David Knibb MELBOURNE Two years after privatising its airports, Australia may provide some lessons for the rest of the world.

two years after Australia privatised its major airports, some effects of that process are starting to emerge. It is too early for conclusions, but the way Australia faced a host of issues could help others starting down the privatisation path. For airlines especially, Australia demonstrates that maybe privatisation is not all bad.

Australia was the third country in the world, after the UK and South Africa, to privatise its airports. It was the first to dispose of airports individually. Combined with cross-ownership limits, this led to separate ownership, encouraging competition between major airports. The results of that are unclear, but a major battle is already brewing between Australian gateways over which will become the country's hub for the Star Alliance.

Australia took other steps, such as limiting foreign ownership to 49% and airline ownership to 5%, designed to protect the independence of its hubs. Yet new airport owners also inherited a restrictive regime on terminal access that effectively bars domestic start-up airlines unless they build their own terminals. Such paradoxes underscore an observation from Peter Harbison, a Sydney-based aviation consultant, lawyer, and manager director of the Centre for Asia Pacific Aviation. Harbison, who was active in Australia's privatisation process, laments that it was driven by politics with "absolutely no aviation or airport policy involvement".

Frustration can yield overstatement, but Harbison's observation is a warning to other countries. There is much to support his view of what happened in Australia. The very decision to privatise was political - pushed by "dry" economists and politicians. In a prelude to privatisation, they launched a bevy of attacks on government airport policies.

Unique among those policies was a pricing scheme that charged the same fees at any airport so that Canberra could cross-subsidise outback stations. That philosophy is embraced by many Australians, who hold a special sympathy for people who work in the remote bush. Yet airlines and urban airports formed an unlikely alliance to oppose it.

The "dries" still lacked the clout to push privatisation through without concessions. They agreed to sell leases rather than the underlying freehold. The leases were for 50 years, with an option for another 49, which effective conveyed ownership, but the concession bought votes. Cross-ownership bans between adjoining airports at Brisbane and Coolangatta, Melbourne and Adelaide, and Hobart and Launceston, also allayed local fears that a single owner might favour the bigger airport in each pair.

Even the decision to sell individual airports, rather than to float the Federal Airports Corporation (FAC) as an entity as the UK had done with BAA, was based more on politics than policy. Partly it was a personal clash between the transport minister and head of the FAC, but mostly it was a government finance department forecast that separate sales would boost revenue. When the government announced that it would sell individual airports, it justified the plan on pro-competitive grounds, even though the Australian Competition and Consumer Commission (ACCC) expressed strong scepticism. Reducing budget deficits, it seemed, overrode any real airport policy.

Financial advice

The decision to use trade sales rather than public floats was based on the advice of financiers in and out of government that this would maximise revenue. So it did. Canberra imposed no rule that bidders for individual airports had to include local governments. It even toyed with lifting the foreign ownership limit on some secondary airports, but retreated in the face of public opposition.

Key decisions were made for non-aviation reasons, but from a fiscal viewpoint, they produced impressive results. Without government valuations or reserve prices, Melbourne, Brisbane, and Perth, the three biggest airports after Sydney, sold in July 1997 for a total of A$3.37 billion ($2.4 billion). A year, later 14 secondary airports fetched another A$731 million. Together, these sales generated A$4.1 billion - 60% ahead of government estimates. Two international airports sat on the sidelines: Cairns, which the federal government did not own, and Sydney, Australia's main gateway.

The government held Sydney back because of uncertainties that could have depressed its value. On the eve of the 2000 Olympics, Sydney has dressed up its terminals and enhanced its value. But its two big issues - the continuing controversy over noise, and whether, when, and where to build a second airport - are subjects of major debate.

Sydney's exclusion from the sale did not seem to chill the interest of bidders in other Australian airports.

"From a price-earnings ratio analysis, some of the Australian airports sold for very high prices," says Terry Morgan, the new chief executive of Melbourne Airport. "Globally, these multiples are at the top range. A lot of that was generated through the competitiveness of the trade sale bidding."

Brisbane's new managing director, Koen Roojimans, questions whether price-earning multiples are the best indicator of value. He views such ratios as measures of the past, rather than of an airport's potential. Yet, he also admits that the A$1.4 billion his group paid for Brisbane Airport is a lot of money.

Before other countries start raising their estimates on the assumption that trade sales will boost their revenue, they should compare their conditions with what Harbison says were the three ingredients that produced Australia's lucrative result. They were: "One, a relatively good basic infrastructure. Two, a fairly solid and predictable traffic flow - predictable probably being the key thing. And the icing on the cake was the potential for substantial inbound tourism growth."

The successful bidders at specific Australian airports would add other key features to this list - geographic advantage, proximity to sea ports, spare capacity, a stable mix of traffic, diversified markets, co-operation of local governments and potential for growth.

Foreign managers

One measure of the interest in Australia is the number of airport managers who speak with foreign accents. Melbourne's Morgan is British. He came from BAA, which is part owner and manager for the group that bought Melbourne and Launceston. Koen Rooijmans, who speaks with a Dutch accent, came from Schiphol, which manages, and is part owner of, Brisbane. The UK's Manchester Airport manages Adelaide and Coolanqatta. Airports Group International (AGI), a US-based company, operates airports in Perth, the Northern Territory (Darwin and Alice Springs, and Hobart. AGI may be bought by a UK company. The world's major airport players are all in Australia. As Rooijmans notes: "Schiphol saw a tendency for airports, like other businesses, to go global."

No bidder will admit that Sydney's absence from the bidding made a difference. Yet, all knew that a successful bid at Brisbane, Melbourne, or Perth would limit them to no more than 15% of Sydney, if and when it is ever sold. That is the most important cross-ownership ban of all. But the new owners of Brisbane and Melbourne, which bracket Sydney geographically, seem bent for now on a strategy of if-we-can't-own-it-we'll-beat-it. Both are exploiting Sydney's current uncertainties and its preoccupation with the Olympics, knowing that it could become a formidable rival.

"Sydney is already conscious that it has these two up-and-coming whipper-snappers at its heels," says Melbourne's Morgan. "Inevitably, when Sydney gets more commercial and political freedom, it will move forward."

Morgan insists his group did not consider holding off so they could bid on Sydney later. "To a man (and a woman) the shareholders knew that Melbourne was going to be a good investment."

Harbison nonetheless claims that "there is no secret that BAA wanted Sydney, and still does. When the time comes, we'll find the combination of substantial pressure on the government to relax its cross-ownership rules and/or a move [by BAA] away from Melbourne into Sydney".

At the moment, however, Melbourne and Brisbane are locked in a struggle over which will become the Australian hub for the Star Alliance. They see little chance of wooing a oneworid alliance hub away from Sydney, where founding oneworld partner Qantas is based. Ansett Airlines a Star member, also calls Melbourne home. But Brisbane discounts the importance of that. Ansett is half owned by Air New Zealand, which made its Asian gateway in Brisbane.

Brisbane position

Brisbane, says Rooijmans, is better situated geographically and, if Melbourne were the hub, transfer traffic would have to backtrack. Morgan replies that Air New Zealand and Singapore Airlines, present and a potential Star member, have seen fit to double capacity into Melbourne in the past year. Melbourne weathered the Asian crisis better than Brisbane, he adds, because it had a better mix of business and leisure traffic to and from more parts of the world. The claims sail back and forth, underscoring how important it is for each airport to land the alliance hub. In some countries only one hub is suitable, but airports in China and other nations with multiple gateways should take notice.

Some repositioning is under way among airport managers and owners. A two-year ban on secondary sales is about to expire and some airports are in play. According to Morgan, except for Sydney, there is unrestricted scope for action.

Infratil, a quoted infrastructure fund, is a major shareholder in Perth and the Northern Territory airports. Lend Lease recently agreed to buy 25% of Infratil, with a five-year option to buy the test. AGI, which manages those same airports plus Tasmania's Hobart, is about to be bought by a UK company called TBI.

As Morgan observes, "all this churn is starting to happen - ownership changes within the various consortia. The issue at Perth, Darwin, Hobart and Alice Springs is who is going to end up with the management contract.

"The bigger question is what is the industry going to do over the next few years," Morgan adds. "Will existing owners stay where they are, or will airports be acquired by other airports? I think consolidation is a possibility."

Even the owners of Melbourne and Brisbane are considering their own initial public offerings (IPOs). Neither has made a final decision; both want more financial results under their belt first. But as Morgan admits, "the only [IPO] question is when and how much."

Roojimans adds: "I could foresee an IPO four-five years from now." He admits that the financial institutions that own Brisbane shares "could change".

Some turnover is normal, but the high prices paid for Australia's airports may carry a risk, adding instability because owners are stretched financially. Rooijmans insists the price his group paid for Brisbane has not driven management decisions. Morgan has an equally long-range view at Melbourne, but he admits his shareholders are capitalising interest on their debt. None of Australia's major airports has forecast or yet reported a profit.

During Australia's debate over privatisation, one of the worst fears at airlines amid local communities was that over-extended buyers might defer future improvements, causing airports gradually to deteriorate.

To meet that concern Canberra required successful bidders to make development guarantees. The owner of each airport must submit a master plan updated every five years and pledge a sum that it will spend on airport improvements in each five-year block. At the end of that period, if an airport has spent less than the guarantee, it will forfeit the difference to the government. Canberra does not mandate specific improvements, but it watches closely through annual reporting requirements to see that funds are spent on genuine airport projects. Roojimans credits the airlines in lobbying for these guarantees, which he says are "very reasonable."

Morgan says Melbourne will easily meet its spending targets, but says some airports they over-estimated how soon they would need more capacity. He foresees some pleading with Canberra along the lines of "do you really want us to spend all this money when we don't need it?"

Monopoly concern

The other big concern by airlines was that airports would use their natural monopolies to charge monopoly prices. At airline urging, Canberra's response was a formula borrowed from the UK rules in its BAA sell-off. The amount each airport can charge for aeronautical fee is no more than the annual consumer price index (CPI) less x, a factor that has reduced charges by amounts varying from 5.5% at Perth to 4% in Melbourne. Supposedly, this cap applies only for five years, but it is reviewed by the ACCC, Australia's competitive watchdog. The ACCC has hinted that it may extend the cap beyond that date.

Development guarantees, a cap on aeronautical charges, and a growing likelihood that the cap might last beyond five years, have all prompted Harbison to note a significant and surprising result.

"There's been a major shift," he says. Australia's airports have always been monopolies. Before privatisation, the government's uniform pricing meant carriers paid for airports they did not use.

Harbison says he did not expect, and he doubts the airlines themselves quite expected, the legislation and regulations to work quite so effectively. Because of this, he believes "airlines in Australia are in a stronger position now than they were before".

That view of Australia's experience suggests that privatising airports, usually a turbulent event for airlines, could have a silver lining.

Source: Airline Business