When it comes to buying and selling airports, the sky's the limit.
Institutional investors around the world have rushed to infrastructure assets such as toll roads, shipping hubs and airports, seeking a stream of steady returns they can predict years into the future in a period of low interest rates.
Airports appeal to buyers for their predictable cash flows, but they also have more growth potential than some other classes of infrastructure. The number of kilometres global passengers travel is likely to increase in coming years. And that means more traffic through airports, and more fees earned for owners.
But how much should an airport cost? Airport valuations are based in large part on expected future cash flows, and there are a lot of places that cash can come from. Investors make their money from plane landing fees, as well as the expansion and control of duty-free shopping, parking and on-site hotels.
Valuing the risk and reward of these assets over several decades has several facets. Buyers must consider how much they can expand the airport and raise fees – which can be a political quagmire. They also look at how updated the buildings are, the type of clientele and airlines that use the airport, and the amount and quality of retail space that can be used to sell food, clothes and spare phone chargers to a captive audience of passengers waiting to board their flights.
To further complicate the valuation analysis, there are also a few ways an airport can be sold by the government – from a full privatization, to a sale of the land the airport sits on. Many airports are sold under concession deals, where a consortium of investors will buy the right to operate and manage the airport from the government for a set amount of time – typically 30 years or more.
Airports around the world often sell for between about 10 and 20 times their earnings before interest, tax, depreciation and amortization, according to data from specialist consultancy Aviation Economics. This average has increased in the last couple of years, with multiples in the mid- to high-teens now common.
Like any investment, risks also need to be considered. Airport profits are closely tied to the economic strength of their regions, competing nearby airports and travellers' disposable income, among other things. Brussels' airport, which is part-owned by the Ontario Teachers' Pension Plan, was shuttered for more than a month after a terrorist attack killed 32 people and destroyed part of the departure hall earlier this year.
Notable Recent Airport Privatizations
England's London City Airport
Sold: February, 2016
Buyer: Consortium of investors including Ontario Teachers' Pension Plan, Ontario Municipal Employees Retirement System's Borealis Infrastructure and Alberta Investment Management Corp.
Purchase price: About £2-billion ($4-billion). This was reported to be a multiple of about 30 times earnings before interest, tax, depreciation and amortization (EBITDA).
Deal: London City is not subject to the same user-fee caps as some other airports in England and Willie Walsh, chief executive officer of British Airways' parent company, told the Financial Times that the airline might remove its planes from the airport if fees were hiked to cover the cost of the deal. Meanwhile, the buyers indicated that the potential to increase retail sales was key to their plan to boost returns, as was the rising number of passengers using the airport in a year.
Japan's Kansai International and Osaka Itami airports
Sold: April, 2016
Buyer: France's VINCI Airports and Japan's ORIX Corp. each took a 40-per-cent stake. About 30 local Japanese companies acquired the remaining 20 per cent.
Purchase price: €2.1-billion ($3-billion) for a 44-year-concession agreement.
Deal: This was the first major privatization of Japanese airports and was thought to pave the way for future airport concession deals. Investors said they would grow returns at both properties as traffic increases due to "the expansion of Japan's tourist industry and the development of low-cost airlines."
France's Toulouse-Blagnac Airport
Sold: December, 2014
Buyer: Consortium of investors including Chinese companies Shandong Hi-Speed Group and Friedmann Pacific Asset Management
Purchase price: €308-million for a 49.99-per-cent stake in a 32-year concession contract. This valued the airport at about 18 times EBITDA.
Deal: Foreign investors swooped to acquire a large stake in this regional airport. The deal opened the door to more airport privatizations as the French government sought to sell off billions of dollars worth of assets. This summer France sold large stakes in Lyon-Saint-Exupéry and Nice Côte d'Azur airports to two consortiums for about €1.8-billion.