There aren’t many things that can’t be bought for $21 billion. Australia’s Sydney Airport is one of those things. This week the board of directors of the privately-operated, stock exchange-listed airport turned down a AUS$22.8 billion buyout offer from a consortium of international investors; it was the group’s second rejected bid.
Very few economic sectors were harder-hit than airports by the global Covid-19 shutdown that has extended well into this summer. At the peak of the pandemic’s first wave, commercial air traffic was down by as much as 90 percent and most airports around the world were forced to drastically curtail operations and implement huge layoffs; some shut down altogether. (Recall that Canada closed all but four of the country’s airports to international traffic in 2020.) Given Australia’s numerous snap lockdowns and a continuing ban on international air travel until 2022, that country’s airports have been no strangers to this pain.
The surprising interest in Sydney’s airport suggests savvy institutional investors have already factored in the impact of the pandemic on the industry and are looking far into the future. And not just in Australia. While global deal-making may be down for obvious reasons, airports continue to be highly coveted assets. Last year Aéroports de Paris, the world’s largest airport company, bought 49 percent of India’s GMR Airports. During the pandemic, new privately-owned or operated airports were also opened or announced in Chile, Bulgaria, India and Guinea. And this past April Brazil sold 22 small regional airports in a heated auction that earned substantially more than the government had been expecting.Yet the owners of Sydney Airport sniffed at last week’s eye-popping $21 billion offer, even though it represented a nearly 50 percent premium over the company’s pre-bid market capitalization and was at the very high end of conventional airport valuations. “Sydney Airport is strongly positioned to deliver growth as vaccination rates increase and we move into the post-pandemic recovery period,” the board said in response to the consortium’s first bid in July. Higher offers from other groups are expected shortly as a bidding war takes shape.
“These developments suggest investor interest in airports has survived 2020’s huge downturn in air travel and infrastructure investors are taking a long-term view of airports as revenue-generators,” says Robert Poole, director of transportation policy at the Washington, D.C.-based Reason Foundation and author of an annual report on the worldwide state of airport privatization. He calls the action over the Sydney airport a “dramatic sign” of renewed attention being paid to airports’ investment possibilities. “Here was an offer right at the top-end of previous valuations,” Poole marvels in an interview. “And it was rejected!”
But if Sydney’s airport is worth much more than $21 billion following the worst year in the history of air travel, what might Canada’s airports be worth? And why is no one talking about buying or selling them?
The North American Oddity
Canada’s airports suffered through an existential crisis every bit as bad as Australia or elsewhere. Perhaps worse, considering that bankruptcy was openly discussed for some hard-hit airports and with revenue losses across the sector estimated at $5.5 billion. Only after a hefty federal government bailout, more debt and the recent rebound in domestic air travel has the immediate sense of panic abated. Yet the long-term sustainability of Canada’s airport sector remains an open question due to several significant and enduring problems.
Perhaps the most important development in global air travel over the past several decades has been the growing role of the private sector in airports – either as owners or long-term lease holders. According to Airports Council International, 75 percent of all air travellers in Europe during the pre-Covid era flew through privately-run airports. In South America, the figure is 66 percent. In Asia, it’s nearly half. Yet North America remains a curious exception to this trend. A mere 1 percent of air travellers in Canada or the U.S. transited via a private sector airport.
“North America is certainly out of step with the rest of the world as we have seen a global move towards airport privatization over the past 25 years,” says Poole. The reason for this government-owned oddity varies across the border. In the U.S., most airports are controlled by city or county governments and financed via tax-exempt municipal bonds. Turning over operations to the private sector would require replacing that low-interest debt with more expensive financing. Also, airlines in the U.S. have a veto over changes to airport ownership.
In Canada, the obstacle to privatization is political rather than contractual, and goes back at least three decades. During the 1993 election campaign, Prime Minister Kim Campbell’s Progressive Conservative government announced it was handing control of Terminals 1 and 2 of Toronto’s Pearson International Airport to a private consortium. It would have been a landmark privatization deal for Canada. Sensing a campaign opportunity, however, Liberal leader Jean Chrétien declared Campbell’s move “indecent” and vowed to tear up the contract. Campbell’s party was all-but annihilated on election day.
After the election – and stung by complaints he’d reneged on other campaign promises to scrap NAFTA and the GST – Chrétien dug in his heels on Pearson. As other airports around the world embraced full or partial privatization, the Chrétien Liberals declared the entire sector off-limits forever. The country’s most significant airports were instead given to local, non-profit airport authorities on 60-year leases in exchange for hefty annual lease payments. This turned airports – once a major expense for the federal government – into a cash cow. Canadian airports have since remitted $6.5 billion in lease payments to Ottawa.
The High Cost of Public Ownership
Canada’s airport ownership model is unique in the world. And Canadians suffer for it. Burdened by their lease obligations and managed by independent bureaucracies with little interest in keeping expenses down or satisfying their customers, Canadian airport authorities are notorious for the high fees they charge airlines and travellers alike, and for approving expensive and overbuilt “gold-plated” terminals which push those dreaded fees even higher. Because they’re forbidden to raise equity, Canada’s airport must rely solely on bond financing for all those gilded expansions and renovations.
The pandemic laid bare the inherent flaws in this form of public ownership. Without investors to lean on and with no revenue to speak of, local airport authorities in Canada were forced to beg government to bail them out – and then to take on even more debt. The Canadian Airport Council reports that during 2020 and 2021 its members have added $2.8 billion to the approximately $15 billion in debt they already owe. Since the airports are still technically owned by Ottawa, Canadian taxpayers are ultimately on the hook for all that debt.
“Private ownership is certainly a more robust model,” advises Poole, since it offers greater financial management flexibility. Privately-owned airports around the world responded to the Covid-19 disaster either by reducing dividends or issuing more equity, meaning taxpayers did not have to bail them out. In 2020, for example, the Sydney Airport raised nearly $2 billion through a new share offering.
Airport privatization offers other benefits extending far beyond crisis protection. David Scott is the president of SCOTT Associates Architects, a Toronto-based airport-focused architecture firm that has designed new, privately-operated airports across Europe, South America and the Caribbean. Scott’s firm recently teamed up with Canadian construction giant Aecon Group Inc. to build Bermuda’s new $400 million LF Wade International Airport, which opened last December. In essence, the new facility was provided free to the country as Aecon financed and built the airport and will operate it privately for the next 30 years. “Bermuda didn’t have to put in any money, and at the end of the lease the airport will be handed back to the government,” boasts Scott. It’s a sweet deal for taxpayers.
Besides keeping government costs down, privately-built and operated airports tend to focus on functionality and throughput rather than gold-plated ostentation, Scott says in an interview: “No one is trying to build ego-monuments here.” These more modest ambitions also translate into lower fees for travellers. “Prices are more likely to rise under government control,” he observes. “From a privatized perspective, the more people you can put through your terminal, the more money you will make. You want to generate as much traffic as possible and you do that by keeping your customers happy.” Research by the C.D. Howe Institute backs Scott’s claim that fees tend to be lower at privately-run airports.
The Privatization Conversation
There have been several recent attempts at hoisting Canada’s airports into the 21st century by allowing private-sector participation. All have been unsuccessful. In 2016, former federal Transportation Minister David Emerson delivered a comprehensive report on the state of Canada’s airports to Prime Minister Justin Trudeau’s government. Originally commissioned by the previous Conservative administration of Stephen Harper, Emerson’s report laid out five privatization options to replace what he called the “antiquated Canadian model.” These ranged from the outright sale of entire airports to long-term lease agreements similar to Scott’s Bermuda deal.
Trudeau promptly ignored it all; he did the same thing with another airport privatization study from consultant Credit Suisse commissioned by former Liberal Finance Minister Bill Morneau ahead of the 2017 federal budget. The Liberal policy on airport ownership appears unchanged since the Chrétien days.
Ironically enough, Scott’s Bermuda deal was arranged by Canadian Commercial Company, a federal Crown corporation that brokers large government-to-government deals for Canadian firms. The Bermuda airport thus highlights a peculiar feature of Canada’s airport policy. Ottawa is keen to support and promote airport privatization around the world when it benefits Canadian firms, but has no time for the concept here at home where it would benefit Canadian air travellers, the country’s airlines and the thousands of smaller companies that depend on airports or help keep them running.
At times, Canadian airports have staked out their own positions on privatization, with local airport authorities in Toronto and Montreal quietly supporting private-sector involvement, and their counterparts in Vancouver, Calgary and Ottawa opposing the notion. Yet there hasn’t been any fulsome public debate on this issue since 2019. With many other issues now competing for airtime in the 2021 federal election – and with the Conservative platform mute on privatization – airport policy seems unlikely to play a key role this time around, as it did in 1993. Then again, debt crises have a way of forcing their way onto the agenda at the most inopportune times.
Putting a Price Tag on Airports
Financial analyst Ian Madsen has spent the last two years valuing Canada’s major airports as part of a research project on the sale of Crown assets for the Frontier Centre for Public Policy. In 2019 he calculated that Pearson International Airport could be worth up to $15 billion, making it Canada’s most valuable airport. It’s a significant, if not eye-popping, number. “Of course the Sydney airport is in a much better position,” says Madsen, noting Sydney doesn’t face the same huge debt load or lease payment obligations that burden Canadian airports. “But it shows you what could happen with airports in major Canadian cities if they were on a better commercial footing.”
Madsen valuates Vancouver’s International Airport at between $8 billion and $10 billion; heavily-indebted Calgary International could bring $2 billion. Taking Canada’s airports to market thus offers the opportunity for realizing a substantial source of cash as the federal deficit spirals out of control. If airports could find a way to pay down their debts and eliminate those troublesome federal lease payments, those values could rise significantly, says Madsen in an interview. He suggests any initial private-sector investment should be applied to repaying debt in order to improve the airports’ overall financial situation in the future.
With the ongoing frenzy in Sydney revealing a healthy appetite among large global institutional investors for airport deals, Madsen figures now is a good time to begin the process in Canada. In fact, there may not be much choice. “The Canadian model is not sustainable,” the financial analyst concludes. Scott agrees. “The pandemic has placed huge pressure on the local airport authorities” says the airport designer. “Instead of paying down their debt, they’ve been piling it on – creating huge liabilities.”
Scott figures this mounting pressure could soon rupture the status quo and force the government’s hand. Early evidence of looming distress may be seen in a recent request for interest from investors by Toronto’s small, city-owned Billy Bishop Airport, located on an island near the downtown core. “Here we have a situation where there’s no revenue coming in, and they need someone to come in and take it over,” says Scott. The airport has been closed since March 2020 and plans to reopen next month.
If the underlying problems nagging Canada’s airports – high debt, exorbitant lease payments and political aversion – can be overcome, there’s great value waiting to be unlocked, says the Reason Foundation’s Poole, who will soon release his own valuation report on the prospects for privatizing 35 U.S. airports. “If investors are willing to put their money in airports in Peru, Chile, Colombia, India and elsewhere, they would clearly welcome an opportunity to invest in similar long-term assets in a highly-developed country such as Canada,” says Poole. “Canada and the U.S. are really the last two untapped markets [for airport privatization] in the world.”
Given the demonstrated investor excitement for Sydney’s airport, and with Canadian taxpayers coming to the end of their ability to fund massive federal subsidies and bailouts, now is the time to start talking about bringing Canada’s airports into the modern age.
Peter Shawn Taylor is senior features editor at C2C Journal. He lives in Waterloo, Ontario.
Re-published from c2cjournal.ca
Photo by Bao Menglong on Unsplash.
