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Buying into airports


Asia-Pacific’s airports continue to appeal to investors interested in privatisation deals and upgrading infrastructure, writes Modalis Infrastructure Partners’ partner, president and CEO, Curtis Grad.

Despite being very slow to remove COVID restrictions, Asia-Pacific remains a key region for airport investment and development as traffic flows are predicted to see some of the biggest rises in the coming years, especially for domestic travel in China and India, based on Boeing’s outlook to 2042.

Largely, this has been driven by demographic shifts in terms of population growth as well as wealth creation which has taken more people into the middle-class segment, who then have the means – and inclination – to travel.

According to data sourced by Statista, Asia-Pacific’s already large middle class population – 1.38 billion in 2015 versus Europe’s 724 million – is set to explode to 3.49 billion by 2030. Meanwhile numbers in the developed regions of North America and Europe will be stagnant. Even other developing regions like Central and South America; the Middle East and North Africa; and Sub-Saharan Africa is not expected to show anything like the growth of Asia-Pacific in the coming decade.

Airports in the region are expected to benefit hugely from this growth, which is why governments and private operators are planning ahead to ensure that their respective facilities are equipped to meet the future high demand for air travel. India provides a great example of this as the most populous country in the world has been on a privatisation path for over 15 years.

Indeed, state-owned Airports Authority of India has handed over control of several assets, mainly through public-private partnership (PPP) contracts, to local players such as GMR and GVK, initially, with the latter divesting its airport holdings, including Mumbai (BOM) and the planned Navi Mumbai, to Adani in mid-2020.

As highlighted in the airportIR Deal Pipeline, this process is still ongoing with a second phase of airport privatisations that will see 25 more airports put out to bid based on the mood music from India’s aviation ministry. Most of these 25 are regional brownfield gateways with a total passenger throughput of 13 million, and the contract length is expected to be 50 years.

While India is perhaps the most active market in Asia-Pacific for PPP activity, other major ‘live’ projects are scattered across the region, from Pakistan in the west of the region, to Indonesia and the Philippines, and Australia in the east.

At the end of last year, local media reported that there was a green light for Pakistan’s Aviation Ministry to begin outsourcing operations of Jinnah International Karachi Airport (KHI), Islamabad International Airport (ISB), and Allama Iqbal International Airport (LHE) under a PPP model. In June however, the government announced that it would restrict the outsourcing initiative to ISB only for the time being, opting for a more caution step-by-step approach.

The Ministry tweeted on X (formerly Twitter) that the outsourcing would “pave the way for foreign direct investment”, which could help improve standards and services at the airports under contract(s) that would run for 20 to 25 years.

In the Philippines, several airports are in a privatisation queue, but the big one is Manila’s Ninoy Aquino International Airport (MNL), which handled almost 48 million passengers in 2019.

Unsolicited bids were made in recent years with the latest, according to a local report in June, came from the Manila International Airport Consortium. Its proposal is $4.7 billion (Ps267 billion) for a 25-year concession rather than 15 years.

The consortium – composed of Aboitiz InfraCapital, AC Infrastructure Holdings Corp, Asia’s Emerging Dragon Corp, Alliance Global – Infracorp Development, Filinvest Development Corp, JG Summit Infrastructure Holdings Corp and Global Infrastructure Partners – said a shorter concession would lead to higher passenger charges and lower investment.

The MNL project is structured in two phases – improvements and enlargement of the existing terminals, and expanding capacity to 65mppa within a four-year period. By September, at least five companies had secured bid documents for the PPP deal.

The potential bidders include three major groups – San Miguel Corp, GMR, and Manila International Airport Consortium (MIAC), plus Spark 888 Management Inc and Asian Airport Consortium, and others are expected to enter the fray in the coming months.

Meanwhile at Sangley Point (SGL), the conversion of the Atienza navy base to a civilian airport costing $11 billion, is being positioned to move forward. A local report said that the Virata-Yuchengco-led consortium signed a joint venture and development agreement with the Cavite provincial government. Other partners include Samsung C&T Corp, as well as MacroAsia Corp.

Manila’s new northern gateway, Bulacan International Airport, is well into its construction phase. The PPP project is led by SMC whose subsidiary San Miguel Aerocity Inc was granted the franchise to construct and operate the new international airport following an unsolicited bid.

According to the government, the four-runway airport should begin operations in 2027 and have a capacity of 200 million passengers per year.

As all of these projects are in the greater Manila metro area, they will impact the scope/viability of each other so careful consideration of the terms of each deal will be required on all sides to get the best out of these assets.

China’s listed operators go backwards

Stocks and shares are an indicator of current investor mood. There are a handful of listed airport operators in Asia-Pacific, including Auckland Airport, Beijing Capital Airport Company, Japan Airport Terminal, Shanghai Airport (Avinex), and Airports of Thailand. Their performances to mid-September have been very mixed.

Year-to-date share prices (to September 19) indicate that Japan Airport Terminal Company and Auckland International Airport came out on top with their stock marginally ahead by 0.84% and 0.64% respectively.

Beijing Capital International Airport Company was heavily down by 35.4%, while its mainland rival, Shanghai International Airport Company, did almost as badly, dropping 33.8%. Both stocks are the lowest they have been in some years as they suffer from China’s weakened economy. GDP has been revised down to 5% this year, and 4.5% in 2024, according to a Reuters poll.

“This slowdown could be just the tip of the iceberg,” Bingnan Ye, senior economist at China Merchants Bank International in Hong Kong told the agency. He said the downside risk was that household consumption might improve “more slowly than many expect”.

Moreover, the elation surrounding China reopening its borders in January has been tempered by the fact that travel activity is still low. According to seat analyst, ForwardKeys, neither Beijing Capital or Shanghai Pudong will make the global top 10 for departure scheduled seats for the 12 months to February 2024.

Meanwhile, Airports of Thailand – whose international gateways have traditionally been reliant on Chinese travellers – has seen its shares fall by 6.3% year-to-date. However, after a bumpy ride during COVID-19, the stock has performed well since January 2022 with a solid upward trend overall, despite this year’s drop.

In the world of infrastructure, airports have been a good bet in the past. Modalis Infrastructure Partners recently updated its analysis of EBITDA multiples for selected airports and operators broken down by majority share stakes (in dark blue) and minority share stakes (in light blue).

As the chart shows, the average EBITDA multiple was 15.9 but early majority-stake deals have outperformed this, sometimes by close to double (or more).

After the global financial crisis in 2008-09, multiples slipped dramatically and there was extra caution in the market with more minority (rather than majority) deals taking place. In general, however, EBITDA multiples for majority stakes have performed better, with London City Airport (LCY), Fraport’s Greek Airports and Italy’s SAVE showing some strong gains since 2014.

To list or not to list?

In March, Australian investment management firm Maple-Brown Abbott released an analysis comparing the average trading multiple of listed airport companies versus the average direct transaction multiple over the past decade.

The firm reviewed 35 transactions of global airports over the 10 years from 2013 to 2022. It found an average transaction multiple over this time was 17.0x EV/EBITDA, which represents a 35% premium to the average trading multiple of listed airports of 12.6x.

Why would there be this historical outperformance of unlisted over listed infrastructure? There are several reasons, both structural and circumstantial.

Maple-Brown Abbott said: “In our view, the combined tailwinds of greater leverage, rising asset prices and a widening valuation gap between assets in the listed and direct markets have been the major contributors. Many of these tailwinds are unlikely to continue indefinitely and some appear to have been caused by short-lived factors including a historical period of declining and low interest rates.”

In the airports sector, there is also the stability factor of large gateways being fully owned by the state to consider. In parts of the world such as the United States, Middle East, and parts of Asia, this is the case, even though some, such as Singapore Changi Airport (SIN), operate at arms-length under a private business model. This can offer the best of both worlds: state financial coffers – useful during events such as the Global Financial Crisis and COVID – but still run on a profit principle.

Nevertheless, airport privatisation through PPP continues to have a valuable place. It offers governments a route to new – and regular – revenue streams over a long contract period; better managed facilities, as they are often taken over by highly skilled global operators – sometimes in partnership with local infrastructure players; and a viable route to mid- and long-term investment via capital markets, so that the facilities stay up-to-date through infrastructure development.

Major acquirers, whether individual companies or consortia, are also more likely to actively manage the business, cut costs and improve efficiencies. All of which can improve profitability and appeal to shareholders as well as ratings agencies, an important factor when considering the cost of debt for new projects.

In a post-COVID market, we have seen air traffic recovering at different rates in different regions depending on their speed of opening up to international travel; consumer appetites to go abroad; and, lately, the cost-of-living crisis limiting discretionary spending. But the general trend is firmly back up again.

ACI data shows that major international hubs, in particular, boomed in 2022. Dubai (DXB), for example, saw its traffic soar by 127% pushing the airport up to fifth place in the global ranking (from 27th in 2021). Even more spectacular was London Heathrow (LHR), rising from 54th to eighth on the back of 218% passenger growth.

Asian airports were, however, largely missing from the list, apart from Delhi’s Indira Gandhi International Airport (DEL) ranked ninth, and Tokyo Haneda (HND) ranked 16th. This year, more Asia-Pacific airports should return to the top 20.

The normalisation of air travel in 2023 and 2024 will be a stabilising influence for the market, and a signal for privatisation projects to proceed.

Investors will always look at the numbers first and if the demand forecasts for cargo and passengers are back on track for the next decade, so will their appetites.

Modalis Infrastructure Partners expects to see a steady flow of deals in Asia-Pacific in the next 12-18 months as passenger numbers rise on the rebound of discretionary spending, with capacity constraints again becoming an issue, and general market confidence returning.

About the author

Modalis Infrastructure Partners Inc (www.modalis.ca) is a global strategic advisory firm, specialising in international transport infrastructure privatisation, investment, development and operations. Visit www.airportir.com to read about the latest investor news and industry intelligence.

1 Comment

  1. Valerio Menescal 10th November 2023

    Excellent article, Curtis. Quite insightful


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