Private persuasion: Airport privatisation

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By Richard Rowe in Edinburgh

Airport privatisation was meant to herald a new era of professional airport management that focused on service, cost control and efficiency. So why are airlines so glum?

The privatisation of airports has come a long way since 1987 when the flotation of shares in BAA effectively kick-started a process that has since spread to most world markets. The one hold out is the USA where airports remain largely government owned and airlines wield considerable influence because they own and operate their own terminals.

Although considered the granddaddy of airport privatisations, the flotation of BAA - which raised a tidy $2.3 billion for the UK government - remains one of a relatively small number of airports (or airport groups) that have been privatised through the sale of assets to private investors. A much more common model over the years has involved the leasing of assets for long-term operation and development by private airport, construction and investment groups.

Regardless of model, private sector participation in the airport industry has become both inevitable and essential, believes Kamila Zlobinska, research analyst at Frost & Sullivan. "Given the ­pressure on infrastructure investment, the capital, management skills, efficiency and business approach of the private sector are all necessary," she says.

Private sector involvement also brings clear economic benefits, argues Zlobinska. Not only does it result in efforts to control costs and boost revenues in a way that would not be the case in government hands, it also introduces new management styles and commercial skills, she believes.

"It is easier to create efficiencies following privatisation," says Niels Boserup, now in his sixteenth year heading Copenhagen Airport. "The government-run system supports a situation where it is difficult to make changes."

Narita Airport Authority executive advisor to the president Tsuneaki Iki says privatisation is resulting in significant efficiency gains that is allowing the airport to pay for a runway extension project while reducing landing fees. "To us privatisation means reduced costs," he says. "The promise we made publicly is privatisation should benefit not only us but also customers, the airlines. That's the philosophy."

Enterprise culture

Privatisation has also injected some much-needed commercial energy, adds Yiannis Paraschis, deputy chief executive at Athens International Airport, a 55% government-owned privatised entity. "Many airports have changed from a passive infrastructure to an active enterprise approach, dealing more directly with both airlines and passengers," he says.

Perhaps most important of all, says Andrea Pal, senior vice-president global investments and management division at Fraport, is that privatisation has simply allowed investment where none was previously possible - improving service levels as a result. Fraport itself maintains airport interests in Mexico, Peru and elsewhere, "countries where the former owners were just not able to commit financial resources", says Pal.

However, while airport privatisation can raise substantial sums for government and generate funds for capital investment, history suggests that it is in itself no guarantee of airport profitability. Nor does it automatically mean improved operational efficiency, or higher levels of customer service, notes David Feldman, managing partner at Paris-based Exambela Consulting.

After all, airports that invariably top airline and passenger satisfaction surveys such as Singapore Changi, Dubai and Amsterdam Schiphol are all government-run. The latter looks likely to remain that way for some time following the failure of the Dutch finance minister to push through Schiphol's privatisation before the end of his government's final term.

 
© Arne Peterse, Copenhagen Airports   

Copenhagen Airport is seen as having high levels of customer service and operational efficiency

Meanwhile, Copenhagen - an airport that was privatised in stages, beginning in 1994 - has received praise for its high levels of customer service and operational efficiency thanks to what Feldman describes as "a focus on the drivers of value". The airport also featured at or near the top in all five categories in a recent Exambela Airport Leadership Peer Survey.

It is no coincidence that Copenhagen's good standing has been built during a period in which it has retained a stable management team, led by a long-serving chief executive. "It is important to have that consistency of management and vision," believes Feldman.

Overall, his belief is that the track record of airport privatisation has been sketchy at best - "for every Copenhagen, there are others that have fallen short of expectations" - and that it is the quality of management, governance and regulatory framework that has more bearing on an airport's success than the actual public or private capital structure.

Interestingly, it was not long ago that many airlines were cautiously optimistic about private sector involvement in the airport industry naturally enough, the thought that lumbering state-run airports would be dragged into a brave new world of private sector enterprise held considerable appeal.

However, that mood has changed, says Jeff Poole, IATA's director, industry charges, fuel and taxation. "A few years ago, IATA was proactively in favour of airport privatisation, but it was just an act of faith in the benefits of business management," he says.

Like Feldman, Poole warns against confusing the success of an airport privatisation with the success of an airport. For IATA, the yardstick is not how much revenue is raised by government, but about the efficient management of an airport's infrastructure assets thereafter. "Our concern is that an airport, whether public or private, offers good services at a cost-effective level," says Poole.

But has airport privatisation not brought any benefits at all for airlines? Qantas executive general manager associated businesses Grant Fenn concedes it has provided capital for investment in most of his carrier's major airports. However, for Air New Zealand chief financial officer Rob McDonald, privatisation has generally brought increases in airport charges more focus on investment returns barely discernible improvements in service levels and a proliferation of "non-aeronautical" activity.

Huge profits

SAS director of government charges Jens Justesen also believes that airport privatisation has been disappointing for airlines. "Privatised airports make huge profits that are not reinvested in either lower user charges or improved service levels," he maintains.

SAS even directs a few barbs at its Danish hub following the acquisition - at great expense - of a majority share in Copenhagen Airports by Australia's Macquarie Airports in December 2005. Macquarie Airport's chief executive Kerrie Mather has since reiterated the company's commitment to develop Copenhagen as a major hub for SAS and the region, but SAS remains concerned that the airport will only focus more on profits to justify the high price paid for it. "This is only natural," says SAS. "What is not natural is that increased revenues and productivity are not shared with the users and passengers."

For now, however, SAS's concerns are unfounded. As Boserup outlines, the airport is committed to a charging regime established following detailed discussions with carriers in 2005. "We agreed charges for the next three years, so there will be no more negotiations required until then," he says. In fact, net charges for the period have fallen, while the airport has also taken on a larger chunk of security expenses and agreed to reward carriers with cash bonuses if passenger numbers increase.

As Zlobinska at Frost & Sullivan points out, with just 2% of airports worldwide currently managed or owned by the private sector, the scope for additional privatisation remains ­considerable - despite the high prices that are invariably paid for airport investments.

Feldman points to a somewhat cyclical process and believes that after a quiet period airport privatisation projects are now back on the agenda with airports such as Aeroports de Paris, London City, Bratislava and Hong Kong all on the radar screens of investors.

This year, of course, has already seen the acquisition of BAA by a consortium led by Spain's Ferrovial Group and the subsequent refocusing of BAA's strategy to primarily develop its UK airports. As such, it is now looking to sell its stakes in overseas interests.

Stake sale

Most recently, a consortium led by airport management group Hochtief AirPort signed a Memorandum of Understanding with Ferrovial regarding the purchase of BAA's stake in Budapest Ferihegy Airport. Hochtief AirPort was the second-placed bidder behind BAA in the airport's privatisation only last year. There is also speculation that BAA's London airports will be broken up by UK competition authorities.

Hochtief AirPort's move demonstrates the company's continued belief in airports as outstanding long-term investment assets. And future prospects are equally promising, says chief executive Reinhard Kalenda. "Civil aviation will continue to grow at a notable rate worldwide," he says. "This explains the increased demand for airports - and the higher purchase prices."

Likewise, Andrea Pal at Fraport believes that financial investors or infrastructure funds will continue to invest "because there is just too much money in the market", but also predicts a new wave of opportunities for specialised airport groupings on the horizon. "We expect to see some second markets developing when all these investors sell out," she says. "Airport groups will not compete for expensive targets in developed regions, but will instead probably focus on more difficult targets where airport know-how is really needed such as China and India."

India is one market in which Fraport itself is now involved following its successful bid to develop and operate Delhi Airport for an initial 30 year period. Fraport's involvement at Delhi, plus the management of Mumbai Airport by South African and Malaysian interests, will be interesting to observe, says Feldman.

Meanwhile, IATA continues to voice concerns about what the next round of privatisations might bring for airlines and carriers are equally worried about what they see as a lack of independent economic regulation that sometimes follows airport privatisation. In this sense, airlines revert to a long-held stance that large airports are monopolies regardless of ownership and so are in a strong position to impose their will.

"Governments need to include within the regulatory framework some countervailing checks and balances on the airport's monopoly powers," comments Grant Fenn at Qantas. Good governance is extremely important if the airport privatisation is to be in the public interest, agrees SAS's Andersen. "Independent economic regulation is essential and should be overseen by a competition authority to which airports and airlines have the right to appeal."

According to IATA, there are too many airports where this just is not the case. The association cites a number of airports, but saves much of its fury for the so-called "light-handed" approach practised in Australia and New Zealand following the ditching of formal price-cap economic regulation after privatisation in those countries.

Auckland's airport was privatised in 1998 and is now one of the world's most profitable. Since 2002, it has delivered a substantial NZ$740 million ($496 million) to shareholders by way of dividends and return of capital, although the airport also points out that it has delivered on the policy objectives of successive governments to incentivise new investment, higher service standards and greater productivity. It has invested NZ$431 million in the same five years, with a further NZ$250 million to come over the next two years.

However, Air New Zealand has been vocal about what it considers excessive charging and the lack of clear pricing guidelines to protect users against potential monopoly abuse. "Instead of putting in place a robust framework designed to deal with key pricing principles, monitoring and periodic reviews, the legislative framework provides the airport with a statutory entitlement to 'set charges as it thinks fit', following consultation," says McDonald.

And that consultation is process rather than outcome-driven, he contends. "The lack of countervailing power on the part of airlines means that the sort of commercial negotiation that would occur in a competitive market cannot occur."

However, Don Huse, chief executive at Auckland, argues that privatisation has brought "greater economic clarity" in terms of running the airport and how it engages with carriers. "Assets are administered that much more diligently, although that has given rise to some of the tensions," he says.

He also highlights the "robust debate" that now takes place with airlines on the nature and extent of capital expenditure at the airport. This includes an ongoing charges review, the results of which will take effect from September 2007. "We do have the power to set prices, but the airlines also have a mechanism to object," adds Huse, pointing to the monitoring role of New Zealand's Commerce Commission.

In Australia, Qantas had high hopes when the Productivity Commission presented its recent draft review of airport pricing, only to be dismayed when its request for binding arbitration where carriers and airports are in dispute over pricing was rejected. Qantas has since presented a further submission. "We are hopeful that common sense will prevail," says Fenn.

But airports think airlines should stop complaining to governments. "All they are being asked to pay for is directly related to aviation," says Sydney Airport chief executive Max Moore-Wilton.

"It should be a matter of commercial negotiations. There's nothing different about aviation. They made it different."

Moore-Wilton adds airports need to partly rely on aeronautical revenues to recoup its investments, including a recently completed project preparing Sydney for the Airbus A380, because retailers cannot cover all the costs and governments can no longer be expected to pay. He complains Sydney expected to begin recovering some of the costs of the A380 project this year, when Singapore Airlines was scheduled to begin flying the aircraft, and now has to find a way to make up for the lost revenues.

"We've spent A$100 million ($76 million) on getting ready for the A380. Now there are delays and the airlines are getting compensation. We haven't gotten a dollar of that compensation," says Moore-Wilton. "We'll work it through in our charging."

Kalenda points out that "for a long-time, airlines benefited from services that were subsidised by the state" and adds airports are now simply demanding appropriate remuneration for the services they offer.

Return on investment

Airports also complain airlines generally refuse to recognise airports are more capital-intensive and require higher returns on their investments to survive. Instead the airlines harp on how the airports are more profitable than them.

"We're an extremely capital intensive industry. Much more than airlines. That's why we need high margins to finance the capital costs," says Airports Council International Europe director general Olivier Jankovec. "Everyone has to pay," he adds. "There is no more public money. We're not in the business to make sure airlines make a profit."

Adds Dublin Airport Authority director of market development Tom Haughey: "What the airlines are saying is it's outrageous that airports are earning the cost of capital."

"I believe that anyone taking a higher risk has the right to expect an adequate margin," agrees Kalenda.

All the skirmishes, however, should not detract from the fact that airports and airlines form part of the same value chain and ultimately depend on one another. Kalenda urges airport operators to acknowledge the legitimate interests of carriers and do their best to provide optimal service at a fair price. "We need to work together much more closely than we have in the past," he says.

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