A stone's throw from Hong Kong, Macau has built itself a shining new airport. While operating at a profit, positive returns are no sure bet for investors

Macau is no stranger to a gamble and that is exactly what the former Portuguese colony took with the opening of its first ever airport five years ago. So far, the going has not been easy and there is still no guarantee that the bet will pay off. Although traffic has grown rapidly, the airport's throughput is only half of the available annual capacity of six million passengers, leaving its backers looking at heavy losses.

The airport, inaugurated in Nov-ember 1995, was one of the last major infrastructure projects completed before Lisbon handed the tiny city of 420,000 back to China at the end of 1999. The project was complex on several levels. A scarcity of land meant that the airport was largely built on a man-made island. Its financing was no less innovative.

A build-operate-transfer project, the airport was constructed and is run by the Macau International Airport Company (CAM), a firm formed specifically for the project. The scheme called for CAM to build the airport, and, in lieu of payment, have claim to all revenues derived from its operation over 25 years, with a joint option for 10 more. After that period, the Chinese Government is slated to take ownership of the facility.

Ownership in CAM was shared between the city's private and public sectors. The largest private shareholder, with a 36% stake, is Macanese company STDM. A conglomerate holding a monopoly on the city's famed gambling industry, STDM is owned by ubiquitous local businessman Stanley Ho.

A majority 55% was taken by the then-colonial administration. When Portugal handed over control in December 1999, its claims to the airport were ceded to the region's current government. Like Hong Kong, Macau enjoys unique status and limited autonomy as a "Special Administrative Region".

At inception, CAM believed the airport would position Macau as a key gateway to China's industrial Pearl River delta area, and capitalise on the region's low airport capacity. However, problems immediately surfaced when construction costs soared. STDM's portion of building costs - originally estimated at 3.5 billion patacas ($466 million) - grew to 9 billion patacas. Then, once the airport initiated operations, several once-promising factors changed.

Shortly after its inauguration, CAM watched as the Asian financial crisis played havoc with the region's economy. Then Chek Lap Kok (CLK) airport opened in neighbouring Hong Kong in July 1998, replacing storied, but over-burdened Kai Tak with a modern, efficient, greatly enlarged facility. Unexpectedly, CLK opened a second runway years ahead of schedule, in effect giving it twice the passenger throughput of its predecessor.

Also troubling have been airfield developments on the other side of the now-meaningless frontier with China, as nearby cities Guangzhou, Shenzhen and Zhuhai each built new airports.

Despite this, Macau is far from admitting defeat. CAM recently introduced several new marketing incentives, such as waiving passenger facility charges for people who stay in the city for under a day, and offering half-price landing fees at night. CAM chairman Joïo Manuel de Sousa Moreira boasts that such programmes have made airline costs 30% lower than those at CLK. More importantly, these marketing efforts have met with success.

The result has been an impressive increase in passengers using Macau - from barely over 1 million to over 3.2 million in its first five years of operation. There has also been a sizable rise in the number of flights originating at the airport (see table).

These gains have played the key role in the airport's recent attainment of operational profitability. De Sousa Moreira admits, however, that current projections estimate it will be 50 years - and well after the end of the project life-cycle - before investors earn a positive return. CAM has applied to the regional government for an extension of the concession period to 50 years, but the issue has yet to be resolved.

The Taiwan question

Macau's gains could also be jeopardised by any future thaw in relations between mainland China and Taiwan. In a diplomatic tango, China does not officially allow flights directly between the mainland and the "renegade province" whose autonomy it has forever denied. However, mindful of the role that Taiwan capital plays in the mainland economy, China does effectively allow indirect service to the mainland with connections available from both Hong Kong and Macau.

While such flights are not overly important to Hong Kong's large market, they are Macau's life-blood. On the latest figures, almost 70% of the airport's passengers came from Taiwan. In 1999, that meant that 1.7 million of the almost 2.5 million passengers Macau handled began or ended their journeys in Taiwan.

Similarly, Macau's top two destinations are both in Taiwan: Taipei, with 1.3 million passengers, and Kaohsiung, with 470,000. The next most popular destination is Shanghai, with a rather more modest 204,000. But de Sousa Moreira and Dominic Ching, market development manager at Air Macau, steadfastly predict there would still be a vibrant Taiwan-Macau market, even in the event of direct Taiwan-Mainland flights.

Both believe this market would be kept alive by the likely fact that not all Chinese cities would receive rights for (or could support) Taiwan service, and that the Zhuhai economic zone would continue to attract business traffic. Still, even CAM's optimistic view concedes that direct Taiwan-China flights would cost the airport a third of its traffic.

Macau International Airport operating figures






















000 tones









































Source: Traffic data coutesy of CAM, Destinations data via OAG

Pinning hopes on cargo

It may be that cargo is CAM's best bet out of the red, especially as recently improved road links with China make the shipment of freight by air more viable. Indeed, de Sousa Moreira says the airport's future lies with the air freight of high-value goods. Encouragingly, Air Macau - with whom de Sousa Moreira says the airport has a "marriage" - has said it will introduce two dedicated freighter aircraft (probably in the Boeing 767-size range) by April.

Looking back, several of the airport's difficulties should not have - and perhaps did not - come as a shock. A source close to the project suggests that Portugal knew the airport would not be a financial success from the outset, but moved forward for sentimental reasons. Specifically, he hints that, in its zeal to build a gateway that would safeguard the future importance and autonomy of its soon-to-be ex-colony, the Portuguese Government commissioned overly optimistic construction and traffic estimates to entice private sector participation.

Whatever the situation, unless the Chinese Government extends the airport's concession period to something approaching the desired 50 years, the financial success of Macau International Airport will continue to represent a gamble with long odds.

Source: Airline Business