Asia Airports Think Big, Act Quick - DBS Bank

Asia Airports Think Big, Act Quick - DBS Bank

 DBS Asian Insights
  DBS Group Research • December 2018

                                       Asia Airports
                                        Think Big, Act Quick
Asia Airports Think Big, Act Quick - DBS Bank
DBS Asian Insights

Asia Airports
Think Big, Act Quick

Paul Yong, CFA
Equity Analyst
DBS (Singapore)

Marvin Khor
Equity Analyst
DBS Alliance

Namida Artispong
Equity Analyst
DBS (Thailand)

Produced by:
Asian Insights Office • DBS Group Research

Goh Chien Yen       Editor-in-Chief
Rachel Hui Ting Tan Editor
Martin Tacchi       Art Editor
Asia Airports Think Big, Act Quick - DBS Bank
DBS Asian Insights
                               SECTOR BRIEFING 69

04   Executive Summary

06   Asia Pacific, the fastest growing
     air-travel region
13   Bursting at the seams
19   Large investments needed over
     two decades
28   The increasing role of private
     capital in Asia’s airport
35   Fund-raising lessons
39   Asia’s most valuable airports
      Changi Airport Group
      Hong Kong International Airport
      Angkasa Pura I & II
      Seoul Incheon International Airport
59   Key Risks and Challenges
61   Investment cycle and share prices
67   Appendix
Asia Airports Think Big, Act Quick - DBS Bank
DBS Asian Insights

Executive Summary

Rising air travel leads to                growing middle class, rising propensity to travel and broadly improving global
  urgent need for more                   connectivity are setting the stage for air passenger volume in Asia to rise
   airport infrastructure                significantly over the coming decades. Besides the impending expansion of
                                         airline fleet (evidenced by burgeoning Boeing & Airbus order books), the other
                             critical component necessary to facilitate this growth is the expansion of key Asian airports.
                             Urgency is a mounting factor as the majority of Asia’s busiest airports are already operating
                             at above built-for capacity. Where possible, airport operators are aiming to enhance and
                             enlarge their available infrastructure, in addition to furnishing them with cutting-edge
                             technology and systems. Space constraints are also a common feature, leading to both
                             public and private efforts to find and develop new hub locations.

 Urgent need for more        The International Air Transportation Association (IATA) is forecasting passenger traffic in the
      airport capacity       Asia Pacific to grow at a 20-yr compound annual growth rate (CAGR) of 5.1% from 2016,
                             higher than the global rate of 3.8%, and to reach around 3,500m passengers (pax) in 2036.
                             By 2036, the Asia Pacific market will potentially add 2.2bn more passengers, accounting for
                             45% of global traffic. On average, that works out to be more than 100m more passengers
                             per year for the next two decades – requiring an increase in passenger throughput capacity
                             of 200m pax per annum.

                             While most of the region’s airports have expansions or a new airport planned, many of
                             these airports will still be operating above or at near capacity by the time the expansions are
                             complete, highlighting the need for continuous expansion and investment.

Bigger, better and more      Capital expenditure for airport construction has been rising, in particular for those aspiring
                 airports    to become hub airports, as best-in-class facilities will help draw airline and air passenger
                             customers to use them as connecting points. The potential to build ‘aerotropolises’
                             (airport cities), especially around newer and larger airport expansions, implies large
                             potential investment inflows for the respective geographical areas and leverage to procure
                             government support. Taking the weighted average cost per pax for proposed airports in
                             Asia of US$129.1 per pax multiplied by the c.4bn passenger handling capacity needed in
                             Asia in the next 2 decades, we derive an estimated total Asia’s airports. Given rising land
                             acquisition and construction costs over time, there is likely to be upside risk to this estimated
                             figure of US$516bn.

     A growing role for      While investment in airports in Asia were traditionally thought to be the domain of the
         private capital     public sector, the large investment required, as well as the allure of steady returns and
                             commercial revenue opportunities are attracting an increasing number of private capital
                             into the sector. The staggering investment needed to build airport infrastructure is strong
                             motivation for governments to turn to private capital as a supplementary, or even primary,
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                        means of funding such projects. Generally, there are three airport privatisation models,
                        1) full private ownership, 2) partial privatisation, and 3) long-term concessions. There are
                        more privatisation opportunities in markets like Japan, China, India, Indonesia, and the

Fund raising lessons    Two of ASEAN’s largest airport groups – Malaysia Airports Holdings Berhad and Airports of
   from Asia’s listed   Thailand - were among the earliest in Asia to tap the equity markets to fund their expansion
            airports    plans and both are now in a strong financial position to finance their own growth.
                        Meanwhile, much smaller airports like Samui Airport also managed to raise money from the
                        equity markets with a well-structured sale of concession to a listed fund, showing the way
                        for other small airports to do the same.

The home of billion-    The Asia Pacific region is home to some of the most valuable airports in the world. In fact,
      dollar airports   the largest pure play airport company in the world is Airports of Thailand, with a market
                        capitalisation of nearly US$28bn. Names such as Hong Kong International Airport, Seoul
                        Incheon International Airport and Changi Airport Group, which are among three of the
                        most profitable airports in Asia, are likely worth tens of billions of dollars as listed companies,
                        though Indonesia’s Angkasa Pura I & II groups would also be worth billions when we apply
                        the average PE of listed peer companies to their respective earnings.

                        The examples from airports under our coverage give clear evidence that capex-driven
                        declines in operator valuations are temporary in nature and present an opportunity for
                        investors to accumulate on the cheap for airports with growth potential, as throughput
                        growth is a far more critical share price driver in the long term.
DBS Asian Insights

Fastest growing air travel

        The Asia Pacific               ccording to the International Civil Aviation Organization (ICAO), air passenger
       is the largest air              traffic in the Asia Pacific region reached 1,485m pax in 2017, accounting for
 transportation market                 c.36.5% of overall passengers globally and growing by 10.8% y-o-y compared
            in the world               to 5.3% growth for the rest of the world in 2017. Asia Pacific’s share of air
                            passengers has risen from 27.7% in 2010 to 36.5% in 2017 and more than half the growth
                            of passenger traffic in 2017 was from Asia Pacific.
                            Global air passenger traffic (2010 to 2017)
                             4,500         Africa              Middle East
                             4,000         N. America          Latin America and Caribbean
                                                                                         1,206     1,340       1,485
                               500                  817     922      1,008     1,107
                                       2010      2011      2012      2013      2014      2015      2016        2017
                                                                                                    Source: ICAO, DBS Bank

                            In terms of absolute numbers, an average of nearly 100m passengers was added each year
                            between 2011 and 2015, while nearly 140m passengers on average were added each year
                            in 2016 and 2017.
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                        Growth of air passenger traffic in Asia Pacific (m)


                           105.9        105.1
                                                                 98.8         98.5

                           2011         2012        2013        2014          2015       2016           2017
                                                                                                  Source: ICAO, DBS Bank

The Asia Pacific will   IATA is forecasting passenger traffic in Asia Pacific to grow at a 20-yr CAGR of 5.1% from
 see 2.2bn more air     2016, which is higher than the global rate of 3.8%, to reach around 3,500m pax in 2036.
passengers by 2026      By 2036, the Asia Pacific market will add 2.2bn more passengers, accounting for 45% of
                        global traffic.

                        Growth of air passenger traffic by 2036

                              Series1     Series2    Series3     Series4      Series5   Series6       Series7
                                                    2016                                 2036E

                                                                                                  Source: IATA, DBS Bank
DBS Asian Insights

                           On average, that works out to be more than 100m more passengers per year for the next
                           two decades – requiring an increase in passenger throughput capacity of 200m pax per
                           annum. This forecast may be pessimistic given that the year-to-date Revenue Passenger
                           Kilometres (RPK) growth (August 2018) in the Asia Pacific was 9.5%, while passenger
                           growth in 2017 was 10.8%.
                           Growth of air passenger traffic in Asia Pacific (m)
                                                0      500   1,000 1,500 2,000 2,500 3,000 3,500 4,000

                                                      2016 pax                   2017-2036 pax
                           North America


                            Latin America

                              Middle East

                                                                                                              Source: IATA, DBS Bank

                           What are the drivers for air travel growth in Asia?
    Massive population     Asia has a total of 4.46bn people (60% of the global population) but only accounts for
 portends huge growth      36% of the total air passenger traffic numbers, suggesting there is still plenty of room for
       potential for the   civil aviation to grow in the region.
        aviation market
                           Asia is the world’s most populous region

                                                    Asia         Rest of world                            Growth
                              9,000        MIllion ppl                                                       8,513             8%
                              8,000                                                        7,767
                                                                                 7,357                                         7%
                              7,000                          6,520                                                             6%
                              6,000       5,714
                                                                                 60%      59%         59%         58%          2%
                              2,000                  61%     61%      61%
                              1,000                                                                                            1%
                                   -                                                                                           0%
                                          1995       2000    2005     2010       2015    2020F       2025F       2030F

                                                                                    Source:, DBS Bank estimates
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                         China (1.38bn), India (1.32bn) and ASEAN (634m) alone have a combined population of
                         3.33bn, or 45% of the global total. While population growth in China has slowed down,
                         there are signs that the government is trying to reverse this. Meanwhile, ASEAN and India’s
                         birth rates remain above the global average and will drive Asia’s population growth in the
                         next decade.
                         ASEAN & India’s birth rates are above global average

                                                         ASEAN (Indonesia, Singapore, Vietnam, Philippines)
                          10%                            India





                                    2000        2005        2010       2015        2020F          2025F           2030F
                                                                               Source:, DBS Bank estimates

  Rising income levels   Gross National Income (GNI) per capita in East Asia Pacific (excluding high income countries)
and a growing middle     grew to US$6,667 at a CAGR of 11% in 1995-2016, achieving above middle-class range
                 class   defined by the World Bank since 2010. This has driven rapid consumption growth, including
                         demand for air travel in the region.

                         Rising incomes in East Asia Pacific (excl. high income)

                         8,000     US$
                         7,000                                                                   Middle class

                                                                                         Source: World Bank, DBS Bank estimates
DBS Asian Insights

                     China’s growing middle class
                       100%                3%
                                           7%                     15%
                         70%                                                              Low (RMB 200,000)
                         20%              37%
                            0%                                                         Source: The Economist Intelligence Unit
                                          2015                    2030

                     With the growth of low cost carriers (LCCs) like Air Asia, Lion Air, Tigerair (now part of
                     Scoot), Jetstar and recently Vietjet, air travel in ASEAN has grown rapidly in the last decade.
                     LCC seat capacity quadrupled from 50.3m in 2007 to c.222.9m in 2016. In the same period,
                     ASEAN also saw a c.76% jump in international arrivals from 62m to 109m.

                     The fact that key aviation hubs in ASEAN are within five hours of flight from the major
                     markets of China, India and ASEAN itself has also helped the sector grow rapidly.

                     LCC seat capacity in ASEAN (2007 – 2016)

                      250     Million s





                              2007    2008     2009    2010     2011     2012    2013      2014        2015       2016
                                                                                                     Source: CAPA, DBS Bank
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The great tourism drive   As a result of its latent potential in terms of population base and the rapid rise in incomes,
                in Asia   the Asia Pacific region has been adding the most to global tourists in the last decade. This
                          trend is expected to continue.

                          Outbound tourists globally (1990 2016)

                                                Europe      Asia     Americas     Africa      Middle East
                                       Million Visitors

                           800                                                                                    308
                                                                                     250      263
                           600                                              205

                                       1990     1995      2000     2005    2010      2013    2014      2015      2016
                                                                                                    Source: UNWTO, DBS Bank

                          In terms of absolute numbers, Northeast and Southeast Asia have been driving the growth
                          of outbound (international) tourists in the region while South Asia has also been growing
                          rapidly from a low base – at a CAGR of over 15% from 2011-2016.

                          Tourism growth in Asia Pacific

                                       North-East Asia      ASEAN          Oceania          South Asia
                                    Million Visitors
                          300                                                                              15.3% CAGR
                                                                                                          5.9% CAGR

                          200                                                                             8% CAGR


                                                                                                          5.9% CAGR

                                      2011        2012       2013         2014       2015       2016

                                                                                                    Source: UNWTO, DBS Bank
DBS Asian Insights

                     Four of the five fastest growing markets, in terms of additional passengers per year, over the
                     forecast period will be from Asia. According to forecasts by IATA, China will replace the US
                     as the world’s largest aviation market by 2024. India will displace the UK for third place in
                     2025, while Indonesia and Japan will be ranked 5th and 7th respectively.

                     Fastest growing markets (2016 – 2036F)

                     Region                       Countries           New Passengers         Total Passengers

                     Asia                           China                921 million             1.5 billion

                                                     India               337 million            478 million

                                                  Indonesia              235 million            355 million

                                                    Turkey               119 million            196 million

                     North America              United States            401 million             1.1 billion

                                                                                                          Source: IATA
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Bursting at the seams

 3 of the top 5 busiest                he busiest airport in Asia in 2017 was the Beijing Capital International Airport,
 airports globally are in              also the second busiest in the world, handling nearly 96m passenger movements.
                    Asia               Meanwhile, Dubai International Airport (third busiest globally) and Tokyo Haneda
                                       Airport (fourth busiest globally) handled 88m and 85m passenger movements
                            respectively in 2017.

 Airports in Asia make      Among the 50 busiest airports globally, there were 10 from China, Hong Kong and Taiwan,
up 21 of the 50 busiest     five from the ASEAN region, and two each from Japan and India. Korea and the United
       airports globally    Arab Emirates (UAE) were also represented in the list. Notably, the combined passenger
                            throughput of these 21 airports grew by 6.9% y-o-y in 2017, exhibiting firm growth despite
                            the large base.

10 of the busiest cargo     Three of the five busiest cargo airports in the world reside in Asia, with Hong Kong in the
    airports are in Asia    number one spot and growing by 9.4% y-o-y in terms of tonnage handled to 5m tonnes
                            in 2017. This is followed by Shanghai Pudong Airport with 3.8m tonnes handled (+11.2%
                            y-o-y) and Seoul Incheon International Airport with 2.9m tonnes handled (+7.6% y-o-y).
                            E-commerce has been a key driver of growth and this is expected to continue.

                            Top 5 cargo airports in Asia in 2017

                                                           6.0                                                                          12.0%
                            Freight Handled - tonnes (m)

                                                           5.0                                                                          10.0%

                                                                                                                                                Y-o-Y growth

                                                           4.0                                                                          8.0%
                                                           3.0                                                2.7                       6.0%
                                                           2.0                                                                          4.0%

                                                           1.0                                                                          2.0%

                                                           0.0                                                                          0.0%
                                                                   Hong Kong     Shanghai         Seoul        Dubai     Tokyo Narita
                                                                 International    Pudong        Incheon    International   Airport
                                                                    Airport    International International    Airport
                                                                                  Airport        Airport

                                                                                                                                        Source: ACI
DBS Asian Insights

Busiest passenger airports in Asia and in the world – 2017

 Asia    World                      Airport                            Country                Pax Handled                 Growth
     1     2           Beijing Capital International Airport            China                  95,786,442                  1.5%
     2     3               Dubai International Airport           United Arab Emirates          88,242,099                   5.5%
     3     4                  Tokyo Haneda Airport                      Japan                  85,408,975                   6.5%
     4     8             Hong Kong International Airport         Hong Kong SAR, China          72,665,078                   3.4%
     5     9          Shanghai Pudong International Airport             China                  70,001,237                   6.1%
     6    13         Guangzhou Baiyun International Airport             China                  65,887,473                  10.3%
     7    16            Indira Gandhi International Airport              India                 63,451,503                  14.1%
     8    17           Soekarno-Hatta International Airport           Indonesia                63,015,620                   8.3%
     9    18                Singapore Changi Airport                  Singapore                62,219,573                   6.0%
  10      19           Seoul Incheon International Airport         Republic of Korea           62,157,834                   7.5%
  11      21                  Suvarnabhumi Airport                     Thailand                60,860,557                   8.9%
  12      23           Kuala Lumpur International Airport              Malaysia                58,558,440                  11.2%
  13      26         Chengdu Shuangliu International Airport            China                  49,801,693                   8.2%
  14      29         Chhatrapati Shivaji International Airport           India                 47,204,259                   5.7%
  15      34          Shenzhen Bao'an International Airport             China                  45,558,409                   8.5%
  16      35          Taiwan Taoyuan International Airport              Taiwan                 44,878,703                   6.1%
  17      37         Kunming Changshui International Airport            China                  44,729,736                   6.6%
  18      44            Ninoy Aquino International Airport            Philippines              42,022,484                   6.2%
  19      45         Shanghai Hongqiao International Airport            China                  41,884,059                   3.5%
  20      46           Xi'an Xianyang International Airport             China                  41,857,406                  13.2%
  21      49               Narita International Airport                 Japan                  40,631,193                   4.2%

                                                                                                      Source: Airports Council International

  China’s major airports           In 2017, seven of China’s top ten airports were handling passenger movements above their
   are highly congested            design capacity, while the rest were operating at or near capacity. Inevitably, this has led to
                                   congestion issues at China’s major airports, affecting an estimated 50% of air passengers
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                          Major airports in China – capacity vs demand (2017)

                             Hangzhou                            36                                Design Capacity
                             Chongqing                                  45                         2017 Pax
                                   Xi'an                                 50
                          SH Hongqiao                    20
                              Shenzhen                                45
                               Kunming                            38
                               Chengdu                                    50
                            Guangzhou                             36
                            SH Pudong                                        50
                                 Beijing                                                            82
                                           02         04          06              08           0            100             120
                                                                                                               Source: CAAC, CADAS

ASEAN airports are also   The main airports in Bangkok and Manila are already handling passenger movements above
         overcrowded      their designed capacity while Jakarta is already nearing full capacity despite having just
                          opened a new terminal.

                          Major airports in ASEAN – capacity vs demand (2017)

                            90                                               2017 Arrivals              2017 Capacity
                            80                                                                     75
                                      62              61 63             60                  59

                            50                                               45



                                    SingaporeJ        akarta           Bangkok         Kuala Lumpur               Manila

                                                                                       Source: Respective airports, DBS Bank estimates
DBS Asian Insights

     India’s airports will   Given the rapid growth of civil aviation in India, key airports in Mumbai and Chennai
soon face the strain too     are already at or near saturation. The Indian government also estimated that traffic in six
                             major hubs will reach capacity limit by 2019 covering nearly two-thirds of passengers in
                             India. An article by the Centre For Aviation CAPA) reports that based on projected growth
                             rates, most of the 40 largest airports in the country will exceed their design capacities
                             within the next decade.

                             India’s top 10 airports’ pax movements FY17/18*
                                          FY17/18 Pax (m)                                                                      Growth
                             70.0      65.7                                                                                                 30%

                             60.0                                                                                                           25%
                             30.0                       26.9
                                                                    20.4      19.9 18.2                                                     10%
                                                                                                    10.2    9.2         8.2     7.6         5%

                               0.0                                                                                                          0%









                                                                                         Source: Airports Authority of India, *April 2017 to March 2018

                             Terminal congestion impacts passenger satisfaction levels, while more severe congestion
                             would impact demand. While we mainly focus on passenger handling capacity for airports,
                             there are in fact many different aspects of airport capacity constraints to consider. These
                             include, but are not limited to, a) runway congestion, which leads to more delays and limits
                             the number of flights, b) security, customs and immigration clearance (e.g. some airports
                             take a much longer time to process travellers than others), c) airspace congestion, d) peak
                             or ‘popular’ landing/take-off times, e) other operations such as ground handling, fuelling,
                             check-in desks, boarding gates, baggage carousels etc. f) airport slot constraints and, g) a
                             shortage or lack of skilled personnel, which would impact safety or efficiency.

12 of the top 20 airports    Many of Asia’s major airports were already handling passenger movements above their
    were operating at or     design capacities in 2017. Guangzhou and Beijing airports for example, recorded passenger
 above capacity in 2017      throughputs that were 31m and 16m above their capacities respectively in 2017. The airport
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                          in Guangzhou opened its Terminal 2 in April 2018, raising its capacity to 80m a year while
                          a new airport in Beijing is slated for opening at the end of 2019. Most of these congested
                          airports do have plans for further expansion over the next decade.

                          It should be noted that based on projected growth rates, many of these airports will still be
                          operating above or near capacity by the time the expansions are complete, highlighting the
                          need for continuous expansion and investment.

                          Amongst Asia’s busiest airports, only the main airports in Singapore, Kuala Lumpur, Xi’an
                          and Seoul have some room for growth as they operated at 76%, 79%, 84% and 86% of
                          their design capacities respectively in 2017.

   A further 4 airports   In 2017, four of the top 20 airports handled passenger movements equal to 90% or more
were operating at 90%     of their designed capacity, namely Dubai, Tokyo Haneda, Indira Gandhi and Soekarno-
              or more     Hatta, with capacity expansion plans in place for Indira Gandhi (15m more passengers by
                          2021) and Soekarno-Hatta (37m more passengers by 2025). Dubai has long-term plans
                          to expand its second airport, Dubai World Central, to handle 160m passengers versus its
                          current capacity of 26m (by 2018).

Targeted expansion for    While the Kuala Lumpur International Airport (KLIA) as a whole is operating below full
                 KLIA     capacity, there is disparity between terminals as the headroom is only at the klia2 which
                          began operating in 2014. The KLIA main terminal is handling near its designed capacity of
                          30m pax in 2018, with notable points of congestion, such as at its arrival hall and contact
                          piers, and these congested points have received negative public feedback. Malaysia Airports
                          Holdings has set out plans for procedural optimisation and some infrastructure upgrades
                          to improve processing times, though the group expressed that more substantial expansion
                          plans may be implemented over the next five years.
DBS Asian Insights

Top 20 busiest airports in Asia (2017) – capacity, passenger movements and expansion plans

Rank      Region      Busiest airports in Asia     Pax (m)   Capacity     Deficit (m)         Additional Completion
                                                               (m)                             capacity    date
  1        China            Beijing Capital          96         80              -16              NA         NA
  2         UAE           Dubai International        88        90                                   NA                   NA
  3        Japan            Tokyo Haneda             85        90                                     8                2020
  4        China              Hong Kong              73        72                -1                  30                2027
  5        China           Shanghai Pudong           70        60               -10                  20                2020
  6        China          Guangzhou Baiyun           66        35               -31                  45                2018
  7        India             Indira Gandhi           63        70                                    15                2021
  8      Indonesia          Soekamo-Hatta            61        63                                    37                2025
  9     Singapore          Singapore Changi          62        82                                    50                2030
  10       Korea            Seoul Incheon            62        72                                    28                2030
  11     Thailand           Suvamabhumi              60        45               -15                  45                2020
  12     Malaysia           Kuala Lumpur             59        75                                    10                  NA
  13       China          Chengdu Shuangliu          50        50                                   NA                   NA
  14       India       Mumbai Chhatrapti Shivaji     47        45                -2                   5                2020
  15       China           Shenzhen Bao'an           46        45                -1                 NA                   NA
  16      Taiwan           Taiwan Taoyuan            45        35               -10                  10                2020
  17       China          Kunming Changsui           45        38                -7                  22                  NA
  18    Philippines      Manila Ninoy Aquino         42        30               -12                  45                2020
  19       China          Shanghai Hongqiao          42        40                -2                 NA                   NA
  20       China            Xi'an Xianyang           42        50                                    30                2022

                                                                        Source: Airports Authority of India, *April 2017 to March 2018
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Large investments needed over
two decades

                           ATA projects that air passenger traffic in the Asia Pacific region will increase by 2.2bn
                           pax over the next two decades. Assuming that 80% of that travel is within Asia Pacific
                           with the remaining being inbound or outbound flights from the region, this implies that
                           additional airport capacity totalling nearly 4bn passenger movements will be needed to
                         meet this demand.

    Mega airports will   We estimate that in 2017, the top 20 airports in Asia Pacific handled over 40% of total
     continue to drive   air passenger traffic in the region, while the top 50 airports handled over 70% of traffic.
growth in the region…    Each of these top 50 airports handled between 20m to over 95m passengers in 2017 (see
                         appendix for details) with an aggregate of 2bn passenger movements, which grew by 7.9%
                         y-o-y from 2016.

                         There were another 30 or more airports in Asia that handled over 10m passengers in
                         2017, which meant that the top 80 airports in the region handled about 85% of the total
                         passenger traffic, in our estimates.

                         We believe that mega airports, which we define as airports that handle over 10m passengers
                         a year, will continue to be the preferred and primary infrastructure to accommodate and
                         support Asia’s rapid air-travel growth.

   …supplemented by      At the same time, the proliferation of low-cost carriers has also seen an increasing clamour
    secondary airports   for low-cost terminals, which cost a fraction of mega airports (in terms of both absolute
                         price and cost per passenger handling capacity) to construct. Low-cost terminals are also
                         more suitable as secondary airports or for emerging cities keen to develop or boost their
                         local economy.

The low-cost dilemma     Smaller airports are cheaper to build on an absolute dollar basis and on a per pax handling
                         capacity basis, but at the same time, they struggle to be profitable. In contrast, larger
                         airports are expensive but often provide superior returns. (This is discussed in further detail
                         later in the report.) Besides the fact that major airports are often home to a large catchment
                         area and attract airlines as hubs, the reality that smaller airports often have low or negative
                         returns means that investment in airports is largely concentrated on larger projects and
                         should continue to be so.
DBS Asian Insights

                     We examine a number of proposed airport projects in Asia to extrapolate the amount of
                     investment needed in airport projects to meet the projected demand for air travel in the
                     region. These are airport projects that have been proposed or announced with details on
                     the expected project cost and passenger handling capacity.

                     These include, a) 16 new airport projects that have a proposed capital expenditure of over
                     US$2bn, with an aggregate project cost of US$117.3bn and total passenger handling capacity
                     of 887m, b) 19 airport expansion projects with an aggregate project cost of US$71.1bn and
                     total passenger handling capacity of 513.5m and, c) 21 new airport projects that have a
                     proposed capital expenditure of below US$2bn, with an aggregate project cost of US$10.6bn
                     and total passenger handling capacity of 140.6m. These are provided in detail subsequently.

                     Proposed airport projects in Asia
                              Project Type                Number             Capex (US$bn)            Capacity (m)

                        New Airports >US$2bn                 16                    117.3                    887.0
                          Airport Expansions                 19                    71.1                     513.5
                        New Airports US$2bn          Airport Expansions           New Airports
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229 new airports under    Based on data from CAPA, there were 229 new airport projects being planned in Asia as of
   construction in Asia   March 2018. This is more than the combined total of the rest of the world, underlining the
                          growth trajectory and potential of the sector.

                          Number of airports under construction (Mar 2018)

                          250         229



                                                     58           57
                            50                                                               29
                                      Asia         Europe       Africa       Latin        Middle         North
                                                                            America        East         America
                                                                                                   Source: CAPA, DBS Bank

                          Based on the same data from CAPA, these new airport projects were worth a total of
                          US$145bn, which was more than double that of Europe’s.
                          Investments in airports under construction – US$m



                            80,000                    67,499

                                                                  23,242       20,608
                            20,000                                                          7,731          3,662
                                            Asia     Europe       Latin        Africa      Middle        North
                                                                 America                    East        America
                                                                                                   Source: CAPA, DBS Bank
DBS Asian Insights

                                        The table below lists 16 major new airport projects that are under construction or that have been
                                        proposed. Of these, nine have an eventual passenger capacity of over 50m passengers while
                                        others leave room for further growth. For a list of smaller new airports, please see the appendix.

New airports (proposed and under construction) in Asia with project value over U$2bn

 Country            City                         Airport                    Investment      Initial         Estimated           Final           Estimated
                                                                              (US$bn)      Capacity        Completion          Capacity        Completion
                                                                                             (m)                                 (m)
     China         Beijing          Beijing Daxing International Airport       13.8           45               2019               75               2025

                  Chengdu          Chengdu Tianfu International Airport        12.0             40             2019                90              2040

                  Qingdao         Qingdao Jiaodong International Airport       5.2              35             2025                55              2045

                   Foshan                   New Foshan Airport                 5.1               -                -                30              2022

                   Dalian         Dalian Jinzhouwan International Airport      4.3              20             2018                20               NA

                   Hohhot                  New Hohhot Airport                  3.8               -                -                30              2018

                    Sanya                   New Sanya Airport                  14.5             38             2025                70              2045

                   Xiamen                Xiamen Xiangan Airport                2.1              45             2020                75              2040

     India         Mumbai           Navi Mumbai international Airport          2.4              10             2021                10              2032

                    Delhi                  Second Delhi Airport                2.3               5             2022                30              2032

  Indonesia      Tangerang               Soekarno-Hatta Airport II             6.8               -                -                70              2024

                     Bali                  Bali Buleleng Airport               3.7               -                -                32              2019

 Philippines       Manila                   New Manila Airport                 13.7              -                -               100              2025

                   Manila           Sangley Point International Airport        9.3              25             2021                75              2035

 South Korea         Jeju                    New Jeju Airport                  3.6               -                -                25              2025

  Vietnam      Ho Chi Minh City      Long Thanh International Airport          14.8             25             2025               100              2050

                                                                                         Source: Various new sources and Airport Authorities, DBS Bank estimates
DBS Asian Insights
                                                             SECTOR BRIEFING 69

Meanwhile, based on data from CAPA, there were 339 airport expansion projects being
planned in Asia as of March 2018. This compares with 208 projects in North America and
266 in Europe.
Number of airports under expansion (Mar 2018)


 300                                    266

 100                                                             66

            Asia           North       Europe       Latin       Africa         Middle
                          America                  America                      East
                                                                         Source: CAPA, DBS Bank

Based on the same data from CAPA, these expansion projects were worth a total of
US$171bn, higher than North America’s US$120bn and Europe’s US$105bn.

Investments in airport expansions – US$m

180,000        170,821

120,000                                  105,359
100,000                                                                        86,564
  40,000                                                        23,244
                   Asia      North       Europe      Latin      Africa        Middle
                            America                 America                    East
                                                                         Source: CAPA, DBS Bank
DBS Asian Insights

     Asia’s mega airports                The table below lists 19 major airport expansions that are ongoing or being planned. Of
          are undergoing                 these, six already have a passenger handling capacity of over 50m while four airports will
               expansions                eventually reach a capacity of 100m or more passengers per annum.

Major airport expansion projects (proposed and under construction) in Asia

                       Airport                             Investment    Current         New capacity            Addition             Estimated
                                                             (US$n)      capacity                                                    completion

            Hong Kong International Airport                   18.3          72                  102                   30                  2024

        Chongqing Jiangbei International Airport               4.7          70                   84                   14                  2025

         Shanghai Pudong International Airport                 3.0          60                   80                   20                  2019

      Guiyang Longdongbao International Airport                3.2          16                   32                  16.5                 2019

         Fuzhou Changle International Airport                  2.6          13                   29                   16

             Lanzhou Zhongchuan Airport                        2.6          10                   30                   20                  2020

        Guangzhou Baiyun International Airport                 2.1          35                   80                   45                  2018

      Haikou Hainan Meilan International Airport               0.1          23                   35                   12                  2020

     New Delhi Indira Gandhi International Airport             2.0          70                   85                   15                  2021

Mumbai Chhatrapati Shivaji Maharaj International Airport       2.0          47                   52                    5

      Jakarta Soekarno-Hatta International Airport             4.0          43                  100                   57                  2025

               Clark International Airport                     0.2           4                   12                    8                  2020

       Manila Ninoy Aquino International Airport               3.0          31                   72                   41                  2020

               Singapore Changi Airport                       10.0          82                  132                   50                  2030

                 Busan Gimhae Airport                          5.3          17                   38                   21                  2026

          Seoul Incheon International Airport                  3.5          72                  100                   28                  2020

      Bangkok Suvarnabhumi International Airport               2.6          45                   90                   45                  2020

                 Hanoi Noi Bai Airport                         0.5          15                   60                   45                  2030

           Tan Son Nhat International Airport                  1.3          25                   50                   25                  2025

                                                                                 Source: Various new sources and Airport Authorities, DBS Bank estimates
DBS Asian Insights
                                                                                               SECTOR BRIEFING 69

                  Airport expansion plans by region
                  North Asia
          China   In the 13th Five-Year-Plan (FYP) proposed by the People’s Republic of China (PRC)
(ex-HK, MO, TW)   government, China is targeting to have 260 civil airports by 2020. By the end of 2017,
                  there were 229 airports with licences in China but massive airport construction plans
                  are still on the way. In 2016, China invested a total amount of RMB66bn (c.US$9.5bn)
                  in airport development. To finance the construction and upgrade of civil airports, the
                  Chinese government introduced the Civil Aviation Development Fund collected from
                  passengers/cargo/airlines. The fund’s budget reached RMB13.3bn in 2017, as 20% of
                  total investment. Local governments also issued bonds to support airport projects. Huge
                  bank loans made up for the rest.

                  No. of civil airports in China (2006-2020)





















                                                                                             Source: Wind, 13th FYP, DBS Bank’s estimates

    Hong Kong     As part of the Hong Kong 2030+ Plan, the Hong Kong International Airport initiated the
                  construction of a triple-runway system in 2016, which is expected to be completed in 2023.
                  The project is a complex mixture of land reclamation, a new terminal and third runway.
                  It is estimated to cost around HK$141.5bn (c.US$18bn), funded by bonds (49%), airport
                  development fees charged to departing passengers (18%) and the airport itself (33%).

    South Korea   South Korea’s primary Incheon International Airport has undertaken progressive
                  expansion plans led by the government-held Incheon International Airport Corporation
                  (IIAC), with the latest Phase 4 set to be completed by 2023. Plans to partially privatise
                  (divesting stakes) IIAC were proposed as early as 2008 but met negative public response.
                  To accommodate rising levels of tourist arrivals, a second new Jeju airport has also been
                  proposed by the Ministry of Land, Infrastructure and Transport, with targeted investment
                  costs of US$3.6bn and completion by 2025.
DBS Asian Insights

                     Japan    Airport infrastructure is relatively mature in Japan with progressive expansions primarily
                              being undertaken at key connecting airports. Narita International Airport Corporation is
                              currently planning to add a third runway with a targeted completion by 2028 and expand
                              its LCC terminal’s (completed in 2015) handling capacity to 15m pax by 2021 from 7.5m
                              p.a., via increased lobby area and improved equipment. However, no investment costs
                              have been announced. The Fukuoka Airport HD Corporation also intends to explore a
                              LCC terminal after it commences operating the Fukuoka Airport in April 2019 as part of
                              its privatisation plans.

                              South Asia
                      India   The Indian government had announced plans to double the number of airports (from 100
                              to 200) with a total investment amount of US$60bn to meet the surging demand. The
                              Aviation Authority of India (AAI), the state-owned enterprise also planned to commence
                              the ‘mega projects of new terminals and buildings’ this year, as reported by The Economic
                              Times. The private sector will form the bulk of the investment.

                              West Asia
                     Turkey   Turkey is on track for first-phase completion and opening of the Istanbul Grand Airport,
                              slated to replace its current primary airport the Ataturk International Airport. Built by a
                              consortium of local developer and operators, the Istanbul Grand Airport will open with
                              an initial capacity of 90m pax p.a., though more funding will be required for further
                              expansion. Turkey is planning for it to be the largest airport in the world by 2028, capable
                              of serving 200m pax p.a. with a projected total investment cost of USD36.4bn.

                              Southeast Asia
                Indonesia     Airport development is part of the Indonesian government’s key strategies. According to
                              the Indonesia Investment Coordinating Board, the new government has nine priorities
                              in its agenda. One of the key programmes is to develop 15 new airports by 2019. The
                              crowded Soekarno- Hatta Airport serving the key Jakarta area has expansion plans of up
                              to US$6bn for capacity enlargement and air traffic management improvement to global
                              standards. There is potentially a new Soekarnao-Hatta Airport II in the coming years
                              as well. According to Bloomberg, only a small portion of funding will come from the
                              government, with the bulk committed by private investors, including those from China.

                 Malaysia     Malaysia Airports Holdings’ (MAHB) near-term focus is on improving the quality of airport
                              services and facilities, particularly to comply with the newly established Quality of Service
                              (QoS) benchmarks. While passenger volumes are still below capacity at the primary KLIA/
                              klia2 airports, there are acknowledged choke-points which will require expansion or
                              enhancements to improve passenger flow and comfort. The group is expected to require
                              an additional RM200-300m (USD50-70m) over 2-3 years in capex for the purpose of
                              quality improvement. However, capacity increases at other smaller international airports
                              will be required (Penang, Kota Kinabalu, Langkawi, Subang), which is estimated to need
                              up to RM400m (USD100m) in capex. MAHB largely intends to self-fund capex if feasible
DBS Asian Insights
                                                                           SECTOR BRIEFING 69

              as its Operating Agreement (OA) requires a larger revenue share rate if capex is borne by
              the government but amendments to the OA are expected to be finalised in the coming
              year after a review with the new federal government.

Philippines   In 2017 the ‘Build Build Build’ programme was released by the Philippines government.
              A Php8 trn (c.US$158bn) investment will be rolled out for the infrastructure program
              over the next five years including six airports as flagship projects. The Clark International
              Airport expansion is the first project of ‘Build Build Build’ programme, which will be
              funded mainly by the government and Official Development Assistance (ODA), likely from
              China and Japan, according to Forbes.

Singapore     Singapore Changi Airport is already working on its third runway and a fifth terminal
              is expected to be completed by 2030 as part of the ‘Changi East’ project. To fund the
              expansions, the Changi Airport Development Fund was set up in 2015, which collects
              from passengers, airlines and the Changi Airport Group. The Singapore government has
              also committed S$9bn to the project via the fund.

  Thailand    Airport of Thailand (AOT) is undertaking the Phase 2 expansion of its key Bangkok
              Suvarnabhumi airport to double capacity to 90m pax p.a. by 2021, involving investment
              of up to Bt125bn (US$3.8bn). Initial plans for secondary airports at Chiangmai and Phuket
              have also been proposed with tentative capex of Bt120bn for both.

  Vietnam     The Vietnamese government, via its Master Plan to 2020, is planning to upgrade and
              expand most of the 23 existing airports in the country as well as potential new airports,
              with a projected budget of up to US$13.4bn. These projects will be funded by a mix of
              government budget, domestic and foreign investment as well as overseas development
              aid, according to the Civil Aviation Administration of Vietnam.
DBS Asian Insights

The increasing role of private
capital in Asia’s airport

                                           hile investment in airports in Asia has traditionally been thought of as
                                           the domain of the public sector, the large investment required, as well
                                           as the allure of steady returns and commercial revenue opportunities, is
                                           attracting more private capital into the sector.

                           The staggering investment needed to build airport infrastructure is a strong motivation
                           for governments to turn to private capital as a supplementary, or even primary, means of
                           funding such projects.

                           In addition to leveraging on private capital to reduce the funding burden on governments,
                           airport privatisation can also help to increase efficiency, both operationally and financially,
                           and improve customer satisfaction. It can also help promote local trade and tourism while
                           supporting local economic growth. Other benefits would also include the creation of
                           a more dynamic labour force as well as airport operations that are more responsive to
                           market changes.

                           Generally, there are three airport privatisation models, 1) full private ownership, 2) partial
                           privatisation and, 3) long term concessions:

  Full private ownership   This includes airports that the government has fully sold or transferred ownership of to
                           the private sector. A good example of this is in Australia, where airport leases for 50 years
                           with an option for an additional 49 years were sold to the private sector. In 1997, Phase
                           1 of Australia’s Airport Privatisation Program, which included Brisbane, Melbourne and
                           Perth was completed, which raised proceeds of A$3.3bn with direct cost of sales of less
                           than 5%. This helped to substantially lower the government’s financial burden.

                           A much rarer example of a fully private owned airport in Asia, not involving the government
                           at any stage, would be the Samui Airport which was conceptualised, developed and
                           funded solely by Bangkok Airways.
DBS Asian Insights
                                                                                            SECTOR BRIEFING 69

   Partial privatisation   The best known and a common example of this in Asia would include airports (or airport
                           groups) that are publicly listed, where the government retains a majority or substantial
                           stake with public and institutional shareholders as minority owners. This would include
                           Airports of Thailand, Malaysia Airport Holdings Berhad, Beijing Capital International
                           Airport, and the airports in Shanghai, Guangzhou and Shenzhen. Undoubtedly, the
                           access to private capital and corporate debt has helped these airports fund their rapid
                           development over the years.

                           With many governments concerned about giving up control over key public facilities,
                           public-private partnerships (PPP) are also popular in Asia as a means of funding airport
                           investments. Partial stakes maintained by the government ensure that they have a certain
                           degree of control and influence, while managing public perception. For example, India’s
                           government has developed new airports or modernised existing airports on a PPP basis in
                           Delhi, Mumbai and Hyderabad.

Long term concessions      In a bid to raise money, improve efficiencies, promote the growth of the airport sector,
                           or all of the above, some governments in Asia are now exploring the sale of long-term
                           concessions to the private sector. In 2011, Japan’s Ministry of Land, Infrastructure,
                           Transport and Tourism announced that it would privatise all 19 national airports by 2020.
                           Transactions have picked up noticeably in recent years as 2020 approaches. For example,
                           on 1 April 2016, VINCI Airports (40%) and ORIX Corporation (40%) along with other
                           investors (20%) won a 44-year concession to operate Kansai International and Osaka
                           Itami airports for c.€2.1bn, of which an estimated 70% is debt-funded.

                           In some cases, the government remains the owner and is responsible for funding capital
                           expenditures but signs a management contract with a private operator for a limited
                           period (e.g. 10 to 20 years).

      Smaller airports     One key issue that stands out for the airport industry is that profitability and returns are
       struggle to be      highly skewed towards large or major airports, with many of the small airports being
           profitable      unprofitable. According to the Airports Council International (ACI), the global return on
                           invested capital in airports in 2016 was 7.3%, which was an improvement from 6.3%
                           achieved in 2015. However, in ACI’s 2015 Economics Report, it was reported that 69% of
                           airports globally were loss-making.

                           Generally speaking, smaller airports handling less than 1m passenger movements a year (which
                           makes up 80% of all airports globally) struggle to be profitable, given the intensive capital
                           requirements even for basic airports. A case study on Japanese airports (courtesy of Japan’s
                           Ministry of Land, Infrastructure, Transport and Tourism or MLIT) illustrates this point quite well:

                           Using 2016 financial data provided by the MLIT, we plot the revenue and EBITDA of
                           various airports under the MLIT in 2016. We excluded the four largest airports, i.e. Tokyo,
DBS Asian Insights

                             Shin- Chitose (Sapporo), Fukuoka and Naha, which all have revenues above 16bn yen and
                             positive EBITDA. A clear trend emerges – airports with higher revenue (driven by higher
                             passenger throughput) are more likely to be profitable than the smaller airports.

                             Revenue vs EBITDA for selected airports in Japan (2016)



                                            1,000                      Kumamoto
                                              500                                              Kagoshima
                                                         Tokushima           Komatsu
                           EBITDA Yen (m)

                                                      Miho     Kochi Takamatsu Hakodate
                                                  01      ,000    2,000    3,000   4,000 5,000                    6,000          7,000
                                             Misawa     Hyakuri Kitakyushu       Oita
                                                   Okadama              Niigata
                                             -500           Kushiro

                                            -1,000    Wakkanai

                                                                        Revenue Yen (m)
                                                                           Source: Ministry of Land, Infrastructure, Transport & Tourism (Japan)

                             Therefore, there is considerable difficulty in attracting private investments to smaller,
                             secondary airports.

      Portfolio bundling     One approach that governments are utilising to privatise smaller airports is to bundle
                             smaller airports into a portfolio of assets that also include larger, more attractive airports
                             to entice investors. A good example of this is happening in Japan, where five small airports
                             with less than 2m passenger movements (based on 2015 figures) are being bundled
                             with the Shin-Chitose (Sapporo) airport, which handles over 20m passengers a year, as a
                             ‘One Hokkaido’ package. Indeed, this has attracted a large number of interested bidders
                             internationally and domestically and could pave the way for Japan’s airport privatisation
                             program to blossom.
DBS Asian Insights
                                                                               SECTOR BRIEFING 69

        Passengers handled by ‘One Hokkaido’ airports in 2015

                       One Hokkaido                                                 2015 pax
                   Shin-Chitose (Sapporo)                                          20,461,531
                          Hakodate                                                  1,772,052
                         Asahikawa                                                  1,148,825
                        Memanbetsu                                                  1,088,195
                           Kushiro                                                   877,242
                           Obihiro                                                   605,703
                    Wakkanai Hokkaido                                                197,500
                                                       Source: Ministry of Land, Infrastructure, Transport & Tourism (Japan)

        The logic behind the bundling of smaller airports with larger ones, especially those within
        the same region, is that the smaller airports could benefit from the economies of scale
        (purchasing, administration and management expenses etc.), co-operation opportunities
        and the reinvestment of returns from the larger airports into the portfolio. In addition,
        the private sector would likely be more innovative, and financially motivated, to improve
        the operations of the small airports. The private sector may also be receptive to investing
        in smaller airports that could improve the value of their vested assets, such as nearby real
        estate or tourism related ventures.

        Privatisation opportunities in Asia
China   The funding structure of airports in China is mainly composed of government and self-raised
        capital. Part of the government capital is contributed by the Aviation Development Fund(
        民航发展建设基金)which is charged to passengers to support airport development
        country-wide. Meanwhile, the central and local governments will also allocate budget
        for funding of airports. Self-raised capital includes airport group funds and funding from
        other financing channels, such as debt and equity.
        Capital structure for China’s civil airports

                               Project capital                                           Financing capital
             Government capital              Non-govt capital                               Bank loan
                                                                                          Corporate bond
         Aviation Development Fund      Corporate self-owned fund
                                                                                          Equity funding
            Government financial

                                                                   Self-raised capital

                                                                                                             Source: CAAC
DBS Asian Insights

                     In 2012-2017, total airport fixed asset investments in China grew at a CAGR of 8.3%
                     and reached US$11.4bn. Nearly half of the investments came from the government
                     with the Aviation Development Fund contributing c.30%. The proportion of funds from
                     government capital declined from 67% in 2015 to 43% in 2017, while self-raised capital
                     share rose from 33% to 57%, or roughly US$6.5bn.

                     Airport fixed asset investments in China (US$bn)

                       12         Self-raised capital

                       10         Aviation development fund

                                                                        33%                        57%
                                                          40%                       50%
                        6        57%
                        4                                 28%                       17%            15%
                        2                                               37%
                                              31%         33%                       33%            28%
                                2012         2013         2014          2015        2016           2017
                                                                                               Source: Wind, CAAC

                     In 2016 the Civil Aviation Administration of China (CAAC) published an opinion paper
                     encouraging a further opening-up of airports to private capital. In September 2018,
                     CAAC announced the first batch of 28 airport projects to welcome private investment.
                     Among the 28 projects, 11 of them have already secured investors with eight airport
                     construction projects. Another 17 projects are still being promoted to private capital.
                     The total investment of these projects is US$16.8bn and includes both existing and new
                     projects. More projects are expected to be open to the private sector over time.

                     Status of China’s airport privatisation program

                     Type                                  Progress                 Projects        US$bn
                     Airport Construction       Indentified Private Investors          8              7.5
                                                        In promotion                   2              3.7
                     Airport Support            Indentified Private Investors          3              1.6
                                                        In promotion                  15               4
                                                            Total                     28             16.8

                                                                                                    Source: CAAC
DBS Asian Insights
                                                                            SECTOR BRIEFING 69

              In the long term, we can expect government participation in airport funding to be reduced
              as multi-source financing gains more ground. Equity funding, especially the PPP model is a
              preferred channel as it can help ease financial burden on local governments.

    Japan     In June 2018, Japan broadened the scope of its privatisation plans to cover all 97 airports
              across the country, which include 5 Class 1 airports (mainly for international air travel), 24
              Class 2 airports (mainly for domestic air transport), and 53 Class 3 local airports, as well
              as others used for defence and local governments.

              Of these, eight handled over 10m passengers in 2015, nine handled between 2m to 10m
              passengers, and a further 11 handled between 1m to 2m passengers, with 14 handling
              between 500,000 to 1m passengers. While it would be difficult to privatise all of the
              smaller airports, the bundling of small airports with a larger, more profitable airport like
              the ‘One Hokkaido’ package could pave the way for a significant number of Japan’s
              airports to be privatised.

              Having already completed several transactions and armed with a determination to push
              the privatisation plan through with a clear transaction framework and process, it is likely
              that a lot more transactions in Japan will be sealed in the next few years.

     India    Privatisation in the country has seen little progress since the Delhi and Mumbai airports
              transactions, with frequent
              changes in the legal framework, terms and conditions and even a change in the
              government, thereby delaying the country’s airport privatisation program. Recently, India’s
              government was reported to be looking at the privatisation of eight airports - Lucknow,
              Ahmedabad, Chennai, Jaipur, Kolkata, Guwahati and Pune. It was reported that the civil
              aviation ministry is currently having discussions on setting the framework for the potential
              bids of these airports. The government is keen to keep costs and passengers, as well as
              aircraft fees low but it would have to balance this with providing bidders from the sector
              an attractive enough return for them to be interested.

              It was reported by CAPA in August 2018 that the Ministry of Civil Aviation had proposed
              a new financial model for new airport development projects under the NextGen Airports
              For Bharat (NABH) Nirman scheme with the aim of attracting foreign investment to new
              airport projects such as the Jewar Noida International Airport, Bhogapuram Airport and
              New Pune International Airport. Some key highlights of the new financial model include
              a) extension of airport concession contracts from 30 to 40 years, b) airport tariffs to be
              determined by Maximum Blended Aeronautical Yield in terms of Indian Rupees (INR) per
              passenger, rather than capital expenditure.

Philippines   There have been several unsolicited proposals for airports in the country in 2018, and
              two have recently won Original Proponent Status (OPS). Firstly, a consortium of seven of
DBS Asian Insights

                            the Philippines’ top conglomerates, with Changi Airport acting as a technical consultant
                            (NAIA Consortium), confirmed in September 2018 that the Department of Transportation
                            had awarded it the OPS to rehabilitate, develop, operate and maintain the Ninoy Aquino
                            International Airport (NAIA). The project is said to be worth P102bn for a period of 15
                            years. In the same month, Aboitiz InfraCapital Inc (AIC) was granted OPS on its proposal
                            to operate the New Bohol International Airport, located in Panglao Island. New Bohol
                            Airport is projected to handle two million passengers per year and is intended to replace
                            the existing Tagbilaran Airport.

                            Once approved by the National Economic and Development Authority Board, the
                            unsolicited proposal will undergo a Swiss Challenge, where other private groups are
                            invited to make a competing offer, with the holder of the OPS having a right to match
                            the offer. Besides the two offers above, offers have been made by Mega7 Construction
                            Corp for Kalibo Airport for P12 bn, and by Chelsea Logistics Corp for Davao Airport for
                            P49bn. Meanwhile, the government is also accepting proposals for Iloilo, Laguindingan
                            and Bacolod airports.

                Indonesia   According to a presentation by PricewaterhouseCoopers PWC at the Global Airport
                            Development (GAD) Conference in Singapore in 2018, there are at least 200 airports
                            in Indonesia that need to be expanded to support economic growth and tourism
                            development and more investment is needed to support this. Currently, almost all of the
                            airports are owned and operated by the government, while 26 of the 27 busiest airports
                            are operated by Angkasa Pura I & II, which are Indonesian state-owned entities (SOEs).

                            The Ministry of Transport plans to build 10 new airports under PPP schemes, and some
                            airports that are already under consideration include Komodo, Kediri, Batam and Jayapura.
                            At the same time, a new mechanism called ‘Limited Concession Scheme’ has also been
                            developed, which is aimed towards improving the performance of existing infrastructure
                            by offering concessions to the private sector. This will also help funds for the government
                            or SOEs. Currently, Medan and Lombok airports are under consideration as part of this
                            plan. For privatisation to successfully take off in Indonesia, the rules of engagement need
                            to be clearly defined and streamlined, which will help attract the necessary private sector
                            funding to help Indonesia meet its airport infrastructure needs.
DBS Asian Insights
                                                                                        SECTOR BRIEFING 69

Fund raising lessons
                           Airports of Thailand’s early access to equity
                           funding helped raise its game
                           Airports of Thailand (AOT) became a public company in 2002 under the Corporatisation
                           Act B.E. 2542 with the Ministry of Finance (MOF) as the sole shareholder. Its paid-up
                           share capital was increased from Bt5.7bn to Bt10bn in 2003. A year later, it was listed on
                           the Stock Exchange of Thailand (SET) with a total registered capital of Bt14.3bn and the
                           MOF’s stake was reduced to 70%, but AOT remains a SOE because government agencies
                           have over 50% stake. Under SOE status, AOT must operate within government rules and
                           regulations. The decision-making process tends to be lengthy and AOT is less flexible than
                           private companies. However, being an SOE also has its advantages such as lower funding
                           costs and better access to funding with the government effectively acting as a guarantor.

IPO was mainly to fund     The main objective of AOT’s initial public offering (IPO) was to find another source to fund
the new Suvarnabhumi       the hefty Suvarnabhumi airport project Phase I (budget of Bt125bn) project, which was
        airport project    funded by equity capital (44%) and foreign loans borrowed in Japanese yen from overseas
                           financial institutions (56%). The new airport was targeted as Thailand’s new international
                           and domestic aviation hub catering for another 45m passengers p.a. Suvarnabhumi
                           Airport was officially opened on 15 Sep 2006.

                           Under government rules and regulations, AOT’s cash flows from operations cannot be
                           used for other purposes except for airport expansion. As AOT has no significant investment
                           in any airport expansion due to several delays since the Suvarnabhumi airport Phase I,
                           AOT was sitting on a pile of cash of Bt65.7bn as at end 3QFY18F. Therefore, the funding
                           source for its upcoming major capex cycle- the Suvarnabhumi airport expansion Phase II
                           (costing about Bt62.5bn) should be easily funded by its cash pile and perhaps some debt.

Increasing aeronautical    One way to defray expenses related to the upcoming airport expansion is to obtain
 service fees is another   additional revenue (further boosting internal operating cashflows) from hiking aeronautical
    potential source of    service fees such as parking, landing and passenger service charges. However, this
                 funding   requires quite a tedious process as fee hikes must be approved by both the Civil Aviation
                           Authority of Thailand and the Ministry of Transport. Such a hike was approved only once
                           in 2007 for AOT where international passenger service charge was raised by 40% to
                           Bt700/passenger and doubled to Bt100/passenger for domestic passengers. AOT expects
                           to seek an approval for another fee hike after the completion of the Suvarnabhumi airport
                           expansion Phase II expected in FY20F-FY21F.
DBS Asian Insights

                     AOT’s operating cashflow, net capex, and D/E ratio

                       Bt m
                     40,000                                                                                    100%


                          0                                                                                    0%
                                FY10      FY11      FY12     FY13      FY14     FY15      FY16     FY17
                                                                                              Source: Company, DBS Bank

                     Samui Airport Property Fund – a lesson for
                     secondary airports

                     Samui Airport was built in 1982 by Bangkok Airways, a private enterprise, and was the
                     7th busiest airport in Thailand in 2017, handling over 2.6m passengers. In November
                     2006, Bangkok Airways sold a 30-year concession of the key assets of Samui Airport,
                     including the land, runways, parking aprons, passenger terminal and other constructions
                     to Samui Airport Property Fund (SPF) which was listed on the Thai Stock Exchange and
                     raised over Bt5.5bn for Bangkok Airways. (Bangkok Airways held a 37.15% stake in the
                     fund upon IPO.)

                     SPF holds the leasehold rights to operate Samui Airport for 30 years (2006-2036) and has
                     sub-leased the airport back to the operator (Bangkok Airways) which gives SPF potential
                     upside with downside protection. That is, SPF’s revenue will be in line with the number
                     of passengers and aircrafts to and fro Samui Airport. Moreover, SPF has a minimum
                     guaranteed revenue of 6% of the fund size from the sponsor. All operating expenses and
                     capex are borne by the operator and the fund itself incurs annual-only fund expenses and
                     any increases in revenue would flow directly to the bottom line.

                     Samui Airport handled just over 1.4m passengers in 2006, the year SPF completed its IPO.
                     While it was certainly not very profitable at that time given its size, its owner still managed
                     to structure a transaction using its key airport assets that was well received by investors,
                     had a limited concession of 30 years and most importantly raised a significant amount of
                     money for the airport owner. This certainly could pave the way for many of the region’s
                     smaller or secondary airports on fund raising.
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