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Airport investment in Eastern Europe: opportunities abound but caution needed amid changing markets

In Mar-2015 CAPA published a report highlighting how Belgrade Airport, in tandem with Air Serbia, was working towards a re-balancing of power in central and eastern Europe, away from the traditional hubs of Vienna, Budapest and Prague, although it had a long way to go to achieve such an ambitious aim.

Belgrade Nikola Tesla Airport passenger numbers grew almost 32% in 2014 and Air Serbia underwent “one of the most amazing turnarounds in history,” as it joined the Etihad equity partnership. But not everyone is experiencing such blue skies.

This is an appropriate moment to review infrastructure investments and privatisation activities at airports throughout the entire region, where there are opportunities for investors through concessions, BOTs and IPOs. But as ever, caution is required.

(See also the related report http://centreforaviation.com/insights/analysis/belgrade-airport-with-resurgent-air-serbia-challenged-the-hub-order-in-centralsoutheast-europe-213774).

Eastern Europe catching up with the west on LCC to/from capacity

One of the main factors in the growth of airports in the region and their attractiveness to investors is the continuing increase in low cost airline (LCC) activities. The two charts below contrast LCC capacity share penetration from 2003 to Jan-Jul-2015 in Eastern Europe (1) and Western Europe (2).

(1) LCC capacity share (%) of total seats:2003 to 2015 Jan-Jul* in Eastern Europe

* Year to Month indicated
Source: CAPA - Centre for Aviation with data provided by OAG

(2) LCC capacity share (%) of total seats:2003 to 2015 Jan-Jul* in Western Europe

It is evident that while Eastern Europe lags well behind the western part in terms of LCC capacity on routes within the region and is barely growing, it is catching the western parts when measured by LCC capacity on routes to and from the region. Much of that may be caused by immigration flows and subsequent VFR journeys but they are equally as valid as any other reason to travel. And those journeys have increased as new members have joined the EU, such as Croatia, and others have been admitted as candidates, such as Albania.

The total number of budget airlines flying to and from Eastern & Central Europe in 2015 is 45, as represented in the table below.

LCC Airlines for 2015, Europe: Eastern/Central Europe

IATA/ICAO Code

Airline

Months

EI/EIN

Aer Lingus

From Jan to Apr

G9/ABY

Air Arabia

From Jan to Jul

3O/MAC

Air Arabia Maroc

From Jan to Jul

ML/BIE

Air Mediterranee

From Mar to Apr

V7/SNG

Volotea

From Jan to Apr

BT/BTI

Air Baltic Corporation

From Jan to Apr

OR/TFL

Arkefly

From Jan to Apr

KK/KKK

AtlasGlobal

From Apr to Jul

KK/KKK

Atlasjet Airlines

From Jan to Mar

0B/BMS

Blue Air

From Jan to Jul

BV/BPA

Blue Panorama Airlines

From Jan to Apr

WW/BMI

WOW Air

From Jan to Jul

DE/CFG

Condor Flugdienst

From Jan to Apr

CD/CND

Corendon DUTCH Airlines

From Jan to Jul

U2/EZY

Easyjet

From Jan to Jul

BE/BEE

Flybe

From Jan to Apr

FZ/FDB

Flydubai

From Jan to Jul

XY/KNE

Flynas - National Air Services

From Jan to Jul

4U/GWI

germanwings

From Jan to Jul

2L/OAW

Helvetic Airways

From May to Jul

A5/HOP

HOP!

From Jan to Jul

J9/JZR

Jazeera Airways

From Jan to Jul

LS/EXS

Jet2.com

From Jan to Jul

TB/JAF

Jetairfly

From Jan to Apr

XC

Corendon Airlines

From Jan to Apr

GW/KIL

SkyGreece Airlines

From May to Jul

IG/ISS

Meridiana fly S.p.A.

From Jan to Apr

ZB/MON

Monarch Airlines

From Jan to Jul

HG/NLY

NIKI

From Jan to Jul

DY/NAX

Norwegian Air Shuttle

From Jan to Jul

BJ/LBT

Nouvelair

From Jun to Jul

8Q/OHY

Onur Air

From Jan to Jul

PC/PGT

Pegasus Airlines

From Jan to Jul

DP/PBD

Pobeda

From May to Jul

FR/RYR

Ryanair

From Jan to Jul

QS/TVS

SmartWings

From Jan to Jul

XQ/SXS

SunExpress

From Jan to Jul

XG/SXD

SunExpress Deutschland GmbH

From Jan to Jul

BY/TOM

Thomson Airways

From Jan to Jul

HV/TRA

Transavia.com

From Jan to Jul

TO/TVF

Transavia.com France

From Jan to Jul

X3/HLX

TUIfly

From Jan to Apr

VY/VLG

Vueling Airlines

From Jan to Jul

W6/WZZ

Wizz Air

From Jan to Jul

WU/WAU

Wizz Air Ukraine

From Jan to May

Typically, airports dominated by LCCs are not at the top of the shopping list for investors for evident reasons. Both the aeronautical and non-aeronautical revenues that airports rely on can be severely impacted by their modus operandi. Nevertheless, opportunities can be found, for example at airports where LCC activities can be combined with cargo, or where there might be sufficient spare land to construct much needed logistics facilities. It is no coincidence that numerous Chinese companies have looked hard at cargo and logistical opportunities in the middle of the Continent, and some have made the decision to invest.

Tirana Rinas Airport could be considered a model concession

It may be appropriate to look first at an airport that has been privatised for 10 years as of Apr-2015 and which can be considered a success story, somewhat against the odds. In Albania, Tirana’s Rinas Airport was taken on a 20-year BOOT concession by a consortium led by Hochtief Airports (now AviAlliance), which holds 47% of the equity. Other shareholders are DEG Deutsche Investitions- und Entwicklungsgesellschaft (31.7%) and AAEF Albanian-American Enterprise Fund (21.3%).

The airport company has the title Tirana International Airport SHPK (TIA) and it set itself the goal of steadily optimising operations at the new airport and making it into one of Albania's most up-to-date infrastructure facilities. A new passenger terminal was constructed and inaugurated in 2007.

There were certain risks associated with the project. Albania was still in a state of political and economic transition in 2005. General elections in 2009 and 2013 brought stability through coalition governments and there was a period of economic growth that has since slowed but an open market economy has been established in what was once a closed and centrally planned state. Inward FDI has significantly increased in recent years. Albania has since become a candidate state for EU membership (ironically filling a gap that might eventually be vacated by neighbouring Greece) and is a member of NATO. One fly in the ointment is potential exposure to banking sector ties with Italy and, more importantly, Greece.

By most measures the airport is a success. In 2005, TIA took over Rinas Airport when it was serving about 600,000 passengers per annum, since increasing to 1.8 million passengers in 2014 despite a slight stutter in 2012.

Tirana Rinas Airport annual passenger numbers 2011 - 2014

There is a broad mix of carriers most of them based in neighbouring countries in all directions, and 86% of capacity is currently on full service carriers. This suggests ample potential growth in the LCC segment (currently 7.9%) if and when Albania does join the EU, assuming that the management does actually wish to attract them. It might be forced to.

There are a few other airports in Albania that could handle commercial flights but the 20-year deal under which TIA is operated is also a monopoly on airspace in the country. There have been negotiations to revise those terms of the contract but no changes as yet.

Tirana Rinas Airport capacity (seats) (system) 22-Jun-2015 to 28-Jun-2015

Tirana Rinas Airport capacity seat share by carrier type 22-Jun-2015 to 28-Jun-2015

Meanwhile the airport is almost perfectly balanced between SkyTeam and Star Alliance with about one third of capacity each, with little presence so far from oneworld.

Tirana Rinas Airport capacity, seat share by alliance 22-Jun-2015 to 28-Jun-2015

Presenting the ‘Albanian Leadership Award’ in the category Private Sector/Business in 2008, the government’s award appraisal said that with its investments and the expansion of the airport, the operating company had "changed the image of Albania in the eyes of visitors and tourists into that of an open, stable and dynamic country for domestic and foreign investment".

At the end of the concession the airport will be returned to the government for an unspecified fee.

TIA can be considered one of Europe’s more successful concessions and a benchmark for others in the east of the continent in particular.

BulgariaSofia, Plovdiv, Rousse and Gorna Oryahovitsa airport concessions

The Bulgarian Minister of Transport announced in Apr-2015 that the government is studying the possibilities of granting a concession on Sofia Airport. The government backs the drawing of any form of transport infrastructure modernisation as a general policy. The government would apply as well for aid under the EU ‘Juncker Plan’ (a EUR315 billion [USD390 billion] scheme to boost private investment and instigated by new EC President Jean-Claude Juncker, focusing on removing obstacles to investment, providing visibility and technical assistance to investment projects, and making smarter use of new and existing financial resources).

If a concession was to be negotiated, matters would be firstly coordinated with the EC and the European Central Bank. The Minister added, “If we resort to a concession, it will be more successful than those in Varna and Burgas,” (the second and third largest airports and which are majority held by Fraport in the Twin Star consortium for 35 years). It is not immediately obvious what is meant by that comment. Both airports are growing and the consortium is committed to a EUR500 million investment.

Sofia Airport’s traffic has been consistent in the period 2011-2013 and grew fairly sharply in 2014.

Sofia Airport annual passenger numbers 2010 - 2014

There is a good traffic mix, led by equal distribution between national carrier Bulgaria Air and LCC Wizz Air.

Sofia Airport capacity (seats) (system) 22-Jun-2015 to 28-Jun-2015

Italian companies may be attracted to concession agreements and modernisation schemes for airports in Bulgaria. Trade and economic cooperation between Bulgaria and Italy is reported to be developing dynamically.

At the same time the Minister of Economy has been advised by Hainan Longquanren Century Invest and Development Co that Chinese companies are interested in the possible concession of Plovdiv Airport, which serves the second largest city, and the development of the airport into a logistics centre for European - Asian trade. Chinese companies have frequently shown interest in run-down airports in Central and Eastern Europe that they could develop as logistics bases.

While the Plovdiv province has a population approaching 700,000 the airport is mainly used by charter flights from Western Europe and Russia. There are popular ski resorts nearby. Only Ryanair has a year round service, connecting Plovdiv with Frankfurt Hahn and London Stansted airports. Plovdiv is also the main diversion airport for Sofia. Traffic growth has been quite strong albeit that the numbers are small. While the chart below ends at 2012, the airport has since increased its annual passenger number to 103,500 in 2014.

Plovdiv Airport annual passenger numbers 2008 - 2012

That figure is not considered adequate, however, for the commercial success and development of any airport and at least one other revenue stream is needed.

Plovdiv has a history where its ownership is concerned. It is operated by the state-owned Letishte Plovdiv EAD, which owns the runway and the apron, but the terminal is partly (58.08%) privately owned by Nordic Airport Infrastructure (Denmark), which purchased it from Alfa Finance Holding in 2010. That situation has caused some difficulties in the past with renovation of the terminal.

It is understood that the Transport Ministry has been seeking a concessionaire that would be prepared to take on a 35-year commitment and to construct a cargo terminal to boost the airport's freight operations. The Chinese interest would seem to fit well with that plan.

Separately, the Ministry has been seeking a concessionaire for Rousse (also Ruse) Airport, an ex-military facility which hasn’t seen a commercial flight since 1999 (Balkan Bulgarian Airlines).

Again there is something of a history to this airfield. The government tried to concession it out several times in the mid 2000s without success and despite some interest from Switzerland and from Bulgaria itself. Then in Dec-2014, the Ministry of Transport granted the operation of the airport to Rousse Municipality along with a stake in it. The procedure was finalised in Feb-2015 and the airport is currently officially owned by Rousse municipality. Any investor forthcoming will be required to restore operations. The airport is right on the border with Romania in the north of the country. The city-region is small – only 165,000 people – but Rousse is the most significant Bulgarian river port, serving an important part of the international trade of the country.

Finally, an unnamed US company is reported to have expressed interest in operating Gorna Oryahovitsa Airport, also in the north of the country. It has been offered to the market over a period of years with strong support from local residents, who include numerous ex-pats from Western Europe. It lies in the north-centre of the country in a popular foreign tourist area but is hopelessly underdeveloped.

The government issued a 35-year concession tender for the airport in 2011, as part of plans to boost tourism traffic in the region and to find a concessionaire to invest in infrastructure. An unnamed French construction company showed brief interest in 2012. The US company plans to open an aircraft dismantling facility at the airport, creating approximately 600 new jobs in the region; not exactly the role envisaged, but better than it handling just the occasional cargo flight as it does now. As with Rousse, the last scheduled passenger flights were many years ago. There is occasional usage by dedicated charters and by business jets.

It is important to remember that most of these Bulgarian airports have been ‘floated’ for concession purposes on and off over a period of years.

Economically, Bulgaria, a former Communist country that joined the EU in Jan-2007, averaged over 6% annual growth from 2004 to 2008, driven by bank lending, consumption, and foreign direct investment. Successive governments have demonstrated a commitment to economic reforms and responsible fiscal planning, but the global downturn reduced domestic demand, exports, capital inflows, and industrial production. GDP contracted by 5.5% in 2009, and has been slow to recover in the years since. Despite having a favourable investment regime, including low, flat corporate income taxes, significant challenges remain. Corruption in public administration, a weak judiciary, and the presence of organised crime – all of which contributed to the possibility of Bulgaria’s EU membership coming under scrutiny several years ago - continue to hamper the country’s investment climate and economic prospects.

Romania – possibility of a small stake in Bucharest Otopeni Airport

A similar set of economic circumstances applies in Romania, which also joined the EU in 2007 after transitioning from communism from 1989 onwards.

Very slowly macroeconomic gains started to stimulate creation of a middle class and to address Romania’s widespread poverty. As in Bulgaria, corruption and red tape continue to pervade the business environment. In the aftermath of the global financial crisis, Romania signed three separate emergency assistance packages with the IMF, EU and World Bank to a total of USD38 billion, linked with reforms. Economic growth rebounded in 2013, driven by strong industrial exports and an excellent agricultural harvest, and the current account deficit was reduced substantially. The economy finished 2014 with 2.8% growth, down from the 3.5% recorded in 2013.

Industry outperformed other sectors of the economy. Exports remained the engine of economic growth, led by trade with the EU, which accounts for roughly 70% of Romania’s commerce. In 2014, the Government of Romania succeeded in meeting its annual target for the budget deficit, the external deficit remained low, and inflation was the lowest since 1989, allowing a gradual loosening of the monetary policy throughout the year. However, progress on structural reforms has been uneven and the economy still is vulnerable to external shocks.

In Apr-2015 Romania approved a calendar of bourse listings for 2015 and 2016, with the government, as part of the process, aiming to list a small stake in National Company Bucharest Airports. Separately, the Prime Minister has held talks with Qatar Airways regarding the future of both TAROM and Bucharest Otopeni Airport and will talk to other airlines as well.

The intent is primarily to save TAROM but the airport, which is growing quickly (see chart) could become involved in an agreement.

Bucharest Otopeni Airport annual passenger numbers 2010 - 2014

Otopeni is another airport with a balanced traffic mix between full service and budget carriers.

Bucharest Airport capacity (seats) (system) 22-Jun-2015 to 28-Jun-2015

Bucharest’s other airport, Baneasa, which handled low cost traffic in the mid-200s, was converted into a private business jet airport in 2012 and only handled 6000 passengers in 2014.

Hungary – no IPO for Budapest Ferenc Liszt International Airport

Budapest is Hungary’s largest international airport and, after Prague, the second biggest airport in the countries that joined the EU in 2004.

During Jun-2015 rumours surfaced that Prime Minister Victor Ponta had said he had initiated 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 do anyway as the airport is completely privatised and no-one is known to be selling.

The current equity appropriation is as follows: 

Organisation

% of equity

AviAlliance

52.666

 

Malton Investment Pte (part of GIC, Singapore)

22.167

 

Caisse de dépôt et placement du Québec

20.167

 

KfW IPEX - Bank

5

 

The airport, which changed hands (initially 75% of the equity) between BAA plc and Hochtief Airports (now AviAlliance) in the mid-2000s at considerable cost, with other investors coming on board later, is finally proving its mettle following the demise of national carrier MALEV in 2012 and the battle to attract a broad range of carriers to replace it. It is now making a profit (it recorded a staggering Ebitda margin of 72% in 2014) and it is growing quickly (at around 11% passengers this year, following 7.5% in FY2014). Budapest would appear to be a solid investment for those already in the club, even if there are Hungarians who prefer to go to Vienna Airport because of what they describe as poor access and egress at Budapest.

The ruling Conservative party, Fidesz, was elected in 2010 and again in 2014 with supermajorities (greater than a 50% simple majority). The second term of office is more conservative than the first and has already involved modifications to the constitution in 2013 that have caused concern throughout Europe. More recently Premier Viktor Orbán has expressed the opinion that “the wind is blowing from the East,” referring to the recent increase of Russian influence and presenting the Russian authoritarian state as an alternative to the Western liberal state.

It is difficult to know just what to make of Fidesz at times. Between the date when Budapest Airport was first partly privatised to BAA plc in Dec-2005 and the on-sale of equity to Hochtief in Jun-2007 the party was not in power and in 2006 when an election was due it threatened to renationalise the airport when it was. When previously in power between 1998 and 2002 Fidesz had cancelled a contract to build a terminal with Canada’s Airport Development Corporation (since HAS & ADC and now Airports Worldwide), handing it to the airport management instead. That decision cost the Hungarian Government approximately USD83 million, after it lost a lawsuit in Oct-2006.

It has not carried out its renationalisation threat, yet, but there remains an air of unpredictability not only in Hungary but also in other countries in the region, for example in Slovakia where the deal to privatise Bratislava Airport was cancelled at short notice by the government in 2005 on the grounds that it would eliminate competition and create a regional monopoly.

The new Slovakian Prime Minister, with refreshing candour, declared the sale had been ‘a big mistake’ and that the airports ‘belong to the Slovak Republic’. No less than 49 firms had submitted EoIs for that deal.

It pays to remain vigilant in any dealings in the region.

Here are the traffic and capacity share figures for Budapest Airport.

Budapest Ferenc Liszt Airport annual passenger numbers 2010-2014

Budapest Ferenc Liszt Airport capacity (seats) (system) 22-Jun-2015 to 28-Jun-2015

Source: CAPA - Centre for Aviation and OAG

Lithuania – strong economy underpins the ‘concession’ on three merged airports

One of the three Baltic States and one that is faring well economically but which is in a politically sensitive zone. The three former Soviet Baltic republics were severely hit by the 2008-09 financial crises but Lithuania has rebounded and become one of the fastest growing economies in the EU. Lithuania’s continuing recovery hinges on export growth, which is being hampered by economic slowdown in the EU and Russia. Lithuania joined the euro zone on 01-Jan-2015.

Lithuania will tender operating concession agreements for the management of the country’s three international airports (Vilnius, Kaunas and Palanga), which were merged into one unit, Lietuvos Oro Uostai (Lithuanian Airports) in 2014.

The Transport Minister, who was once Director of Kaunas Airport, is at pains to stress that it is not a privatisation and that ownership will be retained by the state.  It is hoped a ‘strong foreign company’ might be attracted and one that is able to find new carriers and open new routes, following the failure of Air Lituanica and the government’s acknowledgment that no further attempt will be made to set up a ‘flag carrier’.

But if route development is the only objective – there has been no mention of investment or service level agreements so far - would a simple management contract not be more appropriate? A foreign operator might be put off by the fact the three airports were merged in order for them to co-operate better and not to compete, while it would also want to see the regulatory function separated from the operational one. In the interim a new pricing scheme is being developed and it will apply equally to all airlines. Currently LCCs benefit from special pricing agreements at Vilnius.

Vilnius Airport annual passenger numbers 2010 - 2014

Vilnius Airport capacity (seats) (system) 22-Jun-2015 to 28-Jun-2015

Kaunas Airport annual passenger numbers 2010 - 2014

Palanga Airport annual passenger numbers 2010 - 2014

Moldova Chisinau International Airport – privatisation under scrutiny

Not all is well in Moldova where the Prime Minister has proposed to “investigate” the transfer of ownership of Chisinau International Airport to Russia’s Avia Invest, under a 49-year concession agreement. The Chisinau International Airport concession was granted at the end of 2013, after five important investors from Europe withdrew from the competition.

Recently, Premier Chiril Gaburici declared that the contest of selection of a foreign company took place in ‘unfair conditions’.

Serbia – concession possible for Belgrade Airport but 25 other airports to be run by a new state operator

As in Romania there are mixed messages coming out of Serbia. Belgrade International Airport plans to invest EUR20 million in the next two years to expand in order to make Belgrade an international hub, with the Government hoping to attract bids to operate the airport under concession, and with Vinci already expressing interest.

The number of passengers using the airport is expected to reach five million in 2015, nearing its current capacity of 5.5 million. Passenger growth was almost 31% in 2014.

Belgrade Nikola Tesla Airport annual passenger numbers 2010 - 2014

Belgrade Nikola Tesla Airport capacity (seats) (system) 22-Jun-2015 to 28-Jun-2015

At the same time the Government has failed to meet several key deadlines it set relating to the future of Belgrade Airport and behind the scenes it has been planning to create a state-run operator to manage up to 25 of the country’s airports. The establishment of the new state-owned operator is still being considering and is awaiting the approval of other ministries and government agencies involved in its creation.

(See also the related report http://centreforaviation.com/insights/analysis/belgrade-airport-with-resurgent-air-serbia-challenged-the-hub-order-in-centralsoutheast-europe-213774).

Slovenia

Ljubljana Airport transformed from a joint stock company into a limited liability company, while also withdrawing shares from trading on the Ljubljana Stock Exchange in Apr-2015 where it had been listed since 1997.

There are some special opportunities - but knowledge of the market is essential

So, in conclusion, the airport privatisation thrust continues in Eastern Europe though most of the deals on offer are concessions only.

Genuine opportunities are there to be seized but there is the history of dealings in the region that begs to be researched and considered before any commitments are made. All that glitters is not gold.

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