Aeroporto Guglielmo Marconi di Bologna SpA: Italian Airport Recovering from Cornavirus

Introduction

Aeroporto Guglielmo Marconi di Bologna SpA(Ticker:ADB) operates an airport in Bologna, Italy. I’ll refer to Aeroporto Guglielmo Marconi di Bologna SpA as its ticker for the remainder of the article. ADB pre-covid was executing beautifully growing passenger volumes or PAX at a 7% CAGR vs 4% growth for Italian peers. Margins expanded from 9% in 2014 to close to 17% in 2019 due to increasing non-aero revenue which has much higher margins than aero revenue. Then covid came and destroyed air traffic for two years. As of October 2022, PAX has finally eclipsed 2019 numbers by over 4%. ADB has now finally recovered from covid but the stock price is below march 2020 levels. This is where the opportunity arises. 

Euro

The company ADB derives its revenues from the Euro. As a US-based investor, this affects me and so I should try to evaluate the currency. In my previous article on ACEA (Ticker: ACE) I went over the Euro. My thoughts haven’t changed.

Airport Industry

An airport is sorta like a utility in a sense, as most cities only have one airport creating a monopoly in a city. This creates a very stable industry especially if you compare it to airlines. Airports are in a structural growth trend as demand for travel has constantly gone higher for decades. Globally passenger growth is set to grow at 3-4% according to a 20-year forecast by the IATA. Specifically in Europe where ADB is located passenger growth is predicted to be 2-3.5%.

Another attractive factor of the airport industry is its recession-resistance ability. Looking at the below graph of the airport operator in Zurich, Flughafen Zurich (Ticker: FHZN) you can barely see a recession. In 09 traffic dropped from 22.1M to 21.9M. Now the thing you gotta worry about for airports is terrorist attacks and global pandemics. As you can see from the chart traffic dropped significantly after both 2001 and 2020. Both times it took years to recover.

Background

ADB operates the only airport in the city of Bologna, Italy. The city of Bologna has a population of a little over 1 million in its metro area. This makes it the seventh-largest city in Italy. ADB coincidentally is also the seventh largest Airport in Italy. Bologna can be considered a tourist destination. Bologna is one of the oldest cities in the world founded in pre-Roman times. Bologna is home to the oldest university in the world, has a UNESCO world heritage site, is recognized by UNESCO as a city of music (whatever that means), and has two decent basketball teams Virtus and Fortitudo. However, for the most part, traffic to the airport seems to be to get somewhere else. Whether it’s to transfer to another plane or go to another city. 

Only 23% of the total passengers to the airport were Italian. The remainder of the volume came from other EU countries. Only 13% of passenger volumes in 2019 were from countries outside the EU. All numbers were from 2019 as that was the last normal year.

Bologna is centrally located in northeastern Italy and is neaby touristy cities such as Venice, Florence, Rimini, and Verona. It’s quite easy to reach these destinations throught the high speed rail network that connects Bologna to them. All four of those cities are in the top 10 most visited cities in Italy which combined had over 85million nights stayed in 2018.

ADB was growing quite impressively pre-covid at a 7% CAGR from 2014-2019 vs an Italian average of 4%. This is because of two reasons. The first is because ADB charges lower prices than other nearby airports. Aero Revenue is revenue derived from planes coming into the airport rather than concessions, parking, and other revenue. So Aero revenue can be considered what an airport charges an airline for docking at its airport. I then divide this by the number of passengers to get a unit metric to compare against other airports. This isn’t the cleanness measure however because airports differ on cargo and tonnage received. Using aero rev per passenger, ADB is the lowest out of Italian peers that I could find data on at €6.73 (Could not find data for Venice and Verona airports. Would have been good peers). 

Airport	Aero Revenue by PAX(2019)	PAX 2019(In Millions)
Bologna Airport (ADB)	€6.73	9.4
Pisa Airport	€6.95	5.3
Florence Airport	€10.15	2.9
Milan Maloensa & Milan Linate Airport	€12.26	35.3
Genoa Airport	€14.88	1.5
Rome Airport	€13.74	49.4

Two, ADB gets most of its traffic from low-cost airlines vs more expensive legacy airlines. Low-cost airlines have been growing faster than more expensive legacy airlines. ADB’s largest airline by traffic is Ryanair which provides over 50% of the PAX traffic to the airport. Ryanair is a well-run airline that grew its passenger count from 83m to 142m between 2014-2019 which is an 11% CAGR. 

Due to the location of the airport, its lower prices, its focus on low-cost airlines, and its partnership with Ryanair, I think above-average passenger growth will continue post into 2023 and beyond.

Rise

Covid-19 was a disaster for the ADB and the rest of the travel industry. As you can see below passenger count crashed dramatically from 9.4m in 2019 to 2.5m in 2020.

Net income for ADB also crashed from 20m in 2019 to -13.59m in 2020.

But finally in October 2022 passenger count exceeded 2019 numbers for the first time. Also, they set a record for most passengers in a month.

“Another positive month for Bologna Airport: after a difficult start to the year for Covid and after a Summer that finally recorded a steady growth in passengers, Marconi recorded the best October figure in its history. With a 4.2% growth on October 2019 (last prepandemic year) and with a +44.4% on October 2021, in October 2022 Bologna airport in fact exceeded 840 thousand monthly passengers for the first time (exactly: 841.478).“

– ADB October Traffic Release

Goods traffic already exceeded 2019 numbers a while ago and as of October is up 25% over 2019 numbers. This good news has yet to be received by the market however and the stock is down over 40% from 2019 levels. And is even trading at March 2020 levels. That is the year where the company lost over 13m. This year ADB is on course to make 14m-16m in profits from operations. As the trend in passengers is set to continue into next year, revenues and profits most likely will exceed 2019 levels. This means that 2023 will be a record-setting year for the company in terms of revenue and profits.

One extra thing I had to mention about ADB is its debt. Or better yet lack thereof. As of Q3 2022 the company had only €3M of financial debt ex-cash. This is extremely low for an airport. Most airports run with significant amounts of debt because of the stable nature of the industry. And with all the talk of rising rates, ADB won’t really be affected by any of it. Even with this low leverage, ADB pre covid was able to achieve a respectable airport ROE of 10%. In the future, there will always be the optionality to take on more debt which in turn will juice ROE and potentially grow the airport faster.

Expected Return

Below are my future projections for ADB going forward, with an explanation of my assumptions below.

Year	2028 Projection	2023 Projected	2022 Projected	2019
Passengers(In Thousands)	12,604	9,875	8,957	9,405
Price Per Passenger	€12.70	€11.50	€11.20	€11.44
Non-Aero Revenue(In Millions)	€64	€45	€40	€44
Aero Revenue(In Millions)	€92	€68	€60	€63
Core Revenue(In Millions)	€156	€113	€100	€107
AERO REV MARGIN	0.60	0.60	0.60	0.59
Non-Aero Revenue Margin	0.40	0.40	0.40	0.41
Non-Aero EBITDA	€38	€27	€26	€26
Aero EBITDA	€29	€20	€8	€19
Non-Aero EBITDA Margins	60%	60%	66%	59%
Aero EBITDA Margins	30%	30%	13%	30%
EBITDA	€67	€47	€34	€44
EBITDA/Income	0.45	0.45	0.45	0.46
Income	€30	€22	€15	€21
Shares	36.13	36.13	36.13	36.13
EPS	0.84	0.59	0.43	0.58

Base Case Assumptions

I assume passenger growth continues on its current trend and by the end of 2023 is 5% above 2019. Pricing has been a little anemic in 2022 most likely due to volumes still under 2019 levels. For 2023 since volumes with be over 2019, I assume pricing will also be a little higher than in 2019. Because of the recent inflation, 11.50 may prove to be on the low end. The price per passenger here includes non-aero revenue. The price per passenger in the background section only included aero revenue. 

As for after 2023 I assume that ADB will be able to outgrow the European projected growth of 2.1-3.4% because of their location, exposure to low-cost carriers, and low pricing. So I projected 5% Passenger growth from 2023-2028. This is less than the 7% growth they experienced last decade. With that, I assume pricing growth of 2% which is double what ADB did last decade. I assume this causes inflation looks to be more aggressive this decade than last. This translates to around 7% revenue growth till 2028. 

For margins, I assume basically the same as 2019 numbers even though ADB has grown margins from 9% in 2014 to close to 17% in 2019. Also, airports benefit from operating leverage as the airport becomes more utilized so this may prove to be a conservative assumption.

These assumptions get me to an EPS of €.84 cents in 2028. The current share price is at 12.5 times 2019 earnings which should be eclipsed in 2023. If ADB trades at the same multiple going forward and the dividend is reinstated to a 70% payout the expected return is 12%. With around half coming from growth and the other half coming from the dividend. ADB was trading at 20-30 times earnings in 2014-2019. Also, airports in general usually trade at 20-30 times earnings. So theirs an opportunity for a great amount of multiple expansion which is not included in my return calculations.

Expected Return 2028

Current Price	€7.74
Passenger Growth	5%
Price Per Passenger Growth	2%
PM	17%
EPS	.84
Multiple	13
Future Price	€10.88
Dividend Yield	6%
Expected Return CAGR	12%

Passenger Reviews

On google maps, the Bologna Guglielmo Marconi Airport which is the airport ADB operates is rated at 3.4 Stars with 12,143 reviews. Compared to peers this is the lower end of the spectrum. 

Airport	Google Rating	Total Reviews
Bologna Guglielmo Marconi Airport	3.4	12,143
Florence Airport	3.2	3,290
Pisa Airport	3.6	1,976
Venice Marco Polo Airport	3.8	10,488
Malpensa Airport	3.8	19,786
Valerio Catullo Airport	3.5	3,980
Genova City Airport	3.5	2,323

Reading some of the recent reviews, customer complaints can be summed up by the word busy. Some common complaints were unclean bathrooms, not enough seating for flights, and long wait times for baggage. Taking the glass half-empty approach while reading the reviews could paint a picture that the airport is approaching max capacity or is already at max capacity. So barring significant investment into the airport, growth in passengers could actually be lower than the European average going forward. At least that’s the risk. Also if passenger reviews continue to deteriorate passengers may try to avoid the airport altogether which would result in the same outcome. Taking the glass half full approach the airport is busy which is good for revenues. ADB has had issues with staffing as most companies have which may explain some of the complaints. As of ADB’s Q3 2022 report, the average workforce is at 483 which is down 12% from 2019 levels. Management in the same report also seemed to acknowledge the quality problems so we’ll have to see if anything is done about it.

Carrier Exposure

Ryanair makes up over 50% of the traffic to ADB’s airport. This presents a risk if Ryanair were to go bankrupt. Ryanair seems to be well run. From 2014-2019 Ryanairs profits averaged around a billion a year. Also as I’ve said above from 2014-2019 Ryanairs passenger count grew at an 11% CAGR between 2014-2019. As of Q3 2022 Ryanair seems to have fully recovered from covid-19 and had a very profitable quarter. So bankruptcy seems unlikely but the airline industry isn’t known to be the most stable industry.

Another risk is if Ryanair decides to take its business elsewhere. Ryanair first partnered with ADB in 2008 and their agreement has been renewed twice both in 2013 and 2016. I currently have no reason to believe that Ryanair will be going away anytime soon, but you never know about the future. Let’s say that something did happen and Ryanair goes bankrupt. That scenario may not be as bad as it sounds. I saw this little tidbit in Fraport’s 2019 annual report.

“I would also like to highlight the good development at our airports in Porto Alegre and Fortaleza in Brazil. Both airports together recorded passenger growth of just under four percent. I am very satisfied with this result, given the bankruptcy of Avianca Brasil, one of the highest volume airlines at both airports.” 

– Fraport 2019 Annual Report

Fraport(Ticker:FRA) an international operator of airports had a very high volume carrier to two of their airports in Brazil go bankrupt yet both those airports reported growth of 4%. I’m not saying that if Ryanair went away that ADB would continue to grow. But it probably wouldn’t be the end of the world.