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NEWS Last modified on December 13, 2011

Making a good return

Oliver Clark and Dominic Welling report from the first Invest & Manage conference.
Oliver Clark and Dominic Welling report from the first Invest & Manage conference.

As a central part of a national transport system, airports were once seen as a pretty safe bet for investors that bore the hallmarks of a good return.

But today’s market is far more complex and challenging than ever before and choosing the right airports to invest in, making them profitable and, for airlines, deciding on the best airports to operate to, were central themes of the first ‘Invest & Manage’ conference at Chelsea’s Stamford Bridge football stadium.

A mixture of volatile traffic trends, increasing aviation taxation, the growth of low-cost carriers (LCCs) and a “worsening debt finance market”, is making for a challenging environment to invest in UK airports, warned Michael McGhee, a partner at Global Infrastructure Partners (GIP) in his opening address to delegates.

McGhee outlined how the investment fund had successfully refinanced following the acquisition of Gatwick Airport in December 2009, raising £600 million in bonds and £235 million in bank debt, but also revealed market conditions were difficult with banks unwilling to underwrite big debt commitments.

“Banks operate with a herd mentality, their current strategy is deleveraging, shrinking their balance sheets to meet capital ratio,” he said.

McGhee also stated that while the airport investor “wants to borrow for long periods of time” the longest most banks are prepared to talk about is five years.

The rise in UK’s ADP and the “optimal” use of aircraft by LCCs had driven traffic away from the UK, and is contributing to volatile traffic trends nationwide, warned McGhee.

Meanwhile, a 2002 report compiled by JP Morgan in which growth forecasts for Heathrow and Gatwick for 2010 were wide of the mark by some 20% and 19%, illustrated the perils of predicting future growth.

But these challenges have not diminished GIP’s appetite to invest and the fund was now “in the process of raising a second fund to invest in the airport sector” he said.

For Abertis, the operator of airports and terminals in Europe, North and South America, two central tenets of its investment philosophy have been to generate good returns for shareholders, and raise customer service standards, said Paul Kehoe, the CEO of Birmingham Airport.

An example of the former comes from his own experience at Birmingham, which he described as a “complete mess” before privatisation, but which is now running at a profit, has seen full service carrier growth of 12-15% per annum and is making 55% of its income from non-aeronautical sources.

Also speaking at ‘Invest and Manage’, Rajeev Jain, CEO of Mumbai International Airports Limited (MIAL), outlined the ambitious investment plans of GVK Holdings.

GVK Holdings, which already has a large presence in India, investing in sectors from coal, oil and gas to hotels and airports, unveiled its plans to invest heavily in more airports in the country as well as expand its infrastructure side globally.

Not only does GVK have a controlling interest in Mumbai’s Chhatrapati Shivaji International Airport and Bengaluru International Airport, it has also “been offered the first refusal” to operate the proposed second airport in Mumbai, Navi Mumbai International Airport (NMIA), when it is completed.

However, according to Jain, the company’s plans do not stop in India, and it also is weighing up its options to invest in two new greenfield airports in Indonesia – the New North Bali Airport and Yogyakarta Airport – for which the company has already been given exclusive rights.

Furthermore Jain talked of “an exciting opportunity” in Goa, where plans are being put together to build a new 2,200 acre second international airport in Mopa, 40km from the current international gateway.

For this project, Jain said the masterplan should be completed by October 2012, while the tender process should start the following December.

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