Episode 4 - How is Melbourne Airport taking off?

Disclaimer: The information contained in this podcast is general information only and opinions of participants are their own and not the views of their organisations. Any advice is general advice only. Past performance should not be relied on as indicative of future performance.

Intro: Welcome to The REAL Deal, a monthly podcast about what’s happening across the real estate and infrastructure sectors.

Episode grab (Lorie): America has 100 open skies arrangements with different countries, Singapore has 60 and we have seven countries with arrangements. So we need to modernise the approvals, we need to get the skies as open as possible, because airlines now in a post COVID world are far more dynamic. And quite frankly, if they can't grow here, then they'll go somewhere else.

Intro: Australians are back in the skies at near pre-COVID levels, and Lorie Argus, CEO of Melbourne Airport, has big plans for the growth of the precinct. Lorie is talking to Dexus CEO Darren Steinbergabout the state of the airline industry and how Melbourne Airport is positioning itself to become the largest in Australia by 2031.

Darren: Welcome everyone to The REAL Deal podcast. Today we are joined by Lorie Argus, the CEO of Melbourne Airport. Lorie, thanks for joining us today.

Lorie: Thanks for having me, Darren.

Darren: You've been in aviation for your whole career and have had an interesting journey. Perhaps let's start there, can you tell our listeners about how you got to where you are today?

Lorie: Sure. Well, I guess I kind of fell into the industry, I think straight out of school when my Dad's wife gave me a job selling tour tickets at the airport. So that was in the very breezy Edmonton, Alberta,which on an average evening would be about minus 40 or minus 50. I used to sell tour tickets to Mexico and to Hawaii and great places like that. And then, ultimately I ended up working for Canada 3000 airlines, andspent ten years at that airport with them and they brought me over to Brisbane, Australia in 2020. Unfortunately, after September 11, like many companies, my little airline went bankrupt at the same time asAnsett collapsed, so I spent a year on the beach on the Gold Coast deciding what I was going to do and then the fabulous Brett Godfrey gave me an opportunity at Virgin Australia, where Iended up stayingthere, I must say, about 11 years. And then Melbourne Airport came knocking. So about nine years ago I came to Melbourne, moved the Queensland family to Melbourne, and I've run a number of portfolios there before ultimately getting this appointment last year.

Darren: Well what a great opportunity it is to be running Melbourne Airport, one of Australia's truly great aviation assets, and it is really like running a mini city, isn't it? So maybe you can tell us how Melbourne Airport’s going post-COVID.

Lorie: Sure. Yes, look, it's going great. It's hard to believe it's recovered so quickly, and international is well and truly exceeding expectations. Domestic lags a little bit behind still,we think for a number of reasons. So we're at about 93% pre-COVID levels for domestic, but international by this Christmas will be back to a full 100%. And we've got markets that are continuing to grow and new markets. So about 10% of our international traffic is new destinations to Victoria. So [I’m] really quite proud of that recovery and what we've been able to do with diversification of markets. Of course when China was closed, we had to get creative about where else were we chasing business. And with the growth we're seeing through India, Vietnam and other destinations, it's fabulous to be fully back on the map and to be partnering with the state government and all of the industry bodies to make sure that [Melbourne] Victoria is ready to be the biggest airport in the country by 2031.

Darren: Excellent. And we'll talk a bit more about competition, et cetera, in a minute. But obviously, as I said before, it's like running your own city there. What does a day look like for Lorie Argus?

Lorie: Well it certainly never looks the same, Darren. When you think about our business, we have one of the largest business parks in Australasia, if you put together all of our retail shops and food and beverage, we're probably the biggest shopping mall in Australia as well. So quite bespoke businesses around property, retail. We run a ground transport business as well and we've got great product offerings there for our customers getting to and from the airport, and then of course, our aviation. So, with so many different business units, the challenges are diverse and every day is different. And then, of course, we run and operate utilities. We have an embedded network, so we provide electricity to customers. So really, every day is something new. I do, though, remain quite disciplined in a few regards, which is the traveller experience being at the core. You will find in my routine, I always make time to walk every terminal every day and make sure that from a traveller perspective that we're continuing to improve. And I really do hope people have seen just the amount of improvements that have gone into the terminals over the last few years. But yes, every day is a new challenge, whether it's a baggage belt system breaking down or a technology system failing, you have those things day in and day out. But we've got an incredible team that keeps the place running and we've got an incredible asset management team that looks after a really diverse set of assets.

Darren: Yeah, I think sometimes people really underestimate what goes on with the running of these real assets. And with Dexus, we oversee about $60 billion worth of assets. So not all of them as complex as Melbourne Airport, mind you, but there's just so many things that go on in any day, and no day is the same. I think that's one of the great challenges. When you're running assets of this nature, you just don't know what's going to hit you from left field, as we've now witnessed with COVID, for example. Who would have ever thought that a major airport such as Melbourne would be virtually shut down for periods of time? So how many staff do you have that actually help you run the airport?

Lorie: It's interesting, you just made me reflect then on. We're probably a learning academy currently as well because we had 20,000 staff at the airport pre-COVID, and that's with all of our providers as well, but that got down to, I think at one point, the lowest of the low was about 1,800 people working at the airport.

Darren: Wow.

Lorie: And now we've had to scale completely back up again. We've just done an economic and social impact report with EY recently on our contribution both socially and economically to the state and that currently has our staff numbers at 18,000. So we are almost back to where we were. But we're a small big business, so we only have 430 people within the management team, but obviously we influence those full 18,000 people at the airport and manage everything from their license to operate airfield or their access control in and out of the terminals. But it's like you say, it's a mini city. And we've been doing a lot of work too on making sure that whether it's a Melbourne airport employee, or a Launceston employee, that our stepping forward program for service is trained to everyone, because we want the security guard or the cleaner, or any of our providers, to be able to offer assistance to the travellers. So we are all united on that front to make sure we're looking after the traveller experience.

Darren: Excellent. One thing that was really interesting to me, and I didn't know this, and probably interesting for your customers, is that while you oversee the entire airport, the actual airlines look after their own terminals. And I think trying to explain to some of our investors that, yes, we oversee the airport, but it's Qantas that actually controls what happens inside the Qantas terminal. That's correct, isn't it?

Lorie: Yeah look, it's really tricky to explain to people because there's different models across every terminal. Security currently in T1 is managed through Qantas as an example, yet we manage it in terminals two, three and four. Lounges are of course operated by the airlines and how they operate within each terminal. It is a challenge because we build infrastructure based on the needs of the airlines who are ultimately our main customers, but we also have our own opinions of what a good terminal looks like for the traveller experience as well. So you are always balancing how to build the right capacity, but also to the right scope that makes sure your airlines are happy and that makes sure we've got a great traveller experience. So it is pretty unique across every terminal and different suppliers across every terminal. I have this one conversation with people all the time, so if anyone is a passionate commuter and wonders why you have to keep your laptop in a bag in when you go through one security in one city and out when you go through another, that is just the reality of different infrastructure across different airports that sometimes it becomes a pain point for the frequent flyer. So we do look to align both across the country systematically and seamlessly, but it is a challenge when you're building terminals for different airport customers.

Darren: Lorie, as someone with a fake hip I know only too well. I can seamlessly walk through in Sydney in Qantas, but in in Melbourne it's shoes off, belts off and the weekly pat down sometimes, so let's hope they upgrade the security soon. But it's Qantas, not Melbourne Airport. While we're on the topic of Qantas, and airline competition is obviously a hot topic, and I don't know how much you can say here, but do you have any comments on what has taken place with regard to Qantas and Qatar? Obviously a lot of press about that in the last couple of weeks, but are there any comments you would want to make on that?

Lorie: Yeah look, the bilateral arrangements are a real challenge and when you think about the Airport Act, it's been in place for so long. I think every policy and procedure has its time and place, and the thing that we've been really advocating for is to say that it is now time to modernise our bilateral agreements. What you've just seen with Qatar is kind of what every airline goes through when they want to enter Australia, which is a lot of process, a lot of red tape to get approvals. Manage that around trying to build your network and your capacity and it's a just in time approach with our current bilateral agreements. And what that means is it takes a long time for the airlines to get approval, and then obviously as we've seen recently, Qatar was unsuccessful with a request for additional services. We're lucky in Melbourne; Qatar has a double daily service in Melbourne; we’re their largest frequent port, and we're really hopeful that their application will be reconsidered because we know that it drives more competition, and we know that it would mean more competitive airfares for the consumers in Australia. Of course, the government has their place to make sure that their national security and the country's national interest is considered. But I just keep looking at the fact that America has 100 open skies arrangements with different countries, Singapore has 60 open skies arrangements with different countries and we have seven countries with arrangements. So we need to modernise the approvals. We need to get the skies as open as possible because airlines now in a post-COVID world are far more dynamic than they used to be. So they have movable assets and we have to make sure that Australia stays on the globe. And quite frankly, if they can't grow here, then they'll go somewhere else. So we are really advocating for a more open skies, liberal approach to those bilateral agreements.

Darren: I totally agree with you and once again, as an investor in a few airports now, I think it would be a very good outcome. I suppose it also ties into if you look at population growth, the Australian population is forecast to grow 30% by 2040, from 26.5 million today to the forecast 34 million by 2040. You've got the overseas migration being a driver of that as well, you've got families coming in and out, and Melbourne in particular is a is a very multicultural city. It will need the biggest airport and I think the masterplan sort of sees you having to deal with 70 million passengers on the back of that population growth by 2031-32. That's going to involve a lot of capital spend in your city, in the Melbourne Airport. Runways, I think there's a plan now to do a second runway, will that be able to cope or will you need future runways over and above that second runway?

Lorie: We've got a vision that really ultimately could see us out to 100 million passengers. But to your point, 76 million passengers by 2042, we definitely need the parallel system runway. We currently have two runways, but it's a cross runway, so I kind of call it one and a half runways. We really need the parallel system, which is ultimately our third runway. That is currently in for Federal approval now and the reason that we need that is because every airport of our size and scale has parallel systems, and that creates efficiency for capacity, for weather, for operations. We know that Brisbane's recently opened their parallel runway system. Sydney of course, has had parallel for a long time and that triangle operations, I think it's something like 60% of the country's traffic has touched Melbourne before 11 o’clock in the morning. So if we don't have that parallel system and we become a handbrake for the rest of the country, that's a really big challenge. So we absolutely need that third runway approved to be able to see out our masterplans and we're hopeful that we might get that approval in before Christmas.

Darren: Excellent. I think there'll be a lot of people happy to see that runway up and running. If it does get approved, when would it be completed by?

Lorie: So that's subject to a number of approvals and also to agreement with our airlines. So we are planning to have it in the next ten years, but we obviously have to negotiate that with our customers. It's a six-year build time, so we do hope to be building in the next couple of years. And then we have to do airspace design, which is pretty complicated and technical as well. So a number of approvals along the way once we get our first formal large project approval, but through consultation, we're really hoping that we're constructing by 2026-27 at the latest.

Darren: As someone that's been involved in a lot of development over the last sort of 30 years, I was discussing this question with someone the other day, so hopefully you can answer it, you may or may not be able to. So obviously these are concrete runways but is there any particular special technology in how they're built? Because I was surprised just how long it takes. Now I know obviously the airport's operational and there's only certain times you can construct, but I was surprised at the sheer cost and time, because time is cost when you talk about construction, it takes to build these runways.

Lorie: Yes. We're just in the process of finishing a runway overlay. So every ten years you have to put new asphalt across your current runways and that is just a well-oiled machine of construction, which has very few hours in the day to be able to get out there and work. So the planning and the logistics that goes into building and operating those in situ is pretty challenging. The great thing for us about our third runway is it really is a greenfield approach, if you like, because it doesn't interact with the rest of the building. So operations and disruption is pretty minimal. However, we have quite a few gullies and hills and other challenging things within our landscapes that means it's a lot of fill, it’s a lot of flattening. And then to your point about pavement, it's pretty hard to believe, you'd be surprised at how deep the pavement has to go to make sure we meet those regulatory obligations for landing those heavy aircraft as well. So many people say to me, that price tag is a pretty big one and the build seems long, but when you look at logistically what has to go into meeting those obligations, both from a safety and regulation perspective, experts do say that is what it's going to cost, and that is how long it's going to take. And then, of course, we're looking at all kinds of new technology, particularly for environmental considerations and how can we be thinking better about embedded carbons and emissions and so at the same time as planning it out, we're also doing our best to make sure we've got the best ESG outcomes for that third runway as well.

Darren: Excellent. So I said before, Dexus has done several airport investments now. Jandakot was our actual first investment there, which is the second largest airport in Perth and the main freight airport. The value for us when we first looked at that investment was actually in the industrial land bank, which was adjacent to the airstrip, and we've built that out over the last couple of years with tenants like Amazon and HelloFresh. As you mentioned earlier, when we when we look at Melbourne Airport, we just see it as a aerotropolis in its own right. So business parks, retail property, solar farm, future plans for entertainment parks, there’s a surf park there which is obviously part of the entertainment. It's a fantastic asset where you see real estate and infrastructure properly integrating together. Maybe one thing we've focused on a lot lately has been just the ability to run things more efficiently, and you touched on it a second ago, but maybe you could expand on your solar farm and electricity generation. And how you’re thinking about Scope 1, 2 and 3 with regard to the running of Melbourne Airport as we move forward from here?

Lorie: Yeah, it's an interesting if you look at our build, I'm glad you mentioned Urban Surf, it’s so funny when I moved to Melbourne from Queensland it was a bit of a shock to the system with the weather, but I'm Canadian so I jumped into the change in seasons pretty quickly, but when somebody said we were opening an outdoor surf park year-round in Melbourne, I thought you can't be serious, but sure enough it's fully booked every day of the week. So we have a number of precincts and property portfolios as you said, warehouse development to date, we've got about 265,000 square metres coming out in the next couple of years. So freight business you touched on as well, we carried 202 million tons of freight through the airport last year so that's a big business as well. And then we have to your point, the commitments around Net Zero for Scope 1 and 2 and then a lot of work happening in Scope 3. So Net Zero and Scope 1 and 2, we've committed to be Net Zero by 2025. And I kind of always say, that's probably the easy bit because we've got a very large solar farm, we're in the process of building a very large second solar farm, all of our tenancies in those large warehouses are solar proofed, so we will meet those commitments for 2025. But obviously it's quite small in the grand scheme of Scope 3 emissions, particularly for aircraft fuel, of course, but we are really active with the current governments around the Jet Zero council, working with the airlines directly, how can we influence SAF, Sustainable Aviation fuels? Of course we're doing everything around our fleets, EV fleets and the like locally, but the really big ticket item, I think, aviation fuels are responsible for 2.5% of the world's emissions. So that's the big ticket item to solve. And we do want to make sure that we ultimately become a conduit, if you like, to the airlines on supporting the industry to solve for that. The EV and all those other things are really important as well, but I think solving for sustainable aviation fuel to the future is really going 
to be important to meet those IATA targets by 2050.

Darren: Yeah, there's a lot of work going into that and I think people talking about solar and different oils, the way to fly these planes, but as a frequent flyer I want to make sure they get that technology right before we start going into airplanes. I don't want to be a crash test dummy, so to speak.

Lorie: That's one of the biggest challenges, right, is our location, and we need really big planes and they have really big engines. But our location is not going to change and so that is one of the unique challenges for Australia and there's not a lot of other transport modes if you're going for long journeys. But yes, of course, the regulations are going to play a critical part in that and how we partner, I think Vitol's are a good example of “it's easy to have the aspiration”, and I think it's actually easier to have the technology solutions than it is to work through, well what is the actual change management of making sure that the public consumer is comfortable with where things are headed.

Darren: Yes and with technology obviously comes the ability to fly direct into places like New York and London. Once again, I think we spoke about this, but do you see that creating even more demand for the airports than what we currently have capacity for?

Lorie: The long range aircraft are a bit of a game changer and they are for us as well. So aircraft that couldn't fly direct to Melbourne ten years ago now can and that will continue to change with long range. So it does mean that airlines have a lot more choice and particularly not requiring to hub over kind of different destinations. So reaching cities that we could have never reached before is definitely on the horizon. And there will be more of those, which is which is great. Melbourne – Dallas was launched recently, that's like 17.5 hours, which is which is incredible, I think it's the second longest route. So there'll be more of that to come for certain. But of course, that's got to be weighed up with what airlines do with their hub strategies as well. But the aircraft are incredible, the range is only getting greater, and that obviously gives us more markets and more business to chase.

Darren: Lorie, how competitive is the landscape? Do you see yourself competing against Brisbane and Auckland and Sydney on a regular basis? Obviously you've got Avalon Airport down there in Victoria as well. Who would be your major competitor in your eyes?

Lorie: My very politically correct answer is it's always Team Australia first and foremost. Because regardless of where you land in Australia, most travellers will then do domestic connections as well. So if it's Team Australia first and foremost, I'm happy with growing the tourism and travel market for Australia. But then of course, yes, we all compete for airlines and routes. Brisbane, Sydney and Melbourne are close competitors for many of those big carriers and we recognise that airlines have a lot of choice. But we also recognise that it's what drives, I guess we don't get to choose everything, the destination chooses itself, of course. But your point about migration, Melbourne has a very large student market, I think we brought in 140,000 international students this year, that's $7 billion for the annual economy for Victoria, and we have a lot of visiting family and relatives because we are such a multicultural state. So there's different pros and cons to each state, of course, but we certainly all chase the same business and we chase the fleet as well. So I always give my business development team a hard time that Air Canada's not back directly Melbourne– Vancouver yet, but they want to be, they just don't have enough aircraft to cover their growth network. So it's a fine balance between what markets make sense for Victoria and for Melbourne, what markets make sense for the visitors versus the leisure and or the corporates, and then you kind of put that all into the mixing bowl and work out who is your top priority. And of course, I can't divulge who our top priorities are, that would give my secrets away, Darren.

Darren: It does amaze me there aren’t more direct flights to Vancouver. There's so much traffic going between the two cities, so many similarities between Australia and Canada as well, and yet the majority of direct flights only seem to happen in winter for the skiers. So I think many people would love to see that direct flight, whether it is from Sydney or Melbourne, more often.

Lorie: I always like to say we want to grow the pie. We want to grow the pie for all of us. So if there's more people traveling across all the airports, then that's a good thing.

Darren: Now, Lorie, obviously there's a lot with gender equality going on in the Australian workplace at the moment, but as one of the few successful Australian business women running a large business in Australia, have you got tips to young ladies about how they get senior roles in business in this country or any country?

Lorie: Look, I think aviation is a challenging market, so if I just speak about aviation for a minute more broadly, my advice to any young female that I talk to is just put your hand up, put your hand up regularly and constantly for opportunities. And whether they're short term, long term, every time I've ever been asked about a job in my career, I've asked about the job and not the location and I used to say to my husband, the location is secondary, so if the job is great, we're going and we'll work out where we're going to live later. So always put your hand up, of course. But for the aviation sector in particular, we've been working really, really hard on our gender targets. I've made a commitment around 40/40/20, 40% female, 40% male and 20% flexible, and I think that you just have to open the funnel more. So from a recruitment perspective, have all those policies and procedures in place so that you know you're removing unconscious biases, blind CVs so that you're not looking at gender until well and truly down the track. I also say, of course, always choose the most capable fit for the role because you don't want to choose people based on gender but try really hard to make sure you've done your best to have all representation at the table when you're considering people in the future. So I get pretty passionate about policies and procedures to support that. But equally, for young women, I say just get involved and get yourself out there and back yourself and put your hand up. Richard Branson, his advice is famous for it, but he said it to me once directly before, he said we spend so much time worrying about getting the job, just get the job, and then you can worry about how to do the job later.

Darren: That's great advice. And I think your advice for males or females about just take the job and experience new experiences, move around more. I've always found throughout my career, having moved only in Australia, I haven't done what you've done and moved countries, but I've moved right around Australia and it's opened up tremendous opportunities. Yet I've offered other people at various times the ability to move, and they've said no because they didn't want to move. And moving isn't forever [but] it can be. You've obviously decided that Australia is your home for the time being, but it you can always go back if you don't like it.

Lorie: Absolutely, and you know what? Of course change is hard and particularly if you have children in schools and a hundred other things to think about. But kids are so resilient, and I've moved my kids everywhere and I just think that you've just got to try, and if you're uncomfortable, then that's exactly where you should be. Because if it was easy, everybody would be doing it.

Darren: Great advice. And Lorie, just one last question, as an investor in in Melbourne Airport, which also includes Launceston, I suppose we should say that clearly. What kind of returns would you expect an airport would generate? In general, I'm not holding you to specific guidance here, but in general, what kind of return or annual return should an airport provide?

Lorie: I can't answer that safely without being obligated to talk to the regulators. Look, ultimately we're obligated to make sure that we grow in line with our obligations for the lease and then develop those portfolios as we touched on before, about making sure we're diversifying our business. So we have a really critical role to play for our shareholders, for our investors around. And for all of those mums and dads that are invested in those super funds as well, we genuinely at the airport believe that is our mission to deliver to the traveller, but also to make sure that we're a really solid business. So we stare into that very strongly and holistically to make sure it's the best one possible would be my politically correct answer.

Darren: Excellent, so from a Dexus experience, when I look back over time, that in general, these investments in these style of assets should deliver a sort of 9 to 12 [per cent] total return. That's sort of the experience that we've found. So Lorie, look, thanks so much for taking time out of your busy schedule to have a chat with us today. It's been really insightful, and I've really enjoyed the discussion, so thank you very much.

Lorie: Thank you. Thanks so much for having me.

Darren: That brings the episode to a close. As usual, if anyone has any questions, please send them to therealdeal@dexus.com. On our next episode we'll see Deborah Coakley, who runs the funds business here at Dexus, speaking about global markets and investor sentiment. Thank you very much.

Outro: You’ve been listening to The REAL Deal, a podcast for Dexus. Listen to The REAL Deal at dexus.com/therealdeal and follow free on Apple Podcasts, Google Podcasts, Spotify or wherever you listen to podcasts. This podcast is recorded on the lands of the Gadigal people of the Eora nation and the Wurundjeri people of the Kulin nation.