Will the conversion of a taxiway into a second runway be a sweetener for a new investor as rumours are revived over possible GIP London Gatwick sale?

It is been rumoured for some time that Global Infrastructure Partners (GIP) would like to dispose of some or all of its 42% holding in London Gatwick Airport. Similar rumours emerge from time to time about GIP’s 100% stake in Edinburgh Airport. Those are the only two airport assets GIP now holds, since it sold London City Airport in Feb-2016 for a suggested GBP2 billion.


Summary:

  • Global Infrastructure Partners (GIP) is once again thought to be about to sell its share in London Gatwick Airport;
  • A specific purchaser has been “identified”, according to reports, but details remain vague;
  • News last week that the airport is looking to convert a taxiway into a second runway could act as a sweetener for a new investor;
  • With Brexit ‘negotiations’ plodding on endlessly GIP could not be blamed for eyeing other airport investment opportunities across the English Channel in Paris.

Apart from GIP the other investors in the company which runs Gatwick airport are: Abu Dhabi Investment Authority (15.9%); Korea National Pension Service (12.14%); CalPERS (USA) (12.78%) and Future Fund Board of Guardians (Australia) (17.23%). It is not known if any of these entities seeks to increase its stake.

In this case the rumour has reached the stage of “close to reaching an agreement” and one of the potential investors is believed to be Canada Pension Plan Investment Board (CPPIB). CPPIB has no active airport interests but in the past has pitched in variously for Nice Cote D’Azur Airport in France, Santiago International Airport’s (Chile) expansion and operation tender, London Stansted Airport and Madrid and Barcelona airports.

GIP’s 42% holding is believed to be worth GBP3 billion, which would make Gatwick as a whole worth around GBP7.15 billion, or what the management there expected to spend on a second runway had its pitch to government not been beaten by that of London Heathrow. It is also just over 250% more than London City’s price. If that sounds relatively inexpensive compared to London City, which had less than 10% of Gatwick’s passengers in 2017, think of the value of the land that London City is built on and around.

The key to GIP’s decision now probably lies with that runway and with the news that rather than go ahead and build it anyway, to compete head on with Heathrow’s when that is built as Gatwick’s management has suggested would be possible, an existing runway/taxiway could be converted into an operational runway again. An old idea which has resurfaced.

London Gatwick Airport’s 2018 draft master plan sets out proposals for the airport’s ongoing development and sustainable growth. It explains its latest thinking on how the airport can meet the increasing demand for air travel and provide Britain with enhanced global connectivity.View the document: London Gatwick Airport Draft Master Plan 2018   

GIP’s investment in the airport was partly predicated on the calculation of the potential for success in the second southeast England runway battle, which it could see coming even in 2009. It almost certainly was in the case of those later investors who already took part of GIP’s equity there.

Without such a runway, while the future is hardly bleak for Gatwick it cannot achieve the goals that would be open to it. The alternative proposal, bringing a taxiway into use as a runway, could add 20% to 30% capacity as measured by aircraft movements, for not a great outlay.

The 40-year moratorium on any ‘second runway’ with what was the West Sussex County Council from 1979 expires in 2019. However, operations would be limited to short haul. Does that matter? Not really, as 54% of the seats at Gatwick are on flights of less than three hours.

CHART – The majority of flights from London Gatwick Airport are under a three hour duration with the average flight length being 3hr 10minsSource: CAPA – Centre for Aviation and OAG

Under its current planning agreement, Gatwick’s existing standby runway is only used when the main runway is closed for maintenance or emergencies. Its new draft master plan sets out for the first time how Gatwick could potentially bring its existing standby runway into routine use for departing flights, alongside its main runway, by the mid-2020s.

This could be a sweetener to a new investor, but the obvious negative is that it would put to bed Gatwick’s argument for a genuine new-build second runway, for a long time.

It is suggested that GIP could stay on in some sort of management role under contract, especially as CPPIB has no operational experience. But it did not do that at London City, as far as it is known. GIP is a series of private equity funds that exists to make money for its investors, not an operator. That is what London Gatwick Airport Ltd is for. Once they move on, they’re gone.

The other potential ‘key’ to this transaction is that GIP sees better opportunities coming up elsewhere. It has been known for a couple of months now that it is one of at least three big hitters in the business (along with Vinci and Industry Funds Management plan) that intend to submit bids to acquire a stake in Groupe ADP. as the France’s Government seeks to divest its entire 50.6% stake in the Paris airport company.

With Brexit ‘negotiations’ plodding on endlessly GIP could not be blamed for eyeing an altogether better investment opportunity involving two main capital city commercial airports, across the English Channel.