Like most industries the aviation sector was hit hard during the economic downturn with many airlines reporting a decline in revenue and others going out of business altogether.
In November 2008, airports hit their lowest valuation and almost three years on, many are only just returning to pre-crisis levels.
However, many governments now view privatisation of state-owned assets as a way of reducing ongoing deficit problems by generating muchneeded revenue. With 19 of the world's 30 busiest airports state owned in their entirety, there are some exciting opportunities on offer.
This progression towards privatesector ownership of airports is already taking place around the globe - Saudi Arabia is pressing ahead with the privatisation of Al-Madinah International Airport, the Spanish government is looking to partially privatise Aena and the South Korean government has stated its aim to consider the IPO of Incheon International Airport later this year.
Indeed, as some airport operators become better at demonstrating that a well-run airport can be a profitable asset, the market is becoming increasingly buoyant on the demand side with more specialist infrastructure investors, including Carlyle, Macquarie and Global Infrastructure Partners (GIP), willing to invest in airports. Australian bank Macquarie, a trailblazer in this field, made a more or less immediate return in 2002 on its new shares in Sydney Airport.
The current outlook
So, if the appetite to invest in airports is evident, where are these groups likely to focus their attention?
Recent research by EC Harris provides some interesting insight in response to this question. The study, which ranked 17 countries across the globe based on the relative attractiveness of their aviation sector to inward private investment, found that China emerged as the most attractive place for aviation investment.
Given its ambitious expansion plans this should come as no surprise with investors clearly recognising the revenue opportunities that would be created by better-developed passenger and cargo infrastructure. Other BRIC countries, most notably India and Russia, demonstrated a clear impetus to invest in their aviation sector, although a lack of clarity in fiscal and political issues continues to deter investors.
The research also revealed that environmental issues are beginning to have a significant influence on where funds choose to invest in aviation assets.
Plans to include airlines in the EU Emissions Trading Scheme (EU-ETS) means some European countries could face a significant cost outlay, especially the UK or Germany where it would be in addition to national taxes. Conversely, it could offer Middle Eastern airports an opportunity to promote themselves as strategic stop-off points for global airlines travelling in to the EU, wishing to reset their emission levels before they enter EU airspace.
Despite this, the study did show that Europe continues to hold strong appeal for investors who are particularly attracted to the Iberian peninsular and Greece, where they foresee potential bargains as their governments look to make a quick sale in order to resolve ongoing deficit problems.
Brazil also is highly attractive for a similar reason, with their government keen to consider privatising some of its aviation assets as it bids to build a modern transport infrastructure in time for the 2014 FIFA World Cup and 2016 Olympic Games.
Building the business case
Having established that there is an appetite to invest in aviation assets, the challenge facing airports is to build a business case that clearly differentiates the benefits of their facility in the face of fierce competition.
Four areas are crucial as they build their business cases.
1. Align airport design with business outcomes
The design and operational capacity of an airport has a fundamental impact on its bottom line so a key priority should be to ensure that the asset is equipped to effectively serve as many passengers as possible.
As business-modelling technology becomes ever more sophisticated, it is now possible to accurately forecast passenger numbers, passenger movements and the variations in fleet mix. This data then enables the operator to calculate and implement detailed plans that help them to get the most out of their asset.
Similarly, these tools can be used to assess the impact that a major capital investment project will have before a single brick has been laid. In each case this ability to clearly and accurately articulate the future return that any investment will deliver them is a major factor in helping to build confidence and secure funding.
2. Minimise risk from green taxes
Recent focus group sessions with the investor community revealed that their primary concerns are still around macroeconomic issues, including fuel price stability and environmental taxes. While the first is difficult for airports to predict,
modifications to the facility design can help ensure that their associated carbon emissions are as low as possible.
For example, capacity problems often> Paul Willis explains what makes airports an attractive asset in which to invest.result in airlines circling in a holding position before they land, or taxiing on a runway before they take off. A more strategic approach can limit these periods, helping reduce unnecessary emissions and consequently the taxes that airlines may have to pay.
3. Satisfy airline demands
As the number of airports across the globe increases, airlines are beginning to exert more pressure on their operators around the charges they have to pay for the use of the facilities. This is likely to increase further in the future, especially as they consolidate and develop dual and multiple-hub strategies.
To help retain their airlines, operators need to ensure they can offer the most efficient and reliable service possible. From an investor's perspective, it is also important to understand the relationship between the 'regulated' and 'nonregulated' charges (single or dual till) as they impact on the ability to maximise revenue opportunities.
4. Maximise return from non-aviation assets
According to recent figures from the Airports Council International (ACI), airports typically earn less than 20% of their income from airlines.
The majority now comes from associated commercial activity, including retail, restaurants and car rentals, all of which are affected by pressures such as passenger growth, GDP, spend profiles and passenger characteristics. This is undoubtedly an area that airports should focus on, as it will impress would-be investors attracted to an asset that can generate profits above and beyond their core activities.
The bottom line
Despite tough economic conditions, the desire to invest in airports remains high. To capitalise on this opportunity, airports need to act now before investor attention is diverted elsewhere.
Practical and achievable modifications to the way in which an airport is designed and operated can help to make it a much more convincing proposition to investors and ultimately one that is more likely to secure significant capital funding.
About the Author
Paul Willis is head of aviation for EC Harris Built Asset Consultancy.
