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British and Irish airport investments continue busy merger and acquisition activity

18-May-2012

If there was any doubt that the UK & Ireland remains one of the most dynamic air transport markets in the world that suspicion was dispelled by the level of recent and potential activity in airport M&A.

With Edinburgh Airport about to change hands, Glasgow Prestwick and Manston (Kent) airports may follow this year, as will London Stansted, later. Cardiff Airport’s CEO resigned after a politician complained about lack of investment by the operator and there are plans to re-open Plymouth Airport under new ownership.

Meanwhile, in Ireland, the case has been made for a change of ownership at Shannon Airport - but not an outright privatisation – signaling the potential break-up of the Dublin Airport Authority.

The UK’s Competition Commission, which has been responsible for driving the break-up of the BAA, with London Gatwick Airport already having been sold, released a report in mid May-2012 on the final undertakings for the Edinburgh Airport sale. As previously reported, Global Infrastructure Partners (GIP), which already operates London Gatwick Airport, though now as a minority shareholder, is expected to complete the GBP807.2 million acquisition of the facility from BAA by the end of the month. See related report: GIP wins the race for Edinburgh Airport.

The company plans to appoint Sir John Elvidge as Edinburgh Airport chairman from 01-Jun-2012 once the acquisition comes into effect. He previously held the post of permanent secretary to the Scottish Government, until 2010.

Prestwick and Manston airports set to follow Luebeck out of Infratil’s portfolio

Airport M&A activity is not yet complete in Scotland. Glasgow Prestwick Airport, situated on the coast about 30 miles southwest of Glasgow, confirmed that PwC is acting as advisor to Infratil in the sale of the airport. Prestwick is one of only two airports remaining in Infratil Airports Europe’s portfolio after it disposed of its 90% interest in Hamburg Luebeck-Blankensee Airport to municipal authorities in 2009 after four years. Luebeck Airport was heavily dependent on Ryanair, and still is, and recent route reductions by the Irish LCC have resulted in a significant decline in traffic at the airport.

It is perhaps for that reason that Infratil lost confidence with Prestwick Airport as well. Traffic there amounted to 1,295,000 passengers in 2011, down from 1,661,000 the previous year, and fell by an average of 33% in the first three months of 2012. Again, Prestwick is very reliant on Ryanair, which opened one of its early bases there but which appears to have gone as far as it can in building a market. Ryanair currently has over 95% of all seat capacity and the only other scheduled airline is Wizz Air.

Glasgow Prestwick Airport capacity, seats by week, by carrier, 14 to 20-May-2012

Manston Airport, also known as Kent International, on the north Kent coast and which does not host Ryanair or any LCC, has not fared at all well with passenger traffic though it has held its own with freight operations - up to seven cargo airlines – and flight training. The only scheduled airline there was Flybe, which operated to Manchester, Belfast and Edinburgh, but all services were axed in 2011. Apart from the cargo flights Manston now relies on occasional holiday charter flights operated by two tour operators. Its growth was also thwarted by a night flight ban.

The airport produced an ambitious master plan in 2009, both for the long-term and the 2012 Olympic Games but later reduced its scale, cutting passenger projections for 2018 from 2.7 million to 2.2 million. It may benefit for a few months from the London Olympics, as it is able to handle heavy cargo loads.

In the case of both Prestwick and Manston a marketing process is under way for their divestment, and offers from interested parties are being actively sought. Infratil’s CEO Marko Bogoievski said the sale process could take a while due to challenging economic conditions in Europe and due to the “specialist nature of potential investors.” Losing both these airports would leave only the rather more successful Wellington Airport in Infratil’s portfolio, unless it decided to spend again and there is little by way of suggestion that is the case.

Cardiff Airport’s “negative impression of Wales”

Cardiff Airport, operated by Spain’s Abertis, has been adversely affected by a number of factors, including the strength of nearby Bristol Airport. Passenger numbers have been falling consistently. There were 1,399,000 in 2010 (-13.9%), falling again to 1,208,000 in 2011, with further falls of 33%, 23% and 5% in the first three months of 2012. In all it has lost about one million passengers since 2007. The closure of some bases by the LCC bmibaby in favour of operations at Cardiff, where there was not so much competition, provided a welcome boost but it was short-lived as bmibaby’s parent, British Midland International was sold by Lufthansa to IAG, with no taker for bmibaby itself; as of now it is slated for closure in Sep-2012.

The First Minister for Wales, Carwyn Jones, called on Abertis either to invest in its future or put it up for sale. Mr Jones said he had been in talks with potential buyers interested in a public-private partnership with the Welsh government taking a stake, though it is unclear what the electorate would think of such a (partial) reverse privatisation. A local, Cardiff-based property developer, Thomas Bailey Investments (or TBI plc as it became), bought Cardiff Airport in 1995 as part of a package of its first investments (also including London Luton and Belfast International airports), and was then taken over by Airport Concessions and Development Limited (ACDL), owned by Abertis (90%) and AENA.

Mr Jones criticised Abertis for delays in a GBP26 million investment plan and has said the airport is falling behind its rivals. He has previously said that he does not want visitors to arrive in Wales via Cardiff Airport because of the negative impression of the country it gives - for which he himself was heavily criticised. Abertis said it has no plans to sell but would be open to offers. Abertis does not need to sell it. The airport does make a small profit and TBI took on a pile of debt when it bought. so Abertis may feel it still needs to secure a reasonable return, BAA/Stansted-style, until better economic times arrive. (That, incidentally, is not necessarily the case at London Luton airport, where other politicians have expressed some ‘dissatisfaction’ with Abertis. Abertis’ lease arrangement [Luton Airport is still owned by the municipality] comes up for a mid-term review in 2014 and there are moves to ‘encourage’ it to terminate the lease early. Abertis and Luton Council are in dispute about the airport’s capacity potential. But such encouragement could leave Luton Council with a termination clause bill of up to GBP300 million).

In the wake of Mr Jones’ remarks there was a casualty. Patrick Duffy resigned from the position of Managing Director at Cardiff Airport in mid May-2012. Politicians are always right...

Cardiff Airport capacity, seats by week, by carrier, 14 to 20-May-2012

Post Edinburgh, Incheon Airport has turned its attention to Stansted Airport

The future for London Stansted Airport was speculated on recently by CAPA. Manchester Airports Group seems to have the upper hand, with its complex message of ‘invest in MAG in order to invest in Stansted’ scheme, which to the uninitiated must appear confusing, but which has attracted the likes of Industry Funds Management Pty, Cheung Kong Holdings, Canada Pension Plan, RREEF, Morgan Stanley Infrastructure, 3i and the Abu Dhabi Investment Authority as potential bidders. It appears that the objective is to raise a sufficiently high sum, and offer a sufficiently high price, to exclude all other bidders for Stansted.

But Incheon Airport, which lost out to GIP with a bid for Edinburgh Airport (jointly with JP Morgan) has suddenly emerged as a potential bidder for Stansted, and possibly directly, not via MAG. It is said to be in talks with other companies (including JP Morgan). Incheon Airport is clearly keen on expanding its international business and was also reported by the Korea Economic Daily to be showing an interest in Glasgow International Airport, though that is currently not for sale, BAA having already disposed of the single Scottish airport it was required to sell. It is unlikely that the Korean newspaper inadvertently referred to Glasgow International rather than Prestwick: Incheon is not really the appropriate size or scope for Prestwick.

Viable Group hopes its plan to reopen Plymouth Airport is viable

Down in the southwest corner of England, and in a city which Airport Investor Monthly long ago identified as most likely to lose its airport – Plymouth – there is a growing movement to get Plymouth City Airport back open again. It closed to flight operations in Dec-2011 after its owner, Sutton Harbour Holdings, which also owned Air Southwest and which it sold to Eastern Airways, evaluated the economic downturn and decided the land was more valuable for housing than for airline operations.

Plymouth City Council stated it supports plans by the Viable Group to acquire the Plymouth City Airport lease so long as there is a (no pun intended?) "viable plan to go forward". The Viable Group claims its five-year strategy could see 500,000 passengers using the airport if Sutton Harbour Group (SHG) would sell the lease. SHG currently holds a 150-year lease on the airport with estimates the lease could be worth up to GBP15 million.

A triple-phase business plan to reopen the airport has been drawn up and the Viable Group has now become an incorporated company. Previously, thousands of people signed a petition to save the city’s airport as Viable members took to the streets.

Viable’s plan envisages the runway being extended, a new terminal built and some land turned over for commercial use to turn the airport into what it calls a “gateway”. The three-phase approach would first need the airport to be reopened soon with key tenants including Plymouth Flying School and Flag Officer Sea Training reinstalled (Plymouth is a major British naval base) and providing an income to cover operational management. This first-year operation would also involve charter flights returning to the airport.

The second phase would be the re-introduction of scheduled air services, with 20-seat turboprops flying to UK destinations in a similar fashion to Air Southwest.

The final phase would involve a 40 metre extension to the runway, allowing 90-seat jets to connect Plymouth to Europe and making the city a destination for lucrative Chinese and Indian investors. (The publicity does not explain exactly how that would be achieved).

Viable says the vision is financially achievable, with just GBP150,000 working capital needed for phase one and GBP700,000 for phase two, for instance, and the potential to sell land for commercial development to bring in funds, with private investors potentially involved too. But little interest was shown in the airport by other investors when it was functioning. Two separate consultants’ reports indicated very little interest in running either the airport or any flights into it, with clearly inadequate demand from businesses.

There is a counter proposal to invest into the construction of helipads elsewhere in the city, for defence and medical use, and the Viable Group fears that would stop military and air ambulance flights needing to use the airport.

Denmark to Plymouth in 20 hours

Plymouth was a classic ‘use or it lose it’ case. Now that it’s gone, its value has become a little clearer. Plymouth is about as isolated as a medium sized English city can be, 190 miles (307 km) from London, with inadequate rail services and a motorway that peters out long before it gets to the Devonian city. One foreign visitor from Denmark who signed Viable Group’s petition said it had taken him 20 hours to get there, not much less than it would take to get to Australia.

There are other airports in the region but the future of Newquay Airport, which is operated jointly with the military, is uncertain, while a trip to Flybe’s main base at Exeter (where the M5 motorway ends) while not exactly arduous, does by implication lend support to an outright competitor for business and commerce in this part of the country.

Viable Group’s supporters point to the rapid success rate of London Southend Airport since it was bought (by the Stobart Group) and invested in, for example attracting easyJet. It insists the investment secured by Southend will have long term benefits to the people of south east Essex, and that Plymouth's airport could do the same for that city. But that may be a case of comparing apples with oranges.

Southend is a different concept altogether, catering to a rapidly rising population to the east of London, designated as a London airport with a new fast rail link from the terminal building into the capital, and located close to where the re-elected London Mayor Johnson still wants to place his dream of a Thames Estuary Airport. If it was nowhere near London it would also probably have closed down by now, just like Plymouth. Conversely, if Plymouth was sufficiently close to London to merit the name ‘London Plymouth Airport’ Stobart Group might have bought that, as well.

Halfway House deal to shift Shannon off the DAA’s books

A change of ownership is in the air across the Irish Sea, too, at Shannon Airport, one of Europe’s most westerly, and a key staging post for aircraft in the era when they could barely cross the Atlantic in one go. But that era is long over and Shannon has been losing traffic at an alarming rate. Passenger numbers at the airport have declined from 3.6 million to 1.6 million in the five years to 2011. What’s more, the airport lost around EUR8 million in 2011.

Shannon International Airport Network Summary (at 20-May-2012)

Total Airlines

6

    Domestic only

0

    International

6

Total non-stop passenger destinations

21

    Domestic

2

    Africa

0

    Asia Pacific

0

    Europe

15

    Latin America

0

    Middle East

0

    North America

4

Total non-stop freight destinations

0

    Domestic

0

    Africa

0

    Asia Pacific

0

    Europe

0

    Latin America

0

    Middle East

0

    North America

0

Shannon Airport capacity, seats by week, by carrier, 14 to 20-May-2012

Dublin Airport Authority (DAA), which owns and operates the airport along with Dublin and Cork airports, conceded for the first time in May-2012 that Shannon has a viable independent future and that an independent airport could attract an additional 250,000 passengers per annum.

However, the solution is not to be privatisation, but rather Shannon’s positioning within a new (public) entity together with parts of Shannon Development (Corporation), Ireland’s only economic development agency. Meanwhile Cork Airport, also in the west of the country would be maintained within the DAA.

Shannon Airport will be separated from DAA and brought together with Shannon Development to form a new entity with a commercial mandate in public ownership. In addition, the Government has decided Shannon Development’s functions in relation to indigenous enterprise and foreign direct investment will transfer to the organisations Enterprise Ireland and Invest in Ireland, respectively. Its tourism functions will transfer to Fáilte Ireland. A steering group will be set up in coming weeks to decide the organisational structure of the new entity, including its financing, with recommendations expected before the end of 2012.

The Minister for Transport, Leo Varadkar said the decision is a significant step in developing the aviation sector in Ireland and securing the future of Shannon Airport. He said the airport will begin its new era “debt free”.

Ryanair says the Shannon sale was a "missed opportunity"

As might be expected, Ryanair, which has been responsible for much of the lost traffic at Shannon, criticised the Government for "missing an opportunity" to sell off Shannon Airport to the private sector. The carrier said, "Transferring Shannon from one failed semi-state, the DAA, to another means that there will be no real change or reform nor radical cost reduction or efficiencies, but rather lots of continuing political interference and bureaucratic mismanagement". It continued: “The Government’s failure to sell Shannon Airport is also a missed opportunity to generate real proceeds with which to pay down either the DAA’s or the Irish Government’s huge debts".

Organisations such as the Irish Hotels Federation voiced strong support for the scheme. But the political party Fianna Fáil’s Transport spokesperson raised a number of concerns about the decision, such as that there is no clear funding stream for the airport outlined by the Government after it is cut loose from the DAA. Fianna Fáil wants the Government to “come clean” on the debt issue and ensure that Shannon will not be saddled with historical debt. It must also ensure that Shannon retains control of Aer Rianta and its valuable revenue generating (e.g. Duty Free) potential. Fianna Fáil is also concerned that Shannon development’s tourism functions are going to Fáilte Ireland, the business support and investment functions are going to Enterprise Ireland and the IDA (International Development Authority) and what’s left will be “folded into” the new Airport body.

In the sense that a local development agency will now have responsibility for a local airport (though it loses local ‘tourism’ at the same time?) there would appear to be some logic in this decision though there is still something of a ‘halfway house corporatisation’ feel about it. One factor that has not been mentioned but which must surely play its part is that Shannon’s future role has been identified as being more closely tied to freight than to cargo. At present Irish international ‘airfreight’ is mainly trucked to and from the UK (London).

For several years the US company Lynxs has been waiting in the wings to implement its plan for a large cargo and logistics operation at Shannon. Under this new arrangement it may at last be able to go ahead, working with an organisation (Shannon Development) that is more in tune with its objectives than was the DAA.

Action, interest and airport investment

The UK and Irish airports in the firing line for potential and/or mergers and acquisitions have already weathered the first few rounds of airport privatisation and low cost airline activities. A lot more is now known about the pitfalls and opportunities. Fortunately though there are numerous interested parties still keen to take a position in this form of infrastructure. 2012 is likely to see this activity continue, even against some severe economic headwinds in Europe.


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