Global Airport Development Conference 2016 report: Trump, Brexit, pipelines and PPPs. Part 1
The Global Airport Development (GAD World) conference was held in Lisbon, between 29-Nov and 01-Dec-2016. This CAPA report chronicles the presentations and debates that took place on the first two days, including selected ‘stream’ sessions on both days.
There was, inevitably, a political overlay to the event, with the (Jun-2016) UK referendum on continuing membership of the European Union (‘Brexit’), the (Nov-2016) election of President Trump in the US and associated ‘uncertainty’ dominating events.
Otherwise, the concern was, as always, the ‘pipeline’ of airport privatisation details, or rather the lack of them, while the hope was for the continuation of the trend towards PPP deals.
Global Airport Development Conference Day 1 – Morning
The event was hosted by the French conglomerate Vinci, whose concessions division was the successful concessionaire for ANA, Portuguese airports, in Sep- 2013, and whose subsequent presence at Lisbon’s Humberto Delgado airport was noticeable to all the delegates that used it to access the event. In his opening speech, Vinci CEO Nicholas Notebaert mentioned that Vinci had joined the top five global ‘players’ in the area of airport privatisation, mainly because of the ANA deal, and had achieved an Ebitda margin of 50% in 2015.
The Portuguese Minister of Planning & Infrastructure spoke of the strong passenger growth in Lisbon throughout the last three years, including gains of up to 30-40% recorded in Lisbon, Oporto and the Azores with an overall average of 20%. He joked that “concessions last longer than marriages.” They certainly last longer than governments, except perhaps in Cuba.
Simon Morris of ICF was Chairman for the day and in his introductory speech referred for the first of many occasions to the US Presidential Election and its impact on aviation and to ‘Brexit.’ He said, “if Brexit happens…” which is perhaps a good indicator of the degree of uncertainty that persists in industry and commerce generally, not just in the airport sector.
John Hulsman, US Council on Foreign Relations: Trump’s supporters expect, and he will deliver
To redress the balance, the conference proper opened with a dynamic unscripted presentation by John Hulsman, a Life Member of the US Council on Foreign Relations, a Washington ‘insider’ and now a London-based journalist and commentator. In a 30-minute presentation that embraced Trump/Brexit, the oil price, COP21/CMP11 (the Paris Agreement on Climate Change), NAFTA and the slowdown in China he described 2016 as the year the political ‘tectonic plates’ were broken and warned of more to come, though he stopped short of predicting a victory for Marine le Pen’s Front National in the 2017 French Presidential election.
He attacked much of the popular press for not seeing Trump/Brexit coming and insisted that their analysis was wholly inadequate. Trump is a "Jacksonian Nationalist" (referring to seventh US President Andrew Jackson), a creed which takes a very narrow view of US economic interests, i.e. America first, second and last while recognising it is no longer the only show in town. It feels that 70 years of writing cheques to prop up NATO is coming to an end, as is the US’ support of the Paris Agreement.
Intriguingly, he added that the self-financed Donald Trump “owes nothing to anyone” unlike all his predecessors. There are no favours to be called in, except by those who won the election for him, the white high school educated voters in the Midwest ‘rustbelt,’ to whom he referred as the ‘Springsteen Democrats.’ It is they who expect the revocation of COP21 and the renegotiation of the NAFTA agreement - and that will be delivered.
On oil, the US continues to benefit from shale gas and oil production, which is cheaper and will continue to influence the commodity’s price. It sees the Chinese government as brittle, having to deliver in a way that a democratic government like India’s does not. Tensions, he believes, will continue to rise in US-China relations. Using the analogy of World War II we are in the 1920s right now, an uncomfortable prospect.
While Mr Hulsman did not specifically mention the impact on the aviation industry of these events it is clear for all to see that the bigger picture of global politics is about to influence it in a way that traffic forecasters have not anticipated.
No sign of LCC encroachment on European prime routes diminishing
Mark Manduca, Head of Transport Equity Research at Bank of America Merrill Lynch, spoke of aviation’s winners and losers. He focused on continuing LCC encroachment in Europe and described the situation there as being unique, with low cost carriers competing directly with high cost ones; old fleets with new fleets; and unionised pilots with non-unionised ones.
He described Germany as being an easy target for LCCs where the greatest growth has been on the spokes that connect through Frankfurt. Ryanair in particular has the opportunity to “cut them off” with direct services with the advantage of average fares of EUR61 against EUR140 for Lufthansa. Maintaining that no region is safe from price deflation he suggested that ULCCs will continue to attack indebted carriers and those with industrial issues (e.g. pilot strikes). Multiple price wars will impact on airports and hub airports in particular must resign themselves to the changing paradigm.
A CEO panel including representatives from Groupe ADP, Vantage Airports Group, Corporación América and Vinci Airports debated how airport leaders are responding to this maelstrom of economic, geopolitical, security and environmental ‘uncertainty.’
Vantage Group’s CEO George Casey mentioned PPPs for the first time when he spoke of the New York LaGaurdia Airport PPP. It has set a benchmark for the implementation of this model, with many airlines involved in the negotiations.
Corporación América’s Martin Eurnekian, describing his organisation as “a new kid on the block that has been around for a while,” said that Corporación América has gained experience in crisis environments (i.e. Argentina) and while he is content to continue working in those areas that experience has prepared it for expansion elsewhere in the world.
Vinci’s Nicolas Notebaert bemoaned narrowing timeframes in which to make decisions and the growing lack of stability in the industry while both George Casey and Groupe ADP’s Antonin Beurier referred to the need to invest in people, especially those of an entrepreneurial nature. Casey warned that the ‘trickle down’ of PPP transactions to secondary level airports is likely (e.g. in the US, see later) but that it is limited. Airlines are frequently seeing airports as being part of the ‘customer experience’ and municipalities often cannot deliver.
The Right Hon Baroness Manningham-Buller, ex MI5: Liquids and gels are here to stay
A second external speaker followed, the Right Hon Baroness Manningham-Buller, who was head of MI5, the UK internal secret service, from 2002 (i.e. immediately post ‘9/11’) to 2007. Her presentation was not airport specific and was delivered in the manner of an after dinner speech; nevertheless it was at least entertaining.
Her main message is “don’t try to change too much in a time of crisis”.
Contradicting Donald Trump, she insisted that retaining Muslim staff is essential as they have “an ear to the ground.” Competent individuals are needed equally in government and in commerce but also those with humility, who are open about what they don’t know as much as what they do.
She spoke of the Aug-2006 plot to bring down many airliners either over the North Atlantic or over cities in the US; what has subsequently led to the ‘liquids and gels’ (LAGs) regulations, which affected most of the participants at the event, and which might have remained a mystery had no detailed forensic examination been possible.
True to her own philosophy she admitted candidly in response to a question from the floor that she was ‘out of date’ and could not answer competently. In response to another one, which reminded her that LAGs regulations have been eased in some countries, she stated she was against the profiling of terrorist suspects as an alternative to the present regime as one could always ‘slip through the net.’
Surprisingly, in the light of landside terrorist attacks at Brussels and Istanbul airports in 2016 no questions were tabled on her attitude to heightened landside security and its effects on customer service (which was a subject dealt with on Day 2) and she did not raise the matter herself.
State of the Union – Asia lacks the concession maturity of Europe and LatinAm
Returning to more day to day matters, the ‘Investing in Airports State of the Union’ session, which included Nicolas Notebaert again, also representatives from Macquarie infrastructure, Ardian and GIP, M. Notebaert commented on the Japanese (Osaka) concession in which his firm is involved but focused more on the diversification that Vinci seeks, the need for a wide geographic outlook and to “move quickly” when an opportunity like Osaka presents itself.
GIP’s Michael McGhee reiterated that GIP’s model is to improve existing ‘not so good’ airports and opined that while talk of the ‘pipeline’ is frequent, genuine opportunities are rare.
He foresees a similar pattern of activity in 2017 with a continuing focus on “quality assets” rather than those that are still short on delivery. He would not be drawn on the future of London Gatwick and Edinburgh airports other than to say that the choice of timing for the monetisation of GIP’s airports will be crucial.
For Ardian’s Laurent Fayollas opportunities will continue to arise but it is necessary to know what you want to do with the assets first. Ardian continues to focus on Italy, which was shaping up to a constitutional referendum on 04-Dec-2016 (subsequently crushingly rejected, prompting the resignation of Prime Minister Renzi and adding further uncertainty to the European Union and Europe's economy).
Nicolas Notebaert noted that transactions in troubled economies such as Greece and Italy have progressed surprisingly well but that the ‘rule of law’ and political stability was at least as important as any statistical traffic forecasts.
Asia was identified as lacking the maturity of Europe and Asia for concession deals and that there are political constraints, as in the Philippines. Poor cash returns in China have led investors there to turn their attention to Europe. (See this link for the associated CAPA report on Chinese investment in European airports. http://centreforaviation.com/insights/analysis/chinese-investors-in-europes-airports-2016-europe-is-in-favour-again-a-capa-report-288203)
Kata Cserep, ICF: do not forecast traffic by reference only to aviation
ICF’s Kata Cserep made an interesting presentation which questioned traditional econometric-based air traffic forecasting techniques, hinting that they may have become dated, and suggested that geopolitical situations and decisions should be given much more credibility in the forecasting environment. Examples that she mentioned varied from the High-Speed Rail line between Madrid and Barcelona which is known adversely to have impacted on air traffic between the two cities and Croatia’s entry into the EU which helped increase traffic there by 20%.
Ms Cserep ran through a range of scenarios for ‘Brexit’ (GDP, foreign exchange rates, Common Aviation Area or return to bilateral arrangements, hard/soft exit and airline responses) and mentioned the impact of national planning decisions, not only on runways but equally on high-speed rail and roads. Her message was not to forecast an airport’s prospects in “isolation”.
On the specific subject of attracting airlines, there is the evident need to determine the prospects for both O&D and transit passengers and to be aware of which airlines might fill the gap in the event of a failure, referring to case studies of Malev at Budapest and Cyprus Airways at Larnaca and Paphos.
She concluded by repeating the increasingly common mantra that the only forecasts for traffic growth to carry any authority these days are for two years or less and that achieving a credible for one 10 years is almost impossible.
Deal of the Year – Vinci/Orix a complex and well orchestrated bid
The ‘Deal of the Year’ showcase gave the opportunity to three participants to present their shortlisted case for their airport together with two others on the long list.
Stewart Steeves of LaGuardia Gateway Partners made the case for the USD4 billion central area P3 redevelopment there, which is a complex procedure on a small site, the largest P3 in the US to date, and which attracted partners from across North America and 170 institutional investors. It was notable for its success in gaining airline approval but possibly lost out when judged by a panel for allowing parking revenues to remain with the Port Authority of New York and New Jersey.
Aeroporti di Roma presented on behalf of its 96% owner Atlantia for the deal that saw the acquisition of 60% of Nice, Cannes and St Tropez airports from the French government. The presentation largely outlined the benefits offered by the asset (4.6% CAGR over five years; long haul growth; no single carrier with >30% market share; ongoing refurbishment; investment grade rating; first airport to be carbon neutral and so on, without detailing a positive aspect of the negotiation, which may have counted against it.
There was always a feeling that the Osaka airports deal presented by Vinci would win, and not because Vinci was the conference host airport operator, as is sometimes the case. What set the 44-year concession deal for Kansai and Itami airports apart, in conjunction with Orix, was probably the fact that Vinci was chosen by Orix not vice versa, as is the Japanese tradition, rejecting German and US suitors along the way; that it is a relatively new company by Japanese standards and with no experience of airports (it is better known as an aircraft lessor) thus shifting a great deal of responsibility on to Vinci; the transfer of the existing (and very heavy) debt to the government in return for payment of the concession fee; and the sheer nerve in taking on an airport that is known to be sinking.
To counter the outcome of it sinking faster than expected (within the period of the concession) Vinci/Orix acquired the agreement of the state to take on that risk.
So it was no great surprise when Vinci Airports was announced as the winner at the Taste of Portugal Cocktail Reception that evening.
Global Airport Development Conference Day 1 – Afternoon
The afternoon session was held in two complementary streams, the first one (A) dealing with the ‘pipeline’ of airport privatisations globally and Stream B dealing with the subject of ‘investing in today’s market.’ Stream A was followed by the rapporteur.
French concessions come under the microscope
In the first session the French regional airports concessions were studied in more detail, from the government reforms of 2005 that enabled what transactions have taken place so far to begin, via the Toulouse airport concession of Dec-2015 through to the recently concluded deals that saw the central government relinquish its 60% stakes in the Nice and Lyon airports, with a local authority also relinquishing 4% of its 5% holding at Nice.
Vinci was a finalist in both cases but came second at Nice. However, it was successful at Lyon, which is located in the premier industrial region of France and centrally so, on high-speed rail lines and motorways. Nice was a more difficult transaction as a result of the terrorist atrocity there just one week prior to the transaction date and which prompted a postponement, but its attractions are possibly even greater with its tri-national location, strong UK market (which may or may not be influenced by ‘Brexit’) and usage by ‘high net worth individuals.’
In the case of Lyon the airport CEO stated that Vinci’s experience would help it gain long haul market share, which is an imperative (there are just three long haul routes, one of them seasonal) but in the case of Nice that airport will not be chasing volume for the sake of it, preferring to concentrate on resilience.
In the second part of the session the President of Toulouse Airport and the MD of the Hong Kong-based investor there, Friedmann Pacific, joined the panel to discuss the Toulouse concession, one that perplexed some people at the time. The airport has progressed under private management but still requires more long haul services. It has a similar problem to that of Lyon Airport in this respect, and Toulouse is attempting to reposition itself as the gateway to the South of France from Asia - China specifically – and the Middle East. Other initiatives include reconfiguring the retail space and directing airside passengers through it (which is not always welcomed, though many airports now do it) and finding ways to re-incentivise employees.
Regulation was briefly discussed. Formal regulation of charges is still quite new in France and airports are moving towards an unadjusted single till.
Unfortunately, there was no time to ask the panel about the next step in the concession procedure, which is assumed to involve another raft of primary cities in France, possibly one or two in the dependencies such as Guadeloupe and Réunion, and a further transaction concerning the Paris airports.
See also the associated CAPA reports:
Japanese concession schedule heats up
The next stage in the Japanese concessions programme was lucidly conveyed by the Director of the Ministry of Land, Infrastructure, Transport and Tourism (MLITT).
Japan has over 100 airports, mostly on the islands, and divided into:
- National (e.g. Tokyo Haneda, Fukuoka and Shin Chitose), owned by MLITT and the main privatisation target of the government;
- Local (e.g. Kobe, Shizuoka, Memanbetsu);
- Corporate (e.g. Tokyo Narita, Osaka Kansai and Nagoya Chubu);
Categories 3 and 4 are not currently targeted for privatisation;
Growth has been driven by greater tourism, deregulation, and a belated increase in LCC passengers, of whom there were 24 million to date in 2016.
MLITT’s privatisation aims are driven by the need for more flexible landing fees to attract more airlines; more efficient management; revitalisation of the airports; and for non-aeronautical revenues to grow to offset the reduction in landing charges. In the background is Japan’s fiscal condition.
Forthcoming deals involve the National airports of Fukuoka and Hokkaido and the small Takamatsu Airport where the first screening process will take place in Dec-2016 for a 15-year concession extendable to 35 years. Applicants need only offer operational experience since 2006.
At Fukuoka, where operations are restricted at the request of local residents but which is still designated as ‘congested,’ 100 companies have already shown interest in the airport with the fourth largest passenger volume. Terms will be published in Mar-2017 for a 30-year concession from 2019. A new runway is already under construction. One third of the land is owned by local investors but that situation has been ‘assuaged.’
The concession on the Hokkaido airports is a seven facility project which is being sold as ‘one Hokkaido.’ Shin Chitose is the largest and each of the airports will be marketed on the basis of their ability to attract individual tourist-based route operators. As with Fukuoka, market sounding is continuing at this time.
Other airports to be privatised where the schedule is not yet as advanced include Kobe (2018), Shizuoka (Mar-2019) and Hiroshima (2021).
US PPPs (P3s): a raft of smaller airports could be brought in
A panel representing Denver and Dallas-Fort Worth airports, Manchester Airports Group (which has a US management division), CCR USA, the investor Oaktree Capital and Ferrovial Aeropuertos, which is already active in a P3 contract at Denver Airport, discussed the P3 scenario in the US in greater detail.
CCR’s Amit Rikhy outlined the by now well known reasons why privatisation in general and the 1996 Pilot Programme in particular has failed to make an impact in the US, such as (inter alia) the traditional bond financing activities, airline control of terminals, and the lack of political will.
The great hope is that P3s, now established, will continue to prosper but there is still a degree of misconception about them, which is prompted by there being different laws in different states and even amongst municipalities within states.
But ageing and inadequate facilities, and the realisation by most US international travellers that they arrive at a much better facility than the one they left, are pushing those municipalities into a structural sea-change.
Apart from the deals already under way (see the associated CAPA report [members only] http://centreforaviation.com/insights/analysis/donald-trump-the-third-world-and-us-airports-insulting-to-third-world-airports-ppps-are-needed-313012 for a list) bids to provide infrastructure on a P3 basis in the way of terminals, cargo facilities, people movers and car parking or rental car facilities amongst others are under way or expected at airports that include Kansas City, Milwaukee, Albuquerque, San Diego, Burbank, Oakland, and Los Angeles LAX, while future projects could take place at GA airports such as Teterboro in New Jersey and in Terminal 8 at New York JFK airport.
However, Mr Rikhy warned that some of these airports are heavily unionised, mentioning Oakland as an example, and that there could, accordingly, be considerable resistance.
The representative of Dallas-Fort Worth Airport, Chris Poinsatte, who has previously been noted as an opponent of privatisation, said that a P3 was considered for a new terminal in order to take the debt off the balance sheet but that as American Airlines has 85% of capacity at DFW a sixth terminal for AA – as it would be – with third party involvement would create too many issues.
He did add though that the airport did negotiate a BOT model for a people mover.
East European airports seek concession interest
For the final session of the day in Stream A the CAPA rapporteur moved to Stream B on the basis that the Stream A subject, Saudi Arabia, might be covered under ‘Middle East’ the following day.
Stream B gave an outlet for three East European/West Asian airport operators effectively to advertise the concession of their airports, namely Lithuanian Airports, Kiev International Airport and Belgrade Airport Nikola Tesla. Collectively they represent most, but not all, concession activity in that region at this time.
Lithuania Airports seeks concessions on three quite different airports – at the capital, Vilnius, the second city, Kaunas, and Palanga, a smaller city in Lithuania’s main coastal tourist region, all for 25 years.
The presentation was candid in that both the attractions and downsides were helpfully presented. Attractions include a special concession law with a full demand risk transfer, long term forecast GDP growth of up to 3.5%, a modern terminal with capacity increasing by 1.5 million ppa in 2016/17 and an increase in low cost penetration (Ryanair/Wizz Air).
The downsides include the lack of a national carrier (Latvia’s airbaltic assumes the role to a limited degree while SAS is the leading full service carrier), lack of clout in the cargo segment, a declining population and inadequate tourism promotion, though it has improved recently.
The operator seeks experience of airports with up to 10 million ppa (the target amount for the end of the concession), operating at least two regional airports in Europe, and financial strength. It will be able to develop connecting traffic (difficult – Vilnius does not lie on the road to anywhere in particular though it does attract many passengers from neighbouring Belarus), encourage self-connectivity, drive new point to point routes and instigate a private route development fund out of the concession fees.
(see the associated CAPA reports:
Kiev Zhuliany (or City) Airport is the smaller of the two facilities serving the capital city of Ukraine and its traffic halved to less than one million between 2013 and 2015 owing mainly to disruptions caused by the war in the east of the country. In that sense it has been more badly affected than the rival Boryspil Airport which did manage to recover some 2014 passenger losses in 2015. It is currently operated under concession by Master Avia, under a long term lease to 2059.
The airport has three new terminals with under-utilised space to grow both aeronautical and non-aeronautical activities and with the cessation of hostilities the owners hope to achieve 2.2 million ppa by 2020, which will be boosted by the anticipated access to the European Common Aviation Area (ECAA). Ryanair is but one LCC that has previously declared an interest in operating there under the appropriate circumstances but the changed relationship between Russia and Ukraine could count against it.
Additional investors in the airport are sought accordingly.
The Nikola Tesla International Airport in Belgrade lies in a country which is already in the ECAA, with GDP growth of 3% per annum and Serbia is a candidate for membership of the EU. The privatisation of Air Serbia having been completed the airport is seeking a long term strategic partner and parties are soon to be invited to discussions.
Traffic increases have prompted Ebitda growth and an Ebitda Margin of 56%. There is a dedicated low cost terminal already in place and the management is encouraged by the growth in traffic in Croatia of 20% since that country joined the EU.
(See the associated CAPA reports:
Part 2 of this report, covering the second day of the Global Airport Development Conference 2016 will be published on 6-Dec-2016