18-Feb-2014 7:34 PM

Does the sale of Cardiff Airport signal a return of UK airports to the public sector? - Part 1

Analysis

Could the return of Cardiff Airport (Wales) and Scotland's Glasgow Prestwick Airport to the public sector be an indicator of future trends for secondary and sub-primary level airports in the UK?

There are several other privately operated airports whose future is looking decidedly indifferent.

The question now, as airport ownership has become less attractive to investors than it has been during the last two decades, is whether other airports in the UK might follow suit?

Subsequent to a period of negotiation that began in the autumn of 2012, Cardiff Airport, which serves the capital of Wales in the UK, was purchased by the Welsh Government from its majority private sector owner, the Spanish conglomerate Abertis, on 27-Mar-2013, thereby effectively renationalising it.

Previously the government had preferred a public-private-partnership (PPP) co-operation.

Later in the year (December) the government, through the Permanent Secretary Derek Jones, stated unequivocally that acquiring the airport from Abertis had been the right decision to make. It considered that the amount of investment had been inadequate and that if the Welsh Government had not intervened, there was a danger that the airport could have closed, with practical and reputational consequences. Abertis disagreed of course, supported by Spanish airline Vueling, which operates there - the 2006 investment strategy would have cost GBP100 million. Mr Jones added "I think it is best to judge us in three to five years, but there are signs of progress already."

Cardiff disposal is part of a series of Abertis disposals

The Welsh Government purchased Cardiff Airport, for a total investment of GBP52 million following a period of due diligence and negotiation with TBI, the airport's previous owner. TBI was itself owned by a vehicle comprising Abertis (90%) and AENA (10%), both Spanish. Subsequently that relationship changed as well, as Abertis began rapidly to disengage itself from the airports sector in favour of others; for example Belfast International was acquired by ADC-HAS of the United States (along with Stockholm Skavsta and Orlando Sanford airports), while AENA took control of London Luton Airport's lease along with AXA Private Equity, which later became Ardian.

Later (Dec-2013) GBP10 million repayable funding was made available to improve facilities and meet business plan objectives at Cardiff. The money, part of the Welsh Government's final budget for 2014/15, will be used in a series of enhancements for passengers and the introduction of new technology. The loan will be repayable over 12 years and further improvements will be introduced after the first phase.

The intention was never that the airport would be operated by the Welsh Government. It was to be managed "at arm's length" from the government on a commercial basis and, the government anticipated, that over time it would see a return on the investment. There were no sackings so the same people remained in charge. A new CEO was recruited but he too was an old hand, having previously held the same position at Cardiff Airport.

Abertis, seeking ways at that time to sell off its entire airport estate, appeared to be unconcerned by the economics of this transaction. The company said the transaction had "a neutral impact on Abertis' income statement as the asset sale price equals the value booked in the Company's consolidated balance sheet, thus generating no book gains".

Cardiff Airport represented a small fraction of the group's consolidated business, contributing less than 0.5% of its revenues. Regarding the relevance of this transaction compared to the total value of the company's balance sheet, this disposal represented 0.1% of the total value of its assets.

Objective is to 'develop high quality sustainable air services'

Of course the transaction was highly relevant to the Welsh Government, whose First Minister stressed it was a "vital gateway" to Wales for business, tourists and general travellers alike and that it was essential that its future is secured and that it "develops high quality sustainable services."

Those services had not been much in evidence during the previous five years as passenger numbers had almost halved from 2.1 million in 2007 to 1.2 million in 2011 and 1.017 million in 2012. Revenues declined proportionally resulting in a loss of GBP319,000 in 2011, compared to a profit of just over GBP1 million in 2010, GBP333,000 profit in 2009, GBP4 million in 2008 and GBP7.2 million in 2007.

Having lost the LCC bmibaby and its Cardiff base (it had ramped up services there when the going got tough at others in England) there was some sign of market recovery as Lufthansa, Vueling and Helvetic all signed up to commence services in 2013 along with the return of trans-Atlantic charter services in the northern hemisphere summer of 2012.

But passenger numbers were not expected to grow significantly in the short or even medium term and the telling phrase came from the financial director when he said that the company had adequate resources to continue "in operational existence for the foreseeable future."

With no recent positive financial result on which to help base a calculation it is not clear how the valuation of GBP52 million was achieved. However, an interesting contrast might be made with the sale from the public sector to the private sector of Leeds Bradford Airport in 2006, at the time a similarly sized airport to Cardiff, for GBP145 million, almost three times that of this transaction. When TBI bought Cardiff Airport in 1995 it paid GBP38 million. The valuation does not imply that there was any great scope for Cardiff to improve on its position, especially in the light of the continuing competition from nearby Bristol Airport, which has gone through the six million ppa mark in 2013.

Pressure for a new cross-border airport falls on deaf ears

Indeed, in the week before the sale was concluded the Institute of Welsh Affairs, an independent think tank, said the Welsh Government should proceed with the purchase of Cardiff Airport, but simultaneously plan long term for a new cross-border (River) 'Severn-side Airport' to replace both Cardiff and Bristol airports.

A study for the Institute noted Wales and the west of England should co-operate to promote a 24-hour Severn-side passenger and cargo airport that would serve the whole of southwest Britain. The proposal was submitted to the UK Government's (Davies) Airports Commission, which examined the issue of airport capacity in the UK with particular reference to London and the southeast of England and which made its Interim Report in Dec-2013.

In that report Bristol was mentioned just five times; three times in footnotes and twice in an explanatory capacity while Cardiff rated just four mentions.

So Cardiff Airport is firmly on its own for the future, as is Bristol Airport.

But the Welsh Government boxed clever. Within public control, the Welsh Government is in a far better position to dictate the future direction of Cardiff Airport, particularly if it is able to influence a lower rate of air passenger duty (APD) for Wales, as was achieved by the Northern Ireland Government and which is sought after by the SNP in Scotland (and highly likely to be implemented if Scotland votes for independence in Sep-2014).

Bristol Airport also picked up on this when it raised concerns that Cardiff Airport would "unfairly benefit from state support following the announcement of the Welsh Government's purchase of the airport." Bristol has sought assurances that Cardiff will not get state aid.

A lower level of APD within the UK seems unlikely though; the government has given no encouragement whatsoever to the concept of variable rates of APD and it was also dismissed out of hand (without, it must be said, any real substance to its argument) by the Airports Commission in its Interim Report.

So how well has Cardiff Airport performed as a public enterprise once more? The good news is that traffic is up - by 3.9% in 2013 to 1,057,000, a percentage rate of increase that was slightly better than that of the competing Bristol Airport (6,130,000, +3.6%)

The new (returning) CEO Jon Horne said he is hoping for further passenger growth in 2014 while noting that the top priority for the airport after becoming state-owned again was to stem the five-year decline in passenger numbers by convincing airlines that the airport has a long term future. In that respect it has been successful, with new services announced by CityJet (Glasgow, Paris, Edinburgh and Jersey, some of them replacing routes abandoned by Flybe) while Flybe itself has added some seasonal services to European ski resorts and there is a new service to Germany (Dusseldorf) in Apr-2014 and a charter service to the Caribbean (Montego Bay starts in 2015).

There is a fairly solid core of charter routes already, operated by Thomas Cook and Thomson, but charter is still in decline at most British airports. At least CityJet says it is "committed" to the airport and may expand services in the future.

Airline capacity at Cardiff Airport by carrier (seats per week): 03-Feb-2014 to 09-Feb-2014

But CityJet itself, which is in the process of being sold, along with VLM, by Air France to IntroAviation GmbH, has had a hard time recently, its operating loss having trebled in 2012 and its net loss growing by EUR200 million. What Cardiff Airport needs is stability in its airline clients - bmibaby offered a false dawn - and it must be hoping that CityJet's disposal goes through without difficulty, and with a retention of its link to Air France-KLM flights.

In the meantime, and in recognition of the fact that the government did hint at the time of purchase that it might not be in the business of running the airport "for the long haul", there is no sign as yet of investors hammering on the City Hall doors asking to buy the airport. The purchase of the airport by TBI (which was based in Cardiff) was in a different era altogether when airports were regarded as cash cows, and they often were. No longer is that true at this level.

Will Cardiff Airport be the first of many?

At the time of the renationalisation CAPA asked "could this happen elsewhere?" And indeed it did.

To put the matter into context, the UK is renowned for its very high ratio of privatised airports. The only significant airport group still in the public sector was Manchester Airports Group (MAG) (Manchester, East Midlands, Bournemouth and now Stansted) but MAG is now 35% owned by the Australian fund IFM as a consequence of the Stansted Airport acquisition and the failed attempt to position it as a future London hub airport.

In Scotland the three main airports are split between Heathrow Airport Holdings (HAH) (Glasgow and Aberdeen) and GIP (Edinburgh); there may be a further disposal of Glasgow and Aberdeen this year. There are several peripheral mainland airports such as Inverness, Dundee and Glasgow Prestwick. The latter has a chequered history of private sector ownership, which has involved Stagecoach Holdings (a bus and train operator), Omniport (which operates Norwich (UK) and Maastricht/Aachen (Netherlands) airports) and Infratil Airports Europe. Coincidentally, the Limburg Provincial government in the Netherlands is seeking to take control of Maastricht Airport.

The private sector has failed to make a success of Prestwick Airport

New Zealand's Infratil fund (HRL Morrison) had a very tough time of it after it took on several European airports -Lübeck in Germany, Manston in Kent and Glasgow Prestwick - in the early and mid-2000s. Growth expectations, which seemed quite reasonable at the time, especially at Prestwick which was an early base for Ryanair, were never fully achieved and it appeared for some time that the managers were preparing to exit (leaving just the rather more successful Wellington Airport in New Zealand in the portfolio).

And that is what HRL Morrison did in 2013, listing both UK airports for sale (Lübeck was disposed of in 2009) for GBP10 million each. In fact, Manston was eventually sold to a shelf company run by Ann Gloag, a well known personality in Scotland and one-time director of Stagecoach for GBP1 plus an adjustment of around GBP350,000.

If it seems strange that Ms Gloag should opt to acquire the southern English airport, the decision by the Scottish Government to acquire Prestwick Airport seems even stranger, especially as Glasgow International Airport is likely to be disposed of soon and having a government potentially able to influence traffic in favour of Prestwick would not go down well at HAH. (On the other hand the Scottish Government itself might soon be 'disposed of' and would hold a strong suit if any other Scottish airports remained in, or fell into, the hands of foreign operators).

But that is what did happen, in Nov-2013, when Infratil confirmed the sale of Glasgow Prestwick Airport to TS Prestwick Holdco Limited, an entity wholly owned by the Scottish Ministers, for cash consideration of GBP1. Prestwick had been losing money at the rate of around GBP2 million a year. The modest purchase price reflected the need for more investment, and the Scottish Government began seeking a commercial partner to operate the airport on its behalf.

Infratil claimed it had wanted a buyer who could support the airport into the future, and the Scottish Government could do that. But having bought Prestwick for GBP33 million 13 years previously, and taking continuing operating losses into account, it was a painful experience.

Whatever the political manoeuvring behind the Scottish Government's acquisition of Prestwick it will have a job to make money out of it in the immediate future. Throughout the last decade or more, since Ryanair made it one of the carrier's first bases, the Irish LCC has dominated proceedings at an airport that once hosted trans-Atlantic services by British Airways, Northwest Orient (now merged with Delta) and others, in the days before Glasgow International was permitted to host long-haul services.

In sharp contrast, as of the week 10 to 16-Feb-2014 Ryanair has exactly 100% of Prestwick's seat capacity.

'Pure Dead Brilliant' becomes something of an overstatement

What this means essentially is that unless there is a sea-change in the organisation of air transport services in the UK (and the Airport Commission's recent Interim report into UK airport capacity hardly suggests there will be), Prestwick is very much at the whim of the current philosophy of Ryanair. This will be despite the efforts of the management to change the image of the airport through rebranding, for example by removing the 'Pure Dead Brilliant' (a Glaswegian slang phrase) slogan from outside the terminal building and in marketing material.

The slogan had annoyed many business interests in the community, which felt it portrayed the wrong image.

The influence of Ryanair can work both ways for the airport and Ryanair has been increasing Prestwick services this past year or so and the airport has enjoyed continuous growth during that period, recording a gain of 7.3% in 2013 to 1.14 million passengers.

But Ryanair has equally reduced services dramatically in the past and might be inclined so to do again, in line with its increasing tendency to re-position in favour of the business segment, a policy that is being rolled out throughout 2014. In that regard a move to Glasgow International (possibly itself under new ownership) could be on the cards. And at the same time the mere presence at the airport of the carrier in such bulk is not exactly conducive to start-up services by other LCCs or charter services.

A number of organisations have misgivings about the sale. Numbered amongst them is the Glasgow Chamber of Commerce, which is concerned about the impact that public ownership of Prestwick might have on the fortunes of the private sector Glasgow International in the light of "the direct stake Scottish ministers now have in the performance of the airport industry in the central belt of Scotland."

The government may well have been influenced by all the right reasons in taking over Prestwick but at the same time it has handed itself a political hot potato.

Part 2 of this analysis, "Does Cardiff Airport signal a return of UK airports to the public sector?", will look at how Peel Airports and MAG may be affected by the evolving environment