Second Sydney Airport approved

Prime Minister Tony Abbott has approved the construction of Sydney’s second airport at Badgerys Creek, around 50km west of Sydney's CBD. Shareholders of Sydney Airport shouldn't be worried, though, as it will be at least a decade before the new airport is operational. An environmental impact study must be conducted on the land which will take several years.

Then there is the issue of infrastructure. You can’t just drop an airport in the middle of Western Sydney without the roads and rail to support it or traffic congestion would be overwhelming. A new pipeline to carry jet fuel from the coast will also need to be in place before the airport can be built.

A second airport is also unlikely to cannibalise much of the high margin international traffic from Sydney Airport. In many cases bilateral air services agreements cap the number of flights airlines can make between countries, so airlines naturally want to service the most popular airports. A second airport may increase competition for low margin domestic passengers, but Sydney Airport will always be the main hub as it sits on the CBD’s doorstep and is an integral part of Sydney's public rail system.  

The Government’s approval of a second airport also implies Sydney Airport will be unable to keep up with demand. While the Government is right to assume increasing passenger numbers – they have grown relentlessly for decades with September 11 and the collapse of Ansett barely making a dent – the Government is wrong to assume a proportional increase in the number of planes. Airlines are upgrading to larger planes such as the A380, and Sydney Airport currently uses only 320,000 of its 500,000 allowed flights per year. These two factors mean there is more than enough capacity at Sydney Airport for several decades.

Finally, Sydney Airport has a first right of refusal to build and operate the airport at Badgerys Creek. Whether or not the company takes up this right is the important question, and it now has a two-year negotiation period to decide. If there's money to be made, Sydney Airport is in the best position to make it. Either way, Sydney Airport should do just fine over time. The share price is flat since Sydney Airport: Result 2013 on 27 Feb 14 (Buy – $4.02) and we're sticking with BUY.

Note: Our model Income and Growth portfolios own securities in Sydney Airport.