Three gateways - Brisbane, Melbourne and Perth - are already in private hands, extendable 50-year leases having been sold for US$2.4 billion and handed over to new owners on 1 July. In October tenders will be invited for 15 more of the nation's airports. But the jewel in the crown, Sydney's Kingsford Smith, threatens to remain a government-controlled enigma at the heart of an otherwise privatised system for years to come.
Analysts say no investor will fork out an estimated US$1.5 billion for the premier gateway while it remains dogged by environmental problems, politics and congestion, not to mention uncertainty over the level of future competition from a planned second Sydney airport.
Nor is it known whether a new airport would be sold separately, or as part of a Sydney package. Until these decisions are made, the sale can't take place.
After June 1998 Sydney will be the only metropolitan airport run by the government's Federal Airports Corporation. Operating with a government-imposed traffic cap and a night-time curfew, and besieged by resident objections to development, KSA offers potential owners little more than an ongoing headache.
Worse, construction of a second airport - originally intended for completion in time for the 2000 Sydney Olympic Games - is also embroiled in politics and protest. Some believe it may never be built.
The two alternatives, Badgery's Creek, west of Sydney, and Holsworthy on the city's southern outskirts, face a more serious obstacle. Native Aboriginals say both areas contain hundreds of significant heritage sites, declaring they will 'strongly oppose' airport development.
By law, Aboriginal artefacts can't be destroyed without the consent of the National Parks and Wildlife Service. And overcoming objections in a country sensitive to criticism over treatment of its native population could prove a tough obstacle.
As the controversy continues, many wonder whether government-run KSA can hold its own against its competitors' new commercial strategies.
The privatised airports, particularly Brisbane and Melbourne, are already laying aggressive marketing plans to spur growth and convince airlines to circumvent congested Sydney.
Long-time rival Melbourne, now managed by the UK-based BAA plc, is offering discounts of up to 50 per cent on operating charges for new services to Tullamarine airport.
Brisbane, under the management of Amsterdam/ Schiphol, is coy about its plans to offer fee cuts and insists it isn't interested in a price war. It will launch a campaign before year end to attract users from Asia, North America and Europe.
While no-one seriously believes either Melbourne or Brisbane can topple Sydney as Australia's principal aviation gateway, there is potential for damage to its growth as airlines, discouraged by Sydney's problems, look to save money by expanding services elsewhere.
Brisbane and Melbourne have the assets Sydney badly lacks: plenty of room for expansion, no environmental problems and no curfews.
The first phase of privatisation saw Melbourne purchased for US$967.2 million by Australia Pacific Airports (APA), comprising BAA plc, Axiom Funds Management and AMP Investments.
Brisbane Airport Corporation (BAC) Ltd - comprising Amsterdam Airport Schiphol, Commonwealth Bank of Australia, Commonwealth Financial Services, the Port of Brisbane Corporation and Brisbane City Council - paid $1 billion for Brisbane.
Perth was bought for $475.8 million by Australia Development Group, a consortium including Lockheed Martin and one of George Soros' investment vehicles.
Phase two began in August and will be completed in July next year. A document released in late August by sales manager BZW indicated the second round would bring in about US$300 million.
The government will sell 50-year leases, with the option of another 49 years, for Adelaide, Alice Springs, Canberra, Coolangatta, Darwin, Hobart, Launceston and Townsville. Another seven regional airports will be offered for sale outright.
Sydney's KSA as well as three associated light aircraft facilities will be excluded until aircraft noise and second airport issues are solved.
Amidst all this, the future of the FAC hangs in the balance. Stripped of its stable of airports, federal transport minister John Sharp has indicated that by next year it will be replaced by a new government-owned authority charged with running only the Sydney airports. The Corporation's move to become a manager of privatised airports was barred by government, as was its attempt to use its expertise to form an international airport consultancy.
But the FAC is refusing to lie down. Managing director Barry Murphy says Sydney's US$260 million international terminal expansion will go ahead and the FAC will take 'a much more aggressive approach' to marketing Sydney after its other airports have been sold.
'In the past, the FAC ran a network and no matter where you landed it cost the same. Now three airports are privatised and, without knowing their business plans, I can guarantee [the aim] is to take as much business away from Sydney as possible. Now the FAC is unshackled and we are going to drive Sydney Airport hard,' he pledges.
The competition will be tough. Hardened by their experience in the gruelling European market, both BAA plc and Schiphol will be bidders for a stake in phase two airports: BAA for Hobart and Launceston in Tasmania and probably Adelaide; and Schiphol for Coolangatta and possibly other Queensland or Northern Territory airports.
'I'll say up front that APA is unashamedly ambitious about acquiring more Australian airports,' says Andrew Jurenko, chief executive of the Melbourne group. BAC managing director Koen Rooijmans confirms Schiphol will also be in the running for further airport stakes.
Both consortia see Australia as a step into the high growth Asian region, where they eventually hope to operate networks of facilities as part of lucrative global airport empires.
In Australia, the new owners' first task is to ensure they secure adequate returns on investments many analysts believe were too high.
Peter Harbison, managing director of the Centre for Asia Pacific Aviation (Capa) - consultant to Schiphol during the bid process - suggests even the Australian government was surprised at the size of the sale's proceeds.
According to Harbison, participation was seen at first as a proving ground for the coming Asian airport privatisation boom, and the timing was fortuitous because it occurred when equity was freely available and cheap debt easy to come by.
'The Australian airports were also - again fortuitously - at a perfect time in their growth cycles to forecast strong futures, with a bit of strong recent growth and lots of blue sky ahead.'
The new owners may be tempted to sidestep capital growth requirements if traffic increases prove lower than hoped. 'If it's good, everyone will be happy. If it's below forecasts, there will probably be attempts to renegotiate,' says Harbison.
Although there is a lot of slack in the existing framework, the three owners will have to work hard to meet development costs of around US$750 million over the next five to 10 years.
'The consortia which have bought these airports will make every square metre of them work for them; they'll be integrating them into the local environment, which will generate potentially enormous synergies; and they will be influencing airline activity in ways we haven't seen before in Australia,' he says.
The scale of the upgrade in facilities planned by the new owners is broadly similar to that planned by the FAC, though the new purchasers may be looking for 15 per cent returns rather than the the FAC's more modest 8-10 per cent, adds Harbison.
Former Qantas operations chief Ian Oldmeadow, now a consultant to the carrier, suggests the new owners may have to increase some airport charges to justify their combined $2.4 billion spending spree. He estimates the three owners need combined earnings before interest and tax (Ebit) of around $252 million to service debt and equity costs versus only $86.6 million last year.
The key to adequate medium and long-term returns will be growth and, for now at least, there is plenty of it.
After its formation in 1988 the FAC did a good job of transforming Australia's airport infrastructure into a profitable commercial operation, spending nearly US$1.2 billion on modernisation and infrastructure development.
For the year ended 30 June 1996 it reported record operating profits of $118.8 million for the 22 airports then under its management. Sydney had income of $67.3 million, up 32.5 per cent on 1995. Melbourne and Brisbane had profits of $35.7 million and $33 million respectively.
The impressive growth rates continue. A 1990 forecast for the FAC by British Airports Services predicted international passenger numbers at Brisbane would reach 2.2 million by 1998. With growth of nearly 10 per cent annually it handled that number in the 1996/97 year ended 30 June. The same forecast projected 6.9 million international passengers for Sydney. The airport reached 7.3 million in 1996/97.
Overall figures for the latest year are not yet available but in 1995/96 Australian airports handled 45.9 million domestic and 12.7 million international passengers, up 6.6 per cent and 11.3 per cent respectively.
Troubled as it is, Sydney remains the bulwark of traffic numbers. Preliminary figures show it handled a total of 20.8 million passengers in 1996/97. Melbourne was the second largest airport with more than 14 million total passengers against Brisbane's 10.2 million. Significantly, Brisbane has overtaken Melbourne in terms of international passengers.
Brisbane and Melbourne have similar development strategies, including planned new runways, a heavy focus on freight to tie in with local economic growth, and using airport land to build new hotels and business facilities.
Rooijmans sees Brisbane airport as an important part of the Queensland economy to be developed in conjunction with new port facilities nearby and linked into local industrial development and tourism campaigns.
'This area is not already a mature market. It is at the beginning and this is the difference between Melbourne and Brisbane. This is a fast growing economy which is young, fresh and full of opportunities.'
Rooijmans believes Brisbane is far better located to attract Asian business than either of its two competitors, although marketing will be global. Brisbane currently has only one airline offering direct services from Europe and none from the US. 'Everyone thinks Australia is Melbourne and Sydney. In combination with Schiphol we already have relationships with about 200 airlines worldwide. We will use our Schiphol connections to attract business from Japan, Europe and the US,' he says. Fortuitously, Iata's scheduling conference takes place on Queensland's Gold Coast, close to Brisbane airport, later this year.
BAC plans to spend around $222 million on improvements over the next decade and a 10-year master plan will be ready by mid-1998.
Melbourne's APA and its BAA management team are also showing an inclination to take no prisoners.
By law aeronautical charges at privatised airports must fall in real terms over the first five years, with prices capped below the level of inflation. But Melbourne is offering new and existing customer airlines discounts of up to 50 per cent on landing, terminal and security fees. Melbourne airport chief executive Terry Morgan - formerly head of London's Stansted Airport - will control the size of the discounts, which will be scaled down over three-year periods.
'The core of the business at Melbourne is very stable - rather than looking over our shoulder at Brisbane and getting panicky, we should build on a firm foundation and try to attract international services from everywhere,' says Morgan.
Melbourne's Jurenko sees Tullamarine benefiting from Sydney's woes. KSA may lack the capacity to handle the volume of international flights during the Olympics and he says that presents 'a prime opportunity for Melbourne to be marketing itself as an alternative and preferable route in and out of the Olympic city'. Like Brisbane, Melbourne will be using its BAAconnections to reach potential airline customers worldwide.
Jurenko has no doubts that if the second airport becomes part of a privatisation package, Sydney will not be up for sale until at least 2000. 'That gives Melbourne a significant head start in developing and marketing its facilities.'
Jurenko clearly feels a second Sydney airport will be a white elephant. 'Airlines do not like split operations. They result in vastly increased operating costs. Also, given the massive aviation related developments around Sydney airport, it is difficult to believe that the second airport will be financially viable for many, many years,' he argues.
But KSA general manager Tony Stuart says Sydney's position has strengthened in the wake of the sales. 'Prior to the sell-off, Sydney could not aggressively encourage business because there was an approach within the FAC to ensure that international air services traffic was spread across Australia. That has been to Sydney's disadvantage, and Sydney hasn't had the new entrants some of the other international airports have had,' he says.
Sydney and New South Wales remain the premier destinations for overseas visitors, says Stuart. He adds that Sydney is really only congested at peak times and more effective slot management will significantly help to reduce congestion.
The Capa's Harbison still believes Sydney will see its dominant position eroded by stiff marketing competition coupled with medium-term capacity constraints.
'Sydney will not be solved quickly,' says Harbison. 'The underlying issue in its favour is that government would like to get its hands on the US$1.5 billion that it would sell for. But all in all, it's anybody's bet!'
Source: Airline Business
