AviAlliance acquires three smaller UK airports from AGS – what will the future hold for all of them?

AviAlliance to acquire AGS Airports for GBP1.5 billion

The German airports operator AviAlliance will acquire the UK-based AGS Airports from the joint owners Macquarie Group and Ferrovial for an Enterprise Value (EV) of GBP1.53 billion (USD1.98 billion), subject to regulatory approvals. The transaction is expected to be completed in 1Q2025.

In 2023 AGS reported adjusted revenues of GBP198 million and adjusted EBITDA of GBP69 million, which was GBP20 million greater than in 2022, and a margin of 34.8%.

So the EV multiple on the deal was 21.7x, which is a decent return for AGS as the airport sector continues on its recovery path.

The estimated capital gain to be recognised by Ferrovial at completion is around EUR290 million.

During its tenure AGS Airports had invested GBP250 million to deliver vital improvements at all three airports.

The Düsseldorf-based AviAlliance was previously Hochtief AirPort, the airports division of the German construction giant Hochtief, which was sold in Sep-2013 to a subsidiary of the Public Sector Pension Investment Board of Canada (PSP Investments).

AviAlliance has been active in M&A recently and is an investor today in four airports

AviAlliance has been involved in M&A activity over the past 12 months, increasing - within the framework of the IPO of the Greek capital's airport - its stake in Athens International Airport to just over 50% in Feb-2024. That makes it the airport's majority shareholder, and then, in Jun-2024 it ceded long-held control of Budapest Airport to a public/private consortium of a government agency and French company VINCI, in what was something of a 'coup d'etat'.

Currently AviAlliance manages or invests in four airports, three of them in Europe - Düsseldorf (30% of the equity), Hamburg (49%) and Athens (50%), and one in the Americas (the Luis Muñoz Marín International Airport in San Juan, the capital of Puerto Rico, where it holds 40% of the consortium lease operator, Aerostar).

Active airports for AviAlliance (previously Hochtief AirPort GMBH)

Source: CAPA - Centre for Aviation.

Collectively, those airports handled over 73 million passengers in 2023, with an average growth rate of 21%.

During the past decade and since that sale to PSP Investments, AviAlliance has surrendered its holdings in two airports - Tirana Rinas Airport in Albania, and Sydney Airport in Australia.

Not a prolific bidder, but when it does, nothing is off the menu

AviAlliance has never been particularly prolific in bidding for assets, being rather selective instead.

Even so, its range is global, and in that time it has, solely or in a consortium, bid for or declared an interest in facilities as diverse as those in Brazil (most recently the São Paulo's Congonhas Airport concession); the St Louis Lambert airport lease in 2019; Mumbai Airport and the Bhogapuram greenfield airport in India; Bangabandhu Sheikh Mujib International Airport in Bangladesh (as a PPP); and in Europe SE Lithuanian airports (concession), Toulouse Airport in France (concession) and London Southend Airport (equity stake) .

Before the sale to PSP Investments, as Hochtief AirPort it had bid in a huge range of transactions. These included the aborted private sector development of Berlin Brandenburg Airport, the first attempt to lease Chicago Midway Airport, the development of the South Suburban Airport in Chicago (which is still a work in progress), a BOT project at Riga Airport, London Gatwick Airport when it was being divested by BAA, and St Petersburg Pulkovo Airport (where the majority stake eventually went to rival Fraport).

It was also shortlisted for the sale of London Southend Airport, but was unsuccessful.

With so little enthusiasm for UK airports in the past, why now?

London Gatwick and Southend are the only two UK airports that AviAlliance or Hochtief AirPort is known to have been attracted to. The owner, PSP Investments, has no UK airport assets of its own, although it does have investments in port operations and rail rolling stock there.

So why has it come full circle now to acquire AGS Airports, which operates Southampton Airport on the English south coast, 80 miles (130 km) from London, and the Glasgow and Aberdeen airports in Scotland?

All three of those airports were divested from BAA plc in Dec-2014, eight years after that operator was acquired by a Ferrovial-led consortium and after the three London airports were disposed of.

BAA, which subsequently became Heathrow Airport Holdings, retaining the principal west London asset, had initially been required to sell three of its seven airports after a Competition Commission review determined that a monopoly position existed in southern England and Scotland.

Those airports were identified as London Gatwick, which subsequently was acquired by a Global Infrastructure Partners-led consortium; London Stansted (to Manchester Airports Group); and either Glasgow or Edinburgh, the latter being acquired in 2012, again by Global Infrastructure Partners.

That left just Southampton, Glasgow International (not Glasgow Prestwick, which is separately owned and has its own story to tell) and Aberdeen, the final deal being concluded in 2014, and including the Spanish company Ferrovial.

Following the break-up of BAA, the AGS group of airports are the only assets Ferrovial could have expected to hold on to, after Heathrow

Realistically, Ferrovial could not have been expected to hang on to either of the other two London airports or Edinburgh, which serves the Scottish capital, in the spirit of the monopoly-shattering zeitgeist of that era.

But what became known as the AGS airports were considered suitable for Ferrovial to retain, and in any case they were sold by way of a voluntary procedure initiated by Heathrow Airport Holdings, which no longer wished to own them - it preferred to focus on Heathrow, once the world's busiest airport, but which between 2014 and 2015 had slipped from third to sixth place in the global rankings, being overtaken by Dubai International (for the first time), Chicago O'Hare and Tokyo Haneda airports.

AGS Airports Limited is a partnership between Ferrovial (via Faero UK Limited) and AGS Ventures Airports Limited, an entity controlled by the Macquarie European Infrastructure Fund 4 LP.

It was established to invest in Aberdeen, Glasgow and Southampton airports on their transfer from Heathrow Airport Holdings, and became their owner on 18-Dec-2014.

Macquarie's airport investments are not what they were

Today Macquarie claims to be the world's largest infrastructure investor, but its airport investments are not as comprehensive as they once were, especially when the partially owned Macquarie Airports (MAp) was active in the early 2000s.

At one time MAp was one of the world's largest private airport owners and operators, but latterly the Macquarie Group has divested holdings in Brussels and Copenhagen airports, for example, as well as Bristol Airport in the UK.

That isn't to say it is not active at all in the sector. In 2019, for example, it submitted an expression of interest for the purchase of a 30% stake in Athens International Airport (see AviAlliance's successful deal there, above).

But in May-2024 it let it be known that, together with Ferrovial, it was considering selling its stake in AGS Airports.

That prompted the May-2024 CAPA - Centre for Aviation report 'Potential sale of UK airport group AGS - put on hold by UK General Election?', which questioned whether that sale might have been delayed by the UK general election that had just been announced, and, consequent to the election of a Labour government, the potential outcomes for business regulation, taxation, and traffic in the North Sea oil and gas fields that is serviced by Aberdeen Airport.

Ferrovial redirecting its attention towards the US

For Ferrovial's part, it is not the force it once was in the sector in Europe either.

That is largely down to its decision to sell its shareholding in FGP Topco, the parent of Heathrow Airport Holdings, to the private equity fund Ardian and the Saudi Public Investment Fund (PIF) (sovereign wealth fund) in Nov-2023.

Since then, in Jun-2024, a new deal was agreed involving other (unknown) sellers, by which Ardian and the PIF take 22.6% and 15% respectively, while Ferrovial retains 5.25%.

Under the earlier agreement Ferrovial would have disposed of its entire stake for GBP2.37 billion, valuing the whole airport at GBP9.48 billion. The new agreement valued Heathrow at GBP8.66 billion.

It remains subject to regulatory approval.

Ferrovial anticipates a completion of the Heathrow sale by the end of 2024.

When it exits AGS as well, it will have no assets of any substance in the UK; it was the original and major shareholder in BAA (at 56%) when it was acquired in 2006 for GBP10.3 billion, and that created a row about foreign ownership of critical UK assets that still reverberates today.

Ferrovial seems now to be shifting its attention across the Atlantic Ocean to the US, where it has reached a USD1.1 billion agreement to acquire 96% of The Carlyle Global Infrastructure Fund's 51% stake in 'New Terminal One' (NTO) - the consortium appointed to design, build and operate the new USD9.5 billion Terminal 1 facility at New York John F Kennedy International Airport.

The AGS airports 'provide vital connectivity' in Scotland

AviAlliance's MD Gerhard Schroeder says that "Aberdeen, Glasgow and Southampton airports provide vital connectivity for communities in Scotland and the southeast of England. We are committed to supporting the airports over the long term to expand their route networks, further improve the passenger experience[,] and implement the airports' sustainability strategy."

It is certainly true that the two Scottish airports provide "vital connectivity", since both of them, along with Edinburgh, facilitate movement around a country that becomes more mountainous (and even wild) the further north you go, and which has many offshore islands for which air transport is a necessity.

Glasgow has eight such domestic routes, shown on the map below, while Aberdeen has three. They include PSO (public service obligation) routes that are government-supported.

Glasgow Airport: network map for the week commencing 18-Nov-2024

Source: CAPA - Centre for Aviation and OAG.

Southampton is part of the London bubble...

That is not necessarily the case with Southampton, which is only 63 miles (101 km) from London Heathrow Airport directly by motorway, and with a comprehensive rail alternative. Southampton does also have its own airport rail station, Southampton Airport Parkway, which is a benefit.

Southampton did go through a purple patch not long after it was divested from BAA, when it was promoted as an alternative to Heathrow for business (there is a proliferation of technology related businesses along the M3 [motorway] corridor), far more so than it was during the BAA era, and also for leisure flights.

But the small increase in passenger numbers that became evident in 2016 peaked the following year, and traffic declined in 2018 and 2019 before the COVID-19 pandemic, and despite a strong recovery in 2022 it stood at only 42% of the 2019 figure in 2023, when Southampton was the 22^nd busiest UK airport (755,000).

Southampton Airport: annual traffic, passenger numbers/growth, 2016 - 2024

Source: CAPA - Centre for Aviation, Southampton Airport and UK CAA.

…and faces stiff opposition from Bournemouth Airport

Southampton Airport has at least thrived from the failure even to begin work on the third runway at Heathrow, but on the other hand it faces growing pressure from Bournemouth Airport, which is 31 miles (50km) to the southwest from Southampton, and which is now in the hands of Regional & City Airports (Rigby Group), having been sold by Manchester Airports Group in 2017.

Bournemouth's COVID-19 pandemic recovery was quicker than Southampton's, and in 2023 its passenger traffic stood at 950,000 - more than that at Southampton, and 18% over the 2019 figure.

It benefits from having over 80% of its capacity on Ryanair, which is committed to the airport, as well as an ingrained charter presence (TUI). It is also developing a substantial air cargo business, including long haul operations. The arrival of Jet2.com will further boost traffic in 2025.

Southampton is less dependent on one airline, in fact its capacity and movements are evenly split between full service, low cost and regional airlines which is beneficial, as shown below.

Southampton Airport capacity by airline week commencing 18-Nov-2024

Source: CAPA - Centre for Aviation and OAG.

While the airports have different profiles - for example, only 16% of capacity at Southampton being on low cost carriers, while it is 82% at Bournemouth - and although their route networks are very different, Bournemouth is clearly leading the way in the immediate region with its current growth profile.

Moreover, some parts of Southampton's catchment area to the north overlap with that of Bristol Airport, the UK's eighth busiest, and one with a profile that is closer to that of Southampton.

Relative location of Southampton Airport to Bournemouth, Bristol and London

Source: Google Maps.

Southampton does have several things going for it

There are numerous factors in Southampton's favour.

It has a sizeable conurbation, the seventh largest in the UK (South Hampshire, around 860,000 people), and it has its own railway station; also, Southampton is a major port.

There was a runway extension in 2023, an extra 164 metres meaning that mid-sized jets, such as the Boeing 737 series and A320 series, can use the airport.

But the impression is of a facility fighting a rearguard action. Not so much that its best days are behind it, by any means, but that they are well in the future.

Glasgow has slipped into Edinburgh's shadow

Returning to the two Scottish airports, the main issue at Glasgow, which has historically been considered Scotland's principal gateway - it is the biggest city after all, with the largest conurbation (960,000) - since it took over from Prestwick, is one of image.

Edinburgh Airport, serving the capital city and a conurbation half the size of Glasgow's, had been slowly overhauling Glasgow; it overtook it in 2007 and has never looked back.

In 2023 Glasgow served 7.4 million passengers, making it the ninth busiest UK airport, but it was well behind Edinburgh (14.4 million - almost double), which has now established itself with that 'principal airport' tag.

The size and scope of Edinburgh's operations, the fact that it can rely on incoming foreign tourism year round, and its improved surface transport access (motorways and a heavy rail/tram interchange) now put it foremost in the minds of airline operators when they are considering new services to Scotland, or an increase in capacity on existing routes.

And it is only 40 miles (64 km) from Glasgow.

Consequently, Edinburgh has 90 nonstop passenger destinations in week commencing 18-Nov-2024, including two in North America and two in the Middle East, compared to 52 at Glasgow (one in North America and one in the Middle East).

Like Southampton, Glasgow has been losing traffic since 2017, and has yet to come close to its 2019 total.

Edinburgh, meanwhile, was within two percentage points of its 2019 total in 2023.

Glasgow Airport: annual traffic, passenger numbers/growth, 2009 - 2024

Source: CAPA - Centre for Aviation and Glasgow International Airport reports and UK CAA.

And only one of these two airports, Glasgow, has a directly competing airport with the same city name (Glasgow Prestwick), although that is situated 32 miles (51 km) away.

Glasgow does have a broad span of airline business models serving it, led by easyJet, and with British Airways following it courtesy of its extensive services to London Heathrow, but as in the case of Southampton - regaining its former glory will be a long and hard task.

Surface transport is lacking

An improvement in surface transport would help.

It does have direct motorway access from the city, but there is no rail or tram service. Public transport from the city is by bus.

Various proposals for a direct rail line into one of the city's main rail stations have been proposed over two decades, but have consistently been shelved.

Oil-related businesses prompted potential long haul services at Aberdeen, but they turned out not to be viable

Aberdeen was the UK's 16th business airport in 2023, handling 2.3 million passengers. But it has been losing traffic consistently since 2014, when it peaked at 3.8 million.

Aberdeen International Airport: annual traffic, passenger numbers/growth, from 2009 to 2014

Source: CAPA - Centre for Aviation, Aberdeen International Airport and UK CAA.

The post-COVID recovery has again been cumbersome, and in 2023 there were only 2.2 million passengers, and growth in 8M2024 was a lacklustre 2.9% (well below the national average).

Aberdeen has a different set of airline users altogether serving its 20 destinations, all of which are domestic or European.

British Airways is again the largest airline, mainly on account of London services, but the regional airline Loganair is second. It operates key domestic routes, some of which are connected to the oil and gas industry (which has a major presence in Aberdeen and the North Sea).

For the same reasons the Norwegian airline Widerøe and SAS - Scandinavian Airlines both have a significant presence.

Not so long ago attempts were made to introduce direct long haul flights, for example from Houston, to support oil and gas sector movements and other indirect services ( such as one by Icelandair to tap into its North American schedule), but they were not successful or never got going.

Aberdeen in danger of running out of gas

It is the domination of the energy sector that has been Aberdeen's salvation, but which could also be its undoing. The sector has been running down as oil reserves in the North Sea decrease.

When the Labour government was elected in Jul-2024 it pledged to shift away from fossil fuels to greener energy provision, and it ruled out giving oil and gas firms new licences to drill off the Scottish coast. The Treasury has hiked taxes on participating companies, so it can use the funds to build more solar farms and wind turbines - onshore and offshore.

The oil and gas are not going to run out any time soon, but the future of those industries is now finite.

Aberdeen has other industries too, some of them related, like carbon capture, and there is an effort to rebrand the city as 'Energy Capital of Europe' rather than 'Oil Capital of Europe'. Also a wide range of high tech ones too, but it is in competition with other cities, including Glasgow, Edinburgh and the 'Silicon Glen' that runs between them for that business.

The one industry in which it had a monopoly is on notice.

No obvious 'pull factors' to these airports, but German airports are struggling

From the evidence outlined above there are few obvious pull factors that might have influenced AviAlliance to invest into these three airports.

The case might be supported, though, by another 'negative' - namely, the dire state that the aviation industry in AviAlliance's home state of Germany has got itself into.

Over 32 million of AviAlliance's passengers in 2023 (44% of the total) were at two airports - Düsseldorf and Hamburg.

The country is being held back from any sort of sustained pandemic recovery by high location costs for airlines, including excessive government levies and high access costs (air traffic tax, security fees, air traffic control fees), as well as airport charges.

Airline seat capacity in Germany is scheduled to reach only 87% of 2019 levels in 2024, compared with 102% for Europe as a whole. Germany is the only one of Europe's five biggest markets not to exceed 2019 capacity levels in 2024.

(See the related CAPA - Centre for Aviation report: Lufthansa and Ryanair unite in call for abolition of German aviation tax)

It could be concluded that, in the long run, investing in these three UK airports might make more sense than ploughing money into German ones.

AviAlliance is confident in its investment, but faces a challenge

AviAlliance is positioned to benefit from the positive aspects of each airport outlined earlier, and the fact that AGS had invested in them; it isn't being presented with ageing or inadequate infrastructure.

It is convinced it can enable each airport to realise its full potential, and is "committed to supporting the airports over the long term to expand their route networks, further improve the passenger experience[,] and implement the airports' sustainability strategy."

But this may still be one of the toughest jobs it has taken on.