Mounties to the rescue? YVRAS about to nail UK’s Peel Airports?

It has been known for almost a year that Peel Airports, a division of the Manchester-based real estate developer Peel Holdings, has been seeking an investor, perhaps one that would take a majority stake, and that it had appointed the Manchester office of investment bank NM Rothschild to conduct a search. During that time the firm's fortunes have taken a turn for the worse. Peel Holdings recently released the following financial highlights, if that is the right word, for its airports division, which comprises Liverpool John Lennon Airport (LJLA), Robin Hood Doncaster Sheffield Airport (RHDSA) and Durham Tees Valley Airport (DTVA), in addition to City Airport Manchester, the GA facility better known locally as Barton Aerodrome that Peel hopes to turn into a business jet airport.

Peel Airports financial highlights (GBP, million): 12 months ended 31-Mar-2009

Measure	Amount	Variation %
Revenue	48.3	-9.6
Pre-tax result	-13.1	Cf. -10.6 in the pcp
Passenger numbers LJLA 2009*1	5.1 million	-7.5
Passenger numbers RHDS 2009*1	945,000	-14
Passenger numbers DTVA 2009*1	604,778	-20
Cargo*2	3,000 tonnes	-19
Net debt*3	105.4	+22.55

*1These are Peel's own figures for y/e Mar-2009. The initial independent preliminary figures sourced from Airline Network News and Analysis for the full calendar year 2009 are as bleak and, in the case of DTVA, much worse.
*2 Cargo volume fell as a direct result of the temporary suspension of TNT air services, due to the decline in international imports and exports.
*3 Attributed to capital expenditure projects across the airports, particularly hotel and car park development at Liverpool

Peel Airports passenger traffic 2009 - independent initial analysis

Measure	Amount	Variation %
Passenger numbers LJLA 2009	4.88 million	-8.4
Passenger numbers RHDS 2009	835,000	-13.8
Passenger numbers DTVA 2009	288,000	-55.4

Traffic has fallen at all three airports in 2009 as might be expected during the recession (for example London Stansted lost 10.7% and Manchester 11.5% in 2009), but the huge decline at DTVA will be of concern to any investor. Not only did bmibaby withdraw its services to London Heathrow (effectively cutting the area off from the capital), Peel Airports also lost GBP420,000 in costs on an ultimately futile GBP12 million lawsuit that sought to prove breach of contract.

Unfair APD

Peel blamed much of the increased loss on a reorganisation within the business and insisted the group was well positioned to realise its future potential as the business comes out of the recession." It also, a la Ryanair, criticised the British Government for "failing to develop a competitive climate for regional airlines", pointing the finger at "unfair Air Passenger Duty applied on every departing passenger originating from the UK whilst across (the) European Continental market similar taxation is absent or is being scrapped".

So who would be so brave as to get into bed with Peel to invest in and operate these airports? In the Feb-2010 edition of Airport Investor Monthly we point to YVRAS's renewed interest in Chicago Midway Airport, the lease for which may come up again this year, as economic conditions improve in favour of investment. YVRAS is, since last year, itself backed by 50% investor Citi Infrastructure Fund. There is no legal requirement forcing the City of Chicago to include or exclude YVRAS from any future tender.

But both the Chicago and London Gatwick deals were outside YVRAS's usual modus operandi, which is based on taking a small stake through a consortium, in a small to medium sized airport and then attaching one or more managers to the project who could be Vancouver Airport employees, or, more likely, individuals head-hunted from elsewhere. YVRAS currently has 18 airports in its stable, which includes, for example, Hamilton Airport in Canada's Ontario province, which is 40% owned by Tradeport, a company that is majority-owned by YVRAS, and Hermes Airports, the nine-member consortium responsible for the PPP project to rebuild and operate Cyprus' Larnaca and Paphos airports, and in which YVRAS holds an 11% stake.

Finding its feet

If YVRAS is talking to Peel Airports, as too many rumours are suggesting, it would imply the company is finding its feet again at the sort of level in which it has the most operational experience. It is most likely it would show the greatest interest in LJLA if it has a choice (Peel Airports would prefer to do a package deal), an airport that continues to be a thorn in the side of nearby Manchester Airport, hosting over 20 easyJet services that really should be at Manchester as that airline morphs into a clone of British Airways short-haul, and which also hosts almost 50 Ryanair routes. LJLA has gained ground on its rival Manchester by offering cheap deals to airlines, but has generated no operating profit for Peel. It lost GBP1.3 million alone in the year to Mar-2009. (Then again, no owner - public, public/private or private - has ever made a profit at Liverpool).

However, if YVRAS is interested in the real estate value at LJLA, where there is, or at least was, abundant land, it does not seem plausible that Peel Holdings, which is essentially a real estate developer, would be too keen to give that up. On the other hand there is little suggestion that YVRAS is overly concerned with non-aeronautical land use; after all there is hardly any spare room to work with at Chicago Midway.

As for the other airports, neither is really an attractive proposition just now. RHDS has been losing money for some time and has never attracted bulk services by any carrier, as LJLA has, since it opened in 2005. Recently it lost half a dozen long haul charter flights even before the demise of Flyglobespan, which at least had, like Thomson Airways, tried to support it. Thomson flights were withdrawn protractedly after TUI's merger with First Choice. EasyJet is adding routes since it decided to leave nearby East Midland Airport but RHDS is now coming under pressure from the Bridgepoint private equity owned Leeds Bradford Airport, which has set its stall out, under new management, to be the #1 airport for England's Yorkshire and Humberside region. RHDS has a nascent business technology park based on local expertise in aerospace engineering but, again, this may not be a particular attraction to YVRAS.

All downhill for DTVA

For DTVA it has been all downhill these last few years as the Tees-side region, Britain's last remaining area that is still dominated by industry, has witnessed a consistent decline, capped by the announcement in Dec-2009 that steel manufacturer Corus, now owned by India's Tata Group, is to close its Redcar factory with the loss of 1,700 jobs. Recent figures show that unemployment has increased by 50% in some parts of the region in 2009, with 28 people chasing every job vacancy in the key regional town of Middlesbrough. Moreover, DTVA is under relentless pressure from the resurgent Leeds Bradford Airport to the south, and Newcastle Airport (local municipality/Copenhagen Airports owned) to the north.

With Flyglobespan (when it was still flying) and Thomson also quitting DTVA in addition to bmibaby, and services by Ryanair and Wizzair, the fear on Tees-side will be that if YVRAS, or anyone else, cannot save DTVA, it may well face the same fate as did Coventry Airport, in the English Midlands, in 2009 - closure. In DTVA's favour is a strong local pride and that Coventry was scuppered by the owner's failure to get planning permission for a new terminal to replace a hopeless existing one. Even though the infrastructure is fairly basic at DTVA, it is not that bad and the local supporters of the airport will be cheered up by the news that Coventry may be rescued as soon as mid Feb-2010 - proving there is life after death in the airport business - and that some new services will start at DTVA this year, including the return of Thomson for the winter season.

A further piece of good fortune arrived at the end of Jan-2010 when KLM announced it would launch twice daily cargo service between Amsterdam Schiphol Airport and DTVA on a six month trial basis. The airport has not had international cargo deliveries for two years, not surprisingly causing the construction works for Peel Holdings' freight distribution park to cease.

City no-go area

At first glance there would be little to entice YVRAS to investing in the City Airport Manchester, which still has grass runways. Peel is attempting to enhance this facility - which is close to where the parent company has some enormous property developments such as Media City for BBC North - for business jets and possibly even scheduled passenger operations eventually, at a particularly difficult time for the bizjet community. Then again, YVRAS might look at Toronto's City/Billy Bishop airport (which it does not own), which is progressing rapidly, and London's City Airport, and conclude it could do the same at Manchester.

Global experience

YVRAS can offer not only the finance at this level (easily) but a broad, almost global experience on which to draw. That combination will be a great attraction to Peel Airports, which has never strayed outside the UK with its airport portfolio. Apart from those airports already mentioned, its only other venture was the now defunct Sheffield City Airport, a StolPort whose runway was not long enough to service many commercial aircraft.

Economic substitute?

There is no suggestion that Peel has been tardy when it comes to investing in its airports - well, LJLA and RHDS at least. Weighed against that is the fact that neither it has been tardy at claiming the maximum benefit obtainable from the European Union's Objective 1 and 1A schemes that supported economically deprived areas such as Merseyside (LJLA), South Yorkshire (Sheffield City Airport and RHDS) and Tees-side (DTVA). The usual agreement in these schemes is that the EU matches every GBP1 of private sector or PPP expenditure. Note though the past tense - 'supported' rather than 'supports', because these schemes are now exhausted as the EU shifts financial support packages to the east and the new entrant countries.

Might YVRAS come to perceive itself as no more than an economic 'substitute'?

Breaking News

Speculation has continued to mount in the first week of March that the projected deal between Peel Airports and YVRAS is in fact for all the airports, in their entirety.

It is difficult to value Peel Airports as many different factors in play. Airport valuations are in freefall, with Gatwick selling for just twice the price of London City two years earlier - but is ten times bigger. EBITDA multiples have been up to 30x (e.g. Leeds Bradford in 2006, GBP140 million, right in the peak of the boom) but fell back to 12x for Gatwick. It isn't easy to value Peel Airports by this method because there is no positive EBITDA for the airports.

It might also depend whether the land is part of the deal. Peel Holdings is essentially a real estate developer not an airport operator and might not want to sell it. There is land at Liverpool and also at Doncaster, where they are developing an aerospace business park, and at Durham Tees Valley (a cargo development). There are some good assets like the car park at Liverpool, but Liverpool has never made a profit in 75 years under public/public-private and private ownership.

Then there is the fact that EU money is running out. Merseyside, South Yorkshire and Tees-side all benefited from EU Objective 1 or 1A funding, which Peel and associated agencies were quick to apply for, though they did also invest heavily themselves. Most of that source has dried up and moved on to East Europe. The best guess we can hazard with no recent benchmark is GBP50-100 million, probably nearer to GBP50 million.

Background Information:

The GBP500+ million per annum turnover Peel Holdings has four other divisions -

• Peel Land & Property, owners of substantial property investment, development and land assets, mainly in northwest England. 

Peel Ports, operators of the ports of Mersey Docks and Harbour Company, Clydeport and the Manchester Ship Canal;

Peel Advertising

• The Trafford Centre, a large and unashamedly ostentatious shopping mall five miles southwest of Manchester city centre;
• LJLA was once part owned, in the late 1980s/early 1990s by BAe Systems, which at that time also owned British car manufacturer Rover. The suspicion was that BAe really wanted the land for a Rover manufacturing plant and might even close the airport which was struggling - there are two large car manufacturing plants close by in the suburb of Speke. Then it confounded everyone by producing a document claiming it would expand LJLA to 40 million ppa. Subsequently it sold its 76% holding to Peel Holdings and the Merseyside councils later sold their share.