An Aer Lingus Group Plc aircraft sits on the tarmac at Dublin Airport in Dublin. Irish... Read More
About 770,000 passengers will travel through the airport over the holidays, rising 8 percent from last year, boosted in part by families flying off to winter sun and skiing vacations, according to the state-owned DAA, which runs the airport.
Reinforcing the appeal of a rebound in Irish travel, British Airways (IAG) owner IAG SA made an offer for Aer Lingus Group Plc (AERL) this month, prompting a surge in its shares. The passenger numbers flowing through the airport may also present an opportunity for investors looking to play Ireland’s revival, according to Philip O’Sullivan, an analyst in Dublin at Investec Plc (INVP), which recommends buying DAA’s 2018 bond.
“DAA is very much a leveraged play on the Irish economy,” saidO’Sullivan. “We have been fans of the bond for some months now, viewing it as a relatively cheap way to play the sovereign.”
In 2010, then Prime Minister Brian Cowen used the
opening of the airport’s second terminal, unveiled as passenger numbers plunged, to confirm that the government was in talks about an international bailout. Four years on, Irish bond yields are close to a record low, passenger numbers have risen to a six-year high, and Aer Lingus turned down the bid from IAG saying it undervalued the business.
The interior of Dublin airport's Terminal 2 building in Dublin.
Almost Sovereign
The DAA’s 550 million euro bond due in 2018 offers a yield of about 1 percent. That compares with a yield of 0.35 percent on Ireland’s sovereign bond maturing the same year, and a yield of 0.78 percent on Spanish airport-operator Ferrovial SA’s 2018 security. While the DAA bond isn’t state-guaranteed, the company provides vital infrastructure and is 100 percent state-owned, making the debt quasi-sovereign, according to Investec.“Sixty-three basis points yield pick up for three months shorter curve,” said O’Sullivan. “That’s pretty generous to me.”
At the airport late last week, a school choir serenaded passengers with Christmas songs as family members were reunited in the arrival hall, which was decorated with stars, glittering lights and signs pointing the way to the North Pole. Dec. 19 was one of the airport’s busiest days since 2008, according to DAA.
White Elephant
The airport is a microcosm of the wider Irish economy. In 2008, about 23.5 million passengers used the airport. The number plunged to 18.4 million in 2010, as Ireland’s economy went into free fall. That prompted Ryanair Holdings Plc (RYA) Chief Executive Officer Michael O’Leary to brand the debt-financed Terminal 2, which has capacity for 15 million passengers, “a white elephant.”Since then, business at the airport has picked up in tandem with the economy. Passenger numbers rose 6 percent to 20.2 million last year, boosted by transatlantic flights, and the DAA says the numbers will be about 22 million this year.
“Despite the unfortunate sharp drop in passenger numbers in 2009 and 2010, it wouldn’t be shocking if T2 got close to full capacity by the end of the decade,” said Joseph McGinley, an analyst at Davy, Ireland’s largest securities firm. “We think the 2018 bond is cheap, relative to other European airport debt.”
The DAA funded the terminal in part by the sale of the 2018 bond, and its debt levels reached 764 million euros in 2010. During the past three years, the company has reduced its net debt by about 150 million euros.
Pension Hole
Even with the economy turning, though, problems remain. Last week, labor union members rejected proposals by the DAA to deal with a pension deficit, in part with a 72 million-euro contribution from the company. The proposal was rejected by an “overwhelming majority,” according to SIPTU, the biggest union at the company.“The two main risks are disappointing passenger numbers and larger than anticipated pension contributions,” said McGinley at Davy.
One of the airport’s biggest customers, Aer Lingus has moved closer to a resolution of its pension hole, after investors this month approved the company’s plan to make a payment of 191 million euros to a new pension system.
With the pension question nearing resolution, IAG said last week it had approached Aer Lingus about a possible takeover. While Aer Lingus rebuffed that offer, IAG may come back with a higher bid as transatlantic traffic rises, analysts said.
Last year, Dublin airport had a record 1.9 million transatlantic passengers, and this summer, 134 departures will leave Dublin every week for the U.S., making the airport the fifth-biggest in Europe for departures across the Atlantic.
“Aer Lingus’s transatlantic business has had a stellar year,” said Mark Simpson and Jack Diskin, analysts at Goodbody Stockbrokers, in a note. “The recovery of the economy in Ireland and the U.S. has helped stimulate demand on the Atlantic.”
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