Title: Whither airport privatisation now?
By: David J Bentley
Introduction:
The privatisation of airports, worldwide, has become a fundamental feature of the aviation
industry in the last five years. This short paper summarises some of the main developments
and asks how the dreadful events of 11th September will affect its progress.
Body text:
Whither airport privatisation now? Since the mid 1980s the propensity of municipal
authorities across the World to offload their airports wholly or partly to the private sector has
steadily increased and, before 11th September, had reached boiling point. The shock waves of
the terrorist attack on the USA pulled the plug right out though as it became evident that
airlines, who were already demanding landing, passenger handling and parking fee reductions
to counter declining yields and to enable them to combat the new breed of low price budget
carriers, now had further impetus to cut back or consolidate marginal routes (seemingly in
many cases what they aspired to do anyway). And fewer passengers also mean less
expenditure at airport retail shops and concessions, a double whammy. Furthermore, pressure
to transport airfreight henceforth in cargo-only aircraft would benefit only the (very few)
cargo-only airports, as most airports exist on a wide mix of business.
At the same time, some of the more traditional full service airlines were already demanding
that the airport should be part of the ‘positive’ experience that their customers increasingly
sought – translating as less crush, more space and greater comfort. Airports are caught in a
pincer movement and we are already seeing a consequential airport segmentation that mirrors
airline segmentation – ‘business’ airports, ‘budget’ airports, ‘point to point’ airports, ‘hub and
spoke’ airports, cargo-oriented airports and so on. While many airports do virtually nothing
more than handle vast hordes of package holiday makers or independent low-budget
travellers, Germany’s Stuttgart Airport, for one example, actively promotes itself as the ‘Blue
Chip’ airport, as a consequence of the many leading world-scale and innovative technology
companies located in and around the city, with facilities to match.
The tendency to seek private capital injections into airports was born of commercial reality.
Most airports first saw daylight as, and long remained, functional municipal entities, often
doing little more than providing the catalyst for irregular point-to-point air services at the
behest of product-focused airlines rather than that of the passenger, and there was often little
pretence of marketing or customer-focused planning. However, the dramatic growth in air
travel from the 1950s, the introduction of faster jet aircraft and charter services, lower ticket
prices and of marketing awareness in the operators, demanded a change in the very nature of
airports.
In the new era of globalisation, rapidly advancing technologies and an increasing propensity,
worldwide, to travel by air, the days of the functional, ageing, drab, dingy and distant airport
terminal were coming to an end. More than half the world’s 6 billion population now use an
airport in any single year and most forecasts indicate annual rates of passenger and freight
traffic growth, worldwide, of 6-7%, much more in some regions that are emerging from
economic isolation. This enormous activity takes place within a framework of estimated
capital investment needs for improvements of at least £250 billion ($350 billion, €370
billion), in the first fifteen years of this century just to keep pace with demand, let alone to get
ahead of the game. The airport owners, usually city or regional governments, sometimes
national ones, had to face dilemmas of business, for perhaps the first time: how does one
finance better facilities while traditional income remains static? How is it possible to remove
the financial burden of essential redevelopment from taxpayers? In some cases, for example
Europe, substantial existing modes of income like Duty Free sales have disappeared through
regulatory changes. The answer, in a growing number of cases, has been to seek some form of
investment from the private sector, in the expectation that such funding also would be
matched by the opportunity for ‘greater efficiency.’
This process of ‘privatisation’ of airports (a term that has many different interpretations)
really began in Great Britain in the 1980s, under a government highly driven by the freemarket philosophies of economists such as Milton Friedman. During the following decade it
spread quickly, not only to countries of the ‘First World’ but also into many others, across the
globe, widely differentiated by politics, economics, culture and living standards. It has
adopted several different forms. Investment may be sought for particular projects (runways,
air terminals etc), from which the investor may expect to profit from the operation of the
facility over a period of time. It can take the form of a management buyout or an external
management contract, possibly performance-related. It could be the purchase of some or all of
the equity of an organisation, by private companies, from central or local government airport
owners (or vice versa). It can be found in turnkey projects for expansion of existing facilities
or entirely new airports financed either wholly by the private sector, or partially, in
conjunction with governments, with various permutations on eventual ownership. It has also,
in only a fairly small number of cases to date, been manifested in the form of a public
flotation of all or part of an organisation’s stock, enabling private and institutional investors,
for the first time, to share in the development, rewards and risks of airports. All these
processes have been aided by changes in the fundamental nature of economic regulation in
many countries that has meant that private airport operators cannot ignore issues of public
interest, for example those of environmental protection. The business is huge. The projected
number of ‘deals’ involving the injection of private capital, in some form or other, into a
government-owned airport facility, was estimated to be several hundred, in the period 20002003, in fifty countries, and within Europe alone privatisations and secondary offers including
on-sales are likely to generate 20 billion Euros, this year and next. There is, though, still only
one fully privatised quoted ‘public limited company,’ Britain’s BAA.
There are strong drivers towards this privatisation activity, but equally there are significant
disbenefits that merit consideration. Traditionally, the economic performance of airports is
much more robust than that of airlines. A measure of this robustness, the Revex ratio, which
compares the relationship of revenues to expenditures, indicates that ratios of 1.10 to 1.60
(representing profitability margins of 10-60%) have been experienced by many airports,
(worldwide, and especially in Europe) during the last two decades, whilst airlines tend only to
manage ratios of 1.1 or less, even in the (relatively) ‘good times’ experienced since 1995 and
before Autumn 2001. There are several reasons for this strong performance, including:


Airports can anticipate their costs far better than can airlines
Airports can benefit from their (sometimes) monopolistic position in the supply chain


Airport terminals and surrounding land can be put to profitable non-aeronautical commercial use
Airports have acquired a ‘sexiness’ resulting from constant media exposure, similar to that previously,
but no longer, enjoyed by airlines. (This may be transient).
However, airports are also subject to the threats that are posed to air travel generally:












Massive and continuous improvements in information and communication technology that intrude on
both the business and leisure travel markets
A demanding, vocal, growing and well-organised environmental lobby
Much improved surface transport such as high speed trains, threatening regional air services and
supported by governmental policy shapers
Aviation safety record that is not perceived to be improving
Terrorism (BAA passengers fell by 13% in September 2001, individual airlines lost from 0% to 40%).
Declining yield
Airline alliances marginalizing regional airports
Next generation high capacity and sonic aircraft marginalizing some airports
Crumbling infrastructure, especially Air Traffic Control
High cost of passenger taxes
Effects of global warming and other long-term meteorological implications
The Unknown. Wars, natural catastrophes, man-made problems. Increasing awareness of air travel
induced medical problems
The BAA, with its seven airports led by Heathrow, Gatwick and the fast-growing Stansted,
has become something of a benchmark for other airport operators to mimic. It has, variously,
made its mark as a property company, a surface transport operator, a hotel company, an
airport management consultant and most notably as an operator of retail facilities, chiefly
within airports, throughout the UK and worldwide, and in which it has an international
reputation. It is truly a global operator. Despite several ups and downs its share price has
stayed relatively stable through the (pre 11/9) recent markets turmoil. It has been able to apply
diverse commercial skills that would have been well beyond its government owners although
some would claim that its core airport investments have been no better than might have been
achieved under government ownership, and certainly not matching those in, for example,
Paris. Nevertheless, owing to the lack of investment at its main gateway, Heathrow, BAA’s
future was unclear until the recent British Government decision giving the go-ahead to
Terminal 5. Elsewhere in the UK other British civil airports with a turnover of more than £1
million ($1.45 million, €1.5million) were also required to become PLCs, whilst remaining
under the control of their municipal authority owners, led by professional Directors. Some,
like Manchester, have chosen to remain firmly within the grasp of their municipal landlords
whilst seeking investment and management contracts widely, at home and abroad; others like
Birmingham concentrate more on their core activities while inviting private capital in a
variety of ways.
Probably the most notable feature of UK airport privatisation though was the interest shown
by organisations from outside the airports sector, in acquiring and operating them. These
organisations have been as diverse as bus operators, (Stagecoach, National Express, First
Group), aerospace firms, (British Aerospace) and investment and property companies, (TBI,
Peel Holdings, Wiggins Group) all attracted by the apparent ease by which airports, which
have normal operating costs that are readily quantifiable and therefore easily anticipated, can
be turned into cash cows by the application of skilful marketing. It has not always been plain
sailing and several of these companies have subsequently exited the airports business,
partially or wholly, while others have scaled down their business plans or have themselves
been exposed to hostile takeover bids.
Airport privatisation was a little slower to catch on in Europe, but not much. In Germany,
where the privatisation trend generally quickly caught up the UK, Frankfurt Airport, Europe’s
second busiest, sold over 30% of its stock to the public earlier this year and announced its
determination to become one of the world’s largest airport operators. At other German
airports external organisations have participated in partial trade sales and a consortium of the
two original bidders will fund Berlin’s new airport privately. In Austria and Switzerland,
partial privatisation has taken place at the main Vienna and Zurich airports respectively, also
in Copenhagen, Rome and Athens (a deal to build, operate and eventually transfer the airport
back from private into public ownership). The same is about to happen at Amsterdam, after
years of wrangling. Some countries, like France and Spain, retain a more traditional view that
the airport is a key responsibility of local or national government, but the mood is changing
here too. Many Eastern European governments want to get in on the act but the real value of
many airports here remains questionable. Several European companies, lead by British ones
like TBI and Wiggins, have or had plans to develop networks of secondary or tertiary airports
to support the burgeoning budget airline sector, the one to have best survived the economic
fallout from 11th September, at least so far.
Outside Europe, the ‘privatisation’ of airports can often take on a different meaning and refer
more to diverse management contracts and trade sales. In the USA, where there are over 400
primary commercial aviation airports, development funding comes largely from a mixture of
the government’s reinvigorated Airport Investment Program (AIP) and public bonds, the latter
supported by a favourable tax regime. However, there is an increasing tendency for airlines to
own and operate their own terminals. By and large though the larger airports especially, such
as Chicago O’Hare, Atlanta and Dallas Fort-Worth, which have built up a momentum purely
through their huge size, are self-supporting municipal operations, investing individually and
through the AIP in infrastructure while the airlines are left to get on with the job of running
the ‘hub terminals.’ A government experiment that commenced in the mid 1990s to privatise
the operation of a small number of secondary airports was successful, but has not so far led to
a significant expansion of this activity. In Canada, many of the leading airports are run as
‘not-for-profit’ organisations, with a strong emphasis on stakeholders, which usually means
consumers, organised labour and the local business community, rather than individual or
corporate shareholders.
Mexico has seen most of its major airports sold off since 1995 in a series of partial trade sales
that have attracted the major airport operators from across the world, including those of Spain,
Paris and Copenhagen. A similar series of events took place in Argentina, and indeed Latin
America has become a hot bed of activity, the major exception being Brazil, where the
general economic situation and the influence of the military in aviation matters has restricted
opportunities. However two model privatisations are now under way. The Latin American
aviation scene right now is characterised by airline failures, enforced return of leased aircraft
and mergers, all within the context of a rocky macroeconomic milieu, especially in the two
key countries, Brazil and Argentina. Both Varig and Aerolineas Argentinas are heavily in
debt, made worse by large first half (2001) losses. This will influence the further privatisation
of the airport infrastructure here.
In Asia, the substantive aim of privatisation has been evident for some time, but progress has
been hampered by both philosophical and economic considerations. Traditionally, local
culture and philosophy discriminate against the very concept of privatisation. Economically,
there are problems of finding both capacity and capital. Nevertheless the Malaysia Airports
Berhad was partly offered to the public in 1998, initially domestically and then to foreign
investors later. Elsewhere there is significant activity in Thailand, where a new airport for
Bangkok will (eventually) be built from private funds, also Korea and Japan, where new
airports at Inchon and Chubu (Nagoya) respectively, amongst others, have been financed by a
mix of central and local government, bank loans, bonds and corporate investors. The North
Asia region is one of the fastest growing in the World presently and Korea especially hopes to
benefit from what it perceives as China’s inability to support air travel to, from and within its
air transport infrastructure. Although China continues to fund the maintenance and building of
its airports, there is a large and growing private sector involvement. Initially funded by loans,
more financing now comes from local stock markets. There are huge developments at Beijing,
host of the 2008 Olympic Games, where the Capital Airport was publicly floated in 1999 with
the Aeroports de Paris as a strategic partner, and also at Shanghai, Hainan and Guangzhou,
amongst many others. Some airport development plans anticipate staggering traffic increases
of 250% or more in just five years, but many of China’s airlines have serious problems.
Having gone through a very rapid period of growth, to over 35 airlines from 1 (the national
airline CAAC) in just a few years, there is now an equally rapid period of consolidation and in
May 2001 the airlines were actually asked by the government to share revenues. In India, the
five main international airports under the control of the Airports Authority of India (Mumbai,
New Delhi, Calcutta, Chennai and Bangalore) are to be privatised by way of offer for leases
of between thirty and fifty years, but the going is slow and time scales are long. India also has
a marvellous example of cooperation of private and public sector interests, together with
10000 expatriate shareholders, who jointly financed the new Cochin Airport in Kerala State.
In Australia the privatisation of airports began at the same time as Mexico’s, 1995 and also
took the form of trade sales, the three busiest metropolitan airports first (except Sydney),
followed by the smaller ones. These sales have not universally been considered successful as
some of the airports are thought to have been overvalued. A long standing argument over the
need or otherwise for a new Sydney airport was resolved when the government decided to sell
the existing Kingsford Smith airport, the successful bidder having first option to build another
airport for Sydney later. The process was put on hold after 11th September. New Zealand’s
Auckland Airport, the country’s main gateway had the majority of its shareholding sold by a
public flotation and latterly a consortium has bought Wellington Airport. New Zealand’s
aviation scene is currently in crisis following the collapse of Air New Zealand’s subsidiary
Ansett Australia, and the partial re-nationalisation of the parent airline.
Africa is a continent that increasingly seeks private capital for both basic and advanced airport
projects and on the surface it appears as if there is considerable scope for deals to be done, but
there are problems. In many countries attempts are being or have been made to privatise, or to
attract inward investment and/or management support, no doubt fired by the slightly
surprising success of events in South Africa, where the Rome Airports Group took a
substantial stake in the government airport operating company, ACSA and where significant
investment in airport facilities has turned the country into the aviation hub for sub-Saharan
Africa. One senses though that there is an unreal expectation amongst governments at the
level of interest likely to be shown by foreign airport operators, construction companies,
financiers and entrepreneurs in what is a genuine chicken and egg situation – which comes
first, the tourists and businessmen or the facilities that might attract them? Many of these
African airports are characterised by little international passenger traffic, low and sporadic
throughput generally, discounts on aviation charges to contain the costs of travel to the
consumer and the low incomes of many of the users themselves, and little, or low value-to
weight, freight business. These problems are often compounded by inherently weak airlines
and political instability.
Finally, airport privatisation, previously ‘patchy’ has become more noticeable in the Middle
East, and is emphasised by recent developments in Oman, where the Seeb International
Airport was partly privatised, with the government retaining a 25% share while a consortium
led by the BAA runs the airport. This region, together with west Asia, both often beset by
political and religious problems, looks to be the next key area for government airport sales.
Or at least it would be, if not for the events of 11th September, which has caused investors to
rethink their strategies drastically, in the wake of mass airline redundancies (200,000 in the
US and Europe alone by mid November), lack of flight guarantees virtually anywhere,
swingeing capacity cuts, total airline failures, consolidations, ticket surcharges and special
offers running concurrently, and the unknown costs to the air transport industry of providing
the level of security that henceforth will become the benchmark of the public’s ‘travel
decision.’ As British Airways’ chairman said, this is about as bad as gets. Or perhaps it isn’t.
Yet the whole travel industry should take heart from the fact that it has consistently proved to
be resilient. Both passenger travel and air freight declined severely following the US bombing
of Libya in 1986 and the 1990-1 Gulf conflict only to bounce back dramatically once the
immediate crisis passed. (But of course who is to say when the current crisis will really be
over?) Reductions of 15% – 50% in both the number of passengers travelling now, and of
advance bookings for 2002 have given way to some return to normality since the beginning of
November and many of the budget airlines have actually improved their load factors, if not
their yields, which proves that price based offers overcome fear like scissors cut paper. And
as the World Travel Organisation points out, tourism has increased in almost every single
year since the end of the Second World War, irrespective of events. Many airport financing
deals have been postponed, but it seems likely that some will resurface early in 2000. While
the prompt arrest or eradication of terrorists would clearly help, the industry and its investors
ought not to worry unduly.
A more comprehensive paper on airport privatisation and finance (17,000 words) is
one of several that feature in our publications list and may be purchased from us. It is
updated regularly.
Author details:
David J Bentley
Associate - Feather Consulting
© D J Bentley 2001