Private matters22 December 2017
The British Airport Authority’s transfer to private ownership in the 1980s sparked an increase in privatisation. Future Airport debates the positive and negative aspects of this trend with Gerben Broekema, an independent consultant based in the Netherlands, and former head of Royal Schiphol Group’s strategy and international development.
The model for airport operation and ownership began with investments from local or national governments, but deviated away from this in the UK in 1987, when the Conservative Government, which owned three airports in London and four other major airports in the UK, formed the British Airport Authority (BAA). Since then, other countries have introduced private sector involvement with varying levels of private ownership and management. This ranges from having 100% private ownership and operations at an airport to subcontracting the management of them.
BAA came into being as a public entity when the Labour minister for aviation, Roy Jenkins, introduced a bill in 1965 to form the airports authority as a company that was still under government ownership. BAA was formed in 1966 and was responsible for four hubs: Heathrow, Gatwick, Stansted and Prestwick. This took the UK’s airports out of direct government control, with the aim of making them more efficient and profitable.
As air travel grew, BAA expanded by buying Edinburgh Airport from the government in 1971, and Aberdeen and Glasgow airports in 1975.
In 1986, the UK Government introduced the Airports Act, and the above assets were transferred to a new company known as BAA, which was floated on the stock market in 1987, with a valuation of £1.225 billion. But 2006 saw BAA find itself on the end of a massive hostile takeover bid, where it was eventually bought for £10.3 billion by Spanish construction company, Ferrovial. Globally, a major pattern of government divestment and private sector consolidation through acquisition and disposal has taken place since the 1980s. This is similar to the UK’s experiences, and continues today.
Gerben Broekema is an independent consultant based in the Netherlands. Until last summer, he headed Royal Schiphol Group’s strategy and international development. He is confident about the outlook for airport privatisation, investment and its drivers.
“Traditionally, the three drivers for airport privatisations were that the private sector was needed to finance investments in upgrades or green field airports; improving quality and efficiency of airports through private sector expertise; and the government’s view on its role at airports, and its desire to cash in on airport value,” he explains.
According to Broekema, when looking towards the future, there are a number of trends that will propel privatisation, including higher growth that requires expansion and new airports. Broekema believes that future growth in air travel will be even higher than generally assumed, as traditional forecasts are too narrowly based on economic drivers, failing to recognise social drivers of growth.
“Local authorities may find it difficult to finance these investments themselves and will need to rely on public-private partnership (PPP) models that, for example, are starting to happen in the US,” Broekema says. “Privatisation is, however, considered less of a necessity to finance as it may have been before. Airports, including those in the US, are generally profitable enough to finance investments and governments are successful in securing financing through bonds; for example, the new international airport in Mexico City.”
Elsewhere, Broekema also believes that, while Asian and Middle Eastern governments have long recognised the importance of high-quality international airports as national symbols, other parts of the world have, in the past, focused primarily on keeping airport costs low, or have allowed airlines to deal directly with airports without government involvement. This is now changing, and there is an increasing appreciation for having a high-quality hub from those areas that once overlooked it.
“Airport expertise to improve quality has been an increasingly important factor in the various rounds of Brazilian airport privatisations, and it was the main driver of New York State Governor Andrew Cuomo’s $10-billion plan to upgrade JFK Airport,” he says. “Many non-privatised airports lack the expertise in-house and scale to drive innovations to improve passenger experience and airport efficiency.”
Mind the gap
As technology becomes more important in achieving improved efficiency, Broekema predicts that the gap between private and public ownership will become bigger. While consultants can deliver support in providing overall direction, making improvements requires organisational changes with direct – and full – access to expertise. In Broekema’s opinion, an experienced private sector partner can deliver that know-how, which is important because there has been greater awareness that airports act as a vital precondition for a functioning economy. They are also recognised as a ‘magnet’ for economic development, which is only getting stronger.
“I often say that the real profit and loss of an airport is at the level of society,” he says. “I am not talking about the number of jobs the airport directly or indirectly creates, but what share of the economy is dependent on sufficient airport capacity and efficient connections, and what economic development potential is possible when airports and local governments work well together.
“The challenge with privatised airports is that there is a strong focus on the profit and loss of the airport company failing to take into consideration the impact [its decisions have] on the national economy, regional development and, more globally, society at large. There are cases, and we will see more of that as long-term concessions are getting towards the end of their concession periods, where private airport owners will start to sweat their assets or fail to sufficiently invest to ensure [that the] target internal rate of return levels are met, limiting the development of the airport.”
Broekema believes that this may lead to substantial constraints for society to develop in a more networked and globalised world, as, for the sake of profit optimisation, private airport operators may seek too much growth or not fully accommodate this. He recalls when a transport minister for a European nation told him that they regretted privatising an airport due to an inability to exercise sufficient control over a strategic national asset.
“As a result of this trend, I think we will see different types of privatisation than before,” he muses. “We will see fewer full privatisations through IPOs and full concessions. Instead, we will see more strategic minority investments, operator joint ventures, management contracts and strategic partnerships between airports, including financial compensation for expertise.
“These privatisation models will allow governments to get the benefits of private sector involvement, knowledge, and a more private-oriented organisation as opposed to a civil servant mindset and some financing, while allowing them to keep control of the development of critical infrastructure for the functioning of its economy. The 20% sale of Airports Corporation of Vietnam to Groupe ADP in March this year is, I think, a very good example of what we will see much more of.”
A question of control
Broekema believes that airport investors tend to want majority control, but in his view full control by an airport does not exist because of their strategic importance as well as the political attention they receive. Additionally, governments continue to have a strong interest in airlines, and even majority ownership will not lead to full control. He says governments should be very clear about what they want in terms of accessibility, based on a forward-looking view on the role of airports in facilitating economic and social interaction and stimulating economic activity.
It is important that governments review which – if any – privatisation model will allow them to get the desired outcome, in terms of accessibility by air. He also recommends finding a private partner who has a strategic interest, as opposed to a predominant financial interest in the development of the airport.
“A potential pitfall is that governments are often too narrowly focused on the financial side ‘tradeoff sell-now’ versus future dividend or profit income,” he says. “When structuring a deal, it is imperative to have a very clear view for investors on economic regulation and the scope of the activities to be included. It is also important to build in the right incentives for quality improvement and capacity expansion, while it should be flexible enough to allow the future airport operator to adjust to changes in market conditions.
“Mandatory capacity development steps, [such as the] case of the Brazilian airports privatisation, can lead to financial disaster if the economic development goes south, finally requiring the government to step in again.”
In Broekema’s view, this means investors will have to be more aware of the strategic value of airports to governments. Providing a source of financing and improving the efficiency and commercial performance of the airport are still valuable, investors will have to think much more about what they can do to improve connectivity in the air as well as on land.
“Landside connectivity is often neglected in terms of joint economic development, at and around the airport, and sustainability efforts,” he says. “Airport operators, especially European airports such as Schiphol Airport and Zurich, which have long experience in development as instruments for national and regional economic development, are much better positioned for this than more financially oriented investors.”
There have been many cases of successful privatisations that create value to governments, consumers, airline users and investors. Broekema gives the example of Brisbane Airport in which Schiphol Group, alongside financial investors, took an 18.7% stake in 1997. This move boosted the airport’s quality and overall development for serving Queensland with domestic and better international connectivity that created value for the government, businesses and consumers.
“Through the [influx] of expertise from Schiphol, Brisbane Airport has developed into a very professional organisation,” he explains. “Similarly, the PPP model for JFK airport, in which a foreign airport operator (Schiphol) through a joint venture with Delta Air Lines leases and operates terminal four at JFK, is working very well for the airlines and consumers, delivering very attractive returns to the Port Authority of New York & New Jersey.
“Investments by Fraport in Antalya, major improvements at Gatwick Airport, and many other deals have shown that involving a private party can deliver value to all parties involved. The challenge, though, is to structure the deal in such a way that governments don’t lose too much control, but can still benefit from the advantages that private sector involvement can [add].”