Hungarian government seeks to gain ownership of Budapest Airport
The Hungarian government, in the form of the current ruling party, Fidesz, has a chequered history where its gateway airport in the capital, Budapest, is concerned.
Having once owned the airport, it had cancelled a contract with a foreign company to build a terminal (at some cost) and then subsequently threatened to renationalise it and/or list it on the stock exchange on several occasions after it was privatised when Fidesz was out of power. Latterly a consortium with connections to the government had sounded the owners out, late in 2020.
Now the government has made an unsolicited bid to buy the majority share that is held by the German company, AviAlliance.
It looks for all the world as if this is a political manoeuvre by the Prime Minister, Viktor Orbán, who faces a make or break general election in 2022 or sooner, and who is embroiled in yet another conflict with the EU to settle the issue before Hungary potentially quits the EU – or is even ejected.
It could lead to a bidding war as the sector starts to clamber out of the COVID pit it has been in for 18 months.
- The Hungarian government makes a bid to take (back) a majority share in Budapest Airport.
- Preceded by an offer from a consortium with links to the government last year in 2020, it is part of the ruling party’s efforts to renationalise widely.
- Hungary is at loggerheads with the EU over several human rights issues, and has even been invited to leave the bloc. This bid may be positioning for such an eventuality.
- Other bids could be made, now the cat is out of the bag.
- Budapest Airport was, and remains, a low cost airport.
- Other Eastern European governments are unlikely to follow suit, but some of them have history where abandoned airport privatisations are concerned.
Hungarian government makes non-binding offer for 55% of Budapest Airport
Hungary's Innovation and Technology Ministry said that it was "strategically important" for the airport to be under state ownership, while AviAlliance stated that it hoped to "be given the opportunity to remain invested" in the airport. The state has no stake in the airport at this time.
AviAlliance is required to review potential offers, whether or not they are solicited. AviAlliance is the airport's largest shareholder, with 55.4%, with GIC Special Investments holding 23.3% and Caisse de dépôt et placement du Québec owning 21.2%. Neither GIC nor Caisse de Depot has been approached concerning their stake.
A previous offer had paved the way
A change of ownership for the airport has been on the cards for some time. It was reported by CAPA in a Nov-2020 article that Hungary's partially state-owned oil refiner MOL Group, as part of a consortium of companies and business people in Hungary and the US, had submitted an unsolicited offer for the purchase of Budapest Ferenc Liszt International Airport. Please see: Consortium bid for Budapest Airport; more political than it appears?
It was suggested at the time that there might be a political motive behind the move. Hungarian Prime Minister Viktor Orbán has been open about his desire to oust the foreign owners from Budapest Airport, which had been one of the world’s fastest growing midsize hubs. He has already reintroduced state control in several other sectors during his tenure.
The two privatisations of the airport to date have both met with political resistance.
The ‘key’ to relaunching tourism, says minister
The Innovation and Technology Minister László Palkovics, who has been put in charge of the airport deal, has said that acquiring the airport was the “key” to relaunching tourism after the pandemic, and he criticised its owners for not investing enough in the quality of services at the airport. That is an often-used argument which has previously been directed, rightly or wrongly, at a wide range of private sector operators over the years, most notably at the Spanish company Abertis, which eventually exited the business altogether.
AviAlliance has already responded, noting that all its five airports have been severely affected by COVID-19, but that “we continued our investments in the (Budapest) airport’s infrastructure and operation during the current crisis as we believe in its fast economic recovery and long-term growth potential”.
BUD slow to regain capacity
Regarding COVID-19, the chart below shows that Budapest Airport has been slow to regain capacity compared to many others, although capacity did start to climb rapidly from the end of May-2021.
Even so, in the week commencing 12-Jul-2021 it is still at par with where it was at this time in 2020, and at only 43% of what it was in 2019.
Budapest Ferenc Liszt International Airport: weekly total system seats capacity, 2018-2021* (projected)
Investments total USD735 million at Budapest Airport
As for AviAlliance and the consortium’s previous and future investments at Budapest, according to the CAPA Airport Construction Database around USD735 million in infrastructure investment was committed at the airport through to 2023. The planned investments include the construction of a new terminal building next to the existing terminal 2 and a new cargo city.
In Jun-2020 the airport completed the construction of pier 1 in terminal 2A, increasing the zone's surface area to 11,500sqm.
A long history of transactions
The airport having previously been state-owned, 75% of it was sold in 2005 to what was then the UK’s BAA plc for EUR2.6 billion (and at a very high earnings multiple of 29.3), when it was handling 7.8 million passengers per annum.
BAA had outbid the German constructor Hochtief Concessions (now AviAlliance) and 11 other ‘big hitting’ investors in the process of securing Hungary’s biggest-ever privatisation deal. The attraction to these investors at the time included the recognition by IATA that Hungary was expected to become the third fastest growing aviation market in the world.
Two years later the same holding was sold on to a consortium for EUR1.9 billion, representing an earnings multiple of 23.8.
The consortium consisted of Hochtief (AviAlliance), the Canadian pension fund Caisse de dépôt et placement du Québec, the German bank KfW IPEX (Kreditanstalt für Wiederaufbau) Bank, and the Singaporean sovereign wealth fund GIC, through its investment arm Malton Investment Pte. KfW IPEX has since exited.
At that time, passenger numbers had risen to 8.2 million, but an economic downturn was clearly coming and the collapse of the state airline Malév was only three years away.
Otherwise, that reduction in perceived enterprise value over two years stands as evidence of the overconfidence that existed in airport infrastructure in the mid 2000s.
The Governing party, Fidesz, also has a history – of tampering with airport deals
But confronting the optimism of the first deal in 2005 were potential long term political ramifications.
Immediately after the results of the first round were declared, Hungary’s opposition right wing and nationalist Fidesz party, which was leading the governing Socialists in opinion polls, said that it would consider renationalising the airport if it came to power in elections due imminently.
When previously in power, between 1998 and 2002, Fidesz had cancelled a contract with Canada’s Airport Development Corporation to build a terminal, handing it to the airport management instead. That decision cost the Hungarian Government approximately USD83.4 million after it lost a lawsuit in Oct-2006.
Fidesz, which has dominated Hungarian politics since a landslide election victory as part of a coalition in 2010, a victory repeated in 2014 and again in 2018, continued to be a thorn in the side of the privatised airport.
In Jun-2015 rumours surfaced that the government intended to initiate an IPO process for Budapest Ferenc Liszt International Airport, and that approximately 20% of its share capital would be issued in the first round. That was not the case, and would have been somewhat difficult to achieve anyway, because no one was known to be selling.
More recently Fidesz had been quiet on the matter, but the latent distaste for the airport being wholly privatised to foreign entities ensured that there was little surprise in the suggestion that the government is behind this move, and that the MOL Group offer might even be the equivalent of a ‘stalking horse’ manoeuvre to test reaction.
Nevertheless, no details about the amount offered for the airport transaction, or about Mr Orbán’s exact role in the process if any, were disclosed.
Things have moved on apace since the last report.
Hungary has been in the news recently after Mr Orbán’s nationalistic government introduced legislation combating paedophilia, but which also banned the depiction of LGBT people and loosely defined so-called “gay propaganda” in content written for children.
Hungary is moving towards elections next year, with opinion polls tight, and Mr Orbán clearly seeks to reaffirm his right wing credentials in this matter.
Not unexpectedly, this move provoked outrage across much of the EU.
Hungary has repeatedly blocked EU conclusions on human rights issues and made numerous enemies along the way. The Dutch Prime Minister Mark Rutte asked Mr Orbán outright why Hungary did not leave the EU if it rejects the bloc’s laws, which prohibit discrimination based on sexual orientation, even suggesting that Budapest could use Article 50 to leave the union.
This is language rarely heard at a European Council, and is even more remarkable given that the UK has only recently used Article 50 to do just that, the EU thereby losing its second largest financial contributor.
Furthermore, there are several other countries in the east of the continent which have expressed dissatisfaction with the EU and could be tempted to take Hungary’s side if the dispute were to escalate.
Portugal’s Prime Minister, António Costa, has suggested that Hungary has the choice to be like Norway or Switzerland, to exist as a ‘part-member’, and that is an avenue it might possible explore if Mr Orbán’s party is successful in the elections.
No clear indication of a winner in the opinion polls
In the most recent polls Fidesz-KDNP is slightly behind (47%) the main United Opposition (50%), but the polls have been like a rollercoaster ride for both parties, with the lead often changing. The week before, Fidesz led by nine percentage points.
The United Opposition consists of six Hungarian parties which announced in Dec-2020 that they would run together in the 2022 parliamentary election in an effort to defeat the ruling Fidesz party. Other minority parties acting independently have virtually no say in the matter.
So the government’s move on the airport could be interpreted in several ways:
It could merely be a desire on Mr Orbán’s part for the airport, or at least a majority stake, to be in domestic hands, which just happens to have manifested itself now.
Or it could be a statement of intent to rally support in advance of the election, pandering to the electors who share Mr Orbán’s nationalistic preferences (and there are many of them) and turning the EU’s ire over the paedophilia/LGBT issue back on itself. That the majority shareholder is a German company and that the EU is perceived as being run by Germany will help in that respect, and it is notable that no offers have been made to the Canadian and Singaporean shareholders.
Or it could be that Mr Orbán is positioning his country for when it is no longer a part of the EU, perhaps becoming an EEA member like Norway and Iceland or negotiating a separate treaty like Switzerland chose to do. Or simply just leaving, like the UK did. That would evoke fears of Russian influence returning.
Once a low cost airport, always a low cost airport
Budapest Airport has been a fast growing, medium sized airport that benefitted from a boom in low cost travel, to the point where it might have challenged Vienna Airport as a gateway for the eastern part of the continent, but it is facing a difficult market due to the pandemic.
The chart below shows consistent passenger growth from 2015 through to 2019 before the pandemic brought about a 76% fall, which has worsened to 80% in 1H2021.
Normally this would be the right time to make an offer, but there is no certainty about the effects of the pandemic on the airport in the future, which marks it out as an outwardly politically inspired move.
Budapest Ferenc Liszt International Airport: passenger numbers/growth, 2015-2021
Some airport traffic profiles have changed noticeably during the pandemic but not at Budapest, where low cost seats still account for 74% of the total in the week commencing 12-Jul-2021 – exactly what it was when the Nov-2020 report on this airport was written.
Budapest Ferenc Liszt International Airport: system seats for all business models, week commencing 12-Jul-2021
The vast majority of routes from Budapest are to Western Europe, followed by Eastern Europe. There are a handful of Middle East flights and long haul services to Southeast Asia, but none across the Atlantic Ocean.
There is not much of an airline alliance presence, and less than 23% of seats currently are on alliance airlines.
Solid, regular utilisation outside curfew hours
Utilisation of the airport by airlines across all days is quite equitable. The chart below is for Wednesday 14-Jul-2021. Outside a curfew which appears to run from 0100 to 0600, there are arriving and departing seats spread throughout the day.
Budapest Ferenc Liszt International Airport: system seats per hour for 14-Jul-2021
So, not a great deal has changed at the airport in the last eight to nine months, and it is only marginally closer to ‘normality’ than it was then.
Likely to be a serious offer and it could encourage more of them
What has changed is the political ball game.
This is no longer speculation; Fidesz and Mr Orbán are quite content to use the airport as a political pawn in their determination to win the election and keep a lengthy run in government, for another few years at least. It is not the first time there have been such governmental shenanigans involving airports, and it will not be the last.
Whether or not AviAlliance will play ball is anyone’s guess. The terms of this non-binding bid have not been made public. It could range anywhere from laughable to one that they can’t refuse.
If it is the case that the MOL consortium acted as a stalking horse to assess the real value of AviAlliance’s shareholding at today’s COVID-influenced level, then it will more than likely be a serious offer to which they will have to give equally serious consideration – as well as being mindful of what legislation Fidesz might introduce if they win in 2022 but still have not gained control over the airport.
And of course, as in Australia, where a joint Australian/US indicative bid for Sydney Airport was immediately followed by rumours of others, there will undoubtedly be private sector airport operators discussing whether they should throw their hat in the ring.
Just how the Hungarian government would react to such an eventuality is uncertain, but if a better counterbid came from an operator and/or investor in a country that Hungary favours (and vice versa), then there is no reason why it should contest it.
(Could a bid emerge from a Russian operator, which typically do not work outside their own shores? We shall see).
Most Eastern European countries - some belatedly - are happy with their privatised airports
The one thing that the government offer here is unlikely to do is to inspire other Eastern European governments to do the same with their privatised airports.
Most of them have been privatised well after the Budapest transactions, the most recent being Sofia’s airport, and even though there have been instances where governments changed their mind midstream, such as in Slovakia, the majority seem to be content with their private sector owners or concessionaires.