Infrastructure development is lagging behind air travel demand. Cash-strapped, slow-moving governments are hard pushed to remedy the situation.
But asking the private sector to develop airport capacity is not the only answer—or necessarily the best answer—for the consumer.
Competition is key
Privatization has worked well in the airline industry. As more and more airlines were privatized, competition intensified. Since 2000, air fares have fallen about a third in real terms.
The experience of airport privatization has been completely different, however. Studies have found that privatized airports charge more than government-owned airports and, not surprisingly, have far greater profit margins. Operational efficiency, in contrast, is comparable to government-owned gateways, which is not what would usually be expected of a privatized entity.
The underlying cause is lack of competition in the airport sector. It means that airport privatization to date has come at a cost that is borne by consumers and by airlines. This, in turn jeopardizes aviation’s many benefits from job creation to economic and social development.
A government’s short-term financial gain from the sale of an asset therefore comes at the expense of long-term benefits. Not only that, often privatizations go hand-in-hand with a lack of transparency and insufficient consultation with the industry. This is compounded by regulatory safeguards and provider-biased contractual terms that have not worked as intended.
“We are not against privatization, but we are cautious,” says Hemant Mistry, IATA’s Director, Global Airport Development and Fuel. “Governments should explore all the options available. And if privatization is the choice then we need to work together to ensure that it follows best practices, especially on governance and regulatory oversight.”
Successful airport privatizations should:
- Deliver long-term social and economic benefits for the wider economy
- Provide effective, efficient capacity and service levels for passengers and cargo to allow sustainable growth
- Deliver cost effective and fit for purpose investment
- Provide a passenger experience to suit the markets needs
It is in neither parties interest for the other to be unprofitable—there is an inherent mutual interest in the financial success of an airport.
5 out of the top 6 airports in the Skytrax ranking are public (Skytrax)
- Singapore Changi Airport
- Incheon International Airport
- Tokyo Haneda International Airport
- Hong Kong International Airport
- Hamad International Airport
- Munich Airport
Spotlight on… The consumer interest
Airlines are part of an interdependent aviation system that must work like clockwork to get passengers to their destinations on time.
But the good service, affordable fares, and connectivity that passengers demand are threatened by the infrastructure capacity crisis. For aviation to continue delivering economic and social benefits, passengers must have confidence in the system and the freedom to fly where and when they choose.
Cost and operationally efficient airports are an essential part of that equation.
Mistry says a new IATA guidance booklet, Airport Ownership and Regulation provides the facts that will help governments to make the right decisions.
The reality is that governments rarely consider the value of alternatives to airport privatization.
“A broad range of ownership operating models exist that can meet a government’s strategic objectives without a transfer of control or ownership to the private sector,” says Alexandre de Juniac, IATA’s Director General and CEO. “Globally, many of the most successful airports are operated as corporatized entities of governments. Governments need to evaluate the pros and cons of different models taking into account interests of all stakeholders, including airlines and customers. The most important thing is that airports meet the needs of customers and airport infrastructure users, at a fair price.”
Airport privatization programs stem from a variety of needs, including getting infrastructure built quickly, improving the airport’s financial sustainability, helping government financing, and enhancing airport management capability. Accordingly, there are many different types of airport ownership and operational models to address these needs. There is no one-size-fits-all solution.
In other words, there are multiple ways for governments to achieve their strategic objectives without the sale of important airport assets.
Corporatization—in which control of an airport is transferred to a dedicated corporation or airport authority, owned by government—often works well. The separation of regulatory functions and operational responsibility for the airport, and the formation of an independent corporate board underpins operational efficiency and a consumer-centric approach.
Singapore Changi was corporatized in 2009 and voted Skytrax’s best airport in the world for the sixth year in a row in 2018. The Changi Airport Group is successfully expanding the airport, is able to borrow independently from government, and leverages its specialist airport management expertise internationally through a range of service, management, and concession contracts.
Indeed, service and management contracts are other alternatives to privatization, allowing a government to access specialist help and reduce costs. These arrangements range in complexity from expertise in a particular aspect of airport work to full operational responsibility. Siemens Postal, Parcel and Airport Logistics provides operation and maintenance services for baggage and material handling systems at Dubai International Airport, for example. It is a performance-based contract with key performance indicators to incentivize efficiency.
“Our focus on customer service and operational excellence played a crucial role in choosing a professional long-term service partner for our baggage and material handling systems,” said Chris Garton, Executive Vice President of Operations at Dubai Airports at the 2015 contract award. “We trust this partnership with Siemens will continue to make a major contribution to our strategic goals.”
Fraport, meanwhile, had a management contract at King Khaled International Airport in Riyadh and King Abdulaziz International Airport in Jeddah from 2008 until 2014. During this time, traffic and cargo throughput grew substantially. Fraport also delivered a range of consultancy and training services. It provided more than 17,100 man days of consulting to local managers and a total of about 27,500 man days of training.
At the contract’s conclusion in 2014, Dr. Matthias Zieschang, Fraport AG’s executive board member for finance, said: “Our know-how has been instrumental in guiding the Saudi hubs through an ambitious expansion phase, while simultaneously enabling the existing facilities to handle growing traffic and customer-service demands.”
Other options for governments to consider is alternative financing models and the selling of a minority stake.
The key in all cases is clear and transparent government objectives that guide the design of the ownership model. Each model has its pros and cons, but a robust evidence set should support the preferred option.
Equally important is the understanding that models are only sustainable if they are flexible and able to address the dynamics of an air travel market that is always subject to disruption and change.
Alexandre de Juniac
IATA’s Director General and CEO
“The most important thing is that airports meet the needs of customers and airport infrastructure users, at a fair price”
Dr. Matthias Zieschang
Fraport AG executive board member for finance
“Our know-how has been instrumental in enabling the existing facilities to handle growing traffic and customer-service demands”
IATA’s Director, Global Airport Development and Fuel
“If privatization is the choice then we need to work together to ensure that it follows best practices, especially on governance and regulatory oversight”
If a government still determines a need to privatize via asset divestiture or introducing a long-term concession contract for operation of the airport, then best practice must be followed.
- A focus on long-term socio-economic benefits;
- Clear bid evaluation guidelines;
- Concession contract guidelines; and
- A need for stakeholder consultation and regulatory safeguards.
There is a wealth of literature available on public-private partnership, including airport-specific advice, such as is on the World Bank website. Generally, four stages are identified: project identification and selection; project preparation, appraisal, and structuring; transaction management; and project implementation.
It is recommended that governments take advice on the key terms of a concession contract required to safeguard public value; ensure continuity of service and appropriate investment in the airport; and be realistic on the timescales required to complete a transaction.
“The one thing governments must not do is simply accept the highest bidder as happened in Brazil,” says IATA’s Mistry. “They have to take a broader view and focus on what is best for the economy and the consumer in the long term. Airports are a key link in the chain that attracts trade and tourism to a country.”
Most importantly, though, privatized airports need the correct regulation. “Efficient and economical air transport contributes directly to a community’s prosperity,” says de Juniac. “Poorly thought-out airport privatizations put this at risk. The balancing role of effective and strong economic regulation is essential.”
IATA’s guidance booklet recommends that the development of the regulatory framework is undertaken in parallel with an assessment of the airport’s market power and the decision about which ownership model to pursue. There is higher risk of abuse of market power from privatized operators as their action will be focused on shareholder benefits as opposed to consumer and wider economic benefits.
The work of a regulatory think tank has been an essential pillar in IATA’s work to ensure credible regulatory solutions that avoid abuse of market power from both privately owned and public airports.
Independence is a key component in all regulatory solutions. Economic oversight should be clearly independent from ownership and operations of the airport function and from the state entity that handles private involvement in airports. The roles and responsibilities should have no conflict of interest and be clearly defined. The interests of the traveling public must be respected and investor confidence in the market supported. The designated regulatory body should be able to set charges and a regulatory framework that allows it to fulfil its duties.
Aviation needs airports that serve the passenger. Only then can aviation’s many benefits take hold. “It is wrong to assume that the private sector has all the answers,” de Juniac concludes.
“Airlines have had to endure many disappointments. Airports are critical infrastructure. It is important that governments take a long-term view focusing on solutions that will deliver the best economic and social benefits.”
A call to arms… Balancing for success
For privatization to be successful, the interests of consumers, airlines, investors and economies must be balanced. A resolution unanimously adopted at IATA’s 74th AGM in Sydney called for:
- Governments to protect consumer interests by establishing robust regulatory safeguards to ensure cost efficiency in charges and improvements in investments and service levels ;
- Expectations for performance improvement to be set in consultation with airport users and the consumers;
- Periodic monitoring of airport privatization through public consultation, with corrective action taken to ensure benefits are realized for the passengers, for airlines, and for cargo consumers.