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Feb 9, 2017

Palisade gets the deal to run Sunshine Coast airport

Another example of how investing in airports is so much more rewarding than owning shares in airlines


An alarmingly empty Qantas 717 at the Sunshine Coast airport

Palisade Investment Partners scooped up the 99 year leasehold as operator of the Sunshine Coast airport at Maroochydore today, meaning the local council which owns it and its ratepayers need only worry about banking the rent for the rest of their lives while someone else does the hard work of competing with Brisbane Airport and the remoter facilities on the Gold Coast and Wellcamp to lure more jets to this part of Queensland.

It’s a big play for comparatively little money beside that other Australian airport looking for generous lease holders out at Badgerys Creek where the all new Sydney West Airport is to open by 2026.

Palisade, once the detail of the loosely titled Half Billion dollar deal announcement is sorted out, looks to be up for around $372 million by 2022 as well as rent of five percent of gross revenue of the airport per year over the lifetime of the lease.

The Sunshine Coast airport recently notched up its one million passengers in a year mark, which also loosely makes it about 2.5 percent as large by head count as Sydney Airport at this moment.

No doubt there will be further illumination as to just who has or will actually pay for what, considering the exquisitely opaque wording of the media release released late this afternoon.

Palisade will be responsible for operating, investing and developing the airport and will oversee future negotiations with airlines to expand both domestic and international routes available from the Sunshine Coast.

Mayor Mark Jamieson said that under the deal, the council would maintain responsibility for facilitating the proposed airport expansion project, which included construction of a new runway, apron expansion and related infrastructure.

The differences between ‘facilitation’ and ‘funding’ could merit exploration. The fine print says Palisade will give council more than $200 million toward the runway construction in 2022. Perhaps someone like the AFR will unleash its forensic accountants on the media release, but really, who cares? The sums involved resemble what merchant bankers spend over lunch within a few blocks of the ASX on a week day.

But it does seem like a good deal for all parties, given that late last year the Turnbull Government said it would provide the Sunshine Coast Council with a $181 million loan to assist with the current expansion of airport infrastructure and an extended runway able to take medium sized wide body jets flying from further afield than New Zealand, as already happens these days.

Queensland is the front line of opportunity when it comes to opening new and expanding established tourism markets, especially after Australia and China agreed on immediate open skies between both countries late last year. Even Wellcamp well to the west of Brisbane is well positioned to benefit from both the fresh food export markets and the strong desire of leisure travellers in a multitude of cities in China to visit this country.

The Sunshine Coast is underdone in this respect compared to the Gold Coast and Brisbane in terms of non-stop services, yet very attractive to visitors who could make it a Queensland gateway rather than an add-on or side trip as it mostly is now.

Palisade has shown its understanding of the potential of Queensland and Northern Territory tourism for some time. Its investments include Airport Development Group which owns the Darwin, Alice Springs and Tennant Creek airport and equity in the Gold Coast Light Rail.

The history of airline and airport privatisation in Australia has consistently and abundantly demonstrated that airports will make the most money, in the order of some ten to 20 times as much money as retail investors who buy into airlines. If that history is taken as a guide, building and operating airports is over time one of the least risky investments that can be made in tangible assets in this country.


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11 thoughts on “Palisade gets the deal to run Sunshine Coast airport

  1. Cantbeeffed

    It seems that Palisade had something to prove after ADG missed out on Port Headland, but doesn’t seem to have learnt a lesson from that given the successful vendors are rumoured to be regretting the amount they paid for the asset. Would love to see proper detail on this deal, on face value it seems Palisade had paid way above the money for Sunshine Coast. The council overlooked other bidders with operational experience for a smaller infrastructure investor with no no direct airport operational expertise. The other big issue is the runway development, it’s a big project with lots of downside risk, and big long-term funding challenges. Unless there a huge boom on the Sunshine Coast at the premiun end of the market, either the council or the new owner may take an ugly haircut.

  2. Deano DD

    What a deal for Palisade !!!
    Instead of buying up the airport (including the land) they just pay a lease….
    I would think that the rates alone would be more than the annual lease payments which is less than $1 million per annum and there is no mention that it is indexed to CPI

    Palisade will earn $16.06 per arriving and departing passenger or $16 million per year
    And both the charge and passenger numbers will continue to grow
    Retail rent
    Aircraft charges
    To say that they will earn $20 million or more per year would be conservative

    Creative accounting at it’s best

    Why our council chose to sell of such a great money earner is beyond me
    Passenger charges will only go up, thus stifling future growth

    Plain and simple
    Sunshine Coast Council need only break even on our airport to be a success as bringing holiday makers to the coast is good for everyone
    Palisade on the other hand needs to turn a profit on any investment, no problem with business making a dollar
    However, this will only see charges rise over time, which is not good for the sunny coast

    1. Cantbeeffed

      Your figures are way off the mark. Palisade, according to the figures in the council’s media releases, will pay more than 30 times EBITDA, for an asset that is predominantly driven by the low-cost Jetstar, so aero charges aren’t going up by much. Add to that Brisbane’s second runway coming online, and the new operator of SCA has more than its fair share of challenges. If you think Palisade has it made, I dare you to lock yourself alonewith Jane Hrdlicka for a couple of hours.

      1. Deano DD

        Maroochy already charges a higher passenger rate than Brisbane, although it is cheaper to park your car at Maroochy but not by much

        Brisbanes third runway (not second) will have minimal impact
        Brisbane has a population of 2.3 million, Sunny Coast 0.3 million
        Brisbane therefor has 8 times our population
        SCA averages 8-10 commercial flights per day and is 70-80% inbound tourists
        At the same rate Brisbane would have a mere 80 domestic flights per day where the number is more like 170 domestic flights per day so to say that SCA is already under serviced would be on the mark
        SCA could quite easily fill double the number of flights it currently has, particularly outside Sydney and Melbourne

        To say that SCA is a predominately LCC destination is not quite correct
        Jetstar flies on average 5 out of 8 movements per day, but hardly has el cheapo fares
        Many locals trek to Brisbane to fly Tiger
        Tiger to Sydney is often about $40-$50
        Jetstar MCY-SYD is rarely below $80
        Save at least $30 each way x family of 4 = $240.00 for a 1-2 hour drive each way

        Qantas and Virgin have no interest in servicing more ports from Maroochy such as Newcastle, Canberra, Townsville, Cairns, Hobart or even Perth as it would just be taking passengers away from Brisbane (and the same can be said for the Gold Coast) to pay a higher passenger charge at Maroochy
        Even Jetgo, Rex and Air North won,t fly here because of the high charges
        I can’t see this changing once the airport is privatized, in fact I can only see it getting worse
        Go here to see airport charges for yourself http://www.sunshinecoastairport.com.au/Corporate/Airport-Operations/Fees-Charges-Conditions-of-Use

        1. Deano DD

          BTW Brisbane Airport charges a mere $5.00 per arriving and departing domestic passenger well above the $16.00 charged by SCA

          1. Dan Dair

            Perhaps that’s where some opportunities lie…?
            Better business brains, using a smarter business model,
            to significantly increase passenger & freight volumes, which would allow them to reduce landing fees &/or passenger fees,
            which in turn would improve the prospects of making those volumes changes happen.?

        2. Cantbeeffed

          It will be Brisbane’s second RPT runway, nobody cares about a GA strip. Why is the new runway relevant? Because Brisbane is aggressively pricing its charges to ensure it gets enough traffic to make a return. Brisbane isn’t just going to let SCA take flights. That puts downward pressure on SCA’s ability to increase its charges, and from what I’ve read, Palisade has assumed a significant increase to RPT pricing on their valuation.
          Palisade doesn’t have aviation operational talent in-house, they’ll have to rely on SCA’s existing staff or hire additional resources, which increases their cost base, reducing returns and hitting their valuation.
          The other huge issue is construction of the new runway, it’s a big, technical project with lots of scope for cost over-runs and delays. Given that Council has locked in what they get paid for it, if it ends up costing more than anticipated, rate payers could end up taking a bath. Alternatively the state and federal tax payers could take a hit if the council can’t pay back is loans (thanks Warren Truss).
          SCA might be able to get volume with more flights, but what about yield? Other airports have suffered from chasing new services at the expense of profitability, especially low cost and international routes. The devil might be in the detail, but I think Palisade’s investors are going to be cranky in a few years.

          1. Deano DD

            On you first post you said
            driven by the low-cost Jetstar, so aero charges aren’t going up by much

            Then said on your last post
            from what I’ve read, Palisade has assumed a significant increase to RPT pricing on their valuation

            Looking at other airports they own/run they seem to charge about 1/2 of what SCA charges, however, there is a massive charge for “per ton landing fees”

            From what I can see

            $82 million for 99 year lease that is less than $1 million per year
            In excess of $20 million per year of income (just passenger fees and parking) + landing fees, shop rent, GA charges etc
            Take out expenses and it’s probably about $15 million per year net
            Then in 2022 (5 years) $290 million for the runway and $28 million for terminal improvements
            They will earn $75 million of that in profit for the first 5 years
            Borrowing the balance $243 million
            @ 7% interest only this is $17 million per year (just shy of current earnings) but factor in inflation and they are virtually guaranteed of profits every year with 0 increase in passenger numbers
            However factor in (conservative growth compared to the last 5 years) growth of 10% in passenger numbers per year
            Current 1,000,00 per year @ $16.00 = $16,000,000
            5 years 1,600,000 per year @ $16.00 = $25,600,000
            And probably another massive increase of 20% likely when the new runway opens and more destinations open up and $30,000,000 would be a realistic figure and that’s just on passenger charges at todays money

            Again, why would our council give away a goldmine like this
            They have done all the hard work and despite 3x the passenger charges of Brisbane, SCA Airport is still the fastest growing airport in Australia by far

            Just plane stupid Sunshine Coast Council!!!!!!!

          2. Cantbeeffed

            Deano, your revenue figures are way too high. One thing you should keep in mind in that the ‘rack rate’ you see on the airport’s website is not what airlines actually pay. There are various discounts (volume, new routes, growth etc) that mean the real amount paid by airlines are much lower. Low cost carriers generally pay the least, and their passengers don’t spend much in the terminal, so the value of LCCs to airports can be marginal. SCA’s EBITDA is orders of magnitude lower than what you’ve posted, net profit is likely in the low single digit millions, but that’s a bit opaque as, with council-run assets there can be hidden operating costs due to centralised functions that don’t get properly costed back to the business. Privatised assets can have higher operating costs for that reason – they’re more costly to run on a privatised basis ss the lose the cross subsidies and economies of scale unless the new owner can brings their own, and the only 3 airport groups (excluding BAC which was never in contention for obvious reasons) who could have done that either didn’t bid or were knocked out early – that should speak volumes about this process.
            Palisade doesn’t operate any airports, it’s a minority investor in ADG, the owner of Darwin, Alice Springs and Tennant Creek Airports. The media about it being an airport operator is misleading. It won’t be able to use any of the expertise in Darwin unless it pays for it on an arms-length basis, the other 80% shareholdings will make sure of that.
            The growth prospects for SCA are much lower than the forecasts used by council, they were grossly inflated. Airports are facing increasing challenges, airlines are playing very nasty in relation to airport charges, and Uber is eating into parking revenue (autonomous vehicles may be the death knell for parking revenue). Domestic airlines are not going to be eager to pay more to land at SCA on a runway they don’t need, and international growth will be slow and sporadic. If the council can keep the runway construction costs lower than forecast and maintain schedule, they will be a clear winner in this process. If not, both council and the new owner will be in trouble. Your fears about your council having been taken for a ride are misplaced, although the economics of the new runway could be everyone’s undoing.

          3. Dan Dair

            Deano DD,
            Uber is having a backlash about its operations in various parts of the world. They may yet be ‘curbed’ (no pun intended as it’s spell’t differently) in all or parts of Australia.

            To keep costs down, perhaps the Wagners should be offered the chance to quote for building that new runway, though why an airport with such low traffic numbers as Sunshine Coast would need a new one for another decade isn’t clear to me.?

  3. comet

    Hopefully the new operators of the airport don’t decide its a good idea to cram shopping centres around the runway.

    Once upon a time, in the old days, people thought about safety, and kept shopping centres away from airport runways. Canberra is an example of an accident waiting to happen, with Bunnings style centres very close to plane movements.


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