GAD Review - Autumn 2015

Review • Meet The Investors: Successful strategies for today’s market • Becoming The Partner Of Choice: What makes a marriage made in heaven? Considerations for governments and investors on the cusp of privatisation • Battle Of The Airlines: What the battle for the skies tells us about the new geopolitical order • Plus – GAD Asia 2016 Destination Revealed!

In this edition ...

Review Meet The Investors Alfonso Barona, Corporate Development Director, Ferrovial ­Aeropuertos

Becoming The Partner Of Choice

John Bruen, Managing Director, Macquarie Infrastructure and Real Assets (Europe)

Gediminas Almantas, CEO, Lithuanian Airports

Battle Of The Airlines John Hulsman, Geopolitical Expert & Life Member, U.S. Council On Foreign Relations

GAD Asia 2016: Where Will We Be Landing?

Can you work out our destination from these clues?

Live Like A Local Top tips for what to see and do in Amsterdam

GAD Throughout The Years A comprehensive list of GAD’s destinations throughout the years

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Welcome to the ­autumn edition of the GAD Review

With GAD 2015 less than six weeks away, we are delighted to present this autumn’s edition of the GAD Review, featuring airport development community news, articles and research powered

by GAD’s expert speaker faculty.

I’d like to give a special welcome to one of this year’s guest speakers, John Hulsman, who’s take on the ‘Battle Of The Airlines’ you can read on p9-10. If you like John’s article, make sure that you join his Washington Briefing style Scenarios Game on airline competition at GAD this year.

We’d also love you to join in the discussion.

Feel free to reach out to us online via T ­ witter or ­LinkedIn, or join us 9-12th November in ­Amsterdam.

Heidi Stancliffe Editor-in-Chief GAD (Global Airport Development)

Connect with us online GAD – The Global Airport Development Conference @GAirportD

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Meet The Investors

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We sat down with two leading airport investors to hear their strategies for success in a competitive market. We know they have already cooperated on one deal in the last 12 months, but how far will they agree on valuations, capex and other issues that divide the investor community?

As everyone knows, we are in a highly competitive market. What will be the most hotly contended airport deal this year (and, briefly, why)?

Alfonso Barona

Corporate Development Director Ferrovial Aeropuertos

John Bruen

Managing Director Macquarie Infrastructure and Real Assets (Europe)

AB: Assets in OECD countries are the ones that wake the most interest in investors because of their economic stability and well defined legal framework. This means that the potential privatization of Nice and Lyon airports in France together with the sale of the London City airport would be very competitive processes. However, other countries with a strong economic growth potential should not to be ruled out, such as Brazil, where the government is planning on launching a third round of privatization that will include a total of four airports, although this is more likely to happen throughout the next year.

JB: It looks like the French regional airports and London City airport will dominate the agenda in Europe for a while - and there appears to be more to follow in the pipeline too. Hopefully enough to go around for all!

Are we in danger of entering an infrastructure asset bubble and what would sound the alarm bells for you?

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AB: The historically low interest rate environment and the excess of liquidity might produce some pressure on return requirements. However, I do not think we have entered an asset bubble as leverage is still under reasonable levels. The question would be, how long will the current interest rates environment be maintained. It seems that we will see gradual interest rates increase in the US in the coming months while Europe should follow sooner rather than later. At that moment in time investors will increase their return requirements.

are typically more assets coming to the market.

Therefore investors can offset requests for excessive flexibility from sellers as they consider multiple buyside opportunities - that should preserve a healthy balance in the market.

How flexible should investors be in the face of limited opportunities?

JB: Strong UK and European economic growth, continued strong growth of lower cost airlines, and the benefits to the industry of ongoing low oil prices are all contributing to strong growth in passenger volumes and consumer spending.

Constrained airports and the requirement to invest in new capacity are natural outcomes as we seek to capture the full benefits of the underlying growth.

Which aviation industry trends are having the biggest impact on the way you approach airport investments?

AB: Airlines, more than ever, have acquired a great capability for adapting very quickly to changes in the market. Airlines could deploy or JB: While asset valuation is certainly rising at a take away many aircrafts in a matter of months steady pace, underlying risk free rates remain low at a single airport. For airports it is more difficult and economic recovery is gathering pace across to cope with fast changes in demand (upwards Europe. Higher rates in the UK and Europe and downwards) and that’s why it is critical to would naturally negatively impact valuation, understand the current and potential users of the even where GDP growth stayed strong. airport in order to plan ahead and mitigate risks.

AB: When we refer to long term investments, like these, we must consider the risks that we are taking and the future evolution of the asset, without focusing ourselves only in the short term, assuming the current performance will be sustained indefinitely. Also, it is very important to take into account what value we can add running the asset and how we can optimize it.

Only competing by reducing the return can be dangerous, especially if the current interest rates environment changes. It is better to let slip an opportunity than to make a bad investment.

JB: When market conditions are strong there

Is the airport industry as a whole too gung ho when it comes to capex and what role do investors play in this? (In the current climate, is it politically palatable for investors to be seen to opt for cash returns?)

AB: Airports by nature are capital intensive; 5

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even if there is sufficient infrastructure capacity for future growth, there will always be considerable needs for replacement and maintenance projects like runways resurfacings. Airport investors should be conscious of the reality of these types of infrastructure and plan accordingly.

JB: Airport development capex will always be the right answer where it is targeted at passenger growth and is fit for purpose. There are certainly examples of where this discipline isn’t followed and airport investors will want to ensure it’s a top management priority. Cash returns will vary by airport and should reflect the development cycle of an airport at the time.

What is the one thing that airports generally could do to most improve your experience when you travel?

AB: Provide a smooth, fast and reliable process for the main passenger processing areas, i.e. check in, security search and baggage collection.

JB: It’s never just one thing - every passenger wants something slightly different. We’ll continue to make constant improvements to please as many as we can.

Alfonso Barona and John Bruen will be participating in the Bull/Bear Debate (‘This House Believes That Airport Deals In 2015 Have Been Overpriced’) on Monday 9th November at GAD 2015.

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Becoming The Partner Of Choice

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How can private sector investment maximise the value an airport brings to its home economy and how should investors use the idea of airports as an “economic multiplier� when negotiating with governments?

Airports interaction with the national and regional governments happens in many different forms - the ownership, the key stakeholder role, tax payer, or simple a project partner. Economic impact of the airports to the region or on the national scale is overwhelming. A few examples: Frankfurt airport being the largest employment complex at the single location in Germany, Schiphol expects that in 2015 about 175,000 people will work direct or indirect for Schiphol.

Another impressive forecast for Schiphol in 2015 - 3 eurocents of every euro that Holland receives as income, will be from Schiphol.

Gediminas Almantas CEO Lithuanian Airports

Regional governments fight for keeping their regional airports alive even in the loss making case, which is an absolute majority in the segment of small airports, bellow 1 million passengers annually. The study of ACI Europe on the impact of the airports (2015) indicates that European airports contribute with 674.5 billion euros to GDP (4.1% of national GDP), and create 12,343 million direct jobs. The impact various from country to country and GDP contribution ranges up to 6.4% in Portugal or 11% in Cyprus.

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How to utilize and maximise this value? Airport privatization transactions typically focus on the financial benefits to the governments in the form of the concession fee and a capex program. A broader economic impact of creating additional jobs, increased contribution to national GDP, improved connectivity, which results in the improved investment climate of a region or a country, typically, is not the part of the privatization or a concession agreement – but it should be.

According to the “fDi Markets” 18% of investors indicate that good connectivity is a critical element in choosing the foreign market for the investments. Connectivity matters not only in the case of attracting foreign investments, - similar impact is expected on promoting exports.

It is quite rare to meet the private investors performing less efficient than the public sector, and there is always an implied value in a privatization case, which is to be claimed and shared, and which typically stays untouched.

Gediminas Almantas will be participating in a panel with the same title on Tuesday 10th November at GAD 2015.

The airport cities are becoming now a market standard. How much one should charge for the privatization of a city with critical role to the national economy, and how much the governments should pay to the owner or an operator of that city for each additional basis point contributing to GDP, creating jobs, improving investment climate or export conditions?

The investors might utilize this value by negotiating with governments better privatization contracts. The economic value, facilitated by the investors, is highly relevant to the national and regional economy, and this value should be claimed by the investors and shared as much as revenues or profit. Airports privatizations and concessions should focus on connectivity as a leading element, in the package with capex, the concession fees, and other supplementing elements.

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The Geopolitics Behind the Battle of the Airlines

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I am always amused by the number of analysts who are political experts but couldn’t balance their check book, or conversely know macroeconomics inside and out, but would be hard-pressed to name three members of the British cabinet. Modern overspecialisation has led to the creation of public policy intellectuals who can describe half the world, which is less than no good for today’s corporate needs. Politics and Economics simply cannot be separated if a rounded, edgy, complete analytical picture is to be drawn by political risk consulting firms for their clients.

The current, looming Battle of the Airlines is a case in point. The Gulf super-connectors (Etihad, Emirates, Qatar Airways) and Turkish Air have risen onto the aviation scene like a colossus, becoming true market disruptors. It is not too much to say that the global balance of power has shifted in the aviation industry, as the superconnectors increasingly dominate the long-haul routes between Europe and Asia. In 2014, the four carriers flew 115 million people into and out of their hubs in the Gulf or Istanbul, compared with only 50 million in 2008. Their combined fleet has expanded to more than 700 aircraft, with a further 900 on order. Emirates on its own is now by far the world’s biggest international carrier.

Its hub, Dubai airport, has recently overtaken Heathrow as the world’s busiest airport for international traffic.

John Hulsman

Geopolitical Expert & Life ­Member U.S. Council On ­Foreign Relations

In contrast, Europe’s struggling international airlines (Lufthansa, AF-KLM) were among the first to start losing market share to the superconnectors. They have been caught in a strategic pinch, as at the same time they have lost out to Low-Cost carriers (RyanAir, EasyJet, Air Berlin) 9

Review over shorter, intra-European routes. For example, Lufthansa has stated that its own Frankfurt hub has lost nearly one-third of its market share regarding Europe-Asian routes since 2005. It is an open question as to whether the legacy European carriers will survive in their present form through the next decade. US Legacy LongHaul carriers (Delta, United, American) have also begun to be pressed by the Gulf Three.

If that is the economics, now the politics comes into play. In retaliation, in March 2015, the American long-haul carriers charged that their state owners have given the Gulf superconnectors $42 billion in assistance in the past decade (Emirates-Dubai, Etihad-Abu Dhabi, Qatar Airways-Qatar). This, they thundered, amounted to unfair competition. The American Three called on the Obama administration to investigate, and to ultimately re-negotiate the Open Skies Treaties between the Gulf States and the US, ending these ‘subsidies.’ In addition, the American legacy carriers called on the White House to freeze any future route expansion by the Gulf Three until the matter is settled.

In tune with their American colleagues, European legacy carriers have been urging the EU to create a Common Aviation Policy, a centrepiece of which would be a re-negotiation of the Open Skies Treaties with the Gulf States. They call for ‘Fair Competition’ provisions for current and future air treaties, to end what is seen as their unfair competitive practices. Also, the European legacy carriers are calling on the EU to immediately halt the expansion of Gulf super-connector routes into European air space. The EU has promised to formulate a new aviation policy by the latter part of 2015.

US simply do their legacy carriers’ bidding not look good. They are loath to roll back the Open Skies Treaties, which have been such a global commercial success, particularly for them. In addition, they will be very wary about halting the expansion of the Gulf super-connectors; domestic American and European makers of aircraft and engines are benefiting hugely from the expansion of the Gulf fleets, and also comprise a powerful lobby. So do passengers, who seem to care far less about the fate of their struggling national airlines, and more about the upstarts’ cheaper fares.

Geopolitically, the Gulf States are an important western ally in a region that finds itself on fire.

To stir up unnecessary trouble in attacking headon the flagship airlines of Qatar, Dubai, and Abu Dhabi seems to be geopolitically reckless at best. So while the simple answer to the question of whether the EU and US will come to the aid of their threatened airlines industries would be ‘yes,’ a more rounded political/economic/ geopolitical assessment leads to a strong belief that the answer will be ‘no.’

I strongly hope that you will join me at the GAD war game where we will—with real world scripts culled from the headlines of the past months and in real time—test all these hypotheses against the clash of competing economic, political, and geopolitical interests. Designed in Washington, where I played similar war games for the Executive branch and the intelligence services, war games at their best test settled views about policy against the rigours of a changing world. I do hope to see you there.

Dr John Hulsman will be hosting a Washington Briefing style Scenarios Game on airline Yet the underlying politics and geopolitics of competition on Wednesday 11th November at the case make the chances that the EU and GAD 2015.

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GAD Asia 2016: Where Will We Be Landing?

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Can you work out our destination from these clues?

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It has a population of 1.3 billion It will be one of the top three aviation markets globally 20-30 new greenfield airports expected to be built by 2025

You’ve guessed it. 2016 will mark GAD’s first visit to India, where we will be hosted in Delhi by GMR Airports and Delhi International Airport.

India has long been a powerhouse of airport development. Home to 1.3 billion people, set to increase to 1.6 billion by 2050 (thus becoming the largest country by population), India’s civil aviation sector has grown steadily by 13.8% over the last decade. Although this took a dip in the 2013 due to the overall economic slowdown, it has since bounced back to 6% in 2013/14 and 11% in 2014/15. Airbus forecasts growth of 11% for the domestic Indian market (10% for the combined domestic and international routes) in the next 10 years – double the global average.

Fact: If even just 1% more of its population starts travelling by air, India will need to double its current aircraft fleet.

Although many industry watchers are sceptical about the Ministry of Civil Aviation’s stated aim to build up to 200 new airports across the country in the next 20 years, experts are fairly sure that we can expect to see 20-30 greenfield airports built by 2025, as well as strong growth at the current top 10-15 airports. What makes this all the more 11

exciting to the GAD community, of course, is that in the world with its global experience in India, India has a track record of airport concessions Philippines, Turkey and Maldives” and PPPs and that future growth promises more opportunities for international investors.

DIAL CEO Mr. I. Prabhakara Rao said, “We are delighted to partner with GAD Asia 2016, which With greenfield airports in Mopa and Mumbai is scheduled to be organised in India for the first currently under tender, a second round of airport time. This is a highly acclaimed annual event concessions on the cards and rumours of IPOs where airports operators, investors and other of currently concessioned airports, all eyes will stakeholders meet to discuss the growth need of be on India in 2016. However, history shows us the global aviation industry and explore the role that these processes are not always smooth and of private sector players. India is witnessing very with issues such a regulation still unresolved, fast growth in the aviation sector and promising local knowledge remains paramount – and what a huge growth potential for the international better way to build your network than attending investors. In this journey, GMR has been playing

by GAD Asia 2016 in Delhi. a pivotal role to place India at the top of global aviation map. As per ACI-Airport Service Quality Mr. Sidharath Kapur, President – Finance and (ASQ) 2014 ratings, our Delhi Airport has become Business Development, GMR Airports said “GMR World’s Best Airport in 25 - 40 million passengers Airports, is delighted to have this opportunity to category, which is a testimony to this.” host the global airport community at its flagship Delhi airport in India for the very first time. GAD GMR Airports Ltd (GAL) is one of the largest is the largest community of global airport leaders private airport developers in the world having connecting airports, developers and investors capacity of more than 80 million passengers per and we are pleased to host such a diverse group annum. Currently GMR Airports operates and of representatives. GMR Airports, as one of the maintains Delhi International Airport, Hyderabad leading global airport developer has developed International Airport and recently won Cebu iconic and world class airport assets and plays Airport in Philippines. a leading role in airport development community 12

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Delhi International Airport is the largest on the India subcontinent and the best connected in the region, serving over 115 destinations with 56 international and 8 domestic airlines. 40.8 million passengers passed through DEL in FY 2015, with 18.6% of throughput representing transfer passengers. It is by far the busiest airport in India with an annual passenger handling capacity of over 60 million and hub to major 足national carriers such as Air India, Vistara, 足IndiGo & SpiceJet. Delhi Airport through its three runway operations has consistently maintained an OTP of 78%, which is highest amongst all major airports in India.

GAD Asia 2016 will take place summer 2016, dates TBC.

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Live Like A Local Wij wensen u een prettige tijd bij het GAD evenement in Amsterdam!

With GAD 2015 less than six weeks away, we asked our Dutch friends for their top tips for what to see and do in Amsterdam.

Visit - - - - - -

Reypenaer Proeflokaal Madame Tussauds Amsterdam Amsterdam Tulip Museum Stedelijk Museum Amsterdam Van Gogh Museum Willet-Holthuysen Museum

Shop - - - -

Droog Het Hanze Huis Jamin IJ-Hallen Flea Market

Eat - - - - -

Brasserie SenT Humphrey’s De Pizzabakkers White Elephant Ramen-Ya Amsterdam

Drink - - - - - - -

Bouwerij het Ij Café Belgique De Engelse Reet Bierfabriek Amsterdam Roest Westergasterras Tara

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- Reypenaer Proeflokaal - Madame Tussauds Amsterdam - Amsterdam Tulip Museum - Stedelijk Museum Amsterdam - Van Gogh Museum - Willet-Holthuysen Museum

- Droog - Het Hanze Huis - Ij-Hallen Flea Market

- Bouwerij het Ij - Café Belgique - Amsterdam Roest - Westergasterras - Tara

- Brasserie SenT - Humphrey’s - De Pizzabakkers - White Elephant - Ramen-Ya Amsterdam

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Throughout The Years

2004

2015 2007 1994

1995

2000

2010

2005

2009

2012

1996

Dublin

Copenhagen

2002 Hamburg

2011

Amsterdam

Berlin

Prague

Paris

1997

Vienna Budapest

Nice

Madrid

Barcelona

2013 Rome

1999

2006 1998

Athens

2003 2008

2001 2014

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GAD Asia

Delhi

Kuala lumpur

2016

2015

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GADConnect Don’t forget, GADConnect goes live on Monday 26th October and is the only way to view the GAD 2015 interactive attendee list.

We will be sending personal login details via email two weeks before the event, so keep an eye on your inbox.

GAD Editor-in-Chief : Heidi Stancliffe Editorial Contributors: Alfonso Barona, John Bruen, Gediminas Almantas, John Hulsman and GMR Airports Design: Zhovana Khalwatyan

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