A full recovery from September 11 has not been easy for the global aviation industry which has since been hit by an economic slowdown, war in Iraq, the outbreak of severe acute respiratory syndrome (SARS) and industrial action, all of which have added to a decrease in passenger levels. While airlines have been badly affected by these events, the resilience of airports in the face of falling passenger volumes has been surprising.

Most governments put privatisation, expansion and new airport development plans on hold post September 11, as a bleak outlook for the sector loomed. However, as airports have proved their financial stability under the most difficult circumstances, projects have moved back onto the table and the airport sector looks to be picking up again, albeit slowly and this summers' passenger figures (June and July 2003) have signalled the start of a potential recovery for the sector in general.

The future of privatisation

With governments under increasing pressure to cut back on infrastructure spending, there is every sign that privatisation of airports will remain in government interest. As one investment banker notes, "airports tend to attract private sector interest more than other infrastructure assets, this is owing to the natural monopoly that airports enjoy, the transparency that is essential in such transactions and the fact that it continues to be a growing sector, in which added capacity is always going to be taken up." Governments are also viewing airports more and more as a tool for economic growth, with many countries having successfully used their airports as nodes for surrounding development, and government's are increasingly looking to optimise airport operations.

Although it may be incorrect to say that lenders have not been more cautious of the aviation sector recently, it is evident from the success of the sector's two largest deals since then - the whole business securitisation of Aeroporta Di Roma in February this year and the acquisition of Sydney Airports Corporation by the Southern Cross consortium late last year - that lenders will always be interested in well-structured deals.

Insurance needs changed post-September 11, with airports forced to take on terrorism cover. The rush to take out such cover led to a lack of availability of insurance on reasonable terms in the market and, in many cases, governments had to provide support to bridge the gap. Most airports also had to increase their security facilities. While these factors have increased the costs of running an airport, many have placed increased emphasis on developing their non-aeronautical services, including retail, advertising and other ancillary facilities, such car parks and hotels. The market has developed an increased awareness of the potential in developing these non-aeronautical services and this has gone some way in offsetting negative perceptions around investing in airports as a result of increased insurance and security costs.

What is evident is that financing of new-build airports tends to be undertaken by development banks and multilaterals, mainly because these banks can offer good terms and commercial banks are understandably often weary of offering debt on cheap terms to airports that have no history of traffic. Development banks such as the European Investment Bank (EIB) and the International Finance Corporation (IFC) are generally able to private funding on cheaper terms for such projects and can afford to be more aggressive. The sector is still small in terms of deal flow, with not much more than a handful of deals closing each year on a global basis, meaning that not many commercial banks can afford to concentrate specifically on airport projects. However, over time, as the magnitude of lending opportunities increases, more and more banks are likely to get involved. There is evidence of a number of export credit agencies backing projects, supporting local operators that are expanding their influence to airport projects abroad.

According to one advisor in the industry, "there is no real black and white when it comes to how to go about privatising an airport and it is becoming more and more evident that a dominant financing model is unlikely to develop." Solutions are being developed to suit individual government objectives, be it an IPO, trade sale, build-operate-transfer concession or corporatisation.

For example, the objective of the Australian government in its privatisation effort was to raise proceeds from the sale of airports and this was achieved through 99-year concessions - although the airport is returned to public hands after 99 years, it is effectively a 100% sale. However, the vast majority of governments want to maintain some kind of control over these assets and the kind of structure opted for ultimately relates to the control needs of the government concerned. The regulatory framework in place in the country also has an affect on which type of model can be adopted effectively. Also, IPOs seem to make more sense for large capital city airports and BOT concessions tend to be more appropriate for new build airports.

Western Europe - hold the IPO

In Europe, the focus remains on privatisation, with talks continuing, but nothing likely to be finalised this year. Although an IPO has been decided for Amsterdam Airport Schiphol, when this will take place is still undecided. Citigroup is advising the Dutch government on the Schiphol privatisation, UBS is advising Schiphol while ABN Amro and Credit Suisse are to manage the share issue. The IPO is stalled following the link-up between Dutch carrier, KLM and Air France. Although agreements have been reached between the Dutch government and the merger partners to maintain the airport's important intercontinental network, it is not yet clear exactly what affect the link-up between these two major European carriers will have on traffic at the airport. In fact, the restructuring of the European airline industry generally, with a number of airlines investigating possible alliances, will have an effect on all European airports, whose strategies might well have to change for them to remain successful.

There is no real news on developments with regards to the privatisation of the two Milanese airports. Citigroup is advising the Italian government on this transaction. While plans for an IPO in 2002 were announced around two and a half years ago, these were set back by September 11 and other financing structures are now also being explored.

When the privatisation of the Portuguese airports will be finalised is also not certain. Novois, a group comprising ABN Amro, PricewaterhouseCoopers and local bank Banco Efifa, is advising the Portuguese government on its privatisation effort, which involves the privatisation of the Lisbon, Faro and Porto airports and a group of airports in Madeira and the Azores. It is also likely to include the construction of a new airport for Lisbon. The idea is that this will be done under a BOT concession. Ota, 40km outside of Lisbon, has been chosen as the preferred location for the new airport.

Shortlisted bidders are still waiting on the announcement of a preferred bidder to redevelop and run the Larnaca and Pafos international airports in Cyprus for a period of twenty years. Shortlisted bidders put forward best and final offers a year ago. Elections in the country are cited as one of the primary reasons for this delay and it is hoped that an announcement will be made within the next few weeks. The shortlisted bidders on this Eu344 million ($344 million) project are the Hermes consortium, which includes amongst others the AerRianta International and Bouygues, the Alterra consortium, led by Alterra partners and the Cyprus Airports Group, which includes Grupo Dragados and Joannou & Paraskevaides amongst others.

In 1999, London Luton airport raised £85 million ($142 million) to provide a new terminal, extra taxiways and aircraft parking facilities in what was the first public private partnership airport development. Sponsors TBI and Alterra partners, which operate the airport under a 30-year concession decided to refinance this debt in July. The growth in traffic at the airport has been above all expectations, mainly as a result in the massive growth in no-frills airlines and refinancing provided an opportunity to capitalise on this growth. Barclays Capital arranged the £90 million refinancing with KfW and other banks participating.

Eastern Europe: terminal velocity

Although there have not yet been any airport privatisations in Central and Eastern Europe, it is expected that this will be an area of activity in the next two to three years. Central and Eastern Europe, unlike Western Europe, is experiencing high growth rates in passenger traffic and needs to increase capacity significantly in order to cope with this growth. Although governments in the region have been looking into privatising airports, no deals are in the market.

However, two of the major airports in the region have closed financings this year to finance the construction of new passenger terminals to help provide much-needed capacity.

The first phase of Prague International airport was completed in 1992 to deal with 3.5 million passengers, but the airport is currently handling six million passengers and a new terminal is urgently needed. As such, Czech airport operator, Czech Sprava Letist, was granted a 25-year EIB CZK9 billion ($331.1 million) guarantee facility to finance the new terminal in April this year. In June, a five-year commercial bank guarantee was underwritten for the full CZK9 billion by mandated lead arrangers ABN Amro, Bank Austria Creditstalt and HSBC. A CZK1.5 billion bridge facility was made available in July to enable construction to begin. The deal is now in the syndication phase and commitments from interested banks are expected this month. Bovis Lend Lease is managing the project.

Warsaw Okecie International airport will also have a second passenger terminal through a project sponsored by the Polish Airports State Enterprise. Ferrovial, together with its local subsidiary Budimex, is the appointed EPC contractor. Financing is to come from a $215 million EIB guarantee facility with Bank Austria Creditanstalt and its local partner, Bank Przemyslowo-Handlowy providing a 15-year guarantee. The two banks are also arranging a $30 million revolver, which is for VAT purposes. As with Prague, syndication has been launched with commitments expected soon.

Latin America makes concessions

Latin America has embraced the BOT model and a number of airports in the region have been privatised in this manner. The Lima airport in Peru was privatised in 2001 when Lima Airport Partners, a consortium comprising Fraport and Alterra Partners, signed a 30-year concession. The first few years of the concession were funded through equity commitments but earlier this month a $125 million loan was finalised. The loan, for the construction of a new terminal at the airport, an upgrade to the existing terminal as well as the development of a retail centre, the Peru Plaza, and a hotel, is being provided by the Overseas Private Investment Corporation (OPIC) and KfW.

It is hoped that the financing of a new facility at Mariscal Sucre International airport just outside Quito in Ecuador will be finalised soon. In November 2002 Quiport, a consortium comprising Houston Airport Development Corporation, Airport Development Corporation (Canada), Aecon group and the Canadian Commercial Corporation, took over operation of the airport as part of a 35-year concession to build and operate the new Quito airport. The project involves the construction of a new international airport in Ecuador by 2007, enabling the country to move one of its two main airports out of the centre of Quito and therefore accommodate greater commercial air traffic and improve safety. The Overseas Private Investment Corporation (OPIC) announced in April its commitment of $200 million to the project but the financing has not yet been finalised. The Canadian and US export credit agencies, Export Development Canada and Ex-Im Bank are also linked to the project and final discussions to bring the project to a close are underway. The government of Ecuador has also expressed interest in issuing a concession to upgrade, maintain and operate its Simon Bolivar airport in Guayaquil under a 15-year concession.

One advisor notes that of airports that can be successfully project financed in Latin America, there is not much left to do. That is aside from Brazil, which has not undertaken any projects with the private sector. Although there has been talk of privatisation for many years, the last two years have not been easy for the country and airport privatisation has not been seen as a priority.

In the Caribbean, an Alterra Partners-led consortium took over the operation of Curacao International Airport in the Netherlands Antilles in August under a 30-year concession. The consortium has also obtained a $37 million loan facility for the design and construction of a new passenger terminal building and associated apron from DVB, which has brought in two local banks - AG and Maduro & Curiel Bank. Alterra's vision is to grow the airport beyond the current tourism dependant operation and establish Curacao as a leading Caribbean passenger hub.

US: don't mention the munis

Although some of the major airports in the US have undertaken some form of privatisation or have looked at various privatisation possibilities, the likelihood of there being any real shift in this direction for the country does not seem likely. Airport development in the US is typically financed through tax-exempt municipal bonds. These bonds are issued by not-for-profit airport companies to fund development and in essence carry a government guarantee, making raising finance a cheap and easy option that is difficult for other financing options to seriously compete with.

Asia-Pacific: return to Oz

In Australia, which embraced airport privatisation early on and has privatised virtually every airport in the country, a secondary market is developing. A number of refinancings having been completed this year, including the Northern Territory Airports refinancing, the Gold Coast Airport refinancing and Perth Airport refinancing, which is a natural progression for airports that have established a track-record and are now seeking better financing terms. New Zealand has also completed much of its privatisation efforts and as a result not much flow is expected.

Asia is the continent that market participants are looking to with anticipation, however, for the meantime, it is likely to be a lot more talk than action, with many plans still in the early stages. The biggest news to come out of the Asia this year is the announcement that Hong Kong's Chek Lap Kok airport is to be partly privatised next year in what could be one of Asia's biggest listings. It is believed that Merrill Lynch, Rothschild and UBS, have been appointed to advise to the government on the proposed IPO, which is expected to be launched in the third or fourth quarter of next year.

In September, the Indian government announced plans to privatise two of its biggest airports in New Delhi and Mumbai in a bid to upgrade them to world standards. The airports authority of India, which operates the country's 130 airports, will hold 26% of the privatised airports while retaining air traffic control and airport security services. This is not the first time that the government has announced such plans having launched international road shows previously. Indian press reports have stated that government gave a tentative timeframe of eight months, after cabinet approval was given in September, to shortlist the bidders.

The UK export credit agency ECGD is backing the upgrade and expansion of the Maldives' second largest airport, Gan International Airport. The ECA has provided an export credit guarantee on a £7 million loan from HSBC to provide finance towards the £12 billion contract, which has been awarded to British company Lagan International to construct a new terminal, enabling Boeing 706 aircraft to land directly at the airport.

And in Africa, the IPO of the Airports Company of South Africa, which operates the vast majority of the countries airports, including Johannesburg, Cape Town and Durban international airports, has been earmarked for next year.

Generally the market outlook for the airports sector is one of renewed interest with bankers and developers admitting to be actively pursuing new opportunities, despite the fact that the short-term outlook for the market - the next 12 to 24 months - is expected to remain difficult.