Heathrow BAA

Historically, governments have viewed commercial airports and airlines as essential public utilities, strongly resisting any attempt to wrest their assets and services from state control. As a result, as recently as 2006, a mere 2% of the world’s airports were owned or managed by the private sector.

Less than a decade later, severe cuts to national budgets, the inexorable rise in passenger traffic and escalating operating costs mean that this traditional public-ownership model is looking increasingly untenable, even in emerging markets such as Africa, where state autonomy remains strongest.

Pension, private equity and sovereign wealth funds are now making significant capital investments in primary airport infrastructure, motivated by the promise of steady revenues in hard currencies, high profit margins resulting from economies of scale and optimistic growth forecasts.

Cash-strapped governments in mature and emerging markets have woken up to the profit-making potential of airport services and now treat major hubs as strategic national assets.

"Hub airports in Asia-Pacific are attractive options for private investors because of the still largely untapped growth potential and relatively stable income," confirms Ahmed Bukalla, director of operations at the Department of Civil Aviation, Sharjah International Airport, United Arab Emirates. "A significant number of airports in Asia-Pacific are already run by corporations operating to commercial principles, although they are still fully or partially owned by governments.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.
"Pension, private equity and sovereign wealth funds now make significant capital investments in primary airport infrastructure."

"When privatisation comes, there will be pressure for further productivity gains, and airport operators will need to be even more innovative and adopt new technologies to stay competitive."

Private-for-profit: the benefits of airport privatisation

For champions of privatisation, the benefits of the private-for-profit business model are clear. Operating efficiency and revenues are boosted thanks to competition and forensic cost-cutting; consumer-orientated management and marketing skills encourage improved customer uptake and retention; and better investment decisions are made as a result of corporate-style governance.

The figures appear to bear out the success of the formula. The Centre for Aviation’s (CAPA) 2013 Airport Finance and Privatisation Review noted that primary-level mergers and acquisitions (M&A) rose to near record levels. By the end of Q3, global deals of infrastructure assets – the majority of them in Europe and Asia – hit $23.5bn, more than the annual deal values for every year since 2008.

In June, Japan announced that domestic and foreign bidders will be eligible to compete for the rights to operate hangars and runways at Sendai Airport, the nation’s tenth largest hub. The administration led by Prime Minister Shinzo Abe also intends to sell rights to operate facilities at the New Kansai International Airport, built on reclaimed land in Osaka Bay, as part of its debt reduction programme.

The same week, the Airport Authority of India (AAI), unbowed by objections from the previous administration over concessions, pushed ahead with plans for a new privatisation agreement. Around 13-17 firms had shown interest in Sardar Vallabhbhai Patel International Airport in Ahmedabad.

"Hub airports in Asia-Pacific are attractive options for private investors because of the still largely untapped growth potential and relatively stable income."

Another emerging market, Brazil, has also shown enthusiasm for privatising national infrastructure. In November 2013, the Brazilian Government raised $9.1bn by privatising two major airports ahead of the 2014 World Cup. A consortium led by the Brazilian construction company Odebrecht and the Singapore airport operator Changi paid $8.3bn for the rights to operate Rio de Janeiro’s Galeão airport for 25 years. A second group comprising Brazilian highways operator CCR and the Swiss operator Flughafen Zurich paid $795m for a 30 year contract to operate a smaller airport, Confins.

Value judgements: IATA reservations and long-term profitability

But does airport privatisation always offer value for money for investors, operators and consumers?

The International Airport Transport Association (IATA) has significant reservations and has warned against rash decisions to sell off government-owned aviation assets as a short-term debt solution.

Speaking in 2008, IATA director general Giovanni Bisignani urged Japan not to repeat the same mistakes made in past airport privatisations, such as the "disaster" at London Heathrow. Operator BAA – now Heathrow Airport Holdings – was harshly criticised by travellers, airlines and politicians for overcrowding and delays following its £10bn takeover by Spanish multinational Ferrovial.

"We have seen too many privatisations fail because governments sold the crown jewels without appropriate guidance to the new owners," Bisignani said. "Look around Heathrow. Failed regulation allowed for a 42% profit margin. The new Spanish owner is happy, but Londoners suffer with terminal facilities politely described as a national embarrassment. There is no need to repeat the mistakes in other places."

That same year, 2006, a report by analysts Frost & Sullivan classified airport management companies into four distinct groups: global airport operators, airport development groups, investment groups specialised in airports; and specialist operators that focus on specific aviation activities.

It is worth noting that, eight short years later, two of the major players cited in that same report, Heathrow Airport Holdings and German company Hochtief, have offloaded most, if not all, of their aviation portfolio, a sign that not all investors are confident in the sector’s long-term profitability.

Power to the people: the future of airport privatisation

What is clear is that airport privatisation is here to stay and that in emerging markets such as India the government is under increasing pressure to relinquish control of key national industries.

"We have seen too many privatisations fail because governments sold the crown jewels without appropriate guidance to the new owners."

Speaking in 2012, Balaji Srimoolanathan, principal consultant for aerospace, defence and security at Frost & Sullivan, discussed Reliance Industries‘ (RIL) decision to invest $1 billion transforming India into an aerospace manufacturing hub. The parallels with airport privatisation are unmistakeable.

"This investment by RIL is not just significant for India’s aerospace segment – it sends out a clear message that there are still companies in India with a significant appetite for risk," he says. "It also confirms that the private sector is willing to invest in aerospace manufacturing, an industry that traditionally has been characterised by delays and impacted significantly by global economic trends.

"As importantly, it will increase both the confidence and competency of the private sector in India versus state-subsidised, public sector entities that continue to monopolise the market, despite inefficiencies and delays in delivering projects over the last few years."

What is also clear is that the temptation of quick profits from the sale of aviation infrastructure must be tempered by responsible business decisions and financing – and, crucially, success must be measured by service levels and cost-effectiveness, not by financial gain.

IATA outlines ten key lessons for successful airport privatisation. They include key stakeholder engagement through the entire project life cycle, efficient asset management, independent and robust economic regulation, and the implementation of effective service level agreements.

In this way, privatisation can claim to be to the benefit of all commercial aviation stakeholders, including passengers and the wider community, and not just governments and private investors.

Energy link