Fraport - "airport operators have bid advantage over private equity companies"
Fraport's CEO, Wilhelm Bender, has gone on record that he believes the current financial crisis and falling demand for air travel provides airport operators with an advantage over private equity companies in bidding for airports that are for sale. His comments come as Fraport is short listed, along with Changi Airport International and Macquarie, for a USD900 million investment in the proposed new airport project in Kunming and a stake in the company that will operate the new airport, Yunnan Airport Group. Mr Bender also confirmed Fraport is interested in London Gatwick Airport, when the sale process begins, so his comments come at an opportune moment for Fraport.
Mr Bender's theory is based on his belief that "the expectations of sellers are that they need airport operators' know-how to position airports in these financially weak times", ergo (conversely, by implication) that private equity companies cannot offer this degree of know-how.
Not a unique viewpoint
This refrain is not unique. Several industry commentators for example have voiced the opinion that Grupo Ferrovial is not an airport operator per se and that while it was able to handle relatively small-scale projects, it was ‘found out' when it raised its ambitions dramatically with the bid for BAA. In a similar vein, some airlines have openly expressed the desire that the next operator at Gatwick is more concerned with the operational issues that affect airlines and passengers than with financial ones and does not incur unrealistic levels of debt.
In referring to "financially weak times", Mr Bender makes reference to the fact that global air traffic shrank in Sep-08 for the first time since the SARS epidemic in 2003, with shrinkage in Business travel spending particularly notable. In consequence, airports are now under pressure to keep their costs down and to generate more revenue from retail sales.
Private equity funds modus operandi under scrutiny
But is he suggesting that private equity funds are unable or unwilling to do either? It is certainly true that the modus operandi of such funds has been under intense scrutiny. In the UK for example, an analogy is frequently drawn with the popular and long-serving Automobile Association (AA), which was taken over by the private equity funds Primera and CVC in 2004. 3,500 employees were laid off. When it subsequently merged with Saga, the Managing Partners stood to make GBP300 million each for owning the company for less than a year, while service standards were said to have plummeted.
There are also many questions posed about the British taper relief tax regime under which such funds work, which allow private equity capitalists allegedly to ‘pay less tax than a cleaning lady' according to one newspaper.
Private Equity Funds do typically have a short-term objective and demand a minimum return on investment of 25%. The providers of these funds are usually not covered by protective legislation, so their investment can be highly risky, hence the demand for a high rate of return.
Evidence from the UK is that there has been (pre-credit crunch) a redirection of the sums invested by private equity firms towards smaller deals. Investment increased during 2007 from GBP2.9 billion to GBP31.6 billion but the effects of the credit crunch have hit harder in 2008.
Investment at Leeds Bradford exceeds some expectations
One positive example of a private equity fund in action is the UK's Bridgepoint Capital, which in the airport business has specialised in smaller deals, at Birmingham and Leeds Bradford (LBA) airports.
Bridgepoint argues that its record on investment at Birmingham Airport (1997-2001, when it owned 24.125% eventually sold to Macquarie) bears comparison with any other and since it took over LBA early in 2007 (100% equity for GBP145.5 million) it certainly has.
By most accounts LBA was a moribund municipally-owned airport before the Bridgepoint acquisition, but a GBP70 million investment announced immediately thereafter is taking shape now with plans for a GBP28 million terminal expansion being put to public consultation. The airport is to be expanded to a capacity of five million ppa by 2013 and 3,000 jobs, it is claimed, will be created, an interesting comparison with the lay-offs at the AA.
Since the takeover some 30 new routes have been announced and in Aug-08 the airport saw a record 345,000 passengers pass through the terminal - the highest number the airport had ever experienced in a single month. The number of passengers travelling out during the summer months also grew significantly with a total of 1,277,752 passengers passing through the airport between May and August, making it one of the fastest growing airports in the UK after years of stagnation.
That is not to say a private equity fund could do the same at London Gatwick, which is a whole different ball game, (and there is at least one interested enough to try), but it does show that there are two sides to the story.
Background information:
- Private equity firms that are involved in airport operation, or that aspire to be, include: Advent International; Blackstone; Bridgepoint; Penta; RReef (Deutsche Bank) and Terra Firma
- For more infomation on private equity funds, see the new World Airport Privatisation 2008 report, published by David Bentley. Contact db@centreforaviation.com.