Airport groups are continuing to invest in a sector that is proving resilient through the tough times. See also survey on page 48
The past year has been one of consolidation for the world's airport groups. While they have traditionally been viewed as "defensive" investments, offering some protection from downturns, the demise of Swissair and Sabena shows that even major hubs come with risks attached. Even so, most airports have weathered the storm in much better shape than airlines.
Australian investment bank Macquarie has been attracted by these qualities, and has been the most active player in the market over the last year. Macquarie only entered the sector two years ago, taking a stake in the UK's Bristol Airport. Birmingham Inter-national followed shortly after, and this year it has added Sydney Kingsford Smith and Rome airports.
The high multiples of cash flows that Macquarie is prepared to pay for its investments, combined with its willingness to accept highly leveraged debt structures to help finance them, has raised eyebrows. "The multiples they are paying are phenomenal," says Paul Kehoe, director at TBI, the UK group which itself has been buying up airports around the world. He argues that the prices being paid by Macquarie reflect the "cheap money" available in today's low interest rate environment.
Marcus Balmforth, associate director at Macquarie, argues that a combination of its ability to tap the financial markets and airport management skills enables the bank to accept high multiples and gearing levels. Macquarie significantly boosted its management expertise two years ago with the purchase of the Portland Group consultancy. "We are not a passive finance house," he says.
On the issue of cash-flow multiples, Balmforth argues that these can be misleading. "We base our decisions on 30-year discounted cash flows, not a snap shot of what happened last year." He gives the example of Bristol, which Macquarie bought in 2000, paying a multiple of 16 times operating profits before depreciation (equivalent to cash flow). A year later, an improved financial performance by the airport saw this multiple cut to 12. Rome and Birmingham were both bought on multiples of less than 10, and although Macquarie paid a multiple of 14.6 for Sydney, Balmforth says that this is a reflection of the fact that the bidding process was very competitive for a major gateway airport where the seller offered a majority stake.
Raising the stakes
Hochtief AirPort, a subsidiary of German construction giant Hochtief, was also involved in the Macquarie-led consortium at Sydney, taking a 15% stake. The company has also increased its share in Hamburg Airport through its 80/20 joint venture with Irish airport operator Air Rianta. The two partners have increased their shareholding by 9% to 49%, with the remaining 51% held by the City of Hamburg. The extra investment cost €70 million ($70.4 million).
Hochtief AirPort says that despite the industry downturn it continues to seek new opportunities. "Figures are already improving again and this is an indication that in the long term the prospects for the sector are very good," says managing director, Dr Reinhard Kalenda.
In the short term at least, what growth there has been has tended to come from the low-cost sector. An example of this is provided by TBI, with a portfolio that includes London Luton, Orlando Sandford and Stockholm Skavsta. TBI has found that while both the mainline and charter sectors have been under pressure, the low-cost sector has been more buoyant, leaving overall passenger numbers fairly flat. Kehoe says this is likely to be the case for the rest of the financial year. "This has been a year of consolidation for TBI," he notes.
The potential risks in airport investments has been demonstrated by Fraport's experience in the Philippines this year. The Frankfurt Airport operator has invested $378 million in a new terminal at Manila Airport. However, the government is questioning the validity of contract agreements signed with the previous government in 1999. Fraport is not taking this lying down. "We will fight," warns Fraport chairman, Dr Wilhelm Bender. Despite this, investment analysts at Schroder Salomon Smith Barney is still tipping Fraport, along with other airport groups, as a stock to buy - a sign, perhaps, that while the sector is not risk-free, it remains an attractive investment at a time when the wider industry is experiencing its worst downturn in more than a decade.
REPORT BY COLIN BAKER IN LONDON
Source: Airline Business
