Regional airports – a ‘recession proof’ asset?
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Regional airports – a ‘recession proof’ asset? www.pwc.co.uk April 2014 Rob Lewis Partner +44 (0)20 7213 8550 [email protected] Oliver Gill Senior Manager +44 (0)20 7213 1598 [email protected] In the pre credit-crunch era, the ever-increasing desire for double-digit returns underpinned a drive towards investment in infrastructure assets, and airports in particular. Constant demand for two week family summer holidays, rapid expansion of low cost airlines and growth in business travel led many private equity houses to view regional airports as imperative portfolio constituents. Capitalising on this trend, incumbent owners (often local state authorities) sold off many assets. Comparatively easy access to favourable credit sparked bidding wars, but key legacy issues, which were considered minor points which could be easily ironed out post transaction, were often not addressed. Tough macro economic conditions in recent years have reduced passenger numbers, adversely impacting landing fee revenue and turnover rents. Airlines have withdrawn unprofitable routes and sought renegotiation of terms. The UK government also increased air passenger duty, eating further into wafer thin margins. The projected return to growth of the global economy may imply that any of the regional airports which were to fall over will have done so by now; however a two-tier structure has now developed in the UK. Larger airports with multi- national reach are reporting growth in passenger numbers and record results. Meanwhile, smaller regional assets are still struggling, dependent on a small number of low cost airlines, which themselves remain under pressure (as shown recently by Ryanair). Heathrow Airport Holdings, for example, is looking to offload its smaller UK airports to investors better able to provide the financing that these assets require. Ferrovial has put in offers for Aberdeen, Glasgow and Southampton, but faces competition from Partner Group, which has pushed bids up to 15x EBITDA. Because of the way in which airports are financed, it is often difficult to tell how much financial assistance equity sponsors are providing (e.g. through subordinated loan notes). Secured lenders may only realise too late the gravity of any financial distress, with equity value eroded completely and sponsors ready to hand back the keys. To avoid this situation, Newcastle International, for example, recently required a significant refinancing, with extra equity injected by a group of seven local authorities. In other cases, there may be less distress, but the pre-crunch funding in place may simply not be suitable or viable. Clearly, careful consideration of the suitability and sustainability of regional airports’ capital structure is needed, and whether restructuring action is required before it is too late.
Transcript of Regional airports – a ‘recession proof’ asset?
Regional airports – a ‘recession proof’ asset?
www.pwc.co.uk
April 2014
Rob LewisPartner+44 (0)20 7213 8550 [email protected]
Oliver GillSenior Manager+44 (0)20 7213 1598 [email protected]
In the pre credit-crunch era, the ever-increasing desire for double-digit returns underpinned a drive towards investment in infrastructure assets, and airports in particular. Constant demand for two week family summer holidays, rapid expansion of low cost airlines and growth in business travel led many private equity houses to view regional airports as imperative portfolio constituents.
Capitalising on this trend, incumbent owners (often local state authorities) sold off many assets. Comparatively easy access to favourable credit sparked bidding wars, but key legacy issues, which were considered minor points which could be easily ironed out post transaction, were often not addressed.
Tough macro economic conditions in recent years have reduced passenger numbers, adversely impacting landing fee revenue and turnover rents. Airlines have withdrawn unprofi table routes and sought renegotiation of terms. The UK government also increased air passenger duty, eating further into wafer thin margins.
The projected return to growth of the global economy may imply that any of the regional airports which were to fall over will have done so by now; however a two-tier structure has now developed in the UK. Larger airports with multi-national reach are reporting growth in passenger numbers and record results. Meanwhile, smaller regional assets are still struggling, dependent on a small number of low cost airlines, which themselves remain under pressure (as shown recently by Ryanair). Heathrow Airport Holdings, for example, is looking to offl oad its smaller UK airports to investors better able to provide the fi nancing that these assets require. Ferrovial has put in off ers for Aberdeen, Glasgow and Southampton, but faces competition from Partner Group, which has pushed bids up to 15x EBITDA.
Because of the way in which airports are fi nanced, it is often diffi cult to tell how much fi nancial assistance equity sponsors are providing (e.g. through subordinated loan notes). Secured lenders may only realise too late the gravity of any fi nancial distress, with equity value eroded completely and sponsors ready to hand back the keys. To avoid this situation, Newcastle International, for example, recently required a signifi cant refi nancing, with extra equity injected by a group of seven local authorities. In other cases, there may be less distress, but the pre-crunch funding in place may simply not be suitable or viable.
Clearly, careful consideration of the suitability and sustainability of regional airports’ capital structure is needed, and whether restructuring action is required before it is too late.
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However, through our recent work on cases such as Exeter International and Manston & Prestwick airports we’ve seen there are a number of legacy issues that can impact both the viability of a restructuring as well as what the new structure may need to look like to ensure it is sustainable and acceptable to the company’s wider stakeholders:
• Many regional airports have considerable dependency on one airline. Given that in most cases, airlines can pull unprofitable routes with only a few weeks’ notice, a downturn in the fortunes of one airline can directly threaten the viability of an airport.
• Local councils often remain involved either through deferred consideration or shareholdings, which could slow the process down.
• A defined benefit pension scheme deficit may mean the trustees demand a seat at the table of a debt restructuring.
• Structural group reorganisation (e.g. through an insolvency appointment) could lead to the invalidation of the airport’s CAA licence.
• Additional capex requirements, which cannot be funded due to a lack of additional financing, could lead to a significant discount being applied to asset valuations.
• Funders can be a mixture of clearing banks and project financiers, which can lead to a more diverse set of opinions during a debt restructuring than may normally be expected.
• Part of the appeal of the original deal would have been the large land bank required to run an airport and the assumption that the land could be redeveloped. There may be significant unforeseen barriers, which significantly reduce the valuation of the land.
It is clear that the ‘recession proof’ status of airports has been completely undermined. Airports remain an attractive investment, but interest will no doubt be partly directed towards the long-haul market, including Asia and other emerging markets, as the low-cost budget airline segment, which Europe remains so reliant upon, continues to mature.
The outlook for airports across Europe in 2014 is uncertain, with some smaller peripheral European locations expected to come under particular pressure. The airline sector has been evolving rapidly and airports need to keep pace with that evolution. Most larger airports are pushing ahead, but outside Western Europe even some of these may not be safe, due to tightening regulation and the amount of cash that has needed to be invested to meet the required standards. Clearly, there a number of smaller airports, which may still have underlying issues that have not been addressed. Such issues are unlikely to go away quickly and should be considered sooner rather than later.
