By Jenny Ruth
Sunday 1st June 2003
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Under Goulter's leadership, AIA has increased its asset base threefold, boosted its profits nearly 20 times and improved its profit margin from 5.7% of sales to nearly 35%. Since its partial privatisation and share market listing in 1998, it has significantly outperformed the NZSE40.
In July, 62-year-old Goulter will retire after 15 years as managing director. He'll hand the controls to Don Huse, currently chief financial officer at Sydney Airports Corporation and former chief executive of Wellington International Airport. As he reflects on his tenure at the top, Goulter basks in a warm glow of satisfaction. "We've created something New Zealanders can be proud of," he says.
Clearly the guy's not one to hide his light under a bushel. But there are plenty of others who are equally enthusiastic about his achievements at AIA. James Miller, head of research at ABN Amro, is one of Goulter's many fans in the financial community. Miller rates Goulter "10 out of 10. He's articulated a growth story to the market and he's delivered on it. Name one other general manager in New Zealand who's done that. John can look back 10 years and, year in, year out, he's delivered good profit growth."
That growth is inarguable. Back in 1988 when he took the helm, the airport had assets of $367 million. By the end of December 2002, assets had grown to $1.1 billion. Net profit in his first year on the job was $3.7 million on $65 million in revenue; in the year to June 2002 it was a record $71.5 million on $201.1 million revenue.
Yes, this boring utility stock is flying high - even in this incredibly awful aviation environment.
What it's not
So what's been the Goulter formula, and why has it got AIA flying so high? Like all good engineering problems, a good place to start is with eliminating what it's not. For a start, charisma appears to have played little part. Goulter comes across as a blunt, down-to-earth pragmatist. His description of the airport business as being "no nonsense, no funnies" might just as easily refer to himself. Not that he's bland. Analyst Rob Bode of First New Zealand Capital says Goulter is passionate about the business and its people. "Charismatic in his own way," he says. Another analyst describes him as a "wily operator" who tends to polarise people. "Some love it, some hate it and some are amused by it. But I don't think you could describe John as dull or boring." What other chief executive would have the cheek to present an award at an annual results briefing to the analyst whose forecast came closest to the annual profit figure? ABN Amro's Miller was the happy recipient last year. What did he make of the award and Goulter? "What you see is what you get," says Miller.
Charismatic or not, Goulter has certainly become something of a celebrity boss in his final few months on the job. Last year he won both the Deloitte Chief Executive of the Year award and the National Business Review's New Zealander of the Year gong. And, although he's yet to retire, he had a street in the airport precinct named after him. This, he points out, was an initiative of the AIA board and wasn't his idea. He laughs heartily when it's pointed out that, so far at least, John Goulter Drive is not a very big street. "Someone said to me that it goes nowhere at one end and goes around in circles at the roundabout at the other."
There's another important element to eliminate in the Goulter success story. Given that the airport is essentially a monopoly - the only one in the nation's largest city and handling more than 70% of New Zealand's international passengers - is it possible Goulter could have just flicked the business onto autopilot and achieved the same stunning results? Goulter could be the living proof of Woody Allen's axim that "80% of success is showing up".
Not so, he protests. If the business was simply taking advantage of its monopoly position, gouging passengers and the airlines for what it could get, all it would need do is provide a large processing hall, he says. There'd be no need for long-term planning, and running the business would be simply a case of coping with the minimum demands of the day. Instead, the nearly 1500ha airport site is a complex mix of three terminals, hangars and other essential aviation services, commercial and industrial buildings, a shopping centre that includes a 24-hour supermarket and The Warehouse discount department store, and extensive car parking facilities. It also boasts a golf course, health club, childcare facilities and a jukebox museum. Butterfly Creek, which will house a butterfly display, is under construction and a marae is planned. Even a hotel is on the drawing board, although potential partner Sky City pulled out in January. "We elected to make this a very commercial, innovative, somewhat adventurous place," says Goulter.
Still, that's not enough to silence the doubters about just how comfortable the ride has been. "Goulter's done a very good job, but it's not as hard a job to do as it is for companies out there in the real world," says one analyst. "I do get a bit frustrated when I see all the awards John's won. It's not that I think he's done a poor job, but I wonder whether some of the people giving those awards appreciate just what a strong position AIA is in." Most of Goulter's time is spent at the operational level but few chief executives in competitive industries have that luxury, he says. "In the real world, operational matters are a small part of what Chris Liddell [former Carter Holt Harvey chief executive] or Ralph Waters [Fletcher Building chief executive] spend their time on. Not only do they have to deal with operational issues, they have to deal with a competitive market and strategic issues. John's never had to worry about that."
Clearly the investors don't mind either way. Commonwealth Bank's funds management arm, Colonial First State, likes the airport so much that it is now the company's largest shareholder with 17.2%, having taken advantage of the Auckland City Council selldown to increase its stake. Hans Kunnen, head of investment markets research at Colonial First State, says while it's "helpful" for a business to be a monopoly, that doesn't guarantee its success. "There's more to an airport asset than just planes landing and taking off," he says, confirming Miller's view that investors are more interested in the management of the ancillary services. "Let's give him [Goulter] and the rest of the staff credit for developing the cream," Kunnen says.
Another way to answer the question is to compare it with other monopolies. Shares in a pure play monopoly such as electricity lines company Powerco are trading at about 8.3 times its forecast 2004 EBITDA (earnings before interest, tax, depreciation and amortisation). AIA is trading at about 10.4 times its expected 2004 EBITDA. "The market's not focused on the regulated side of the business, it's focused on the [competitive] retail, car parking and land development aspects," says Miller.
How about comparisons with other airports? That's less easy. Sydney's international airport has three runways against Auckland's one. Melbourne's airport houses domestic and international in a single terminal - Auckland has two domestic and one international. Auckland has lots of land, Wellington has significantly less. Even comparisons such as revenue per employee or passengers per employee are distorted by the fact that all of the AIA's rescue and fire staff are on its payroll, while in Australia these people are employed by government departments. AIA has 262 direct employees and about 8000 in total work at the airport, while Sydney has 62,000 employees on site with about 350 employed directly.
One comparison that is perhaps valid is revenue per passenger. Auckland extracted $22.85 per passenger in fiscal 2002 - including $6.57 in retail income - while Sydney managed $A19.02 ($NZ21.06). Indeed, so well is AIA valued that it has become the standard. These days analysts usually begin any attempt to benchmark other airport businesses with AIA. "It's just the leader of the pack. Auckland is at the top end of the scale," Miller says. Not bad for a small outfit at the bottom of the world.
What he has done
So if it ain't charisma and (probably) not monopoly status, what's Goulter done so well? Here's where Goulter's mixture of flair and patience comes to the fore. For a start he did a "think big".
"This is an organisation and a facility that in all probability will still be used in 100 years' time," says Goulter. "Aircraft may take off a little differently - maybe vertically - but aviation will still be connecting New Zealand to the world." In keeping with his belief in the value of a clear, long-term road map, he spent his first two years developing a master plan that involved trying to envisage what the airline industry would look like in 2040 and what services it would require from an airport. The vision that emerged is kind of disappointing to the first-time listener - "To accommodate the aviation development necessary to underpin New Zealand's economic development" - but the outcome is much more exciting.
By identifying its key attribute as a "land bank" with massive traffic flows, AIA has diversified extensively away from aviation. In addition to the retail and cargo development mentioned above, AIA is expanding into new developments such as corporate headquarters. New Zealand's largest corporate, dairy company Fonterra, has its head office at the airport and one analyst reckons Air New Zealand may also move there. Goulter won't confirm this, but does say the airport "is in the process of considering a major development for a major corporate at the moment". AIA is also talking to various other companies involved in travel or import/export. And there's still about 250ha yet to be developed, including a second runway. Before being corporatised in 1988, there were about five shops in the international terminal. Now there are 85. There was virtually no property development apart from Air New Zealand's jet base. Now there are 35 commercial developments including a separate shopping centre.
Diversifying this way has served as a foil to the ups and downs of the aviation market. Indeed, it's a key reason why the 1998 Asian crisis and the fallout from the September 11 terrorist attacks hit so lightly at AIA - both revenue and bottom-line profit continued to grow through those events. The airport's 2002 revenue of $201.1 million was almost equally split between its monopoly aeronautical revenues and its retail and property activities. "We identified very early on when we were doing the master plan that you could always be prone to any downturn in aviation," Goulter says. "And we saw we could trade with Aucklanders or others who weren't necessarily travelling." Attractions such as the jukebox museum mean Aucklanders come on the weekends, and while there also spend on food and beverages and possibly other shopping. The museum is deliberately located near the public viewing deck so visitors can watch planes landing and taking off. "It's all part of great entertainment on a wet day." And while it's easy to be sceptical that anyone would regard the airport as a shopping and entertainment destination, Goulter says the airport regularly surveys patrons to the museum and knows it is attracting non-travellers.
Another canny move has been Goulter's incrementalism. All the efforts to convert the airport's land bank into rental streams have been cautiously done. Usually the airport builds only when tenants have been secured (although its latest office building was "on spec", but it is already virtually fully tenanted). Or take the approach to a second runway. While all the resource consents are in place, Goulter (and presumably his successor) has no intention of building it until it is really needed. In the meantime, he has developed the existing runway's taxiway so that it can act as a standby runway.
"It's given them the ability to have the functionality of having two runways with very little extra marginal costs," says Rob Mercer, head of research at Forsyth Barr. While he doesn't believe in putting managers on a pedestal for doing what they are paid to do, "there's a great deal of thought and strategy gone into both improving returns and thinking outside the square".
Throughout this development the company has kept religiously to the master plan. "Everything we've done since has always been an incremental step to that particular goal," Goulter says. "If you don't vary from that plan, if you believe in that plan, then you shouldn't make too many mistakes."
And have there been any mistakes? "There's nothing that causes me to stay awake at night, or causes me concern, or causes me to say 'bugger'." Well, nothing major. He does admit to one small error in judgement. In a fit of cost-cutting fervour, he once reduced the airport's toilet paper from two-ply to one, only to reverse the decision as penny pinching. "The good news is that the mistakes we've made have all been rather inconsequential."
Plainly, though, Goulter believes the little things count. Of his achievements, he rates highly the decision to provide free tea and coffee in the customs hall. "It's still the only airport anywhere I've found that does that, yet the goodwill we've created by doing that is beyond comprehension," Goulter says.
Another was bringing a McDonald's outlet into the airport, the first in an airport in the southern hemisphere. "We were still living in the age of a cup of tea, a scone, a lamington and sandwiches. Anything apart from that was pretty revolutionary," he says. "We've tried to get the word 'service' encompassed in everything we do. Fundamentally, we are in the service industry."
So what's left for Goulter's successor Huse to do? As passenger numbers grow, more terminal space and more docking space for aircraft will be needed. The new A383 two-storey aircraft, which will carry 550 passengers, is due in service in 2006 and that will require new loading and unloading techniques. And there's the second runway to be built and the rest of the 250 undeveloped hectares in the airport's land bank awaiting development.
While Goulter is justly proud of his achievements at AIA, he's humble about his place in the long-term development of the business. "Any one of us are only guardians for a period of time. There's plenty for him to do, just as there will be for whoever eventually follows him," Goulter says. Lucky for Huse that Goulter has left such a clear flight path.
Benchmarking done by the government when it privatised its stake in 1998 may have been flawed. ABN Amro's James Miller suggests the government lost a lot of money because its advisers benchmarked it against the British Airport Authority. BAA trades at about nine times EBITDA while Auckland has traded at up to 13 times since it listed, he says.
The government sold its 51% stake for $460 million, including a $70 million special dividend. The shares were sold at $1.80 each and traded as high as $2.08 on their first day of trading (they are currently trading above $5). At the time, ACT leader Richard Prebble claimed the government could have got $250 million more if it had sold the stake to a trade buyer.
Sky high profits
There's no question that under John Goulter's leadership AIA has become highly profitable. Back in his first year, the bottom line represented only 5.7% of sales. In the six months ended December, net profit was 34.7% of sales. But does that represent price gouging? Goulter rejects any such suggestion. He's particularly derisory of allegations made by the Commerce Commission in a report last year alleging AIA extracted around $4 million a year in monopoly profits from airlines. Following a review of airfield pricing begun in 1997, the commission issued a split 3:2 decision to the government recommending price controls. The government has yet to make a decision.
Goulter and the AIA board have consistently maintained that the commission's arguments are flawed. "Any process that takes six years and is still ongoing can't be critical to the development of anything. I stand by what I've always said. Our charges are slightly below average."
Indeed, the AIA's record is so good that some analysts say the reason Auckland City Council couldn't find a trade buyer for its 25.7% stake last year was because current management had already extracted just about all the efficiency gains to be had from the business. The council ended up selling 12.8% to institutional investors in December after about a year of dithering, and undertook to hold the remaining shares for at least two more years.
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