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ECONOMICS Last modified on July 18, 2013

Greek odyssey

Hans-Dieter Janecke talks us through the latest developments regarding the government’s plans to privatise Greece’s regional airports.

With the notable exception of Athens, today all Greek airports are operated by the government owned Hellenic Civil Aviation Authority (HCAA).

Athens is different because when the government looked to build a new gateway for the Greek capital about 20 years ago, it was the private sector that stepped forward and made it happen.

Indeed, a consortium led by German construction group Hochtief planned, financed and built the current Athens International Airport, which opened for business in 2001.

And Hochtief is still the major shareholder of operator, Athens International Airport (AIA) SA, although this will change later this year when a Canadian pension manager’s €1.1 billion acquisition of Hochief AirPort is rubber stamped.

Airport charges

Greece devised its existing airport fees and charging system during the development and construction process of the new Athens International Airport.

The so-called Airport Development Fee (ADF) obliges airlines at all Greek airports – not only Athens – to pay a flat fee, which today amounts to €12 for passengers with final destinations in EU countries as well as Norway, Iceland, Liechtenstein and Switzerland and €22 for passengers with other final destinations.

Funds generated from the ADF are split between HCAA and the airports – 25% to HCAA in the case of Athens, and 50% in the case of regional airports.

Apart from the ADF, aeronautical charges at the regional airports are limited to landing and parking fees and even these have not been charged by HCAA for the last couple of summer seasons in a bid to promote tourism to aid Greece’s flagging economy.

There are no charges for other services like the use of infrastructure in passenger terminals or the rent of check-in facilities. Also, there is no separate charge for security measures.

Diversity of airports

HCAA’s airport portfolio includes airports, which are extremely diverse in terms of size and traffic structures. They ranges from major gateways like Heraklion International Airport in Crete, handling more than five million passengers per annum, to many small airports welcoming less than 100,000 passengers.

Traffic at many of the regional airports is also highly touristic – in many cases 60-80% of the annual traffic occurs in the four month period from June to September – and, as such, play a crucial role in tourism development across Greece.

The situation, however, means that many of these airports require high capacity in summer, but remain largely unused in winter. Consequently, airport operators have to adjust their resources to this pattern.

It is not an ideal scenario, but for residents of many of Greece’s very small islands, airports remain a crucial infrastructure, which allows fast transportation to the mainland urban centres of Athens, Thessaloniki and other major cities.

Indeed, in some cases the only alternative to air transportation is a ferry, which for some of the more remote islands can take upwards of eight hours.

Their social, economic and political importance, however, ensures that the government is duty bound to keep them operational even if they are not profitable.

Air routes to these islands are often operated under the PSO (Public Service Obligation) regime, which is applicable under EU legislation and which allows subsidies to the airlines operating these routes.

Heraklion International Airport

Heraklion is capacity-constrained and the plan is to develop a new airport at the Hellenic Air Force base near Kastelli as a replacement for the existing gateway.

The new airport is, however, not part of the regional airports privatisation process and will be dealt with in a separate tender.

Once completed, Crete’s existing Heraklion International Airport – also known as Nikos Kazantzakis Airport– will be closed.

Most probably this project will be launched under a BOT structure involving a complex process of financing, both for the construction of the airport and of the necessary new access roads.

The fact that it will be built on a greenfield site and requires significant investment distinguishes it from Greece’s other regional airports projects.

Potential investors will include major construction companies, not only airport operators.

Privatisation process

After an extensive preparation period, the regional airports privatisation process commenced in April 2013 with the publication of a request for Expressions of Interest in Greece’s regional gateways.

The project is being managed by the Hellenic Republic Asset Development Fund, supported by a team of advisors that include Citibank, Eurobank, Norton Rose, YLP, D&V Law, Lufthansa Consulting and Doxiadis Associates.

In addition to the Greek government, the move is also supported by the Troika consisting of the European Commission, the European Central Bank and the International Monetary Fund.

All believe that it and a wider privatisation programme that includes transport and energy networks, state corporations, and real estate assets, is the best way to generate fiscal revenues that can help reduce Greece’s debt burden.

The details

Around 15 to 20 of the country’s smallest regional airports will not be included in the transaction, due to their specific PSO function. The bigger regional airports will, however, be privatised in two clusters:

The first cluster includes the airports of the Ionian Sea and the mainland, which handled about 10 million passengers in 2012.

The group includes the airports of Thessaloniki, Chania, Kerkira (Corfu), Zakynthos, Kefalonia, Aktion and Kavala. Potentially three additional airports may be added to this group: Alexandroupolis, Araxos and Kalamata.

The second cluster includes airports in the Dodecanese, Cyclades and Aegean, that between them, accommodated a total of nine million passengers in 2012.

These airports include Rhodes, Kos, Santorini, Mykonos, Mytilene, Samos and Skiathos. Possible additions to the second cluster are Chios, Karpathos and Limnos, as well as Nea Anchialos.

The final composition of the two clusters will be defined in the request for proposals, which are likely to be issued this summer.

The concession period for the two clusters will be at least 30 years and the fee will be a combination of an upfront fee, and recurring payments.

Legally, the deals will be ‘service concessions’, but the winning bidders will be obliged to upgrade and maintain their respective airport infrastructure to ensure that they are equipped to meet future demand and the customer service levels required by the government.

It is estimated that the winning bidders in each cluster will have to invest between €200 and €220 million on upgrading their airports in the first three years of the concessions.

As mentioned above, the very small regional airports are not included in the above two clusters. They will, however, be transferred to an as-yet-to-be-established public airport management company in due course.

Restructure and fees

In order to implement the concession of the two airport clusters and the new public airport management company, the Greek government will restructure the Hellenic Civil Aviation Authority (HCAA) so that its responsibilities no longer include operating airports.

As a result, the HCAA will focus on its regulatory and supervisory role in civil aviation. This will include the responsibility for safety, security and economic regulation for airlines, airports and air navigation service providers. Furthermore, another HCAA branch will continue to provide air navigation services.

In addition, the government has stated its intention to modify existing legislation on airport charges to lessen the dependence on ADF revenue and allow for the introduction of a more diversified system.

The changes are designed to ensure that the new concessionaires will be profitable and are in a better position to compete with their peers in the Mediterranean region – the latter point being viewed as critical to the success of the Greek tourism industry.

A cap on regulated charges based upon a benchmarking mechanism is one way the government plans to improve the charging system.

And, as an incentive to upgrade the airports, any increase in airport fees is likely to be tied to the completion of any short-term investment programmes.

So what happens next? The overall tender process for the two regional airports clusters consists of two phases – a prequalification phase with clearly defined criteria and the second phase, in which prequalified bidders receive the request for proposals and may prepare binding offers.

If all goes to plan, Greece’s regional airports could be in private hands by this time next year.

About the author

Hans-Dieter Janecke is a managing consultant at Lufthansa Consulting.

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