Airport privatisation - no stopping the juggernaut January 1999
The financial and economic crises in various parts of the world, triggered more than a year ago by the ailing Tiger economies in Asia, appear to have had little effect on the airport privatisation juggernaut. In fact, rather the opposite seems to be occurring — economic crises appear to be speeding up the airport privatisation process, and 1999 looks set to be a busy year for the industry.
The drive to airport privatisation is now global. For example, the second round of the Australian sell–off has taken the total influx of money into the government coffers beyond A$4bn (US$2.6bn), with Sydney yet to come. South Africa made its first foray into the private sector last spring and Argentina finally managed to sell off 35 airports, although many consider the success of the winning bidders a double–edged sword.
Meanwhile, selection of a preferred bidder for the first group of Mexican airports is imminent, while in Europe the contract for the new Berlin airport was due to be signed in December 1998. In 1999, more Mexican airports will come onto the market, Portugal is expected to privatise 15 airports, while further opportunities are likely in Spain and Italy.
In the US, the FAA pilot scheme is getting slowly off the ground, but the real money there appears to be in managing and operating terminal facilities at the major gateway airports. Both Airport Group International (AGI) and the UKs BAA have established a bridgehead and can be expected to make further decisive moves in that country in the near future.
Overall, therefore, the prospects for continuing airport privatisation look assured. Individual stock–markets have recovered some of the losses sustained at the height of the economic crises, and the reflationary package in Japan and IMF–led recovery programme in Brazil have been designed to re–stimulate both market areas — although worries persist over the muddled situation in Russia. But if the upturn materialises, IPOs, rather than trade sales may become the favourite way of attracting new money into airports.
The economic crisis, which has now lasted for more than one year, is doubtless driving privatisation moves in the Asia/Pacific region. Thailand is planning to privatise the Thai Airports Authority (AAT), which is responsible for Bangkoks Don Muang International and the new Bangkok International being built at Nong Ngu Hao, as well as Chiang Mai, Hat Yai and Phuket, the other three airports with international traffic. Present plans call for 75% of the equity in the three provincial airports to be sold to the private sector for a period of 20 years. A study by Thai Investment Securities has suggested that privatisation of the three airports could raise at least Baht10bn ($215m).
The details for the main Bangkok gateways are unclear, but the Thai government was expected to draw up a shortlist of candidates by the end of November 1998. The high traffic levels at the Thai airports, swelled by a considerable tourist traffic, make the sale attractive to possible investors, and it is known that the UKs BAA, Amsterdam Airport Schiphol and Aéroports de Paris are among those determined to take up this opportunity.
The Korean government will privatise the Korea Airport Construction Authority (KACA) next year as a first step towards the private operation of Seouls new Inchon International Airport, currently under construction. A total of Won 2.5trillion ($1.8bn) of capital is intended to be sold to private investors in several tranches.
Other Asian countries affected by the crisis could well follow suit, with perhaps Japan top of the list for potential investors, and China also in the frame. One of the hardest hit by the crisis is Indonesia. As part of the structural reform package agreed with the International Monetary Fund (IMF), the Indonesian government has appointed Warburg Dillon Read to advise on the privatisation of airport operator Angkasa Pura II.
With tourist traffic having fallen sharply as a result of forest fires, continuing political unrest, outbreak of dengue fever and a spate of aircraft accidents, it is possible that Angkasa Pura II could be picked up cheaply, although it is difficult to see one of the major European airport operators being prepared to take the risk in such a volatile country as Indonesia.
Europe on track
Among a 10–point strategic plan to define the future role of German airports, privatisation remains a major objective. After the controversial $350m sale by the government of North Rhine–Westphalia of its 50% stake in Düsseldorf, with powerful local company Hochtief ousting the preferred bidder Airport Group International (AGI), signatures were due to be put to the contract for the new Berlin Brandenburg airport sometime in December 1998.
Hochtief again proved the victor, leaving a trail of formidable bidders in its wake. They dropped out one by one — BAA, Copenhagen Airport, Amsterdam Schiphol and AGI — leaving a straight fight between the Hochtief consortium, which includes Frankfurt Airport (FAG), and another German–dominated consortium led by IVG.
The amount paid by Hochtief for the 74.9% stake on offer has not been disclosed. Now that the Berlin deal has been concluded, the federal government is keen to get on with selling the rest of its holdings in Hamburg, Cologne/Bonn, Frankfurt and Munich.
In the UK, a private/public sector partnership to provide the investment needs of London Luton Airport was signed in September. Barclays Investment, together with AGI and Bechtel Enterprises paid £100m ($165m) for a 30–year concession to operate and develop the airport. Ownership will remain with the local council. The money will be used for new passenger facilities to eventually increase the airports capacity to 10m passengers.
Portugal is making plans to privatise its airport system next year, while neighbouring Spain is also seeking new initiatives. The Czech government will be using the spa town of Karlovy Vary as the test case for its proposed airport privatisation programme which, if successful, will be used on two other small regional airports at Brno and Ostrava.
Elsewhere in Europe, UK property company TBI has bought a 90% stake in Skvasta Airport in southern Sweden for around $33m. TBI already owns Cardiff and Belfast International in the UK and Sanford International (Orlando) in Florida.
The second round of airport privatisation in Australia attracted few of the heavyweights that pursued Brisbane, Perth and Melbourne, yet it still proved a similarly successful enterprise for the Australian government, if not quite on the scale of the first. The 14 airports netted the government another A$730m (US$500m), bringing the total raised to date to close on A$4.1bn (US$2.7bn).
A consortium led by the UKs Manchester Airport took the lions share, paying nearly A$470m for Adelaide, Parafield and Coolangatta airports. Canberra went to the local Capital Airports Group for A$66.5m, while Australia Pacific Airports Corporation (APAC), which won Melbourne in the first round, paid A$17.3m for Launceston. Hobart International Airport Corporation, which includes US Airport Group International (AGI), bought Hobart for A$35.9m, and AGI is also involved in Airport Development Group (ADG), which paid AS$110m for Darwin, Tennant Creek and Alice Springs. Mt Isa, Townsville, Jandakot and Moorabbin were sold to property investors for A$31m and Brisbanes Archerfield went for A$3.1m.
The third and final round will include the airports in the Sydney basin — Kingsford Smith, three general aviation fields and the yet–to–be–built new Sydney airport at Badgerys Creek. Given the successes achieved in rounds one and two, even with unprofitable airports, analysts expectations that the Sydney airports will yield in excess of A$3bn would appear to be highly realistic.
There is also growing support for airport privatisation across the Tasman Sea in New Zealand, although the government is taking a more softly softly approach. A Merrill Lynch study into the Auckland airport company concluded that the government should relinquish its 51% stake in the gateway airport to the private sector, if it is to avoid the risks inherent in changes to the airline industry and expansion into non–core business necessary to finance the investment for future growth.
The value of the airport company of around NZ$1bn (US$500m) would make its sale an attractive proposition and the government has opted for a flotation on the stock–market, rather than a direct sale or lease to a strategic investor. While this is an attempt to keep ownership within the country, it has not ruled out offering shares to foreign investors. It has been predicted that a successful flotation could raise up to NZ$2.5bn (US$1.25bn).
The New Zealand government has also sold its two–thirds stake in Wellington Airport on the southern tip of North Island, but the reluctance by the other owner, the Wellington city council, to sell its shares illustrates the schism that is still prevalent on the privatisation issue. While both owners had initially endorsed the sale, Wellington decided to hold on to its share, with the result that one of the key bidders, the UKs BAA, pulled out.
In the end, the government share was sold to New Zealand company Infratil for just under NZ$100m (US$50m). The airport was estimated to be worth some NZ$200m (US$100m). New Zealands third major airport, Christchurch on South Island, could also be partially privatised, and the government and the local council are considering selling their 25% and 8% respective holdings.
Strategic move in South Africa ...
The Airports Company South Africa (ACSA) selected an international consortium led by Aeroporti di Roma as its strategic partner in May. Having won out over such formidable competitors as BAA, Amsterdam Schiphol and Frankfurt Airport/Aéroports de Montreal, this success marks Aeroporti di Romas first decisive move into airport management outside Italy.
The consortium, which also includes AND AMRO Ventures, Cofiri, LDV Holding, Robert Fleming and Company, and Simest, paid R820m ($165m) for a 20% stake, with the option to acquire another 10% within six years. ACSA operates nine major airports in South Africa, including the three principal and profitable international facilities at Johannesburg, Durban and Cape Town. The others are Bloemfontein, East London, George, Kimberley, Port Elizabeth and Upington.
... but rest of continent some way behind
In East Africa, the formal handing over of Kilimanjaro Airport to a private company in September 1998 ended four years of hard negotiations for the increasingly shabby tourist facility. The Kilimanjaro Airports Development Company (KADCO), owned by Mott McDonald and Inter Consult of Tanzania, with the government retaining a minor holding, has won a 25–year concession and believes it can make the airport — which is the main gateway to the Serengeti and Ngorongoro national parks — a profitable enterprise once it has been upgraded. Offshore, the Republic of Malagasy has called in consultants to take a serious look at the privatisation of all of Madagascars airports.
But these are mere blips on the African landscape and should not be seen as a major shift. Going into 1999 African governments are still fiercely determined to hang on to control of their airports (and airlines), in many cases watching what are their main links to the outside world deteriorate for lack of investment. The attitude of African governments will change, but this is unlikely to be in the short–term.
What is more significant, however, is the lead taken by Oman to give the private sector a greater role. Other countries in the Middle East may be forced to follow suit, as the need to reduce reliance on oil becomes more pressing. Oman is planning to fully privatise Muscats Seeb International Airport within nine months, with Salalah next on the list.
Full steam ahead in Latin America
Another success for Italy was achieved in Argentina, with Milan airport company Società Esercizi Aeroportuali (SEA) coming out on top in the fierce battle for a 30–year concession for the management and operation of a total of 33 airports. The Aeropuertos 2000 consortium, comprising SEA, US services company Ogden, Italian financiers Simest and Argentine company Riva, has agreed to pay the Argentine government $171m a year for the concession, which allows for a 10–year extension, and has committed to an investment of approximately $2.1bn.
Of this, some $1.35bn will be expended at Buenos Aires main Ministro Pistarini International Airport at Ezeiza, with another large chunk to go to the capitals other airport, Jorge Newbery (Aeroparque). This leaves little for the rest. Some believe that the consortium paid well over the odds and as the serious examination begins, it would not be surprising to see the airports back on the market.
Mexico is close to announcing a strategic partner for the first of four airport groups to be privatised. The Southeast Group, which comprises nine of the countrys 58 airports, including Cancun and Merida, has the highest base of international traffic and will prove the most attractive segment of the privatisation programme, aside from Mexico City itself.
On offer is a 15% stake, with a 5% additional option, an annual technical fee and the right to appoint key board members. The group will be floated on the stock exchange and on international capital markets in the first half of 1999.
Financial advisor Warburg Dillon Read says the strategic partnership concept is more likely to get the price right than would a higher risk trade sale. The Pacific Group was expected to be put up for sale before the end of 1998, followed in 1999 by Mexico City and the Northcentral Group. At Mexico City, the Ministry for Communications and Transport (SCT) may go for a build–operate–transfer (BOT) structure.
Venezuela has been toying with the idea of airport privatisation for some time and has now made a start with the appointment of US consultants Aarotec to develop privatisation strategies for the airports in the state of Sucre on the north–eastern Atlantic coast.
The three airports are Antonio José de Sucre International at Cumana, and the small domestic airports at Carupano and Guiria. Aarotec is also part of a team advising the Honduran government on commercialisation of the four main airports at Tegucigalpa, Roatan, La Ceiba and San Pedro Sula, but the terrible devastation caused by hurricane Mitch will have set back these plans by many years. Lima, Cuzco, Arequipa, Iquitos and Trujillo airports in Peru will also be privatised, as will Montevideo airport in Uruquay, where bids are now being processed.
Elsewhere in South America, the lucrative market of Brazil could offer the next major opportunity for airport privatisation.