June 23, 2007

Governments all over the world are selling off airports, but are private owners good for airlines?

TWELVE MONTHS AGO, AEROPORTS de Paris initiated its oft-delayed privatization process with the sale of 32.8% of the company. In addition to raising €1.12 billion ($1.44 billion) for the French airports operator and the government, the IPO raised the ire of otherwise reserved Air France KLM Chairman and CEO Jean-Cyril Spinetta. In a rare series of public outbursts, he openly disapproved of the privatization that led to a new Economic Regulation Agreement for the 2006-10 period permitting a 5% hike in airport charges at Paris Charles de Gaulle in the first year followed by increases of 4.25% annually over the next four years.

Spinetta argued that ADP was abusing its "de facto monopoly" position to raise its tariffs at thrice the rate of inflation, while ADP countered that it needed the additional revenue to finance its €2.5 billion five-year investment program.

The partial sale (the French state still holds a 67.2% stake) had yet another effect: It poured new fuel into the smoldering debate over public versus private ownership of airports. The issue is definitely topical in Europe, where last year some other high-profile privatization dossiers surfaced. There was the £10 billion takeover of BAA by a consortium led by Spanish infrastructure company Grupo Ferrovial as well as the pending IPO of Schiphol Group. The latter deal ultimately was shelved after the City of Amsterdam, which owns 21.8% of the airport company, used its veto right to block the transaction.

The irony is that Schiphol Group, while struggling to get itself privatized, is active on the international privatization scene, with stakes in Brisbane Airport and Terminal 4 at New York JFK (see article, p. 38). It is not alone. Plenty of state-owned airports participate in the privatization process of counterparts, abroad and at home. For instance, Changi Airports International, a wholly owned subsidiary of the Singapore CAA and owner-operator of Singapore Changi, acquired a 7.1% stake in Auckland International in 1999 and holds a 50% stake in Alterra Partners, which owns equity in Costa Rica, Curacao, Lima and London Luton airports.

"Three to four years ago, IATA along with everybody else believed that the privatization of airports was a good thing because we would see them being managed on a commercial and a business basis rather than under state ownership. But what we have seen is that the ugly state-owned airports turned into even uglier privately owned airports," says IATA Director-Industry Charges, Fuel and Taxation Jeff Poole.

"Airlines tend to get hit twice in an airport privatization," he adds. "The prime reason most governments privatize airports is not anything philosophical or esoteric, it is just generating revenue, and given that the purpose is to raise revenue, everyone tries to fatten the turkey beforehand. How do they do that? Through charges. The airport is then privatized, usually by competition, and goes to the highest bidder, who needs to recover the investment. In many case airports are overbid for. So how do they recover their investment? Through charges."

For IATA, which has elevated airport privatization to one of its core focuses and integrated it into its Aviation Value Chain crusade and External Cost Campaign, the ADP privatization/tariff increase was such "an extreme case" that the organization launched legal action against the French state and ADP. The Federation Nationale de l'Aviation Marchande, representing French airlines, and the Board of Airline Representatives in France filed separate though related suits.

Interestingly, Air France, which is by far the largest user of CDG and Paris Orly, did not join its fellow carriers in their legal pursuit. Observers suspect that Spinetta actually may have borrowed IATA DG and CEO Giovanni Bisignani's proven tactic of "politely shouting" to get what he wanted: A reduction of the proposed tariff increase that initially was set at 6% annually and an acceleration of ADP's investment program geared toward AF.

In truth, far worse scenarios exist elsewhere. Tirana International Airport Nene Tereza increased its package of basic airport charges by about 50% two years ago when a private consortium, in which Hochtief AirPort holds a 47% stake, took over management. The privatization agreement concluded in October 2004 came with a comprehensive modernization program representing an investment of around €50 million. A brand new terminal opened in March.

"It's all gorgeous and state-of-the-art," concedes Christian Heinzmann, CEO of Albanian Airways, which has its base at TIA. "The facilities are contemporary and attractive. In addition, the access roads to the airport have been modernized. But it all comes at a high price for us." A comparative study by the airline of airports of similar size in its network shows charges at Tirana are by far the highest, he claims.

Further south, users of Larnaca and Paphos airports in Cyprus were presented with a 47% increase in per-passenger charges from last April with further raises in July and November. By the end of this year, the increase will be around 70%. The hike was planned for May 2006 when Hermes Airport took over management of the two airports, but under pressure from the International Air Carrier Assn., which represents 39 airlines serving the leisure industry, it was delayed by 11 months.

"There is no justification for this increase, which for IACA carriers alone amounts to €18 million," Manager-Operations Luc Geens reasons. He equally criticizes the 33% concession fee that will go directly to the Cypriot government without any financial risk or any commitment to reinvest it back into airport infrastructure.

By Cathy Buyck, Air Transport World
The full of this article's can be read on the source at: Air Transport World

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