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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