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Global Airport Development Conference report: Trump, Brexit, pipelines and PPPs. Part 2

This report on the Global Airport Development Conference held in Lisbon on 29-Nov to 01-Dec-2016 covers the proceedings of Day 2 of the event.

Part 1 of this report was published on 5-Dec-2016: Global Airport Development Conference 2016 report: Trump, Brexit, pipelines and PPPs. Part 1

Global Airport Development Conference Day 2 – morning

A popular early morning call for the second attempt to concession Jamaica’s capital city airport

The second day began with a breakfast briefing by the Airports Authority of Jamaica and various advisors on the resurrected concession of the Norman Manley International Airport in the capital, Kingston. Despite the disconcertingly early hour, it attracted several dozen attendees.

The Sangster International Airport at Montego Bay has already been successfully concessioned and with a subsequent on-sale. However, the procedure at Kingston was curtailed a year ago as potential investors recoiled from the expectation of an excessive upfront payment and a high fee for extending the runway by 300m. That upfront fee has now been reduced to USD5 million and the mandatory CapEx requirement to USD110 million, of which USD50 million must be spent in the first three years.

The Norman Manley airport is operated 24/7 with no curfew (which is not the case at Sangster) and under a single till charging regime, with no peak charges and a 55% overall increase in rates authorised for the next charging period. (The single till regime is not mandatory, and the concessionaire can ask for it to be changed). The airport is located close to the country’s main sea port and handles mainly VFR traffic, since the majority of tourists use Sangster.

The objective is to claw back some of that traffic from Sangster on the western side of the island and perhaps to increase LCC penetration, although that already stands at 26% (seat capacity) and does not square with the hefty rate increase.

The Airport Authority’s CEO (Mr Audley H. Deidrick) candidly admitted that growth had been ‘anaemic’ in recent years (it was stable from 2011-2014, the most recent figures available to CAPA), but in fact Sangster has not fared much better. The authority is confident that passenger traffic can be raised from 1.5 million ppa to 3 million by 2018.

The principle attraction to investors will be the fact that tourism structure is being increased considerably, with the hotel stock rising to 33,000 rooms, while new highways now link the eastern side of the island with the western side where the tourism product is concentrated. Additionally, the terminal infrastructure is already in place with a new one having opened in 2008, and there is also an opportunity to improve the ratio of non-aeronautical revenues, which currently stand at 33%.

The RFQ procedure will begin in Jan-2017, will complete in Mar-2017, with a decision expected in 1Q2018.

IATA remains confident about growth prospects; but external shocks always possible in the background

In the first formal session of the day an overview of the global air traffic forecast was given by David Oxley, a Senior Economist with IATA.

The presentation followed familiar lines, mentioning that developing markets continue to take an increasing share, with higher growth rates, and the centre of gravity of the air transport business continues to shift. The growth of traffic between developing markets was emphasised.

China is now expected to be the largest domestic market by 2025, with India rising to number 3, Indonesia moving up from 10th to 5th, and Turkey pushing into the top 10 for the first time in the same period; Italy will drop out. (It was not explained whether or not the current political issues in Turkey had been taken into account in the forecast.)

Passenger traffic has been growing at 1.75 times that of global GDP historically, but that relationship is becoming increasingly variable.

Generally speaking, from IATA’s viewpoint the future still looks bright, but many things can go wrong of course. There is no forecast of imminent recession in the dominant world markets but it can come quickly.  The oil price, having been stable and high from 2010 to 2014, then collapsed to USD35/barrel – to the great advantage of airlines, though the price has since recovered by 50%. IATA estimates that the oil price fall accounts for 50% of traffic growth in 2015/16 (the implication being that a return to 2014 prices would occasion a similar reduction in traffic). Some airlines have fared better than others, depending on the relationship of their main earnings currency to the settlement of fuel bills – which is typically in US dollars.

The largest passenger growth in IATA’s latest timeframe (to 2030) is anticipated in Africa (+5.1%), but that is from a small base. Otherwise Asia Pacific will have the largest growth from an established base. The slowest growth will be in the mature markets of North America and Europe, but they will remain substantial ones nevertheless. Overall passenger numbers are set to double, but the industry remains vulnerable to the sudden and often unanticipated exogenous shocks that have plagued it for decades.

The source material for this presentation was mentioned in an article in CAPA’s Airline Leader, Issue 35, Jul/Aug-2016, which focused on the shape of international airport markets in 2025.

See: http://www.airlineleader.com/categories/feature/the-worlds-top-20-international-airports-in-2025-will-mostly-reflect-hub-connectivity-expansion-295056.

Customer service – staff outside the airport’s control...

David Feldman is a consultant with a particular interest in airport customer service and he chaired a session on how airports are managing that service, operational efficiency and commercial revenues while operating under capacity constraints. The panel consisted of executives from small and medium-sized airlines and one from NATS – the UK ATM provider.

The chairman said that he had heard the words ‘customer experience’ 17 times already at the conference, but that in his experience it was usually low on the list of priorities at most airports. His point was proved by his own panel. While several valuable comments were made, the discussion drifted away from customer service to the environment following a contribution from Andre Schneider, CEO of Geneva Airport. He is new to the business and rather mysteriously identified the environment as the key determinant of customer service, rather than capacity limitations.

As is often the case at GAD events a notably incisive observation was delivered from the floor by Professor Rigas Doganis, who said that the panellists had rather missed the point, which is that (1) it is non-airport employed staff who are the biggest issue at most airports where service standards are concerned (for example in outsourced security and ground handling functions, not to mention immigration control), and (2) that the worst offenders of all are air traffic controllers, who are continually going on strike.

Gatwick Airport commits to continuing capacity expansion (the Government selected Heathrow for development)

The first of two presentations by the respective winners and losers in the UK airport expansion race was made by Stewart Wingate, the CEO of London Gatwick airport. While not exactly conceding defeat, Mr Wingate chose to focus on the ongoing investment at Gatwick. He is still keen to add capacity there, if only for corporate reasons now rather than the ‘national interest’.

Putting the airport – the world’s busiest single runway facility – into context, it recently handled 949 movements in a single day; a world record for a commercial airport. It now serves 50 long haul routes.

GBP1.3 billion has been spent on infrastructure in both terminals since the airport was privatised in 2009, with a further GBP1.2 billion to come by 2021. Of the throughput 40% of passengers use the airport’s rail terminal for access and egress – a terminal that has been transformed with a GBP30 million investment – and there is a growing network of rail stations to the north of London (Gatwick is 25 miles to the south) which are now connected to it.

Within the terminals airlines are being relocated according to type, but the airport’s already established self-connection facilities, which are in both terminals, will not be affected in any way. Self-connection, point-to-point traffic and the rise of long haul low cost were critical planks in the airport’s submission to the Airports Commission for a second runway.

His main message is that Gatwick Airport works with local communities “to be a trusted and valued neighbour”.

There was no word on the potential for Gatwick to build a second runway, irrespective of the government’s stated preference for Heathrow. That is a shareholder decision.

Heathrow presentation based around route development and job creation

In the second presentation later in the morning Andrew McMillan, Strategy and Economics Director at Heathrow Airport, set matters off on the wrong foot by including the phrase ‘the UK’s only hub airport’ in his opening sentence; one that has become one mantra too far for many people. Thereafter he became more modest, saying the Heathrow management had been surprised at the inequivalence of the decision in its favour.

He concentrated more on route development activities. The anticipated capacity after the third runway is constructed (by 2025 – allowing for faster processing of the planning process by way of consent orders) will be 130 million ppa, though this may mean some additional terminal space as well. The aim is to connect 95% of global GDP through the airport. New routes can be delivered despite PSO and rail constraints, and ‘Brexit’ may increase the opportunities for PSOs, which are currently regulated by the EU.

Compulsory purchase orders will be used to demolish a waste energy plant and some homes. He did not mention the demolition of the British Airways headquarters building at Harmondsworth (at that firm’s expense), which has angered the CEO of IAG, but there was no opportunity to question him on whether IAG airlines might start to relocate to other airports either in the UK or abroad.

The opportunity to improve local job prospects is, he admitted, a payoff for support for the runway.

At the end of the session there was a symbolic presentation of a cake – part of a ceremony that has existed between Heathrow and Amsterdam airports for some years as the fortunes of Heathrow in its quest to secure an additional runway have ebbed and flowed.

Investors call for more active promotion of airport privatisation by trade bodies

Earlier, another session addressed the deal ‘pipeline’ and how the investment community can better justify its role in infrastructure provision. Three of the panellists were members of an international global investment organisation. With only four or five deals a year, and that rate likely to continue in 2017, it was suggested that the airport sector could learn from others – for example, in the way their trade bodies are more keen to intervene to promote private ownership.

Perhaps the most remarkable event took place towards the end, when a question from the floor asked about the ‘high profile failures’ of airport privatisation. The panellists were unable to name one – somewhat surprisingly, since several stand out prominently: the renationalisation of the Abertis-concessioned airports in Bolivia; privatisation of the Glasgow Prestwick and Cardiff airports in the UK; the almost total collapse of Coventry Airport (UK); and the passing of New York Stewart International Airport back into the public sector after only seven years of a 99-year lease.

AENA’s CEO Vargas declares himself a fan of privatisation

The partial privatisation of AENA almost two years ago has gone down in the annals of airport privatisation as a roaring success and José Manuel Vargas Gómez, the Chairman & CEO, was invited to tell its story. Presently AENA’s share price is around EUR130 (from a float price of EUR58) and an Ebitda margin of 60% is being achieved.

The key to the success of the transaction had been the reorganisation of its tariffs, according to Mr Vargas.

He added that AENA is ‘different’ for two reasons. Firstly because it is a ‘gateway to tourism’ meaning the Spanish resorts, islands and historic cities, and secondly because it is the gateway to Latin America.

Traffic growth is being driven now by tourism (he admitted this is as much to do with other countries’ problems as with any improvement in the Spanish tourist product) and by a rallying of the Spanish economy after five years in the doldrums. But he warned that the alignment of these conditions cannot continue forever and, hence, growth cannot continue at its current rate.

A regulatory review is due. AENA wants to freeze tariffs at their present rate while airlines continue to press for a reduction. The general regulation continues to be enshrined in the law that brought about AENA’s privatisation: i.e. that there will be no increase for 10 years. This has not had the adverse effect on profitability that some feared, partly because of advances in non-aeronautical revenue generation streams.

AENA still benefits from its ‘network’ (which again is enshrined in law) and has no intention of shrinking it. Pressed on the prospect of further privatisation he said this might be better for the existing investors as the entity would then be majority privately owned and better placed to attract high-quality executives.

In general, he is a ‘fan’ of privatisation, which has secured AENA’s position as a global leader with a “fantastic financial situation.”

AENA’s privatisation was examined at the time (Apr-2015) in the associated CAPA report: http://centreforaviation.com/insights/analysis/aenas-part-privatisation-by-all-accounts-a-success-and-shares-climbed-dramatically-218685

Airport expansion limited by environmental and economic impact factors

A panel discussing ‘Permission to Grow – Tipping the scales in favour of airport expansion’ – returned to the theme of the environment, and also to economic impact. Vincent Harrison of daa bemoaned the lack of advance planning in Ireland and especially so around Dublin, where 20% of GDP is created in the immediate environs of the airport. He said, not unreasonably, that it is the (many) airports in Ireland that drive the economic growth there.

Swedavia’s Karl Wistrand, the Group CEO, spoke of seeking zero emissions around Stockholm Arlanda airport while at the same time propelling a ‘Connect Sweden’ hub policy that would utilise its position with regard to other Scandinavian, and Baltic, countries. He said that it took 26 years to implement the agreement for a new runway there.

Patrick Burrows, the London City Airport representative on the panel, lamented the imposition of draconian noise regulations there, while Munich Airport’s Ralf Gaffal was adamant that Bavaria is not a state that is interested in the economic impact argument. Being probably the wealthiest in Europe it does not need such impact and the argument for a third runway there sold itself simply because people have the need to “get to places.”

Panel chairman Clive Condie of Luton Airport concluded, not for the first time, that there was a need to share information with the public on airport expansion plans in a more focused and meaningful way.

Schiphol group is virtually printing its own money

A session on how airports are financing growth brought together representatives from Gatwick Airport, Schiphol Group, daa and Manchester Airports Group (MAG). All the members have been active in major financing exercises in 2016.

A second runway is crucial to Dublin Airport, being situated as it is on the edge of Europe and with no land link to the mainland. Half of all investment at the moment is directed towards that runway, which has regulatory approval. A 12-year finance deal has been concluded at an interest rate of 1.55% which the CFO referred to as “acceptable” to laughs from the audience. He also said the credit rated airport “plays to the bond market” and if it equity listed “things would be different.” He noted the diminishing demand for bond market financing in 2016 (USD25 billion) compared to 2015 (USD42 billion) but could not offer a reason for it.

Gatwick’s CFO stated that the lighter regulatory regime applicable there now has led to increased infrastructure spending, post RAB.

Robert Lenterman, the Director of Finance for the Schiphol Group, was openly bullish about that organisation’s financial credentials, revealing that Schiphol Group “could have raised USD1 billion in a day” this year had it wanted to, such is the appetite for a range of financing instruments such as bonds and private placements. Inadvertently perhaps he was also questioning the need for privatisation, which has been rejected in Amsterdam, though no-one picked up on it.

MAG’s Finance Director Iain Ashworth made reference to the renegotiation of a revolving credit agreement with a consortium of banks similar to that at other airports except that the number of participants has shrunk from 12 to eight since the first agreement. More pertinently he pointed out the modular nature of the GBP1 billion expansion at Manchester Airport which will see Terminal 2 expanded and linked to Terminal 3 by a new connecting skywalk, while Terminal 1 will be made redundant. The modular nature of the expansion means that any of the 30 separate projects can be brought forward or put back as demanded by economic circumstances.

Millennials dictate the future for airport apps

The final session of the morning was presented by Brian McBride, a Chairman of several online retail companies and once CEO of Amazon UK. His theme was ‘What can airports learn from GAFA (Google, Apple, Facebook and Amazon) - digitalisation and innovation in retail, business and life.’ While disruption didn’t figure in the title it was there in spirit.

As in the case of the ex-Head of MI5 on the first day the presentation was entertaining and ranged over a wide area: Moore’s Law (the doubling of computer processing power every 18 months); miniaturisation; and how big IT companies come and go (for example Nokia, which “missed the smartphone.”) There were three main messages:

  1. E-Commerce is disrupting traditional retail activities;
  2. It is ‘all about mobile’ – 50% of internet traffic is now on mobile devices;
  3. Digital is changing the world of advertising.

In support of (1), Mr McBride said that Google is seeing its own core business under attack as the need to ‘search’ for products and services has diminished. Many people have up to five ‘apps’ on their ‘phones and companies have to fight to be seen there. Entire industries have grown up around the mobile and the app, Uber being the best-known example.

See the associated CAPA report on Uber and other Transportation Network Companies and their relations with airports: http://centreforaviation.com/insights/analysis/airports-and-uber-2016-transportation-network-companies-now-more-welcome-at-airports-capa-report-304466

But there can be too many apps. For the ‘millennials’ personalisation and discovery are the watchwords.

Unfortunately, for all the interesting insight into the world of CIT (for example how fashion is being sold to adolescents via Snapchat) there was little that was directly relevant to the airport sector, other than the observation that airport retail operates “in a bubble” and is often the vehicle for stress purchases or time-killing entertainment rather than serious purchase consideration. Also, that airport operators should “make it easy” for teenagers to use their apps because they are most likely to use the ‘back’ button.

Global Airport Development Conference Day 2 – afternoon 

Heavyweight panel makes the case for the next round of Brazilian concessions

The afternoon session of the second day was again streamed and the selected one was Stream B, which consisted of a series of country and regional presentations similar to Day 1 except that deals are not necessarily imminent. It was chaired by Curtis Grad of Modalis Infrastructure Partners.

In the light of the proximity of the third tranche of concessions in Brazil, that country opened the proceedings with presentations and a panel discussion involving representatives from regulators and operators in Brazil and Argentina and also from Flughafen Zurich, which is already active in Brazil.

The panel session coincidentally took place on the day the concession terms for the third tranche were to be advised in Brazil.

Brazil’s credentials for investors include the fact it has by far the largest population on the continent, is the third biggest domestic air travel market in the world and has had the largest traffic growth there in over a decade. But the recent economic crisis has led to significant capacity reductions.

The combined bids in the first two tranches amounted to USD15.2 billion and USD8.67 billion has been invested in the relevant airports to date. There has been more investment in the last five years than in the previous 16.

There are numerous changes in the concession terms for this round including the opportunity for concessionaires to vary aeronautical charges during the day, to an average set by ANAC, the regulator.

Concession fees on this occasion will be paid at a rate of 25% upfront, then 75% thereafter with a five-year period of grace.  The terms for the four airports (Porto Alegre, Salvador, Florianopolis and Fortaleza) vary from 25 to 30 years as they have done in the past. The Executive Secretary of the Civil Aviation Secretariat was asked on the sidelines why that is the case and could only reply “it varies by airport” which is not really an answer.

Bids will be classified in descending order on their size and initial fee payment proposal. Data room documents will be available from 16-Dec-2016 in English, with Spanish to follow later (date unspecified). The auction will take place at the São Paulo stock exchange on 16-Mar-2017. Previous concessionaires can participate for all four airports but would be limited to two of them, one in each in the north and south.  

Several observations were made about previous rounds, including that emergency CapEx was required in some cases (for example Belo Horizonte) when state operator Infraero had been found not to have done its job properly. Infraero’s holding is down to 47% and it will be phased out as a shareholding entity in the future.

Dario Rais Lopes, the CAA Secretary, concluded the session by insisting that “this is the right time” for investors but in the light of questions about previous over-valuations and overpayments, the economy, the political background and blunt comments about the “catastrophic financial situation” at Rio de Janeiro’s Galeão airport there remains a degree of the dreaded ‘uncertainty’ as to whether the government’s more concessionaire-friendly approach will be enough to secure the returns it seeks this time around.

Russia – easier to do business there, now

Russia, a country not well known to most delegates, attracted a large audience nonetheless to a sweeping overview by VTB Capital’s Peter Stonor. He referred to the series of financial crises that seized Russia from 1997 to 2010 but insisted that despite current concerns (depressed oil prices and politically generated economic sanctions) the economy is more resilient now and is focused on market-led solutions, such as a floating exchange rate that has been in place since Oct-2014 that has led to a 34% gain by the ruble against the euro in 2016.

Air traffic has grown throughout the present crisis despite the emergence of the ‘staycation’ concept in Russia, but international travel remains low at an average of one trip per person per annum.

The airport system is still oriented heavily towards the Moscow system (Sheremetyevo, Domodedovo, Vnukovo, and now the fringe Ramenskoye/Zhukovsky), with passenger traffic at St Petersburg, the second city less than one fifth than that of Moscow and it is at those airports where the largest growth has been achieved (5%) in recent years.

Mr Stonor referred to the 2010 concession of St Petersburg’s Pulkovo Airport (Northern Gateway Partners), where a USD1.2 billion investment has been made and to the recent on-sale of equity to Qatar Investment Authority for USD240 million (comparable with international benchmarks), the diminishing involvement of Fraport (now 25%) and the exit of Fraport’s partner (as it is in Greece), Copelouzos.

St Petersburg represents the largest foreign investment to date in the Russian transport sector.

In response to a question from the floor about difficult negotiating circumstances in Russia that were highlighted at a previous GAD by a senior representative of Northern Gateway Partners he responded by saying that it was no worse than at any other bilingual negotiation, that the provision of dual language documentation has since improved and that “there are no difficulties in transactions in Russia these days”.

Turning back to Moscow, millions of dollars have been spent by both the public and private sectors to improve the airports there and agreements have been signed to continue both the privatisation efforts and consolidation of management and operations.  Vnukovo Airport is now 74.9% in private hands and Sheremetyevo 70%, leaving 25.1% and 30% respectively with the Russian Federation.

Moving on to the regional airports (which are freehold concessions) the three main investors were identified as the Basel Aero consortium (Basic Element, Sberbank and Changi Airports International), which is mainly active in the south of the country, the Airports of Regions consortium for which Ekaterinburg is the main asset, and Novaport, which has interests across the country.

There are few active or potential direct Russian investors in foreign airport assets (VTB Capital is one), or foreign investors into Russian assets, but there was insufficient time to pursue the reasons for that state of affairs.

Iran – lots of potential for investors but that elephant is back in the room

A presentation on Iran ("Coming in from the cold – what airport infrastructure does it need and opportunities for international investors") was made by the Business Development Manager of Vinci Airports, which has established itself as first mover in this potential, developing yet still uncertain market.

M. Rémi Maumon de Longvialle identified Iran as having the second largest economy in the Middle East, with highly developed industry and GDP growth rate of 5% anticipated since the curtailment of most economic sanctions and vast potential for tourism.

However, right now there is very low market participation by airlines with only 0.3 trips per annum per capita.

The presentation focused on two airports where Vinci is already involved – the one servicing the holy city of Mashhad, also heavily industrialised, 900 km from Tehran and difficult to access by surface transport, but which M. de Longvialle candidly admitted would be unlikely to be on any westerner’s visit list for now; and Isfahan, the third city by population, the former capital, only three hours by car from Tehran but which would be popular with foreign tourists.

Both airports fit Vinci’s requirements of having good growth prospects, but which also need a high quality partner to deliver a development strategy.

An MoU has been signed for a BOT agreement to be concluded by the end of 2016, to close in Apr-2017 (a year in which there is a Presidential election) and for Vinci operations to begin in both cases in 2Q2017.

Of course the ‘elephant in the room’ (a phrase used almost as often as ‘uncertainty’ throughout the event), is the ‘Trump effect,’ meaning the potential for the return of sanctions, which would hit Boeing, Airbus and just about everyone else. M. de Longvialle summarised Vinci’s position as being “we will take risks, but not do crazy things”.

Middle East – more PPPs expected and a surprise announcement from Oman

New infrastructure was the main hook for a session on the Middle East countries which looked at the drivers behind their aviation aspirations, and which involved representatives from Bahrain, Oman, IATA and the companies Airport International Group (AIG) and Egis.

Bahrain Airport, whose large expansion project has made little news lying as it does in the shadow of the regional giants, is driven by capacity constraints but is determined to be the most efficient in the region in order to differentiate itself.

Jordan’s Queen Alia International Airport was described as a ‘test case’ for PPPs in the region and it is anticipated there will be more of them (starting with Saud Arabia in 2017), while the Jordanian capital’s airport itself was expanded under a Phase 2 procedure that completed in Sep-2016.

Possibly the most dramatic announcement at a conference where the lack of (pipeline) announcements was a constant theme came from Sheikh Ahmed Sultan Al-Hosni, the CEO of Oman Airports Management Company (OAMC). Referring initially to the five-year project that is under way there to improve the Muscat and Salalah airports with new terminals and that five new runways had been opened since the beginning of 2015, he said OAMC’s vision is for both to be in the top 20 airports globally by 2020 in terms of quality standards (e.g. Skytrax).

The existing terminal building at Muscat International airport will be retained as a low cost facility with no variation in charges between it and the new terminal.

But the biggest announcement was still to come, namely that Oman would start looking again beyond its borders for foreign investors (there was a failed 25-year concession deal that lasted from 2002 to 2004 on the then Muscat Seeb and Salalah airports) and a 30% equity share would be made available to suitable parties at the end of the five-year project. Moreover, OAMC will seek to become a foreign investor, itself.

Canada – to privatise or not?

Session chairman Curtis Grad was in his element as the next panel discussed the potential for privatisation of Canada’s main airports, having himself been directly involved in the management of three airports there.

The panel comprised airport executives from both sides of the privatisation argument including the retiring CEO of Aéroports de Montréal (nominally for it) and the CEO of Edmonton Airport (nominally against it) as well as an investor (OTPP) and a lawyer (McCarthy Tétrault).

The post-1992 Canadian airport paradigm is a complex one with airports able to charge what they like, which gives them a high credit rating despite having to pay 8-11% of revenues as taxes and which would be marginally attractive to investors. On the other hand those high charges have been driving potential passengers into the arms of US airlines operating from lower cost airports over the border, the length of the country.

The argument was made is that ground rent payments are egregious and that ‘pay-back’ (to the government) has already been made. Many airports are experiencing difficulties attracting external entities to invest, for example in hangars.

One proposal that has been considered by Credit Suisse, which is advising the government on the next step is the ‘bundling’ of a privatisation process but that was rejected by OTPP’s SVP Infrastructure, Andrew Claerhout, who supports the notion of starting off with one or two of the smaller airports that are clear of debt to test market appetite. (Rapporteur’s note: he might also have mentioned the failure of such a bundling procedure in the case of BAA in the UK, where it took decades to unravel a privatised monopoly).

M. Claerhout referred to OTPP’s freehold airport investments in Europe and lamented the fact that no regulatory scheme exists in Canada under which airports have moved from public to private control, hinting that a light-handed regulatory scheme would be required. As a deal-maker OTPP needs control over its operations “to make things happen,” he said, echoing many such previous observations. He also mentioned government minority ownership in Europe, in airports invested in by OTPP, suggesting he would be content with a similar scenario in Canada.

Edmonton Airport’s Tom Ruth expressed his surprise at how quickly events were moving in Canada and then went on to present Credit Suisse’s initial proposals, which are:

  • Retain the status quo;
  • Monetise current leases, with an extension where appropriate;
  • Lease to a for-profit organisation (instead of the current non-profit ones);
  • Sell to the current airport authority;
  • Sell to a full profit entity, outright.  

There are legal issues imposing on any procedure because current leases run through to 2072. The word ‘expropriation’ has been mentioned and the government has the right to do that. At Toronto Pearson International Airport the government holds right of first refusal on any future transaction. The consent of bondholders would be needed in many cases. In British Colombia aboriginal land claims (which recently have become an embarrassment to the government) further compliance matters.

Moreover, a workable privatisation model must take into account the competitiveness of the airports. Referring back to an earlier session on the morning of Day 2, it was revealed that most customer complaints are about government services at airports rather than about those under the control of the management.

As for the future timing of this potential sea-change in how Canadian airports are managed, financed and invested in, the expectation is that a formal proposal will be made in advance of the next Budget, i.e. by Feb or Mar-2017.

See also the associated CAPA reports:

http://centreforaviation.com/insights/analysis/airport-privatisation-in-canada-transport-policy-review-271346

http://centreforaviation.com/insights/analysis/torontos-second-airport-debate-london-international-waterloo-pickering-and-jc-munro-in-the-mix-310721 (Premium, members-only report).

Latin America – Mexico creates an innovative trust to handle the transfer from old to new airports in the capital

The penultimate session of the second day returned to Latin America, to a discussion on airport projects and ownership there and immediately to a further conversation on the fate of Infraero in Brazil, an entity that was described as being ‘redesigned’ by Dario Rais Lopes, who returned to this panel. By that he meant that it is exiting both air traffic services and existing concessions and will reduce from 12,000 to 5,000 employees. Its future lies in a joint airport services venture with Fraport.

Mr Lopes also mentioned the separate federal state airport privatisations that are taking place outside of the national level ones and that there might be a role for Infraero in those. He did not allude to the suggestion made three years ago when the diminution of Infraero was first mooted that it might become involved in foreign transactions.

A presentation was made by the President of the Airports Regulatory Authority of Argentina which detailed the original privatisation of 33 airports (to AA2000/Corporación América) in the midst of a recession in 2001, the subsequent renegotiation in 2007 and that more airports might be built in Argentina “but it is open to debate” and not much more.

AA2000’s Matias Patanian said that dealing with the state was very hard in the early 2000s but his company is now handling 100 million ppa. His biggest problem still is the competition from long distance buses.

An update was give on the new Mexico City airport, where the private sector is heavily involved in 52 construction packages at an airport that will end up with six runways eventually, but not in the actual financing; at least not yet.

One innovation has been the creation of a trust to handle the transition between the old and new airports so that the original one financially supports the new one. 40% of the financing of the new airport will be from this trust with 60% from bond issues, which have been oversubscribed. A revolving credit facility has been concluded with a consortium of 13 banks.

OPAIN’s representative Andres Ortega Rezk spoke about expansion works at Bogota’s El Dorado International Airport raising capacity to 65 million ppa and that the new ‘El Dorado II’ airport that is scheduled to open in 2022 “will have to compete with us.”

Andrew O’Brian, the CEO of Quiport, which he insisted is the first fully privatised airport to be built, made reference to shareholders Aecon (Canada) and CCR (Brazil), the latter of which is growing in significance in the region.

Africa – Bridesmaid Revisited

Africa is often the bridesmaid at investment conferences and was the last region to present here but a hard core of interested persons stayed on to hear two competent presentations from the Rwanda Civil Aviation Authority and the Tanzania Airports Authority respectively.

Both covered similar ground, namely the difficulties that Africa still has in attracting transport sector investors.

Prudence Tuyishimire of the Rwandan CAA spoke of there being no air transport ‘culture’ in Africa and joked about a 1:20 ratio between passengers and meters & greeters. A 1% growth in passenger traffic continent-wide in 2015 was offset by a similar fall in movements, which at least shows that load factors are increasing, and cargo grew at 3.5%. However, in Rwanda, passenger growth was +13%, in line with a spurt in GDP growth.

A boom in tourism is both happening and anticipated, led by government activity in the M.I.C.E. segment. Air Transport is thus a priority for the government and the national airline is protected as far as possible.

Returning to the wider African scene he said that many international airports are full to capacity, which has prompted an African proverb along the lines of “if you don’t see a crane beware the lack of capacity.”

Others have capacity “but not when required,” which left some delegates scratching their heads.

On a positive note there is a much greater level of investment and of construction projects across Africa (which is confirmed by the CAPA Global Airport Construction Database). He referred specifically to Rwanda’s own Kigali Bugesera Airport, which is scheduled to open in 2019, a USD800 million PPP with a secured infrastructure investor, Portugal’s Mota Engil Engenharia e Construcao Africa, a Chinese company having withdrawn from the project in 2013.

However, he was honest enough to admit that key challenges remain such as the securing of further private sector finance, the high cost of the infrastructure, connection challenges and the all pervading failure of liberalisation measures across the continent as embodied in the Yamoussoukro Agreement.

Salim Msangi, Acting Director General of the Tanzania Airports Authority followed a similar line. Linkages are still weak and, surprisingly, to this day it is still often necessary to travel from Africa to Europe (or the Middle East) and back again simply to move within African countries.

The scarcity of government financing is paramount; the small scale economies of many African countries permit no other outcome.

The low cost segment has been a disappointment there. Clearly referring to Fastjet without actually naming it he said they have not done what was expected.

Leadership, land, people and unambiguous political strategy is still required.

This presentation brought the main airports section to a close - the third day was more airline-oriented - and it finished with a similar theme to the first presentation on the first day, one of the more successful concession or PPP deals, which must have given some comfort to the delegates as they made their way home, and perhaps a little more certainty.

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