Approaches to the privatisation of airports

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Approaches to the privatisation of airports
April 21, 2009 Dr. Romano Pagliari Senior
Lecturer Cranfield University
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Why privatise airports ?

• Government needs to raise capital to finance
  public spending
• Government unable to finance capacity expansion
• To improve efficiency / financial performance of
  airports
• To improve quality of service to passengers and
  airlines

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Short history of privatisation

• 1940s to late 1960s pre-corporate era
• 1970s to late 1980s corporatisation of airports
  rise of the state-owned airport authority
• First privatisation BAA in 1987
• Since 1990s airport privatisation in other
  European countries, Australasia, South America
• No privatisation in USA
• Most major airport companies today are still
  government-owned

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What are the benefits of privatisation ?

• Focus on customer service
• Increased creativity in
• Marketing to airlines
• Development of commercial (non-aviation) revenues
• Focus on cost efficiency and improving
  productivity
• Cost-effective investment

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What are the risks of privatisation ?

• Reduction in quality of service to passengers and
  airlines.
• Large increase in aeronautical charges to
  airlines.
• The privatised airport will not invest to expand
  capacity.
• Over-investment in airport capacity followed by
  higher charges to airlines gold-plating.
• Economic regulation of privatised airport can
  deal with the risks.

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Methods of privatisation
Trade sale
Stock market floatation
Management Contract
Project Finance BOOT
Concession
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Methods of privatisationstock market

• All or a of shares sold on stock market
• Management able to retain more control
  investors are small and generally passive.
• Employees can buy shares stock options for
  management - Management may be too concerned with
  share price
• Stock markets are volatile
• Only BAA has done 100 flotation (de-listed in
  2006)
• Others (e.g. Copenhagen, Vienna, ADP, Fraport)
  have been partial

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Methods of privatisationtrade sale

• All or of shares sold to a single / group of
  investors
• Sale usually through public tender leads to
  higher prices
• Investors have experience
• Some shares could be retained by government to
  protect public interest
• Trade sales common in Europe, Australia, New
  Zealand
• High prices

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Methods of privatisationconcession

• Private company has a concession to operate the
  airport for a fixed period (30-50 years)
• Private company pays the government a charge
• Private company has service level agreement with
  government (capital investment obligations)
• Very popular form of privatisation in Central
  South America.
• No need for separate economic regulation
  included in the contract
• Bureaucracy / higher administration costs

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Methods of privatisationothers

• Management contract
• Private company responsible for day to day
  management
• State retains responsibility for capital
  investment and aeronautical charges
• Used in high risk regions
• Project Finance (BOOT)
• Build Own Operate Transfer
• Used for new infrastructure (terminals)
• Similar to concession model

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Privatisation of airport networks

• Choice is to sell as one network or to separate
  the airports and sell individually or in groups
• Advantages of network privatisation
• New private owners take responsibility for small
  loss-making airports as well.
• Lower administration / transaction costs to the
  state.
• Advantages of separating airports
• Lack of diversity / competition between airports
• New private owners may neglect management of
  small airports

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Privatisation of airport networksMexico

• Privatisation of Mexican airports using
  concession model (1998-2000)
• Airports split into 3 regional groups each
  group formed around one large airport
• State retains share in each group
• Group pays of revenue to the state
• Each group must have Mexican investor foreign
  investor (AENA, AdP, Copenhagen)
• Mexico City Airport remains state-owned
• All very small airports under government
  ownership

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Privatisation of airport networksAustralia

• Australian Government privatises government-owned
  airports 1998-2002
• Government received very good prices for selling
  the airports (17 times EBITDA)
• Major airports were separated and sold
  individually to investors (trade sale)
• 3 phases (Sydney in 2002)
• Foreign ownership restricted to 49
• No government share holding
• Economic regulation

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Privatisation of airport networksArgentina

• Argentina decided to privatise all its 33
  airports as one network in 1998 under concession
  contract
• No corporatisation prior to privatisation
• Annual concession fee to be paid to Government
  based on winning bid
• Concession fee AR118 million and profits of
  the group AR140 million
• 2001 economic crisis and problems with concession
  contract

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UK experience of privatisation
Central / regional government
Local Council
Government-owned BAA
Private
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UK experience of privatisation

• UK Airports Act 1986
• Privatisation of BAA - BAA sold as 1 company
• All major local council airports to be
  established as commercial enterprises
• Price-cap economic regulation of 4 airports (3
  BAA and Manchester)
• Local council airports cannot borrow capital to
  finance expansion
• Government policy pro-liberalisation /
  anti-central planning
• Airports must be free to make commercial
  decisions themselves

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UK experience of privatisation

• 2003 - Need for national airport strategy to deal
  with lack of airport capacity
• BAA has become very commercial since
  privatisation revenue diversification
• Concern that BAA has neglected investment and
  service levels
• UK Competition Commission enquiry - BAA will have
  to sell 2 airports in London and 1 in Scotland
  (decision of March 2009)
• Regional airports have performed very well since
  privatisation all have become very profitable
  competitive market
• Manchester airport is the only airport to have
  remained under local council ownership

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Do you need economic regulation?

• Traditional view is that all airports should be
  regulated.
• Are airports monopolies and will they take
  advantage of their market power to increase
  charges to airlines?
• Airports with little traffic and spare capacity
  less likely to take advantage of airlines.
• Airports compete with
• Other airports in the region /country.
• Other airports across the world.
• Possible abuse of market power more likely at
  large hub airports with limited capacity.

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Do you need economic regulation?

• Proposed EU Directive on airport charges has
  provisions for independent economic regulation
• What type of economic regulation should be
  applied to privatised airports?
• Does the airport possess market power and is it
  likely to abuse it?
• Forms of economic regulation are
• Ministerial approval
• Price cap
• Rate of return
• Reserve power / prices surveillance

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Do you need economic regulation?

• UK has used price-cap regulation (3 airports)
• Price cap has been criticised
• too bureaucratic
• Under-investment
• UK will move toward license-based regulation -
  type of regulation depends on degree of airport
  market power
• Australia replaced price cap regulation with
  reserve power / prices surveillance

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Who buys airports?

• Other airports
• Fraport, Schiphol, Aeroports de Paris
• Transport infrastructure companies
• Ferrovial (BAA)
• Abertis (Luton)
• Airport Investment Funds
• Macquarie (Rome, Sydney, Brussels, Copenhagen)
• Hochtief (Hamburg, Dusseldorf, Sydney, Athens,
  Budapest)

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How do investors evaluate airports?

• Investors looking to maximise cash-flows from
  airports
• Passenger traffic volume and mix (business /
  Leisure) and potential for further growth
• Limited competition from other airports
• High of origin-destination traffic preferred
• Light handed regulation / regulatory stability
• Diversified sources of revenue
• Mix of airlines
• No significant medium-term capital expenditure
  requirements

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Are private airports better?

• Relations between airports and airlines have not
  been good since privatisation
• Arguments over aeronautical charges and quality
  of service
• Examples of well managed government-owned
  airports
• Singapore, Incheon, Manchester
• Globalisation of airport management
• Transfer of management skills / knowledge across
  the world
• Privatisation has improved regional airport
  performance

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Are private airports better?
Sample of European regional airports between 3
and 5 million annual passengers
ownership revenue / cost ratio commercial revenues
Aberdeen 100 private (BAA) 1.6 43
Bordeaux Chambers of Commerce 1.0 44
Leeds Local Councils 1.1 51
Verona Local Councils Chambers of Commerce 1.1 23
Pisa Local Councils Chambers of Commerce 1.2 30
Bologna Local Councils Chambers of Commerce 1.3 45
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Conclusions

• Most major airports / airport authorities still
  under government / public sector ownership
• Privatisation of airports in many countries is a
  controversial issue
• Governments in many countries view airports as
  vital assets seek to maintain control
• Most privatisations have been partial
• Focus on managing airports post-privatisation