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ECONOMICS Last modified on December 10, 2009

The buying game

What does 2010 hold for airport sales? Simon Morris considers the impact the global recession has had on the market and some potential future deals.

Since the sale of BAA in 1987, airport privatisation has been regarded as the panacea for various issues including the perceived inefficiency of publicly run organisations, government indebtedness and the difficulty of raising capital for investment.

Indeed, many airports across the globe now enjoy various forms of ‘private’ ownership, although the model has yet to catch on in the US where gateways are typically public owned entities run by cities or states.

Following the credit crunch of 2009, many observers expected a slow down in the rate of sales as a result of reduced financing availability, recession and sharply reduced rates of traffic growth affecting airport profitability. And to a large extent they were proved right with a number of deals cancelled or postponed, among them Prague-Ruzyne and the sale of majority stake in Lisbon Airport operator ANA.

However, with the new Czech Government adamantly opposed to any sale and the country’s economy in better shape than many others in Central and Eastern Europe, the fact that the Prague- Ruzyne deal didn’t happen cannot have surprised many.

On the other hand, many were confident at the beginning of 2009 that the Lisbon/ANA process would finally happen despite its complexities. For those of you not familiar with the deal, it involves the sale of all of ANA’s airports (including a number of loss-making entities) and replacing the existing Lisbon Airport with a new €3 billion gateway on the outskirts of the city. An RFP was expected in Spring 2009 but did not appear and few will be holding their breath for an early resolution.

The €1.65 billion sale of London’s Gatwick Airport to Global Infrastructure Partners (GIP) was unequivocally the stand out deal of the year and one which will no doubt be perturbing for the investors that paid inflated prices for smaller and less profitable gateways during the boom years of airport sales.

Gatwick was sold following a Competition Commission review, which found that its continued ownership by BAA was anticompetitive. It also required BAA to dispose of London-Stansted and one of Glasgow or Edinburgh over a period of two years.

As a footnote to the conclusion of the Gatwick process, a tribunal has upheld BAA’s complaint that the UK Competition Commission’s recommendations on the break-up of BAA were invalid on the grounds of “apparent bias”, although it rejected the claim that it was being forced to sell the airports too quickly.

The “apparent bias” was the Competition Commission’s decision to include an advisor to the Greater Manchester Pension Fund – later part of a consortium bidding for Gatwick – on its ruling panel.

Aside from the embarrassment to the Competition Commission, this calls into question the likely timetable of any future sales of BAA airports.

Although in principle the Competition Commission could order a new inquiry, this is thought to be unlikely as it would only lead to continuing uncertainty over the future of BAA and its airports. It also is clear that political and other pressure for the sale of London–Stansted and Glasgow or Edinburgh will continue to be maintained.

As a result, what will happen next is by no means certain, although it seems likely that a compromise solution will be found, perhaps enabling BAA to sell off its airports over a longer time period.

So what does 2010 hold in store for airport sales? Well, the experiences of the past two years has brought a welcome dose of sanity to the market ensuring that there are unlikely to be any ‘crazy’ prices paid for an airport in the next 12 months.

Indeed, the heady days of growing prices fuelled by cash heavy infrastructure funds investing in airport assets – a period epitomised by Ferrovial’s $19.6 billion purchase of BAA in 2006, a premium of close to 40% of its regulatory asset base (RAB) – now seem like a long time ago.

Potential deals could include either Chicago Midway, Louis Armstrong New Orleans International Airport or San Juan–Luis Munoz Marin Airport – only one major US gateway can be privatised under the FAA’s Pilot Privatization Program – Moscow Sheremetyevo and London Stansted.

If any of the US airports are privatised it will represent a major milestone for the industry as the world’s biggest aviation market has so far failed to follow the example of Europe and Asia-Pacific and embrace private ownership.

Although only one “large hub” can initially participate in the FAA’s pilot programme, up to five US airports in total could be privatised and at least one must be a general aviation gateway.

Among other benefits, the US airports privatised under the umbrella of the FAA’s scheme will be exempt from the obligation to repay federal grants; allowed to use net revenues for non-airport purposes; and permitted to use PFCs and federal grants on essentially the same terms as government owners.

New York State’s Stewart Airport became the one and only US airport to be privatised to date when it was sold to the UK’s National Express Group in 2000.

National Express acquired the airport’s 99-year lease for a down payment of $24 million and a promised extra $11 million over the next decade, but the project never worked out as planned and it sold up to the Port Authority of New York and New Jersey (PANYNJ) for $78.5 million in November 2007.

Let’s take a closer look at the potential deals of 2010:

Chicago Midway
Following the collapse of the deal to sell Midway last summer, it now looks as though the City of Chicago is prepared once more to put the gateway back onto the market as part of the privatisation pilot programme.

The city is reportedly looking to submit a proposal to the FAA to restart the process by the February 1 deadline, although Mayor Daley recently announced that he was in “no hurry” to privatise the gateway.

Daley told Chicago’s Sun-Times newspaper that any sale is a “long way off” and cites Gatwick’s lower than anticipated price-tag as an example of the deflated state of the market. He claims Chicago will sell Midway when the time is right.

Louis-Armstrong New Orleans International Airport
The FAA formally accepted New Orleans’ Louis Armstrong application in September, which has enabled New Orleans to begin the process of putting the airport out for bid. The process is being driven by the city’s urgent needs to acquire funds for the continuing reconstruction of the city post Hurricane Katrina.

San Juan–Luis Munoz Marin International Airport
The Puerto Rico gateway became the third US airport to declare an interest in being privatised when it applied to participate in the FAA’s pilot privatisation programme in November 2009.

The move means Puerto Rico Airports Authority can begin soliciting bids from private investors interested in operating the gateway, although the FAA and 65% of the airlines serving San Juan have got to approve any final deal.

Luis Munoz Marin International serves as Puerto Rico’s main international gateway and main connector to the US mainland, handling around 10 million passenger yearly.

The Russian capital’s second busiest airport is reportedly being considered for privatisation once the new terminal (Terminal 3 used exclusively by Aeroflot) comes into full operation this year. A second new terminal (Terminal 2A) is also being built to connect the existing Terminal 2 to Terminal 3 and the railway station.

The likely timescale is for the privatisation process to be started this year with the sale finalised some time in 2011.

Tribhuvan International Airport (Nepal)
In December 2009, the Civil Aviation Authority of Nepal announced that it was investigating the possibility of privatising Kathmandu’s gateway to the world.

The first step – to set up a regulatory system – is currently taking place after which it is planned to put the airport’s operating contract out to tender. No details of the privatisation process are yet available.

Priština International Airport (Kosovo)
The government of Kosovo is hoping that in return for an initial 20-year operating contract private investors will come in and take the airport to the next level.

It wants the concessionaire to transform the gateway by funding the €100 million construction of a new 25,000sqm terminal, state-of-the-art air traffic control facilities, water treatment plant and parking areas.

The government is hoping that the concessionaire will also enhance the airport’s airfield capacity with new apron and additional taxiways. The airport recently renovated and expanded its passenger terminal but is currently handling close to one million passengers per annum and needs additional facilities.

“The government of Kosovo invites experienced airport operators, developers and investors to submit qualifications for the purposes of being short-listed to participate in a competitive tender for the operation and expansion of Priština International Airport,” says a government spokesman. “We envision a 20-year design-build-finance-operate-transfer (DBFOT) concession.”

Gyor-Per Airport (Hungary)
The regional government owners of the current Gyor-Per Airport are seeking external investors to take over the airport and invest in a runway extension that would enable it to appeal to low-cost carriers such as Ryanair and Wizzair. Its current owners feel that western Hungary-located gateway has the potential to attract traffic from neighbouring Slovakia and Austria.

London Stansted plus Edinburgh or Glasgow
Following the successful sale of Gatwick to GIP, it is likely that BAA will put Stansted and one of either Edinburgh or Glasgow on the market, although following the overturning of the Competition Commission’s ruling the timescale of such a move now is anybody’s guess.

The earliest date any of the airports will be sold is probably 2011, with the disposal of Stansted perhaps stretching to the end of 2012.

Glasgow – BAA’s likely choice over Edinburgh – will probably be the most in demand of the three gateways due its competitive position (with Ryanair just down the road at Prestwick).

Stansted presents a harder selling proposition, due to declining traffic, the dominance of Ryanair and the potential capital investment requirements that may emerge from a possible second runway. Nevertheless, Stansted probably represents the only significant growth opportunity in the London region should the planned third runway at Heathrow be scrapped by the Conservative party as promised if they win the next election.

In terms of the long-term future of BAA, it remains distinctly possible that with Stansted and one Scottish airport sold, Ferrovial may decide that it should reduce BAA to Heathrow plc and sell off its other airport assets.

So what lessons have potential airport investors in 2010 and beyond learnt over the past 12 months? In our view, they should now be aware that:

• The worst traffic decline of the post credit crunch period is over and that airports are beginning to grow once more

• Despite the pressures the underlying position of major airports remains sound

• Smaller airports found it more difficult than bigger ones to hold onto airlines during times of economic downturn as carriers tend to retreat to their hubs when the going gets tough

• The era of apparently unconstrained optimism on the part of low-cost airlines appears to have ended, with both Ryanair and easyJet seeming to have opted for a future where they enjoy higher yields in return for lower growth

• Financially, the impact of the global recession is likely to be felt by governments for years to come

Indeed, with the purse strings on public spending possibly tighter than ever before and credit hard to find, in one way or another, private money will become increasingly essential to finance the airport infrastructure of tomorrow.

Taken together these lessons suggest the advent of a ‘new realism’: airports will continue to be attractive as infrastructure investments, but past prices based on perceptions of unconstrained high growth rates supported by ready access to finance are over, with inevitable consequences in terms of more prudent valuations.

And it means that investors are likely to be more selective in their approach with concern over earnings quality rather than immediate traffic growth rates.

There is also likely to be a geographical divide with Asia and South America in particular being seen as areas where growth may continue and government support for new infrastructure remains high. In contrast, Europe and North America are likely to be seen as increasingly mature markets.

There’s never a dull moment in the buying game.

Airport World 2009 - Issue 6

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