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Economic crisis hits airport privatisation, but some momentum regained recently - New CAPA report

  • USD180 billion available for investment in transport infrastructure;
  • Financing formula swings in favour of equity;
  • Some of the bigger players running into difficulties;
  • Investors looking at ‘essential’ infrastructure – and airports don’t count;
  • More airlines investing in airports;
  • Activity is Europe is sizeable but on the fringe;
  • European big ticket deals remain dormant;
  • Gatwick hangs in the balance;
  • Netherlands avoid privatisation issue at Schiphol;
  • Sweden makes six regional airports available;
  • Midway failure not the end of the affair in the US;
  • Stimulus package airport benefits unclear;
  • Brazil vacillates on privatisation method.

In the last six months or so, as the economic downturn has really begun to bite, the prospects for airport privatisation have reduced accordingly. The Chicago Midway deal fell through, the Prague offer has been postponed, and the Gatwick sale descended into near farce as only one consortium was left with a bid still on the table. But the business is resilient as it proved after September 2001 when the IPO on Airports of Thailand, the sale of Sydney Airport and the PPP on the two main (Greek) Cyprus airports were all delayed – they all went through eventually. Despite the credit crunch new investors have continued to emerge and there are still a substantial number of smaller deals at the regional level, especially in emerging countries.

This article contains extracts from the 25,000 word, 48-page report ‘Worldwide Airport Privatisation Update' (May 2009), researched and written by the Consulting Editor of Airport Investor Monthly, David Bentley, and published by The Centre. The Worldwide Airport Privatisation Update report is now available for instant download for USD195. It is an essential companion to the Global Airport Charges Survey published earlier this month.

USD180 billion waiting to be parked at an airport near you

One piece of good news is that the Carlyle Group, Morgan Stanley and Credit Suisse Group jointly released a report that concluded that USD180 billion in private capital is still available for investment in airports, highways and other transportation infrastructure. Two years ago, at the height of the boom, the Centre for Asia Pacific Aviation estimated that cashed up investors held an estimated USD50 billion in funds to pursue aviation infrastructure assets.
We are inevitably seeing a shift away from what had become a traditional 25% (equity)/75% (debt) – or even 15/85 – financing formula towards a more reasonable target of 50/50. In the UK the ratings agency Standard & Poor’s informed GIP, one of the bidders for London Gatwick Airport, that it would not grant an appropriate credit rating to any bid structure that contained debt equivalent to more than half the airport's Regulated Asset Base value of GBP1.6 billion.
Some of the bigger players have backed off from the sector, such as Macquarie Airports, while its Australian rival Babcock & Brown went into voluntary liquidation in Mar-09. Ferrovial/BAA needed to get a decent price on the enforced Gatwick sale to reduce a frightening debt burden but does not look as if it will.

‘Ultra-lite’ airports

Airports have latterly been reclassified in some quarters as ‘ultra-lite’ assets, which are more volatile and less protected by barriers to entry than ‘essential’ infrastructure. It is anticipated that investors will focus increasingly in the short term more narrowly on core assets where returns are more heavily regulated (e.g. water, other utilities, possibly telecoms, major retail shopping developments), or based on availability rather than usage (e.g. social infrastructure such as hospitals and schools.) In the UK, one of the last of the 1990s era entrants to the airport business from property (the others mostly now having long exited) – Peel Holdings – is seeking investors for any or all of its three main airports as it refocuses attention on its core property and retail interests and there is speculation that Infratil Europe may choose to do the same. Either organisation might also choose to try to find buyers.

In the wider political sphere some argue that the Anglo Saxon model of un- or lightly regulated finance has come to an end and will be replaced by a more typically Gallic model that places thrift, conservative levels of savings, less consumption, more risk-averse investment, long-term infrastructure planning, co-ordination of transport models and more state control as the most important features.
But it is a strange business and there has been some evidence recently that more airlines are becoming interested in investing in airport infrastructure, as might be observed for example in Bulgaria, Romania, China, Indonesia and Kenya.

European activity sizeable but on the fringe

In Europe, there is a small amount of activity but it is mainly on the fringe as privatisations proceed slowly at Ercan (Turkish Cyprus), Gyor (Hungary), Pristina (Kosovo) and Belgrade (Serbia) in addition to recently concluded deals in Latvia and Macedonia (both to TAV Airport Holding, which is opening up another front in east and southeast Europe). The Pulkovo Airport, St Petersburg (Russia) PPP, quiescent for several months, resurfaced in May-09 with an announcement from the management that Oleg Deripaska’s Basic Element, Fraport and Flughafen Wien had placed bids for a EUR922 million contract to upgrade the airport, while Hochtief has withdrawn.

Big ticket activity is dormant

But it is the big ticket transactions that attract the most attention and there are a number of dormant ones in Europe.
In Spain the proposed privatisation of 30% of AENA, never thought to especially attractive to investors, has hit more hurdles as the new Public Works Minister studies documentation before publishing a schedule. There is also the special airport charges deal cut by the government with airlines to boost Spain’s tourism in very difficult times to take into account (see the Airport Investor Monthly article on airport charges) and the question of whether such an arrangement would be possible in a scenario of partial privatisation
In nearby Portugal, the government plans to launch the bidding process for the tender to build the new Lisbon Airport at Alcochete within 2Q09, and intends to sell a majority stake in the airport authority, ANA, at the same time. The winning bidder will be required to construct the airport with its own capital; not an easy request to satisfy presently and the airport will cost EUR3.3 billion.

Netherlands duck the privatisation issue again, but Sweden offers six regional airports

The sale of Prague Airport in the Czech Republic has been delayed at least until the end of the year and will surely be influenced by the eventual conclusion of the London Gatwick sale. The Netherlands has again ruled out privatisation of Schiphol Airport in the short term, the CEO stating that making a profit is not his priority (the previous CEO gave profit a higher weighting) and that the government should remain the principal shareholder.

In contrast, the Swedish government surprised observers with the announcement that it plans to sell six of its regional airports. The airports are currently managed by state airport and air navigation authority Luftfartsverket (LFV Group), which indicated that it would look primarily to municipalities and other regional interested parties, but remained open to suggestions from other parties who may be interested in operating one or several airports. But these are fairly obscure regional airports with relatively little traffic and equally limited opportunities to develop them further.
Thousands of words have already been written about the sale of Gatwick Airport. As this article is written only one of six original bidders remains in the frame, with a lodged bid. The Manchester Airports Group (MAG) always had a good chance of making the final cut, but perhaps not in the circumstances as they transpired. Within a period of only a couple of weeks the Lysander Gatwick Investment Group was eliminated for an “uncompetitive bid” and GIP dropped out. Collectively this seemed to leave the field open to MAG but BAA is appealing the enforced sale of Stansted plus one Scottish airport and there may yet be more developments. There is also the suspicion that MAG, which had difficulty finalising its own bid, will try to bring in one or both of Lysander and GIP as minor partners.

Midway failure will not necessarily impact adversely on other US privatisations

The other big ticket transaction was going to be the 99-year lease of Chicago’s Midway airport. That deal fell apart when the MIDCo consortium, led by Citi Infrastructure, was unable to raise funding for the transaction and passed through two deadlines, in Jan- and Apr-09, trying to do so. The City of Chicago retains USD126 million in (letter of credit) earnest money from the deal and maintains the right to try again to lease the airport in the future. On the other hand it lost, at least for now, USD2.5 billion, about USD0.5 billion more than BAA might expect for London Gatwick - which is more than 1/3rd bigger - and which might have been used to retire debt, to improve infrastructure or to shore up pension fund losses.
Whether this will have any sustained impact on other proposed US privatisations remains to be seen. At the last count they were at the Long Beach and Ontario airports in the Greater Los Angeles area; Austin, Texas; Jacksonville, Florida; Milwaukee, Wisconsin; Minneapolis/St Paul, Minnesota; New Orleans, Louisiana; Kansas City International, Kansas; and Bradley International (Hartford County) in Connecticut. In not all cases would the airfield operations be privatised, meaning some would not fall within the limitations and restrictions of the 1996 Privatisation Pilot Programme, of which there are officially still only four slots left.
Furthermore, the green field Branson Airport in Missouri opened for business on 11-May-09, billed as the US's first commercial airport built and operated as a private, for-profit business for which federal, state and local taxpayers paid nothing. Branson is a risk, but one that, if it were to prove successful, might well influence US airport privatisation more than the failed Chicago deal.
There has been a further boost to private sector US airport investment from the two-year exemption recently granted for airport private activity bonds from the Alternative Minimum Tax (AMT) including the refinancing of bonds issued within the past five years under the exemptions. The exemption is important because it does away at least briefly with a tax that was hampering airport investment. US airports bonds have been subject to the AMT and the market for these bonds had decreased to the point there was no market as such.

No clarity on stimulus package benefits for airports

However, just how the US airport sector will benefit from the government’s Economic Stimulus Package (ESP) is not at all clear. On the face of it US airports will benefit from inclusion in the ESP, also from the FAA Reauthorisation Act. But in both cases it appears that large sums will be allocated to air traffic control and security issues with airport capacity building something of a bonus, well behind ‘essential maintenance’ and that is before other transport sectors such as those representing America’s crumbling roads and bridges weigh in and pressure groups for high-speed rail in urban corridors (which President Obama supports) have their say.
In other words there is still plenty of potential for the private sector to make its mark on US airports’ financing and management and that fact was acknowledged by US Transportation Secretary Ray LaHood when he said, in Jan-09, that widening budget deficits at the Federal and State levels should lead the government to consider permitting private investors to build, operate and maintain new transport infrastructure, stating, "there's not going to be enough money - I think we do have to think outside the box”.

Brazil vacillates on privatisation method

In Latin America, the big issue presently is the ‘will they/won’t they?’ one of the Brazilian government’s attitude to the privatisation of Infraero. Having enticed potential investors with the impending privatisation of key airports in Rio de Janeiro and Sao Paulo over several years, the government took them by surprise in May-09 when it said it would not “privatise” Infraero. Instead, it will reportedly grant management concessions for some of its airports instead. The system of concessions will be based on a study conducted by ANAC, the Civil Aviation Authority.
Apart from the fact that Brazil has a left-leaning government there are other factors in play with this decision. One of them is the continuing influence of the military in Brazilian civil aviation affairs. Second is the concern about the potential for corruption in a wide-scale and deeper privatisation exercise. Brazil might point to Argentina in the 1990s in this respect. Thirdly, the fear that the enterprise might collapse when prospective investors realised that so many airports were loss-makers. Finally, it may be the case that President Lula feels he must live up to the image he projected before and at the G20 summit of being the leading politician of a continent that has not submitted to the credit crunch to the same degree as the US and Europe thanks largely to better housekeeping. In that sense privatisation of the airports will be seen as a speculative activity and he may look on the London Gatwick sale debacle with disdain.
So it seems that privatisation in Brazil will amount to no more than a handful of tightly controlled concessions with no change of ownership. But then again, that is how Mexico’s privatisations began and they ended up as three IPOs.
Brazil is symptomatic of the whole business of airport financing presently, dominated by uncertainty as to the best course of action. But as suggested in the opening paragraph it has faced such uncertainty before and major transactional activity has resumed. For the moment there is sufficient promise in the smaller deals to keep most investors on their toes.

About Worldwide Airport Privatisation Update report: May-2009

The credit crunch and resulting global economic recession has quickly caught up with some of the major privatisation transactions around the world. This 25,000 word report provides latest updates on airport privatisation activity in 58 countries across Europe, North and Latin America, Asia Pacific, the Middle East and Africa, focusing on the new investors and opportunities that have emerged amid the slump.

The Worldwide Airport Privatisation Update report is now available for instant download for USD195. 

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