the basis that we are seeing a gradual uptick. So we are engaging with that transition from what has been released into aligning as that recovery is coming into play. And we expect that to continue, particularly we're sitting here as at today at 61% of retail in the international terminal being open, which is ahead of demand, which is at 50% to 55%. We expect that to continue. We want to stay ahead, obviously, of the capacity. In terms of the OpEx piece, Phil, do you want to pick that up in terms of previous conversations and guidance on that?

Yes. Thanks, Carrie. And I'll just touch a little bit more on retail as well. If you look at duty free, we're in the process, as Carrie mentioned, of agreeing an extension until we complete the longer-term duty-free retender, which is likely to take place in the second half of calendar 2024. And ballpark where that's likely to land is we won't have the same level of MAG on a per PAX basis that we had pre-COVID. It might be off 15% to 20% of the heydays pre-COVID. So you can run those numbers through, Wade. And on OpEx, yes, our FY '19 result was circa $190 million. We have experienced a lot of inflation since then, and we've battled that through with the most recent budget round. You're probably safe to assume that OpEx for FY '23 will be circa $200 million.

$200 million?

Yes.

Yes. Okay. Next question, just on Slide 17, you're talking about the debt covenants. Can you just remind us -- you've still got the waivers in place. Can you -- what do you need to do to get back to dividend paying? My understanding was the waivers need to go. Or is it a case of getting to a certain level of interest cover, which I think you're already sort of well above where those waivers are?

Yes. Good question. Thanks, Wade. I think everybody needs to understand that we're not under any covenant waivers now. We're out of that. But -- and the quid pro quo for negotiating more relaxed covenants back in February is that the dividend block was extended. It was previously to 31st of December 2021. It's been extended to 31st of December 2022. So there won't be a dividend for the first half of FY '23. The first dividend that we could pay would be for the second half. The other minor qualification that was a result of those negotiations with the banks is an absolute block on dividends being paid from anything other than underlying profit. For example, let's say, we had underlying profit of $100 million but reported profit of $500 million. We wouldn't be able to pay a $500 million dividend, but we wouldn't do that anyway because that's not our dividend policy. Our dividend policy has always been based on underlying profit. But that restriction will continue forward until we start to deliver EBITDA interest coverage that exceeds 3.0x or by December 2024, whichever is the earliest.

Our next question comes from the line of Amit Kanwatia from Jefferies.

Just a couple of questions from me. Firstly, on the outlook, now appreciate you've provided a range of $50 million to $100 million of underlying profit. And I think your passenger forecast is pretty specific, international at 60%, domestic at around 80%. Can you talk to -- if that profit range is -- I mean, if the passenger forecast, I mean, what does that equate to as far as your profit is concerned? Would that be at the midpoint, low point or, I mean, at the high point?

Yes. Thank you. I'll get you to pick that up, Phil.

Yes. So the -- so that's the midpoint of the range. And -- yes. So I'll come back on this call with just an estimate of sensitivity to a plus or minus 10% swing in PAX and MCTOW versus that. I just need to put -- lay my hands on it, but I'll come back to that shortly.

Okay. Okay. That's all right. Just again, I mean, thinking about the retail business, and I think you called out 45% of international retail is open, 90% domestic is open and again, passenger forecasted at 60%, you're highlighting some MAG pressures on retail. But what's the level of retail store openings you see through the year on an average? Would it be at 50%, 60%? Or can it get closer to 90%, 80%, 90% through the year?

Yes. Thank you. I'll start with that. Some of those numbers I was referring to was as at 30 June. And so that has continued to increase. So we are currently sitting at 61% of the international terminal open and over 95% of the domestic retailers open. So that's as at August. Our expectation, we know that we've got further stores opening this month, and they really continue to do so. So my expectation is, like I said, we want to stay ahead of passenger demand. So I'd like to think that we'd be sitting, all things being equal, at -- kind of at 80% by the end of the calendar year, which, again, that is keeping us ahead of that 70% capacity that we're expecting. We can say as far as retail lease occupancy as at 30 June internationally was at 94%. So we've had good occupancy remain. We've had a couple of new store starts. For many of the retailers, the playback to us is really it's a matter of dealing with the labor shortage. So we're a 20-hour a day, 7-day a week operations. For some operators, they can open for restricted hours. For example, some are opening for 1 shift until they hire more staff to get to 2 shifts than otherwise. But I am optimistic that we will continue to see the openings tick up. What I probably can't give you, just because it's not something that we can specifically control or influence, is an absolute date. But I would be comfortable saying targeting 80% by the end of this calendar year would be the space I would see us in.

And perhaps I'll just jump in with that sensitivity. In fact, our guidance range reflects a sensitivity of plus or minus 10% in both passenger numbers and MCTOW.

Yes. Okay. Okay. That's very useful. Just, I mean, a couple of more questions. If I think about the CapEx, I mean, you've said CapEx is $600 million to $700 million for fiscal '23. When was the last time you spent this kind of CapEx? Like I want to see that. And secondly, if I think about aeronautical pricing negotiations, PSE4, and I think in the past, you said your big-ticket items like domestic terminal as well as the transport hub, I think that's included in PSE5. So can you give us a sense of what's the kind of CapEx that could be included in the PSE4 pricing? I know -- appreciate it's under negotiation, but just kind of broader sense.

Well, I think you had 2 questions there. I think the first question, if I caught that right, was to say, when is the last time we'd invested this volume of CapEx. And to my understanding, whilst I'm new kid on the block, somewhat my understanding is we haven't. The highest has probably historically been up for $400 million on that piece. So we are moving above historic in that space. In terms of your question around PSE4 and what is included in that pricing, Phil, are you able to give some insights into the PSE4 versus PSE5? But some of these projects, obviously, we're commencing construction, and one is around delivery versus [ this ] actually.

Yes. That's right. So the likes of the integrated domestic terminal will not be in the RAB and PSE4. As we've indicated, that's a $1 billion-plus project. But there is a range of airfield work, particularly aircraft stands, that will be delivered progressively over that time. There's ongoing roading network CapEx. There's quite a range of utilities, so power, gas, water, that will also be included there. There are -- and there's extensive renewal, particularly in relation to the existing domestic terminal, that we need to up the service quality from that asset. So there'll be significant CapEx in that asset over that time as well, and there are a number of other areas.

Right. And just lastly, just if I can ask on the property business. I think you're highlighting some rental increase, pricing growth in the property business during the year. I mean, I just wanted to get a sense of what's the kind of pricing growth you're expecting for fiscal '23 on the property side.

Yes. So the rent, I'm struggling for the terminology actually at the moment. Rent roll, sorry, gives you an indication -- if you can pay a rent roll to annual rental, it shows you the rent that will be -- that we're expecting from property developments that are signed up as of today. Now we expect that momentum to continue as well. So during FY '23, we've got an active pipeline. So we'll add to that further, but that gives you a bit of a sense of that.

Our next question comes from the line of Andrew Steele from Jarden.

Just the first one for me is on your cost base. I was hoping you could clarify what the inflation assumption is that's implicit in the $200 million of expected OpEx for next year. And are there any key areas of cost pressure that you'd like to call out?