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OTHER ARTICLES Last modified on March 19, 2015

The buying game

Mark Weighell and Simon Morris provide their thoughts on some of the key airport transactions of 2014 and speculate what the year ahead might hold for sales and acquisitions.

Investing in airports appears to be back in fashion. Multiples are rising, deals continue to conclude successfully, and the global economy continues to trend upwards. Everything’s looking rosy. 

It feels like 2007 again, right? Right?

Speaking for ICF Aviation, our transaction advisory business is busier than it has been for more than five years. Expectations for 2015 are high. The drought of 2009-2012 seems to be behind us.

But, as ever, it’s not that simple. It is undeniable that investments in airports are picking up – and that should be viewed positively – but the road ahead looks rather bumpy. 

The geopolitical situation in the Middle East and CIS remains tense and uncertain; the BRICs are losing their former lustre; and the European economy is stagnant and fragile. More about the future later, first, lets look at some of the highlights of last year.


Hit and misses of 2014

There were a good number of airport transactions successfully completed during the year, with one of the big success stories being the sale of a 50% stake in Toulouse–Blagnac Airport to the Chinese-led Symbiose Consortium for a reported €308 million (16 times its EBITDA). 

The consortium was widely reported as being solely a Chinese entity but actually includes the Montréal-based construction firm SNC-Lavalin. Nevertheless, the sale caused some raised eyebrows among industry watchers – and some unease among the French establishment – as it had been widely expected that the asset would end up with either VINCI or ADP, both bidding and both (possibly crucially) French.

Elsewhere, the contract to build a new terminal building at New York’s LaGuardia Airport was slated to be awarded during the summer. Then the decision slipped to early autumn, then the end of the year.
A result is still awaited. 

Given recent history, and governor Cuomo’s recent announcement of a new rail line to the airport, which would probably change the economics of the deal, a swift conclusion looks unlikely at best.

The feeling remains that selecting a consortium to replace LaGuardia’s outdated Central Terminal Building might (possibly, hopefully) trigger a wave of privatisations in the United States. 

In our view, the capital investment this could release would renew and reinvigorate a slew of outdated and outmoded assets. Indeed, it could be transformational: the benefits to strained state and city finances are obvious; the benefits to the travelling public – though enhanced service levels and a more enjoyable travelling experience – perhaps less so, but in our opinion are equally important.

Conversely, abandoning the deal, and leaving the bidding parties with substantial costs, could send a powerful message that it is simply too difficult to invest in a US airport. 

Investors may, for example, view potential issues such as political interference, sceptical and intransigent airlines and labour unions and an unappealing regulatory framework as too big a risk to undertake, especially given the expected upsurge in attractive investment alternatives elsewhere in the world. 

As you might imagine, our fingers remain firmly crossed for a successful closure of the deal.

Other notable successes in 2014 include the keep-it-in-the-family sales of Aberdeen, Glasgow and Southampton from Heathrow Holdings to Ferrovial Aeropuertos. 

Similarly, Macquarie’s Bristol Airport stake went to the airport’s co-owner, Ontario Teachers’ Pension Plan, while Fraport acquired 14 regional airports in Greece, although it won’t take over their operation until later this year.

Elsewhere, F2i sold a 49% stake in its airport holding to Ardian and Credit Agricole, and rumours persist that the new infusion of capital will prompt a renewed focus from F2i to capture a further stake in Milan airport operator SEA, currently majority owned by the City of Milan. We will wait and see.

Multiples in 2014 continued their upward trend. While still below the values reached during 2005 and 2007 – BAA and then HOCHTIEF must still be wondering how they ended up paying that much for Budapest – the transactions for which we have data had an average EV/EBITDA of 18x, well above the nadir of 11x following the 2008 economic crisis.

Creeping into January 2015, the concession to operate Billy Bishop Toronto City Airport’s passenger terminal was sold to a Canadian consortium led by InstarAGF Asset Management. 

Not an investment for the faint-hearted, the airport is dependent on Porter, a regional turboprop carrier that was the previous owner of the terminal building. Porter accounts for 75% of current traffic and the only other significant operator – Air Canada – has, at best, an ambivalent attitude to the airport.

the buying game image2

What next in 2015?

In the UK, all eyes are on the Airports Commission’s findings on which of London’s airports should be permitted to build a new runway. After being established just two short years ago, the recommendation will be delivered to the UK government during the summer, in the wake of an election in May. 

While the new government would not be bound by the recommendation, the Commission’s independent report should, we hope, provide sufficient political ‘cover’ to finally address the critical shortage of capacity in the south east of England.

Whether the Commission recommends Heathrow or Gatwick as the recipient of a new runway, long-standing uncertainties would be resolved and it seems plausible that Global Infrastructure Partners (GIP) will look to exit one (or both) of their Gatwick and London City airport investments. 

GIP has had part-ownership of the latter since 2005, and currently enjoys a 75% share. The airport is awaiting planning permission for an additional pier and adjacent hotel, which should add substantial value to the asset.

Buoyed by the success of Toulouse–Blagnac, the part-privatisation of either or both of Nice Côte d’Azur or Lyon–Saint Exupéry airports is a possibility. The relinquishment of the stake in Toulouse to a foreign consortium should boost interest from overseas investors.

Athens was a prime contender for the sale of a further tranche of the government’s holdings or for a concession extension. However, the new government is likely to be firmly opposed to a sale.

The proposed sale of Kansai Airport near Osaka, Japan (pictured on page 20), has attracted around 20 interested parties. 

However, the bid requires significant Japanese equity and we believe that potential equity providers are wary of aspects of the deal, and are reluctant to engage seriously with the transaction. 

As a result, we believe that the outlined deadlines will probably be extended.

Elsewhere, transaction activity in India is expected with Chennai International Airport looking the standout candidate. Manila–Ninoy Aquino International Airport is another strong contender, as are the larger regional airports in The Philippines. 

In Saudi Arabia, a Build-Operate-Transfer concession for a new airport in Taif is expected to be launched later in the year, continuing the privatisation programme embraced by the Saudi authorities.

While in the Caribbean, St Lucia and Kingston, Jamaica, are seeking airport investment. Heading south to Brazil, the federal government is expected to start a third round of airport privatisations later this year, with Curitiba, Recife and Cuiabá in the frame.   

So, despite the economic and political travails in a number of parts of the world – not least the implications of the Greek election results, and ongoing upheaval in the Middle East – we think the airport world once again looks an interesting and promising place to invest. 

If you’re looking at the sector we wish you the best of luck, although you’re unlikely to need it.

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