Infrastructure: Airport/Airspace

Transcript

Dr. Nadine Itani:So based on what we have been hearing since morning about the potential of this part of the world and increasing demand for air transport and the calls for relaxing the regulations and more calls also for air transport liberalization and trade liberalization. This gives the airlines and the airports, uh, like a mandate or a justification for more expansion and growing plans. For the expansion to take place, the private sector is really trying to find its way into the airports, and there are too many different airport models, privatization models along the spectrum. One of them, one of the most popular models is the public-private partnership. Mr. Waleed, why do you think that this model is the most popular among other privatization models for infrastructure development? And within the Middle East and African context, what are the main challenges that this model faces in specific?

Waleed Youssef:Thank you, Nadine. Let's not forget that privatization or PPP arose out of a need because governments were unable to provide adequate facilitation and adequate facilities to passengers. Of course, it was kicked off after the deregulation in the US and the liberalization in the EU. In the US at the early— in the late '70s and in the EU starting in 1987 when— where essentially the EU market was deemed as a cabotage market. And it became very clear as traffic grew that the existing facilities, existing services were unable to keep up with the growth in traffic. And then something very interesting happened. Margaret Thatcher decided to privatize BAA. And this was kind of a me-too movement in airports where other governments said, you know, the UK is doing it. There's no shame in engaging the private sector and ultimately recognizing that we are not able to provide these services. It was followed by a number of transactions in Australia, in the US, Terminal 4 at JFK, for example, where it proved to be a good tool, a good solution, because it allowed the private sector to do things that the public sector could not do.

Ken O’Toole:Thank you.

Waleed Youssef:And so it was a very interesting departure, and it has proven in many contexts to be a good solution for a real problem. This last year, traffic worldwide exceeded 4.2 billion or so. It depends on who you cite. It is expected to double in the next 13 years, and providing for this growth and creating an environment that encourages this growth growth, both for airports and airlines, cannot be done through the public sector. Therefore, it's quite important. It's an important tool that many governments have sought in order to solve a lot of the problems and constraints.

Dr. Nadine Itani:Okay, I'm going to shift to Mr. Rohit. Last year, Jazeera Airways have taken a really bold move by investing in designing, building, and operating exclusively its terminal, Terminal 5. Usually when airlines go into operating a terminal, they are mainly motivated by an economic logic and also by brand positioning. What, what were the main motives for Jazeera Airways to take this move? And since you are going to celebrate next month, I believe, the first year of Have you met your targets in terms of return on investments and service quality as well?

Waleed Youssef:Sure.

Rohit Ramachandran:I'm in a strange position today of being both an airline, which is a customer of the terminal, as well as the owner of the terminal. To the best of my knowledge, this is the only case I'm aware of in the world where an airline has funded, built, designed, and now operates its own terminal. Now, there are 3 reasons why we went down this route. If you look back to 2 or 3 years ago, by any objective standard, Kuwait Airport had some of the most challenging circumstances of any airport in the GCC. So it was very clear that we needed to take more control over our passenger experience and the evolution of the airline was very much dependent on our ability to give our passengers a good start to their journey, by definition, from a terminal. So we designed the terminal and we built it from flat ground to a fully functional terminal in 11 months, and we opened doors last May. It's good for us in 3 ways. One, it gives our passengers the ability to go from the door of the terminal to the door of the airplane in 15 minutes, and very much consistent with the DNA of the airline itself, which is a low-cost, quick, efficient way of travel. Second, it helps us monetize this investment because instead of paying the government, we are essentially paying ourselves. Also, we monetize it with the— it's essentially a shopping mall type business model where you've got the duty-free, the F&B, all the retail concessions and so on, which really give us the benefit of every additional passenger that we put through the terminal, returns come back to us. And the third benefit is there's still some headroom in terms of additional capacity where other like-minded airlines can choose to operate through this terminal, giving us additional income. With these 3 ways, I'm happy to report that the terminal broke even last year, and this first quarter of this year already generating Yeah, that's good.

Dr. Nadine Itani:That's good news. Actually, the exclusive terminals between airports run by airlines, they are win-win situations for both airlines and airports, but specific conditions, this relationship might be jeopardized because the over-control of the airlines on the operations and being able to control the planning for stands, etc., might put the overall efficiency of the airport at risk, and at certain points also the coordination, general coordination of the terminals and the airport operation in general. From an airport perspective, Mr. Ken, how do you think that an airport operator can overcome the potential What are the pitfalls of an increased control of an airline-exclusive terminal?

Ken O’Toole:Yeah, it's interesting to hear Rohit. He basically described London Stansted there, except, you know, he's one of very few airlines that actually has the proven capability and expertise of building, designing, and running terminals, which is— having worked on both airlines and airports— are very different Different models. I need to answer your question. You know, there's no two ways about it. An airport and an airline have to work hand in hand. But it does come back to who knows what they're doing and where does that expertise lie. From an airport's perspective, you know, the efficiency of the operation, utilization of the assets, maximizing utilization of the assets, driving the most non-air aeronautical revenues that you can. All of that plays out in keeping landing costs as low as possible. And if we look at the history of aviation over the last 20 years, and if we look at where fleet orders and demand is saying aviation is going for the next 15 or 20 years, you know, LCCs and low-cost operators are going to drive aviation growth going forward. And having spent 7 years working with Ryanair, I can tell you they the costs of operating will be the key, or one of the key determinants, as to where that growth goes. So, you know, it, it's incumbent on the airport to work with its passengers and its customers, being the airlines, but that incumbency is aligned to maximizing the efficiency of the airport because the benefits ultimately do play back for the airline customers.

Dr. Nadine Itani:Okay, Mr. Samson, um, Lex already has The airline-exclusive terminals, Southwest, Delta, and others. What's your take on this? And are the economic benefits from an airline running a terminal, do they outweigh the operational efficiency and the other things that are at stake?

Samson Mengistu:My colleague Ken said it very well. Airlines and airports have to work in tandem. But at the end of the day, airport sponsor or airport owner has to take responsibility for creating efficiency. And especially in the US, the airlines have their DNAs to get as much exclusive asset as they can, and it's okay. But in an airport like ours, where we have, you know, limited and finite footprint, we have to drive the efficiency. I'll give you an example. In the last 5 or 6 years, LAX grew by about 20 million passengers, but with the same number of aircraft activity. How did that happen? It happened Uh, with the change in fleet and, and the airline's own capacity discipline. Um, but the next 20 million, 20 million passenger growth is going to come from the efficient use of our gates and the check-in desks and all of that. For that, the airport sponsor really has to take control of that. Sometimes airports have pressure to monetize and to get a return on the investment, but in the long run though, it has to be balanced by the amount of control the airport owner has to have.

Dr. Nadine Itani:Starting from where Mr. Samson had concluded, Waleed, what's your opinion on this? You already managed different airport projects and you have been involved in the concession, even contracting and other aspects. So what's your opinion on this airline-airport relationship in terms of running terminals?

Waleed Youssef:Thank you. I believe it is— it's a very symbiotic relationship. It can only be successful if both parties are committed to the proper development and operation of the facility and the airport in general. Where that fails is— I mean, I can tell you from my perspective, when we are acquiring an airport or we are designing a terminal, it is very hard to get real information from airlines on what kind of design it is necessary, what kind of relationships, what kind of scheduling, traffic forecasting is an issue, because it seems that airlines have a more short-term focus, whereas as an investor, you're investing in 30 or 40 years and you have a more long-term focus on what the facility should be like in operation. I would also give another example where alliances create havoc for For example, I remember at JFK in one of the terminals, British Airways and United were co-located for many, many years because they had struck up an alliance, and then all of a sudden that alliance fell apart and British Airways had to move to Oneworld. They were not able to connect properly and vice versa. This is one of the challenges, but there's also another aspect which is quite important, which is the ability of the government, the grantor, to facilitate the right environment for airports to succeed. Ultimately, the grantor plays a very important role, and it's not just limited to signing a concession agreement and saying, good luck, make it work. As I said, PPPs are a tool, but that is not enough. It needs to actually bear fruition. And one of the big issues is the enabling environment, the economic regulation, and things like that. That can be robust enough to deal with an investment and a privatization for a span of, let's say, 30 or 40 years. A lot of things have changed. If you look back 30 or 40 years ago, no one would have envisaged that we would have the kind of industry that we have today. And yet, everything is so well detailed in concession agreements and there needs to be some sort of flexibility. I would also add one more thing. We also need to recognize, as is the case with airlines, that airports very often operate in networks. The integrity of the network of airports in any country is quite important. I think this is an issue that IATA and ACI have differed on. It's very important to have the right environment that supports the smaller airlines. Airports, because as we know, airports that are smaller than 1 million or 1.5 million, whatever that threshold is, cannot be financially viable. And yet they're important to the integrity of any network. And so these are some of the issues that airport operators and investors struggle with, because just operating a capital airport in itself may not be enough if you don't have an enabling environment around that airport.

Dr. Nadine Itani:Yeah, talking about the financial feasibility of airports and airports of different sizes, generally airports are natural monopolies, and when natural monopolies exist, there's a need to regulate in terms of the public interest. The rate of return regulation for airports is usually imposing a restrictions, yet high incentives for airport operators to invest more in order to increase the volume of their profits. But this is coming at the expense of the consumers, the airlines, and the passengers as well. For you, Mr. Rohit, as a low-cost carrier, Jazeera Airways, how is the airline able to overcome the burden of the economy economic regulations since you are a cost-sensitive business model as a low-cost carrier?

Rohit Ramachandran:That's a very good question, and the honest answer is it's hard for a low-cost airline in this part of the world because there aren't too many secondary airports around, which is a key part of the low-cost airline business model. So not too many airport owners, operators, and service providers pay much attention to the ICAO Airport Handling Manual, which specifies a reasonable rate of return. And there's no self-regulation in terms of demand and supply and alternate airports that can keep pricing in check. For example, my friend here who was talking about LAX, while not in the same capacity class, but you have Burbank, you have Orange County Airport, you have a number of airports that present low-cost airlines with an alternative if they so choose. Stansted, until a few years ago, was regarded as an alternative— alternate airport to the main 2 airports in London. Of course, now it's a very successful airport in its own right. In this part of the world, Not too many. The only option you have is if you operate to a destination, your business case better be rock solid with the monopolistic airports that you're looking to operate to.

Dr. Nadine Itani:Are you involved and into stakeholder conversations with the government, with the regulators? Because Kuwait has serious plans for expansion and for development. They are building also a new terminal which will reach the capacity for 25 million passengers. How does your position and your brand and the financial viability of this model, being exclusively running this new terminal, how does it fit within the global vision for Kuwait in terms of air transport?

Rohit Ramachandran:First, let me answer the first part of your question. Sometimes it helps if you just ask nicely. If you go build a relationship and ask nicely, you may be surprised with the results that you get. Again, coming back to the overall vision for Kuwait, it's a case of better late than never. Now, there's a very ambitious plan to revitalize the airport infrastructure in Kuwait. Terminal 1 is the original airport which is now— which was last year operating about 13.5 million passengers, which is about 5 million over its design capacity. Terminal 2 is the small satellite Sheikh Zayed Terminal which used to be the private jet terminal but now has some airlines operating from there. Terminal 3 is the terminal which is under construction Construction right now, believed to be ready expected 2022. Terminal 4 is the new Kuwait Airways terminal that's now managed by Incheon Airports Company, opened for business I believe last August, if I'm not mistaken. And it's a good new home for the national flag carrier Kuwait Airways. And Terminal 5, T5, is the Jazeera Airways terminal Yeah, it seems there's a—

Ken O’Toole:Nadine, before you go on, as an airport representative, I couldn't sit here on a panel and leave a sweeping comment like airports are natural monopolies go unanswered. I mean, I think what— there are obviously some airports that have monopolistic positions. That's why you have regulation. I think the other comment that we probably all would agree on here is Exactly.

Waleed Youssef:Nadine, may I just add one thing about that? I think airports are a monopoly to the extent— we saw Peter's slides this morning where Emirates has a very large share of the market and so on. In the local sense, it is, but let's recognize that most of the traffic in this world is being handled by large hubs. as a share of the total traffic, and people do have a choice of where they connect. So I also would not agree with you that airports are natural monopolies. I think in very specific cases they can be, and in those cases they are usually regulated.

Dr. Nadine Itani:Maybe sometimes the regional or geographic structure makes them monopolies when I mention the natural. So there is always room for competition. growth and expansion. And Los Angeles Airport has already been approved expansion plans and has allocated like $16 billion for building a new terminal, access transport systems, and more upgrades also to the runways. Stansted Airport as well is going to expand to reach 34 million—

Ken O’Toole:43 million.

Dr. Nadine Itani:43 million passengers. Expansion projects of airports, usually they are sometimes encountered with community oppositions. How is the best combination for an airport operator to answer the interest of the community yet remain balanced in terms of economic sustainability and financial viability and yet, I mean, answer the community worries?

Samson Mengistu:Yes, it's a challenging issue, especially in a state like California where the environmental rules are very, very strong. The $16, $17 billion modernization, we call it, only about half of it has been entitled, meaning for the rest half, we have to go through the approval and the entitlement process. A good part of that is getting the community buy-in. By and large, we do 2 major things. One is invest in in the environmental friendliness of the airport. We've spent over the years close to $1 billion in noise mitigation. As you know, LAX is surrounded by residential community. We have spent as much as, you know, $20,000, $25,000 for each home, you know, bringing double-pane those, essentially bringing the noise in the interior level down. We have invested in technology. About 45%, 50% of our fleet is either zero or low emission. The other aspect of it is that you have to make the community participate in in a positive as well. You know, airports are huge economic engines, and in that regard, we have set aside 30% of the construction jobs to go to the local community. That is a requirement. All of our contractors go along with that. In addition to that, for the businesses as well.

Waleed Youssef:There is—

Samson Mengistu:based on the specific project, we set aside also a percentage of that to go to local contractors. So making them participate in the positive and trying to also minimize the negative impacts in the community goes a long way.

Dr. Nadine Itani:Okay.

Ken O’Toole:Ken, are you following the same strategy in the sense Yeah, I mean, Stansted got permission to increase its passenger throughput from 35 to 43 million passengers last November. That permission was granted to us by Huddersfield District Council, which is the actual local community around the airport, which is a phenomenal result that an actual planning committee at the end of our runway gave us permission to increase. And that didn't come by accident. It's come come 6 years we've owned Stansted, and since day one, I suppose, the public ownership ethos of Stansted under MAG, Manchester Airports Group, which owns Stansted, has been deployed. And, you know, we focus that under a number of banners, whether it's education, economic, or environmental. And some of the stuff on environmental I don't need to repeat. Some of it is directly driven by the airport, so we're carbon neutral ourselves. Some of it's driven by the airlines and fleet management. So in moving from 35 to 43 million passengers a year, we were able to commit to doing that without actually increasing the number of movements we already have permission for, taking advantage of aircraft size and aircraft technology, but also a lower noise envelope in terms of the operation of the airport. And that's, that's really important. Educational— we're the only airport in the UK that actually has a 3rd-level college on-site, and this is one that we are one of the founders of, and that gives people, young people, an opportunity to, to get into the industry, to live and work in the areas where they grew up, and it's the only such establishment in our region. And that's just one of probably 4 different grades of education that we invest in. And as I said, economic, you know, we are the single largest employer in our region, 12,000 people. 75% live within the immediate region of the airport. So it's, it's a difficult balance that we have to find. And if we were only driven by commercial returns, I'm sure we wouldn't have got that permission. And it's one that it takes time to build credibility, and it takes time to build trust. And that trust is long— it takes a long time to build, but it's very easily lost and can be very quickly lost.

Dr. Nadine Itani:Yeah, good luck, because I mean, in this part of the world, we feel that the dynamic of the industry is different and the system and the setup of the stakeholders is different. So we have less like community pressures on airport expansion projects. So maybe when the industry or the setup matures more, we will be facing similar challenges. I think that's a very good point. challenges. Waleed, you have spoken about the governments, how they are really referring to private-public partnership due to mainly lack of funds to expand the— to invest in the infrastructure, airport expansion projects, and because of the efficiency gains that the private sector brings into the project itself. How difficult it is for governments in less developed economies or developing countries as well to justify or to convince the private investor about the economic viability of an airport project?

Waleed Youssef:First of all, I should say that not all airport projects are viable. In fact, most airports in this world will lose money. I think The most important thing, in my opinion, is to manage some of the risks that the investor is looking at. For example, as I mentioned, having a clear and robust economic regulatory environment gives certainty not only to the investor but to the banks that the cash flow can be predictable, because really, ultimately, the cash flow should be influenced primarily by traffic risk, which is the element of risk, the biggest element of risk that's transferred from the public to the private sector. So I think that's one of the key issues. So viability has to do more with providing clarity about the project, defining very clearly what the project is and what the respective responsibilities are between the public and private sector, and providing a mechanism where if there is a disagreement, Those issues can be resolved quickly because the private sector needs also that clarity, especially if it's a publicly listed company. In the case where airports are not viable, but it is important to provide some form of investment, they can be either grouped with profitable airports in a sort of a grouping, and that has happened successfully in Mexico and in other places. Or there can be a clear transfer of concession fees in terms of a subsidy for those airports. Just as a note, maybe a bit of a departure, but we've seen very unusual levels of concession fees that are being paid by the private sector to the grantor in order to gain these concessions, very often now exceeding 50%. In one case in Santiago de Chile, Chile, it was 75%. And we've seen cases in Istanbul, the new airport, where the winning consortium pledged $20-something billion over many years, but still. In the case of Portuguese airports in the middle of the recession there, it was about $3 billion pledged by Vinci for these concessions. And I think we as an industry Both airports and airlines need to ensure that those monies are reinvested in our industry rather than going to the public treasury and being spent on things that are outside. It can be directly through airports or the airport network, or it could be through enabling investments in tourism and access to and from the airports and things like that.

Dr. Nadine Itani:Governments play a really important and crucial role in creating an enabling environment to support the privatization projects. In your personal opinion, how far are governments in the Middle East, or how close they are in creating this enabling environment? And is it there, or are we trying to reach this enabling environment to support the airport expansion projects?

Waleed Youssef:I think it's really a big challenge, not only in the Middle East, at other developing countries. I'll give you an example. I led the— I used to work for IFC, the World Bank Group's private sector arm, and I led the Queen Alia privatization, and it was very difficult to find a counterpart. We were advising the government, in fact, but the government was not well informed. They had a mandate to privatize. They didn't have money. They needed to build a new airport. But they didn't know, okay, post the day after you privatize, what is my role as a regulator? How do I measure performance? How do I— do I just rely on self-reporting from an investor? I think the same. I led on behalf of TAV Airports the acquisition of Medina Airport, and GACA also was struggling in the same way, just until today relying on self-reporting of performance and and financials and things like that. So those are the issues and many other places. I also worked in Abuja Airport in Nigeria. And so there are many cases I think where there needs to be a strong investment in this kind of regulation. And I remember going to Captain Jamjoum at the time at GACA and I told him representing TAV, I really— I would like to offer to help you develop your regulatory framework, because the worst thing for me than having no regulation and the uncertainty of it is to have a bad regulator who is actually working against me and against this PPP. So I think clarity is very important for an investor, and especially when you are spending billions of dollars over 30 or 40 years. And I think governments in general, not only in this region, but elsewhere, need a lot of support in terms of this kind of creating this economic— this enabling environment, whether it's economic, whether it's performance management, whether it's defining more clearly the relationship between the airport and the airline, especially in the case where you have national carriers. That becomes very, very difficult. And also with respect to employment, because that I think is the number one fear of governments is that the private sector will come in and will dismiss all this stuff, and that's usually an impediment to proper private sector participation.

Ken O’Toole:If I may add to that, MAG are one of 5 shortlisted bidders for Sofia Airport at the moment. I think the description is quite good. There are factors which a private operator will control, which is essentially the commercial risk, but the legal, the regulatory, and the political environment, they are the things as a private investor that we will be looking at and trying to appraise and getting comfort that actually that's an environment that we want to go and operate in for a 30-year period.

Samson Mengistu:Let me add, it is indeed the future. In LA, 2 of the largest projects in just the last couple of years are public-private partnership. There are new models. I think it's structured the right way. Governments, airlines, airports are embracing it. It could be really a win-win situation.

Dr. Nadine Itani:Rohit, from an airline perspective, how important is it for an airline to have a clear and stable air transport national policy? I mean, in the Middle East, in this part part of the world, we don't really see clear and stable aviation policies. Some countries don't even have a vision for air transport. Other countries have already published their visions online on the websites, but there are too many imbalances from east to west. I mean, when it comes to Middle East and North Africa, so because you operate internationally, not only in this part of the world, in this region. How important is it for you to have a strong and stable air transport policy for the Middle East?

Rohit Ramachandran:I think there needs to be a balance between having a strong and stable policy, a logical policy, and not to have too much regulation. So there needs to be a balance between having the bare minimum necessary for safe and efficient operation of aircraft as well as airports, but not to the extent that you stifle the private sector with too much overregulation. The other unique aspect of this part of the world is the fact that Airlines, airports, and traffic rights are seen as national assets and not sound businesses in their own rights. So unlike the EU, for example, where an EU-registered airline can just place 3 airplanes in a city and operate from there because of the open skies regime that's in place there, Here, an airline cannot place 3 airplanes in another country and start operating from there because the traffic rights of that country are seen as a national asset. All these present natural obstacles to the penetration of aviation in the economy in this part of the world compared to most of Europe, the United States, and parts of Asia. Correct.

Dr. Nadine Itani:Do you have anything to add on this, Samson?

Samson Mengistu:I'm going to agree with Rohit, the first part of what he said, which is that it needs to be a proper balance. Absolutely, you have to create the environment for the airlines and the private business to thrive, but certain regulations especially in the areas of safety and security, is key. In that regard, I think the interests are aligned.

Ken O’Toole:Ken, any comments? Yeah, I probably would take a more stringent view on the need for regulation of airspace management, but I think even in Europe and the UK, what we can see is the lack of integration. even in a highly regulated market, brings inefficiency. And we need to remove and eradicate that inefficiency if we're going to be able to continue to grow.

Dr. Nadine Itani:Okay. Thank you so much, gentlemen. It was a real pleasure. Please join me in thanking our speakers for this panel. Thank you so much.

Copyright policy: All transcripts on this site are the copyright of CAPA - Centre for Aviation. Our reproduction policy is as follows: you may quote up to 400 words of any transcript on the condition that you attribute the transcript to CAPA - Centre for Aviation and link to the original video page. All other use is prohibited. While we aim for 100% accuracy in the transcript, there may be some minor transcribing errors.