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ECONOMICS Last modified on September 27, 2010

The stakes are high

David Bentley takes a closer look at airport ownership and the different and ever-changing business models.

As Bob Dylan intoned, the times they are a-changing and that is certainly the case in the arcane world of airport ownership and investment.

Where real estate companies and surface transport operators like bus and rail companies were the willing investors a decade or so ago, they have largely moved on now, to be replaced by pension funds, hedge funds, private equity, transport sector-designated investment funds and sovereign wealth funds.

The problem is, does the investor have the capability to manage the complex business of running an airport? For every instance where that has been the case (and there are several in Europe, for example), there are others (in Latin America, for instance), where legitimate questions continue to be asked about ownership and management models that can cost the airlines more than many routes can sustain.

If we look at some recent airport sales and lease transactions (and there aren’t many) there are some participants that were simply not on the radar a couple of years ago. The €100 million, 20-year concession to operate Kosovo’s Pristina Airport was won by a consortium of Turkey’s Limak Investments, which is involved in a similar deal – with India’s GMR Infrastructure and Malaysia Airports Holdings Berhad – at Istanbul’s Sabiha Gökçen Airport, and Lyon Airport, which is not known as a foreign investor.

London Gatwick Airport was ‘snapped up’ from BAA in December 2009 by the Global Infrastructure Partner’s $5.6 billion fund, managed by Credit Suisse and General Electric; and then subsequently, a large part of the equity was offered out to two pension funds, one from South Korea and one from California, and to Abu Dhabi’s sovereign wealth fund. Eyebrows were raised in 2006 when a private Spanish company, Ferrovial, led a consortium that took over the UK’s BAA plc but no-one could then have imagined that a significant part of that empire would only three years later be managed by such funds.

Pension funds have long been keen on infrastructure assets with guaranteed longevity and returns such as airports can (usually) provide and Canada has no less than four of them, all actively scrutinising the business for investment opportunities. While they have grown in number, there has been some stagnation amongst several of the infrastructure companies, with the exception of India.

France’s Vinci Concessions, for instance, began to scale down its international activities (Mexico, China, and Africa) in the airport sector over five years ago, although it has more recently taken up more management contracts within France itself.

Abertis Infraestructuras, the Spanish conglomerate that operates motorway toll roads and telecommunications infrastructure might be tempted to sell off its non-core airports division (which accounts for only 6% of revenues) as a result of a potential buy out involving one of the world’s leading private equity firms.

It has invested heavily in airports in Europe and the Americas; 31 in nine countries. Similarly MAp Airports (previously Macquarie Airports) has reduced its airport ownership to a core of Sydney, Brussels and Copenhagen airports, having divested interests in Aeroporti di Roma, Birmingham and Bristol (both UK) airports and Japan Air Terminal. As this article is written, it is disposing of a minority holding in Mexican airport operator ASUR – at a loss – because it “was unable to bring its active management model to bear”, a frequently heard complaint, and not only from MAp.

Some of the earlier investors do keep hanging on in there. Notable amongst them is New Zealand’s Infratil, which was one of the world’s first infrastructure funds and which entered into airport investment in 1998 at Wellington, followed by Glasgow Prestwick (UK), Manston (UK) and Lübeck (Germany) airports.

It exited Lübeck in 2009 after the airport failed to reach its targets (is that something we will see more of?) but has persevered at the two British airports, despite many setbacks. Infratil has always said it is in airport management “for the long-haul” and that resolve has been sorely tested. In fact, you get the feeling that just as the ravens leaving the Tower of London is supposed to signify the fall of the Kingdom, Infratil quitting the airport business would somehow signify the end of that enterprise entirely.

Earlier, I mentioned Indian infrastructure companies. The subcontinent is one part of the world where such companies are still at the forefront of airport investment and ownership, and their numbers are growing.

A recently published management report* identifies almost 300 current or aspiring investors globally in the airports business – it seems never to lose its attraction even if the number of deals going through presently is less than at any time in the last 15 years. India alone hosts 21 of these companies. Most of them describe themselves as ‘infrastructure companies’ although they also include real estate concerns, construction firms, private equity and venture capital funds.

Almost all are actively pitching for the myriad of opportunities arising from the potential for greenfield airports, modernisation of ‘non-Metro’ airports, cargo-only airports and attendant ‘airport cities’ within India, most of which will be undertaken as public-private-partnership (PPP) schemes.

Some of them have made it clear their ambitions do not end at the national boundary line. The GMR and GVK infrastructure companies are already involved in or seeking global opportunities, as is Tata. Latterly they have been joined by Airports Authority of India, a huge government department intended eventually for privatisation itself (though it is anyone’s guess when) and which, in August, announced that it wanted to construct airports overseas.

Civil Aviation Minister, Praful Patel, urged it to “look at every small opportunity to maximise revenue generation. Change your mindset, without which we are not going to transform into the future. Look for every single opportunity. Bid for airports outside the country. If you have expertise, utilise it and leave a footprint.”

The more exotic new investors globally – actual or tentative – include a Malaysian plantation conglomerate with no experience in the airport sector; a Philippine brewer; a New Zealand charitable trust; a US insurance company; a Chinese industrial group; a Bulgarian government company; a Mexican luxury resort operator; a Saudi healthcare company; a US food and beverage retailer and one of the world’s largest port operation and telecommunications firms.

Only two years ago a bidder for a slug of Belgium’s ‘low-cost’ Charleroi Airport was the country’s leading coffee shop operator.

Another interesting development has been the growth in the number of airlines actively investing in airports. In some parts of the world this is possible, in others it is not. At least ten cases are known of, in Europe, the Middle East and Asia (also in the US but airlines building terminals is an established part of the culture there) and including, surprisingly perhaps, Ryanair.

The ownership and privatisation models employed throughout the world vary enormously and are often dependent on the degree of control the sovereign authority wishes to retain.
In Latin America, for example, most of the privatisations to date have been by concession, for a maximum period of 35 years, although the three main operators in Mexico subsequently moved from concession to public listing by IPO on various stock exchanges. In that part of the world concerns have grown about privatised monopolies and ‘double dipping’ into the till by governments that want a share of airport charges as well as concession fees.

In Europe the outright or partial sale, or IPO, have been the preferred methods (though some governments still prefer only to offer partial IPOs) and the IPO has been popular for the major transactions in Asia as well, apart from Australia where most of the airports were privatised through concession agreements.

PPPs have grown in popularity, and have a history. I mentioned India earlier; most of the many forthcoming greenfield airports there will be developed in this matter. At the same time, it should not be forgotten that the first clearly identifiable ‘private’ airport construction anywhere – at Ireland’s Waterford Airport from 1979 to 1981 – was a PPP.

And Waterford was the very first airport to host a scheduled flight by Ryanair – in July 1985. For the record it was a 15-seat Embraer Bandeirante to London Gatwick. The load factor
isn’t recorded.

The private ownership model is not yet fully accepted, of course, especially in North America where state support from the Federal Aviation Authority (FAA) (paid for by ticket taxes), allied with tax-free public bonds, remain the most popular funding method in the US where airports are still largely regarded as being in ‘common ownership’ like bus and rail stations.

Despite the recession-induced dearth of public financing (the FAA’s Reauthorisation Bill – “to authorise appropriations for the FAA for fiscal years 2010 through 2012, to improve aviation safety and capacity, to provide stable funding for the national aviation system, and for other purposes” – remains unsigned), despite 15 airports queuing up for a couple of slots on the privatisation pilot programme, and despite a shining example of a privately built low-cost airport wholly in tune with the times (Branson, Missouri), most US politicians still consider the ‘private airline public airport’ scenario to be the one that ‘works’ for them.

Interestingly, one alternative method of airport financing that the US has been able to export, rather than import, is bond financing, having dealt with its own local difficulty – the Alternative Minimum Tax that was hampering airport investment (a two-year exemption was granted last year). Towards the end of 2009 there was a plethora of bond issuing activity at such diverse locations as Prague (where the privatisation of Ruzyne Airport is suspended, possibly indefinitely; London (BAA; Madrid (Ferrovial; New Zealand; India and China.

Neither have any of the privatisation models yet caught on in Canada, where the ‘not-for-profit ‘ model has been employed at the major airports (Toronto, Montréal, Vancouver etc) since Transport Canada transferred operational responsibility to corporatised entities run by local authorities, in 1994. The method is widely regarded there as being both successful and appropriate, although many airlines may not agree as charges at some airports are amongst the highest in the world.

Intriguingly, the 1994 Federal Government reorganisation led to one of the rail companies that Transport Canada had responsibility for – CN Rail – being privatised by IPO, but unlike the US, which introduced its airport privatisation pilot programme in 1996, Canada has not considered such an option itself.

There is a great deal of academic debate about the value and efficacy of privatisation. The well known economist, Joseph Stiglitz, argues that this level of ‘semi-privatisation’ of the variety found in Canada usually offers the best option – with local stakeholders (perhaps even airlines) determining the future direction of the facility while it is free to use its profits to the betterment of the region as a whole, a judgement best left to local representatives of the city.

He goes on to say that there has been too much polarisation around government ownership versus outright privatisation and that there are ‘halfway houses’ and other alternatives that merit investigation.

Right now there is a hiatus in privatisation activity. When that activity picks up again (probably with an IPO/strategic investor deal at Korea’s Incheon International Airport later this year), the debate will resurface.

Airport World 2010 - Issue 4

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