Private airport investment is becoming more attractive in Eastern Europe

Two East European countries, Bulgaria and Romania, have made announcements during the last week which suggest that they are embracing the concept of the private investor in their airports as they are asked to participate at capital city airports.


Summary:

  • In Bulgaria, Sofia Airport is again to be put out to concession, with tough terms following several other successful airport privatisation;
  • In Romania, a new airport is proposed, to be built, developed and managed under a P3 agreement at Bucharest;
  • Both events have taken their lead from the concession on Belgrade Airport but time is of the essence as the political winds gather force in Eastern Europe.

It is possible these events have been driven by the concession of Belgrade’s Nikola Tesla International Airport in Serbia to France’s Vinci Airports, one of the world’s biggest airport investors and operators, which was approved by that country’s Competition Commission in Jun-2018.

MAP – Bulgaria and Romania are neighbouring nations in Eastern Europe and flanked on their eastern coast by the Black SeaSource: Google Maps

In Bulgaria, the government has resurrected the 35-year concession on Sofia Airport, a procedure which was extended (four times), delayed and then cancelled on account of several factors including the election of a pro-Russia Prime Minister in Nov-2016. The government had announced procurement plans in May of that year, and a number of teams were preparing proposals. The airport is one of the last significant state-owned enterprises in Bulgaria.

By the time it was cancelled 27 companies had submitted declarations of interest in the pre-qualification stage of the tender and 25 proceeded to the next stage, at which point they would have been required to submit non-binding offers. But none were forthcoming.

That might be because the airport’s financial results were not too engaging. In 2016 it reported a net loss of BGN13.8 million (USD7.8 million), compared to a profit of BGN5.6 million (USD3.2 million) in 2015. Operationally, the airport also recorded a loss of BGN15.4 million (USD8.7 million), compared to an operating profit of BGN4.4 million (USD2.5 million) in 2015. Potential bidders found the results unattractive.

Then the procedure unexpectedly emerged again in May-2017, under the auspices of the Ministry of Transport. The government contracted with the International Finance Corporation (IFC) to advise it on the process and a potential deal structure. Tenders for the freshly proposed concession were accepted up to the end of Jun-2018. The conditions are tough.

The Minister of Transport said last week that the concessionaire will be required to make a payment of 10% of the revenue generated from airport operations per annum. The Ministry is seeking investment of EUR600 million from the successful company. Concessionaire requirements include holding net assets of EUR200 million in the last three years and operating at least one international airport with passenger traffic of over 10 million ppa. That narrows down the field.

There are other privatised airports in Bulgaria. Fraport Twin Star Airport Management AD is the German-Bulgarian concessionaire at Varna and Burgas airports, 60% owned by Fraport AG and 40% held by Airport Services Bulgaria, and which was awarded in 2006 with a 35-year concession. The company manages both Black Sea coast airports and develops them. And it has done a good job. Since 2009 there has been only one year of negative traffic growth at Varna and so far in 2018 (Jan-May) it is an astonishing 58%. A similar story applies at Burgas.

Then in Mar-2018 Bulgaria awarded China’s HNA Airport Group a 35-year concession to operate Plovdiv International Airport, during which it is obliged to make investments amounting to EUR79 million. HNA Airport Group plans to gradually develop the airport into a cargo distribution and regional tourist hub for central and Eastern Europe, playing an active role in the construction of the ‘Belt and Road’ initiative.

But there has always been an element of diffidence, not only in Bulgaria, but in Hungary and Slovakia for example, towards privatising the capital city airport. It is make or break time. And much the same applies to Romania, where there has been talk of privatising airports, including those in the capital, Bucharest, over the last 20 years but little action.

Bucharest’s main airport, Otopeni (Henri Coanda), and the secondary one, Baneasa (Aurel Vlaicu, which is dedicated now to business jets), are 80% owned by the state and 20% by a fund, but it is a state fund that exists to restitute, at its actual value – the property confiscated by the previous communist governments.

Baneasa is one of the oldest airports in the world and was replaced by Henri Coanda but that airport is becoming capacity constrained. Only last month the Transport Ministry published a draft government decision project proposal including construction of a new passenger terminal capable of accommodating existing and projected passenger traffic, new runways, aircraft platforms and associated airport infrastructure, representing investment of RON4.8 billion (EUR1 billion/USD1.16 billion). Large-scale expenditure indeed for an airport with 12.8 million passengers in 2017 and a growth rate that has fallen by 50% in 2018.

But at the same time the government has adopted another strategic investment package including a proposal for the construction of ‘Bucharest South Airport’. This new airport is planned to be built on an area of up to 600 hectares, equipped with at least two terminals and have capacity of around 30 million passengers per annum, in a support role for Otopeni as an alternative international airport both in terms of passenger and freight operations.

Airport ground access will be provided through the new Bucharest-Alexandria-Craiova highway and the also new Bragadiru-Unirii Square subway station projects. The investment package is to be prepared and awarded under a public-private partnership (P3) by the National Commission for Strategy and Forecasting.

CHART – Bulgaria (top) and Romania (bottom) have seen a significant growth in LCC traffic following their entry into the European Union Source: CAPA – Centre for Aviation and OAG

So both of these countries are belatedly seeking private capital and expertise for their capital city airports, in Bulgaria’s case the existing one and in Romania’s a new one. 12 years ago such was the suspicion surrounding airport transactions in this part of the world, following a string of questionable tenders and transactions that the attraction of serious bidders with EUR600 million to put into investment was pretty much out of the question.

However, since then, both of the countries have joined the European Union, LCCs have been attracted (currently offering 50% and 65% of international seat capacity respectively in Bulgaria and Romania) and tourist numbers have increased by four million and 1.5 million respectively.

CHART – Bulgaria (top) and Romania (bottom) have seen notable rises in annual tourism visitor arrivals Source: CAPA – Centre for Aviation and Republic of Bulgaria and Romania National Statistical Institute

The time is right to seal both the deals but any further delays while East European countries continue to drift away from Western ones in the EU on issues such as immigration, raising the possibility that they could break away after the UK leaves in Mar-2019, could be fatal.