13 May 2014

Duty free cut may hit AIA earnings

6:57 am on 13 May 2014
Duty free downturn - but its not yet a sunset industry.

Duty free downturn - but its not yet a sunset industry. Photo: PHOTO NZ

From November this year, the duty-free allowance will fall from 200 cigarettes to 50 cigarettes.

Forsyth Barr says the loss of tobacco duty free concession income will impact the airport's earnings by a reduction of about four percent in the 2016 financial year.

In a note on the stock, the broker says that while the airport is well positioned, it had elevated investor passenger growth expectations, rising regulatory risks and an expensive valuation which all contributed to its underperform rating.

Head of research Andy Bowley said the structural change in retail was also a risk.

"Simplistically, it will reduce their overall group earnings by around 3 percent to 4 percent," he said.

"Passengers will spend less on tobacco and therefore the retail concession income that Auckland Airport earns from its duty-free operators will be lower".

Mr Bowley said that the total payments from duty free shopping were around 35 percent of group earnings.

One aspect of longterm decline in spend rates which was a concern was the narrowing of the price gap between what passengers paid in duty-free and what they paid to buy on the internet.

"That's at the expense ... of the price perception that passengers will hold with regards to airport shopping or duty-free," he said.

But he duty-free areas was still a very attractive shopping mall because passengers were effectively confined within it and could not leave until their plane departed.