Airport Privatization Being Proposed In A Soft Market

Shirley just noted the recent activity on port privatization. As I noted in my newsletter, cash-strapped governments are also looking at airport privatization as a way to cut costs and reduce deficits.

Last month, officials of the governments that own two more U.S. airports—Kansas City International and Connecticut’s Bradley International—suggested they be considered for privatization, presumably under the FAA’s Airport Privatization Pilot Program. But while city and state governments are in financial distress, making it attractive to cash-in their airports, the airport industry is in a slump due to the global recession. Moreover, the global credit crunch means financing such deals is more challenging than it was a year ago.

In Kansas City, Mayor Mark Funkhouser, formerly the city auditor, was the driving force behind a flurry of reports in late February about a possible airport lease. Several city council members were quoted as looking favorably on the idea. The city’s well-respected airport director, Mark Van Loh, told the Kansas City Star that “We haven’t really found any negatives” in the idea, and that the city should apply for one of the three remaining slots in the pilot program within the next month or so, to avoid being pre-empted by other cities. But in early March, Aviation Daily reported that the council’s transportation committee was putting the idea on hold “out of concern that the issue leaves too many unanswered questions in these uncertain times,” and that the committee does not want to rush into such a major decision.

In Connecticut, the state owns Bradley International, and it was Republican state legislators who suggested privatization, to help with the state’s large budget deficit. Two bills have been introduced, one by Minority Leader John McKinney to study the privatization of Bradley and the other by Rep. William Hamzy to permit the state to privatize Bradley and the other five state-owned airports. In this case, Transportation Commissioner Joseph Marie opposes the privatization, telling the Hartford Courant that attempts elsewhere have been unsuccessful (whatever that’s supposed to mean).

These new proposals come at a difficult time for both sellers/lessors and buyers/lessees due to the combination of an aviation slowdown and the debt market crisis. Aviation Week (Feb. 16, 2009) reports that airports privatized in 2006-07 were going for multiples of up to 30 times earnings, but that currently multiples of 7 to 12 are more likely, according to aviation economist David Bentley. That makes airports relative bargains for would-be acquirers like Fraport and various infrastructure investment funds—assuming they can find debt financing for a chunk of the transaction price.

An investment banker with experience in airport privatizations told me this week that a year and a half ago, such deals could be financed at a debt/equity ratio of 75/25. Today, however, 50/50 is more like it, with some deals requiring an even larger fraction of equity. On the other hand, banker ABN Amro managing director Justin Symonds notes that most airports that are tracked by rating agencies remain investment grade, and that both government-run and privatized airports have been able to refinance debt recently. Thus, potential purchasers of London Gatwick and possibly other BAA airports ought to be able to finance those deals, though more expensively than a year or two ago.

I am also hearing from reliable sources that the $2.5 billion Midway Airport deal is still expected to reach financial close within the next month or so. Assuming that prediction is on the mark, that will be good news not only for Chicago but for others interested in privatizing their airports.