April 21, 2009Dr. Romano PagliariSenior LecturerCranfield University

Approaches to the privatisation of airports

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

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

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

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.

Methods of privatisation

Trade saleStock marketfloatation

Project FinanceBOOT

ManagementContract

Concession

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

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

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

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

• 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

Privatisation of airport networks

• 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

Privatisation of airport networksMexico

• 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

Privatisation of airport networksAustralia

• 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 = AR$118 million and profits of the group = AR$140 million

• 2001 economic crisis and problems with concession contract

Privatisation of airport networksArgentina

UK experience of privatisation

Local CouncilGovernment-owned BAAPrivate

Before privatisation

Central / regional government

After privatisation

Privatised BAA

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

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

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.

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

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

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)

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

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

Are private airports better?

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

Sample of European regional airports between 3 and 5 million annual passengers

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