Time to sell Manchester Airport?
Hot on the heels of the news that Dubai has become the Middle East’s most congested city since the introduction of a road toll scheme, comes the revelation that the Manchester City Council (UK) wants to apply a congestion charging scheme of its own to rival London’s. Under the scheme, drivers will have to pay up to GBP5 per day to enter and exit the inner control zone during peak travel periods and, unlike London’s, will have to have an electronic control box fitted to their vehicle – a precursor, perhaps, of a national scheme.
“The ‘driving force’ behind the proposal is Manchester need to find GBP3 billion (USD6 billion) to fund a huge programme of transport infrastructure projects, including new tram lines and rolling stock, trains, station improvements, new buses and bus corridors and hundreds of yellow school buses”, said David Bentley, the Centre’s Manchester-based Regional Manager, UK & Ireland and editor of the Centre’s Airport Investor Monthly and Global Airport Privatisation reports.
The ten councils that make up Greater Manchester (the cities of Manchester and Salford plus eight other metropolitan boroughs) have applied for a British Government Transport Innovation Fund (TIF) loan to pay for the infrastructure projects, which would be at least partially repaid out of revenues accruing from the congestion-charging scheme, depending on its success. Opposition is growing, particularly amongst business leaders who believe it would have a detrimental effect on the local economy.
“Strangely, few observers have yet considered that there is a viable alternative to raise the necessary funds – the sale of Manchester Airport, which, coincidentally, is also owned by the very same municipal authorities, in the proportion 55% by the Manchester City Council and 45% by the nine other authorities. Especially as not all the councils share the same objectives about the airport’s future”, said Mr Bentley.
Despite intense competition from airports like Liverpool John Lennon and the new Doncaster-Sheffield airport, Manchester is still a formidable airport, with 22.4 million passengers in 2006, making it the UK’s fourth busiest (London Stansted having just overtaken it) and has an attractive mix of network, ‘low cost’, charter and cargo services, ensuring it is rated highly by credit agencies like S&P. Within the last month it has claimed it offers more destinations (225) than any other UK airport, including Heathrow, Gatwick and Stansted. Moreover, it is the only English airport outside London with two runways and it is not capacity constrained on those runways or in the terminals – there is ample space for expansion.
Privatisation of airports in the UK has been gaining ground since the BAA was sold off in 1987 and the Manchester Airports Group (MAG), which also includes Humberside, Nottingham East Midlands and Bournemouth airports, is the last remaining operator in the country still under local authority control.
Two months ago, Leeds Bradford airport was sold in its entirety to a private equity company, one of a batch of new recruits to airport privatisation that include banks, international investment funds, pension funds and property developers and more recently part of the equity of Birmingham Airport changed hands, that entity having been partly privatised as long ago as 1997, when the firm that bought Leeds Bradford Airport was one of the original investors there.
The BAA is now under the control of a consortium led by Ferrovial, a Spanish construction company. The Centre estimates there is as much as USD60 billion in investment funds globally currently chasing airport assets as they become available.
The value of an airport is traditionally measured by its Ebitda (Earnings before interest, taxes, depreciation and amortisation) and its sale price is measured as a multiple of the Ebitda. Recently, airports have been changing hands on Ebitda multiples of up to 30 times, as was the case at Leeds Bradford, which was sold for GBP145.5 million. Hungary’s Budapest Airport – much smaller than Manchester - has changed hands twice in the last two years, on the first occasion going for GBP1.5 billion. The half share of Birmingham Airport (an airport less than half the size of Manchester) that was sold recently raised GBP854 million on an Ev/Ebitda multiple of 18, and Denmark’s Copenhagen Airport, similar in size to Manchester, sold 40% of its equity to Macquarie Airports for GBP2.1 billion, on an Ev/Ebitda multiple of 10.3.
The point is that even though MAG’s business performance has not been particularly strong in the last couple of years, with an Ebitda of GBP155.2 million in the financial year 2005-6 on revenues of GBP385.2 million (a margin of over 40%), and forecast not to fall appreciably in the financial year that has just ended, a sale of this asset would attract worldwide interest.
“A price of up to GBP4.65 billion could be anticipated if recent valuations were to be repeated (enough to put down gold plated tram tracks) – although GBP2 billion + is more realistic”, said Mr Bentley.
MAG has stubbornly resisted privatisation for the last two decades for a variety of reasons, including the belief that it has a good management record (and the arrival of the private equity companies and pension funds into the airports sector does add some weight to that opinion) and purely altruistic ones like the fact it might be prevented from sponsoring events like the current Manchester International Festival by private sector owners. Car drivers might take the view that the days of such philanthropy are over.
“Although it is possible to understand the Manchester Airport management’s position it is almost certainly the case that there is no better time to sell the airport than right now. Most analysts conclude that airport assets have been overvalued and prices will inevitably fall. Failure to sell now could be a decision regretted later”, concluded Mr Bentley.