Airport Privatization Seventeenth ACI World Annual General Assembly Conference Bijan Vasigh, Ph.D. Professor College of Business Embry-Riddle Aeronautical University Daytona Brach, Fl 32114 bijan@avionconsult.com vasighb@erau.edu www.avionconsult.com
A Brief History of Privatization Objectives of Airport Privatization Airport Privatization Initial attempt Privatizations: Pros and Cons Policy Issues Regulatory Framework Airport Valuation Model Privatization Strategies Conclusion
A Brief History of Privatization Argentina, Brazil, Chile, Colombia, Mexico, and Peru: Efficiency gains, averaged 67% and output increased 34%. Privatization has brought a positive flow of funds. Reduced public debt, and increased tax revenues from private firms. Mexico: The waiting time for new telephone connection dropped from 890 to 30 days. Argentina: The number of phone lines increased from 3.1 million to 6.85 million. Bolivia: The share of rural towns connected to long-distance telephone service increased from 25 to 33 %. The government received $429 million of revenue.
Argentina: About150,000 workers lost their jobs (between 1987-1997). Mexico: About 50% of employees in privatized companies lost their jobs. Brazil: There was a reduction of more than 90,000 jobs from peak employment levels in privatized railways alone. Nicaragua: Privatization resulted in the loss of 15% of the labor force. Efficiency Gains Macroeconomic Concerns
Objectives of Airport Privatization Improve efficiency and service Complete the projects on a fast track Utilize private funding to design, build, and finance the airport facilities Minimize: government involvement in operations and maintenance public sector funding Modernize air- and land-side facility
Airports are gateways for trade and commerce generate significant economic and transportation benefits are catalysts for economic growth and improve the quality of life for travelers
Airport privatization The UK government conducted a public share offering of the former BAA, valuing the company at $2.5 billion (1987). BAA owned and operated 3 main London airports and 4 main Scottish airports: In 2006, Ferrovial acquired BAA, which then serving 141million passengers per year and valued at over $18 billion Source: JPMorgan
PRIVATIZATION: PROS AND CONS Arguments for privatization Cost savings: Greater efficiency of operations Capital infusion: Open up non traditional sources of capital Convert private airport into a tax-paying corporate entity Help increase the capacity of the airport system Liberate resources for other government expenditures
Arguments against privatization Would cause private monopolies Cross subsidization Higher aeronautical charges Cutback on unprofitable programs Without right incentives, private investor may not be as efficient and productive, adequate investments may not happen
Policy Issues and Concerns The effect on airlines Airports could raise their fees because they face only limited competition. Airline charges could be capped at historical rates plus an inflation factor. The effect on local governments Governments would benefit from adding airports to their local tax bases. Governments could retain all privatization proceeds. The effect on passengers Airlines may pass on the cost increases to passengers. The effect on the federal budget Access to tax-exempt debt represents significant cost savings for public airports.
Price Regulation Are airports subject to competition? Have airlines significant countervailing powers (varying degrees of veto power over airport capital programs)?
Privatization Strategies Full privatization Strategic partnerships Long-term lease agreement Build-own-operated (BOO) Build-own-operate-transfer (BOOT)
Examples: Major privatizations in Latin America Argentina Colombia- Barranquilla Cartagena Bolivia: three airports Dominican Republic: four airports Mexico (Southeast and Pacific Groups) Uruguay Punta Del Este Costa Rica, San Jose, Chile, Santiago Source: Unisys
Airport Valuation Estimation of revenue is a key element in establishing financial feasibility of a privatization proposal. Overly optimistic traffic forecasts generate overly optimistic forecasts of revenues to be derived from users. All risk elements need to be identified, measured and their impact assessed. V Airport + = n S (1 g )( p )(1 T t 1 t t t t= + k t 0 (1 ) t ) S ( f t + w t )
BUD Recent Privatization:2001-05 P/E RATIO LTN SYD NCL PEK ADR BRS AVG LTN BHD ADF ADR EMA AKL BRU CPH BHM HAM 35 30 25 20 15 10 5 0
Fraport The parent company of Germany s Frankfurt Airport, Fraport was privatized in 2001 though state and municipal governments still hold stakes. Fraport owns major portions of Hahn and Hanover airports in Germany, Lima airport in Peru, New Delhi airport in India, and one of the Mexican regional airport groups.
AENA AENA Although still government-owned, AENA operates commercially. It owns 47 airports in Spain and has ownership stakes and/or management contracts for 29 others in seven countries including several major airports in Colombia and a stake in one of four regional Mexican airport $2.9 billion revenue in 2005:
YVR Airport Services Ltd. Formed in 1994 18 airports in 7 countries 27 million passengers Over 720,000 aircraft movements Serving over 160 airlines US$400 million revenues under management US$1.2 billion assets under management
Conclusion Private sector participation preferred and possible Private airports may have direct access to capital markets Government should clarify policy and regulatory environment Not all airports are financially viable for privatization.
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