Prospects for the airport privatization market look good. The confidence of state owners in the privatization of infrastructure has now been fully restored after a brief decline at the beginning of this decade.

Worldwide, according to figures published by Deutsche Bank, there are currently plans for the sale of around ten airports, seven of these within the next twelve months.¹ So there are twice as many airports up for sale as in the years 2000-2002. The list of privatizations already announced includes airports in such diverse places as Mexico City, Milan, Budapest, Mumbai, Delhi and Hong Kong. It is estimated that in the next five years alone, revenues from privatizations will total some 30 billion dollars.² The increasing number reflects the extremely positive experience gained by central and regional authorities since the very first airports were transferred to the private sector.

Since the first (partial) privatizations in the mid-80s, private operators and investors have demonstrated that they really are able to tap an airport's potential more effectively than the former public-sector owners.

The best example is Sydney. Before the airport was privatized, the authorities were planning to build a second airport on a greenfield site as the only way of coping with the forecast growth in passenger numbers from 27 million to 68 million in 2020. Since then, the now private owners have prepared a 20-year master plan to handle this growth merely by optimizing existing facilities. The lesson is that private enterprise promotes the provision of infrastructure efficiently and in a way conformant with needs, boosting competitiveness and opportunities for economic growth. This makes it understandable why the concessions and privatizations market is gathering speed again.

Airports' new popularity with investment funds

What is new is that supply is now faced by significantly higher demand. Airports are coveted investment objects, attracting interest from various quarters, from companies with varying motivations. There are several good reasons for this. Airports have shown themselves to be particularly resistant to crises in economically difficult times. They have kept their promise of high cashflows and stable yields.

Admittedly, airports are also subject to risks; crises such as 9/11 and SARS can interrupt their progress. But history has shown that after such setbacks they quickly return to their original growth trajectory.

Moreover, airports nowadays are more than just guarantors of mobility. So they have become interesting for financial investors, too – and competition for the most attractive airports has become tougher. As well as the established airport operators, more and more institutional investors also want a slice of the cake. So authorities putting airports out to tender have to choose the best strategic partner.

Public authorities make diverse demands: high revenues from the sale but also effective, growth-oriented management. A bidder's capital resources are important, in order to obtain the best possible price from an airport disposal; also important, though, is that the new owners will run the airport in the interests of the region and its inhabitants and guarantee long-term mobility and growth. An airport is, after all, always a local flag-bearer and source of prestige. "Airports are such vital centers of growth and development that they've become as important to a region as a city's central business district", says journalist Haya El Nasser, census and demographics reporter for USA Today.

This makes it all the more imperative to improve an airport's earnings situation, competitive position and long-term strategic alignment. That in turn calls for broadly based know-how, with technical, commercial and legal expertise. Only a company that continuously steps up an airport's efficiency, focuses on its core competencies, extends its facilities in line with demand, improves service quality and range, and attracts more airlines will be able to gain more customers and thus help to shape the airport's future success.

Airport optimization

But when it comes to optimizing an airport, there are no standard solutions. Many operators have tried – usually without success – to apply a once-proven concept to other airports. But each airport needs to be developed in line with its individual strengths and needs. This is where independent airport managers, i.e. those who do not operate from a home base, have an advantage. They tailor their concepts to each new airport rather than the other way round. And the aim of the independent operators is not to demonstrate size for the sake of size and to outdo the competition; instead it is to ensure sustained, long-term profitability.

The investment must pay off right from the start and also generate the required long-term returns. Independent managers and operators who are not tied down by the needs of home bases or constrained by standardized strategies can optimize each airport on a one-off basis.

Just how this works in practice is exemplified by the development of HOCHTIEF Airport's portfolio. Since it was founded in 1997, HTA has acquired stakes in the airports of Athens, Düsseldorf, Hamburg and Sydney, and also operates Tirana International Airport in the framework of a BOOT concession.

In all its activities, the company's aim – in cooperation with local partners and in consultation with both the relevant authorities and the private investors – is to tailor its concept carefully to the individual airport. It is this approach which distinguishes HTA from other market players. HTA has a broad spectrum of experience, because its individual privatization projects differ from one another as regards degree of maturity, size, location, type of contract and the history of the privatization. But they also have one thing in common: their successful development since the entry of HTA. Athens International Airport, for instance, is the greenfield project in the HTA portfolio – and a demonstration of the company's ability to develop a highly efficient airport from scratch: from the idea to commissioning and through to daily operational management.

HTA projects

Since Athens International was opened in 2001, it has won acknowledgement above all for its exceptional service, steadily rising passenger figures, turnover growth and its attractive non-aviation areas. HTA has supported the operating company, for instance in the field of real estate development and in establishing a retail park. The Olympic Games in 2004 represented an acid test for Athens International – and it came through with flying colors. Tribute to this came in 2005, when the airport received the ACI Best Airport Award in the category 10-15 million passengers. Also in 2005, Athens International received Flight International's Aerospace Industry Award for operational excellence during the Olympic Games and for creating an excellent operational and business environment.

Another success story is Düsseldorf Airport, the first airport in Germany to be partially privatized. HTA played a key role in procuring the financing for its new central terminal (needed following a major fire in 1996, before privatization). Another focus in Düsseldorf has been the development and introduction of a private enterprise corporate structure, organized according to business areas. HTA developed a master plan which identified substantial capacity reserves; this enabled the originally budgeted costs for Düsseldorf's expansion program to be halved. Currently, work is commencing on the construction of Düsseldorf Airport City, a business park in the immediate vicinity, where HTA has played an important role in planning and negotiations.

In Hamburg, whose airport is considered the most profitable in Germany, HTA is cooperating with the operating company to improve earnings and competitiveness. It also provided support in spinning off parts of the airport company into subsidiaries and in the re-alignment of the cargo activities.

In Sydney, HTA has opened up potential above all by changing the management structure. The aim is to make the airport fit for the future, with a significantly reduced cost base. One indicator is the number of employees: Sydney Airport has just eleven employees for every one million passengers. This proves the now more streamlined structure of the airport company. HTA has also developed a master plan for the next 20 years, creating a long-term perspective for this airport.

It does not matter precisely where existing potential is tapped – in the non-aviation area, in the reorganization of operational work sequences or within the framework of a master plan – what does matter is that this development ultimately benefits customers and the region. The fact that changes are recognized and acknowledged is impressively indicated by AETRA surveys on customer satisfaction: in 2005, Athens took second place in Europe in the category 5-15 million passengers, Düsseldorf first place in respect of services at the terminal, while Sydney was voted the world's fifth-best airport.

Getting the financing right

To be able to optimize airports for the benefit of all concerned, one essential always is appropriate financing. Up until recently, the side providing the capital was largely neglected, but in fact it plays a decisive role in privatization processes. Investors and banks primarily support attractive and assured, low-volatility investments. The airport manager, positioned between the relevant public authority and the investors, has to take the interests of both sides into account; at the same time he is equally dependent on both sides, because to be able to pay an appropriate price in the first place, he had to rely on private capital.

This makes it clear that a bidder that can offer a combination of expertise and capital clout has a distinct advantage. Neither know-how without the appropriate capital backing, nor financial strength without the requisite operational experience is enough by itself to win a bidding procedure.

The market demands an increasingly close union of know-how and capital. Dynamic developments necessitate innovative investment concepts and transaction structures. These are essential for continued success. Cooperation of this kind already exists, where for example funds have teamed up with operators. A more evolved form of such cooperation is the investment partnership that HTA concluded early in 2005 with three international investors in order to bundle airport expertise, financing know-how and capital clout. HTA transferred part of its portfolio to HTAC and sold this to the investors, whom it continues to serve as general manager of the partnership. This partnership brings a number of benefits:

With their combined competencies, HTA and HTAC are in a position to address projects and project financing of any size.

Both HTA and the investors pursue long-term goals, thus setting themselves apart from those whose interests are merely of the short-term financial kind. HTA's goal, as an internationally active airport manager, is sustained profitable growth, while its investment partners need to deploy the capital entrusted to them, such as pension contributions, safely and with stable yields over a substantial period of time.

This means that HTA/HTAC can handle airport privatizations – financing and operational management through strategic development – from a single source and without external partners. The authorities putting any such project out to tender benefit from the close cooperation between HTA and its HTAC partners and their consensus in matters of strategy.

It is partnerships between know-how and capital like HTAC which will establish themselves successfully in the marketplace, because only those who create scope for further growth can stay out in front. Those players who bundle expertise and financial clout will oust traditional airport operators from the market. And only those who know how to position airports for long-term profitability and stable returns will be able to run and develop an airport the way that public authorities would like to see.

Footnotes
1 Anthony Stafford, Clinton Wood (Deutsche Bank Asia Pacific): European Airports-Government ownership now departing. Deutsche Bank Industry Update, April 2005.
2 Ibid.