The decision by Sydney Airport to walk away from its first right of refusal on building the city’s second airport at Badgerys Creek comes as no real surprise.
As anyone who has used Sydney Airport knows, it’s in the business of making money – big time.
Thanks to the monopoly granted to it by the Howard government, Sydney Airport is one of the most expensive airports in the world for both airlines and passengers.
For example, for every $1 it receives at its very expensive car parks, 73 cents is profit.
Not bad if you can get it – and it’s the prospect of not getting it that prompted Sydney Airport to decline the opportunity to own and run multiple airports.
“The risks associated with the development and operation of Western Sydney Airport (Badgerys Creek) are considerable and endure for many decades without commensurate returns for our investors,” Sydney Airport boss Kerrie Mather said in a statement to the Securities Exchange.
And that’s the rub.
Sydney Airport was formerly owned by Macquarie Bank, which knows all about big infrastructure development, having held stakes in a number of airports and toll roads around the world.
In Australia, toll roads have been the poster child for greenfield infrastructure development gone wrong.
Brisbane’s Airport Link, as well as Sydney’s Cross City Tunnel and Lane Cove Tunnel, all struggled financially in their early years as revenue fell well short of traffic predictions.
There are no such concerns at Sydney Airport, where earnings were up 13 per cent last year, to $321 million – $100 million of that profit came from those very expensive car parks.
Why would it want to saddle itself with the $5 billion cost of building Badgerys Creek Airport, when it doesn’t know how long the new airport will be losing money and what its eventual profits might be?
Analysts at Citi Group have done a detailed study of the financials around Sydney’s second airport and they share that view.
“We expect the second airport would have significant greenfield development risk given the high capital expenditure requirement and also the uncertainty in the demand profile during the initial 10 to 15 years of operation,” they say in their report.
“We think any business should refrain from investing for the sake of growth at compromised returns.”
If Canberra won’t build it, no one else will
Other potential private sector builders and operators of Badgerys Creek will be having the same thoughts, which brings us back to the federal government.
For Canberra, the metrics are different. An airport is a piece of nation building infrastructure with a big multiplier effect.
Politicians are not concerned about short-term returns to shareholders. Their worry is jobs for voters, which help them keep their jobs.
Airports create tens of thousands of jobs, not just at the airport itself, but in the businesses that support the airport – for example, hotels, car hire, freight, shops, restaurants, etc, just to name a few.
“Through 10 years or so, what started out as a $5 billion investment by the government can easily turn into a $50 billion economy,” explained Perpetual Head of Investment Strategy, Matt Sherwood, when he appeared on ABC’s The Business program last year.
Citi Group estimates Badgerys Creek Airport has a negative net present value of up to $2 billion.
In the context of the federal budget, that’s not a large amount of money for the potential monetary and social returns.
The government will get most of its money back in the taxes paid by people whose jobs are created by the airport.
And of course, there will be the big pay day when Badgerys Creek Airport, like Sydney Airport, eventually is privatised.
So, while Badgerys Creek doesn’t add up for the private sector, for the government, it’s a different kettle of fish.
After Tuesday’s decision by Sydney Airport, the reality appears to be that if Canberra doesn’t build it, no one else will.