Ferrovial Aeropuertos Chief Executive Jorge Gil warned the global airport development community: "only time will tell" whether airports will continue to be seen as a low-risk asset. As new socioeconomical trends are impacting the airline business, airports are expected to provide improvements on the customer experience. But what makes airport development projects stand out from the crowd? We asked the experts to find out.
According to airport PPP project expert Dr Fethi Chebil, airports are a naturally attractive investment option because they offer
- diversified revenues through aeronautical and non-aeronautical revenues,
- substantial ROI compared to other investments, and
- integrated opportunities like F&B, car parking, retail, maintenance, etc., which allow flexible cashflow management, and more options to diversify business and to mitigate risk.
“Investors tend to view airports as essential infrastructure assets with the benefit of multiple underlying revenue streams to secure financings”, Seth Lehman, Senior Director, Global Infrastructure & Project Finance of Fitch Ratings, told us. “In Fitch’s view, airports that can manage to leverage and strike a balance between utilising internal cash flow, and tapping the capital markets are better positioned to maintain a stable financial profile.”
Investment into airport development has proven successful for many years now. Dr Chebil noted: “Based on Modalis Database, for any airport PPP transaction signed during the last 15 years, the traded EBITDA versus transaction is in average of +12%. Furthermore, based on the ACI economic brief at GAD World 2018, on average, any airport PPP transaction secured an average of 15,9% ROI.”
However, not all airport privatisation process leads to the bidding phase. Many would receive resistance from different players and some powerful stakeholders. Meanwhile, investors learned a lot from previous experiences. Hence, their decision to embark in an airport development project is becoming more sophisticated.
Rob Collins, Managing Partner, Head of North American Infrastructure of 3i Infrastructure, told us that “3i looks to invest in airport development projects that have alignment amongst stakeholders to create true partnership; have sensible risk allocation to ensure value; and provide multiple business plan levers to drive performance.”
For Lehman, forward-looking, fleshed-out proposals are the ones that grab the attention.
“Airports are a capital-intensive enterprise. As such, investors should pay close attention to both the size and scope of the long-term development needs”, Lehman explained. “We find that each airport has its own story and the development related risks tend to be unique when comparing one airport to the next. Fitch views more positively from a credit perspective an airport which has modern and well-maintained facilities, and a proactive approach to capital planning.”
He noted that expansion projects can be complicated, so “a well-phased capital programme” detailing the construction timeline and budget can help investors’ decision making and risk management.
However, Lehman warned: “Risks can develop when misjudged needs lead to inadequate growth and under-utilised new infrastructure. These circumstances can elevate credit risks and result in lower ratings. This was seen at multiple airports in the U.S. during the last recession and when a carrier ended their hubbing operations.”
Collins places a big emphasis on the customer experience at airports, but again, it’s all about the minute details.
“3i strives to provide a location in which customers enjoy the flight experience and, through investment across our portfolio, we have proven our willingness to invest in terminals to upgrade the customer experience”, Collins told us and added: “Balancing the risk properly and ensuring that the investor has reflected their risk allocation in their business plan helps to align these same parties over the longer term.”
Dr Chebil highlighted concerns expressed by investors about dealing with government agencies and regulators. He mentioned that "issues of concern include the uncertainty related to aleatory and arbitrary certification requirements and random, unstructured and non-transparent regulatory enforcement processes, the latter of which induces unforeseen costs and unwelcome distractions".
This has led to an ever-increasing number of investors successfully transferring the risk of regulatory compliance and safety to a new type of dedicated cost-effective company – the "airside integrator".
"Investors showed creativity and more sophisticated tools to mitigate risks, and this is good for business", Dr Chebil said.
Location, Lehman argued, is an important factor in how the airport will be developed.
“An airport focused on local traffic can assess the facility requirements based on regional demographic and economic characteristics. Hub airports with a large dependence on connecting traffic tend to focus development based on one or a specific set of carriers. As a result, the service levels will be a function of business decisions of airlines.”
This makes a supposedly low risk investment a larger hazard than it initially looked. Partnerships and airlines’ decisions are key.
“Investors are clearly aware of past situations where a number of U.S. airports had invested significant funds to build runways and terminal facilities in order to cater for hubbing services only to later lose their connecting operations and left with stranded investments”, Lehman said.
“Investors should pay close attention to the exposure to operational changes or financial difficulties in the airline industry, especially at secondary hubs or vulnerable markets. Mitigants to this risk depend on the strategic importance of the specific market to the airline or strong contractual terms under airline lease agreements.”
“The complexity and interdependence of these projects require all parties to buy into the model and have an aligned vision of what success will look like”, Collins reminded us.
So despite its attractiveness at face value, investing into airport development projects is still highly challenging. Clearly defined, preferably varied revenue streams, the potential of growth and more opportunities, and above all, partnerships that work are all key indicators that will signify to the investors whether the project will make it or not. But rules and regulations, political stability, and LCCs are, as always, key risks for investors, and according to Dr. Chebil, they will be still in the future.
Mark Morehouse, Managing Director, P3 Investment Banking, Oppenheimer & Co. Inc.:
"These projects are high-visibility and incredibly complex, so it really comes down to proper preparation and timing to ultimately lead to success. Preparation includes managing multiple stakeholders, ensuring you have a project champion in the administration, being able to tell a compelling investment story and hiring experienced advisors to manage the process. You really have to hit the timing just right. Several years ago, I worked on a project that was right on the cusp of closing when the financial crisis hit, and the project failed as a result."
