Airport privatisation: the new phase November 2002
Airport privatisation is moving into a new phase. Investors have become a bit more sceptical about airport values but there is now a very interesting secondary market.
The birth of the process came with the UK Government privatisation of BAA in 1987. The following years saw a small number of similar transactions, including the part–privatisations of Copenhagen and Vienna Airports.
During the 1990s there was a growth spurt in airport privatisation. A solid financial track record by the privatised airports encouraged other governments to follow suit. Privatisation produced funds for government treasuries, and moved the requirement for major capital expenditure to the private rather than public sector.
With this growth came an increasing level of complexity, with variation on the privatisation process — trade sales, public private initiatives etc. In almost all these privatisations, the bids were led by other airports, although their degree of participation has historically diminished. Nevertheless, when a government sold one of its airports, it usually sought comfort in a strong airport brand name in the bidding consortium.
Mexico is a good example of complexity.
Four groups of airports were packaged together by the Mexican government with a 49% foreign ownership limit and sold to a consortium of investors. Fifty–year concessions were granted to the bidders, a form of public private initiative. The idea was that each of the four groups would be floated on the stock–market. But only one of the groups, Grupo Aeroportuario del Sureste based at Cancun Airport, has so far been able to achieve an IPO.
Since 2000 the privatisation process has slowed for several reasons. First, some airports and financial investors regard the current prices being achieved for airports as too high. Second, airports themselves have downgraded their international expansion ambitions. Most of the acquisitive airports have decided on an approach that minimises their equity involvement in airport deals. Airports now as a rule prefer to take a small minority stake in a privatisation, often 5- 10%, but try to gain value through management contracts and technical consultancy services. In the Mexican privatisations, AENA, Copenhagen and ADP were successful minority participants.
Third, the emergence of low cost airlines, which have re–defined airport/airline pricing mechanisms, has caused concern among airport investors.
Fourth, the cost of putting together a consortium bid has become prohibitive for some. For a complex transaction, often with 5–8 members in the consortia, the cost of some bids has been reported to be as much as US$5m. When the odds of winning remain as low as 10–15%, a run of failed bids becomes very expensive.
Airports enjoyed an historic perception amongst investors of being defensive, safe havens. Typically they were characterised as being regulated monopolies guaranteed quite high rates of traffic growth, calculated as a multiple (2.5 times) of the rate of GDP growth.
Perceptions have now changed.
September 11 and the uncertain traffic recovery since have made some investors wary. In the past, airport managers could rely on traffic growth to fuel increases in profitability levels. Today, airport managers have to demonstrate new skills, such as enhancing productivity and implementing cost–cutting programmes.
There is a growing level of sophistication and understanding of the main drivers of value creation at airports. Airport investors have a long checklist when making an investment decision, the prime factors being:
- The regulatory regime, single till or dual till, benign or active
- Traffic growth forecasts.
- The capital expenditure requirement.
- Non–aeronautical revenues, often seen as an area regarded as offering strong growth, but in reality, often fully exploited by well run airports.
- Degree of dependence on individual carriers.
- Corporate governance issues.
- Competitive environment, from other airports and in some cases the possible threat from high–speed rail links
- Exposure to ground handling — investors prefer airports that do not indulge in ground handling, regarded as a low margin, highly competitive activity. This is particularly the case in Europe following the EC Ground Handling Directive which has broken up monopolies at some EU airports
- Quality of management
- The ability to create value One of the issues surrounding part–privatisations or concession agreements is reaching a successful balance between public and private interests. Governments are often reluctant to share power and decision–making with private interests, and conversely the private sector does not always appreciate the need to satisfy public interests, both local and national, associated with an airport.
Some new trends have emerged in the airport privatisation process. There is now a second–hand market in airports — Perth, Bristol, East Midlands and Glasgow Prestwick are examples. Also, some of the airports that were initially only part–privatised, with governments retaining majority stakes, have now been placed in majority private hands. Vienna and Copenhagen are examples.
The investment case for airports has changed in the past two years. During the 1990s, airports were regarded as having only upsides for investors and few downsides. Today the investment case has to take in account:
- The impact of the September 11 and the threat of war in Iraq;
- Although barriers to entry in the airport sector remain high, airlines including flag carriers can fail, with major implications for their hub airports — notably Sabena at Brussels and Swissair at Zurich;
- Although major airports retain pricing power, many regional airports or airports with direct competition have been forced to lower tariffs (particularly those exposed to the low cost carrier market).
The emergence of financial investors has changed the nature of airport privatisations.
Macquarie Bank has led the way. By being prepared to accept a highly leveraging debt structure, Macquarie has been able to outbid competitors in successful acquisitions of Birmingham, Rome and Sydney airports in the past two years. Macquarie has some excellent in–house airport operating experience, having bought out the specialist airport consultancy, the Portland Group.
At the Global Airport Development (GAD) conference held in Hamburg in October, the question of airport values and an appropriate level of gearing for airports caused much debate. Agreement was reached that most airports had "lazy" balance sheets that could and should be more aggressively geared.
Concern however was voiced as to whether a highly leveraged airport with little financial headroom would in reality be able to increase charges to airlines, in order to recover revenues possibly lost in another Gulf War or September 11 type event.
The sale of Sydney Airport to a consortium led by Macquarie Bank is instructive. At a price paid of Aus$5.6bn (US$3.1bn), Sydney was sold on an EV/EBITDA multiple of 18.3 times, based on 2002 earnings.
Such trade sales are regarded as maximising revenues for the seller when the airport is efficiently run and there are a number of interested bidders. If the Sydney sale had been conducted as an IPO, it was estimated at the GAD conference that proceeds to the Australian government could have been some Aus $1bn less than the trade sale achieved, as local demand to support was weak.
However, Sydney represents a rare privatisation.
It was a clean sale in the sense that, although a 50–year concession plus options to extend, the Government has sold all of its interest in the airport to Macquarie.
The airport has no local competition, enjoys a benign level of price regulation, has a very highly regarded management team, is the major hub for the region and has a strong national carrier in Qantas.
These factors, supported by strong cash flows, allowed the Macquarie consortium to support the bid with Aus$3.7bn of debt finance. Such a high level of gearing brings strong equity returns — if the airport management team delivers the investors' expectations.
Both parties argue that the benign regulatory environment and the airport’s effective monopoly will allow price increases to offset any disappointments in future traffic flows.
To put the price paid by the Macquarie consortium into context, HSBC estimate that EV/EBITDA multiples are currently in the range of 4 to 9 times for European airports and 5 to 12 for Asian airports. Where trade sales occur however, they can attract significant premiums with EV/EBITDA multiples often in excess of 15 times.
The resilience of the airport sector was highlighted at the GAD conference by the fact that Standard & Poor’s have made very few adjustments to their credit ratings assigned to airports following September 11. The ratings agency had already factored into its ratings, which take a five–year view, that a traffic downturn similar in scale to the Gulf War would be encountered by the industry.
As for the future of airport privatisations, the requirement of having an airport in the bidding consortium is already fading. Most candidates for privatisation are already well run and managed.
Having another airport as a shareholder may also bring conflicts in areas such as hubbing strategy, competition for capital and management resources.
Future airport privatisations will clearly require different models.
Privatisation of successful, mature airports such as Amsterdam Schiphol is likely to be via an IPO with no other airport involvement, assuming the level of public demand is seen as strong. Sales of less well established airports, or those requiring new infrastructure are likely to be in the form of trade sales. Often this will lead to airport and contractor involvement in the bid, although it can perhaps be argued that such management and engineering skills could be better acquired without an airport/contractor needing to make a financial commitment but rather through a straight management consultancy contract.
|Rating / outlook
|Tight financial structure
|Needs to recover from loss of Ansett
|Aeroports de Paris
|No prospect of privatisation
|3% traffic growth in 2001, expected to be higher in 2002
|Concern over future regulatory regime
|Traffic has shown strong resilience
|Privatisation remains delayed
|Returning NZ$ 212m of capital to shareholders
|Review being conducted of regulatory regime
|Concern over on-going regulatory review
|Need to assess development of T5
|Traffic levels recovering
|Management implementation of cost and capital reduction measures
|2002 expected to show falls of 5% internationally and 10% domestically
|Subject to upcoming regulatory review
|10% decline in international passengers
|Offset by strong balance sheet
|88% traffic domestic, therefore low exposure to US carriers
|Strong local economic prospects
|Strong traffic recovery
|Runway reconfiguration should support growth
|Cautious strategy in returns to shareholders
|2002 revenues proving resilient
|Exposure to transborder traffic
|Financials above budget for 2002
|Entry of easyJet into winter programme
|Strong level of liquidity
|Restraint likely in capex programme
|Longer term growth rates remain robust
|High transborder traffic exposure
|Air Canada committed to airport as a hub
|Rate increase in July
|Strong non-aeronautical revenues
|Limited capital demands
|Prospect of increased charges