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Airport Privatisation
Frost & Sullivan, April 2006
Potential Economic Benefits of Airport Privatisation
The airport industry is going through an exceptional transformation that has driven the market towards increasing levels of competition. Additionally, major investment programs are required to meet the expected growth in air travel demand (particularly in some emerging regions, such as Asia). Nevertheless, governments and city airport authorities are becoming more reluctant to support airport projects, since they have major budgetary constraints.
Airports and airlines have historically been considered as essential components of the national aviation system, and hence both were regarded as public utilities. Due to this approach, operational and handling activities were contemplated as being fundamental for the development of the airport business, and commercial activities had a less important role to play. For that reason, airport assets and property have always been publicly managed and commercial activities have occasionally been contracted or outsourced to private companies. Within such a framework, economic regulation was seen as superfluous. The traditional airport management model becomes visibly unsustainable when most governments begin to be concerned about the burden of airport financing and its lack of efficiency. However, for many years, a majority of airports around the world have continued to operate under this model and some still remain attached to it. Since the 1980s, the industry started to evolve with changes being brought about in the traditional airport management model. Currently, governments are progressively regarding airports as potential profit-making enterprises rather than merely considering them as part of the infrastructure suppliers.
There are three main potential economic gains obtained from privatization, namely improvements in operating efficiency (the private for-profit business model more often leads to a further exploration for means to cut costs and boost revenues than public management), the introduction of new management styles and marketing skills directed to serve users with a more consumer-oriented approach, and better investment decisions. However, in many cases, these investment decisions might also imply under investment or capacity reductions, which mandates the presence of a regulatory environment.
Regardless of all its potential benefits, privatisation also involves risks and requires prudent management from the public authorities. Several policy issues have to be contemplated by the governments if the public interest needs to be safeguarded. Specifically, the eventual externality, negative or positive effect imposed by airport users over non-users or other users, generated by the provision of airport services or strengthened market position gained by the airport operator after privatization should be carefully considered. In this respect, a regulatory regime (in terms of charges, safety, quality, and noise intensity or spatial planning) should be designed before privatization takes place and the regulatory role ought to be delegated to an independent body.
Airports: An Increasingly Attractive Industry
Currently, only two per cent of the worlds commercial airports are managed or owned by the private sector. However, the success achieved by private investors so far is encouraging others to enter the market. Various factors that make the industry attractive for investors are listed below in their order of relevance:
- Strong growth trend observed in air traffic during the last several years together with the optimistic forecasts provided
- Growth in passenger traffic leading to improved profit margins resulting from economies of scale (the upward traffic trend is also expected to have a positive impact)
- Strong commercial opportunities that still remain to be exploited in this business
- Significant barriers of entry for newer companies that allows existing participants to improve their earnings
- Reduced risk related to exchange rate fluctuations due to the fact that airports generate substantial revenues in hard currencies and both travel and tourism industries are dominated either by the dollar or the euro
Towards Multinational Airports Operators
The airport industry is under strong influence of multinational airport operators, especially the specialized airport management firms that acquire and manage multiple airport networks. These firms can be segmented into several categories. Some of these groups are:
- Global airport operators, such as the BAA, that take the responsibility for managing the whole airport. The BAA is based in the United Kingdom, where it runs seven airports (particularly the three major London airports). It also operates the Indianapolis airport under a ten-year contract, several airports in Australia (including Melbourne), the Naples Airport (Italy), and besides it manages a group of other properties.
- Airport development groups that offer project financing services and the ability to manage and provide facilities for major airport developments, which single airports do not typically have. A good example is Hochtief. This German construction firm has been a major partner in several German airports, as well as, involved in the construction and operation of the major new airport at Athens.
- Investment groups specialised in airports, such as Macquarie Airports. Macquarie is a private equity investment fund that makes equity investments in airports and associated infrastructure. Its portfolio comprises interests in five airports, namely Sydney, Rome, Birmingham, Bristol, Copenhagen, and Brussels.
- Specialist operators, such as Standard Parking that focus on specific activities. It operates approximately 1,900 parking facilities in 280 cities throughout the United States and Canada. Standard Parking operates 60 airport locations across the United States, notably the OHare International Airport in Chicago.
Privatisation Process Worldwide
After 1987, when the United Kingdom privatised the BAA, the interest for privatization has been increasing across the world. In fact, more than 20 countries have completed the sale or lease of airport facilities so far. Some of them are: Argentina, Australia, Austria, Bahamas, Bolivia, Cambodia, Canada, Chile, China, Colombia, Denmark, Dominican Republic, Germany, Hungary, Italy, Japan, Malaysia, Mexico, New Zealand, Singapore, South Africa and Switzerland.
In the United States, commercial airports have traditionally been independent of the national control, operated locally by local or regional authorities and highly influenced by private interests, specifically the airlines (with enough power to decide major facets of airport management and development). While the degree of participation of private interests in airports differs broadly among states and cities, major U.S. commercial airports are operated through partnerships between the government, local interests and private firms.
The preferred model of privatisation of airports in Europe has been the sale of equity. This was pioneered by the United Kingdom with its initial public offering of 100 percent shares of the former BAA in 1986. After being privatised, BAA, plc has become one of the biggest international participants in the airport industry.
The Australian airports privatization program began in April 1994 when the Australian Government announced its decision to sell 22 airports (in several phases) that were owned and operated by the Federal Airports Corporation (FAC). A particularity of the Australian airport landscape (also seen in the United States) has been the use of the lease model for management of domestic terminals. Under long-term leases, airlines are responsible for all operational features at the terminal. In addition, at some airports, including Melbourne and Sydney, airline responsibility extends to providing and maintaining terminal infrastructure, with the airport operator providing only the land for the domestic terminals that are under lease.
In other Asian countries, many major airports are expected to be privatised in the near future. Among them are those in Tokyo, Hong Kong, and several airports in India. Currently, the airport landscape in China can be defined by a group of prospering big airports (especially those in Beijing, Shanghai, Guangzhou and Shenzhen). The ongoing structural reform in airport sector has provided an opportunity for these airports to seek funding from capital markets as well as strategic investors.
The Middle East has not been a region particularly active in airport privatisation. However, some projects are in place to either upgrade or develop new facilities.
In Latin America, the most common way of privatising airports has been through concession contracts. Concessions allow a country to retain ownership of airport assets while private promoters carry out the investments required. Additionally, the lack of developed capital markets presents a major hurdle for other ways of privatisation.
The African airport sector has its own share of management, financing, safety, and security issues. There is a clear need for upgrading installations in order to meet international standards, modify regulatory framework and to incorporate new requirements in terms of security (airport certification). Substantial investments in airports development are required in Africa to boost air transport that currently plays only a minor role in the world air traffic.
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