Mitigating the critical risks of airport privatisation

Investment into airport development has proven to be successful for many years now. According to Modalis Database, the traded EBITDA versus transactions for any airport public private partnership (PPP) signed in the last 15 years is in the average of +12 per cent. Furthermore, based on the ACI economic brief at GAD World 2018, any airport PPP transaction secured an average of 15.9 per cent ROI. As investors aim to balance a diversified cashflow and capital required for essential assets, airport privatisation and investments continue to be attractive for three key reasons:

• Diversified incomes through aeronautical and non-aeronautical revenues
• Substantial ROI compared to other investments
• Integrated opportunities like F&B, car parking, retail, maintenance, etc., which allow flexible cashflow management, and more options to diversify business and to mitigate risk.

We are witnessing three key trends in this growing and increasingly competitive business:

1. The gap between investors and operators is decreasing; powerful investors/operators like Vinci and Ferrovial continue to create new business models that are yet to be tested. We need to see how Gatwick and Heathrow transactions will evolve regarding finance and operation, and how the selling of ADPi would take place.
2. Investors have developed sophisticated tools to properly balance their transaction risks and ensure that risk allocation is reflected in their business plan for the longer term. Three risks are key for many transactions: Traffic, dealing with safety regulatory compliance, and stability of regulation, mainly related to regulated charges.
3. For the last 10 years, low cost carriers (LCCs) have provided all the growth in Europe, and substantial parts in other areas of the world, giving them negotiation leverage and adding more pressure on the operators.

However, privatisation risks are the subject of many discussions between legal, financial and technical teams from all parties. 

Investors are keen in mitigating risks related to airport transactions

Airport privatisation key risks

Risk 1 – Traffic forecast

The concessionaires, the transaction leader, or the airport operators would have to assume the traffic risk. Balancing the traffic forecast and the asset growth is a critical component in shaping the financial model and the success of the bid. They define the CAPEX (usually related to the construction), the OPEX (usually related to the cashflow), the credit risks and, overall, the rating.  

Forecasting the traffic is a complex process. It is shaped by the growth strategy of the main airline based at the airport, the surrounding strategy, and financial difficulties in the airline industry, especially if the transaction is related to secondary hubs or vulnerable markets.   

The mitigation is a mix of innovative contractual terms of airline lease agreements and continues the discussion with airlines, aiming to create an attractive and customised structure for all to grow. The route development becomes a critical knowhow that requires support of local government and other stakeholders interested by airport growth. 

Risk 2 – Dealing with regulatory compliance

There are concerns expressed by investors about dealing with government agencies and regulators. Issues of concern include the uncertainty related to aleatory and arbitrary certification requirements and random, unstructured and non-transparent regulatory enforcement processes, the latter of which induces unforeseen costs and unwelcome distractions.

This has led to an ever-increasing number of investors successfully transferring the risk of safety-related regulatory compliance to a new type of dedicated cost-effective company – coined “airside integrators“. Airside integrators are a cost-effective structure, operating only airside, providing the required safety system to communicate and effectively enforce regulatory compliances. They assume all risks of airside operation and maintenance, including certification and dealing with regulators. In some jurisdictions, airside integrators offered a welcomed cost saving and, equally important, less distraction meaning operators can focus on enhancing passenger experience and increasing non-aeronautical revenues.

Risk 3 – Stability of the regulation, mainly related to aeronautical charges

The regulated charges compose 60 per cent of airport revenues: Almost 75 per cent are landing fees. Obviously, the stability of these fees is decisive. The regulated charges are defined by the regulator, and, in many jurisdictions, with minor or absent involvement of the private operator. That’s the challenge. Other countries have developed efficient mechanisms to establish the regulated charges: A sort of consultation process where all stakeholders are involved, and serious assessment of financial impact is considered diligently. That’s a good start, but not enough. For many operators, regulators tend to offer relieves to some airlines, a tendency of interference for the benefit of publicly-owned airports and lassitude in case of non-payment by the flag carriers.

The mitigation is not straightforward, as it is the result of a long and painful negotiation of the concession agreement. Negotiations could consider financial guarantees from the guarantor related to the airline payment, having the charges identification process drafted in the concession agreement, and other ways to mitigate the critical risk of an airport privatisation.      

The business of airport privatisation

These risks are some of the key aspects within this growing business. Under pressure to cope with the unstoppable traffic growth, many new countries will open up their airports for private investments, offering more opportunities and striking more challenges.