In Part 1 of this article the particular difficulties that small airports face were examined in detail. In this follow-up, we look at how these barriers can be overcome to create small-scale airport public-private partnerships (SSPPPs).

Admittedly these projects are generally complex due to difficult operational considerations, high project development costs with minimal payout, and weak profitability metrics.

So how can it happen? Many governments recognize the complexity of covering the high costs that small airports face due to their low throughput. In these instances, such gateways are included in a cluster or network encompassing profitable airports with higher traffic.

From a policy standpoint under this model, government financing is reduced by capitalizing on cross-subsidization within a network. This ensures that the economic and social benefits that small airports bring to their communities are maintained.

The PPP model remains applicable to small-scale airports, albeit in varying forms:

• Mexico and Brazil, or more recently the Cape Verde Islands, have adopted airport cluster or network schemes, where one or more larger profitable airports tend to compensate the net losses of smaller airports
• On some continents like Africa, SSPPP schemes are introduced through a combination of measures via grants and higher passenger charges. This presupposes that vital infrastructure such as runways and aircraft aprons are already in place, or that a government and/or multilateral institution offers appropriate sources of finance.
• In North America and Europe, many regional airports or small-size secondary gateways are developed and run within the framework of Operate and Maintain (O&M) management contracts, where the private party takes full management of these elements. However, a more substantive investment in infrastructure is ensured through subsidies by regional or national institutions.

Risky Business?

Whatever the model, we are reminded by the timeless adage that ‘there’s no such thing as a free lunch’. That is, private operators have a bottom line and expect a return on their business for a given level of risk. A successful PPP allocates risk appropriately between public and private entities. The models of private sector participation are differentiated by the degree of risk. For example, shorter-term management contracts (about five years) typically follow a classic O&M model with no, or minimal, requirements linked to financing the infrastructure. However, in cases where capital investments are required, and a government is not able to finance or construct the capital asset (like a new terminal or runway), a build-operate-transfer (BOT) model is used.

A BOT contract is longer than a short-term management contract and its lifespan is dependent on the cost-recovery time (~35 years), as revealed in ACI World’s 2018 Policy Brief: Creating Fertile Grounds For Private Investment in Airports.

The longer the time horizon, the higher the risk transfer to the private sector. However, successful SSPPPs usually require a combination of public-sector financing or other economic incentives coupled with private-sector participation. This is often known as hybrid PPP financing. Based on government objectives and needs, matching the PPP model with the right contract lifespan and recognizing the underlying economics are foundational elements.

In addition to having clear and consistent economic regulatory frameworks prior to privatizations, governments must make the appropriate preparations ahead of tendering and bid processes. This instills confidence in private investors and other stakeholders.

Levers to Grow Traffic

Given that small airports with fewer than one million passengers are generally loss-making due to insufficient scale means that when private sector participation is considered, government incentives need to be bundled in.

On the other hand, the smallest airports worldwide are also some of the fastest growing. In 2006—before the Global Financial Crisis, and based on the airport size categories in that year—the smallest gateways had the greatest percentage gains in passenger traffic.

From 2006 to 2023, airports with fewer than one million passengers (<1m), between 1 and 5 million (1-5m), and between 5 and 15 million (5-15m) experienced absolute growth of 130%, 102% and 94% respectively.

It is true that smaller airports start from a lower traffic base, but many that were classified as small in 2006 (<1m) have graduated into other size categories. With the increased scale, profitability follows. These emerging gateways play an essential role in feeding traffic into hub airports for onward journeys to other major national and international destinations. Thus, important feedback loops are created.

In other instances, existing major airports may already be congested and have reached saturation. This is when smaller airports strategically benefit from traffic leakage and grow as a result of this burgeoning demand.

Centerline Airport Partners, a company focused on identifying and enhancing the value of airports through strategic investment and development, recently acquired a 51% stake in Parma International (PMF) in Italy.

While PMF has modest passenger traffic of 125,000 per annum, the airport is located between Milan and Bologna. Talking to Canadian newspaper The Globe and Mail about the deal, Centerline’s CEO, Andrew O’Brian, described Parma as “a diamond in the rough.” He said that saturation at other airports and an expansive catchment area mean that PMF is ripe for a business model that can attract airlines.

Smaller airports that are commercially driven or have an objective to support the economic development of communities they serve have various managerial levers at their disposal. Traffic development and resultant revenue growth involves several choices and the engagement of multiple stakeholders to ensure success as follows:

• Market analyses and forecasts to promote new routes or increased air service
• Ensuring the infrastructure to support the desired level of air service
• Effective marketing and promotion alongside local tourism authorities and hospitality industries to drive passenger traffic (leisure and business) and air cargo
• Boosting airport-airline relations using incentives such as landing- or passenger-fee discounts, marketing support, and streamlined customs and immigration processes
• Enhancing the overall experience for passengers.

PPPs remain an important development tool and viable financing mechanism for small-scale airport projects provided they are structured well, balancing government objectives with investor expectations.

Making use of proven schemes and hybrid financing models is key to propelling SSPPPs. Unless loss-making airports are clustered within a network alongside profitable gateways, they usually require some public subsidies or grants. This ensures that any financial shortfall is covered, and that infrastructure is financed in a sustained manner.

Finally, but not least, blending in the right entrepreneurial talents—for a longer-term strategy aimed at developing traffic growth and revenue streams—is also a critical lever to drive success.

[1. Patrick Lucas is Principal and Founder of Airport Economics Consulting. He has held various posts at ACI World, rising to Vice President and Chief Economist. The author notes that this article draws from earlier work and contributions from the Airport Chapter of the World Association of PPP Units (WAPPP), in particular Jacques Foullain, Curtis Grad, and Rodolfo Echevaria. Special thanks also to ACI for its data, and to Andrew O’Brian (Centerline Airport Partners), Pierre-Hugues Schmidt (VINCI Airports), Jorge Roberts (AvPorts), Alexandre Leigh (IFC PPP Transaction Advisory), and Rogerio Prado (Pax Aeroportos) for their insights. 2. This article is modified from the original in Airport World, the magazine of Airports Council International.]