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Annual Privatization Report 2013

Airport Privatization

Subsection of Annual Privatization Report 2013: Air Transportation

Robert Poole
April 1, 2013

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Introduction

Airport privatization has become a worldwide phenomenon since British Prime Minister Margaret Thatcher’s government privatized the former British Airports Authority, which became BAA plc, then was taken over and de-listed by a Ferrovial-led consortium, becoming BAA Ltd (it recently changed its name to Heathrow Aiport Holdings). Governments in Europe, Asia, Australia and New Zealand, Latin America and the Caribbean subsequently privatized major airports. Some of these privatized entities have acquired full or partial ownership interests in other airports, and in some cases public sector airports have done the same, even buying into the private sector. Today’s global airport industry is often characterized by airport groups rather than just individual airports, and those groups are often part of consortia composed of investors and other entities from outside the immediate industry.

Table 1 is excerpted from a table of the world’s 100 largest (by revenue) airport groups. Of these 100 largest airport entities, 36 are either fully or partially owned by investors (or are in the process of becoming so, as in Spain and Portugal). In cases of partial privatization, either a minority or majority stake is held by the national, regional or local government entity in which the airport is located. A number of these global airport groups also manage overseas airports, on a contract basis, without actually obtaining an ownership share, a good example being Fraport with Cairo Airport. Several smaller airport companies (e.g., Hochtief Airport, HRL Morrison/Infratil, Peel Airports) had 2010 revenues below the threshold for inclusion in the top 100, so are not included in the table. Total revenue for the 36 privatized entities was $33.6 billion, which is 45% of the revenue of the entire top 100 airport groups.

Table 1: Largest Privatized Airport Groups

Airport Group Global Rank* Main Airports 2011 Revenue($M) Privatization Status
AENA 1 Madrid, Barcelona $4,521 On hold
Ferrovial 2 Heathrow $3,956 Full
Aeroports de Paris 3 Paris de Gaulle and Orly $3,497 Partial
Fraport 4 Frankfurt $3,314 Partial
TAV Airport Holding 14 Istanbul, Ankara $1,231 Full
Flughafen Zurich 19 Zurich $1,028 Full
Southern Cross Airports 20 Sydney $1,015 Full
Beijing Capital Intl. Airport Group 21 Beijing $1,008 Partial
Airports of Thailand 22 Bangkok $945 Partial
Malaysia Airports Holding Berhad 23 Kuala Lumpur $902 Partial
SEA Aeroporti de Milano 24 Milan $901 Partial
Aeroporti di Roma 25 Rome Fiumicino and Ciampino $883 Full
Flughafen Wien 28 Vienna $814 Full
Airports Company South Africa 30 Johannesburg, Cape Town $775 Partial
Guangzhou Baiyun International 35 Guangzhou $657 Partial
Copenhagen Airports 36 Copenhagen $628 Partial
Aeroportos de Portugal 38 Lisbon $604 In process
Flughafen Dusseldorf 41 Dusseldorf $585 Partial
GMR Infrastructure 42 New Delhi, Hyderabad $563 Partial
Australia Pacific Airports Corp. 43 Melbourne $559 Full
Brussels Intl. Airport Corp. 45 Brussels $527 Full
Aeropuertos Argentina 2000 48 Buenos Aires EZE and AEP $470 Full
Athens Intl. Airport 50 Athens $465 Partial
Brisbane Airport 51 Brisbane $456 Partial
Abertis 57 London Luton, Cardiff, Belfast $409 Full
Grupo Aeroportuario del Pacifico (GAP) 59 Guadalajara, Tijuana $396 Full
Aeropuertos del Sureste (ASUR) 66 Cancun $367 Full
Flughafen Hamburg 68 Hamburg $354 Partial
Auckland International Airport 77 Auckland $304 Partial
Westralia Airports 78 Perth $300 Full
Aeroports de la Cote d’Azur 82 Nice $265 Partial
Operadora Mexicana de Aeropuertos (OMA) 86 Monterrey, Acapulco $197 Full
Hannover-Lengenhagen 87 Hannover $192 Partial
SAVE Aeroporto Marco Polo 89 Venice $177 Partial
Adelaide 93 Adelaide $152 Full
Birmingham Airport Holdings 95 Birmingham $150 In process

*Source: “Financial Rankings 2011,” Airline Business, December 2012.

There have been a number of changes in the global airports industry during 2011 and 2012. The Spanish firm ACS Infrastructure is still seeking to divest Hochtief Airports, which it acquired in June 2011 when it bought a majority interest in parent company Hochtief. Two global infrastructure companies active primarily in toll roads—Brazil’s CCR and Portugal’s BRISA—created a joint venture company to bid for the to-be-divested airports of Portugal and Spain. Copenhagen Airports, SA sold its 49% share in the Newcastle Airport (UK), to focus on its core asset, Copenhagen Kastrup Airport. Wholly government-owned Manchester Airport Group will sell 35% of its equity to strategic investor Industry Funds Management from Australia, following the success of their joint bid for London Stansted Airport. Ferrovial, meanwhile, continued to sell partial stakes in its BAA/Heathrow Airport Holdings operation, most recently selling 5.72% to Stable Investment Corporation, a subsidiary of China’s sovereign wealth fund. The Ferrovial consortium also disposed of Edinburgh Airport in Scotland to Global Infrastructure Partners (GIP), on the instructions of the Competition Commission. GIP had earlier acquired London Gatwick Airport from Ferrovial. Other owners of minority stakes in BAA/Heathrow Airport Holdings include Britannia Airport Partners, GIC, Qatar Holdings (another sovereign wealth fund), and Alinda, with Ferrovial now holding 33.65%. Finally, partially privatized Aeroports de Paris purchased 38% of Turkey’s TAV Airports and 49% of the parent company TAV Construction.

Global Airport Privatizations

The largest airport privatizations in 2011–12 occurred in Europe and South America. Europe was already a hotbed of privatization prior to this recent wave. An early 2011 report from Airports Council International-Europe found that 9% of the continent’s 404 principal airports were wholly investor-owned and another 13% had mixed ownership. But in terms of passengers handled, 48% of all passengers in 2010 used airports with either mixed or fully private ownership.

A Wall Street Journal (Oct. 21, 2012) article headlined “European Airports Get Prepared for Takeoff” indicated growing investor interest in this sector. Focusing especially in medium-size airports such as Istanbul, Vienna and Zurich, investors also show interest in multi-airport operators such as Fraport and Aeroports de Paris. The article also noted that “Shares in European airports have all risen since the beginning of the year,” despite the troubled EU economy.

Five airport privatizations were under way in Europe as 2012 drew to a close. By year-end, however, only two European privatizations of any significance are actually “under way,” namely the sale of London Stansted Airport and Aeroportos de Portugal. The other potential transactions are of secondary level airports where there is considerably less investor interest.

In the U.K., Heathrow Airport Holdings (formerly known as BAA) recently completed the sale of London Stansted, as directed by the Competition Commission. Five teams had submitted qualifications: Manchester Airports/Industry Funds Management, Cheung Kong Holdings/Hutchison Whampoa, Morrison/Infratil and New Zealand Superannuation Fund, Macquarie European Infrastructure Fund, and Texas Pacific Group. A deal between Heathrow Aiport Holdings and Manchester Airports/Industry Funds Management was announced in January 2013, for approximately $2.4 billion. BAA/Heathrow Airport Holdings previously sold Edinburgh Airport to Global Infrastructure Partners for $1.3 billion in April 2012, an earnings multiple of almost 17X, compared to the 9.5X in the case of the Gatwick sale.

As part of its agreement with EU institutions, Portugal has agreed to sell a number of assets, including national airline TAP and airports operator Aeroportos de Portugal (ANA). The company owns and operates seven airports, the largest of which is Lisbon. ANA’s value was estimated at $1.9 billion. Nine teams submitted qualifications to bid for the 50-year concession, and three were short-listed. The Vinci-led team prevailed, bidding €3.08 billion ($4.04 billion), with the Fraport team offering €2.44 billion and GIP/Flughafen Zurich bidding €2.0 billion. Vinci’s bid valued the airport company at an earnings multiple of 16X.

Under similar external pressures by the end of 2011, Spain proceeded with privatization of both Madrid and Barcelona airports with the entire airport portion of state agency AENA (which is also the air traffic control provider in Spain) to follow. Six consortia had been qualified to bid, with Madrid Barajas estimated to be worth $5.2 billion and Barcelona El Prat $2.3 billion. But the change of government near the end of the year led to the privatizations being put on hold in January 2012. The new Public Works Minister, Ana Pastor, argued that given Spain’s severely depressed economy, the airports would likely go at fire-sale prices. Pastor said all options would be reviewed, but by end of 2012 there was still no announced decision.

Greece had been expected to sell its 55% stake in Athens airport as part of a sweeping privatization program, but the near-collapse of the Greek economy and repeated bailouts have led to postponements of nearly all the privatizations, partly because of the “fire-sale prices” concern and partly due the government’s focus being on short-term survival. In 2011 that stake in the Athens airport had been estimated as worth $1.4 billion. The latest development is that the Greek government now plans to request expressions of interest from the private sector to operate between 13 and 22 airports.

Italy has a slightly less-troubled economy, and privatizations there are continuing. In 2011 the city of Milan sold 29.7% of airport authority SEA, operator of Linate and Malpensa Airports, to Italian investment fund F2I, which had previously acquired Naples Airport from BAA. In 2012 SEA’s shareholders (which include 13 other public sector entities in addition to Milan and F2I) agreed to both an initial public offering (IPO) on the Italian stock market and the sale of another 14.56% held by the provincial government. Once these transactions are complete, SEA will be majority investor-owned by 2014.

By far the largest airport privatization of the year took place in February 2012 in Brazil. The government offered long-term concessions to expand and modernize three key airports to get them ready for the huge influx of visitors expected for the 2014 World Cup and 2016 Olympics. The 30-year concession for Brasilia’s Kubitschek Airport went for $2.63 billion. Both major airports in the commercial capital, Sao Paulo, were also on offer. The 20-year concession for Guarulhos went for $9.4 billion, while the 25-year concession for smaller Campinas Viracopos went for $2.2 billion. In all three cases the prices paid exceeded government valuations by several hundred percent and up to 600% in one case. There was considerable skepticism among global investors about whether these very high valuations would prove to be commercially viable for the bidders, given the extensive renovation and expansion each airport needs. The government announced auctions of two more concessions in December 2012, for Galeao in Rio de Janeiro and Tancredo Neves in Belo Horizonte.

Other airport privatizations—either outright sales of all or part-ownership as in Europe or long-term concessions for expansion and modernization elsewhere—continued during 2011–12. Further privatizations in India had been expected, but investor interest was reduced by controversy over high charges being levied at the part-privatized (and modernized) airports of New Delhi and Mumbai. The private operators of both levied much higher airline and passenger charges, allowed under the terms of their concession agreements. But after angry protests from airlines, the government overruled the airport operators but agreed to compensate them by investing additional capital into the airports. In October 2012, Fraport (part of the developer/operator team for New Delhi) announced it would sell its 10% stake in the concession company. Fraport also said that in any future investment in India, it would seek at least 30% in order to have greater control. Fraport is known to be interested in the proposed Navi Mumbai (New Mumbai) greenfield airport, one that has been delayed by intergovernmental department disputes and bureaucracy.

Here is a sampling of other recent privatizations:

Finally, in 2012 the International Civil Aviation Organization (ICAO) issued a new report, “Manual on Privatization in the Provision of Airports and Air Navigation Service.” This report, known as ICAO Document 9980, explains how airport privatization fits into international aviation law and replaces an earlier document, ICAO Circular 284 from 2002.

U.S. Airport Privatization

The federal Airport Improvement Program imposes economic regulation on U.S. airports in exchange for annual grant funding. Those regulations require all “airport revenues”—including proceeds from a lease or sale—to be reinvested in the airport (or airport system) that generates them. Hence, a city, county or state that wishes to lease or sell its airport would receive zero financial benefits from doing so. The regulations also prohibit any airport operator (including an investor-owned airport company) from taking any profits off the airport, which means such a company would have no incentive to acquire a U.S. airport.

Congress in 1996 created a limited set of exceptions to these regulations. Under the original Airport Privatization Pilot Program, up to five jurisdictions could apply to the Federal Aviation Administration (FAA) for permission to lease an airport on a long-term basis and transfer the lease proceeds to the general government budget. And the acquirer could seek profits by operating the airport efficiently. In the FAA reauthorization bill enacted early in 2012, Congress increased the number of slots from five to ten. One “slot” in the program is still reserved for a general aviation (non-airline) airport, and only one of the remaining slots can be used for an airport meeting FAA’s definition of a “large hub.” In order for an airport to be privatized under the Pilot Program, the lease agreement must receive the approval of both (1) 65% of the airlines that provide scheduled service at the airport, and (2) airlines that account for 65% of the annual landed weight (on which landing fees are based) at that airport.

The most notable Pilot Program development in 2012, was the privatization of San Juan, Puerto Rico’s Luis Munoz Marin International Airport. After some months of discussion, the airport’s leading carrier, American, agreed to the terms of the draft lease agreement in 2011, and other airlines then followed American’s lead. The July 2011 Request for Qualifications led to a dozen responses, from which the Public-Private Partnerships Authority selected a short-list of six potential bidders, including teams led by ASUR, Ferrovial, Fraport, GMR and Zurich Airport. The 2012 Request for Proposals led to responses from two of the bidders: Grupo Aerpuertos Avance (Ferrovial and Macquarie) and Aerostar Airport Holdings (ASUR and Highstar Capital). In July, the Aerostar team was announced as the winner. Assuming the deal receives FAA approval by early 2013, the airport will be leased for 40 years. The Aerostar team will invest $1.4 billion in modernizing the airport in addition to $615 million in lease payments and taking responsibility for all operations and maintenance expenses. The election of a new governor in November 2012, defeating the pro-privatization incumbent, raised concerns, but Governor-Elect Alejandro Garcia Padilla has promised to go through with the deal.

Only one other large airport holds a slot in the Pilot Program as of fall 2012: Chicago Midway. When Rahm Emanuel ran for mayor of Chicago, he expressed opposition to former mayor Richard Daley’s plan to privatize the airport. Once in office, however, he asked the FAA to allow the city to hold onto its slot in the program while it figured out what to do. With that extension set to expire in April 2012, the city asked for one last extension to Dec. 31, 2012, which the FAA granted. If Chicago did not submit a privatization plan by then, the FAA said it would terminate Chicago’s place-holder status, opening up the sole “large hub” slot in the program to other cities. In December 2012, Mayor Emanuel announced that the Midway lease would go forward.

As of the beginning of 2012 two slots in the program were held by owners of general aviation (GA) airports: Gwinnett County, GA and Hendry County, FL. In the former, the county government requested proposals to privatize Briscoe Field, following a lengthy process and much local debate. Of three pre-qualified teams, the only one that submitted a proposal was Propellor Investments, whose proposal was based on expanding the airport and attracting scheduled airline service in planes as large as 737s and A320s. That idea was the focus of the citizen opposition, and led to the rejection of the proposal by the County Board of Commissioners in June 2012.

The remaining GA slot is held by Hendry County, which is seeking to privatize its Airglades Airport in Clewiston, in the heart of Florida’s sugar-producing region. Proponent Florida Cargo Fresh has developed considerable local support for its proposed expansion of Airglades into a cargo reliever airport for Miami International Airport. The plan would add an 11,700-ft. main runway capable of handling cargo flights from Latin America, expand the airport’s size to 3,000 acres, build a perishable cargo center, and add an aircraft modification and conversion center. The airport is close to US 27, a major north-south truck route from Miami up through the center of the state.

In May 2012, the Airport Cooperative Research Program of the Transportation Research Board released a comprehensive report on U.S. airport privatization, “Considering and Evaluating Airport Privatization” (ACRP Report 66). The body of the 105-page report can be downloaded from the TRB website at no charge. Purchasers of the hard copy will also receive a CD containing six detailed appendices, including a number of case studies. The report explains how the context for U.S. airports differs from that of Europe and other regions, which probably accounts for the slower development of airport privatization in this country. In addition to providing great detail on the Airport Privatization Pilot Program, the report also explains how new airports could be developed without federal Airport Improvement Program grants, and therefore without the legally binding “grant assurances” that are required of AIP recipients.

The country’s only privately developed commercial airport serves country music haven Branson, MO. A group of entrepreneurs created Branson Airport LLC, acquired a suitable parcel of land in Branson, received airspace approvals from the FAA, and raised $155 million. With that, they created a one-runway airport with a contractor-operated control tower and a modest terminal building. Because the airport used no federal grant funds, it is not constrained by the FAA grant assurances. It has offered airlines two-year exclusive rights to link specific cities to Branson, and as of fall 2012 has scheduled service to Atlanta, Chicago Midway, Denver and Houston. Despite that success, Branson’s passenger traffic is far lower than the forecasts on which its construction was financed. Since January 2011, it has been in default on its revenue bonds, but reached a “forbearance agreement” with bondholders, which Branson Airport LLC renewed in 2012. The agreement is aimed at giving the airport time for revenues to “become sufficient to meet all operating and debt service costs.”

Another would-be private airport is still struggling to be launched—the third Chicago airport at Peotone, 40 miles south of the Loop. The local business community, outside consultants, and the Illinois DOT have spent years promoting the airport, and the Illinois DOT has acquired most of the needed land. While the initial concept was like Branson, it evolved into a public-private venture, in which the state DOT will own the land and be responsible for the airside (runways, taxiways, control tower) while the private sector will finance, develop and operate the landside (terminal, parking, etc.). The Peotone airport does have good highway access prospects, since it is close to the preferred route of the Illiana toll road, which both Illinois and Indiana have committed to build.

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Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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