Passenger numbers at Auckland Airport (ASX: AIA) for the 11 months to May 2026 are tracking about 2% higher year on year. Both domestic and international (including transit passengers) are tracking about 2% above last year.

Why it matters: Domestic passengers are tracking a little worse than expected, while international passengers a little better. We raise our fiscal 2026 underlying net profit forecast by 1% to NZD 308 million, 1% lower than last year and still within guidance of NZD 295 million-NZD 320 million.

  • Fiscal 2026 is practically over, and our updated forecasts reflect the latest traffic volume. But the backdrop for air travel is still challenged. While jet fuel prices have declined in recent weeks, they are still well above prewar prices, leading to more expensive tickets as airlines aim to recoup costs.
  • Closer to home, economic conditions in New Zealand are weak. And persistent engine issues at the country’s main carrier, Air New Zealand, are constraining aircraft availability.

The bottom line: We raise our fair value estimate for shares in wide-moat Auckland Airport by 2% to NZD 9.50 (AUD 7.80). As we make only minor changes to our longer-term forecasts, the increase is mostly due to the time value of money. Shares are undervalued.

  • While the near term is challenged, we think it’s transitory. Air New Zealand’s engine issues are temporary. The airline expects all Boeing 787 aircraft to return to service by late June and all Airbus A320neos by 2027. We also think the downturn in New Zealand is cyclical, not structural.
  • We think the market is also concerned about Auckland Airport’s looming capital expenditure bill. But we think the plan’s scale is reasonable, aligned with other global airports and supported by the airport’s balance sheet.

Auckland airport’s capital expenditure 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 precovid 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.