Aviation Infrastructure: Expanding or building new airports?

By Nyonyi Magazine

The widening mismatch between airline growth and infrastructure development has been a recurring theme at global airline industry meetings but Alexandre de Juniac, the Director General of the International Air Transport Association (IATA), still had his audience on the hook.

Illustrating the impact of the capacity constraints in Europe’s air traffic management system, the IATA supremo, revealed that aircraft operating in the region experienced 19.1 million minutes of en-route delays during 2018.

“That is 36 years of wasted time that unnecessarily added 5.6 per cent to our European carbon footprint,” he told an audience of airline chief executives, regulators, infrastructure providers and system integrators during IATA’s 75th AGM in Seoul on June 2.

Although annual growth in demand is expected to drop slightly to 5 per cent, airlines are projected to carry 4.6 billion passengers this year, 200 million more than the 4.4 billion of 2018. By June 2019, the number of city pairs connected by airlines had reached 22,000, more than double the connectivity provided by air two decades ago.

Meanwhile, the in-service fleet is expected to reach 30,000 aircraft by the end of 2020. Moreover, to accommodate demand, airlines are trending towards bigger aircraft. This growth is not only causing congestion along major air corridors in the northern and western hemispheres, but is also stretching ground infrastructure at destination airports.

In smaller markets such as Africa, or East Africa for that matter, years of underinvestment mean new growth in demand for air services is exerting pressure on air terminals. But regardless of geographical region, all governments appear to be reading from the same script, delegating development of new infrastructure to private capital.

Regardless of whether the model delivers the physical goods or not, a major concern for airlines over airport privatization is the associated rise in user costs, which are inevitably passed on to passengers.
According to Nick Careen, IATA’s Senior Vice President for Airports, Passenger and Cargo, the generally held notions about the benefits of privatization have not manifested on the airport sector. Almost invariably, charges are higher at privatized airports without a corresponding gain in operating efficiencies.

“But even though efficiency is not much better for privatized airports, profits are significantly higher, demonstrating that airport privatization comes at a price which we and our customers have to pay,” he says.

According to de Juniac the problem arises from two sources. In many cases, without subjecting airport tenders to competition, authorities have entered lopsided agreements that allow the managers to arbitrarily increase user charges even without investing any new capital.

Airport privatization has often happened before effective regulations to govern concessions are developed with a focus on short term financial gains rather than consumer interest. Cheaper alternatives are often ignored amidst a lack of transparency in the process.

Entebbe Airport VVIP lounge – for private ownership or public participation?

In other instances, especially in the developing world, governments don’t seek industry input before they design and build new airports, resulting in vanity projects that are too big for the market. Either way, the result is higher user charges which stifle growth in demand.

“Primarily, a major shortfall has been that governments have focused on short term financial gains from the airport sale or concession and often it is simply the highest financial bidder that is selected for the privatization without the necessary focus on quality of services to be provided,” de Juniac says. According to a report that was jointly developed by IATA and the global management consultancy firm, Deloitte, there is a wide range of ownership and operating models that can reconcile governments’ desire for increased financing and efficiency gains, without the need to sell assets and consequent loss of strategic control of the airport.

The report recommends options to PPPs where the government retains ownership and operates the airport through an autonomous department, ministry or trading entity on a not-for-profit basis. The other approach is corporatization, where the government owns the asset but with private sector participation through alternative finance mechanisms, value release; service or management contract. This is the model that Singapore adopted for the expansion of its Changi Airport, South Korea for Incheon International, Hong Kong for Hong Kong International and Germany for Munich Airport. Both these models don’t involve change in ownership.

In more than 300 instances, however, governments have gone for total private ownership through equity sales or PPP concessions. IATA says it has found too many shortfalls in concession contracts under this model because the provisions tend to be either biased towards the interests of the government or the concessionaire as opposed to the users of the facility.

“Historically, airport concessions have suffered from unduly long and arbitrary concession lengths which can be for the government in terms of higher concession fees and the concessionaire who enjoys longer term returns. But these are bad for users because it is difficult to predict the course of events over time,” de Juniac said, giving the examples of Aeroports de Paris where a 70-year concession is being proposed and Sydney which was privatized in 2002 on a 50-year lease with the option of a 49-year extension.

“We have seen many examples of very high concession fees where the larger proportion of gross revenue from the airport is diverted to the government and not necessarily re-invested back into aviation,” he added, giving the example of Santiago de Chile where the winning bid was based on 78 per cent of gross revenue.

In other cases, concessions have been negotiated with a fixed price over the term of the concession. As has been demonstrated in Portugal, this approach carries the risk of imposing user charges which do reflect the quality of value of services provided without a corresponding burden on the concessionaire. On the other extreme, the infrastructure committed to in the concession agreement is not attuned to the operational requirements of airlines and passengers.

“The lack of engagement and information sharing between airport operators and users of the facility needs to be improved. But this cannot happen until the interests of broader stakeholders are defined and protected in the concession itself,” says IATA, which together with Deloitte has now launched a booklet titled, “Balanced Concessions for the Airport Industry.”

IATA is taking a three-pronged approach to resolving the airport privatization conundrum. In countries such as Canada, the USA and Lebanon where privatization is still in the inception phase, the airline industry lobby is advocating for ownership models which can deliver access to financing and improved efficiency levels but would not require selling to or getting locked into long-term concession contracts with private operators.

Where the privatization process is at the implementation phase, IATA is pushing for transparent and competitive transactions with balanced bid criteria and adequate regulatory safeguards.
In cases where the deal is already done, the lobby is pushing for strengthening of the governance framework to protect against possible abuse of market power by airport operators.

And there have been some victories. In Canada, airport privatization has been put on hold following intervention by the industry. Lebanon is also going slow on its airport privatization as it reviews options proposed by IATA. In the USA, the Federal Aviation is considering a review of guidelines on proposed airport PPP projects.

In other campaigns, Saudi Arabia has suspended the airport privatization plan as the government makes reviews while in Kuwait, the government has asked IATA for help in developing a regulatory framework for planned privatization of its airports. After the recent elections, the Federal Airports Authority of Nigeria paused the airport privatization programme pending a new cabinet.
“We need a solid platform to spread the benefits of aviation with efficient infrastructure. We also need the capability to meet customer expectations with modern global-standard processes. As an industry built on global standards, that action must be coordinated among stakeholders and across geographies,” de Juniac told delegates.

Singling out Turkey which opened a new hub, Ataturk International, earlier this year and South Korea which has through developing air connectivity supported an export-led strategy that has moved it to become the world’s 11th largest economy, de Juniac said meticulous planning and broad consultation with users, as well as “examination of funding options and a keen focus on affordability are the keys” to making airport privatization successful.

“The right decisions today,” he concluded, “will determine the economic and social benefits that will be realized in the future.”

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