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The resilience premium

An ability to weather economic downturns is the characteristic prized by investors in airports – as evidenced by Global Infrastructure Partners’ acquisition of Edinburgh

Cynics were quick to seize on the £807 million (€990 million; $1.3 billion) price tag attached to Global Infrastructure Partners’ (GIP) purchase of Edinburgh Airport from BAA, given that analysts’ initial estimates had predicted a price range of between £400 million and £600 million. It was even suggested that BAA, which had acted like a parent waving goodbye to its beloved university-bound offspring on finally bowing to regulatory pressure to sell the airport, would now wear a contented smile. 

Some commentators suggested that high growth prospects explained the premium. But sources canvassed by Infrastructure Investor indicate that the resilience of the airport through the Crisis was the factor that led GIP to dig deep into its pockets in fending off competition from the likes of JPMorgan Asset Management, 3i and Carlyle Group. 

As has been previously documented in our coverage, investors in the infrastructure asset class were caught off guard by the degree of linkage to economic volatility displayed by some types of asset – including airports – in the wake of the Lehman Brothers meltdown in 2008 and subsequent events. As a result, the airport sector is neither attractive nor unattractive to fund managers per se – but a sharp distinction is now drawn between those airports which appear able to cope with economic flux and those which do not. 

As Colin Smith, a partner and infrastructure specialist at PricewaterhouseCoopers in London, says: “Since the Crisis, there is a wider recognition of how individual airports will be impacted by economic shifts. This has raised the bar for infrastructure investors, and hence the number of airports of interest has got smaller.”

Edinburgh Airport has had a good recession. Benefitting from proximity to a large financial centre, a good mix of business and leisure travellers, the presence of a large number (and different types of) airlines and a good geographic location, it has shown that it boasts the kind of in-built resilience that investors are on the lookout for. 

Edinburgh is also solid in other ways – not least, being overseen by what is recognised to be a good management team that has been allowed a considerable degree of autonomy from BAA. This raises an interesting question. With GIP renowned for the kind of operational improvements it has brought to bear at Gatwick (which by popular concensus was not well run prior to GIP’s involvement), what added value can it bring to an asset that’s already in good hands? One part of the answer is that an organisation with as determined a focus on operations as GIP will always find ways to get some extra bang for its buck. 

But there is a second aspect, say observers – and this is the scope at Edinburgh for commercial growth. They expect Edinburgh to try and win business from neighbouring Glasgow, the BAA-owned former bedfellow turned rival. The two airports have quite distinct strengths, with Edinburgh weighted to the business and low cost markets and Glasgow to charter and long haul. Expect Edinburgh to tap into Gatwick’s experience to try and claim some market share from Glasgow, say experts – and, if successful, expect BAA’s smile to become a little more forced.

The airports sector will remain an important source of infrastructure deal flow, with, for example, cash-constrained municipalities and local authorities needing to call on the private sector to assist public airports with expansion plans. But expect investors to be discriminating when it comes to choosing which airports to check into.