Last year, 3.8 billion people made a journey on an aeroplane, and by 2035 that figure is expected to double. If countries are to remain competitive in the battle to attract a new wave of air travellers, it’s vital their airports are fit for the future.
René Lavanchy, Journalist
29 March 2018
Perched precariously on its Queens promontory, runways jutting into the East River, the old is – finally – giving way to the new at New York’s LaGuardia Airport. The original main terminal building, opened in 1964, was expected to handle no more than eight million passengers a year. To cope with the 15 million people who now pass through the terminal, work has been under way since June 2016 on the 1.3m ft2 (120,770 m2) LaGuardia Central Terminal B, which will provide over 50% more floorspace, enough to accommodate the 17.5 million passengers expected by 2030.
While LaGuardia may be a high-profile example of America’s under-invested and worn-out infrastructure – former vice-president Joe Biden once likened it to being in “a third-world country” – it is far from the only one. “Most of the airport terminals, from small regional facilities to large hub airports in the US are ageing,” argues Dwight Pullen, Denver-based senior vice-president and national director of aviation at Skanska USA. “You can walk through them and see that.”
Not only has traffic increased, so has the size of planes, Pullen notes. The taxiways at LaGuardia are too cramped for modern wide-body aircraft, and public areas too small for the passenger numbers dropped off by each plane. Nor is there space for today’s security screening procedures. It is a pattern repeated all over the country. US airports have drawn up plans for $100bn of infrastructure projects between 2017 and 2021, according to Airports Council International, but many of these plans have yet to leave the drawing board.
If the US has the biggest need of renewed airport infrastructure, Asia and the Middle East may require the most extra capacity over the coming decades. The International Air Transport Association expects four of the five fastest-growing aviation markets in 2016-2035 to be in Asia, totalling an extra 1.8 billion passengers across the region. The Middle East is forecast to be the fastest-growing region, with 4.8% growth and 244 million more passengers.
“There is significantly more growth here in terms of population, GDP, middle class – each of which are key drivers of airport growth and capacity need. Among the biggest obstacles to Asia achieving its potential in terms of economic growth and GDP is the state of the infrastructure” - Don Stokes, Asia-based partner, Freshfields Bruckhaus Deringer.
In the Middle East, the generators of growth are the airlines themselves, suggests Vimal Shinh FRICS, director at Turner & Townsend in Dubai. “The UAE especially and the GCC [Gulf Cooperation Council countries] are becoming large hubs. They’ve got some of the biggest airlines with aggressive growth plans,” he says. “That’s what’s pushing the demand, which is then pushing the airlines, which is then pushing the reason for these huge [infrastructure] assets, because the airlines are growing out of the assets that they have.”
Dubai is spending more than $27bn over 11 years expanding Al Maktoum International Airport to be the future base of the Emirates airline. The ultimate capacity of 220 million passengers would be more than twice that of Atlanta’s Hartsfield-Jackson, currently the world’s busiest airport. With deep pockets and authoritarian political will, Dubai may be willing and able to afford to fund this from public borrowing and revenues. But countries with neither are turning to private finance.
Back at LaGuardia, a British-born quantity surveyor is picking his way round the new terminal’s construction site. On the shoulders of Lionel Dore MRICS, director at Canadian cost consultant BTY Group, rest the interests of American bond investors, who are providing $2.41bn of the $4bn budget. “We visit the project on a monthly basis. We walk the project,” Dore explains. “We have a meeting beforehand with the contractor and concessionaire to understand what’s happened in the month, how much money they are applying for, then we get out and see if that’s reflected.”
That close monitoring is a prerequisite for unlocking private finance in infrastructure. The new terminal is being developed by a private consortium, under a public-private partnership (PPP) contract with the Port Authority of New York and New Jersey that operates LaGuardia. In return for financing, building and maintaining the terminal, the “concessionaire” will operate it and collect revenues for 35 years. While airport terminal PPP projects are nothing new, the LaGuardia project is the first of its kind in the US.
Public authorities, particularly in the US, often see PPPs as simply an additional pot of money they can turn to when unable or unwilling to finance investments from their own borrowing. But once an authority gets interested, advocates say, further benefits emerge. “In a PPP, the partnership is crucial. Working together with the port authority helped us define a solution for the project that went well beyond just financing,” says Farhad Soltanieh, investment director at Skanska Infrastructure Development, one of the LaGuardia consortium’s stakeholders.
“We provided an innovative design, construction and operational solution that achieved the client’s objectives,” Soltanieh says. “It was more cost effective, and served the airport better from the overall delivery and operations perspective.” As revenues grow at the terminal, the consortium pays a share back to the port authority, thus ensuring the public sector can enjoy the fruits of any increased profitability.
President Donald Trump has decried the state of his country’s airports, and his budget proposal promises to make greater use of private finance, including PPPs, so it is likely the federal government will encourage the states and cities that run most US airports to embrace this model. It will not, however, be easy. Securing private capital for an airport requires hard work to demonstrate how that capital will be protected and repaid.
On the other side of the world from New York, private finance is upgrading Mactan-Cebu International Airport, the second busiest in the Philippines. A consortium including India’s GMR Airports is investing some $670m in upgrading the airport, which was designed for 4.5 million passengers, but handles more than eight million.
Sidharath Kapur, president of finance and business development at GMR, is full of praise for how the Philippine government has worked with his firm. However, PPPs in the Philippines have had several false starts over the past decade. One flaw with earlier projects was that the state expected the private sector to assume the risk of securing the permits to build on land. The potential delays and cost overruns involved were unpalatable to investors – a situation the government rectified on Mactan-Cebu.
Access to land remains a problem in Asia: in India, the construction of a new $2.5bn privately financed airport for Mumbai is being held up by the acquisition of the necessary land, which the government failed to complete before awarding the contract.
Making the numbers add up is another problem. Stokes notes that airports in emerging markets such as south-east Asia derive a relatively low share of their revenues from non-aeronautical sources, such as car parking and retail. Most comes from aeronautical revenue like aircraft landing charges. But these airports’ reliance on low-budget airlines, he adds, means “it’s very difficult to generate the sort of revenues that you need for project finance”. This, in turn, makes airports reliant on low-cost development finance, which is limited.
Kapur concedes the point about non-aero revenues, but the flip side, he argues, is that those revenues are growing much faster than in developed countries, such as India, which is reporting average growth of 20% a year: “There are opportunities for private operators to enhance their business model and create shareholder value, because typically in non-aero revenues, a large part goes into the bottom line.” That seems to be the business model for Mactan-Cebu, where much of the debt financing the upgrade is only repayable after 15 years, according to reports. This reflects the fact that the investors plan to grow commercial activities at the airport over the life of the contract, generating enough cash to repay the debt.
PPPs are often lauded for commanding a tighter grip on finances, but they are not immune from cost overruns. This summer RICS joined with more than 40 other global professional bodies to launch the International Construction Measurement Standard, a set of common rules to allow like-for-like cost comparison across global construction projects for the first time.
Kevin O’Grady, an associate director in Arup’s airports practice, believes the standard will benefit his UK airport clients by reducing the scope for cost creep: “The accuracy of cost information to support funding requests is paramount … robust data enables better decisions on design and cost at every project milestone gateway.” Projects whose cost is contained are less likely to be de-scoped or scrapped.
Well-resourced, well-run airports can be made more profitable and contribute more to the economy. Nevertheless, some megaprojects currently on the table will still struggle to pay for themselves. Vietnam plans to seek private investors for a $16bn airport at Long Thanh to serve Ho Chih Minh City, but still expects to contribute substantial public subsidy. Even LaGuardia’s $4bn terminal is part-funded with $1.2bn of grant money from the port authority; this may or may not reflect the relatively low landing charges paid at airports in the US.
“It makes a lot of sense, provided that the risks are manageable, to have the private sector involved. There are instances – particularly at the early stages – where the risks are too great for the private sector to take. It depends what you can charge and what the risks are on revenue. Sometimes a private company will work on certain parts of an airport.” - Chris Chalk, UK-based aviation practice leader, Mott MacDonald.
Established global power or emerging economy, countries have a common goal in expanding their airport capacity to meet demand – and they are responding in different ways. The Middle East, with determined governments and relatively underdeveloped land, is powering ahead with megaprojects. China aims to build more than 70 airports between now and 2020, but other governments in the region are proceeding more slowly and with tighter budgets. The US, meanwhile, could be on the cusp of an airport-building renaissance, if it can get the projects and the financing right.
Operators that fail to invest could find airlines voting with their feet, warns Chalk. “If there’s a lot of congestion, the airport will become less attractive to airlines and they may choose other destinations or put more capacity on elsewhere. Delays cost money, so from an airline perspective it’s important.”
Success or failure in delivering investment could determine which countries can best compete for economic growth and jobs, suggests Dore’s fellow BTY director, Ryan Brady: “If the US falls behind in the quality of its infrastructure, it affects its ability to move goods and services through supply chains, and it impacts our competitiveness on a global scale, which is a salient topic at even the highest levels of government.” President Trump would doubtless agree.
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