Frequent delays

In Canada and the US, talk of an infrastructure bank and $1 trillion legislation has fuelled conversation about whether both countries' airports will soon be on the market. However, hungry investors may still be in for a wait.

Airports have long been considered a sound infrastructure investment, fulfilling many of the requirements fund managers have when seeking long-term yield for risk-averse institutional investors.

“They have a level of protection from competition in terms of new entrants coming into the market and there's a variety of revenue streams you can access,” explains Susan Gray, global head of S&P's global infrastructure practice. “There's also the capacity to continue to grow and improve those revenue streams and to manage costs effectively.”

But unlike other developed markets, airports remain under government control in the US and non-profit authorities established by the government in Canada.

Investors argue the pent-up value of airports could provide an opportunity for the public and private sectors. A report published by Canadian think tank CD Howe Institute estimated the Canadian government could raise up to C$16.6 billion ($12.18 billion; €11.09 billion) from the sale of its eight-largest airports. In the US, the only significant private airport, in Puerto Rico, sold for $615 million in 2013 and is far smaller than the most-prized assets in New York, Chicago, Los Angeles and elsewhere.

“What you often find is that the private investors come in and say: 'We think there's an opportunity to improve the passenger experience, improve the retail, car parking and other facilities that passengers in the airport can use.' So they invest in order to do that and they may also look to develop the airport further,” Gray says.

“What cities and counties are usually hoping to do is get not just the benefit of that additional capital going into the airport, but the multiplier effect within the region of that spending and potentially job creation.”

In 2016, the Ontario Teachers' Pension Plan was part of a consortium that purchased 100 percent of London City Airport. Andrew Claerhout, the pension's senior vice-president for infrastructure and natural resources, told us last month now is the time to bring that experience to North America.

“We are now at a place where it is the right timing to bring in investors with global airport experience to drive efficiencies and improve the customer experience,” Claerhout explained.

Despite interest from investors on both sides of the US-Canadian border, the main obstacle to airport privatisation in either country is the government.

Halfway there  

In Canada, non-profit authorities established by the federal government already manage the country's 26 largest airports and, in a sense, already run them like a business. The authorities answer to an independent board free of government influence, pay rent to the federal government through ground leases, and make payments to local government in lieu of municipal tax.

However, like in the US, there is a provision mandating any revenue made from airport operation be invested back into the asset, effectively shutting out private investors seeking returns.

Interest from investors (and alarm bells for others) was piqued last September when a federal agency, the Canada Development Investment Corporation, hired Credit Suisse to explore airport privatisation. It appears the issue has been left alone for now, as airport privatisation received no mention in the Department of Finance's budget for 2017, but that has not stopped the debate.

Craig Richmond, president of the Vancouver Airport Authority, questioned why the government would want to tamper with the current model if, by his account, the system is not broken. “The government would get a nice, big, fat cheque once, but now they would be in a constant battle with the new owners over things like rates and charges and service levels,” he says.

One argument to allow investors access to Canada's airports – the most valuable being Toronto Pearson, Vancouver International and Montreal-Pierre Elliott Trudeau – is that the ground lease paid to the government acts as a disincentive for authorities to invest in the airport.

But Richmond will have none of that. “It's not a disincentive for us to build anything,” he argues, adding he just met with his head engineer to find ways to speed up Vancouver's current development plans. He also contends that any privatisation will invariably lead to price increases for airlines and passengers. An important note to make is that Canada's airports charge improvement fees of C$25 per passenger, unlike in the US, which capped its passenger facility charge at $4.50.

“If a group of investors now has paid, let's just say for easy math, $5 billion for Vancouver, they have to make that money back,” Richmond explains. “That's just a fact of the model, right? If you have to pay that back, you're going to have to increase all the fees to the airlines and to the passengers.”

Gregory Smith, chief executive of Toronto-based InstarAGF disagrees. “There's no reason why you can't enhance the value of passenger's increased demand for additional services and minimise landing fees for airlines.”

Smith says he views Canada's non-profit airport authorities as partially privatised already and that allowing investors in is “another evolution” of that model. He believes concessions like the Luis Muñoz Marin International Airport, in San Juan, Puerto Rico and PPPs at LaGuardia are the way forward. “It's about not radically changing what's currently done,” Smith argues, “it's actually enhancing what's being done.”

InstarAGF has already put this model to the test in Canada, participating in a consortium that in 2015 won a 40-year concession for a terminal at Billy Bishop International Airport, Canada's ninth-largest. Since then, the consortium has started the development of an underground pedestrian tunnel to connect Billy Bishop, which sits on an island outside Toronto, to the city's downtown.

“These concession models are a nice alternative to full privatisation to get some of the benefits around capital, innovation and global expertise into a local airport, but regulation and oversight remains with government authorities,” Smith says. “I think that model is likely as the privatisation model in a Canadian context.”

No pilot  

In the US, one of the largest impediments to private sector investment is two layers of government involvement in how an asset is managed, at the federal and state or municipal level.

At the federal level, rules such as the Federal Aviation Administration's provision restricting the use of airport revenue to reinvestment in the asset makes it difficult for investors to reap a return. And ownership varying by region means each potential airport sale has conditions that must meet local demand.

Julio Garcia, IFM Investors' head of infrastructure in North America, said this is different from how Australia structured the privatisation of its airports sector in the 1990s. IFM Investors has been an active participant in Australia's airport privatisations and has taken stakes in airports such as in Brisbane, Adelaide, Melbourne and Perth.

“One of the things that's different in Australia compared to the US, in terms of airport ownership, is that the airports are owned by the federal government. So the federal government can take a view on the full net worth of the airports and how they want to deal with the private sector,” Garcia explains. In contrast, “you've got a wide variety of ownership across US airports”.

The FAA's rule calling for airport revenue to be reinvested in the asset may be an obstacle to investors, but that does not mean the agency is against privatisation altogether. In 1996, Congress authorised the FAA to offer a pilot airport privatisation programme.

The programme is a lighter version of privatisation frameworks used by Australia and the UK. The FAA started with five slots, which later expanded to 10, but only allows for one major airport to participate in the programme.

So far, only one US airport in total has been sold through the pilot programme, the Puerto Rico's Luis Muñoz Marin International Airport. In 2013, a consortium including Highstar Capital, which was later purchased by Oaktree Capital, bought a 40-year lease to manage the airport for $615 million and an agreement to invest $1.2 billion over the lifetime of the concession.

The lack of interest in the FAA's programme stems from the varying levels of government involvement in airport ownership and a provision which gives airlines comprising at least 65 percent of an airport's traffic a veto on any potential lease or sale.

After two decades in effect, one airport is now under private management and three others have pending applications. In April, Westchester County Airport published a request for proposals for interested investors to submit plans for a lease and the FAA approved the City of St. Louis' application to enter the pilot programme.

Jane Garvey, Meridiam's chairman in North America and FAA administrator from 1997 to 2002, agrees there has been some “push back” from airlines about the privatisation programme at some airports, but she believes political will is a big factor as well.

“Ultimately, these are public-policy decisions and they really need to be debated at a local level. The decision has to be reached by public officials locally,” she explains.

She points out that the PPP model may be the best way to get private investors involved with US airports for now. Garvey uses Meridiam's participation in the LaGuardia redevelopment project as an example. The Paris-based firm is part of the LaGuardia Gateway Partners consortium that is developing a portion of the $4 billion airport PPP. The consortium is responsible for the design, build, finance, operation and maintenance of LaGuardia's Central Terminal B. According to Garvey, PPPs are a good way to get private sector experience involved in the development and risk management of complex projects.

“Airports considering complex terminal expansions, or new terminals, may look to the PPP model,” she argues. “Rather than privatising entire airports, using the PPP model for an individual terminal may be the preferred approach for many airports.”