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Kansai and Osaka Itami lead Japan's ambitious airport privatisation programme - with 2020 the target

When the privatisation of airports became both popular and frequent in the 1990s Japan was noticeable for its absence, being a country where the concept of public service financing of public projects was well established and politics was often an important component. One result has been the construction of over 90 loss-making airports.

Typically, the expansion of an airport’s terminal or the building of a new one, or the extension of a runway, would be financed by central government and local authorities with relatively small private sector representation in the form of loans from banks and important local companies. The notion of private sector investment backed up by private sector management for private sector gain was not generally welcomed.

But there is change in the air.

Japan's infrastructure costs were too large for a country whose economy had frozen

The first hint of real change came around 2003 and the end of the Seventh Airport Development five-year plan, which involved big improvements at both of the Tokyo airports, the second phase development of the Kansai International Airport, and the Chubu International Airport project at Nagoya in central Japan. The projects had a USD32 billion budget in total, not allowing for a third Tokyo airport, which was back on the agenda at the time.

USD32 billion was a big sum for a country whose economy had stood still for a long time, threatening to divert financial resources and prompting concern for future investments. In consequence, there were already some examples of privatisation activity.

The Chubu project for example was Japan’s first real venture into privatisation by way of a private finance initiative. The Central Japan International Airport Corporation (CJIAC) was set up as early as 1998 with capital of almost USD1 billion, with participation of 40% from central government, 10% from local authorities and 50% from the private sector, including national banks, key companies of the Nagoya region and (inter)national ones like Toyota. At this stage construction companies were still generally absent from these consortiums.

Nagoya Chubu Centrair International Airport share of aircraft movements (entire system/peak hours) 01 to 07-Sep-2014

Haneda Airport had been a partial example of Japan's privatisation initiatives, while Narita was corporatised

Before that, Tokyo’s Haneda Airport had become the cornerstone of an airport privatisation imperative, but only in the sense that the landside was managed (since 1952) by private companies such as Japan Airport Terminal Company Limited, which was established to develop the passenger terminals, and which has owned and operated them since (its major shareholders are Japan Airlines International, All Nippon Airways, Japan Trustee Services Bank, Bank of Tokyo-Mitsubishi UFJ, and Mitsubishi Estate).

The new international terminal built in 2006 is owned and managed by Tokyo International Air Terminal Corporation, whose main stakeholder is Japan Airport Terminal Company Limited.

The basic facilities though (runways, taxiways, apron), have remained owned by the Ministry of Land, Infrastructure and Transport (MLIT). Hence the MLIT has operated the airside of the airport, while the landside has been managed by private companies. In this sense it is similar to the way in which US airports are operated, with the public sector (municipalities, cities, counties etc) responsible for the airside infrastructure while the private sector airlines operate the terminals.

Tokyo’s other airport, Narita was not 'privatised' (in 2004) in the sense that there are now private sector shareholders, but instead was 'corporatised', which means following a corporation management model, through which airports are publicly owned but are operated and managed on a commercial basis. The airport was owned and managed by a public corporation, the New Tokyo International Airport Authority. The Narita International Airport Corporation Act (2003) was adopted to prepare the privatisation of the airport and a new authority, the Narita International Airport Corporation (NIAA) took over the responsibility of owning and managing the airport in 2004. Despite several privatisation projects, NIAA is still a 100% government-owned public corporation. It could still be privatised but may require a change in the law.

See the related report: New runways for Tokyo Haneda and Narita airports would allow Japan to catch up to other Asian hubs

That was pretty much the extent of privatisation in this sector - until recently. What has changed is that Japan was afflicted by the economic crisis as most other countries were and was not slow to identify infrastructure as a source of revenue as it struggles to rein in debt, be it in the form of airports, toll roads or other transport targets.

A big change in 2011 – “all airports to be privatised” by 2020

In 2011, Japan’s Ministry of Land, Infrastructure, Transport and Tourism (MLIT) announced plans to privatise all national airports by 2020, with the first privatisation process to begin via a merger of the Itami and Kansai International Airports. The privatisation would incorporate a long-term lease concession for the rights to manage runways, airport terminal buildings and car parking (that are currently separately managed), but not air traffic control, which would continue to be managed by the national government.

A formal process was initiated to privatise the already corporatised New Kansai International Airport Company (NKIAC) via a scheme that would see foreign and domestic investors managing the two airports (the offshore Kansai, and Osaka Itami, which only handles domestic flights) for 40-50 years from 2015. It is the first large airport infrastructure deal in Japan. The company aims to raise USD7 billion to USD15 billion in the privatisation process.

Furthermore, NKIAC could be the first of 29 airport privatisations in Japan, with other regional airports to follow to a grand total of over 90 (out of 98 in all), also by a process of the granting of management rights.

The privatisation procedure proper began at the end of Oct-2013 when NKIAC acquired a 67.7% stake in Osaka International Airport Terminal Co Ltd, which operates the terminal building at Osaka Itami Airport with the intention of completing the concession in FY2014, subsequent to the passing of a long awaited privatisation bill. The price was around USD280 million.

For the first concession of its kind in Japan, bids were expected from major trading houses, leading real estate companies, megabanks and other businesses. Ferrovial Aeropuertos announced its interest in the tender in Mar-2014, while both Changi Airport Group and Fraport are considered to be in the frame.

USD12 billion of debt to be cleared as part of evolving Kansai package

The Japanese government will invite bids for the operating rights for New Kansai International Airport in Oct-2014. The minimum price for management rights was set at JPY2.2 trillion (USD22 billion) with the airport operator expected to pay off JPY1.2 trillion (USD12 billion) of its debt. Prime Minister, Shinzo Abe, believes that a privatisation deal is expected to be among the biggest in Japan’s drive to inject private funds into public infrastructure.

The sale is now expected to fetch in the region of JPY2 trillion (USD20 billion). The operating license for both airports will be for 45 years, and the auction is open to foreign and domestic investors. The winner is expected to be announced by Jun-2015 with the transfer forecast for Jan-2016. The ability to make debt repayments and “safety” (the meaning of which was not specified) will take precedence in selecting the concession holder.

NKIAC is understood to be seeking three “megabanks” and the Development Bank of Japan to take part in the transaction.

The company will use the proceeds to repay its USD12 billion debt to the state, run up mainly through construction costs. The offshore Kansai airport hoovered up millions of dollars in ongoing repair costs after it opened as it became apparent it was sinking and has never really recovered from that early and costly setback.

New Kansai International is Japan’s fifth largest airport, and is the main hub that services the heavily populated Kansai region, home to 22.7 million people. This urban region, which includes Osaka, Kobe and Kyoto, is the second most populated in Japan after the Greater Tokyo area.

Kansai Airport profile - mostly international

Osaka Kansai International Airport Network Summary (at 01-Sep-2014)

Total Airlines

56

Domestic only

3

International

53

Total non-stop passenger destinations

61

Domestic

13

Africa

0

Asia Pacific

37

Europe

6

Latin America

0

Middle East

2

North America

3

Total non-stop freight destinations

13

Domestic

2

Africa

0

Asia Pacific

8

Europe

1

Latin America

0

Middle East

0

North America

2

Osaka Kansai International Airport capacity (available seats per week, all carriers, entire system) 01 to -07-Sep-2014

Itami Airport route profile - a domestic operation

Osaka Itami Airport Network Summary (at 01-Sep-2014)

Total Airlines

3

Domestic only

3

International

0

Total non-stop passenger destinations

22

Domestic

22

Africa

0

Asia Pacific

0

Europe

0

Latin America

0

Middle East

0

North America

0

Total non-stop freight destinations

0

Domestic

0

Africa

0

Asia Pacific

0

Europe

0

Latin America

0

Middle East

0

North America

0

Osaka Itami International Airport capacity (available seats per week, all carriers, entire system) 01 to -07-Sep-2014

NKIAC seeks to seize foreign opportunities but will need to maintain a focus on Kansai and Itami

NKIAC is nothing if not globally ambitious. Despite the immense issues at Kansai Airport the company’s President has indicated it would be interested in participating in the operation of airports overseas to create new revenue for the company, identifying Indonesia as a specific target and declaring that NKIAC should “seize the opportunity.” But that should not remove the focus on the home market. At least Kansai is attracting more passengers these days following the opening of Japan’s tallest building, Abeno Harukas, and Universal Studios Japan’s Harry Potter-themed attraction.

During 2013 the government also started the bidding process for the operating rights of Sendai Airport at Natori in the Myagi Prefecture. It has a 3000m runway but was adversely affected by the earthquake and tsunami of 11-Mar-2011.

The Myagi Prefectural Government made privatising the airport its priority following the enactment of the aforementioned bill to allow management of national airports to be outsourced to the private sector. The government also set a target of doubling the airport’s annual passenger numbers and cargo volume in 30 years.

Sendai Airport: new investors/operators show interest in operating rights attractions

In Apr-2014 the Prefecture set about transferring all the stock of Sendai Airport Building and Sendai Airport Cargo (the managers of Sendai Airport), valued at USD55 million, ready for a public offering from Jul-2014. Moving on to Aug-2014, Sendai Airport reported interest from five major corporations in the management right sale including Mitsubishi Corporation, Aeon Group, Rakuten Inc and Maeda Corporation (all of Japan), in addition to the Macquarie Group (Australia).

Applications were closed off by the Miyagi Prefectural Government on 01-Aug-2014 with 10 corporations in all filing. Central and local governments will start selection with targeted inauguration of the new administration in Mar-2016. In the first procedure three candidates will be selected to be examined by the government's screening committee.

A snapshot of some of Japan’s new/emerging airport investors/operators

Company

Description

Corporate outline

Mitsubishi Corporation

Industrial trading conglomerate

The Mitsubishi Corporation is Japan's largest trading company. It employs over 60,000 people and has seven business segments. It describes itself as a global integrated business enterprise that develops and operates businesses across virtually every industry including environmental and infrastructure business, industrial finance, energy, metals, machinery, chemicals, and foods. Its current activities are expanding as its diverse business ranges from natural resources development to investment in retail business, infrastructure, financial products and manufacturing of industrial goods. In Jan-2014 it was reported that Mitsubishi Corp may bid for the rights to operate Japan’s Sendai Airport in conjunction with another Japanese company when the government starts an auction of the 30-year concession later in 2014. The Sendai Airport is Japan's 12th busiest, handling around 2.7 million annual passengers.

Aeon Group

Financier/retailer

A Japanese conglomerate, active throughout North and Southeast Asia, and with particular strength in financial services and the retail sector. In Aug-2014 Aeon Group was reported to have expressed interest in the management rights sale at Japan’s Sendai Airport. It is likely to be part of a consortium that requires additional operational experience.

Rakuten Inc

CIT industries

Rakuten Inc. is a Japanese electronic commerce and Internet company based in Tokyo. Its B2B2C e-commerce platform Rakuten Ichiba is the largest e-commerce site in Japan and among the world’s largest by sales. It was founded in Feb-1997. In 2012, the company's revenues totalled USD4.6 billion with operating profits of about USD244 million. It has a total of 10,351 employees worldwide. The corporate Mission Statement is to strive to become the World's #1 Internet Services Company. In Aug-2014 Rakuten Inc was reported to have expressed interest in the management rights sale at Japan’s Sendai Airport.

Maeda Corporation

 

Construction company

A Japanese corporation which was established in 1919. Its main areas of business are building construction and civil engineering. In Aug-2014 Maeda Corporation was reported to have expressed interest in the management rights sale at Japan’s Sendai Airport. Maeda in the past has helped construct such projects as the Hong Kong International Airport.

Sumitomo Corporation

Diversified trading company

One of the largest worldwide trading companies, and a diversified corporation that is already very active in aircraft leasing and financing through SMBC Aviation Capital, the world’s third largest aircraft lessor. It recently signed a contract with Airbus SAS to purchase 115 A320 Family aircraft to be delivered between 2016 and 2022. Has a Real Estate subsidiary that is actively researching potential airport investments, both in Japan and abroad.

Sendai Airport route profile

Sendai Airport Network Summary (at 01-Sep-2014)

Total Airlines

11

Domestic only

6

International

5

Total non-stop passenger destinations

15

Domestic

10

Africa

0

Asia Pacific

4

Europe

0

Latin America

0

Middle East

0

North America

1

Total non-stop freight destinations

0

Domestic

0

Africa

0

Asia Pacific

0

Europe

0

Latin America

0

Middle East

0

North America

0

Sendai Airport capacity (available seats per week, all carriers, entire system) 01 to -07-Sep-2014

Privatisation fever; local ‘study groups’ recommend the best course of action

A sort of privatisation fever then set in, following the moves to privatise the Osaka and Sendai airports.

Other Japanese airports where a privatisation process started or has been discussed include:

  • Aomori Airport, which has lost half its traffic over the last decade (FY2014) and is thus unlikely to be ‘amore’ by investors;
  • Takamatsu Airport (a management outsourcing exercise); and
  • Fukuoka Airport (the fourth largest state owned airport) where management rights may be sold out to finance a new runway.

But the privatisation of Oita Airport was postponed, after the government deemed it “too risky to start immediately” on the privatisation programme, with the airport facing a JPY429 million (USD4.34 million) loss and with issues concerning the runway.

Others that have been mentioned as privatisation candidates following Sendai include Hiroshima, Takamatsu, and Shizuoka airports. In preparation for privatisation, many local governments have established study groups to propose recommendations and suggestions to the national government with a view to ensuring that privatisation will provide benefits to their airports, local communities and regional economies.

The Hokkaido Prefectural Government is reported to be considering a sale of the rights to operate the nation’s fourth-busiest publicly run airport. Proceeds from the sale of the Sapporo New Chitose Airport concession could reach JPY100 billion (USD9.5 billion). The prefectural government plans to hold further internal discussions before making a final decision on whether to proceed with a sale.

Sapporo Chitose Airport route profile

Sapporo Chitose Airport Network Summary (at 1-Sep-2014)

Total Airlines

22

Domestic only

9

International

13

Total non-stop passenger destinations

39

Domestic

28

Africa

0

Asia Pacific

9

Europe

1

Latin America

0

Middle East

0

North America

1

Total non-stop freight destinations

1

Domestic

1

Africa

0

Asia Pacific

0

Europe

0

Latin America

0

Middle East

0

North America

0

Sapporo Airport capacity (available seats per week, all carriers, entire system) 01 to -07-Sep-2014

Firms attracted to PPP incentives

On the supply side, it is reported that well over 20 business firms and groups have already made inquiries to MLIT on the privatisation process, encouraged no doubt by the Japanese Prime Minister’s statement that he plans to triple to JPY12 trillion (USD123 billion) the use of public-private partnerships to fund airports, waterworks, highways and other projects in the next 10 years.

Prospects for these airports are influenced by the state of the airlines in Japan

Financially, and in common with many other Japanese airlines, Japan Airlines (JAL) took a hit in the latter half of 2013, due to increased costs from airport charges and imported fuel because of the depreciation of the Japanese yen as well as a continuing decline in China traffic. In FY2013 JAL made an operating profit of USD1659 million (-3.2%) on revenues of USD13,066 million (+5.7%). Passenger numbers grew by 3.7%. The 2014 forecast is for an operating profit of USD1397 million.

The other leading full service airline, All Nippon Airways (ANA), made an operating profit of USD657.6 million on revenue of USD15,976 million in FY2013. Passenger numbers increased by 3.5% to 49 million. ANA could take over Skymark Airlines, a 1998 start-up that carved a successful niche for itself but which owes Airbus USD1 billion after cancelling an order for six A380s.

(See the related report: All Nippon Airways acquisition of Skymark and its A380s would be difficult but with upside for both).

Meanwhile, Rakuten announced in Jul-2014 that it would set up a low-cost airline jointly with AirAsia. The new carrier, AirAsia Japan, will have an initial capitalisation of JPY7 billion (USD69 million) and plans to start flying in Jun-2015 with a fleet of five Airbus A320s to both domestic and international cities.

Japanese airport investors are increasingly active abroad

It should also be noted that Japanese investors are active outside Japan, for example in Myanmar where the government is inviting private investors to upgrade 30 of the nation’s 69 airports to improve its underdeveloped air transport capacity and infrastructure, on the basis that “We want to stop using the government budget in the coming years, so we’ve decided to call for private sector investment in local airports.” 

It has already awarded a consortium of JALUX, Mitsubishi Corporation and SPA Project Management first refusal rights for the rehabilitation, improvement and 30-year operation of Mandalay International Airport.

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