Where is the airport PPP market heading post-COVID? Modalis Infrastructure Partners’ Curtis Grad takes a closer look at the market and considers the possibilities.
In the post-COVID era there has been plenty of speculation on the role that the private sector, and public-private partnerships (PPPs) in particular, might play in airport ownership and development.
Several governments around the world have had to give financial support to airports during the past two years when their gateways had little to no business and this has acted as a wake-up call. Is it justified that taxpayer dollars are spent on bailing out airports during a crisis when private sector-owned airports would ordinarily go to the debt markets to see them through a rough patch?
Of course, COVID-19 was more than a rough patch, which is why there was even more discussion on the way forward for future airport operations and financing. In the US alone – where airport public-private partnerships are rare – lawmakers allocated about $10 billion in economic relief to eligible American airports via the March 2020 CARES Act (which made available $2.2 trillion in total across many sectors).
The funds for airports were distributed by the Federal Aviation Administration (FAA) through the Airport Coronavirus Response Grant Program (ACRGP). Most of it was shared between commercial service airports; those with more than 10,000 annual passenger boardings. Including concession relief, the amount of public money handed out was substantial, covering a large number of airports.
The US and Canada are a special case because here private sector participation in airports is tiny at just 4% based on passengers handled in 2019 as most gateways are owned by local municipalities. The only other region that has such low private sector participation is Africa at 10%, but that is gradually changing.
By contrast, the share in Europe and South America is 76% and 77% respectively, with a global average of 45%, according to ACI data.
Amid these regional variations, what is in no doubt is that private sector participation is growing. In 2016, there were 614 airports with private stakes and they processed 40% of all passengers. In relatively short order, that number had risen to 708 airports handling 45% of passengers (based on 2019 traffic).
COVID capital spending setbacks
Admittedly, there are some arguments why American-style state funding and operation of airports can be a good thing during hard times. After years of almost non-stop annual passenger growth, COVID-19 ensured that – for the first time in decades – traffic risk has become a talking point.
Airport capital expenditure (CAPEX) contracted in 2020 and 2021 relative to 2019 “in the realm of double digits during the worst days of the pandemic”, according to ACI World’s vice president and chief economist, Patrick Lucas.
Markets with more privatised airports, like Europe and Latin America, suffered some big setbacks as capital spending was reduced due to financial shortfalls. On the other hand, markets like the US, thanks to the CARES Act and institutionalised federal subsidies pumped into airport infrastructure, saw less of an impact on CAPEX investment. Asian and African markets meanwhile were a bit more varied on their spending deferment.
In the good times, however, private sector involvement is often encouraged. Private operators are usually very willing – and faster – to invest if they can see that the returns will be good. Right now, in a strong recovery phase for aviation, investors are more likely to see the positives across 5+ year horizons.
The latest (seventh) round of airport privatisations in Brazil, where the highest bid from AENA was more than three times the asking price, is evidence of this trend. Through airportIR.com, Modalis closely tracks active and potential upcoming deals in the global markets and we are seeing an uptick in activity now that the worst of COVID seems to be behind us.
Earlier this year, ACI World’s Lucas explained in a podcast from the World Association of PPP Units & Professionals (WAPPP) that a fundamental evolution had taken place in the airport-airline relationship and that more risk sharing would be the future. He said: “If we have learned anything from the pandemic, we know that we have to share risks a bit better.” Not just to recover losses from the pandemic but to ensure a more stable financial environment during future crises.
As part of this redrawing of the risk map, ACI expects to see more renegotiations of agreements in the non-aeronautical side of the business, especially when it comes to dealing with uncertain traffic volumes. For example, this is true of minimum annual guarantee (MAG) contracts, and the increasing use of joint ventures, one of the latest being India’s Bengaluru Airport and travel retailer Dufry, where the airport landlord and their concessionaire work in closer partnership.
Third party expertise
At the macro level of airport terminals and whole airports, many smaller or financially-constrained governments have found it easier, and more cost effective, to hand over airport operations via PPPs that act as a national revenue generator.
The impetus is evident in many parts of the Caribbean and increasingly in South America. Africa is also getting renewed interest, with TAV Airports, for example, expanding its footprint on the continent via Lagos, Nigeria, on the back of high traffic expectations.
In the US, too, the PPP bug has selectively taken hold. At New York’s LaGuardia and JFK International airports the landlord, the Port Authority of New York and New Jersey, has been active in pushing ahead with PPP deals with an impressive outcome at LGA Terminal B. The latest $4.2 billion deal for Terminal 6 has just been closed with JFK Millennium Partners.
Dramatic terminal transformations from ‘third world’ embarrassments’, as described by then US Vice President Joe Biden in 2014, are positive examples to other US states looking to improve their passenger experience. A collaborative process that requires less from the public purse but produces good – or even better – outcomes for users is hard to ignore.
Asia, historically has been favourable to the development of airport PPP projects and a quick glance at the projects in play in the region – particularly in India, the Philippines, Japan, Cambodia and Indonesia confirm that appetite still remains.
India remains one of the strongest airport PPP markets in the region with several existing PPP deals and more Airports Authority of India airports are still waiting to come under the hammer. Adani Group is the biggest private player in the Indian airport market and has expressed its intention to grow through further acquisitions should opportunities arise. Expansions at existing privatised airports are also taking place, for example at Bengaluru Kempegowda, plus add-on projects in Malaysia and the Philippines.
In the pipeline
Below is a list of potential future airport privatisation deals in Africa; the Caribbean & North Atlantic; Europe; Middle East, Levant and CIS; and South America based on information available on November 29, 2022.
- Zimbabwe – PPP/concession (status tbc)
- Luanda, Angola – concession (status tbc)
- Tripoli-Mitiga, Libya – concession (status tbc)
- Ghana (multiple airports) – (status tbc)
- Malawi – PPP/concession (status tbc)
CARIBBEAN & NORTH ATLANTIC
- Family Islands, Bahamas – pending after change of government
- Bimini Airport, Bahamas – private group seeking investors
- Pacific (La Unión), El Salvador – market sounding
- Panama, 4 Regional Airports – market sounding
- Bávaro, Dominican Republic – pending Supreme Court challenge
- Orotina, Costa Rica – on hold due to COVID-19 impacts
- Glasgow-Prestwick, United Kingdom (perpetually on-market)
- Palermo, Catania, Genoa, Italy – concession (unsolicited bids)
- Dubrovnik, Croatia (unsolicited bids)
- Bucharest, Romania (unsolicited bids)
- Beauvais, France (concession)
- Warsaw-Modlin, Poland (greenfield, concession)
MIDDLE EAST, LEVANT & CIS
- Istanbul – Sabiha Gökçen, Turkey (secondary)
- North Kuwait (early government planning stage)
- Bishkek, Kyrgyzstan (concession)
- Cayenne, Guyana – concession
- Natal, Brazil – re-tender (Q4 2022 or Q1 2023)
- Santos Dumont w/ Rio de Janeiro-Galeão (re-tender 2023)
- Viracopos, Brazil – re-tender or take-over tbd?
Scale is important
It is notable that the private sector in Asia tends to have weight at high-volume airports in the market as this is where profits generally lie. WAPPP noted: “Asia stands out from the other continents with more than 45% of passengers in the region having travelled using airports benefiting from private sector involvement, even though these airports represent only about 15% of the airports in Asia.”
In the Middle East – where the state has traditionally owned all aviation assets from the airports to the airlines – there are changes afoot. Saudi Arabia’s huge push to develop inbound international tourism as part of its very ambitious Vision 2030 strategy, also brings with it a healthy dose of PPP involvement, from hotels to airport infrastructure.
The Kingdom has stated: “Private investment plays an essential role in realising Vision 2030. Saudi Arabia aims to achieve an increase from 40% to 65% in private sector contribution to GDP.”
The Privatisation Law has already been enacted to attract foreign direct investment and the latest announcement for King Salman International Airport (please see page 15) on the aviation front is a new master-plan for a six-runway hub for Riyadh that will be among the biggest in the world.
The country’s Public Investment Fund (PIF) – one of the largest sovereign wealth funds in the world – said that the airport would include 12 square kilometres of airport support facilities, space for residences and recreation, retail outlets, and other logistics real estate. The aim is to accommodate up to 120 million travellers by 2030.
As we enter the new post-COVID world, there is consensus that travel and tourism will grow again, and quickly. The UNWTO expects that international tourism will reach 65% of pre-pandemic levels by the end of 2022. Of course, while China maintains its zero-COVID policy, a return to 100% and beyond is unrealistic, unless there is a surge in domestic travel that is enough to offset the loss of outbound flyers.
On the other hand, in other regions and markets such as Europe and the US, demand has exploded and globally UNWTO says that an estimated 700 million tourists travelled internationally between January and September 2022.
By sub-region, several reached 80% to 90% of their pre-pandemic arrivals in this period. Western Europe hit 88% and Southern Mediterranean Europe was at 86%. The Caribbean, Central America were both at 82% with Northern Europe just behind at 81%.
Moreover, there were some destinations reporting arrivals above pre-pandemic levels in those nine months including Albania, Ethiopia, Honduras, Andorra, Puerto Rico, Dominican Republic, Colombia, El Salvador and Iceland.
Naturally, private investors in the airport sector are looking closely at all the recovery and forecast traffic data – as well as longer term demographic economic development trends – when making their investment decisions.
The Modalis view is that while obstacles remain, not least those of geopolitical conflict and the risk of an economic downturn, the demand for travel will continue to outweigh the negatives as has been shown very strongly in the second half of 2022.
Coupled with an ever sharpening focus on green finance, this puts the airport PPP market – from both the landlord and investor side – on a strong footing for the future.
About the author
Curtis Grad is the founding partner, president and CEO of Modalis Infrastructure Partners Inc., a strategic investment advisory and professional services company specialising in airport infrastructure privatisation.