Tricky takeoff for European airports

European airport IPOs and secondary share offerings are keeping equity capital markets teams busy. Vendors hope to raise up to e20 billion from selling shares in airports in the next few years. But the upcoming privatizations of Amsterdam's Schiphol airport and Milan's Società Esercizi Aeroportuali airport authority, along with a secondary offering by Unique, the manager of Zurich Kloten, seem set for a rough ride as local and political issues put a damper on investor enthusiasm.

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Schiphol: funding is required for a fifth runway

Signs that trouble lies ahead for share offerings in European airports became evident with the less than spectacular performance of the initial public offering for Frankfurt's airport operator Fraport last month - one of Germany's biggest offerings this year.
The lead banks, Morgan Stanley and Dresdner Kleinwort Wasserstein, were forced to cut the indicative price for the issue to between e32 and e37, far below the e39 to e47 that they had been hoping to fetch for the near 30% stake. On June 11 2001, the first day of trading, Fraport shares had an unspectacular debut rising just above the issue price of e35 before stabilizing at e33.
Analysts say Fraport's IPO, which raised e914 million and will create Frankfurt Europe's second-largest listed airport operator after the UK's BAA, was hit both by depressed market conditions generally and concerns about local opposition to Frankfurt's expansion programme and a pilots' pay dispute at Lufthansa, Fraport's largest single customer.
Yet equity investors remain generally attracted to a sector considered recession-proof and capable of generating strong cashflows. With the rest of the world economy suffering from the US slowdown, European passenger traffic is still growing by 5% to 6% annually and cargo at an even faster rate. Fixed costs remain stable and airports are, up to a certain extent, protected from the volatile performance of airlines, as they are paid fees regardless of the number of passengers on a flight. Airports are less exposed to external factors such as high aviation fuel costs and slowdown in business travel.

For BNP Paribas transport analyst Nicolas Van Den Brul, airport investments combine the qualities of a growth stock with the defensive characteristics of a utility. He says: "In the case of BAA, one can make dividend comparisons to local utilities and see that BAA has historically paid a dividend yield of 3%."
Yet uncertainty and problems connected with their dominant home airlines - which all command a lion's share of traffic at each airport - bedevil all three airports set to come to the primary equity market.
Amsterdam is currently studying the implications of a merger between KLM and British Airways after the two companies reopened informal talks. Meanwhile, both Alitalia and Swissair remain adrift and without partners.
Schiphol Group spokeswoman Marianne De Bie says the airport authority looks favourably on an alliance between KLM and British Airways as it would be beneficial to both KLM and Schiphol.
Although Schiphol monitors developments with cautious optimism, both Milan's airport authority Società Esercizi Aeroportuali (Sea) and Unique, the manager of Zurich Kloten airport, are concerned about the future of their home carriers as the choice of alliance partners will have profound implications for the two airports.
Both Sea and Unique openly dread an alliance between their national carriers and Air France, as Aéroports de Paris is one of the few major European airports with surplus capacity. Industry observers say that Air France and the French government will insist on Paris Charles de Gaulle becoming the dominant hub in any alliance, to the potential detriment of Milan Malpensa or Zurich.
Both Swissair and Alitalia have been holding talks with Air France. But it is unlikely that Swissair would decide to join up with another ultra-unionized and state controlled airline at the same time as it is attempting to parachute itself out of its stakes in Sabena and the near bankrupt Aom/Air Liberté.
An alliance between Alitalia and Air France seems to be more likely after recent high-level talks. The two companies could announce a framework agreement some time in July. Clearly not welcoming an Alitalia-Air France alliance, Sea chairman and chief executive Giorgio Fossa says he remains confident that Alitalia and the Italian government will take necessary measures to protect Malpensa's interests.
"Of course one has preferences. However, I believe that if Alitalia were to conclude a deal with Air France rather than say KLM or Swissair, they would know how to protect the Italian-ness of the airports of Milan and Rome in their negotiations," says Fossa, adding. "Let us not forget that Alitalia is an Italian company in which the government still has majority control. They could not negotiate a deal that would hurt the Italian airport system."
Problems for Fossa and Sea were further exacerbated last month, when Alitalia chairman Fausto Cereti declared that Malpensa would never become a hub and that the airline could consider moving some of its flights to other airports if Sea continued to increase the number of flights operating out of Milan's Linate city airport. "Malpensa will never become a hub. Why should one a call a donkey a horse?" Cereti told reporters, adding, "donkeys can be useful but its better not to let them race in a Grand Prix."
The situation for Unique is not much better than that of Milan with Swissair remaining almost alone as its Qualiflyer alliance continues to unravel.
Unique chief financial officer Beat Spalinger says that while Swissair may cut some destinations with end of its Qualiflyer alliance with Sabena and AOM/Liberté, the damage to Kloten should be relatively minor as the carriers will continue to fly to Zurich even if Qualiflyer becomes defunct. He also noted that Aom/Air Liberté and Sabena currently generate a mere 4% of total traffic at Kloten.
For Hamish MacKenzie, an investment banker at Deutsche Bank specializing in the airport sector, continuing doubts about Swissair's future place Unique's secondary offering at greatest risk of all three issues, "because there is a question whether they can work on their expansion programme if Swissair still has problems."
Although mergers among the major European airports are not on the horizon, at least in the short to medium term, there is heated activity among the airports to conclude strategic accords in specific sectors. Schiphol and Frankfurt have already joined forces in the Pantares alliance aimed at creating an integrated airport network by combining activities such as the handling of passengers, cargo, retail, e-commerce, purchasing and international acquisitions.
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