THE "NEW NORMAL" FOR AIRPORT INVESTMENT - PWC
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www.pwc.com/capitalprojectsandinfrastructure
The “new normal”
for airport investment
November 2013
What’s inside:
What is the “new normal”
for aviation?
p3
When airport projects
fly off course.
p6
Impact management:
creating and sustaining
value.
p 10
Has the trend line shifted?
The impact on airport
valuations.
p 12
The European airline
landscape is changing:
Can airports keep up?
p 19
Propensity to fly in
emerging economies:
Implications for
infrastructure investment.
p 27
Airport transactions:
Taking off around the globe.
p 35Airlines and airports today are
looking at an uncertain future.
As the global economy slowly emerges A clear theme of this updated do that, they’ll have to deepen their
from the impact of the global financial compendium is an exploration of the understanding of the aviation sector
crisis, aviation sector players face a key impacts of the “new normal” and on several key fronts—including what
new world where they can longer ideas for how best to cope with its government stakeholders want to get
count on cheap financing or cheap challenges. For example, you’ll read out of an airport; how to reduce costs
fuel. Equally challenging, it is difficult about how airlines are overhauling their and develop new business in an age of
to identify where the new sources business models to survive in a newly uncertainty and resource constraints;
of growth will be, whether it is the competitive and dynamic market— and how to assess the nuanced risks
BRICS, or further afield, in markets and what that means for airports and and opportunities arising in emerging
such as Turkey or Indonesia. thus investors. And you’ll see how markets’ aviation sectors.
new players arising in the aviation
This world of uncertainty isn’t just The good news is that the
infrastructure investment space may
a one-off experience that the sector opportunities are out there, despite
be better equipped for the game than
must get through before things can the worldwide economic downturn,
players of yesterday. The inputs of
return to previous trends. It’s the “new and that most airports are still making
growth are also examined, whether
normal”—here to stay, for a while at money. By understanding the new
it be in the risks associated with new
least. And instead of planning for a new landscape, investors can identify the
airport projects, or the increasing
phase of constant straight line growth, most promising of those opportunities,
clarity of the government’s approach to
sector players will need a strategy manage the risks, and shorten the
carbon and emissions.
for operating within this new set of odds of gaining the best returns.
conditions. Investors of all types will need to
Yours truly,
adjust their strategies to ink the
best deals in the “new normal”. To
Michael Burns
Partner, PwC
2 PwC | The “new normal” for airport investmentWhat is the “new
normal” for aviation?
Dr Andrew Sentance
As the major western economies With strong growth outside the West
emerge from the turmoil of the global pushing up energy and energy and
financial crisis, we find ourselves in a commodity prices, we are living in
strange and uncertain world. a world of relatively high inflation.
And volatility in financial markets
Growth rates are disappointing,
is continuing to add to uncertainty
relative to the experience before
about economic prospects and access
2007. In the UK, economic growth
to finance.
averaged 3% per annum from 1982
until 2007, more than doubling the These are all features of a “new
size of our economy in 25 years. The normal” economy which reflects
only comparable period of sustained three big changes in the economic
UK economic growth was the post-war environment from the world we were
“golden age” of the 1950s and 1960s. living in before the financial crisis.
But since the trough of the recession
The first change is in the financial
in 2009, UK economic growth has
system. From the 1980s until 2007,
averaged not much more than 1%
western economies enjoyed an era of
per annum.
easy money. The operation of a highly
Other major western economies are deregulated and liberalised global
also struggling. In the three years financial system provided consumers
2011–2013, US economic growth and businesses with relatively easy
is set to average under 2% and the access to finance and allowed a
euro area has struggled to register build-up of debt. Now, banks have
any growth at all. Emerging and become much more cautious and their
developing economies—by contrast— reluctance to lend is being reinforced
are performing much more strongly. by new regulatory requirements.
Even though growth has slowed down
The second change is affecting the
in some of the emerging superpowers
cost of imports. From the mid-1980s—
like China and India, the International
when oil prices fell sharply—until
Monetary Fund (IMF) is still projecting
the mid-2000s, western consumers
growth of 4.5–5% in the emerging and
benefited from an environment of
developing world this year and next.
cheap imports from the rest of the
world. Energy and other commodity
What is the "new normal" for aviation? 3A long period of strong consumer- technology, social and demographic
trends and growth opportunities
driven growth in the West has in Asia and other emerging market
come to an end. economies. While businesses need
to be cautious about over-extending
themselves in a volatile and uncertain
prices remained subdued until the A third change since 2007 has been in environment, it would be unwise to
mid-2000s. And the expansion of the the ability of governments and central totally neglect growth opportunities.
world economy to include new sources banks to underpin confidence in the At the same time, the adjustment
of low-cost production—including private sector. Before the financial to the “new normal” world implies
China and India—initially pushed crisis, governments and central further business restructuring—
down prices of many manufactured banks appeared to be able to support particularly in sectors heavily
products and provided a further boost growth, contain inflation and maintain dependent on consumer growth in the
to western living standards. orderly financial conditions. This UK and other western markets.
confidence has been severely dented So what does this mean for airlines
However, as these large emerging
by the experience of the financial and airports? What are the major
market economies have developed and
crisis and the difficulty we have had adjustments which need to take place
grown, the tables have turned. Strong
steering our way out of a period of in the global aviation industry if it
growth in Asia and elsewhere in the
economic turbulence. is to adapt successfully to this “new
emerging world is now exerting more
inflationary pressure across the world Three tailwinds which supported normal” world?
economy. The world of cheap imports growth for over two decades prior to The first major conclusion is that
has been eroded by successive waves of the financial crisis—easy money, cheap growth is likely to be relatively weak
energy and commodity inflation since imports and strong confidence— in the mature aviation markets of US
the mid-2000s. And strong growth in are no longer available to support and Europe and the major engine
China, India and elsewhere is pushing growth in western economies. The of growth will be the dynamism of
up their labour costs and adding UK and other western economies are Asia and other emerging markets.
further to import costs for the UK and going through a prolonged period This is already evident in the IATA
other western economies. of structural adjustment to the “new global air traffic data which show
normal” world of more restricted the US market up by just over 2% so
The current era of high and volatile
finance and higher and more volatile far this year, compared with growth
energy and commodity prices is
energy and commodity prices. And of nearly 6%–7% in the Asia-Pacific
unlikely to be a temporary phase.
this adjustment is likely to continue region, Africa and Latin America and
The ten largest economies in the
through the mid-2010s. double-digit growth in the Middle
Asia-Pacific region already account for
nearly 30% of world gross domestic A long period of strong consumer- East. European air traffic growth is
product (GDP)—making a larger driven growth in the West has come still benefiting from the development
contribution to the world economy to an end and export opportunities in of low-cost budget airlines, but as that
than either the United States or the emerging and developing economies segment matures, growth rates should
European Union. Over the first half are now more likely to be an engine slow here too.
of this century, Asia’s share of world of growth, which is why export- Long-haul air travel is also likely
GDP is likely to rise to around 50%.1 oriented economies like Germany and to be a beneficiary of this shift in
As living standards in Asia continue Sweden have performed well relative the centre of gravity of the global
to move closer to western levels rise to their European partners. Another economy. As western businesses seek
and population growth continues, aspect of the adjustment is that out new areas of opportunity in Asia
there will be continued upward indebted consumers and governments and other emerging markets, new
pressure on the demand for energy need to adjust their spending and business travel flows are likely to
and commodities, with new sources debt levels downwards to more develop. Trade between the EU and
of supply struggling to keep pace. manageable levels. China, for example, has doubled since
But even though the macroeconomic 2003—and flows of international
environment has become more trade and investment are major
1 See, for example, Asian Development Bank (2011):
difficult, there are still new drivers of longhaul air travel for
“Asia 2050: Realising the Asian Century” and PwC
(2006): “The world in 2050”. opportunities arising—driven by business purposes.
4 PwC | The “new normal” for airport investmentAirlines and airports need to reposition flew between the UK and the US in surge in oil prices may not be the
themselves to take advantage of the late 2000s reflected their high last. And as the global economy picks
these growth opportunities rather exposure to a specific traffic flow up again from the recent weakness
than relying on increasingly mature which was undermined by the global associated with the euro crisis, we
established markets. Those that are financial crisis. could easily see a renewed surge
unable or unwilling to do so are likely towards $150 per barrel in 2014 or 2015.
In addition to managing changing
to struggle and may not survive the
sources of growth and volatility, The “new normal” economy has a
next wave of industry consolidation.
airlines and airports need to be number of significant challenges
A second key feature of the “new able to adjust to a new era of high for airlines and airports—changing
normal” world for airlines and airports and volatile energy and commodity sources of growth, continued
is a continued climate of financial prices. In particular, the oil price is a volatility, and sustained high (and also
uncertainty and volatility. Air travel is key influence on airline profitability. volatile) energy prices. The industry
very sensitive to fluctuations in GDP When I joined British Airways in 1998, players who are most successful at
and financial shocks, as we saw in the the norm was a US$15 to US$20 per managing these challenges will be
global financial crisis, after 9/11 and in barrel oil price. Now, the oil price can those who recognise and adjust to
the late-1990s Asian crisis. In addition, move by US$15 to US$20 per barrel this “new normal” quickly. Those
the slim operating margins and high in a matter of weeks and the norm is who are waiting for a return to the
proportion of fixed costs in the airline US$100 to US$120 per barrel. “old normal” of easy money, cheap
industry mean that fluctuations in
demand can create very large swings
in profitability and cashflow. These
vulnerabilities are exacerbated by
the lags in the investment cycle.
The “new normal” economy has a
There are many examples of airlines number of significant challenges
and airports which have found that
investments planned in the upswing
for airlines and airports.
of the cycle come on stream just as
demand is turning down—creating In my view, this is not a temporary imports and robust confidence will
a double whammy for profitability phase. Since the mid-2000s, every have a long wait. Those conditions
and cashflow. time the emerging world and the are not set to return. And industry
major western economies have both players who think these pre-2007
There is no simple strategy for
been growing healthily, we have conditions will return risk not only
managing these vulnerabilities—but
seen a major surge in oil prices, often disappointing performance, but
there are three very useful lessons
associated with broader commodity ultimately extinction!
from past experience of managing
price pressure. The first surge in 2003-
economic and financial volatility in
2005 took the oil price from around About the author: Andrew Sentance is a Senior
the aviation industry. First, ensure that
US$20 to US$50–US$60 per barrel. Economic Adviser at PwC and is a former Chief
capacity expansion is cautious and Economist at British Airways (1998–2006) and a
The second surge in 2006-8 took the
gradual, reducing the risk of having to former member of the Bank of England Monetary
price up to nearly US$150 per barrel,
fill large numbers of new aircraft, or a Policy Committee (2006–2011). He is based in
before it fell back to US$40 in the London (andrew.w.sentance@uk.pwc.com,
large airport expansion, in very weak
depths of the financial crisis. And from +44 (0) 20 7213 2068).
demand conditions. Second, spread
2009–2011, the oil price surged again
risk among suppliers and business
to over US$100 per barrel, where Key contact for Economics: Tim Ogier, Partner,
partners by ensuring that contract
it has remained despite the recent PwC (tim.ogier@uk.pwc.com,
conditions can be varied in the event +44 (0) 20 780 45207).
weakening in the global economy.
of a downturn in demand or some
other negative financial shock. And, The IMF’s baseline scenario for the oil
third, try to ensure a diversification of market is for a further rise to US$200
revenue across a range of geographies per barrel by 20202. So the recent
and market sectors. Economic and
financial shocks normally have a
regional or sector-specific component.
The failure of Eos, Silverjet and 2 See IMF (2012): “The future of oil – Geology versus
other “business only” airlines which Technology”, Working Paper WP/12/109
What is the "new normal" for aviation? 5When airport projects
fly off course.
Anthony Morgan
Executive summary perhaps most significantly, airport
Any major infrastructure project is facilities are being built at a volatile
vulnerable to going over budget, time for air travel when it is difficult
running behind schedule, or to predict accurately an airport’s
experiencing other setbacks. needs 10 years or even five years into
Sometimes the issues can be resolved the future.
through negotiations, but often Unlike other capital projects, airport
they lead to disputes that require developments tend to be more
arbitration or result in litigation. politically sensitive and attract much
Airport projects unfortunately may fly more media attention. The media
off course more often than other types coverage can be primarily local,
of infrastructure construction because but may be international because
they are more complicated and involve an airport is a city’s gateway to the
more uncertainty. world, attracting people from across
the globe. If a project encounters
The stakes can be high: A US$400 serious setbacks, widespread media
million contract for construction of a attention can damage the airport’s
new runway, breakwater, and terminal reputation with potential travellers,
at Beirut-Rafic Hariri International retailers, construction and engineering
Airport ballooned by more than firms, and other interested parties.
US$100 million because of additional The negative coverage may even
costs the contractor claimed due to cost a city’s mayor his job in the
delays that put the project more than next election.
19 months behind schedule.
But airport owners and developers
Airport projects are especially complex can mitigate the risk of disruptions
because they involve a wide variety and disputes by making provisions for
of stakeholders and revenue sources. possible adjustments in their contracts,
Airport developments also are typically incorporating as much flexibility as
very large in scope and have a long possible into their designs, and closely
timeline from planning to completion, monitoring not only the construction
increasing the likelihood of design process, but also changes in the airline
and other changes along the way. And industry and the outlook for air travel.
6 PwC | The “new normal” for airport investmentWith any type of project, the For instance, technology allows
passengers now to check their baggage
greater the uncertainty about online, print out their own luggage
demand and other factors, the tags, and load their bags on a conveyor
belt when they arrive at the airport-
greater the risks will be. -all without even interacting with
an airline employee. As a result, an
expansion project may be well under
Multiple stakeholders, was nearing completion when local way before an airport owner sees that
revenue sources, and regulatory authorities said the it needs less physical space for people
smoke alarm and evacuation systems to queue up and check bags than in
regulations
didn’t meet code requirements, the past.
Building a bridge or parking garage
delaying its opening and requiring
is relatively straightforward, with That would then require a terminal
additional work.
only a few key stakeholders and a redesign in the middle of construction
single revenue source. In contrast, an to allocate some of that check-in
airport construction project typically The cloudy skies space to other uses, such as retail
entails a large variety of stakeholders With any type of project, the greater shops. Such modifications can result
and multiple revenue sources. When the uncertainty about demand in differences of opinion and disputes
an airport expands, it affects the and other factors, the greater the between owners and contractors over
operations and revenues of the airlines risks will be. But the volatility of how much the changes increased costs
flying into that facility, operators of air transportation is especially or delayed completion of the project.
the car parking and garages, retail intense today, which can make
shops in the terminals, nearby hotels, Even more costly and disruptive is a
the outlook particularly cloudy
and train lines to the airport, among major change in an airport’s roster
and add uncertainty to an already
others. In fact, a national airline may of airlines. If an airport is being
complex project.
be effectively shut down if its home expanded to serve as a hub with
airport isn’t operating. During the construction phase, many passengers transferring to other
airports may have to adapt to changes flights, it requires a more expensive,
That greater complexity means that in their mix of airlines and the size sophisticated baggage handling
the repercussions can be much more and shape of jet planes, technological system to transfer people’s luggage.
significant when a project runs into advances that can affect an airport’s Should the airline that’s intended to
trouble and the calculation of the exact operations, and an increase or decline transport people to other destinations
impact on the various stakeholders’ in the number of passengers flying in. go bankrupt or be acquired by a
revenue more difficult. When an competitor, the expansion project is
oil pipeline is late, it is relatively Moreover, a particular airport could
no longer appropriate and money was
straightforward to determine the suddenly face political instability and
wasted on such features as the transfer
impact on a refinery’s business. But see a sharp drop in tourism in the
baggage system.
with an airport expansion delay, the midst of a major expansion. We also
financial loss to airlines, retailers, food have seen how a major devastating
caterers, and parking facilities isn’t so event such as the terrorist bombings of Emerging markets:
clear-cut. How do you determine how the World Trade Center and Pentagon opportunities and risks
much revenue a souvenir shop lost in 2001 and the global financial crisis With air travel expected to grow
because of a delayed airport project? in 2008 can sharply change air travel fastest in emerging markets, airport
patterns and affect airport projects. construction will increasingly be
Airports also can encounter
Indeed, by the time an airport project concentrated in the Middle East,
problems if they were designed
is finished, the amount of air travel Asia, and other developing areas of
without taking into account all
and passengers’ needs may have the world. While that bodes well for
of the relevant regulations. In
changed so much that the number engineering and construction firms,
addition to international aviation
of security lines, parking capacity, or it also may mean more complications
standards, project managers need
other features of the new facilities are and disputes. Growth rates in
to be knowledgeable about national
no longer suitable. emerging markets are harder to predict
and local regulations. For example,
the new airport in Berlin, Germany,
When airport projects fly off course. 7than in mature economies, making it Anticipate change How to avoid disputes
that much more difficult to project air Scope change is the one sure To minimize the number of disputes,
travel demand in five or 10 years and thing to count on with an airport project managers need to look
design an airport of the proper size construction project. So from the outward, not just inward. They are
with the necessary features. outset, airport operators need to plan used to ensuring that the project
Moreover, airport operators and for the likelihood of needing to make comes in on budget, on scope, and on
contractors in emerging markets don’t adjustments to the project. schedule. But with airports, they need
have the experience in dealing with to closely monitor the bigger world of
Project owners and contractors should
risk and the sophisticated knowledge airlines and travel to make certain that
clearly set their expectations and
to figure out solutions to problems the project still matches market needs.
establish communication channels and
that their counterparts in Europe and change procedures. They need to agree Another way to avoid disputes is to
North America enjoy. They also don’t up front that there will most likely be expand in smaller increments. While
have the established relationships changes along the way and that they it might be more economical to design
that can often help the parties in an should be prepared to reassess the an airport expansion to meet expected
airport construction project avoid business case frequently to determine demand for 10 years down the road
problems and resolve disputes more whether the assumptions behind the rather than just five, that longer time
expeditiously. In addition, contractors project still hold true. Such advance horizon increases the risk of making
from developed economies will likely work can go a long way toward inaccurate passenger demand forecasts
find different construction standards preventing major disputes that end up and needing to modify designs during
and a looser legal framework in in arbitration or litigation. the construction process.
emerging countries.
It’s best to detail in contracts the Airport designers also are advised
Cultural differences will also come governance structure processes and to build in as much flexibility as
into play. For instance, project changes information requirements for dealing possible. If they use modular design,
may not be viewed as a normal part with changes and variations. The they can move or knock down walls
of the construction process in some airport owner shouldn’t be required to change configurations. Such a
inexperienced, emerging countries. to carry all the risk and pay for all simple adjustment could provide
As a result, they may not build change design changes. The contractor not more room for baggage claim, for
control procedures into contracts, only would make money from every instance, if passenger traffic suddenly
leading to disputes that can’t be change, but he also would hold the rises that space could be taken away
easily resolved. negotiating power. Instead, owners from another area, such as duty-free
Another potential risk factor in the should consider a “gain share/pain shops. Flexible design also could allow
Middle East is the desire to create a share” approach, which means sharing terminals to more quickly add parking
landmark design for an airport that with contractors both the risks of slots for planes or make modifications
has a sort of “wow” factor. Such unique cost overruns and schedule delays to accommodate larger or smaller
designs may draw attention, but they and the financial benefits of finishing planes.
also are more vulnerable to problems under budget. The project owner also
Project managers also should stay
because they’ve never been done might consider withholding part of
on top of the rapid advances in
before. Contractors may try to price the budget and establishing a capital
technology to avoid being stuck with
that risk into the contract, but if they reserve to cover the expected but
outdated systems when the airport
don’t get it right, they will try to get unknown changes, rather than add
project is completed. That’s made
their money back by contending that new charges later.
the design was flawed from the start
and the problems are the owner’s fault.
From the outset, airport operators
need to plan for the likelihood of
needing to make adjustments to
the project.
8
When airport proyects fly off course PwC | The “new normal” for airport investment
8It’s wise to include in the
contract the dispute resolution
mechanisms, such as mediation
or arbitration, which will be used
in case there’s a conflict over
changes and increased costs.
even more complex by the extensive It’s also wise to include in the contract Next steps
network of technologies within an the dispute resolution mechanisms, Airport operators and engineering
airport. So much technical change is such as mediation or arbitration, and construction firms will no doubt
possible during an airport construction which will be used in case there’s a face more, not less change in the air
project that the risks can be quite conflict over changes and increased travel business in the coming years.
high and the likelihood of disputes costs. That way, the parties spend any They also will be working increasingly
much greater than with other types expense and time on resolving the in less developed countries, where
of infrastructure projects. While a conflict rather than figuring out the disputes are more likely than in mature
toll road involves some technologies, procedure for settling it. markets. Consequently, they need
it’s much less complicated than to become more flexible and more
Owners and contractors also may want
an airport’s host of technologies, sophisticated to thrive in this volatile
to select in advance an adviser that can
including navigation, radar, baggage climate. Simply put, the better they
do a thorough quantitative analysis
management, communication, can anticipate and plan for changes
in case of a dispute. When a new
reservation, and check-in systems. in air travel demand and shifts within
airport was being built in Hong Kong,
Finally, it’s usually preferable to build it turned out that the specifications the airline industry, the more likely
the kind of airport structures that for the terminal’s roof tiles were they are to avoid major adjustments to
have been done successfully in the extremely tight, causing problems projects and thorny, costly disputes.
past. One-of-a-kind terminals may with the construction tolerances and
About the author: Anthony Morgan leads
be visually exciting and add to an requiring reworking. That resulted in
PwC’s construction dispute resolution practice
airport’s allure, but they also invite a a disruption claim against the owner in EMEA and regularly acts as an independent
multitude of potential problems and in which the contractor retained expert on the project management of large
disputes during construction. an adviser to conduct an extensive complex capital projects. The capital projects
analysis to quantify the impact of the team advises both owners and suppliers on
delivery, control and commercial issues that
tight tolerance on productivity and
Being prepared for costs and presented those findings to a
they face in implementing engineering and
construction projects.
possible disputes mediator for settlement of the claim.
Information is power. That’s why it’s
so important that both airport owners From a cost and time standpoint, Contact: Anthony Morgan (anthony.j.morgan@
it’s clearly better to resolve disputes uk.pwc.com, +44(0) 20 7213 4178)
and contractors invest in top-notch
information technology systems to outside the courtroom. Taking legal
collect data about a project that can action also can raise questions about
be used later to support their case in which nation’s laws apply if the
the event of a dispute. Such thorough, contractors, operators, or financing
easily accessible records can help entities are from outside the airport’s
resolve a conflict more swiftly. home country.
When airport projects fly off course. 9Impact management:
creating and
sustaining value.
Jonathan Grant and Susannah Fitzherbert-Brockholes
Environmental, social and information available to understand
economic impacts increasingly all these issues, their consequences
need to be measured, managed and and how to respond. This will be
communicated to a wide group of key to maintaining asset value and
stakeholders. Like many businesses future viability.
airports are feeling the pressure.
In an ever more uncertain and
Airports looking to maintain competitive world, airports are
competitive advantage must be able to already faced with a series of complex
demonstrate to investors, as well as the challenges to the way that they
communities in which they operate, currently operate. Additional pressure
a broader range of value measures. is being placed on the industry as
Not only do they need to create real the global community tries to meet
value in the form of a return on the challenge presented by climate
capital invested, but they also need to change. The aviation sector currently
demonstrate their value to the wider contributes approximately 2% of
economy and society. And that value total energy-related Greenhouse
includes managing and reducing Gas emissions. This may not sound
their environmental impact. Multiple like much but it represents over
compromises will have to be made over 660 million tonnes of CO2 annually
the coming decades between growth, and is rapidly growing (see Figure 1
the environment and communities. on next page).
The successful airports of the future
Despite only contributing to a small
will be able to make best use of the
proportion of these emissions, airports
are also expected to play their part
in controlling them. There are many
examples of airports leading the
In an ever more uncertain and way in emissions reductions and
operational efficiency. Such as the
competitive world, airports are Swedavia group of airports which is
already faced with a series of aiming to be zero carbon by 2020. The
International Air Transport Association
complex challenges to the way (IATA) has also set ambitious
that they currently operate. efficiency and emissions targets.
10 PwC | The “new normal” for airport investmentFigure 1: Traffic, emissions and intensity trends in the aviation sector 2001-11 impact climate change itself is likely
160
to have on its own operations. The
coming decades are expected to see
major shifts in the frequency, severity
140
and distribution of extreme events and
climate conditions. Many airports are
located in low-lying coastal regions
120 where sea level rise and increased
precipitation pose a real threat.
Failure to develop comprehensive
100 climate change risk management
strategies will impact the continuity
of business operations, profitability
80 and asset value. Basing investment
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
and risk management decisions on
RTK CO2 emissions CO2 intensity (CO2 /RTK past experiences only will increasingly
expose business to losses in the
Source: IATA WATS 2011, PwC analysis, 2001=100.
Source: IATA WATTS 2011, PwC analysis, 2001=100. future. Airports will need to look to
the future and understand what risks
Just last month at International Civil be increasingly critical. Airports are posed to their physical assets
Aviation Organization’s (ICAO) 38th contribute many benefits to the wider and ability to operate by disasters
Assembly meeting, governments economy and society, including and the changing climate. Climate
agreed to negotiate a global market access to markets, jobs, social Analytics help to identify and quantify
based approach to addressing progress and global connectivity. climate risk by translating complex
climate change by 2016. This was the As airports, particularly in mature scientific information for commercial
outcome that aviation business groups aviation markets, seek to maintain use by businesses in efforts to plan
were calling for. The alternative, a competitive advantage, their ability and manage assets, investments
patchwork of different regulations to communicate these benefits in and operations.
around the world, would be an comparison to their environmental It is clear that there are still many
administrative nightmare as well impacts will have a material influence challenges that lie ahead for the
as raise concerns about competitive on key business decisions. Getting this aviation sector in both achieving its
distortions for both airlines and hub message across is not always easy—the targets for a low carbon future and
airports. In the interim ICAO has difficulties faced by a number of large preparing itself for a changing climate.
reaffirmed its target of improving hub airports in securing additional In a future world where stakeholders
energy efficiency by 2% a year as well capacity demonstrate just what a are likely to increase their demands on
as formally endorsing the use of the challenge this can be. businesses to deliver value—for the
Clean Development Mechanism as an economy and society, and not at the
One way of demonstrating this is
approach to carbon offsetting. cost of the environment—being able
through Total Impact Measurement
With many hundreds, if not thousands, and Management (www.pwc.com/ to measure, manage and communicate
of new airports to be built in emerging totalimpact) which gives boards and this in a meaningful way will be
economies over the coming decades, investors better insight into the social, critical. Maintaining competitive
it is hard to see how they will be fiscal, environmental and economic advantage and a license to operate will
exempt from this pressure. Easy impacts of their activities. Being able depend upon it.
access to cheap finance is no longer to measure, understand and compare
a given and investors increasingly the trade-offs between different About the authors: Jonathan Grant and
expect companies of all types to strategies, means that decisions can be Susannah Fitzherbert-Brockholes are climate
change policy specialists at PwC. The
demonstrate that they are taking into made with more complete knowledge Sustainability & Climate Change team works
account the broader impact of business of the overall impact they will have with companies and policy makers helping to
decisions and managing material and a better understanding of which set the agenda, analyse the issues and develop
risks. New airports will be expected stakeholders will be effected by practical solutions.
to be designed to the highest possible which decisions.
standards: energy efficient, smart, safe Contacts: Jonathan Grant (jonathan.grant@
Finally, it is not just the impact that uk.pwc.com, +44 (0) 20 7804 0693) and
and resilient.
airports have on their surroundings Susannah Fitzherbert-Brockholes (susannah.
Consideration for the communities that is important. Airports will fitzherbert-brockholes@uk.pwc.com,
in which airports operate will also increasingly need to understand what +44 (0)20 7213 8302)
Impact management: creating and sustaining value. 11Has the trend line
shifted? The impact on
airport valuations.
Romil Radia, Constantinos Orphanides and Robert Behan
Executive summary European airports at or above 25
2013 has seen Manchester Airport times EV/EBITDA. Passenger traffic
Group’s (MAG) acquisition of Stansted growth forecasts at the time of these
Airport, followed by various European transactions indicated expectations
airport transactions, namely the sale were for continued traffic growth from
of Hochtief’s airport division to PSP an all-time high.
Investments. Both these transactions But unlike more traditional
demonstrate that there is still infrastructure assets, airports serve
strong interest in the airport sector. airlines as their primary clients and
Understanding individual airport value therefore share in the fortunes and
drivers and associated risks remains woes of a highly cyclical industry.
key to securing a good deal. Airport valuations are predicated on
Airports are a unique class of asset. expected future cash flows, which are
While they have historically enjoyed a in turn underpinned by passenger
moderate degree of cash flow certainty demand for travel.
they have also offered greater potential Despite the resilience of airport
for growth than more traditional cash flows in the previous economic
infrastructure assets. downturns, the onset of the
global financial crisis led to lower
passenger traffic and revised growth
Airports are a unique class of asset. expectations. Downside valuation
risks for airports became apparent.
These risks were subsequently borne
In the mid to late 2000s, against out by airport transaction multiples
a backdrop of greater availability observed since 2008 which, on
of credit and sustained passenger average, declined in-line with traffic
traffic growth, we saw enterprise growth expectations.
value to earnings before interest, tax, Today’s market is characterised by
depreciation and amortisation (“EV/ modest growth expectations and
EBITDA”) transaction multiples for significant short-term uncertainties.
12 PwC | The “new normal” for airport investmentAirport transactions continue to hit
the headlines.
For this reason, we do not for the increasing uncertainty in economic Airport investors
moment expect to see a return to EV/ outlook across the world makes Financial investors in airports such
EBITDA transaction multiples of more airports a relatively attractive asset as infrastructure or pension funds
than 20x for European airports last class to invest in. are interested in the stable cash flows
observed in the mid to late 2000s. airports offer. And they often invest
with their eye on the long term. Many
Instead, airport transactions in the Airports are uniquely
focus on the internal rate of return
past five years indicate that regional appealing assets
(IRR). They also try to enhance
airports with higher traffic growth Many investors see airports as
value by implementing optimal
transact within a range of between 14 relatively safe assets. That is because
financing structures.
to 18 times EV/EBITDA, and larger, airports typically offer stable cash
more mature airports transact within a flows with the potential to realise Trade buyers (such as other airport
range of 10 to 14 times EV/EBITDA. significant capital gains on disposal. operators) try to improve operational
Indeed, having at times enjoyed traffic efficiencies; for example, by increasing
However, once there is greater
growth rates in excess of two times commercial yields and by expanding
visibility around the strength and pace
gross domestic product (GDP) growth, the airport’s route network. We
of traffic recovery, nothing precludes
listed European airports, on average, are observing an increasing trend
observing the higher level of multiples
have continued to outperform the of airport operators forming
again in the medium term, if there are
FTSEurofirst 300 index over the last consortia with financial investors
asset specific reasons to justify this.
five years. (See figure 1.) with the aim of boosting value
This article explores the trends in UK through operational and financial
Even when air traffic falls during
passenger growth and the movement structuring improvements.
economic slowdowns, airports can still
in EV/EBITDA transaction multiples
deliver growing dividends to investors The key messages arising from this
for airports over time. It also highlights
through the deferral of operating paper are relevant and applicable to
airport valuation drivers and risks.
costs and rescheduling or reducing of both trade and financial investors.
Finally, we identify considerations
capital expenditure.
important for investors to take into
account when valuing airports.
Figure 1: Listed European airport share price performance
Airports: A very current Figure 1: Listed European Airport share price performance
150
valuation topic
Airport transactions continue to 125
hit the headlines: MAG acquired
Stansted concurrently with Australian 100
infrastructure fund IFM’s purchase of
a minority stake in MAG in January
Index
75
2013; Canadian pension fund PSP
acquired the airport portfolio from 50
Hochtief group in third quarter of
2013. More recently, the Spanish 25
public body Aena acquired Luton
Airport from Abertis in August 2013. 0
Jan May Sep Jan May Sep Feb Jun Oct Jan Jun Dec Mar Jun Nov Feb May Oct
Given the continuing Eurozone 08 08 08 09 09 09 10 10 10 11 11 11 12 12 12 13 13 13
crisis and the need for investments
Københavns Lufthavne A/S (CPSE:KBHL)
in key transport infrastructure in
Aeroports de Paris Societe Anonyme (ENXTPA:ADP)
the emerging markets, partial or full Flughafen Wien AG (WBAG:FLU)
privatisation of state-owned airports FTSEurofirst 300 Index—Index Value
may remain popular. Furthermore, the Fraport AG (XTRA:FRA)
Flughafen Zuerich AG (SWX:FHZN)
Listed European airport average
Source: Datastream and Capital IQ
Has the trend line shifted? The impact on airport valuations. 13UK traffic: Reversion Figure
Figure2:2:
UK airport
UK traffic
airport andand
traffic GDPGDP
growth
growth
to trend?
250 100%
90%
Tracking growth against
the trend 200 80%
Trough
Figure 2 shows UK terminal passenger Trough Trough 70%
Percentage growth
to trend to trend to trend
traffic (“pax”) since 1976, with ? years 60%
Pax (million)
150 4–5 years 5–6 years
the long-term passenger growth 50%
trend superimposed. 40%
100
30%
The graph shows that, up until 2008,
20%
it typically took four to six years for
50
traffic to return to the long-term 10%
passenger growth trend following a 0%
recession or other economic shock. 0 -10%
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Thanks to these patterns, it has
often become conventional wisdom UK terminal pax UK real GDP growth (%)
Long-term pax trend Pax % change
that traffic growth and associated
airport cash flows will revert to the Source: CAA, IMF, PwC analysis
Source: CAA, IMF, PwC analysis
long-term trend after a shock rather
than grow at a similar rate from a
lower base. Indeed, between the late Figure
Figure3:3:UK
UKairport traffic
airport andand
traffic European transactions
European transactions
1990s and mid 2000s, UK traffic saw 35.0x
significant growth above the long- 350
term trend. This was fuelled by a 30.0x
sustained period of economic growth, 300
greater availability of credit, and the 2006–2008 25.0x
EV/EBITDA multiple
Avg. 22.4x
emergence of low-cost carriers (LCCs).
Pax (million)
250 2003–2005 20.0x
Avg. 17.1x
2000–2002
Avg. 15.0x 2009–2011 15.0x
Growth expectations and 200 Avg. 14.2x 2012–2013
transactions Avg. 14.4x
10.0x
Figure 3 shows actual UK passenger
150
traffic alongside UK traffic 5.0x
expectations in 2007, the last full year
0.0x
prior to the global economic crisis. 100
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
In 2007, the expectation was that UK
UK terminal pax Transaction multiples for European airports
airport traffic would continue growing UK traffic expectations in 2007 (DfT) Average transaction multiple
from its 2007 peak at a rate broadly in Long-term pax trend
line with the long-term growth trend.
With hindsight it is clear that 2007 Source:
Source: CAA,
CAA, DfT
DIT projections, PwC analysis
projections, PwC analysis
Note:
Note: The
The graph
graph above
above combines European transaction
combines European transaction and
and UK
UK traffic
traffic data
data as European traffic information
passenger growth expectations did as European
dating traffic
back to 1976information d
ating back to 1976 was not available
was not available
not materialise.
Take a look at the EV/EBITDA
multiples between 2000 and 2013
for European airports in Figure 3. peaking in around 2007 and, on and expectations for future earnings
Whilst there are obvious challenges average, have fallen since. growth, with the simple relationship
in comparing transaction multiples being that the greater the growth
Perhaps unsurprisingly, passenger
between airports due to each airport’s potential, the higher the multiple.
numbers in the UK have seen a similar
specific operations and individual pattern. The upshot of this analysis In the case of airports a primary
growth potential, it is fair to say that, is relatively straightforward: at a driver of earnings growth potential is
on average, airport transactions basic level, transaction multiples passenger growth.
multiples rose in early to mid 2000s, are a function of current earnings
14 PwC | The “new normal” for airport investmentWhat influences an airport’s value?
Discounted cash flow analysis. While transaction multiples provide useful valuation benchmarks, typically the
discounted cash flow (“DCF”) valuation methodology is used as the primary approach to value airports. This is because
airports generally have long-term projections that offer cash flow visibility. The DCF approach is also more appropriate
for differentiating between an airport’s revenue streams (aviation, retail, real estate, external operations) and the various
regulatory mechanisms under which airports operate.
Airport transaction multiples. There are clear challenges in comparing transaction multiples between airports. This
is due to each airport’s specific operations and individual growth prospects. In addition to market factors and competitive
bidding conditions at sale, key factors impacting airport value and transaction multiples include the following:
• Maturity of the airport. Most large, mature airports • Catchment area penetration. The extent to which
have less potential to increase traffic than smaller an airport has penetrated its primary and secondary
regional airports and may trade at a lower multiple. For catchment areas affects its passenger growth potential.
a small regional airport starting from a low passenger
• Capacity constraints. Runway or terminal capacity
base, attracting two or three new airlines can transform
constraints tend to depress an airport’s traffic growth
the business—a prospect that is often reflected in
potential. Alleviating these constraints may require
transaction multiples. Conversely, larger airports
significant capital expenditure (capex) spend as well as
tend to have a broader airline base, so they are less
planning and regulatory approval.
vulnerable to customer concentration risk and volatility.
• Airport traffic mix. The make-up of an airport’s
• Potential for yield improvements. Airports
traffic—the mix of short—and long-haul as well as
with non-aeronautical revenues that are lower than
business, leisure, charter, and low-cost traffic—affects
those of comparable airports can boost their earnings
airport earnings. For example, traffic mix can strongly
by improving their retail offerings, increasing parking
determine an airport’s commercial revenue spend
fees, and making other similar enhancements. This
per passenger. Domestic passenger retail spending
potential for better earnings can also be reflected in
will tend to be lower than that of other leisure and
transaction multiples.
business travellers, due to shorter airside dwell time.
• Regulatory environment. Airports are typically Also, business traffic will likely stay steady during an
subject to regulation when regulators see them as economic slowdown, compared to other traffic types
holding substantial market power. Regulated airports’ such as charter.
risk/reward profile differs from those of unregulated
• Airline customer dependence. The degree of
airports—for example investors see regulated airports
airline concentration at an airport will impact value.
as more vulnerable to changes in regulatory regimes i.e.
If an airport is highly dependent on one or two key
regulatory risk). Airports are also subject to different
airline customers a reduction in aircraft capacity (due,
regulatory environments in different jurisdictions. In
for example, to reallocation of aircraft capacity across
the UK, for instance, regulated airports are allowed
an airline’s network or airline bankruptcy) will have a
to earn a return on their regulated asset base (RAB).
material impact on the airport. Further, airports typically
RAB is therefore a key valuation metric, and the market
have to renegotiate tariff increases on a frequent basis
places significant emphasis on enterprise value to RAB
with their main carriers and single airline dominance at
multiples in assessing the value of regulated airports.
an airport will impact negotiating power.
Given the number of circumstances affecting an airport’s value,
investors need to carefully assess airports’ comparability and
adjust transaction multiples where appropriate.
Has the trend line shifted? The impact on airport valuations. 15Back in 2006–2008, observers However, caution should be exercised: Where do we go from here?
expected long-term passenger traffic Based on the latest data released in An improving picture is slowly
to keep growing at the rates seen in October 2013, IMF revised its global developing for the advanced
the immediate preceding years rather and Eurozone GDP forecast down by economies, albeit from lower
than revert to the long-term trend. around 1% from the first half of 2012, expectations than the first half of
Put another way, they anticipated a whilst UK forecast growth remains 2012. But emerging economies like
one-off upward shift in the long-term unchanged. Therefore some downside India, Indonesia, Turkey, South Africa
traffic trend. risk to the sustainability of future and Brazil have run into trouble as
traffic growth still remains. Indeed, capital has started to flow back to the
These expectations were reflected
smaller regional airports are even advanced economies. Moreover, the
in increasingly higher transaction
more vulnerable given the shift in the pace of European economic growth
multiples paid over that period. In
balance of power to low cost carriers remains uncertain and the impact of
effect, investors in airports were
who are increasingly mobile and can the Fed’s inevitable decision to taper
willing to pay high sums for the future
relocate their operations at short quantitative easing looms.
growth they anticipated in 2007. Once
notice. Cardiff Airport and Glasgow
investors realised that the expected After a period of generally
Prestwick Airport were re-nationalised
growth wasn’t going to materialise— disappointing growth in 2011 and
recently after failing to attract buyers.
and once credit markets tightened— 2012, the UK economy has shown
The key for these airports is to
transaction multiples declined. signs of recovery in the first half of
ensure there is a healthy balance in
Over the past year we have seen airline customer dependence such 2013. Consumer spending growth is
average transaction multiples stabilise that the traffic growth expectation projected to follow a slightly more
at around 14 to 14.5 times EV/EBITDA. is sustainable. optimistic UK GDP growth rate. But
The latest UK traffic data (to July again risks to growth remain weighted
Note: The transactions we are talking about here
2013) seems to suggest future terminal relate to European as well as UK airports. We
to the downside, due in particular to
passenger growth may follow the believe that the two airport markets are sufficiently the possibility that the current relative
revised long-term traffic trend.
developed and similar to draw consistent insights calm in the Eurozone may not last.
from the data.
Figure
Figure4:4:UK
UKairport traffic
airport and GDP growthto trend
traffic—reversion
350 40%
35%
300 30%
Percentage growth
25%
Pax (million)
250 20%
15%
200 10%
5%
150 0%
-5%
100 -10%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
UK terminal pax UK traffic expectations in 2013 (DfT)
Forecast UK traffic (GDP elasticity 2) UK traffic expectations in 2007 (DfT)
Forecast UK traffic (GDP elasticity 1.6) Long-term pax trend
Forecast UK traffic (GDP elasticity 1.2) UK GDP (historic and growth % forecast)
Pax growth (%)
Source: CAA, DfT, IMF, PwC analysis
Source: CAA, DfT, IMF, PwC analysis
16 PwC | The “new normal” for airport investmentThe speed at which traffic may return However, once there is greater
to the long term trend line hinges on visibility into the strength and pace
the pace of economic recovery. Figure of traffic recovery, nothing precludes
4 sets out current passenger number seeing this level of multiples in the
expectations for the UK aviation medium term if there are asset specific
market, but also projects a range of reasons to justify this. As can be seen in
potential passenger growth profiles Figure 3 airport transaction multiples
based on forecast UK GDP growth and are perhaps stabilising.
a range of income elasticities.
Given current market evidence, we
In Figure 1, we saw that in the would continue to expect higher
early 1980s and 1990s, it took four growth regional airports to transact
to six years for traffic to revert within a range of 14 to 18 times EV/
to the long-term trend after an EBITDA, and larger more mature
economic slowdown. airports in the range of 10 to 14 times
EV/EBITDA.
The patterns in Figure 4 suggest
that even in a high-growth scenario, There is certainly significant interest in
passenger numbers are unlikely to the airport assets coming up for sale,
revert to the trend line before and competitive tensions may increase
2022–2024. transaction multiples observed.
Given that the drop in UK passenger
About the authors: Constantinos Orphanides
traffic since 2007 has been markedly and Robert Behan are airport valuation
sharper than that observed in previous professionals at PwC. Romil Radia leads the
periods of economic recession, a ten PwC airport valuations team in London.
to twelve year period for reversion to
the long term trend does not appear Key contact for Valuations: Romil Radia, Partner,
unlikely. Indeed if one were to focus PwC, London (romil.radia@uk.pwc.com,
on lower passenger growth profiles, +44 (0)20 7804 7899).
it could be argued that the long-term
trend line is shifting downwards and
that the premise that traffic always
reverts to long term historical trends
must be questioned.
Looking at current growth
expectations and market uncertainties,
we do not expect to see a return to
the 20+ times transaction multiples
observed in the mid 2000s in the
short term.
Has the trend line shifted? The impact on airport valuations. 17You can also read
