Outlook 2023: airports need to change with the times – investment and strategy insights. Part One
2020 and 2021 were terrible years for the airport sector.
2022 has been better, but no sooner did the COVID-19 pandemic start to wane (in most places, but not Asia Pacific) than the Ukraine war set off a series of events that helped plunge much of the western world into a dystopian nightmare of power shortages, high utility prices, inflation (the dreaded stagflation in some cases), and industrial unrest.
Against that background the sector is expected to 'recover' in 2023, while remaining in the grip of global influencers for whom every rotation off a runway is another nail in the planet's coffin. It is going to be another very difficult year, and who knows what additional problems lie in wait around the corner?
However, there are still some bright spots, nationally, regionally and globally.
When peace finally comes, Ukraine, its airports and tourism infrastructure will present the world with its greatest rebuilding challenge for more than 70 years.
While it is also possible that more airports could close, many have taken the opportunity to design or redesign new terminals in ways shaped by the pandemic. For the first time they will actually be in a state of preparedness for a 'Black Swan' event.
More airports need to follow the lead.
Summary
- The mistakes of 2022 must be avoided and airports must become more resilient than ever.
- Airport sales and leases have been in decline, but the public-private partnership (P3) model thrives.
- There is a potential power shift in the Middle East and investors there are looking outward.
- While the Brazilian airport concession process comes to an end, the Japanese one forges on.
Passenger memories are long; the mistakes of 2022 must be avoided
The year 2022 has been an even more difficult year for airports than it has been for airlines, with a multiplicity of staff to be found to man not only fundamental airport functions, but also the paraphernalia of daily operations by third parties, such as shops, restaurants, duty free stores, car parks, airline catering, security, border control, and so on.
Whether or not some airports could have prepared better for a surprisingly sudden (in many cases) easing of travel restrictions is a moot point, but the majority appear now to have achieved an acceptable level of staffing.
Passenger memories can be long though, and it is in the sector's interests to avoid any repetition in 2023, with airline schedules already contracted for the (northern) winter and potential passengers having to put basic living costs well before discretionary spending on travel. The continuing war in Ukraine hardly helps the situation, obviously.
In such circumstances it can be difficult to predict events for a new year, but at least there were identifiable trends in 2022 that have provided a degree of foundation for speculation.
Sales and leases in decline
There was inevitably a slackening in the rate of M&A activity in the sector throughout the two main years of the pandemic and it continued into 2022.
The unexpected sale of Sydney Airport to a consortium led by IFM investors did go through in the early months of the year; but in what appears to be a sea change in the rationale for airport M&As, the sale of the City of Auckland's holding in its airport, if it happens, won't be because they crave it ideologically, but because they want to placate ratepayers, and the City no longer sees a value in investing in the airport. Auckland, along with other New Zealand airports, took a hammering from the pandemic, and especially from the tough travel restrictions imposed by the government.
Even so, for a city to see no value in holding equity in its own airport, the country's principal air transport gateway, must be a world first.
How many will follow in 2023 if economic circumstances do not improve?
Auckland International Airport: annual traffic, passenger numbers/growth, 2018-2022 YTD
There were the first signs, too, that some investors are beginning to question the value of some of the global gateways in their portfolio.
Ferrovial was a 'founder' core investor in London Heathrow Airport 16 years ago when the airport was disentangled from BAA plc, and has held its 25% stake ever since. But earlier this year it was heavily rumoured to be seeking to offload at least part of the stake, with the Saudi Sovereign Wealth Fund being one of the interested parties, with investment possibly going elsewhere in the world.
London Heathrow's lamentable record for flight cancellations and customer service on account of insufficient staffing during the second quarter of 2022 might have prompted this state of affairs, and it will be interesting to see if, on reflection, Ferrovial does decide to move on, and if any of the other Heathrow investors take a similar view.
Activity may be slower, but the number of investors does not decline. The Global Airport Investors Database continued to grow in 2022, with 1074 active, passive or aspiring investors in the sector listed.
With its acquisitions by lease or equity purchases in Brazil, Mexico and Cape Verde during 2022, VINCI Airports cemented its position as the #1 private sector investor in the airport sector.
Image of the Airport Investors Database
It would be foolish not to expect more of the same in 2023.
Where other 'big names' fell by the wayside over the past 10 years - such as Global Infrastructure Partners (GIP) and Macquarie Airports - VINCI just kept growing, and 'growing like Topsy'; but with intent.
Another investor likely to play an increasing role is IFM, which (apart from its [consortium] purchase of Sydney Airport) made moves by way of its subsidiary Airports Group Europe (AGE) to increase its stake in Flughafen Wien by 9.99% - ultimately being restricted for now to just 1.78%, raising the total to 41.78%.
Like 'Arnie', AGE will undoubtedly be back; and possibly elsewhere in tandem with MAG Overseas Investments Limited (Manchester Airports Group), where it is a 35% investor.
Other potential privatisations to watch out for in 2023 include Stockholm Arlanda Airport, a Swedish government-commissioned report having recommended partial privatisation, and Edinburgh Airport in Scotland.
In the latter case GIP is again rumoured to be switching emphasis away from the UK, where it has already sold London City Airport and minimised its exposure at London Gatwick Airport. A sale of Edinburgh Airport could be linked to its potential appointment as the first British airport to have US Border Control pre-clearance facilities.
In the Asia Pacific region the two airport projects to keep an eye on are at Long Thanh in Vietnam (and particularly what private sector financing can be found for this mammoth project), and the resurrected Sangley Point Airport at Manila, now subject to a Swiss challenge procedure after the original Chinese developer was dropped.
(See later for other comments on China).
Investment coming from the Middle East now other than in Europe?
One potential development to keep an eye on is a growing propensity in the Middle East to switch investment away from major airports in the West towards other regions.
Qatar Airways is already an actual and putative investor respectively in airports in Rwanda and Russia, and Qatar Investment Authority is considering investments in Pakistan, including the two largest airports there.
Potential shift in power in the region
There is arguably a shift in power taking place in the Middle East.
While Dubai remains dominant and has reasserted itself as the primary and busiest international hub airport globally, investments at airports such as Kuwait and Bahrain, together with the rise of Qatar, suggest that Dubai will not always have it its own way.
Exactly what impact the FIFA World Cup had on Qatar's prospects in the transport sector is not yet revealed; but the Qatari authorities will be buoyed by attractive, exciting games, good fan interaction, and the country having been shown in a better light than they might have anticipated, given the protests that were threatened before the competition began. (This paragraph was written before the competition's completion).
Doha Hamad International Airport: annual traffic, passenger numbers/growth, 2015-2022 YTD
Will the PPP continue to gain ground?
Throughout 2022 CAPA frequently commented on the increase in public-private partnership (PPP or P3) deals to build or rebuild airport infrastructure; usually terminals, but often buildings such as central car rental facilities or surface transport facilities like people movers. Just about any airport infrastructure can be, and has been, built by this method now.
And that is especially true of the United States, where full airport leases have dried up and the San Juan airport in Puerto Rico stands as the only successful long term example since the process was introduced in 1996.
The New York region is a beacon for airport P3s, with terminal construction at all three of the major airports, but examples range across the country and there will be more of them.
But they are not limited to the US by any means.
During the year CAPA has reported on examples as geographically widespread as the (US) Virgin Islands, Laos, Peru and Ecuador, where specific PPP deals have been sought to develop airports.
Expect more of the same in 2023, both in number and diversity.
End of the Brazilian concessions, but Japanese ones continue
One common factor throughout the past five years or so has been the airport privatisation process in Brazil, which actually began in 2011, and also the one in Japan, which got under way in 2015.
The Brazilian concessions are drawing to an end. The seventh round, which includes São Paulo's Congonhas Airport and only the Santos Dumont airport in Rio de Janeiro, which has been lumped in with a reconcession of the city's Galeão Airport, remains of any consequence.
However, and not unexpectedly, these privatisations have been put on hold by the recently elected government of former president Lula da Silva along with a series of previously announced infrastructure privatisations and PPP transactions in other sectors. Both the airports of Galeão and Santos Dumont were due to be concessioned or reconcessioned by the end of 2022, as was a projected USD1.2 billion auction of Porto de Santos, the country's largest port. The process might have reached an earlier than expected conclusion.
Investor interest, including that from abroad, has been high throughout, even with the latter concessions of small regional airports, with many of the world's biggest players involved - notably VINCI and AENA.
But equally, questions have consistently been asked about the financial demands placed on the investors.
Within the past month a 'concession rebalancing' procedure has been applied, by which five investors have received reimbursements, while one was asked to pay more as it had not delivered a new terminal building.
The key take-away from the exercise will be the impact it has on concession procedures in other countries, mainly in Latin America, where several countries are attracted to the Brazilian concept of groups anchored on one attractive airport; but also in India, where a similar scheme may be adopted.
The Japanese situation is somewhat different.
While there were some 'group' transactions, for example in Osaka and on Hokkaido Island, most of the concessions there have been on an individual airport basis, and some of them quite small.
Active airports for Hokkaido Airports Co Ltd
While the big players were again attracted to the larger airports, in a uniquely Japanese way it is consortiums of Japanese companies that have come together to win the concessions on the smaller ones.
Not all the transactions have had a successful outcome to date, mainly on account of the COVID-19 pandemic, and in one case the operator applied to be recategorised as an SME (small/medium enterprise), for tax reasons.
That will probably continue to be the order of the day in a procedure that is set to last many years yet, and it will be interesting to see how many of these Japanese companies get a taste for airports to such a degree that they seek to add foreign ones to their portfolio.
So far, that hasn't happened.