Auckland Airport’s (ASX.AIA) fiscal 2026 underlying net profit was NZD 309 million, flat on last year. Two percent growth in total passenger movements drove about 3% revenue growth, offset by higher depreciation and net interest costs given the airport’s massive redevelopment spending.

Why it matters: Net profit was in line with our forecast. We raise our fiscal 2027 underlying net profit forecast by 1% to NZD 319 million, in line with newly released 2027 net profit guidance of NZD 290 million to NZD 330 million.

  • Travel demand is weak in New Zealand amid tough economic conditions, worsened by capacity issues at primary domestic carrier Air New Zealand, where engine maintenance issues weigh on aircraft availability, and conflict in the Middle East.
  • But we expect increasing passenger numbers, commercial income, and higher aeronautical charges to drive revenue growth of about 7% next year. Air New Zealand’s engine issues are now mostly resolved, and we view the downturn in New Zealand as cyclical, not structural.

The bottom line: Shares in wide-moat Auckland Airport are slightly undervalued compared with our unchanged NZD 9.50 ($7.80) fair value estimates. We think sluggish passenger growth and its looming capital expenditure bill are the main overhangs.

  • Passenger growth of 2% is sluggish, with total passenger numbers now at about 90% of precovid levels. But we expect improvement over coming years, with passenger numbers returning above fiscal 2019 levels by fiscal 2029.
  • We think the airport redevelopment plan is reasonable, in line with other airports, and well supported by its balance sheet. We expect this investment to drive a step-up in regulated charges. The next price setting event for aeronautical charges is set to commence from fiscal 2028.

Between the lines: Auckland Airport is now in the peak investment phase of its redevelopment, commissioning about NZD 1 billion in assets this year and guiding to around NZD 1.2 billion in capital expenditure next year.

Auckland Airport’s redevelopment should allow an uptick in regulated pricing

As the primary gateway to New Zealand, Auckland Airport should benefit from rising air travel to the island nation. Auckland Airport is the largest airport in New Zealand, and Auckland is by far New Zealand’s most populous city. No other airport in the country is likely to outdo Auckland as an international hub. We expect the airport to capture good medium-term growth from further airline capacity expansion to and from New Zealand. We forecast total passengers handled by Auckland to grow to more than 20% above fiscal 2019 levels over the next decade.

Auckland Airport has carved a wide economic moat, thanks to its near-monopoly position in a stable regulatory environment. We don’t think a second major airport is likely to emerge anytime soon, given Auckland Airport’s expansion potential to accommodate continued growth in passenger numbers, protecting its position for decades to come.

Aeronautical and nonaeronautical operations each contribute about half of revenue, with profitability typically higher in the nonaeronautical business. The aeronautical business is regulated. The regulator allows Auckland Airport to earn a suitable return on its “regulated asset base,” which includes prior capital expenditures and some revaluations. Landing fees and per passenger charges are set with airlines every five years, and independently reviewed to ensure Auckland Airport isn’t abusing its monopolistic power. But this structure presents near-term earnings risk—passenger fees are set up to five years ahead, and lower-than-expected traffic could weigh on returns on invested capital. Nevertheless, capital investments are typically structured with some flexibility should lower traffic eventuate, reducing the risk of extended overcapacity.

The nonaeronautical business is unregulated, but still principally driven by passenger traffic. Retail operations are the biggest part of the nonaeronautical business—notably duty-free, which relies heavily on international passengers, who far outspend domestic travelers. The property business is about half the size of retail, but has grown faster, driven by new developments and rent reviews. Car parking rounds out the bulk of unregulated earnings.

Bulls Say

  • Auckland Airport provides exposure to rising incomes in the region, and population growth in New Zealand.
  • Auckland Airport has a wide range of attractive development projects on the horizon, with undeveloped land providing optionality.
  • Auckland Airport should enjoy a meaningful increase in regulated passenger fees, to compensate the firm for its likely sizable capital spending over the next decade.

Bears Say

  • A slowdown in the global economy, a deterioration in international relations, or climate challenges could affect tourist inflow to New Zealand, limiting passenger fees and retail spending at the airport.
  • A more onerous regulatory environment could curtail Auckland Airport’s ability to generate economic profit from its aeronautical business.
  • The firm’s bottom line and expansion plans are sensitive to interest rates, which have increased substantially from their all-time lows during the pandemic.