By Jacques Follain (Paris, France)
A large majority of countries, at different levels, have taken the step of awarding concessions or privatizing their airport assets. Despite the upheavals that followed the previous financial crises, the airport concession and privatization market has been, for the past 25 years, very attractive for all players, be they airport operators, contractors, private equity funds or investment funds dedicated to infrastructure.
In 2019, and even at the beginning of 2020, the business of dealing in airport infrastructure assets saw major deals such as the;
- buy-in of Groupe ADP into GMR Airports,
- sale of Macquarie’s 36% stake in Brussels airport,
- success of the 5th round of airport privatization in Brazil, and;
- award of the Hokkaido airports concession in Japan.
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Other recent transactions include:
- acquisition of a majority stake by Vinci Airports in Gatwick airport,
- award of Sofia airport concession in Bulgaria,
- purchase of a controlling stake in Almaty airport by TAV Airports, and;
- resumption of concession activities in Africa.
A few short months ago, 2020 promised to be a very active year with concession or M&A transactions of all sizes envisaged in Europe (Montenegro, Edinburgh, Athens, ADP …), in Asia (Japan, Philippines, India … ), in Africa, in the Middle East in Latin America and the Caribbean (Brazil, Chile, Barbados …).
In just two months the image has changed completely and dramatically as a majority of airlines have grounded more than 90% of their fleet and the airports are either closed or operating in slow motion, running cargo and repatriation flights and in few countries in Asia, the U.S., etc. some limited domestic flights. According to ACI this has resulted in colossal losses of airport revenues close to USD100 billion, i.e. a loss of 40% of the previously projected revenues for 2020.
History has proven that airports are long-term strategic assets and therefore, unlike airlines, offer significant resilience to crises. In this case however, many questions remain about the rebound in the airport industry and, while most of the deals which were to be undertaken in 2020 are likely to be postponed by one year, investors question the interest and the opportunities that the airport market could offer in the coming months and years in a world where other profiles of infrastructure assets such as energy infrastructure, in particular; renewable energies, telecommunications, hospitals, urban transportation infrastructures and others seem to be more attractive.
One can argue that the fundamental long-term driver of demand (GDP) is still valid and in place. As such, desire and propensity to travel may return to previous levels, however the current decline in GDP growth will hamper fundamental demand until the world’s economy is back in shape.
Source: IATA/ Tourism Economics, April 2020
The airport PPP transactions market has been hit by many crises before, the most important ones being those following the September 11, 2001 terrorist attacks and the 2008 financial recession. The number of airport M&A and PPP transactions fell dramatically, reaching a near-zero level for a year or more. How could we then dream of an airport PPP market bouncing back faster this time, when all air travel experts agree that the COVID19 crisis overshadows every that we have seen in the past decades?
Pricing assets for carrying out a privatization or any sale of airport infrastructure requires a minimum of business visibility which, obviously, the current situation does not offer either in the short or medium term. The majority of experts agree that domestic traffic will start to recover this year, while international travel is not expected to rebound before the end of the year or early 2021; but what will be the offer in terms of seat capacity and what will load factors look like?
A vast majority of airlines have liquidity shortages, and many are close to bankruptcy; only major airlines are likely to benefit from government support and many airlines have already initiated fleet reduction programs and/or have canceled aircraft orders.
Reductions in seat capacities and price increases seem to be inevitable.
In addition, no one yet knows what the impact of the cost of the health measures to be imposed on airlines will be and how COVID19 will change travel habits of tourists and business passengers.
A mountain of uncertainties even for the best air traffic forecasters!
In addition to question marks about the development of air travel, individual airports will have their own health measures that will be imposed and also, to show solidarity with the airlines by accepting terms of tariff regulation, which could prove less advantageous.
In such context, predicting the airport world of tomorrow requires a “crystal ball” which surely does not create a satisfactory environment for investors, whether private equity funds, longer-term infrastructure funds or airport operators, to privatization or concession operations.
Nevertheless, some funds and even operators continue to see in the instability an opportunity for high profit transactions.
Why not? Let’s be realistic. Even if the COVID19 crisis will cause serious and lasting economic setbacks in most countries or regions and worsening public debt levels and the need to revive the economy will lead governments to consider more privatizations program, it is very unlikely that they will rush to sell off their airports to private sector investors in the short term.
It also seems very unlikely that, in case some transactions could be carried out, the banks would commit, in the view of the latent uncertainty about the future air travel activity, to structured finance without recourse, or even corporate finance on assets under significant stress. Such operations would be mainly attractive to “deep pocket“ investors, keen to invest their liquidity and ready to invest 100% in equity and wait for better days to refinance, while traditional airport operators will rather focus on their in-house priorities to restore their activity , in particular, for those still predominantly owned by their government.
Extreme cautiousness of banks could also affect the sustainability of already privatized airports in liquidity shortage and lead weakened shareholders to call on new shareholders either to inject fresh cash through a capital increase or a subordinated debt mechanism or to acquire their shares, taking advantage of opportunities in a stressed market.
Impending Liquidity Crisis/Freeze?
Maybe a window for investors? It seems that the most reasonable conclusion is to recognize that until end of 2021, investment funds and operators will have to be patient and wait for a market recovery. The next year or two will be marked by a very limited number of new transactions, if not by transactions already committed, or by distressed assets in desperate need of liquidity.
I close on a positive note by saying that investors should stay optimistic vis à vis the airport infrastructure market and be confident in the sustainability of the airport business because past experience has shown that airport assets will remain profitable in the long term although, undoubtedly, the airport economic equilibrium will differ going forward.