View from Europe's secondary airports: Interview with Clive Condie, CEO Churchill Airports

Airport Investor Monthly (AIM): Tell us a little about Churchill Airports, where it has come from and where it is going. What is the nature of your interaction with financiers?

Clive Condie (CC): Churchill Airports was established in 2005 when, together with Paul Lush and Al Romeu, I left Alterra Partners - the JV between Singapore Changi and the US group Bechtel. When the shareholders decided to exit Alterra, we developed our own business plan and decided to set up Churchill Airports.

We have brought some other experts into the business - notably Gelin Manzano and Jeremy Halse - and have developed Churchill Airports into a boutique vehicle that works with airport investors and owners to create value from airport investments and acquisitions. We do consider ourselves to be a truly independent operator.

As a management team we have worked together successfully over the last 10 years or so and have been instrumental in delivering seven successful airport transactions. Our classic model is engagement through a project's inception, acquisition and crucially the execution of the Business Plan post acquisition - principally in a quasi non-executive capacity.

Our experience is much wider than that though - I spent many years at Manchester Airport and some years at British Airways. Al spent many years in senior positions at Bechtel, and successfully managed airports in the Alterra portfolio. Paul has been a director of London Luton (UK) and other airports and is well versed in acquisitions having undertaken numerous acquisitions, large and small, in his career, whilst Jeremy has extensive senior management experience at BAA and Bristol Airport and has advised on numerous airport deals as a consultant.

As Churchill, we have worked with a number of investors including Barclays Private Equity, the Australian infrastructure investment bank Babcock and Brown, and Balfour Beatty Capital (UK).

Our focus has historically been on small- to medium-sized airports in the UK and Europe (for example, Leeds Bradford, Blackpool, Lahr and Pilsen) but given the limited number of suitable projects and our strong credentials in Latin America and also in larger airports (such as Luton, Lima and Curacao whilst we were at Alterra apart from our pre-Alterra experience) we have recently broadened our outlook to consider larger opportunities elsewhere.

AIM: At Blackpool, the airport has lost services from Ryanair and Monarch - almost a 50% reduction over two years - though Jet2.com continues to support the airport with a series of services to Spanish vacation destinations. What prospects are there for future growth just now, given the economic climate and the Air Passenger Duty (APD)? Do you believe that a 'special case' should be made for regional UK mainland airports in the application of the APD, as has just happened in Northern Ireland because of the proximity of Eire's Dublin Airport with its much lower tax regime? What criteria would you use?

CC: Blackpool, like the rest of the UK, has faced a very challenging economic environment over the last few years. As the UK economy recovers I would expect traffic to once again grow from UK regional airports although the impact of the Air Passenger Duty presents a significant challenge for the aviation industry in the UK. Let's not lose sight of the fact that it was introduced to discourage people from taking flights at all. A legacy of redundant political dogma, which sadly for us all seems to have worked - since 2007, the number of air passengers from this country has fallen by 22%.

A typical family of four is currently faced with an APD of GBP48 when flying economy class on a short haul European flight and the Government's current intention is to increase this next April by 10% - double the rate of inflation. That is on top of the fact that it has risen up to 325% over the last six years. When Britain enters the Emissions Trading Scheme in Jan-2011, this too will add greater cost to flights at a time when many ordinary families are coming under great financial pressure.

As we all know, it is an indisputable fact that airports create jobs and stimulate economic activity and I would argue that the logic the Government has applied recently in protecting Belfast's trans-Atlantic service by reducing the applicable APD from the Long Haul rate to the Short Haul rate demonstrates clearly that the Government's thinking is fundamentally flawed. I strongly believe that the APD should be scrapped to stimulate growth in aviation - Britain's airline passengers are already the highest taxed in the world. Even in Germany where the APD is also characterised as a Green tax to discourage people from flying, it is roughly only half the rate of that of the UK.

Unfortunately, the numbers of inbound tourists to the UK have also dropped significantly this year and despite the recently launched 'Great Britain' campaign and the attraction of the Olympics next year, I believe the ADP represents a significant barrier to growth. Indeed I believe it represents a significant barrier to Britain's competitiveness.

AIM: Quite a lot of money is being invested in the town of Blackpool to enhance its fading tourist appeal, though it did lose out on the national Casino Project three years ago when the Government changed its mind about such attractions. To what extent do you think Blackpool will be able to influence its own identity in the future, i.e. by attracting incoming traffic rather than relying on outgoing?

CC: Blackpool is a great place. According to a Which survey last year, it is the UK's all-time favourite seaside resort. It attracts 14.5 million visitors a year and significant investment is taking place. The sea defences are being upgraded, the tram system rebuilt and the Tower has recently reopened having undergone substantial improvement.

The Illuminations and Pleasure Beach (the latter incidentally attracts over six million visitors annually) are world class too. I believe Blackpool has a great future and over time I would expect to see more and more overseas originating tourists visiting Blackpool. After all, it also serves as a great gateway to the English Lake District.

Blackpool Airport, capacity (seats per week) by carrier: 03-Oct-2011 to 09-Oct-2011

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Source: CAPA - Centre for Aviation and Innovata

AIM: On a similar theme, a major attraction at Germany's Black Forest Airport, Lahr, has been the huge Europa Park amusement park nearby, and the Black Forest itself. But the airport is situated fairly close to major cities like Strasbourg and Basel. To what extent do you consider Lahr to be a regional passenger airport? And what prospects does it have for increasing freight throughput, given it has a long and strong runway?

CC: The facilities at Black Forest Airport Lahr (BFAL) are first class. It does indeed have a very strong 3000m runway, a modern ILS, a very large apron and quite reasonable terminal facilities. The opportunity for the airport is its proximity to the A5 motorway, the Black Forest and Europa Park - a mere 15 minute's journey by road.

Europa Park is a first-class theme park - Europe's largest seasonal theme park. The Sunday Times Travel Magazine ranked it the Best European Theme park even ahead of Disneyland Paris. The park has a number of excellent quality hotels and compared to other European theme parks offers a world-class product at great value for money.

The issue for the airport is not so much the proximity to other airports, Baden-Baden at 80km, Basel at 100km or even Strasbourg at nearly 60km, all of which represent significant time distances to Europa Park. The issue for the airport is the licensing regime in Baden-Württemberg. The region grants the licence for the airport and they are also the owners of Baden-Baden Airport. I think it is a shame that BFAL has not been granted an unrestricted licence by the region.

AIM: How does Pilsen Airport in the Czech Republic fit into the portfolio? What advantages and challenges does it bring?

CC: We became involved with Pilsen at the same time that we became involved with BFAL, both of which were acquired together with Babcock and Brown when their previous owner entered into administration.

Pilsen is rather like BFAL in the sense that it has a number of issues to overcome if it is to fully realise its potential. In time, I believe Pilsen will become a successful airport - located on the E50 and about one hour's drive from downtown Prague.

AIM: Ahead of the GAD conference in Nov-2011, where the future prospects for airport privatisation will again be discussed at length, how do you see things developing from your point of view as an operator of smaller, secondary level airports?

CC: Airport privatisations have obviously slowed down considerably during the financial crisis. Immediately prior to the collapse of Lehman Brothers prices had also become, in our view, excessively high. Since then we have seen the collapse of the Chicago Midway deal in 2Q2009 and there have been few transactions since.

The most significant transactions have been the sale of London Gatwick to GIP in 4Q2009, the sale of a 65% stake in Peel Airports to Vancouver Airport Services and the award of a 25-year concession for Male airport to GMR, both in 2010. There has obviously been the asset swap between MAp and Ontario Teachers Pension Plan earlier this year and the sale of Hochtief's airport business looks like it is currently nearing completion.

The sale of London Stansted and one of BAA's Scottish airports - most likely Glasgow - is being dragged out though, as Ferrovial seem to be buying time in the expectation that market conditions will improve. A potential sale of a significant stake in Newcastle Airport (UK) also seems to be taking a long time to come to market.

Elsewhere, the partial privatisations of Barcelona and Madrid airports seem to be progressing but with the impending election in Spain, I doubt that the aggressive published timescale will be achieved. The sale of a number of airports in Brazil too seems to be quite a protracted and politicised process.

I would anticipate that as market conditions improve, more transactions will come to market. There seems to be a general consensus that global air passenger demand will grow at around 5% or so annually for the foreseeable future and therefore airports will have to continue to invest and increase their capacity. The public sector is likely to continue to face financial constraints and therefore I would expect the airport privatisation market to present significant opportunities across all categories of airport going forward.

AIM: What type of airport does Churchill Airports covet as the next addition to its portfolio? We understand that Churchill Airports was reserve bidder for Leeds Bradford Airport in 2006, a transaction that was ultimately won by Bridgepoint Capital for what was and is a considerably bigger airport than those in Churchill's portfolio.

CC: The Churchill team have considerable experience of successful larger airport transactions and therefore our goal going forward is to work closely with institutional investors and pension funds, help them fully understand the airport sector and thus obtain the best possible return from an airport investment. Our model is to principally align our reward structure to the realisation of a successful transaction over potentially a number of years. We think our model is unique and we are now setting our sights firmly on some larger opportunities.

AIM: Finally, where did the company name come from?

CC: Quite simply, everyone has heard of Winston Churchill - he was a great leader. We have set out to be leaders in the airport transaction environment. One of my favourite quotes from Winston Churchill is: "It is no use saying we are doing our best. You have got to succeed in doing what is necessary".