Agi: Snapping Up The Runways
Like most people who buy airports for a living, Patrick Cowell is spending a lot of time away from home these days. Until recently, the notion of privatizing airports produced a lot more talk than action. But over the past year, cash-strapped governments around the world have put up scores of major airports for sale or lease (table), and this trend shows every sign of accelerating. "The fish are really jumping in the pond," says Cowell, chief executive of Airport Group International Inc. (AGI), which has emerged as the top U.S. contender in a highly politicized, big-bucks contest for global airport supremacy.
At a cost of about $500 million, the Burbank (Calif.)-based AGI has acquired three airports in Bolivia, two in Australia, and another in England to go with the 18 U.S. airports it already helps manage for other owners. But these buys look like just a warmup for AGI's deep-pocketed shareholders, led by Lockheed Martin, Soros Fund Management, and GE Capital Services. Cowell now is eyeing large-scale privatizations in Mexico, which has invited bids on 35 airports, and Portugal, which may offer 15. "We certainly regard AGI as a major competitor," says Michael Bell, president of the U.S. arm of BAA PLC, the reigning world champion of airport privatization.
For a growing number of public authorities, selling airports has become the best way--in some cases the only way--to attract the funds needed to expand them. For private buyers, the lure is the purchasing power of the hordes of affluent travelers who throng the world's airports. In addition to attracting more flights, private owners try to boost revenues by adding shops, restaurants, hotels, golf courses, and other amenities. "Airports stand virtually alone in welcoming a population with the highest concentration of disposable income," says Cowell, a native Tennessean who formerly was a top executive of South Africa's Sun International Hotels & Resorts Ltd.
Founded in 1929, AGI may well be the world's oldest commercial airport operator. But for most of its existence, it was a sleepy, minor Lockheed division called Lockheed Air Terminal. In the mid-1990s, the aerospace giant renamed the unit AGI and refashioned it into a stand-alone company with the aim of buying airports as well as running them. Cowell, 48, was hired in 1996 to complete the overhaul. Along the way, Lockheed gradually reduced its ownership (currently 38.7%) by selling stakes to a group of heavyweight investors, including Soros (28.4%), GE Capital (9.4%), construction giant Bechtel Enterprises (4.7%), and airport shop operator DFS Group (3.5%).
Although dwarfed in size by its owners, AGI's push into airport ownership is spurring rapid growth. Revenues hit $138 million in 1997, up 83% from the previous year, according to Cowell. And the company posted a $2 million profit after a $10 million loss in 1996.
Ironically, many of the most active rivals that AGI is facing in global auctions are government-owned airport operators. Some are national (notably Spain and Ireland) and others municipal in scope (such as Amsterdam, Frankfurt, and Paris). But many of these agencies are chafing under government control and hope to float public stock offerings, as the airport agencies of Copenhagen, Vienna, and Rome have done already.
AGI's backers--Soros excepted--are seeking strategic benefits as well as direct profits from global airport ownership. Connections made through AGI, Lockheed expects, will boost sales of its air-traffic control and airport security systems. GE Capital is looking to finance the construction of new airports, which Bechtel hopes to engineer and build. And for DFS, the world's largest duty-free retailer, owning a piece of an airport should give it a leg up in bidding for prime terminal space.
By contrast, AGI is purely an investment play for Soros, which hopes ultimately to earn 20% to 25% annually on its money. While all of AGI's owners want to take the company public, an initial public offering is unlikely before 1999. "I think we all feel that the company has to win a few more bids before we attempt an IPO," says Robert Soros, a managing director of Soros Fund Management and a son of famed speculator George Soros.
AGI's business plan projects revenues of $700 million and profits of $30 million to $50 million by 2000, Cowell says. To meet these ambitious goals, AGI will have to win a large-scale privatization. However, AGI's unhappy experience in Germany suggests that this could prove much easier said than done. Last October, the state of North-Rhine-Westphalia picked an AGI-led consortium as the final bidder among a dozen contenders for a 50% stake in Dusseldorf Airport. But just two weeks later, state officials reversed themselves and announced a new winner: German construction giant Hochtief. While offering no public explanation, officials say privately that AGI reneged on a promise to raise its bid. Cowell, angrily denying any such promise, contends that the state caved in to pressure from Hochtief.
Shaking off this bitter disappointment, Cowell submitted a proposal for a much bigger, $4.5 billion airport project in Berlin. In January, rival consortia headed by AGI and Hochtief were among four groups short-listed in Berlin. But just a few weeks later, AGI quietly withdrew. "To buy a foreign airport anywhere in the world, you've got to have local partners," Cowell says. "But in Germany, you have to have partners powerful enough to go up against Hochtief--and we didn't."
Cowell's job also requires some fancy footwork within AGI. Since the company has little permanent capital of its own, its CEO has to solicit the participation of each partner in each deal. And because AGI's owners are a diverse lot with varying investment criteria as well as abundant opportunities outside the airport business, this can be a contentious as well as unwieldy process.
Cowell was rudely introduced to AGI's internal politics when he was shepherding its successful bid for a 50-year leasehold on Perth Airport, awarded in mid-1997. Judging the $495 million bid to be too rich, Soros declined to participate. Cowell scrambled to find other investors and eventually filled most of the void by signing up Infratil Australia, an infrastructure investor, for a 49.5% stake.
GOLF, ANYONE? Perth is unusual among privatized facilities in that it already ranks among the top airports in the world in terms of passenger spending per capita. Concedes Cowell: "The real upside in Perth is nonaeronautical revenue." The airport came with 3,000 acres of lightly developed land, on which Cowell hopes to build a resort with a golf course.
In Bolivia, meanwhile, AGI's far more modest plans for the three airports it acquired under a 25-year lease have been complicated by a tiff with Lloyd Aereo Boliviano (LAB), the national airline, which for years had paid lower landing fees than other airlines. When AGI did away with LAB's preferential rates at its three airports, the airline withheld payment of all fees. AGI responded by grounding all LAB flights for the several hours it took to arrange a truce.
As it scouts opportunities abroad, Cowell will have to battle to maintain AGI's management franchise at home. Late in 1997, the Burbank-Glendale-Pasadena Airport Authority announced that it would put out for bid a management contract AGI has held since 1978. BAA promptly announced plans to bid on what has long been AGI's home airport. But to Cowell's relief, a few weeks later the Burbank airport commission reversed itself and said it would renew AGI's contract after all. In the airport business, it seems, hometown politics knows no nationality.