Introduction

This study examines the capital structure of Auckland Airport Limited (AIA),
the largest and busiest airport in New Zealand. The company was formed in
1998, when the NZ government sold their 51.6% of equity interest to public
at $1.80 per share. It is a major gateway to NZ and its revenue stream
comprises of airport operations, terminal charges, rents and car parking. AIA
is implementing a Faster, Higher & Stronger strategy where high levels of
capital expenditure is been done to expand and significantly improve the
airport (i.e. terminals), rental area and car parking to take full advantage of
the growth opportunities in foreseeable future.
The purpose of this study is to analyze the capital structure of AIA during the
period 2009-2010 to 2013-2014, as to identify factors that influenced the
managements

capital

structure

decisions

and

its

impact

on

AIAs

performance. The analysis is done by measuring the changes in equity and

debt over the study period and the factors that influenced this changes. The
capital structure changes are used to analyze its effect on AIAs financing
costs over the five years, compared to the achieved performance.
Over the past five years AIA has been increasing its profits, debt capacity
and overall revenue; these achievements give AIA a strong financial position
which is clearly identified by the managements decision of taking an
aggressive amount of debt to finance the 30 year expansion plan.
1.2 Sources of data.
Secondary data is used for this study.

NZX Company Research website was used to get the annual reports of

AIA from 2010-2014.

Yahoo finance website was used to get the analysts opinions and
historical prices of AIAs shares.

Interest.co.nz was referred to calculate the risk free rate, return of the
market and get specific information regarding individual bonds of AIA.

Equity Capital:
Changes in
Equity
At 1st July
Profit
Other
Comprehensi
ve Income
Total
income
Shares
issued
Share
buyback
Capital
Return
Dividend
Paid
Equity
at
30th June
Issued
&
Paid
up
capital
Number
of
Shares

2014
$000
2,499,507
215,881
740,348

2013
$000
2,472,767
177,967
5,485

2012
$000
2,467,531
142,284
(16,860)

2011
$000
1,913,634
100,761
539,003

2010
$000
1,841,147
29,694
7,641

956,229

184,452

125,424

639,764

37,335

11,043

25,141

138,507

(10,883)

(454,146)

(82,661)

(156,714)

(120,348)

(111,008)

(103,355)

2,918,935

2,499,507

2,472,767

2,467,531

1,913,634

$322,343

$348,848

$348,846

$338,386

$313,245

1,190,126,4
87

1,322,371,6
45

1,322,370,7
45

1,322,158,2
45

1,309,974,5
87

Over the past five years AIA has followed an increasing trend for equity as
clearly shown in the above table. The increase in equity was attributable to
the rise in the profits rather than increase in common stock. Even though
from 2010-2012, new shares were issued by the firm but in later years were
bought back to balance the mix of equity and debt clearly indicating
managements preference of debt over equity as a source of financing.
The overall trend can be explained by the following events listed below:

A dividend reinvestment plan was introduced on February 2010, which

gave shareholders the right to receive the value of their dividends in

the form additional shares. The reinvestment plan offered great

incentive to the shareholders and hence led to increase in equity and
number of outstanding shares as most of the shareholders took part in
the plan. However the plan was discontinued in the later years as it
resulted in share dilution and reduction in stock price
Years
Shares issued under
the plan (in millions)

2010

2011

2012

2013

2014

$14.80

$25.12

$10.72

N/A

N/A

In January 2010 Auckland Airport introduced a right issue for existing

shareholders in order to partially fund the investment in North
Queensland Airports. Under this, eligible shareholders were entitled to
acquire one new share for every 16 existing shares at $1.65 per new
share. This resulted in an increase of equity of $122.620 million, net of
issue costs.

On 12th October 2011, the company undertook an on-market buy-back

of its ordinary shares. The purpose was to counteract the impact of
dividend reinvestment plan. The total buy-back cost was $10.833
million.

On 12thFebruary 2014,AIA after the approval of shareholders carried

out a planned capital return by way of a 1:10 share cancellation and a
payment of $3.43 for each share cancelled leading to a total cost of
$454.146 million as shown in the table above. As the management
believed that the mix of equity and debt is less efficient than it has
been in past, the capital return will improve AIA balance of equity and
debt, returning it to levels achieved in 2011.

The remaining balance of shares issued by the company as shown in

the table is the shares issued to employees under the employee share
scheme. The plan is intended to encourage and incentivize employees

by providing them with a stake in the company and a financial interest

in the companys performance.
Debt:
Year
Debt ($000)
Increase/Decr
ease
Debt/Equity
(D/E)

2014
1,507,672
31.94%

2013
1,142,690
2.99%

2012
1,109,430
2.22%

2011
1,085,353
(0.66%)

2010
1,092,529

51.65%

45.72%

44.9%

44%

57%

The debt of the company comprises of Bonds (fixed & floating), Bank
facilities, Commercial Paper and USPP notes. Bonds are the major sources of
financing for AIA and has shown an increasing trend over the past five years
(2014:58%, 2010:50%).
The above table shows the overall trend of debt borrowings increased from
2009 to 2014 because the purpose for debt borrowing was mainly to
refinance existing debt programs, to provide funding for capital development
projects and for general operational projects except for AIA 130 bonds which
were issued on May 2014, with the purpose of mainly refinancing the capital
return paid to shareholders on April 2014.
Management preference of bonds over other sources of debt (i.e. Bank
facilities) is because most of them are unsecured and unsubordinated, giving
the company more flexibility over utilizing their assets offsetting the higher
interest been paid. Hence the cumulative effect of tax shield benefit and
lower

cost

of

debt

in

comparison

to

equity,

clearly

dictates

the

managements approach of financing their projects from debt.

Management Approach
Based on the Tradeoff theory, AIA has decided to go for an aggressive debt
financing especially during 2013-2014. As the company has steady and

reliable cash flows and strong liquid assets, it can maintain a high level of
debt and still have a low probability of default. Following this, the benefits
from the increase in debt offsets the increase in the probability of incurring
financial distress costs. The decision to increase the debt can also be
explained using Modigliani and Miller proposition (with taxes), as AIA has
increased its debt level seeking a reduction of its WACC with this decision.
AIAs management has also announced that their upcoming 30 year
expansion plan will be purely debt funded hence proving that AIA is
committed to take more debt in order to maximize its value and therefore
achieve the optimal level of leverage.

Table: Financing costs for AIA from the period 2009-2014.

YEAR

WACC from CAPM MODEL

WACC from ROE/ROD model

Cost of
Debt

WACC

Cost of
Debt

Cost of
Equity

WACC

Average
WACC

7.29%

6.58%

1.55%

1.4%

4.34%

3.20

7.42%

6.49%

4.08%

4.28%

6.55%

2.97

7.38%

6.22%

5.75%

5.38%

6.38%

3.82

7.30%

5.84%

7.12%

6.26%

6.78%

4.55

7.13%

4.52%

7.40%

6.06%

6.59%

5.13

Cost of
Equity

20096.86%
8.50%
2010
20106.58%
8.50%
2011
20116.5%
8.50%
2012
20126.21%
8.50%
2013
20135.95%
8.50%
2014
APPENDIX PAGE 3: (Assumptions

Debt
Capacity
(Interest
Coverage
Ratio)

and Calculation are stated in the appendix)

We are taking two different approaches in calculating WACC, however for the
analysis purposes we are using the WACC from CAPM model as the
benchmark. The WACC is fluctuating over the five years period; it is very high
from the year 2009-2012, as the equity increased in comparison to debt,
which led AIA to incur high financing costs.

However AIA took measures such as market buy-back of shares and return of
capital in the later years to improve the mix of equity and debt leading to
reduction of WACC. With that AIA also introduced more debt in the capital
structure in form of both floating and fixed rate bonds to take advantage of
lower cost of debt. AIA is maintaining a policy-mandated level of fixed rate
borrowings to reduce the impact of interest rate fluctuations as well. These
measures in later years reduced the WACC to its lowest level benefiting AIA
with much higher earnings.
The debt capacity of AIA has also increased over the period of five years as
stated in the table above.

The ratio should be at least 3 times for

comfortable service of debt. Even though the firm was increasing their debt
in the later years, the strong performance of AIA has led to higher profits
allowing them to pay their annual fixed interest payments easily. Overall it
clearly indicates that AIA is in a strong position to take on more debt in future
for their upcoming projects.

Appendix
Calculation of WACC by Return on Equity (ROE) & Return on Debt (ROD):

Assumptions :