Flawed, but still attractive

If the saying 'you're only as good as your last success' were to apply to airport privatisation then the US market would have Luis Muñoz Marin (LMM) International Airport to refer to – the first-ever privatisation of an airfield in the country and the largest airport and only international gateway on the island of Puerto Rico, a US territory.

But two years have passed since Aerostar Airport Holdings, the consortium awarded the $2.5 billion project, reached financial close and one has to wonder how long LMM can continue to serve as a reference point for successful airport privatisations.

While it's not the US' only success in the sector, it is the most recent. Another airport project that merits mention in this context is the redevelopment of Terminal 4 at New York's John F. Kennedy (JFK) International Airport. Although that project did not involve privatisation of the entire airport, it was the largest airport reconstruction programme in US history. 

It was procured as a public-private partnership (PPP; P3) by the Port Authority of New York and New Jersey, the agency that owns the city's airports, and JFK IAT, a consortium that at the time comprised the US subsidiary of Dutch Schiphol Group, real estate developer LCOR and investment bank Lehman Brothers.

The $1.4 billion project involved demolishing the old International Arrivals Building (IAB), which was built in 1956 and designed for propeller aircraft. It was expanded in the '60s and '70s to accommodate jumbo jets, but was still inefficiently equipped to handle an ever-growing number of passengers.

JFK IAT was awarded the project in 1997 and during the next four years operated and managed the existing terminal while building a new one covering 1.5 million square feet in its place. The new terminal opened in May 2001 and continues to be operated by JFK IAT which is now a wholly-owned subsidiary of Schiphol USA.

Since then Delta Airlines, which has made JFK its Northeast hub, has invested an additional $1.4 billion in further expansions, making Terminal 4 one of the largest in North America, serving 17 million passengers in 2014 compared with 9.5 million in 2009.


Today, another significant airport project is under way – the redevelopment of the Central Terminal Building (CTB) (also known as Terminal B) at New York's LaGuardia (LGA) airport.

Like JFK's Terminal 4, the LGA-CTB project – estimated to cost $3.6 billion – would involve demolishing the existing facility. Built in 1964, Terminal B had a design capacity of 8 million passengers, significantly less than the 13 million passengers that passed through in 2013. However, capacity is not its only shortcoming.

According to the Port Authority, which issued a Request for Information (RFI) in December 2011, “the CTB faces a wide variety of challenges to both airside and landside operations”.

In addition to replacing the existing 835,000-square foot CTB with a new 1.3 million-square foot, 35-gate terminal building, the project would also entail replacing surrounding infrastructure.

In July 2013, the bi-state agency announced four shortlisted teams but in March 2014 disqualified Aerostar New York Holdings, a consortium teaming Mexican airport operator Grupo Aeroportuario del Sureste (ASUR) and Highstar Capital, which also operates LMM in San Juan.

According to the Port Authority's website, the consortium was disqualified “due to procurement violations”.

The three other teams that remain in the running are: LaGuardia Gateway Partners (Vantage Airport Group/Skanska Infrastructure.

Development/Meridiam Infrastructure); LGAlliance (Macquarie Infrastructure and Real Assets/Lend Lease Investments); and LGA Central Terminal Consortium (a joint venture between ADP Management & TAV Havalimanlari Holding/Goldman Sachs Infrastructure Partners).

However, the disqualification, which some have described as “mysterious”, has not been the only bump in the road. Several delays have also contributed to what has been a lengthy procurement process.  

The latest delay was announced in February. 

“We simply decided it would be prudent to see what the conceptual design is before proceeding with the process,” Port Authority chairman John Degnan told the Wall Street Journal, referring to the redesign competition New York Governor Andrew Cuomo unexpectedly announced in October 2014 for both LaGuardia and JFK. 

The Port Authority has not issued an official statement explaining the delay and it is also unclear when it intends to announce a preferred bidder. The agency did not respond to Infrastructure Investor's requests for comment.

“The delay of the LGA-CBT project is certainly not helping the perception that the US airports privatisation market is expensive and hard to penetrate,” Mar Beltran, investment director, airport investments, at Australia-based fund manager AMP Capital told Infrastructure Investor.
“It certainly does put pressure on bidders to commit and having to firm up your offer over an extended period of time increases uncertainty of outcome,” she added.

As frustrating as the delays may be, no one Infrastructure Investor spoke with expects any of the remaining bidders to walk away, considering the time and money they've invested to reach this stage, which according to some estimates may be as high as several million dollars.

But will the delays have a negative impact on the US market in the way Chicago's two failed attempts – one in 2008, the other in 2013 – to privatise Midway Airport did? 


“I think the reality is it just doesn't matter,” John Schmidt, a partner at law firm Mayer Brown says. “The US market is huge and people want to be in it. The limitation is not that airport operator investors won't be willing to commit themselves to it; the limitation is the inability of US public entities to do deals.”

AMP Capital's Beltram agrees: “The US is the largest and most profitable aviation market in the world. Europe and North America have passed through the legacy and low-cost carrier consolidation phase and within these regions the industry has now evolved to the point where financial performance has evolved significantly following restructured and scaled-back cost bases. These fundamentals together with the high forecasts for growth would certainly attract investors such as AMP Capital to the US aviation market.”

Investors' continued interest in the sector despite various challenges is not the only good news. Another reason to be optimistic is that airlines' resistance to privatisation, described as a major obstacle, has begun to diminish.

“If you were to talk to JetBlue, which is now the dominant airline at the San Juan airport, they're extremely positive about the results there,” Mayer Brown's Schmidt says.

JetBlue did not respond to a request for comment, but Southwest Airlines, which also operates out of San Juan, did.

“We think the US airlines understand privatisation and that is why we are seeing smaller scale privatising (not the entire airport) and third-party developers,” Southwest airlines spokesperson Chris Mainz, wrote in an e-mailed response. “In our view, SJU [San Juan airport] was a good opportunity.”

Another source echoed that view: “Since the concept of airport privatisation, US airlines have seen the product offering that airlines in Europe are able to offer their customers by working in conjunction with private airport operators and have begun to seek ways to emulate those services in the US.”

But to bridge the gap between supporting privatisation and actively pursuing it, Schmidt believes that a change in tax legislation is needed.

“Changing the tax law so that tax-exempt debt on airports and other public infrastructure could remain outstanding or be replaced with other tax-exempt debt would remove a significant financial inhibition,” he says. 

An indicator of investors' interest in the sector could come as early as this month when the deadline expires for submissions of qualifications that Colorado's Transportation Commission requested for the redevelopment of the Great Hall terminal at Denver International Airport, the fifth-busiest in the country.

As Schmidt remarks: “Some people said 'you'll never see a US airport privatisation,' after the first failed attempt to privatise Midway but when it came to San Juan the bidders were there. I think that's true generally.”