One big risk that threatens Sydney Airport Holdings Pty Ltd’s share price rally

It feels like Sydney Airport Holdings Pty Ltd (ASX: SYD) can do no wrong. The stock has been a hot favourite among income investors over the past few years and growth investors looking for exposure to the Chinese tourism boom.

However, its share price could come under pressure later this year and it won’t be because of rising bond yields.

This isn’t to say that higher bond yields won’t be a drag on the stock, which is considered a bond proxy like other infrastructure stocks such as Transurban Group (ASX: TCL) and APA Group (ASX: APA).

When yields rise, as they are starting to now, the price of such securities drop as yield and price move in opposite directions.

But what may be a bigger threat to Sydney Airport is the Productivity Commission as it looks to kick off an enquiry into major airports later this year.

This will be the Commission’s first look into the sector since 2011 and the risk of a negative outcome is higher this time around, according to Morgans.

“In the past the PC [Productivity Commission] reports have been relatively benign. However, there is a risk that SYD could suffer fall-out from the disputes that Melbourne and Brisbane airports have had with airlines over the pricing to support the development of new runways,” said the broker.

It’s a little too early to be worried about the PC’s impact on Sydney Airport as the terms of reference for the enquiry are yet to be set.

There is also potential upside from this exercise with the Australian Consumer and Competition Commission (ACCC) supporting a review of regulatory restrictions on the airport. These restrictions include Sydney Airport’s infamous flight curfews that were imposed in 1995 and the cap on aircraft movement.

But a lot has changed since and modern aircraft are quieter. An easing or lifting of the curfew and cap will be a positive for the stock.

“Relaxation of operating restrictions is an upside risk for investors as SYD could sell additional slots into the valuable international market,” added Morgans.

“The Report also suggested the ACCC may consider regional price rises to address disparity with domestic and international pricing (prices have not increased since 2001 as they require ACCC approval and escalation is capped at CPI).”

It’s not only Sydney Airport that will benefit from such a move. Airlines like Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) will also be smiling.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. The Motley Fool Australia has recommended Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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