Research Report: What’s Everyone Talking About? (Part 2)

Dear Friend of GAD, 

As we countdown to the release of the GAD 2014 programme, there’s just time for this second instalment of my Research Report. Today’s edition is based on my conversations with 50+ airport executives and focusses on the priorities and challenges these industry leaders identified for 2014. 

10 Big Themes For Airport Executives

CC image 'Airport' by Samrat Mondal on Flickr 

Developments In Airline Business Models 

As ever, much of this attention is focussed on the low cost space. Ryanair’s move to first tier airports is creating winners and losers, while its new second cabin bag allowance makes a considerable different to the airline’s potential revenue. Norwegian and Vueling are both pioneering transfers – although it remains to be seen how they can minimise the cost of this operation – in another development that points to the increasing convergence of low cost and full service short haul models. The potential for further LCC growth within Europe is a point of debate. Cross-border models continue to evolve in Asia, although the exuberant growth of the last few years is biting into yield and even Air Asia, normally the most bullish of LCCs, is now beginning to constrain capacity. 
Long haul business models are also coming under focus. Flag carriers have performed surprisingly well over the last couple of years, particularly off the back of consolidation in the US, which is reflected in their current market capitalisation. Constraining capacity is the name of the game at the moment. Could we see US scale consolidation – and the accompanying phenomena of stranded hubs – in Europe? What about over the Pacific, which has not yet undergone the same consolidation as the Atlantic? Low cost long haul is still being talked about as the next revolution: Asian LCCs are leading the way, but no one has cracked how to make this profitable, given the higher comfort that passengers demand on a longer flight. 
Meanwhile, airline alliances are losing favour to bilateral agreement and equity relationships – we wait to see how the European Commission rules on Etihad/Alitalia/Air Berlin. The big three Middle Eastern carriers continue to be a market juggernaut, with the full scale of the challenge for European and Asian legacy carriers still becoming apparent. New generation aircraft are also a game changer, offering new potential for point-to-point traffic. At the current time, the winners on the airport side seem to be regional hubs, which continue to grow apace. 

A New Era For Airport-Airline Relations? 

Both IATA and ACI are now talking about a partnership approach, which is gathering steam in Australia, New Zealand and the UK. This usually involves the airport incentivising an airline to make a longer term commitment but can go as far as joint investment in new 
infrastructure. At the heart of this is whether both parties see the other as a strategic partner, or simply a customer/supplier to be squeezed. Advocates of light touch regulation claim that where such long term agreements can be reached, regulators should take a hands-off approach. Given the size of these deals, it will be critical for both parties to get them right.  One question which strikes me is to what extent an airport can really consider all of its airlines ‘partners’, or whether a partnership – be it with a flag carrier or a dominant low cost carrier – is implicitly a ‘preferred partner’, which might be perceived to be at the expense of others. 

State Aid For Airports 

While the last 12 months has seen no real clarification on this issue, it continues to hang over smaller, marginal regional European airports. From the renationalisation of two struggling UK regional airports (Cardiff & Glasgow Prestwick) to the sometimes murky role of regional development and tourism funds in supporting airline routes, the evolving relationships between the public and private sectors continues to be in question.  

Who Is In Charge Of Airport Strategy? 

While active financial investors are nothing new, airlines are increasingly interested in talking to the equity holder, rather than to airport management. The same goes for consultants and other suppliers and service providers. The power of the airport CEO appears to vary, but in some cases it seems that airport management is being side-lined from strategy development. 

Putting Strategy Into Practice 

Building on point 4, while most airports have a master plan and a mission statement, it is noticeable that the number who are successfully gaining market share in a three to five year timeframe is far fewer. What is the trick to turning strategy into results? We might look to Brussels and Athens Airports, who have both successfully turned themselves as regional hubs over the last few years. 

Getting On With The Neighbours 

From the west coast of the US to central Europe, airport executives are reporting challenges posed increasingly by local, grass roots campaigns. Labour and environmental issues are both high on the list of concerns. Noise is always a particular difficulty for airports: while aircraft may be getting quieter, jet engines are always going to be noisy and there is only a limited amount that precision takeoff/landing or other solutions can do to mitigate this. The complaint across western geographies is that airports are seen as noise and pollution factories, rather than employers and bringers of economic benefits to the region. While this may be less of a competitive issue locally (most airports are in the same boat), European airports in particular can find themselves at a disadvantage in the global competition between business centres and aviation hubs – Akbar Al Baker’s recent comments about noise around Heathrow illustrate that this simply isn’t considered an issue in some markets.  What strikes me is that this is again an issue that airports can do relatively little about (just as they can only watch their home market legacy carriers lose market share to the Middle Eastern challengers). However, one thing is certain – airports need to be thinking about how they engage with their local communities, something that requires quite a different approach to influencing policy makers and regulators. 

Environmental Resilience (Or Lack Of It) 

Last Christmas Gatwick Airport flooded for the first time. This is an event that should make airport executives far and wide nervous. With changing weather patterns and an increasing number of extreme events, airports who have thus far not faced environmental hazards now need to think about their own vulnerabilities. This includes financial planners thinking about OPEX, as well as operations professionals. While most greenfield projects are being developed with a mind to environmental resilience, retro fitting old infrastructure to cope with these phenomena will be costly and difficult. 

Airport To Airport Revenue 

While a number of airports with a strong track record in innovation, customer service or a particular skills set have been in this game for a while, it is noticeable that many smaller airports now have a dedicated Innovation programme and are creating a new revenue stream by then selling this technology or knowledge to other airports. Innovating is one skill – creating a business to monetise this effectively is another. 

The Future Of Retail 

We have been talking about the great potential of airport retail for a number of years now, but it is clear that most of the industry is now waiting for the next big step forwards. Trends mentioned include ‘show rooming’ (where customers can view goods and then buy them online with their smart devices) and airlines increasingly challenging airports with new, technology-based retail offerings, but strikingly no one really knows what is around the corner. While airlines have (increasingly valuable) passenger data, airports understand footfall, so there could be potential for collaboration (with the question then being how the two divide the dividends) – but on the other hand, who says that retail requires physical footfall at all? Given the technological and consumer revolutions emerging around us, it would be very surprising if we don’t see something big in the next few years. 

Airport Brand 

Finally, brand is increasingly important, as airports see the fruits of being considered a trusted vendor in an online context – a recognisable brand allows them to expand into a wider range of products and services. However, airport executives report building a brand/digital marketing is a field in which they are finding their own way at the moment – many say they feel that this expertise has not widely made its way into the transport sector and guidance is lacking. Expect to see this topic rise up the agenda in the coming years! 

On The Agenda At GAD 

With all of the above and some great new topics on the agenda for GAD 2014, there’s certainly lots to talk about in Athens in November and I look forward to seeing you there.  In the meantime, enjoy the rest of your summer! 

Best wishes, 
Heidi Stancliffe
Conference Director, GAD 2014

Director's Report: What’s Everyone Talking About?

By Conference Director Heidi Stancliffe

I hope this finds you well. As I am sure you will know by now, GAD 2014 will take place in Athens from 17-20 November this year, putting us on the spot for two of the most exciting airport transactions in the pipeline at the moment – Athens International Airport and the two groups of Greek regional airports. Combined with the prospect of some winter sunshine for those of us escaping northern climates, it promises to be a great setting for this year’s meeting.

As I sit down to write the draft agenda for GAD 2014, I wanted to take a few minutes to share some of the key takeaways from my research with you. As usual, my colleague Ian Law and I have spent the first few weeks of the process speaking to 100+ of the leading lights of the industry to find out what we should be talking about at GAD come November. Here are some of the highlights! Today’s instalment, based on conversations with 50+ airport investors, will focus on the global deal pipeline and a second (to follow) will look at some of the priorities and challenges raised by airport CEOs.

Europe

After the frenzy of the last couple of years, the privatisation and M&A pipeline is somewhat quieter this year, particularly for investors with a focus on north-west Europe. Here, the last BAA assets and Macquarie European Infrastructure Fund’s stakes in Bristol and Brussels are generating the most interest. Down the line, other assets from closed-end mid-2000s vintage funds – most notably Global Infrastructure Partners’ stakes in London City and Gatwick – may offer exciting opportunities in the next couple of years. However some industry observers think that many of these assets will be transferred within the existing shareholder base. Meanwhile, despite the huge market appetite, corporate owners may be unwilling to let go of assets, given the lack of new opportunities – with a competitive market and a paucity of opportunities leading to aggressive valuations, participants could very well find themselves out of the market.

In southern Europe, the aforementioned opportunities in Greece are attracting the most interest, so all eyes are on the Hellenic Republic Asset Development Fund for more details and shortlists to emerge. For both Athens International Airport and the two groups of Greek regional airports, interested parties stated that understanding Greek growth trends will be key to getting the business plan right. The regional airports also have their own idiosyncrasies, presenting both challenges and opportunities to the incoming operator.

AENA would also, of course, be a huge and long awaited deal – if the mooted IPO goes ahead. Speaking of deals that have been talked about year after year at GAD, might we see the first privatisation of a French regional airport (Toulouse) this year? Italy is lively at the moment, with Atlantia’s acquisition of AdR, Corporacion America’s acquisition of Florence and Pisa airports, the move to a new airport system in north east Italy and a handful of smaller sales on the cards. To the east, Ljubljana is of high interest. Lithuania is also in the process of creating a national airport system with a view to privatisation, although it is not yet clear what form this will take. The refinancing of Budapest Airport (with its challenges of historic over-leverage), due to be completed this year, is an important event. Russia remains a high growth market and the restructuring of the Moscow airports’ shareholding goes on, but recent events will have done nothing to allay concerns about political risk. Meanwhile, in London, the Davies Commission continues its work ahead of its final report in 2015. Anyone travelling on public transport or reading a London newspaper can’t fail to have seen the ‘Gatwick Obviously’ campaign. One big question for the European market in the next few years is whether the move to long term capital will see the transaction pipeline slow down significantly in the long term. Let’s hope not – it would make for a boring conference!

Asia & MENA

Outside Europe, most eyes are on Japan as the privatisation of New Kansai International Airport Company oves forward and the process looks like it will be very competitive. Here interested parties stated that understanding the vendor’s requirements is their top priority.

India is also exciting, with the new Mumbai airport and further privatisation of mid-size airports coming up after the election, although doing business in this market is recognised as a challenge.

Turkey also continues to boom, but talk around the new Istanbul airport has gone quiet in the face of political tensions and the difficulties in financing such large greenfield projects.

South-east Asia is also a region that has been talked about at GAD for many years, so it is good to see that the legal dispute of Cebu has been settled. Meanwhile authorities in Vietnam have approved a plan to privatise the country's airport authority.

Also for the adventurous airport operator, there are rumblings of opportunities in the MENA region from Morocco to Pakistan.

The Americas

In the Americas, the reconcession of Santiago is understandably gaining the most interest this year and, like Japan, the process will be very competitive. However, interest in Brazil has noticeably cooled. Decisions regarding the third round of privatisations are on hold until after the election – we may or may not know when this will happen and which airports will be included by the end of the year. However, these assets will be much smaller than the transactions we have seen in the last two years and some international players may not participate after the experience of the first two rounds. This summer will, of course, see the World Cup come to Brazil, so we will see how the newly privatised airports perform! There are also some smaller assets in Colombia and Peru and the rumblings about a new airport for Mexico City go on. 

In North America, La Guardia is well underway and we should know the winner before November. However, following the collapse of the Chicago Midway transaction just before GAD last year, further privatisations seem to be once again on the backburner, although the general sentiment still seems to be that there will be widespread privatisation within the next decade. 

What's on the agenda at GAD 2014?

With a slow pipeline, high prices and squeezed yields in Europe, another big question for the coming years has to be the search for yield, so we can expect to continue seeing opportunities in emerging markets on the agenda at GAD. The round up above is certainly not meant to be to be comprehensive, so, despite what may be on the surface a slower pipeline, there is no shortage of things to talk about in Athens in November and we look forward to seeing you there. 

In the meantime, have a lovely summer! 

To register to attend the GAD 2014 conference, please visit www.icbi-gad.com