Arup Aviation Ten-year prospective view of

Airport privatization

Tiago Lopes

0 0 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 0 Contents

1. development

2. Heathrow performance indicators

3. Airport privatization market

1 1 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 1 Heathrow airport overview

z Third largest airport in the world in passenger throughput (67.5 mppa in 2007) after Atlanta and Chicago O’Hare

z Heathrow is the world’s largest

z 34% of passengers at Heathrow are transfer pax

z Heathrow handles 1.3 million tons of cargo per year and is the 4th largest cargo airport in

z Heathrow is a destination for 90 and has direct connections to 180 in the world

z Heathrow has 5 passenger terminals including T5 with an initial capacity of 35 million passengers +45 million for the others

z Home base of (), BMI () and

z London Heathrow has the highest connectivity (# flights) in the transatlantic market, the largest single market in the world

z Heathrow operates under strict environmental constraints

z The airport employs around 68,000 staff, 4,500 by BAA alone

z Heathrow airport is owned by BAA, which also owns Gatwick and Stansted in the London area

z Aeronautical charges are regulated through a price-cap. Following the latest review Heathrow is allowed to increase its charges by 23% in real terms over the next 5 years

2 2 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 2 London Heathrow challenges

z Heathrow is congested and offers poor passenger experience

z Its two runways operate at 99% of permitted capacity. By contrast, Frankfurt has been given the go ahead for a fourth %Full runway, Charles de Gaulle has four and Amsterdam has Current (Current five – all operating at around 75% of capacity Current ATMs ATMs as a passenger (arrivals proportion z Heathrow served 227 destinations in 1990. This dropped to 180 numbers Destination and 2010 ATM of 2010 in 2007 (mppa) Runways* s served departures) capacity capacity) Heathrow 67.5 2 180 477,000 480,000 99% z Heathrow has fallen behind Frankfurt, Paris, Amsterdam and Munich in terms of destinations served Frankfurt 52.8 4 265 490,000 660,000 74.2%

Paris CDG 56.8 4 223 541,000 710,000 76.2% z Heathrow is also competing worldwide with airports like Dubai, Doha, Abu Dhabi and in the ‘Kangaroo route’ Amsterdam 46.1 5 260 440,000 600,000 73.3% Schiphol between the UK and / NZ

z After the recent implementation of the ‘Open Skies’ agreement several started flying to Heathrow, by acquiring slots form other airlines marginally increasing passenger numbers

z The ownership of BAA over its London airports is currently being scrutinised by the competition commission, which might lead to a possible breakup of the BAA quasi-monopoly

z The price cap review mechanism is only valid for the next 5- years; from then on there uncertainty to what that might be

z The airport site is the smallest of any of the large European airports further limiting expansion opportunities

3 3 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 3 London Heathrow transformation Heathrow in 2006 and in 2012…

4 4 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 4 London Heathrow major development projects… already completed 2007 2008 2009 2010 2012 1 2 3 4 5

z tower: Located in the middle of the airfield the new control tower is 1 fundamental for the future development of future infrastructure

z Terminal 5: 396 meters long and 176 meters wide, T5 (A + B) has a 35 mppa capacity and is the base of British Airways the world’s largest 747 operator (57 units)

z Terminal 5 has its own transport interchange incorporating a rail station under the terminal building, a 3,800 space multi-storey car park and a bus and coach station inter

2

5 5 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 5 London Heathrow major development projects… under development 2007 2008 2009 2010 2012 1 2 3 4 5

z relocation: After BA relocates most of its flights to T5, 3 the oneWorld alliance will relocated to T3; Skyteam to T4 and Star Alliance to T1. Relocation will minimize transfer times and allow for the implementation of the ‘under one roof’ concept for each of the 3 alliances

3z Terminal 1 and Terminal 4 refurbishment: After T5 BAA will upgrade T4 with a terminal extension, forecourt redevelopment, increase in check-in capacity , new lounges 4 and the immigration hall departure and arrival concourses will be renovated

4z Terminal 5C: Terminal 5 second satellite building will open in 2010 and will be linked with other T5 buildings by a underground transit system

5z Heathrow East: Replacement of Terminals 1 and 2 with a new terminal which will be the base of Star Alliance. The terminal should be ready for the Olympic Games

5

6 6 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 6 London Heathrow potential long-term development projects (i) 201… 6

z Third runway: put forward by BAA together with other measures should increase the number of movements at Heathrow by 50% allowing for additional capacity

z Terminal 6: to be located between the Northern and the future Third runway T6 would allow for matching airside capacity created by the 3rd runway with terminal capacity

7 7 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 7 London Heathrow potential long-term development projects (ii) 201… 7

z Heathrow hub: Heathrow to become the first stop on an extended High Speed Rail Network that currently terminates at King’s Cross St Pancras. This would provide the airport with a direct rail link to continental Europe.

Up to 104 domestic flights arrive and depart Heathrow, and a further 140 flights go to and from European cities that would be within a two and a half hour high-speed train journey from the airport. Extending the high-speed network to Heathrow would offer passengers the choice between different modes of transport .

8 8 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 8 Contents

1. Heathrow airport development

2. Heathrow performance indicators

3. Airport privatization market

9 9 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 9 Heathrow’s Terminal 5 impact

Terminal Space Utilization z Besides runway constraints, Heathrow also 70 After T5 faces terminal congestion Airports close to Airports close to LHR z Terminal congestion has impacts on service 60 terminalterminal capacitycapacity Until 2008 levels and of passenger airport experience

z Lower service levels might become a critical 50 CDG FRA issue for transfer passengers who have the choice between several European hubs 40 AMS MAD z T5 will put Heathrow at par with its European 30 LGW rivals and minimize transfer times as most

Mio. PAX p.a. Mio. PAX FCO MUC transfer pax fly British Airways BCN ORY 20 MAN DUB CPH ZRH MXP BRU ARN DUS VIE OSL AirportsAirports withwith sparespare 10 NCE HAM terminalterminal capacitycapacity CGN STR HAJ TRN BSL 0 0 100 200 300 400 500 600 700 800 Terminal space in SQM ('000) Source: IATA(2004), ACI(2003)

1010 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 10 Success in the non-aeronautical business depends on high penetration levels and optimal space utilization

Non-Aeronautical Revenues per PAX vs Non-Aeronautical Revenues per SQM After T5 (?) 14 z Heathrow’s space utilization is largely due to TopTop PerformersPerformers terminal congestion rather than its commercial 12 FRA CDG proposition MUC HAJ 10 ORY ZRH z LHR In theory Heathrow should be able to AMS outperform its peers as it has a larger share of 8 MAN STR FCO CGN LGW CPH high-spending intercontinental passengers ARN HAM BRU DUS OSL NCE 6 VIE z Increased levels of service (i.e. less time MXP Penetration

Penetration required for c/I, passport control, security) TRN 4 should allow for increased quality time for commercial activities (shopping) 2 LowLow PerformersPerformers Non-aeronautical revenues per PAX (EUR) PAX per revenues Non-aeronautical 0 0 500 1.000 1.500 2.000 2.500 Non-aeronautical revenues per SQM (Euro) SpaceSpace UtilizationUtilization

Source: Annual reports (2003), ACI (2003) , IATA (2004)

1111 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 11 London Heathrow loses non-aeronautical revenue by offering poor passenger service

z Skytrax defines Service Quality as: z Finding your way around Service Ranking vs. Non-aeronautical revenues per PAX − Parking − Transportation TopTop PerformersPerformers 14 − Access and directions DUB FRA After T5 (?) 12 − Distance between gates CDG MUC ORY z Terminal facilities ZRH LHR 10 AMS GVA − Retailers, restaurants and fast food MAN 8 LGW STR CPH − Airline lounges FCO CGN STN HAM ARN BRU OSL NCE DUS − Business facilities LTN VIE 6 MXP − Hotels 4 z General passenger comfort

2 (EUR) PAX per revenues Non-aeronautical LowLow − Public seating areas PerformersPerformers − Cleanliness and smoking policies 0 100 80 60 40 20 0 − Flight information

Service Ranking (Skytrax) − Immigration, security

Source: Skytrax (2004), Annual reports(2003), ACI(2003)

1212 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 12 Looking at a recent service quality ranking, most of the top ranked airports outperform their European peers in terms of profitability

Service Quality Ranking vs EBITDA Margin z There is a correlation between service quality 70% offered to passengers and EBITDA margin TopTop PerformersPerformers z London is up to a point able to outperform its 60% CPH After T5 (?) peer based on the large share of intercontinental traffic

50% AMS MAN ZRH z It is believed that new terminals, specially T5 LHR ARN will be able to significantly increase spending 40% FCO BRU NCE per pax (non-aeronautical revenues) VIE ORY CDG DUS GVA LTN

EBITDA Margin (in %) Margin (in EBITDA 30% LGW STN STR MXP DUB CGN FRA HAM 20% MUC LowLow PerformersPerformers 10% 0 20 40 60 80 100 120 Service Quality Ranking (Skytrax)

Source: Skytrax (2004), Annual reports(2003), ACI(2003)

1313 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 13 As a result, besides capacity utilization, Heathrow should also focus on the improvement of customer service levels…

 Low Return on Assets (RoA) Airport Performance Positioning Matrix  Good long-term  Generally profitable perspectives High  Generally at world-class Efficient but level… Star  But this is difficult to reach under-utilized Star VIE y t i l i b t a n p e a m C t

/ s In l e f l ra i v s n In tr k I HHN ve u S Service Level st ctu me re nt  Customer Satisfaction Ma (airlines and pax) In rk FRA ve eti  High traffic limits ability to  Average delay st ng me  Turnaround time nt deliver high service levels  PAX waiting time  Infrastructure investment Low Performer Congested required for long-term LHR growth

Low  Growth opportunities constrained by Low Actual Traffic High Airport performance domains for skills/capabilities Available Capacity equal asset base (infrastructure and capabilities)  Actual traffic (movements, passengers,…)  Available Capacity (runway, apron, terminal,…)

1414 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 14 Benchmark of Heathrow Runway Capacity Utilization

90% Actual Runway Capacity Usage vs. Declared (Opening Hours) Capacity (2002)

80%

70% z In terms of runway operations London Heathrow is one Europe’s most efficient airports 60% z Under current operating conditions there is little scope 50% for improvement i.e. traffic growth is severely limited 40% z Current capacity restrictions (not allowing for 30% simultaneous arrivals and departures from one 20% runway) still artificially limit LHR’s throughput

10% z Runway restrictions at Heathrow are partially 0% compensated by large average aircraft size VIE LIN HAJ FRA GVA LTN AMS STR STN MXP OSL LHR MAD FCO ORY MAN ZRH ARN BER HAM BCN CPH DUB BRU DUS NCE CDG CGN LGW MUC Heathrow Airport Planning Day Profiles 300,000 Summer 2007 - All Airport

Average A/C Movements per Year divided by Number of Runways (2004) 60 11000

250,000 55 10000

50 9000

45 8000 200,000 40 7000

35 Arrival Flights 6000 Departure Flights 150,000 30

Pax Arrival Pax 5000 Departure Pax Movements 25 4000 100,000 20 3000 15

10 2000 50,000 5 1000

0 0

0 0 0 0 0 0 0 0 0 0 :00 0 0 :00 :00 0 0 :0 1: 2: 5: 6: 8: 2: 00:00 0 0 03 04:00 0 0 07 08 09:0010:0011:0012:00 13:00 14:00 15:0016:0017:001 19:00 20:00 21:00 2 23 VIE

LIN Time HAJ FRA GVA LTN BSL AMS STN MXP OSL STR EMA LHR MAD FCO ORY MAN ZRH ARN BER HAM NCL BRS TRN BCN CPH DUB BRU DUS NCE CDG CGN LGW MUC

1515 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 15 Heathrow future opportunities

z Nonetheless Heathrow has a tremendous potential. The underlying fundamentals are excellent:

z Significant local catchment area: London (Europe's richest region) plus all SE England i.e. more than 20 million habitants with high propensity to fly

z Improved accessibilities with high speed rail will put the whole of England + Benelux + Northern France within Heathrow’s catchment area

z UK’s economy is expected to grow above the Eurozone with corresponding effect in air travel

z From an industry perspective:

z The airport operator BAA is in good financial shape and its based carriers: BA, BMI and Virgin are profitable and have ambitious expansion plans

z By 2012 Heathrow will handle 80% of its passenger in new terminals and by 2015 it will Source: – Current Market Outlook 2007 have considerable runway capacity (in case the Note: cities with population over 6 million 3rd runway is built)

z BAA plans to invest 6.2 billion pounds (8.0 billion EUR) over the next 10 years in Heathrow

1616 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 16 Contents

1. Heathrow airport development

2. Heathrow performance indicators

3. Airport privatization market

1717 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 17 Rationale for airport privatization – demand side

z Civil aviation worldwide is growing faster than GDP

z Airports have proven to be crisis resistant and/or having rapid recovery after world-wide crisis

z Boeing Current Market Outlook 2007 “Economic and traffic growth, 2006-2026“: Worldwide rise in GDP will average 3.1 percent per year, annual increase in passenger numbers 4.5 percent

z Airports offer:

z relative stability and quick recovery from any shocks

z high returns and low volatility

z strong asset backing

z the ability (for institutional investors) to match long- term assets with long term liabilities

z scope for commercial opportunities

z limited competition among airports and high barriers to entry

Source: IATA, IMF

1818 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 18 Rationale for airport privatization – supply side

z High capital expenditures needed to cope with increasing demand, especially in developing countries

z In Europe alone there are 30 new and recent projects requiring an investment over 500m USD each in a total of over 60bn USD (source: ACI)

z Eurozone countries have tight budgetary constraints

z Private investors allow for:

z Access to domestic and international capital markets

z Reduce the financing requirement for public entities

z Transfer risk/ responsibility in an operation

z Introduce efficiencies and thereby improve financial performance

Source: IATA, IMF

1919 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 19 Different forms of airport privatization

 (D)BOT – (Design)  (D)BFO – (Design) Build Operate Airport Privatization Positioning Matrix Build Finance Transfer (or similar) Operate (or similar)

 Contractor needed  Contractor needed z The observation of the most (preferably as risk sharing (preferably as risk sharing partner) partner) significant airport transactions Greenfield  Experienced airport  Experienced airport performed a pattern can be identified operator operator  Strong financial backing  Strong financial backing z The combination of strong financial partners and of experienced airport Airport operators is highly desirable intervention needed z In the case of greenfield sites  Experienced airport  Experienced airport operator desirable construction companies are often operator desirable or involved  Strong financial backing mandatory (depending on Brownfield  Long-term investment conditions) partners (for the duration  Strong financial backing of the concession)

concession sale  IPO, auction, limited  Management Level of government privatization, contract intervention secondary trading

2020 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 20 Type of investors

z Around 60 airport investors are currently active in the market. They come from different backgrounds, typically: airport operators, construction companies, banks and fund management companies

z Airport operators actively involved in the airport market are: AdP, AdR, Fraport, Schiphol, BAA, Vienna Airport, Changi, etc

z Construction companies who also have invested in airports include: Hochtief, Ferrovial, Abertis, TAV

z Banks with large investments in airports are: Citi, Macquarie, RBS, Santander, CSFB

z A large number of funds both private equity and sovereign wealth funds with different investment strategies (see figure)

2121 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 21 Airport privatization summary

z The market for airport acquisition has existed for about 10 years with a constant number of deals coming to the market

z Concessions, trade sales or management contracts have been the vehicle of choice rather than IPO’s

z The increasing number of privatized airports has created a market for secondary offering e.g. BAA, Budapest, London City, etc

z Different countries have different types of airport ownership at country, regional or local level, which influence the type of privatization

Source: CAPA Note: No secondary transactions, cargo-only or general aviation airports included

2222 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 22 Future deal flow

z According to ACI there will be a be a 4% average annual growth in traffic until 2025

z To match this growth investments of 200 bn USD will be needed in airport infrastructure (source: BCG)

z Likely airport privatization processes in the short-term (until 2010) are as follows:

Source: HTA

2323 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 23 Opportunities and Concerns

Opportunities Concerns

z For the State z Airports represent an essential service and piece of z Accelerates infrastructure development infrastructure which must remain in state hands

z Promotes economic growth and z Private party wants to have management control and employment implement sometimes radical change management z No financial burden to state and taxpayers processes z For airports z Possible private abuse of an alleged monopoly z Modern and adequate infrastructure z Airports are indispensable elements of structural policy z Sufficient funding for growth z Professional management and higher z Airports need to be developed in line with public interests efficiency (e. g. traffic vs. environment) z Focus on commercial development z Negative experiences with full privatizations z For airlines z Negative image of private investors z Adequate infrastructure and service quality z State of the art technology z National security

z For passengers z Ownership of a network of airport (at regional or state z Customer service & convenience level) might lead to a monopolistic position and abuse of z Improved commercial offering dominant position vide BAA z Value for money

2424 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 24 Context

Contacts:

z Tiago Lopes +44 (0)20 7755 5788 [email protected]

z Stephen O’Driscoll +44 (0)20 7755 3715 [email protected]

z Jeff Ashe +44 (0)20 7755 2669 [email protected]

2525 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 25 Thank you for your attention!

www.arup.com

2626 LogistelProject International [] Conference Lisbon, MayFinal 2008Report [] 200 [] 26