airport privatization risk management services · privatization transactions follow a similar...

M2P ▪ Airport Privatization Risk Management Services

1

Airport Privatization

Risk Management Services M2P PRODUCT OFFERING

M2P ▪ Airport Privatization Risk Management Services ▪ 2/8

M2P Consulting New York ▪ Silicon Valley ▪ London ▪ Frankfurt ▪ Dubai ▪ Hong Kong

M2P.NET ▪ [email protected]

PRIVATIZATION OF AIRPORTS ELIMINATES BARRIERS TO GROWTH AND FOSTERS INNOVATION

Currently around 1 trillion USD are planned globally in airport capacity expansion projects1. Still, industry and

political representatives repeatedly emphasize on an upcoming infrastructure crisis due to lack of airport handling

capacity, e.g. in the US or in Europe. Therefore, investments in global airport expansion and construction remain

strong2.

The investors and their reasons for investments in airport privatization projects are diverse. Many global hub

airports, predominantly in the US or Europe, but also in other regions of the world are operating near their capacity

limit. Governmental institutions aim to extend airport handling capacities, however, often struggle to secure the

necessary funds. Airports are also an interesting and profitable long-term investment opportunity for banks, funds

and other investors as cashflows usually tend to be relatively stable with low volatility and protection from inflation.

Due to its long duration, airport privatization projects can be a particular good fit for investors with long-term

liabilities.

Being a public sector infrastructural system intertwinded with local public transportation, airports often lack

innovative approaches in this digital age. This limits process efficiency optimization and impedes growth, as

governmental owners tend to keep public transportation infrastructure development out of focus. Airport

privatization projects have predominantly peaked throughout the past decade in the global aviation powerhouse

of Europe, where handling capacity is as much of a scarce resource as governmental funds. Ultimately, several

major European hubs are up to date on latest technological trends, e.g. biometric border control or self-service

check-in/boarding, setting the scene for future aviation traffic growth centers, such as Africa or South-America.

PITFALLS OF PRIVATIZATION AND KEY LEARNINGS

Airport privatization projects have been increasing in frequency and scale throughout the past decade, varying in

size, structure and business intention. Whilst the majority have been success stories to a varying degree, there are

numerous negative examples around the globe. The root causes of these failures are diverging and represent an

important example of lessons learned.

The 1987 privatization of London Heathrow airport is seen as one of the trendsetters for airport privatization

projects. Back then, the private investor group took 100% control of all airport operations and expansion projects.

However, as a profit oriented investors group, the focus was rather on retail and commercial areas instead of

security of check-in queuing space, not only negatively impacting the security aspect but also diminishing customer

experience. Further allegations involving an underinvestment in the crucial winter equipment, causing numerous

delays and cancellations and resulting in sustainable reputational damage of the airport at the time. This case

became a key threat for all full-privatization projects, requiring investors to provide operational expertise and agree

on certain operational targets to be achieved.

The privatization wave spread across the ocean about two decades later, reaching Chicago Midway Airport in 2009,

shortly after the financial crisis took a major hit on the global financial system. The bidding consortium back then

1 Source: Capa Center for Aviation 2 Source: International Airport Review




failed to raise enough money to pay the transaction price. Taking timing and macro economical variables into

account became a key lessons learned from this attempted operational concession.

As the economy recovered, major airport projects were on the rise again. São Paulo awarded an operational

concession for their new terminal in 2012, which previously had been state-owned. The project was delayed due

to major bureaucratic and legal hurdles, which had not been addressed in the initial alignment phases and caused

stakeholder commitment to crumble at the base, endangering the success of the project itself.

The lessons learned from these case studies are a valuable insight into the required risk management and project

preparation, which complements M2P’s expertise in this area in order to provide the optimal project delivery to

the client.

M2P CONSULTING – THE IDEAL PARTNER TO ADD VALUE

M2P provides substantial experience, tools and judgment to support its clients to successfully acquire, construct

and commission airports. Our knowledge areas cover in-depth knowledge of the infrastructure and airport

privatization, in risk management, major construction projects and commissioning infrastructure. Through the M2P

team’s vast experience in airport privatization, PPP projects and construction around the world, in the Americas,

Europe, Africa and Asia, our knowledge and capabilities cover, amongst others, the following aspects:

▪ Identification of target(s?) XXXX

▪ Analysis of competitive environment

▪ Holistic investment target and transaction risk assessment

▪ Due diligence

▪ Design of target operational model under consideration of risks and benefits

▪ Overall feasability assessment

▪ Holistic construction project risk assessment

▪ Contract risk management

▪ Project management throughout the construction phases

▪ Regulatory compliance

▪ Operational transition management

▪ Stakeholder management and alignment

▪ Overall programme / project management

▪ Operations management

▪ Market intelligence




APPROACH AND METHODOLOGY

There are several factors that can endanger a successful airport privatization, ranging from transactional risks to

macroeconomical conditions and non-compliance with regulatoy requirements. In order to conduct a large scale

and complex privatization project such as an airport, M2P uses a proven end-to-end approach, split into three major

phases that help to identify, assess and categorize all relevant risks and to respond to these in the for you

appropriate manner:

PHASE 1: TRANSACTION

Privatization transactions follow a similar process approach as usual M&A transactions. The figure below outlines

the M2P adapted process elements, tailored towards airport privatization projects. Due to M2P’s extensive risk

management and aiport privatization and operation knowledge, we are able to guide you securely through the

entire airport privatization transaction process.




M2P’s extensive knowledge of airport operations and operating models, including the economic models, serve as

a major asset to the client in the initial planning and target approach phases. It is crucial to clearly identify the target

operating model of the airport in order to narrow down the peer group at an early stage. Given the complex

stakeholder environment of an airport, including airlines, ground handlers and federal authorities, transparent

communication and clearly defined roles and responsibilities are required to be set at first contact with the selected

target. This ensures alignment of scope amongst all involved parties and secures a strong commitment at the base.

An airport has two basic but yet very distinctive economic models to choose from that will define the airport’s long-

term strategic and financial direction.

The single-till model has a single revenue stream with all aeronautical (landing fees, ground handling, aircraft

parking fees, etc.) and non-aeronautical revenues (retail, duty-free, gastronomy) included. While this approach

simplifies the airport’s accounting efforts, it exposes all commercial profits to the highly regulated aeronautical

revenues. Hence, the dual-till model separates aeronautical and non-aeronatuical revenues, using pure profits from

the retail business to further modernize and digitalize the airport. Simultaneously, it imposes the threat of carving

out profits and destabilizing the economic base of the airport. M2P will assess each case individually and support

the client in making the correct decision and financial modeling.

The aviation industry is among the most volatile businesses in the world, including a long list of potential risks and

threats to evaluate prior to making a project decision. Due to the extensive experience in the airline/airport and

their stakeholder sectors, M2P’s end-to-end support to the client throughout the project will decrease the risk to a

minimum, distributing the responsibility of the residual risk equally to all parties involved.




PHASE 2: CONSTRUCTION

Various risks can affect the construction of an airport. These risks may be specific to the construction phases, cut

through the phases or be external. Risks may occur due to interfaces of the construction work with the ongoing

airport operations or with other ongoing or planned airport construction projects.

M2P can support you in providing an overview and systematically identify all relevant risks and categorize your “risk

universe” – as in all risks relevant to your construction project:

Once materialized, these risks affect the project objectives such as schedule, scope, cost, quality, safety & security,

business continuity and reputation.

Effective risk management reduces the variability of these project objectives, increases the understanding of the

factors that may affect the project outcome and improves decision making in order to enforce the delivery of

project value.

M2P can help you by developing an effective risk management system which allows you to identify relevant risks

timely, accurately assessing and prioritizing risks and deploying sufficient and effective countermeasures.

In order to enable you to manage your risks, without adding additional resources, M2P supports you by embedding

the risk management process in your regular project governance and reporting structure. Please see below a Risk

Break Down Structure (RBS), which is a proven M2P approach to support you on identifying all relevant risks

throughout the different construction phases as well as interface risks between the construction and the operations

and other projects.




PHASE 3: OPERATIONAL TRANSITION

This final phase is, dependent on the selected type of airport privatization, the most long-term oriented, requiring

a deep commitment at both ends, the consultant and the client.

There are three prominent types of airport privatization to be considered:

1. Full Private Ownership Government fully transfers ownership of the airport(s) to the private

sector.

Federal influence is eliminated at the time of ownership transfer, however, the risk is a lack of focus

on infrastructural projects to enhance airport capacity, shifting focus rather on commercial profits.

2. Long-Term Concession Airport operator receives long-term concession (+25 years) to operate the

airport, often on a revenue share basis.

The “Build-Operate-Transfer” is the best case scenario for a long-term commitment-seeking public

owner. The contractual risks are major for both parties, putting the focus on clearly stating and

clarifying all roles and responsibilities, as well as a sound financial model.

3. Partial Privatization Privatization of the airport, with the government keeping a significant

ownership stake (+51%).

Strong mediation required between public and private owners, especially in aligning goals.

Governmental influence may impede growth opportunities.

Part of M2P’s core business is the operational side in the aviation business, with a long list of clients in airports,

airlines and the stakeholder environment, including public, private and federal authorities. We understand to

assess the target’s existing infrastructure and potential to expand or increase efficiency, supporting the client

end-to-end throughout all of the three phases. Constant stakeholder transparency in data transfer and

communication, as well as a mediation and alignment function, is a key strength of M2P and will reduce the

residual risk for the client to a minimum.

LET’S PARTNER TO ASSESS YOUR AIRPORT INVESTMENT OPPORTUNITY




Contact us for an immediate, no obligation discussion of the situation and needs of your organization, your

requirements and schedule, and how M2P will assure your total satisfaction as a valued client.

Dr. Christoph Lymbersky

Partner, Venture & Capital

Frankfurt, London,

Silicon Valley

+49 173 7290021

[email protected]

More than 12 years of experience in top

management consulting especially

turnaround, restructuring and raising

efficiency projects. Former VP at

Deutsche Telekom Capital Partners and

CEO of T-Venture, Europe’s biggest

strategic venture capital firm.

Priscilla Schelp

Head of Risk Solutions

Frankfurt, London

+49 173 7290052

[email protected]

More than 5 years of experience in

consulting boards of international

companies across various industrial

sectors in Asia and Europe. Focus on

major projects, strategy, risk

management and supply chain

management.

WHY M2P

Our team of leading airport and airline industry experts in business planning, strategy, and management plus

stakeholder communications and relations have been delivering award winning services to clients for more than 19

years. We are independent and objective.

OUR STRENGTHS

M2P has real world functional and operational experience in airports and airlines, combining the knowledge and

experience of strategy consultants and functional specialists. Thus, we provide expertise across all airport subjects:

business strategy, operating standards, actual operations, physical asset, human resource management, security

planning, and business restructuring.

We possess a deep understanding of airline strategy, regulation, financing, operations, and route development,

and setting of airport charges to airlines in the U.S., Europe and elsewhere. And M2P’s digitalization expertise adds

value in assessing future ways of doing business.

OUR PROFILE

M2P has a global presence, with more than 100 dedicated employees serving all markets and industry companies

worldwide from offices in New York, Silicon Valley, London, Frankfurt, Dubai and Hong Kong. We have provided

value to satisfied clients via 500+ projects within the past 19 years.

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