CHARM OFFENSIVE - Orient Aviation

By Tom BallantyneThe new owner of Australia’s primarydomestic and international hub,Sydney’s Kingsford Smith Airport, couldbe decided by the end of October. The victor,likely to be buying into a rich source of revenueas well as a few ongoing problems, may haveto pay up to US$2 billion for the prize.There has been little open lobbying by theprospective candidates following a warningfrom the government’s Office of Asset Salesand IT Outsourcing (OASITO), which is organisingthe sell-off, that they should not play theirbids out in public.While an official list of bidders was notreleased following the mid-July deadline forprospective buyers to submit non-indicativebids, the main players are all consortiums:• Southern Cross: Macquarie Bank, CommonwealthBank of Australia (CBA) andGerman airport operator Hochtief.• Sydney Gateway: Hastings Funds Management,insurance group AMP, DeutscheBank, Hong Kong’s Cheung Kong Infrastructureand Canada’s CDP Capital. Britishairport operator, BAA, has a non-exclusiveconsulting role.• Connect: ABN-Ambro, Egis of France andSchiphol/FAG of the Netherlands.Under the terms of the offer Australianinvestors must own a minimum 51% of theairport. Since July, the preferred bidders havehad access to special data rooms to studythe airports highly confidential operationaldata, the information they will use to decideprecisely what to offer for the facility.Investors are keen to win a stake inSydney Airport because, like all airports, it isa virtual monopoly business. The hub handlesabout 40% of all international passengertraffic moving through Australia as well ashalf the country’s air cargo.Insiders suggest the airport will post solid10% underlying earnings growth annually.“Our estimate is ROA (Return On Assets) nextyear of 6.9%, rising to 9% by 2005,” said theairport’s chief executive, Tony Stuart.The sale price for Sydney has beenboosted by an estimated US$600,000, followinggovernment approval earlier this year of anear doubling of airport charges. That movecaused anger among airlines, but in one fellswoop lifted the airport’s annual revenue byaround US$45 million.Another potential concern, the possibilitya second Sydney airport might be built atsome stage in the future, providing seriouscompetition for Kingsford Smith, has beenneatly sidestepped.New Sydney airportowner will facetesting issuesSydney Airport: strong assetWhile the proposed Badgery’s Creekairport, in Sydney’s western suburbs, hasofficially been put on the shelf for the timebeing, government has eased concerns forbidders by saying the winning contender willhave first right of purchase on any secondfacility that is built.The winner also will receive an extremelyefficient and modern facility, thanks to ahuge spending splurge over the past fewyears to ready it for the 2000 Sydney OlympicGames. Indeed, the International Air TransportAssociation (IATA) Global Airport Monitorranked Sydney Airport as the world’s “bestin class” for international airports for the year2000, up from tenth place the year before.The airport has been praised by internationalcredit rating agency Standard & Poor’s,with its associate director of corporate andinfrastructure ratings, Parvathy Iyer, describingit as a “very strong asset” with strong growthprospects. “We view the current managementas quite positive. It’s a very well run airport,”she said.However, she did sound a warningthat the airport could receive a credit ratingdowngrade after privatisation, regardless ofthe buyer. Iyer said she would not be surprisedif the ratio of debt to equity, or gearing, roseto 75% from 40% after the sale, based onother similar airport sell-offs. S & P currentlyrates Sydney Airport with a long-term creditrating of A-plus, with negative outlook and ashort-term rating of A1.Iyer believed the rating could easily fall toBBB if the gearing rose to 75%, as was oftenthe case in an airport sell-off. “If the gearing’sgoing to go up to 75%, that is definitely goingto be a trigger for a downgrade,” she said.The new airport owners will have other issuesto confront, apart from airline complaintsabout levels of charges. Already touching thelimit of its capacity during morning and lateafternoon peak periods, there are seriousconstraints on expansion. The airport operatesunder a strict government-imposed capof 80 aircraft movements an hour as well asan 11pm to 6am curfew.Because the airport is close to the citycentre and heavily populated areas there arerestrictions on flight paths for environmentalreasons.And, like many big airports, it facesconstant attention from local protest andgreen groups fighting issues such as noisepollution. They are steadfastly opposed to anyhint of expansion or easing of environmentalrules.September 2001 | Orient Aviation | 45