AIR RAIL GROWTH BONANZA FOR UK OWNERS

Sydney's Airport Link and Brisbane Airtrain carried more than 8.5 million passengers in 2014, or about 17 per cent of the 50 million passengers that passed through the airport gates in both cities.

Air passenger numbers are expected to double over the next 15 years, giving the UK's Universities Superannuation Scheme (USS) fund more bang for the $1 billion it has spent in recent years on Australian infrastructure assets, including the Melbourne-based toll road group ConnectEast.

Britain's second-largest superannuation fund bought Brisbane Airtrain, which cost $220 million to develop, for just $110 million.

The value of its 49.9 per cent investment in Sydney's Airport Link has not been disclosed, although Westpac, which sold the stake to USS in 2013, is reported to have bought it for $300 million in 2006.

While the financial performance of both air rail services remains under wraps, the most recent figures show Airtrain posted EBITDA of $16 million in 2013.

Sydney-based infrastructure investment manager CP2, which has minor stakes in both assets after brokering the deals with USS, says it is comfortable with the financial performance of both operations.

"The Airport Link has been successful in meeting business targets for FY15 by taking advantage of the strong growth in Sydney airport patronage and increased congestion on the major road links servicing the airport," says Peter Hicks, the head of asset management at CP2, which manages both rail assets.

"On the other hand, market conditions in Brisbane are more challenging with the airport recording no or low growth, improved road capacity to access the airport and a more sluggish economy."

However, Hicks says the broader trend is positive for both operations, with combined passenger numbers from Australia's only airport rail links tracking third from a global perspective, behind Hong Kong Airport Express and KLIA Ekspres in Malaysia.

In 2014, the rail services' 8.5 million combined throughput compared with 14.8 million in Hong Kong and 9.2 million in Kuala Lumpur.

"Rather than talk profit, we would suggest mode share is the biggest differentiator between airport mass transit facilities," says Hicks, adding that the Sydney and Brisbane services have closed in on 100 million passenger movements over the past 15 years.

"In Sydney, mode share is amongst the best in the world with a share of more than 18 per cent. On the other hand, Brisbane is less than half this amount with a share over its life between 6 and 9 per cent per annum.

"In Melbourne, we understand that the airport bus is running at similar mode share to Brisbane.

"It is clear that Australians are transitioning away from road-based transport to access airports via rail. Our research shows this is a global trend."

USS acquired both airport rail operations in 2013 as part of a diversification into infrastructure assets that provide inflation-linked cashflows.

Market analysts at the time saw the acquisitions as strategic in the investment cycle, and an opportunity that many Australian fund managers had overlooked.

Hicks says the problems faced by both services when they started about 15 years ago are no longer issues under the current ownership.

Both services initially failed to attract expected passenger numbers, which led to the original operator of Airport Link to fall into receivership and saw Airtrain come close to voluntary administration in 2003.

"As with all major private infrastructure in Australia, we were challenged in the initial period with construction costs and consumers learning how to access our services," says Hicks.

"Initially, in both Sydney and Brisbane, take up was not as significant as planned as the train did not offer competitive times to alternatives like taxis, and congestion on alternate road routes was not what it is today.

"We now know the cyclical nature of these businesses and the market environment and, as investors, we take a long-term view of their overall performance.

"We also have a much stronger understanding of consumer behaviour and motivations and this enables us to be more effective and efficient in our marketing, communications and delivery of customer service."

Brisbane's Airtrain has an edge in the market through a 35-year agreement that excludes the operation of subsidised public transport buses to Airtrain stations. That agreement expires in 2036.

The service was also given a major boost this year with confirmation that the Gold Coast light rail will be extended to heavy rail at Helensvale ahead of the 2018 Commonwealth Games.

"A direct rail connection between Brisbane Airport and Surfers Paradise-Broadbeach within three years will be a massive boost for both Brisbane Airport and Airtrain, particularly as the devalued Australian dollar brings more international visitors to the Gold Coast," says Hicks.

Hicks concedes the air rail services in both Sydney and Brisbane suffer from perceptions of being expensive.

"As you are aware, urban rail across Australia recovers less than 30 per cent of its operational costs from the fare box with various state governments subsidising urban rail services in excess of 70 per cent.

"In the case of both Sydney and Brisbane airport rail links, there is no government subsidy available for operational costs. Also, these costs do not take into account the initial expense of construction. 

"Our fares, whilst perceived as expensive in comparison to government subsidised rail fares, are comparable to airport rail link fares around the world, and reflect the cost of operating an unsubsidised railway.

"Importantly, they are highly competitive with the cost of taxis or parking at the airport.

"In terms of train frequency, we pay for every train and therefore, like airlines, we carefully plan our train service available for the majority demand, not the minority."

In Sydney up to 12 trains per hour operate during the peak and, in Brisbane, Hick says the frequency of trains has increased to match arriving passengers.  

"Our research and mode shares show that Australians are just as likely to use airport trains as the rest of the world, provided it is attractive in terms of journey time, frequency and destination," says Hicks.