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From Government Management and Ownership to Professionally Managed and Publicly Traded Airport Organizations by Rafael Roberto Enriquez Andrade B.S., Civil Engineering Universidad Nacional Autonoma de Mexico (1982) Master in Business Administration Instituto Tecnologico Autonomo de Mexico (1986) Submitted to the Department of Civil and Environmental Engineering in Partial Fulfillment of the Requirements for the Degree of Master of Science in Transportation at the Massachusetts Institute of Technology June 2002 © 2002 Massachusetts Institute of Technology. All rights reserved. Signature of the Author ........ .................. ..................................... Department of Civil and Environmental Engineering May 10, 2002 Certified by............... .................... Amedeo Odoni T. Wilson Professor of Aeronautics and Astronautics and Civ and Environmental Engineering hesis Supervisor Accen td b ... .... ....................... p y Oral Buyukozturk MASSACHUSETS INSTITUTE Chairman, Departmental Committee of Graduate Studies OF TECHNOLOGY JUN 3 2002 3NPKER LIBRARIES From Government Management and Ownership to Professionally Managed and Publicly Traded Airport Organizations by Rafael Roberto Enriquez Andrade Submitted to the Department of Civil and Environmental Engineering on May 10, 2002 in Partial Fulfillment of the Requirements for the Degree of Master of Science in Transportation ABSTRACT As a result of the deregulation of the air transport industry in the United States and Europe, and the globalization of the world's economy, governments have being facing important challenges to meet the demands of a growing and changing air transport sector. The participation of private investors and private management in the ownership and operation of airports has become an important element in the effort to satisfy these demands. The flexibility, efficiency, and innovation capabilities provided by a privately managed airport organization are widely accepted. However, the airport privatization movement around the world has being struggling with the problem of resolving the natural conflict between the interests of private investors and those of the public at large. This conflict is exacerbated by the fact that airports, to a greater or lesser extent, are natural monopolies when it comes to services for originating and terminating passengers. Although there is no perfect substitute for a competitive environment, an effective approach is to design and implement an economic regulation mechanism that, on the one hand, makes it possible to achieve the advantages of a privately managed organization, and on the other, protects the public interest. A more democratic stockholders' structure, through a publicly traded and professionally managed organization, can also be very useful in this respect. This thesis begins by presenting a quite detailed overview of the airport privatization movement around the world. Then, it addresses the basic regulatory issues that should be considered in designing and implementing the mechanisms that can facilitate a smooth transfer of airport activities to the private sector. The case of the Southeast Airport Group, as part of the Mexican airport privatization process, is used to illustrate many of these issues. There is some practical evidence to the effect that government regulation at major airports has achieved the objective of protecting airport users from monopolistic pricing of facilities and services. It is, however, important that the future economic regulation addresses objectives that go beyond pricing. These include the proper incentives for making timely investments in increasing airport capacity, as well as ensuring safety, security and an adequate level of service. Although, the events of September 11, 2001 will have a deep impact on the air travel industry, it is expected that the airport privatization movement around the world will manage to sustain its current momentum. Thesis Supervisor: Amedeo Odoni Title: T. Wilson Professor of Aeronautics and Astronautics and Civil and Environmental Engineering Acknowledgements First, I would like to acknowledge and thank my thesis advisor, Professor Amedeo R. Odoni, for his continuous support during the development of this work. It was great to work with one of the most respected experts in the airport industry, but it was greater to work with a wonderful person. I would like to express my gratitude to Professor Joseph Sussman, who helped me with his advice and support during an incredible challenging adaptation process. I would also like to express my gratitude to Professor Cynthia Barnhart, Professor Peter Belobaba, Professor Moshe Ben-Akiva, and Professor Ismail Chabini. I am grateful for the financial support provided by the MIT Global Airline Industry Program. Gracias a DIOS por esta maravillosa e inolvidable oportunidad...... Gracias a la compaFera de mi vida Elisa, por la confianza, el apoyo, la entrega y el amor incondicional...... Gracias a mi Eli, que con su fortaleza y su entusiasmo me "ayud6 a soltarme de la cuerda"...... Gracias a mi Rafa, que su dulzura y entereza me hizo fuerte en las largas horas de sacrificio...... Gracias a mi Manuelito, que con su riza y sus caricias me hizo darme cuenta de las pocas cosas materiales que se necesitan para ser realmente feliz...... Gracias a nuestro jrbol que siempre nos ha dado las manzanas m~s jugosas en los momentos que mas las hemos necesitado. 3 TABLE OF CONTENTS Page Abstract 2 Acknowledgements 3 Table of Contents 4 List of Tables 6 List of Figures 7 Chapter 1. Introduction 8 1.1. Objective and Scope 8 1.2. The Global Air Transport Industry 9 1.2.1. The Airline Sector 9 1.2.2. The Airport Sector 11 Chapter 2. The Emerging Private Airport Organization 13 2.1.The Objectives of the Airport Organization 15 Chapter 3. The Relevant Privatization History and Trends 16 3.1. Airport Privatization in Europe 16 3.2. Airport Privatization in North America 20 3.3. Airport Privatization in Latin America 23 3.4. Airport Privatization in Asia and Australia 25 3.5. Airport Privatization in Africa and the Middle East 27 3.6. Summary of the Airport Privatization History around the World 28 3.7. Relevant Privatization Schemes 30 3.8. Major International Airport Operators 31 Chapter 4. Economic Regulation 33 4.1. Limited Competition Among Airports 33 4.2. The need for Economic Regulation 35 4.3. Economic Regulation Objectives 36 4.4. Different Types of Services 37 4.5. The Economic Regulation Mechanism 40 4.6. "Single Till" Approach versus "Dual Till" Approach 43 4.7. The Landing Fee Methodologies used at U.S. Airports: Residual 49 versus Compensatory 4.8. Implementing the Regulation Mechanism under the Price Cap 51 Regime 4.9. Relevant Cases and Results 57 Chapter 5. Valuation Methodologies 61 5.1. The Major Economic-Value Drivers 63 5.2. Discount Cash Flow Analysis (DCF) 67 5.3. Comparative Market Valuation (Multiples) 79 4 Chapter 6. The Mexican Airport Privatization Case 83 6.1. The Mexican Airport System 83 6.2. Objectives and Principles 85 6.3. The Privatization Strategy 86 6.3.1. The First Phase: The Airport Grouping and the New 87 Corporate Structure 6.3.2. The Second Phase: The Strategic Partner Selection Process 89 6.3.3. The Third Phase: The Initial Public Offering 92 6.4. The Southeast Airport Group Case (ASUR) 93 6.4.1. The ASUR new Corporate Structure 93 6.4.2. Strategic Partner Selection Process 94 6.4.3. The ASUR Initial Public Offering 96 6.4.4. The Southeast Airport Group Investment Case 96 6.4.5. The Valuation of the Southeast Airport Group 96 6.5. First results 98 Chapter 7. General Considerations and Conclusions 100 7. 1. Advantages and Risks of a Private Airport Organization 102 7.2. Economic Regulation Conclusions and Recommendations 103 7.3. Valuation Methodology Conclusions and Recommendations 104 7.4. The Privatization Movement after September 11, 2001 104 Appendix 1: Relevant Statistics 106 Top 30 Airports in the World Y2000 Revenue Distribution in Major U.S. Airports (2000) Revenue Distribution in Major European Airports (2000) Appendix 2: Ownership of Publicly Traded Airport Authorities/Operators 109 Appendix 3: The RPI-X formula for BAA's London Airports 110 Appendix 4: The RPI-X formula for Mexican Airports 112 Appendix 5: The Southeast Airport Group (ASUR): Discount Cash Flow Valuation Model (Excel) 113 Appendix 6: IPO versus Trade Sale Analysis 117 Appendix 7: The Bidding Rules for the Strategic Partner Selection Process 119 Bibliography 127 5 List of Tables Table 1.1 Boeing Air Travel Growth Forecast by Region 10 Table 1.2 2000 World Airport Traffic 11 Table 3.1 Summary of Relevant Historic and Forthcoming Airport Privatizations 29 Table 3.2 Relevant Privatization Schemes 30 Table 3.3 Major Airport Operators in the World 31 Table 4.1 Essential Airport Services 37 Table 4.2 Complementary Services 38 Table 4.3 Commercial Services 39 Table 4.4 "Single Till" Advantages and Disadvantages 45 Table 4.5 "Dual Till" Advantages and Disadvantages 46 Table 4.6 Average projected price caps per passenger at BAA's London Airports 49 Table 4.7 Basic Projection Approaches 52 Table 4.8 Economic Regulation Relevant Cases 57 Table 5.1 Revenue from Essential Airport Services 63 Table 5.2 Revenue from Essential Landside Services 64 Table 5.3 Revenue from Complementary Services 64 Table 5.4 Revenue from Commercial Services 64 Table 5.5 Cost Reductions 65 Table 5.6 Most Common Revenues from Essential Airport Services 72 Table 5.7 Most Common Revenues from Complementary Services 73 Table 5.8 Most Common

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