The sight of a flooded Kansai International Airport and 3,000 stranded people after Typhoon Jebi slammed into southern Japan this week should be a warning to the world’s infrastructure investors.
Airports have been a highly rated asset class over the past decade. The combined market capitalization of the companies that run the terminals in Paris, Shanghai, Sydney, Frankfurt, Copenhagen and Thailand has almost quadrupled in the past 10 years, and is up by about two-thirds since the end of 2016.
Owning airports is seen as a surefire way to guarantee long-term cashflows and achieve hefty capital gains when the assets are sold at the end of multi-decade leases, underpinned by air-passenger growth that’s set to run at around 4.7 percent a year over the coming two decades. Airports of Thailand PCL, Sydney Airport Ltd. and Auckland International Airport Ltd. all have enterprise values in the region of 20 times forecast Ebitda, compared with multiples of around 12 times for Facebook Inc., Alphabet Inc. and Apple Inc.
That makes the sector’s patchy disclosure around climate change risk all the more extraordinary. Through most of the 20th century, the key requirement for building an airport was the availability of a large stretch of undeveloped and affordable flat ground close to a major city. In many cases, that meant building on low-lying marshes, or even reclaimed land as at Osaka’s Kansai. Almost by definition, a large number of the world’s airports are in locations most at risk from rising sea levels, high tides, storm surges, extreme rainfall, or a combination of all four.
Just how many will be affected is hard to say, but you can get a decent picture by looking at how many hubs would be submerged by an event as dramatic as what’s just happened in Japan. Kansai Airport sits about 11 feet (3.4 meters) above sea level. That’s about in line with both of Shanghai’s airports; terminals in Rome, Brisbane, Barcelona, Tianjin, Bangkok and Amsterdam are all of equivalent elevations or lower.
Similar levels of flooding would affect 13 of the largest 47 U.S. airports, according to a 2014 government report, including all three major airstrips in the New York metropolitan area, two around San Francisco and two near Miami, as well as tarmac in Philadelphia, Washington, New Orleans, Honolulu, Tampa and San Juan.
Although most climate models predict between 0.2 meters and 2 meters of sea-level rise by 2100 (with a median estimate of 1 meter), the main risk to airports isn’t that they’ll be permanently submerged. Instead, it’s that elevated waters and more extreme storms cause flooding that had previously happened only rarely to become a regular threats, necessitating increased capital spending on prevention measures and pushing up insurance premiums. That in turn risks undermining valuations, resulting in writedowns for the asset owners and in a worst-case scenario the necessity of moving to higher ground.
Assertions that an asset is safe against a 100-year flood event should be taken with a large pinch of salt. The previous 100 years on which those models are based are likely to look very different from the 100 that lie ahead. A 2012 U.S. study found that floods in the New York City area previously expected to occur only once in a century would happen every three to 20 years under climate-change conditions.
To be sure, many airports may be able to survive the lower-end climate-change predictions through a combination of levee building, improved drainage, and rebuilding of essential infrastructure to lift them out of reach of storm surges.
In that situation, occasional flooding will become an occupational hazard for major low-lying airstrips — an event that would cause immense disruption to the populations that depend on them, but won’t ultimately lead to the wholesale abandonment of sites. Still, that’s cold comfort to infrastructure investors who are counting on assets to hold their value in the long term — and if the higher-end scenarios come to pass, the consequences could be worse.
Airport owners who haven’t done proper climate risk modelling — or who haven’t publicly released it — shouldn’t be granted the benefit of the doubt by their investors. Refusing to talk about a risk doesn’t make it go away.
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