- Pre-tax profit reduces by 42% in 1H08;
- Better when exceptional items are stripped out;
- Scheduled and charter services lost across the board...
- ...but still offers more routes than any other UK airport;
- Management invests heavily on security queue provision at Manchester;
- Dividend increased, but is there a political motive?
Manchester Airport Group's (MAG) operating profit fell by almost 5% during 1H08, which includes the usually busy Summer period, as turnover slipped 4.3% to GBP217.3 million and traffic by 2.2% to 16.6 million. Despite continuing to operate "in a highly competitive environment", the Group CEO remains 'upbeat' about the future.
MAG reports the following financial/traffic highlights for the six months ended 30-Sep-08 (figures GBP million):
- Revenue: 217.3, -4.3%;
- Operating profit: 68.4, -4.7%;
- Profit before tax: 38.4, -41.7%;
- Passenger numbers: 16.6 million, -2.2%.
Lost routes not being replaced quickly enough
MAG comprises Manchester, Bournemouth, East Midlands and Humberside airports, but it is Manchester that has taken the biggest hit, losing both Zoom and XL flights as those companies folded, together with the effect of the continuing consolidation in the charter market generally. British Airways (BA) cancelled its New York service from this Winter, switching the capacity to Gatwick where it has otherwise reduced its long-haul services and subsequently bmi has said it will do the same with its trans-Atlantic services (shifting capacity to London Heathrow for BMED routes) and Virgin will withdraw St Lucia. Singapore Airlines and American Airlines have reduced frequencies. Domestic air traffic has been affected negatively by Britain's improved rail services, especially on the Manchester-London route where fast trains now run every half hour.
East Midlands increased its traffic in the period (+0.2 million), mainly as a result of more low cost routes there, while Humberside and Bournemouth were flat. MAG has already indicated this year that it is prepared to sell the loss-making Humberside.
MAG CEO, Geoff Muirhead, states that the loss of the New York service will have little impact on the group's financial performance as Manchester continues to add routes to other destinations, but a scan of new route activity in the last few months reveals only small gains by frequency increases on existing routes, with occasional new ones from Ryanair, which is busy building bases elsewhere, and the biggest news being the launch of a service to Bangladesh by Air Sylhet. Surrounded by aggressively operated airports like Liverpool and Doncaster Sheffield (Peel Airports); Leeds Bradford (Bridgepoint Capital) and Blackpool (Balfour Beatty), hardly any airlines are queuing up to fly out of Manchester as they were in the 1980s and 90s, with the encouragement of super-salesman and visionary Sir Gil Thomson.
Which makes MAG's rather relaxed attitude to AirAsia X (which this month announced it had chosen London Stansted as its first UK airport) all the more strange.
On the other hand, stakeholders will be comforted by the fact that Manchester, remarkably despite all the lost services, still offers considerably more routes than any other UK airport, currently totalling almost 240.
The profit slump at the pre-tax level takes account of a GBP17 million reduction in valuation of the group's investment properties in offices, freight activities and hotels, and the closure of its Ringway Handling business. The previous year's accounts also were improved by a gain of almost GBP61.58million from land disposal. Without those exceptional items pre-tax profit would have come in at GBP61.8 million, a much healthier figure.
While aviation income remained steady, car parking and concession income both grew by 4.2%.
MAG's largest cargo operation is not at Manchester but at East Midlands, one of the busiest freight airports in the UK. Total cargo grew by just 0.2% in the period but that is a good performance in the light of some savage losses elsewhere in the UK, such as at London Gatwick.
Cost control is very much the order of the day and 100 jobs have been lost to natural attrition, reducing staff numbers to 2,864. MAG has to be very careful in this respect. As well as being the UK's second largest airport operator it is the only one of any substance still in the public sector and to ward off frequent calls for it to be privatised it must demonstrate it is a good and socially responsible employer in the way that privately-run companies are sometimes perceived by the public not to be.
Investment at Manchester in particular is one of the company's stronger points this year, the long queues for immigration and security control in Terminal 1 having been largely eradicated. This is expected to benefit the airport if and when overall growth returns to the aviation sector in 2009/10.
Congestion charge vote may determine if calls for privatisation will return
Despite the reduction in profits the interim dividend to MAG's shareholders, the 10 Greater Manchester councils, will be increased by GBP1 million to GBP26 million. There may be a political motive lurking in the background here. On 11-Dec-08 the region's voters will decide on a proposed congestion charge scheme that would penalise motorists driving into the city centre, a little like London's but on a larger scale (in fact the world's largest, with the boundaries covering 80 square miles). The charge would help pay for much-needed surface transport improvements. Early indications are that the proposal will be rejected. If that is the case then calls for the group, or parts of it, to be sold or leased are certain to re-emerge. Increasing the dividend would showcase the airport as a community benefit in its present ownership guise. The group's valuation for sale purposes may have reduced by as much as 25% in the last 18 months but a sale would still easily generate enough funds to cover the contribution to the transport improvements that the congestion charge would have done.
There has been some speculation locally about the future prospects for Mr Muirhead in his present position following some high profile management exits, but the only notable development has been the appointment of Andrew Cornish, Managing Director at Manchester, to the main board of MAG. It is not likely there will be any more significant developments until the future of London Gatwick, for which MAG is almost certain to be a consortium bidder, is decided.
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