Rating Action Overview

• Australia-based Perth Airport Pty Ltd.'s (PAPL) solid market position supports robust passenger traffic growth over the next few years. We expect PAPL to maintain a ratio of funds from operations (FFO) to debt of above 9% over the next three years.
• We have revised our assessment of PAPL's liquidity to strong from adequate, reflecting a lack of material near-term debt maturities.
• We have affirmed our 'BBB' long-term issuer credit and issue ratings on PAPL.
• The stable outlook reflects our expectation that regional passenger traffic will remain strong and both interstate domestic and international passenger traffic will return to pre-COVID levels in fiscal 2025.

Rating Action Rationale

We see passenger traffic growth remaining robust over the next few years. Strong commodity-related activity should continue to support regional passenger traffic. In October 2023, interstate domestic and international passenger traffic recovered to about 97% and 94% of pre-COVID levels, respectively. We expect both interstate domestic and international passenger traffic to return to pre-COVID levels in fiscal 2025 (ending June 30, 2025). High fuel costs, inflation, and cost-of-living pressures could prolong the recovery.

We expect FFO to debt of above 9% over the next three years based on the company's committed capital expenditure (capex) profile. Along with improved passenger traffic growth, the agreed tariff increases with airlines (except Qantas Airways Ltd.) until the end of June 2025 and high demand from car parking should support the company's credit metrics over the next three years. Our capex forecasts only include committed projects given that the airport is unlikely to proceed with any expansion spending without appropriate commercial agreements with airlines. Nonetheless, PAPL's appetite for capital spending will remain key. This is because the airport's credit metrics could deteriorate if it undertakes projects without accretive EBITDA and appropriate funding over the next two to three years.

Executing on the airport's development program would require commensurate capital management, including new equity. The company has plans for a major development project, including development of a fully integrated terminal and related apron infrastructure, and construction of a new parallel runway. Currently, the airport has not committed to these investment plans, and management continues to reiterate its policy that these projects would only be undertaken if underpinned by commercial agreements with airlines. Given the size of the capex, we believe that there is limited headroom in the current metrics to fully undertake this capex on balance sheet. Based on management's policies and representation, we expect appropriate capital management would be undertaken to support the current rating, including new equity to fund a portion of the capex.

Outlook

The stable outlook on PAPL reflects our expectation of strong passenger traffic at the airport over the next 12-24 months. We expect regional passenger traffic to remain robust and both interstate domestic and international passenger traffic to return to pre-COVID levels in fiscal 2025. We expect FFO to debt of above 9% over the next three years, based on the company's committed capex profile.

Downside scenario

Weakness in financial metrics due to debt funded shareholder distributions with FFO to debt approaching 8% would lead to downward rating pressure. Higher capex, which is not supported by equity and shareholders, is speculative, or is not EBITDA-accretive leading to ratios approaching 8% with no clear plan to maintain buffer to 8% on a sustained basis could also lead to ratings pressure.

Upside scenario

An upward rating action is highly unlikely given the current trend in financial metrics based on our forecasts and potentially large capital spending program if the company commits to expanding the airport. That said, we could raise the ratings if PAPL can maintain its FFO to debt well above 10%, supported by financial policies that favor a higher rating.

Company Description

PAPL owns and operates Perth Airport, the fourth-largest airport in Australia and the largest in the state of Western Australia. The company holds a 99-year lease on the airport that commenced in 1997. About 3.3 million international passengers and 10.9 million domestic passengers travelled to and from Perth Airport in fiscal 2023.

PAPL is privately held by Perth Airport Development Group Pty Ltd. (PADG). PADG is owned by a consortium of investors, including Utilities Trust of Australia, Future Fund, The Infrastructure Fund, Australian Super Pty Ltd., and Australian Retirement Trust.

PADG also owns 100% of Perth Airport Development Group Investments Pty Ltd. (PADGI), to participate in retail development opportunities on airport land.

Our assessment covers the consolidated group PADG, which includes PAPL and PADGI.

Our Base-Case Scenario

Assumptions

• Given the impact on travel from the pandemic, we do not believe that passenger growth will correlate with GDP growth in Australia or passenger origin countries over the next several years.
• Regional passenger traffic to remain robust. We expect a full recovery to pre-COVID levels in fiscal 2025 for both interstate domestic and international passenger traffic.
• Tariff increases in line with the current agreement until end of June 2025.
• Aero revenues based on passenger volumes, noting that domestic passengers' contribution to aero revenues is disproportional (i.e., lower) compared with the passenger mix in general.
• Increase in retail revenues both on an absolute basis as well as per passenger revenue basis, particularly from an increase in international passengers.
• Property revenues has not been materially affected and is expected to continue at around pre-pandemic levels over the next few years.
• Car parking and ground transportation revenues in excess of overall passenger growth and expected to remain higher per passenger compared with pre-COVID levels, reflecting the strong demand for car parking.
• Operating expenses over forecast period to be above pre-COVID level, primarily reflecting higher inflation and passenger traffic growth.
• All-in effective cash interest rate of about 4.8% for fiscal 2024 and progressively increasing over the forecast period, reflecting the current interest rate environment.
• Capex of about A$230 million and A$170 million in fiscal 2024 and 2025, respectively.
• We assume dividends to shareholders at levels commensurate to sustaining FFO to debt above 9% over the next three years.

Key metrics

Liquidity

We assess the airport's liquidity as strong. Liquidity sources are likely to exceed uses by more than 1.5x over the next 12 months and 1.0x over the next 24 months, and sources less uses would remain sufficient even if EBITDA were to drop by 30%.

PAPL has been compliant with its debt covenants, and we expect this to continue to be the case over the next 12-24 months. We believe PAPL has good banking relationships as well as good standing in credit markets.

Management has been able to refinance debt maturities well in advance of the due date.

Principal Liquidity Sources

• Cash and undrawn bank facilities of about A$570 million as of the end of June 2023; and
• Forecast operating cash flow of about A$220 million over the next 12 months.

Principal Liquidity Uses

• Capex of A$220 million over the next 12 months;
• Debt maturities of A$100 million over the next 12 months; and
• Shareholder distributions.

Environmental, Social, And Governance

Social factors are mildly negative in our credit rating analysis of PAPL. Although passenger traffic has continued to recover at a pace faster than our expectations, it has been led by significant growth in regional traffic. This has been driven by strong commodity-based activities in the region. In October 2023, Interstate domestic and international passenger traffic has recovered to about 97% and 94%, respectively, of pre-pandemic levels.

Ratings Score Snapshot

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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