Airport construction & investment back in fashion

Airline Leader

Airports are very much back in fashion as investment material, as the air transport industry goes beyond its most recent recuperative phase (airlines are expected to make USD36.3 billion in net profit in 2016, up from USD33 billion in 2015 and many airports reported record passenger numbers in 2015), interest rates remain low and other sectors nowadays have less appeal.

  • Over $900 billion is expected to be invested in airport projects globally, with the potential to break the $1 trillion barrier in the near future.
  • Africa has more new airport projects than North America and the Middle East combined, with a significant increase in investment.
  • Airport privatisation activity has slowed down, but deals are expected to take place in Asia Pacific, Europe, and Latin America in 2016.
  • Funds across the world are driving the growth in airport investments, particularly in Asia Pacific.
  • Countries to watch for airport development and investment include Indonesia, the Philippines, and Vietnam.
  • The US is lagging behind in airport construction, but there is pressure to modernize the Airport Privatisation Pilot Programme to attract more investors.

To top it all, air travel is becoming 'sexy' again and it is the vastness of the investment into runways and terminal buildings across the globe that is exciting financiers every bit as much as new or expanding airlines. In a recent report, CAPA revealed that, according to its Airport Construction Database, a little over USD900 billion is to be lavished on airport projects, both existing and new build. The USD1 trillion barrier may well be broken this year or next. These projects are to be found right across the world and they often evoke some surprise.

There is for example far more new build ('green field') airport activity in Africa than there is in North America and the Middle East combined, whether it is measured by projects (+40%) or investment (over 100% more).

While there has been a lull in airport privatisation activity in the last few months there are a number of deals forthcoming in 2016. Again these are well spread across the globe, in Asia Pacific, Europe and Latin America in particular although once again North America stands out, with only the transfer of airport assets between municipal owners such as cities, counties and states in the US offering any hope for the future, unless and until the public-private partnership (PPP) captures the popular imagination there.

The CAPA Global Airport Investors Database currently lists over 660 entries and in particular it is various types of funds across the world which continue to drive the growth.

In Asia Pacific, two deals were recently concluded in Japan: for the 44 year lease of the Osaka airports of Kansai and Itami, and at Sendai. The Osaka deal was successfully negotiated by Kansai Airports, a consortium of a newcomer, Japan's Orix, a financier (especially of aircraft) and France's Vinci, the construction conglomerate that has been very active acquiring assets in the airport sector in recent years. The Sendai Airport's 30 year public service concession went to a consortium of Tokyu Group (Japan) and other organisations - Maeda and Toyota Tsusho - that had originally bid independently.

The sticking point in each set of negotiations was the debt factor. In the case of Osaka at least (currently USD8.4 billion) that was a primary reason why there was only one bidder left standing after the others pulled out, though it should be mentioned that many other companies in the Kansai region are now expected to pile in and take minority stakes. Sendai Airport, which witnessed another large downscaling of interest once due diligence was completed, is also a heavy loss maker.

Much rests on the success of these initial transactions. In theory upwards of 100 airports in Japan could eventually be privatised if the government so decrees, with Fukuoka and the Sapporo New Chitose Airport in Hokkaido next in the frame. That would be a 1800 turn for the government, which authorised these transactions because it needs the money. At least in the case of Osaka there is a powerful international operator in place (Vinci); at Sendai there are only Japanese companies, which are inexperienced in this sector.

Elsewhere in Asia Pacific it increasingly looks as if the future development of airports will require a combination of government and private investment. The latter will only come with greater deregulation and de-limitisation of foreign investors. Countries to watch include Indonesia, the Philippines and Vietnam.

The Indonesian government, mainly through Angkasa Pura I and II, continues to attempt to hunt down potential PPPs across a wide range of airports. Recent successes include Jakarta Pondok Cabe Airport, a partnership agreement involving Pertamina and Garuda Indonesia. But there was a setback at the West Java International Airport which, having begun to shortlist a joint venture partner (maximum 60% ownership) out of a positive local and foreign response (40 companies), suddenly withdrew from its search after receiving financial support from the Ministry of Transportation. But all is not lost. Investors will be redirected to projects in the proposed Aerocity development nearby. Even so, this sudden about-turn sends out mixed messages about the government's commitment to privatisation in the airport sector.

The Philippines government approved five consortiums to participate in the bidding to develop, operate, and maintain five regional airports under a 30 year USD1 billion PPP programme. The first up is Bohol Airport. Contracts will be awarded in Feb-2016. But the big story is the PPP project for the modernisation of Manila Ninoy Aquino Airport in a 15 to 20 year concession that has attracted all of the movers and shakers in the Philippine investment and construction sectors.

India stepped back from entering into PPP concession on Chennai, Kolkata, Ahmedabad and Jaipur airports in Aug-2015. However, Singapore's Changi Airport was subsequently nominated by the government to operate and manage Ahmedabad and Jaipur airports. The Airports Authority of India has formed two committees to structure the terms and conditions of the management contract. If this model is successful it may lead to further airports being awarded on management contracts. However, this will not address the need to invest in new capacity at Ahmedabad and Jaipur, both of which are expected to approach saturation in the next 2-3 years.

Although there is no clarity on when the privatisation process of India's existing airports may resume, any greenfield projects are expected to be developed on a PPP basis. The draft civil aviation policy does at least provide some clarity on the proposed direction of economic regulation of private greenfield airports, with a hybrid till being favoured. This should improve investor confidence in the process.

Nevertheless, the two major greenfield airport tenders currently underway continue to experience delays. Navi Mumbai, the proposed second airport in Mumbai, is unlikely to be operational until at least FY2021/22. A re-tender is also possible in an effort to attract more bidders to increase competitive tension. There are currently just four pre-qualified consortia.

The RFP document for Goa Mopa airport, which was to be issued in Oct-2015, is still awaited. The project continues to be delayed because hotel and tourism operators in the south of the state oppose the new airport on the grounds that they will be disadvantaged by its northern location. Meanwhile the existing airport is facing severe airside congestion during peak hours which are accentuated by the curfew on commercial operations for several hours a day when the airport is reserved for defence movements. These capacity constraints have serious repercussions for Goa's economy.

Going forward the central government is expected to focus on rehabilitating unused airports and developing low cost infrastructure in smaller towns. Regional connectivity is a key priority of this Ministry.

However, at a macro-level India does not have a medium to long term national master plan in place and infrastructure development is only expected to become more challenging as competing demands on land in urban areas increase.

Vietnam continues to attempt to privatise some of its airports through the vehicle of BOT concessions in order to finance a new 100 million ppa airport at Long Thanh, 40km from Hon Chi Minh City, which will cost USD16 billion. The opportunities are attracting both Vietnamese and foreign companies.

Meanwhile, Airports Corporation of Vietnam (ACoV) had its own IPO in Dec-2015, raising USD49.6 million from a sale of 3.4% of its equity. ACoV now seeks a strategic investor, to which it will offer a 20% stake. Both local and foreign firms have been attracted, including the front runner, Aeroports de Paris. Changi Airport Group failed at the application stage.

At the same time, and as with India, ACoV seems to be having a change of heart about some airport privatisations. For example it decided only to lease a terminal at Phu Quoc Airport rather than sell the airport. The authorities seem to be concerned about the potential for monopolisation by airlines and regulatory issues that might threaten the country's security.

There is still no positive outlook for foreign investors in China. There has been plenty of interest in the new Beijing Daxing International Airport for example, but investment is led by the government and because of its size it is considered that private investors could not expect a reasonable return on their investment.

Of course that could change if China's economy continues to stall, thus reducing tax revenues and there would be plenty of firms willing to charge in if the door opened again.

Most of the privatisation activity in West Asia/Middle East is in Russia, as might be expected, with mainly Russian investors taking control of numerous small and mid-sized airports across the huge landmass. There is no sign of that trend easing, irrespective of sanctions and economic stagnation. The Ministry of Transport will develop proposals for Moscow Airport concession agreements in 1H2016.

A particular financial model needs to be offered that takes into account the obligations of the government to create relevant infrastructure.
Iran potentially offers remarkable investment opportunities, although uncertainties linger, despite removal of the main body of sanctions in Jan-2016. There is a lot to play for. The country has over 75 operational airports, many of which require modernisation and the Minister for Transport stated at CAPA's Iran Aviation Summit that "airport development is an essential programme", and that the government "looks forward to cooperate with foreign partners", although stopping short of specifying direct foreign investment in airport infrastructure.

With the need for a significant amount of airport development over the next 15 years, private sector participation will inevitably be needed. The deals themselves are more likely to be of the BOT (build-operate-transfer) variety or one of its variants, which might see a terminal or two at an airport constructed and managed by the private sector over a specific period of time. Some private sector investors may be wary of exposure to a new location that lies outside their typical portfolio profile, and commitment may be longer in coming than is anticipated by the government.(For more on the Iranian airport investment scenario, see the online report: centreforaviation.com/258081)

Also in West Asia, Kazakhstan's government has approved privatisation plans for 2016 to 2020 and confirmed that companies in the list include at least five airports, Astana International Airport being amongst them. For actual airport construction activities in Asia Pacific, the region is currently second in terms of the number of airport projects at existing airports but easily leads the way in terms of investment levels with a total of USD273 billion in actual or anticipated investments.

The biggest projects are at Hong Kong, Melbourne and Wuhan, in investment level order. There are 396 new-build airports currently known to CAPA, of which 208 (52.5%) are in the Asia Pacific region.

Number of new airport projects by region, Feb-2016

The pie chart on the previous page identifies Europe as the largest world region for airport projects (though it is not so for investment levels, which are relatively small) and the bar chart shows it to be the joint second largest for new airports.

The main European projects by investment level, actual or projected, are at Heathrow Airport (now drawing towards a conclusion and not including the putative third runway), Rome Fiumicino (which may be reassessed in the light of changing environmental services) and the interminable construction of Berlin Brandenburg Willy Brandt Airport around the site of the existing Schoenefeld Airport. This is counted as an existing airport expansion though it could equally be considered as 'new'.

A decision on the sale of the UK's London City Airport is expected in 1Q2016. The sale, by Global Infrastructure Partners and minority owner Highstar Capital/Oaktree Capital Group, is attracting political controversy on account of a decision by the Mayor of London to reverse a previously granted dispensation to permit physical expansion of the airport. (For more detail please read the online report: centreforaviation.com/242948)

Another important issue is the relevance of the airport once the east-west, partially underground, Crossrail express heavy rail line opens in full in 2019 as it will connect the City of London and Canary Wharf (the new City) to Heathrow Airport, and rapidly. There is a growing band of politicians that would like to see much-needed affordable housing built on the London City Airport site.

Budget airlines not required - London City Airport thrives on full service carriers - seat capacity by airline, Feb-2016

Even so, there were many interested parties, subsequently reduced to five, including Cheung Kong Infrastructure and Atlantia, together with three consortia (led by Macquarie, which has now withdrawn); Allianz/Borealis; and Wren House/Hermes/Ontario Teachers' Pension Plan.

The airport's estimated value of GBP2 billion (USD2.83 billion) is based on a formula of 27 times its EBITDA, which in 2015 was GBP71.5 million; an earnings multiple that goes back to the pre-financial crash days, and which may reflect land values rather than infrastructure values. Apart from the Royal Parks the airport site is probably one of the most highly valued in London for its property potential.

Most of the major airports in mainland Europe are now partly or completely investor owned. The French partial sales get under way again in Feb-2016 with completion of the Nice and Lyon airport deals, which attracted over 20 interested parties. (For further information see the online report: centreforaviation.com/249583)

The French government may reduce its stake in Aeroports de Paris though it would require a Bill to be passed in both parliamentary assemblies.
In Spain the privatisation of AENA could be threatened by the make up of the new government there, though there are no evident signs yet of any appetite to reverse it. Elsewhere, a tender for the management of Murcia Covera International Airport should be issued again early in 2016. Seven companies are reported to be interested in the tender.

The question must arise as to whether Ciudad Real Airport could be revived again. Attempts to auction it off at a sensible price have failed. It was launched at a terrible time economically but with Spain's economic fortunes now on the up and Spanish airlines beginning to support even more remote airports like Badajoz, it is not impossible that someone might try to make a go of it. But they would need to remember that most of the original investors lost their shirts on the project.

The Greek regional airports 40 year concession agreement (to Fraport/Copelouzos) was signed in Dec-2015, opening the way for a further island airport tranche and a possible IPO or other disposal method appropriate to Athens Airport though the Greek government may prefer to hang on to the flagship airport if it can.

Otherwise in Europe and apart from the occasional small airports in Italy (where the air navigation organisation ENAV will also be part-privatised in 2016) and one-offs like Frankfurt Hahn in Germany, where purchase offers have been made, the opportunities for investors will be mainly in Eastern Europe. Indeed, a concession has just been awarded to operate Bulgaria's Gorna Oryahovitsa Airport for 35 years, a transaction that had been anticipated for five years.

Those known of, or believed to be forthcoming, include Krakow International in Poland (potential stock market flotation); Sofia Airport in Bulgaria (concession); Belgrade Airport in Serbia (likely concession); and the concession on the combined Lithuanian Airports (Vilnius, Kaunas and Palanga) which is in play momentarily. Interested parties in the Lithuanian transaction are not known but may include - unusually - Manchester Airports Group, and Aeroports de Paris, which is known to be seeking more 'challenging' projects that have lower prices. (For more information see: centreforaviation.com/244819 (also Part 2))

In North America, there are two different stories where airport construction is concerned. 20.4% of global airport construction projects are at existing North American airports, but in terms of new airport project construction that region is very much at the bottom of the pile where construction is concerned.

And Canada is even trailing the US; there is no known new airport construction project there, only the very hypothetical one at Pickering to the east of Toronto. The moral seems to be 'make do and mend' across the continent but to be fair there is perhaps more investment in US runways and terminals at the airports that already exist than politicians and trade pressure groups give the country credit for.

That is not the case where airport privatisation is concerned.

Despite Congress enacting the federal Airport Privatisation Pilot Programme in 1996, the only US commercial airport in private hands is Luis Munoz Marin International Airport in San Juan, which is not even in the US proper. The second failure of the lease agreement for Chicago Midway Airport seems to have knocked the wind out of the sails of the privatisation movement.

There is pressure building on Congress, as it acts to re-authorise the FAA during 2016, to modernise the Pilot Programme to enable US airport owners, the global airport industry, and financial investors to share in the benefits of airport privatisation.

Four potential privatisation changes in the US might be:

  1. Simplifying the airline approval process, perhaps reducing the required airline approval ratio from 65% to 50%;
  2. Allowing partial airport privatisation, which might make many city and county governments more comfortable with the concept. Actually this is happening already through PPP deals such as at New York LaGuardia. A variant might be to have some or all of the airport sponsor's retained stake transferred to a public employee pension fund;
  3. Eliminating the numerical limit on airport privatisations. The current Pilot Programme permits only 10 airports to be privatised and only one can be in the 'large hub' category. This restriction exists nowhere else;
  4. Allowing the use of tax exempt bonds for a privatised airport. Current tax law requires that they be paid off or defeased if the airport changes hands. The Pilot Programme law could be amended to permit companies to use tax exempt debt in the acquisition of airports, including the refinancing of existing tax exempt bonds of the airport in question.

In the absence of a breakthrough in these critical areas it is unlikely any airport will sign up to the Pilot Programme as it stands.

In the Middle East attention is mainly focused on events in Saudi Arabia where the General Authority of Civil Aviation (GACA) adopted a new strategy in 2015, namely, inter alia to "transform Saudi Arabia's aviation sector profitability and performance by encouraging foreign investments - and privatising the management, and operation, of our airports". Easing the financial burden on the state budget is also an important objective. Low oil and gas prices have been affecting the country's finances although it has enough sovereign reserves for its expenses for at least a decade.
In Jul-2015, Madinah International Airport, the first privatised airport in Saudi Arabia, opened its terminal following the completion of the initial stage of its development. The entire project will roll out over three phases, under a USD1.2 billion BOT contract. GACA is following up its work to privatise this airport with plans for similar projects at other Saudi Arabian airports, commencing in 1Q2016.

The process will run between 2016 and 2020 and will include domestic, regional and international airports. Riyadh's King Khaled International Airport will be the first airport to be privatised, followed by Jeddah's King Abdulaziz International Airport (1Q2017) and Damman's King Fahd International Airport (3Q2017). BTO (build, transfer, operate) schemes will predominate while GACA will continue to own the airports. The privatisation of both international and domestic airports will be available to foreign and local investments and some airports will be capped at 25% to ensure foreign operators have a majority holding in operating contracts.

GACA has already selected daa International (Ireland) to operate and manage the new T5 at Riyadh Airport. GACA also confirmed it will move to privatise the country's air traffic control network and it will develop two 'economic cities' within the boundaries of the Riyadh and Jeddah airports. Elsewhere in the region, in the UAE, Sharjah Airport let it be known it was seeking investment to expand all areas of operation, which could be BOT or PPP schemes, or joint ventures.

Looking at construction activities, some of the largest projects in the world are in the Middle East, with Dubai World Central alone costing over USD32 billion in total. Expenditure on new airports is comparatively low. It could be argued the region as a whole does not need them in the sense that congestion and overlap between existing airports is one of the contributory factors in the challenge of airspace management in the region, which threatens its future viability (the others are military only channels and political instability).

In Latin America, attention will return to Brazil in 2016 and the third tranche of airport privatisation there. The government will hold 21 concession procedures across the entire transport spectrum in 2016, raising as much as USD17.5 billion.

It has been suggested that both of the first two tranches saw excessively high concession prices and that will probably influence the pricing of the third one. The largest airports have been privatised now; the ones to be concessioned in May 2016 are the much smaller and less well strategically situated Florianopolis, Port Alegre, Fortaleza and Salvador airports. The poorer than expected financial performance of Brazilian airports generally is expected to influence concession fees negatively. The government is targeting USD740 million in fees.

There have been other changes. The concession parameters are less attractive. 25% of concession fee payments will be due upfront and there is a requirement on the concessionaires to invest USD2.1 billion in terminal and runways post-privatisation over the 25 and 30 year concession periods. Concessionaires will be restricted from managing two or more airports in the same region.

On the other hand there will be less government ownership. Infraero, the state owned airport company which retained 49% equity stakes in the five first privatised airports will hold no shares in the next privatisation round, not even a 'golden share' or reserved veto right. Infraero is reported to be facing financial exhaustion as it struggles to meet its capital obligations for the five existing airport concessions. (Furthermore, the government reportedly plans to sell 10% of the 49% of capital held by Infraero in airports that are already privatised.) The sale is primarily driven by Brazil's challenging economic outlook.

Elsewhere in Latin America, Vinci Airports will complete the acquisition of six airports in the Dominican Republic from Advent International in 1Q2016, thus bringing the total number of airports operated by the French construction conglomerate to 33.

Paraguay will commence the 30 year concession process of Asuncion Silvio Pettirossi Airport in Apr-2016, with a decision to be announced in Jul-2016. Chile's Concepcion Carriel Sur Airport will award a concession contract by mid-2016.

In the Caribbean, the bidding process for the privatisation of Norman Manley International Airport in Jamaica closed without any bids being received by the 30-Dec-2015 deadline. Five contenders had been prequalified. The Minister of Transport is investigating reasons why the process fizzled out but is adamant there is no rush to complete it as the airport is profitable.

Airport construction activities in parts of South America tailed off as a result of the completion of projects relevant to the 2014 Soccer World Cup and the 2016 Olympic Games in Brazil. Partly for this reason Latin America is the lowest ranked region for airport construction at this time at existing airports - though it is higher in the rankings for new airports, such as the one at Mexico City.

Indeed, IATA has called for more investment in aviation infrastructure throughout Latin America, referring to its inadequacy as an economic handicap. It will return. In Brazil for example the regional aviation programme covering 270 airports and including 13 new ones, will be ramped up in order to be completed in time for the end of President Rousseff's period in office in Dec-2018.

In Africa, airport construction activity is at a higher level than might be expected. The number of existing airport construction projects there actually ties with those in Europe though the aggregate value of those projects is less, at USD17 billion. As for new airports, there are no less than 16 projects over USD250 million in value, including two around the USD4 billion mark.

In the next five years, the GDP of Africa is expected to be USD2.6 trillion. To keep pace, and with a rapidly growing population, there will be a direct increase in infrastructure spending by governments as the demand for infrastructure will rise faster than availability. Moreover, according to IATA, seven of the 10 fastest growing country markets in percentage terms will be in Africa over the next 20 years. Each is expected to grow by 7%-8% p/a on average, doubling in size each decade.

Even so, the world is not beating a path to Africa to invest there. There are still too many uncertainties concerning diverse matters such as safety (in the air and on the ground), the infrastructure requirement (airports and air traffic control, both from a base position) and political interference.
Nigeria has been talking about privatising its airports for years and in Dec-2015 the Minister of Transport announced plans to privatise four of them including Murtala Muhammed (Lagos); Nnamdi Azikiwi (Abuja); Port Harcourt, and Mallam Aminu (Kano) in order to "guarantee efficiency and good management in view of limited resources at the disposal of the government for infrastructural development in the aviation industry". The government expects to complete construction of new terminals at all of these airports by the end of 2016. There is latent interest. 14 companies are reported to have submitted bids for the proposed concession of Asaba International Airport, the vast majority are local to Nigeria and hardly a single one is previously known to CAPA. In the interim, Federal Airports Association of Nigeria will adopt a concession model in areas such as car parking and ground handling.

It is widely held in Nigeria that the use of PPPs for airport concessions and infrastructure development is still a novelty and that the parties involved in such agreements are still learning the rules.

Like it or not, those rules have to be learned and applied quickly because the rest of the continent will be looking to Nigeria for guidance in their own privatisation attempts. (For further comprehensive information see CAPA's online report: centreforaviation.com/260864)