Airlines have been busy developing their alliance strategies for years, ever since deregulation began to hold out the promise of creating truly global groupings. Now, it seems, the airport sector too is to develop a taste for globalisation. But while the search for mergers and acquisitions may be a natural progression for some of the more commercially-minded airport groups, say most observers, that does not make the ambitions of some easy to explain.
There is little synergy in owning a couple of different airports around the world while a "global brand" is still only a distant dream. "How many airport logos can you think of?" asks one airport watcher.
One reason for this is the number of airports which are still in public hands and therefore unable to develop a corporate culture abroad. Despite the recent wave of airport privatisations, just 2% of the world's airports are in the private sector, although a larger proportion are now corporatised and operating as if they were privately owned.
The vast majority are still in the early stages of introducing the corporate strategies that airlines long ago took for granted. Outsourcing, public/private joint ventures and build-operate-transfer project financing techniques are relatively new, as are long term private management contracts.
But recently, a new phenomenon has begun to emerge - global groupings. This began with the first privatisation in the UK of the former British Airport Authority (BAA), which now runs seven of the UK's airports. It began expanding into Europe in 1997 when it bought a 70% stake in Naples airport. It later looked to the rest of the world when it acquired smaller equity stakes in Melbourne and Launceston, Australia.
The Amsterdam-based Schiphol group has followed suit by buying a stake in Brisbane airport in Australia and participation in the consortium which is re-building New York's JFK. It also has plans to participate in the privatisation of Indonesia's airport system.
Equity stakes
While the BAA Group and Schiphol have long been recognised as active commercial businesses ready and willing to acquire abroad, there are a host of other airport companies which are just beginning to spread their wings. Aeroports de Paris has already taken construction and planning skills internationally, while operators at otherlucrative European hubs, including Frankfurt Vienna and Manchester, are developing their horizons.
Italy's two big airport groups, Aerporti di Roma (ADP) and Milan's SEA, are also jockeying for an international prescence. ADP emerged with the winning bid in South Africa's airport privatisation, and SEA had earlier led a consortium which won a contract worth $2.3 billion to reorganise and manage Argentina's 33 domestic airports. Some question whether the Argentinian deal was overvalued, but it represents a two-year trend of rocketing prices for airport contracts and equity stakes.
There are signs that the prices have already made some wary of bidding for expensive majority stakes. For example, it is claimed that BAA's stake in Melbourne stands at just 15% because the prices became too inflated during the bidding process.
The reason for the upswing in airport selling prices is the introduction of a newer set of participants that traditionally had little to do with airport ownership. The new actors, which Mercer Management Consulting in London calls "focused purchasers", include retail and property investment groups led by Airport Group International (AGI), Ogden, Trizec Hahn and TBI. Smaller niche players, such as airlines, hotels and financial groups, are also becoming increasingly keen on owning or managing airports.
Of the property developers, UK-based TBI group and Trizec Hahn in Canada are among the most active. In September TBI finalised a contract to purchase AGI, adding Orlando Sanford Airport in the USA to its stable of Cardiff and Belfast airports in the UK. The US-based Trizec Hahn, meanwhile, has bid for redevelopment projects in Santiago and Boston.
New owners are not limited to property developers. Construction companies, such as Bechtel, which is a minority share-holder in AGI and Hochtief, (a German-based group at the head of the consortium building the new Berlin and Athens airports), are beginning to get actively involved in airport ownership, not just construction.
The two main types of modern airport owners - the operators and the property developers - are separated by one obvious difference: experience in managing an airport. According to Mercer, the latter is burdened further by the need to watch closely how each airport fits in with its own core business as well as the need to build a team of airport experts from scratch.
The airline industry is also beginning to get in on the act in Europe as they see airports increasingly as make-or-break assets. In Europe, airports "rent" out terminal space, which airlines can decorate in their own logo when their aircraft is using a particular gate. But now Lufthansa at Munich and British Airways at Manchester are taking a similar approach to those adopted decades ago in the USA where airlines regularly build, own and operate their own terminals.
This pattern, which transfers the onus of airport construction from the local authorities to the airlines, is seen as a good method of providing private money for airport construction projects. But while BA and Lufthansa still represent the exception, rather than the rule, it nevertheless demonstrates the encroachment of non-airport operators into the direct ownership of airports in Europe.
Financial investors
Largely because of their quasi-monopoly status, airports still enjoy profit margins that airlines can only envy. It is not surprising, then, that they have become attractive to financial investors. Traditionally they have played the passive lender role but are now becoming active consortium members, leading privatisation programmes or even taking an active role in the building of new projects. For example, investment bankers Lehman Brothers participated in building the new international terminal at JFK alongside Schiphol.
Additionally, there is an oddball range of groups that once never participated in the ownership of airports but are doing so now. UK bus company National Express, for example, now owns the regional East Midlands and Bournemouth airports in the UK while airport retailer Ogden is a consortium member at Macao's new airport.
But it is the major global groupings that attention will focus on in the next few years, not least, says Mercer's David Feldman, because no single player from any sector has achieved a leadership position. "Success in airport management will require mastering all aspects of the industry's value chain," he adds.
So are these companies, all of which, until recently, ran just one airport or one airport system, expanding to build a global airport brand? Do airport operators believe their skills are replicable when they take over management and possibly and an equity position in another airport? And is there genuine synergy to be gained in operating a global group of airports?
"Yes," says Paul Behnke, director of economics at Airports Council International (ACI). All of them. But with caveats. "There are inherent problems in creating an airport brand. For example, many travellers will simply not recognise it," he says, adding however that the financial markets do appreciate the brand, which provides a great boost when it comes to raising capital.
"There are certainly synergies in play when a successful airport operator takes over another but we also have to remember that airports tend to be regulated so what works in the UK does not necessarily work elsewhere," he says.
But another industry watcher detects an element of fashion at play: "It's nothing more than airport management wanting to do a bit of travel and plant a few flags in an old fashioned game of empire building."
Cash needed
The truth may lie somewhere in between. But while there is uncertainty about what really is the motivation behind global airport groupings, it is clear that the underlying driving force is the need for airports to improve their facilities. And that needs cash.
According to estimates by the International Civil Aviation Organisation (ICAO), up to $350 billion will be spent on airport infrastructure improvements in the next six years around the world. Financing this through government expenditures is now not a realistic option. Private financing, beginning with privatising airports or outsourcing management, is the only real alternative.
Indeed, the urgent need for governments to put their airports into private hands could, according to Mercer, peak in the next few years with as many as 15 major airports sold into private hands each year.
This steady privatisation is clearly helping to drive the appetitive for mergers and acquisition. As with any other commercial business, the newly privatised airports are keen to tap into the merger and acquisition market as a way to keep profits and share prices rolling ahead. For most airports that means looking abroad.
BAA was among the first to free itself from the shackles of government ownership in the mid-1980s and so was also the first to enjoy the fruits of privatisation by doing just this.
"I think it was natural then that once it had the right formula within its own airports it should start to look to export its own expertise," says Wyn Ellis, head of transport research at Commerzbank.
Creating shareholder value, therefore, is a basic motivation for both BAA and Schiphol, as it too searches for a way of keeping up with global trends as part of its preparation for privatisation.
"Expanding in the global airport management business is a way to earn profitable growth for shareholders as well as finance further capital investments and build a strong company in the domestic market," says David Feldman of Mercer.
But with these two industry leaders in mind, it is difficult to pinpoint why the others are expanding so rapidly without pressures from shareholders. Acquisitions such as that by SEA of Argentina's major airports is a good example, says Commerzbank's Ellis, but inevitably one element is a fear of being left behind by rivals and the search to find cost savings.
Others agree but, says Graham Howarth, vice president of Gemini consulting, even with corporate airport operators such as BAA the "synergy" argument is not convincing.
"It is a little different [to airlines] where there is a clear synergistic rationale behind alliances. Synergy is less certain in airport groupings because airports around the world are run under different regulations," he explains.
Clearly expertise at Schiphol or BAA can be employed to run an airport elsewhere more effectively, adds Howarth, particularly when it comes to retail or non-core activities. "There is an argument that says you could bring improved management into situations but that is something quite different than having fundamental and underlying synergy to be exploited."
There are other benefits for airports moving abroad, he says, such as learning other airport-management techniques and economies of scale, but on the whole there appears to be little to gain for groupings in the short term.
Longer-term airport groups will have the opportunity to build up a series of hubs and offer a "package" to an airline or an airline alliance. But as Howarth points out, the links between airline alliances and airport groups currently follow no such logic.
Congestion at some of Europe's major airports is unlikely to help airport groups accommodate the needs of airline alliances.
"But with secondary hubs, which are not constrained by capacity, I can certainly see where an airport grouping would consciously plan to extend facilities in conjunction with an airline or an airline alliance," he says.
Benefits to airlines
Given how far the process still needs to go, the impact of the growth of private global airport groupings on airlines is an open question. There are the usual worries that airport charges will go up as privatisation progresses.
However, the greater the level of co-operation that develops between airlines and airports in the future, the weaker this argument will sound.
"Every airport and every airline realise how much they need each other," adds ACI's Behnke. "They know that a poor hub system can be the kiss of death for an airline and if an airline decides to go to another hub then it is a kiss of death for the airport."
Time will tell whether the growing competition between airport groupings will benefit airlines. However, consolidation on a global scale appears inevitable. Some, such as Mercer, believe that a handful of airport groupings will end up running the world's airports outside of the USA. "Of those airport groups that exist today AGI, Schiphol and BAA appear to be the best placed to benefit from this consolidation," states a recent report from the consultants.
Others predict that although consolidation will take place, it will be a more drawn out process than most people are predicting. ACI's Behnke says that while some global players will emerge, there are financial constraints for airport operators in taking too many equity positions abroad.
Commerzbank's Ellis concurs. He suggests the inflated prices paid for some airports could mean a crop of failures as stretched management resources fail to overcome a completely different set of regulations and circumstances in another part of the world. He believes the non-specialist investors may be the most at risk, while dedicated airport operators, such as BAA, may find themselves in the enviable position of stepping in and grabbing some airports on the cheap.
Patience in the airport business could turn out to be quite a virtue.
Source: Airline Business
