As more airports move into the private sector, airlines are hoping for better service and investment yet worrying about higher prices. Tom Gill reports.

Airport privatisation is gathering pace, and although private investment and the introduction of commercial airport expertise appears to be good news for airlines, it is too early to tell whether the private sector can always deliver where governments have failed.

'BAA was seen as a Thatcherite experiment. "An airport - forget it! You've got to be mad!" we said at the time. But since 1992 [when Vienna was partially privatised] every chancellor around the world has been looking at the idea,' says David Freud, managing director of corporate finance at SBC Warburg Dillon Read. Freud is advising the Mexican government in its forthcoming airport privatisation programme, just one of a vast number of similar projects which are set to yield handsome sums.

With expectations of an average 10 per cent return on investment everyone - airports, airlines, banks and institutional investors - wants a piece of the action.

Although fewer than 5 per cent of commercial airports are managed or owned by the private sector, the accelerating pace of privatisation will see most international airports in private hands within 10 years, says David Feldman, principal at Mercer Management Consulting.

Cash-strapped national and local governments worldwide are abandoning responsibility for costly airport development, while filling the treasury coffers. Mercer estimates that some $350 billion worth of investment in airports is in the pipeline up to 2005, but budget constraints in the West and the currency crisis in the East mean funding for such a large investment is unlikely to be provided from the public purse.

This year is set to break all records for airport privatisation. Following the sale of the Bolivian airport system to US-based Airport Group International (AGI), the government of Argentina started 1998 by awarding a 30-year, $5 billion concession for all 33 of the country's airports to a group led by Milan airport operator Societa Esercizi Aeroportuali (SEA). Airports in Mexico, Uruguay, Peru, Chile, South Africa and Australia are now set to go under the auctioneer's hammer.

In Europe privatisation is also gathering pace. Last year BAA, the former British Airports Authority,bought a 70 per cent stake in Naples/Capodichino, Italy's third largest airport, and the Italian government aims to move the entire system into the private sector. The Portuguese government intends to sell its airport authority, ANA, and plans a build, operate and transfer deal for a new greenfield airport in Lisbon.

The German government intends to sell off six major airports, including Frankfurt, Berlin, Hamburg and Cologne-Bonn. Bidders for a 75 per cent equity stake in the Berlin Brandenburg Flughafen (BBF)airport company have been shortlisted. BBF plans to close two of Berlin's three airports and concentrate on Schönefeld, where a US$4.6 billion expansion set for completion by 2007 will be the first European airport development to depend almost entirely on private funds.

Russia too, is bringing in private money. This month Aéroports de Paris (ADP) is to sign a contract for a 25-year concession to build and operate a third, international terminal at St. Petersburg.

In the UK, secondary airports are being privatised in order to finance expansion. The local authority owning Luton airport was faced with two options to finance its $115 million expansion, according to Guy Stevenson, an adviser at Credit Suisse First Boston. 'Local councils are constrained by public sector borrowing requirements,' he explains. 'The council's options were either to sell 51 per cent of the shares, as Bristol and Birmingham City councils have done, or grant a concession.' In March Luton will grant a 30-year concession to AGI, Bechtel, Copenhagen Airport or the National Express bus firm.

In Australia, the sale last year of long-term leases in Perth, Melbourne and Brisbane grossed around US$2.1 billion. Melbourne was sold to Australia Pacific Airports Corporation (APAC), in which BAA holds a 15.1 per cent share. APAC plans to spend US$32 million on the apron and taxiway, and is planning an aggressive expansion in traffic through a 50 per cent discount on landing fees for new airlines during their first year and a 30 per cent reduction for new services by existing operators.

Brisbane airport went to the Brisbane Airport Consortium, which includes Amsterdam/Schiphol and will spend US$195 million on expansion including a new parallel runway. The second wave of Australian privatisations, due to be completed this year, is projected to raise a further US$645 million, though Sydney is excluded for now.

For governments ridding themselves of massive investment liabilities and money-losers, equity sales, stock market listings or concessions may seem a good deal. The final bid for the Argentinian airport concession offered the government $171 million in annual fees.

'The Argentinian government did quite well in terms of proceeds from sale,' understates Barney Parrella, managing director of Washington-based consultancy GKMG, adviser to the Peruvian government. Lima aims to have 'wrapped up' the sale of its airports by the end of the year.

For Argentina, 'it is way too early to tell whether it will be a successful model,' says Parrella, who adds that he is studying a number of privatisation paths but that the concession is likely to be more than 20 years.

What is clear, he says, is private investors and internationally recognised airport operators can often achieve what governments can no longer take care of - improvements in capacity, efficiency and safety.

In Parrella's view the UK experience of privatisation 'worked well in a very mature and regulated environment. In less developed countries, governments are tilting towards building and enhancing the transport system rather than just offloading the assets.'

Around $800 million was needed over the next five years to prevent Argentina's airports from becoming inoperable, and to secure this the Argentinian government tied a £2 billion capital investment spend to the sale.

Likewise, the Uruguayan government, which was to open the bids for a $150 million, 15-20 year concession for Montevideo airport on 30 March, requires investors to build a new terminal and extend two runways.

Costa Rica's Juan Santamaria Airport at San Jose is also said to be looking at privatisation to meet a projected $176 million investment bill over the next 12 years.

BAA's acquisition of Naples airport was also tied to investment. 'A major capital expenditure programme was part of the deal,' says Roger Kitley, director of international business at BAA's property development arm BAA Lynton. He says a masterplan is currently being drawn up to include expansion of the terminal and retail development, while as part of the Melbourne deal BAA undertook to complete a car-park expansion.

Investors in The Airports Company South Africa will also have to contend with the airport company's investment plans, says BAA, which hopes to secure the concession. The closing date for strategic investors to bid for a 20 per cent stake in South Africa's nine airports was at the beginning of March. The state will reduce its share to 51 per cent by offering 9 per cent to airport staff and 10 per cent to the National Empowerment Fund, and by providing the winning bidder with the option to buy a further 10 per cent stake though a public share offering projected to take place within three years.

But not all airport privatisations have capital investment commitments written into the contract. The Mexican government, which this year is selling to strategic investors 15 per cent stakes in four groups comprising 35 of the country's 58 airports, prior to a flotation of the remaining 85 per cent shares, believes regulation will ensure the necessary investments. Jorge Silverstein, from the Mexican Ministry of Transport and Communications, says the airports need minimal investment and construction costs are low.

However, this is not the case for Mexico City, which alone forms one of the four regional packets up for sale. Expansion via a fifth runway is not viable, and therefore a new airport will need to be built in either Texcoco or Hidalgo state. This may cost up to $5 billion, says Frank Oidtmann, deputy vice-president of Frankfurt airports' consulting and acquisition arm, Airconsult. 'It is not clear how Mexico City fits into the structure of the privatisation deal,' he says.

According to ADP, which has also expressed an interest in gaining a concession in Mexico, regulation could mean setting minimum service levels and standards taking into account future requirements.

The other reason for privatisation is to bring in outside operational expertise, and this is obligatory in practically all cases. Expertise is required in airport management and in generating non-aviation income, such as retailing, restaurants, and property development. One of the main reasons why BAA is seen to have been a model privatisation is its success in bringing the contribution of non-aviation income to some 70 per cent of total turnover. All airports are seeking to increase non-aviation income, which is only 30 per cent of revenues in South Africa, for example.

Inevitably, airlines are concerned that airport privatisation could result in increased costs for aviation services.

'We have mixed feelings about privatisation,' says IATA charges group chief Julian de la Camara. 'Sometimes it works, sometimes it doesn't.' Whether an airport is fully or partially privatised or just commercialised, airports have to be 'sensible', says de la Camara. He says BAA is 'probably the best example' because charges have not gone up and costs have been controlled. Under the UK's regulatory system, the Civil Aviation Authority forces BAA to cut aviation charges at its London airports every year in real terms.

Since it won a 10-year management contract with 7 million passenger a year Indianapolis airport in September 1995, which includes terminal, airfield and support services, BAA claims it has cut charges to airlines by 37 per cent on a per passenger basis.

To avoid increases in charges, Iata is concerned that all income derived at airports should 'go into one pot'. De la Camara points out that even where airports are still in state hands, private companies run various non-aviation activities such as duty free. 'Because there is no single till, the airport as a whole does not have access to all the revenues.'

In Mexico non-aeronautical activities are already in the hands of private concessionaires, says IATA. Duty free, ground handling and warehousing will not be included in the Argentinian airport concession until the contracts, already awarded before privatisation, expire in 2010. Although the SEA-led airport operator will get some revenues from the duty free concessionaires up to that date, the amounts will be lower than international standards, says Frankfurt airport. Some analysts say that this, coupled with the size of annual fees, means the SEA consortium will little choice but to raise charges either on airlines or on passengers. The Milan operator has not ruled out departure taxes.

Airlines are also concerned about cross-subsidisation. According to some analysts, most private sector investors would not consider buying an airport with fewer than 1 million passengers, and it is only when the 5 million mark is reached that the investment is considered to be attractive. This is why airports have often been sold as a package - good and bad, small and large, domestic and international. Although the most unprofitable airports have been excluded from the sale, de la Camara says only one or two airports in each of the Mexican packages are self-sustaining.

'The majority are subsidised by those few airports that make money.' He says no more than eight of the 33 airports sold in Argentina are profitable and those will have to subsidise the rest. As a result, he says, 'International airlines will pay for more than they use.'

So far IATA's calls for its concerns to be taken into account in the aeronautical regulatory framework which is currently being drawn up in Argentina have been rejected. ' We still have not established contacts with the airport authority,' states de la Camara.

Anil Kapur, the World Bank's leading private sector development specialist and resident expert on airport privatisation, does not believe it likely that charges will increase substantially. 'A change in ownership does not necessarily lead to an increase in charges,' says Kapur, who adds that it is too early to assess the impact of privatisation and suggests airlines 'have also not paid their fair share in the past.'

In any case, many carriers say they are willing to pay more for improved service, says Oidtmann. Heavily involved in the Argentinian bid, Oitdmann says Buenos Aires/Ezeiza airport is one of the most decrepit in the world and airlines are unanimous in their willingness to pay more for better service.

Many countries, including the UK and South Africa, operate a system of airport charge capping, usually a formula pegged below inflation, or plan to do so after privatisation. In Australia a charge-cutting regime was introduced to cover the initial five years of private ownership, but afterwards it is up to airlines and airports to negotiate changes between them, with recourse to a special regulatory body if this proves necessary.

Where infrastructure is involved, the risks for private capital are high. Whether airport privatisation can reproduce the UK success - where the proprietors receive the kind of return they expect while keeping airlines reasonably happy - will depend as much on their own performance as on tough regulation. Governments' will also need to favour long-term aviation development rather than short-term budgetary expediency.

Source: Airline Business