Private investors are generally more interested in an ongoing revenue sharing agreement for Los Angeles’ Ontario Airport than a transaction that would pay a one-time up-front fee for the right to operate the airport over several decades.
Those were some of the “early insights” Los Angeles World Airports Chief Operating Officer Stephen Martin took away from a first look at private investor feedback the city’s airport management arm received on its plan to privatise the airport.
We really want to get a very clear path going forward on whether we are going to go through this process or not because we don’t want to waste peoples’ time
“I think people on average said a large PV transaction probably isn’t ideal in this circumstance,” Martin said, referencing deals where investors calculate the present value, or PV, of an asset's revenues over many years and pay the sum up front in exchange for the right to collect those revenues.
“And people were much more leaning toward a revenue sharing kind of model,” he added.
In January, Martin’s team sought feedback from investors on a potential deal to privatise the Los Angeles World Airports-owned Ontario Airport, located about 35 miles east of Los Angeles in Ontario, California. Late last month, a mix of 10 domestic and international airport operators and investors responded to the request:
– American Airports Corporation, a California-based airport operator;
– Airport Property Ventures, a California-based airport operator;
– AMP Capital Investors, an Australian infrastructure fund manager;
– Aviation Facilities Company, a Virginia-based airport manager and developer;
– Carlyle Group, a Washington DC-based private equity firm;
– Fraport, a German airport investor, owner and manager;
– GMR Airports, an Indian airport operator;
– Goldman Sachs Infrastructure Partners, a New York-based infrastructure fund;
– Incheon International Airport Corporation, a Korea-based airport operator;
– Munich Airport Consulting, a German airport operator;
The 10 responses also indicated that, in general, private investors are supportive of Los Angeles World Airports’ plan to privatise the airport outside of a formal privatisation process run by the Federal Aviation Administration (FAA), the government’s oversight body for the aviation industry.
“Mostly they said that’s probably an unnecessary and burdensome thing to add to the equation,” Martin said. The FAA’s process allows government entities to privatise airports and divert the proceeds to non-airport uses, provided that 65 percent of airlines using the airport approve the deal.
Investors also expressed a preference for a longer lease length than the 20 to 30 years Los Angeles World Airports envisioned in its request for expressions of interest.
“On average everybody would suggest a longer term,” Martin said. One response even indicated an incentive option for a longer length in case the private operator outperforms expectations for making the struggling airport more profitable.
Martin said his team will now thoroughly evaluate all the responses and go before the Board of Airport Commissioners for Los Angeles World Airports in two weeks to discuss options. Ultimately, the board will decide whether to move forward with a privatisation. If it moves forward, the board will decide on the structure of the privatisation, and then issue a request for qualifications from potential investors.
The timing of the transaction may be an issue with the board, Martin said. For example, the recent surge in oil prices may have an impact on the kind of planes that use the airport, which caters to regional jets rather than long-haul aircraft that fly into Los Angeles World Airports’ other airports.
“The run-up in the oil prices might lead us to a conclusion that the timing isn’t right at this time,” Martin said.
Also, the board must decide whether to privatise the entire airport or to leave Ontario’s actual airfield out of the contract and privatise only the non-airfield components, such as the airport’s retail and passenger services operations.
Martin said he hopes to get a recommendation on the deal to the board of commissioners by June.
“We really want to get a very clear path going forward on whether we are going to go through this process or not because we don’t want to waste peoples’ time,” Martin said.