International -- European Business: Airports
Is Your Flight Late? Have a Massage (int'l edition)
Privatized European airports are making big bucks--and deals
Travelers don't just hop on or off planes at Amsterdam's Schiphol Airport. They can also entertain themselves by shooting craps in a plush casino, relaxing with a shiatsu massage, or dining on Indonesian rijsttafel. By going the extra step to please customers, the airport earned a tidy $118 million last year on sales of $570 million for Schiphol Group, the state-owned company that runs it. No wonder the Dutch government is preparing to value the company at around $2 billion and float it on the Amsterdam Stock Exchange within the next few months.
After that, Schiphol Group is set for takeoff. With more and more airports around the world outsourcing their management, the newly privatized company figures it has the experience and knowhow to do the job. But the Dutch won't have the field to themselves. Other European airport companies, such as Britain's already private BAA PLC and soon-to-be-privatized Frankfurt Airport Group, have the same idea. Europeans are far ahead of Americans and most Asians in using private management to extend the definition of the airport business far beyond building runways and terminals--and into generating fatter profits. And these groups intend to apply their winning formulas to airports worldwide.
Running an airport, by definition, is a low-risk, high-return business. Once construction is complete, fixed costs are steady, while global air traffic is growing a solid 5% a year. "Every extra passenger is almost pure profit," says Corne Zandbergen, an airport analyst at Fortis Bank in Amsterdam. The Dutch and other Europeans distinguish themselves by adding all sorts of extra services. "The strategy is to turn the airport into a complete commercial hub," says Richard Brakenhoff, an analyst at Kampen & Co. in Amsterdam. Last year, nonaviation sales reached about 40% of airport revenues in Britain and Rome and 50% in Amsterdam and Copenhagen.
Airport-management companies are already finding fertile ground for expansion. Schiphol has a contract to renovate and run Terminal 4 in New York's John F. Kennedy airport. Frankfurt Airport operates baggage services at Stockholm's Arlanda and Newark (N.J.) International Airport and manages the entire airport in both Indianapolis and Harrisburg, Pa. BAA runs retail and catering facilities in Pittsburgh and Newark. Frankfurt and Schiphol have joined forces to bid for 51% ownership of Rome's airports. Among their competitors is Italy's Benetton family, which may offer $2 billion for the airports.
Privatization is critical if Schiphol is to win these foreign contracts. Airports are unlikely to hire a state-owned firm to manage their facilities. As private operators, they also have the freedom to forge alliances. Schiphol and Frankfurt are considering a stock swap to combine their commercial activities. So far, there's little competition from the U.S., where most airports are still publicly operated. They could go private, but it would cost them their tax-free status.QUIET, PLEASE. Not that the European operators don't have problems. Prices being asked for airport assets and concessions are rising steeply. The end of duty-free shopping last year within the European Union hurt retail revenues--$101 million in lost sales at BAA alone. Airport overcrowding and rising jet noise are longer-term threats. Public opposition is holding up construction of new runways in Frankfurt and a new terminal in London. Schiphol's privatization only got the go-ahead after the Dutch government agreed to allow construction of a fifth runway and cut a deal on acceptable noise limits.
Airports are too important economically to hold back. Schiphol produces 2% of Dutch gross domestic product. Dozens of high-tech companies, including Sony, Yamaha, and Cisco Systems, have picked the area around the airport as their European headquarters. "All the investors say they came because of the airport," says Leo Ver Hallen, a Schiphol marketing director. In Amsterdam and other major cities, ways will be found to expand airports. And when they are, innovative management companies like Schiphol will be there.By William Echikson in Brussels, with Jack Ewing in Frankfurt, Heidi Dawley in London, and Carol Matlack in Paris