April 21, 2009 Dr. Romano Pagliari Senior Lecturer Cranfield 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 sale Stock market floatation Project Finance BOOT Management Contract Concession

Methods of privatisation stock 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 privatisation trade 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 privatisation concession 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 privatisation others 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 ( ) 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 networks Mexico

Australian Government privatises government-owned airports 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 networks Australia

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 networks Argentina

UK experience of privatisation Local Council Government-owned BAA Private 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 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? ownershiprevenue / cost ratio % commercial revenues Aberdeen100% private (BAA)1.643 BordeauxChambers of Commerce1.044 LeedsLocal Councils1.151 VeronaLocal Councils & Chambers of Commerce1.123 PisaLocal Councils & Chambers of Commerce1.230 BolognaLocal Councils & Chambers of Commerce1.345 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