Governments loosen grip on EU airports

Date: 13/07/2000

By Renée Cordes

Whether they like it or not, Europeans are spending more and more time in airports.

The number of air passengers world-wide is increasing rapidly, especially on long-haul flights, and this trend is expected to continue over the next few years as wealthier consumers spend more on leisure activities. European travellers also often have to endure long waits in airport lounges because of delays to flights.

While individual airports can do little to combat these delays, which are largely a result of overcrowded skies and overburdened air traffic control systems, they are responsible for the level of service which passengers get when departing, arriving and transferring between flights.

Transport Commissioner Loyola de Palacio sees better airport service as a key aspect of her drive to bolster passengers' rights in the EU, as laid out in a report adopted by the full Commission last month.

The European division of Airports Council International has already begun working on a voluntary code aimed at improving standards of service. This, it says, would ideally include measures to cut down the time passengers have to wait to check in and pick up baggage; improved transport and access to terminals, especially for disabled passengers; and more training for staff in customer service.

But a handful of European airports have discovered a more efficient and direct route to boosting standards: loosening governments' grip on airports and privatising the company which manages the facility, either through a sale to strategic investors or through the stock market, or both.

Slowly but surely, the liberalisation of air travel in Europe is moving from the airlines to the airports themselves, and it is set to spread to air traffic services as well, much to the dismay of countries with strong trade union traditions such as France.

The British Airports Authority (BAA) was the first to capitalise on this development more than a decade ago and it has since evolved into the world's largest airport operator, largely as a result of international expansion. Earlier this month, the company won a ten-year contract to manage shops and restaurants at the two main terminals of Boston's Logan International Airport. BAA, which already owns a majority stake in the airport at Naples in Italy, also hopes to win the contract to manage New York City's Kennedy and LaGuardia airports until 2015. "Starting with BAA, airports have shown governments that they are not public utilities, but that they can be developed as businesses with various dimensions," said Michael McGhee, managing director of Credit Suisse First Boston's transport and logistics group in London.

Although it has taken a while for other airports to follow BAA's lead - by 1992, there was only one other privatised facility in the world - several others have followed suit in recent years, and the momentum is picking up.

The financial proceeds can be vast both for governments, following the initial sell-off to strategic investors who provide much-needed funds and management know-how, and for the airports, which can use the funds to expand their facilities.

Although only 5% of commercial airports are currently either managed or owned by private companies, the pace of privatisation is accelerating and experts predict that the majority of international airports could be out of government hands within ten years.

Half a dozen airports in Europe have already been privatised, while others such as Hamburg, Zurich and Rome are currently preparing for the transition. Amsterdam, Frankfurt and Brussels are also gearing up for initial public offerings (IPOs) in the near future.

Ironically, some of the airports which have supposedly been privatised are still largely under state control. This is because some governments have sought to retain a 'golden share' in the management company for themselves and limit foreign ownership of such firms to protect what they regard as a precious commodity in the name of protecting national security.

In BAA's case, the government's decision to ban any single entity from controlling more than 15% of the company is still being scrutinised by European Commission regulators, who opened legal proceedings against the UK last year.

Gradually, however, countries are waking up to the fact that privatisation makes good business sense. Some airport executives also argue that countries can regulate airports without retaining majority ownership.

In Copenhagen, the government still appoints most of the members of the management board, after company officials have checked to make sure that they are professional business people with the firm's interests uppermost in their minds.

The Danish government is planning to sell its majority stake in one of the first airport companies to be privatised, Copenhagen Airports - which owns and operates facilities in Copenhagen and Roskilde - possibly later this year. "That is the way ahead if airports are going to make big investments in the future," said Flemming Peterson, treasurer and head of investor relations at Copenhagen Airport. He added that once companies were freed from government control, they did not have to worry about being locked into the federal budget and would have the freedom to expand their commercial activities.

For many airports which have gone down the privatisation route, business development goes well beyond expanding facilities at home. Many such as BAA see opportunities for offering their services abroad as one of the key advantages of privatisation. After all, the air travel business is, almost by definition, international.

Others also see the chance of working with other privatised international companies as a way to expand business, as is the case with the Schiphol Group, which manages Amsterdam's Schiphol airport, and Flughafen Frankfurt/Main, which have been in talks since late last year about the possibility of combining their commercial activities.

The additional income from a sale to strategic investors or flotation on the stock market is an especially attractive option for airports which are still trying to find ways to offset the income they lost when intra-EU duty-free sales were abolished last July.

Aer Rianta, which owns and manages Ireland's three state-owned airports at Dublin, Cork and Shannon and estimates that it lost about €19 million in the second half of 1999 of because of lost revenue from duty free, believes an IPO is the only option for raising the funds it needs for an ambitious investment plan. The €625-million spending programme includes plans to double the capacity of the existing terminal capacity at Dublin, revamp Cork's entire terminal building and upgrade all the facilities at Shannon, where it opened a new terminal in March.

Although Dublin may raise the company's borrowing ceiling slightly, Aer Rianta still desperately needs additional sources of funds and can only raise a limited amount by raising airport fees. "We have a very serious shortage of capital to invest in our airports," said spokeswoman Siobhan Moore. "That is why we have a need for an IPO."

If Aer Rianta has its way, 49% of the company will soon be in private hands and shares could be sold to the public within the next three years. However, Dublin has signalled that it will only allow 25-35% of the firm to be privatised, with the government remaining the majority shareholder. This may come to haunt ministers further down the road, as it could be challenged by EU regulators, although there are no hard-and-fast rules governing golden shares in airports.

As is the case for any airport company, Aer Rianta also faces a difficult challenge to convince investors to hop on board by ensuring a favourable outlook for traffic growth, good returns on investment and clear regulations which allow for even higher returns in cases of outstanding performance. Airports vying for investors' attention will also have to demonstrate that they are both committed to focusing on their core business and willing to expand abroad.

But those whom the airports and airlines will ultimately have to please are the customers, who are increasingly demanding better service in the air and on the ground. "The only important thing with regard to an airport whether it is in public or private hands is the ability to provide excellent service and excellent value for money to air passengers," said British Airways spokesman Michael Blunt.

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