Concession & Privatization

Cyriel Kronenburg

International Air Transport Association

Lessons Learned

Privatization&

Concession

Key Lessons

1. Customer involvement critical

2. Efficient management is vital due to higher cost of capital

3. Good governance is more important than ownership

4. Independent, robust, economic regulation necessary

5. Regulation oversight by independent competition authority

6. Good efficiencies from existing assets, less so from investment

7. Mechanisms to incentivise cost efficiencies required

8. Service Level Agreements are necessary to deliver

9. Asset revaluations and dual-till accounting key challenges10.“Gold-plating” through debt financing is a real risk

10 Key Lessons

Privatization&

Concession

Experience

Most common experiences

Sale of airports to private companies and financial investors

Long-term leasing of airport assets to private investors

Long-term leasing of airport facilities to airlines

Other infrastructure privatization e.g. water, power

Sale to private investors

British Airports Authority (BAA), UKCopenhagen Airport (CPN), DenmarkVienna Airport (VIE), AustriaZurich Airport (ZRH), SwitzerlandBrussels Airport (BRU), BelgiumAuckland International Airport (AIA), New Zealand

Long-term lease of assets

Sydney International Airport (SYD), AustraliaPerth Airport (PER), AustraliaEzeiza International Airport (EZE), ArgentinaJuan Santamaria International Airport (SJO), Costa RicaJorge Chavez International Airport (LIM), PeruAthens International Airport (ATH)

Lease / construction by airlines

New York (JFK), USANewark (EWR), USAAtlanta (ATL), USADallas Fort Worth (DFW), USADetroit (DTW), USAHouston (IAH), USAMany more US airports

British Airports Authority, UK

PROS

Independence of regulatorCC oversightEfficiency incentivizing 5-year price caps at 3 largest airportsService level standardsSingle tillExisting assets cost-efficientSuccessful developing non-aeronautical assets

CONS

Charges still highTime & EffortRegulatory capture?Over-generous WACC allowedNew investment not cost-efficientDiversification of management effort

Effect on Heatrow

50 % increase 2003 – 08A further 50 % increase 2008 – 13Operating costs increasing 30 % per year High charges, poor qualitySupport reference to Competition Commission

Athens Airport, Greece

PROS

Good Service

CONS

No consultationLittle transparencyCostly, inefficient investmentDual-tillRate of return regulation15% return on equity guaranteeCharges can be raised to recoup previous profit shortfallNo regulator independence500% rise in charges

Copenhagen Airport, Denmark

PROS

Charges negotiation requiredCPI-X price caps over 3 years if failure to agreeX includes both efficiency targets plus traffic ‘claw-back’

CONS

Regulator is Transport MinistryNo independent oversightGovt still hold 34% sharesCharges rising in real terms ieCPI+ not CPI-

Auckland Airport, New Zealand

PROS

Obliged to consult with customers (only every 5 years)

CONS

Charges unregulatedLand values inflated to ‘opportunity cost’Commerce Commission recommendation for re-regulation ignored by Govt

Effect on Auckland

Auckland International Airport EBIT 66 %

Microsoft 37 %ExxonMobil 16 %General Electric 15 %Air New Zealand 4 %

Ezeiza Intl, Argentina

PROS

Private CapitalOpen attitude

CONS

Bidding process led to high royaltiesInvestment plans cutNo efficiency incentives

Quito Intl, Ecuador

PROS

New Airport Under Construction

CONS

Pre-financingNo transparencyNo regulation of chargesNo customer consultationUnrealistic traffic forecastsHigh charges

Effect on Quito

128% increase before new airport even opensHigh rate of return for investorsLimited growth, limited accessAirline lawsuitsHigh charges, poor qualityDistorted relationship airlines / airport

Newark, USA

PROS

High quality facilitiesInvestments are bondedAirline control of terminalHigh concession revenuesAbility to control pax experience

CONS

Exclusive to one carrierLack of airside transparencyLimited lease period where airlines loose investment

20

Often airlines feel the immediate effect

Not a sustainable business model

…it’s time for effective economic regulation

Privatization&

Concession

Customer View

Market Dynamics

Airlines pay airports and ANSPs $ 42 billion per year11% of revenuesAirport aeronautical revenue over $ 27 billion aloneFurther $ 26 billion from non-aeronautical Direct impact on route profitability and growth Largest external cost excluding fuelNo or limited control

Airport Charges

Landing, passenger, parkingCargo, security, noise, aerobridges, central infrastructure fees, concession fees

In addition airlines pay for:

Rentals / Lease / BondingMaintenance facilities Staff facilitiesUtilitiesFast-track facilities

Airline View Of Airports

In the business of providing a serviceShould have a supplier/customer relationshipShould facilitate airline operations in a safe, reliable and cost-effective environmentShould be motivated, cost efficient, customer focused, transparent businessesWhere natural monopoly, need regulatory substitutefor market disciplines

But far too often…….

Airlines are treated as users not customersLandowner/tenant relationshipAirport facilitates investors and passengersAirports purely driven to make moneyNo regulation at all, often regulator is the owner

Main Issues

Excessive profits Poor consultation and transparencyGovernment interferenceHigh royalty / concession charges Unnecessary or “political” investmentsLack of efficiency targets

NEED FOR FAIR CHARGES AND CONTINUOUS IMPROVEMENT IN COST EFFICIENCY

Desired Approach

Open, transparent and meaningful consultationAgreed investment priorities supported by business casesClear, credible and accepted benchmarkingMeasurable and accountable cost efficiency targetsand continuous improvementsLonger term pricing arrangementsService Level AgreementsRobust independent regulation and appeals

New Terminal?

Often Leads To Increases

100% Financing by customers

Often no involvement of customers

Shouldn’t the goal of construction be Shouldn’t the goal of construction be to lower the unit coststo lower the unit costs

andand increase the quality?increase the quality?

Privatization&

Concession

ICAO/OACI

All airports should adhere to

Chicago Convention

ICAO Doc 9082 Policy on Charges

ICAO Doc 9562 Airport Economic Manual

34

ICAO charges policies

Non-discrimination

User Consultation

Cost Relatedness

Economic Regulation

Contains Key Elements For Users:

Transparency

Privatization&

Concession

Economic Regulation

Agree on investments

Economic RegulationA Government Responsibility

Non-discriminatory

Stakeholder engagementTransparency

Single-till financingAdhere to ICAO policies

Independent appeal body

37

User Consultation

38

Consensus increaseschances of success

39

Consultation Basics:

Transparency

Clear proposals

Supporting Business cases

A Two way process

Continuous user involvement

40

Transparency?

Transparency Requirements

Justification is required that charges are cost based

Major investments should be justified and required

Airlines should exactly know what they pay for

Transparency should lead to improved benchmarking

In Summary:

It does not matter who owns the airport, as long as there is:

Good governanceEconomic RegulationTransparencyConsultation

Thank Youkronenburc@iata.org