The privatisation path in Hungary

Posted: 16 September 2005 | Sarah Hunter, Head of Investor Relations at BAA | No comments yet

The UK became the first country to privatise its airports almost 20 years ago, a trend subsequently copied around the world to help fuel infrastructure investment.

The UK became the first country to privatise its airports almost 20 years ago, a trend subsequently copied around the world to help fuel infrastructure investment.

The privatisation path is now being pursued in Hungary. The imminent involvement of the private sector at Budapest airport provides an opportunity to examine why airport privatisations have been successful and discover how the experience can benefit Hungary’s most important airport.

Like Budapest the British Airports Authority in the UK, known since privatisation as BAA plc, was originally managed directly by the UK Ministry of Transport. Its directors were appointed by the Ministry and its investments were controlled by the state. With six million passengers a year Budapest is in the same position today as Gatwick was in the early 1980s.

There is little doubt that Budapest has the potential to make as successful a transition to the private sector as BAA. But selecting the right framework for the privatisation is vital; the Government must select a partner equally committed to prolonged success. Without this, Budapest will not deliver the long term development needed by passengers, airlines and the Hungarian community.

Driving factors

UK privatisation was driven by three forces. The first was financial. The cash proceeds generated following the sale of the assets were large. The privatisation relieved the British Government of public expenditure commitments, removed debt from the public sector borrowing requirement and excused the Government of pension fund obligations for retired workers.

The second force was economic. The general principle of privatisation is that it improves efficiency. Unlike the public sector which can rely on taxpayers, private companies are driven by commercial imperatives and the profits incentive motivates management to increase productivity and reduce costs.

Furthermore, free of public sector constraints, BAA was able to hire the best management and take a more flexible and progressive approach to productivity. Similarly, with its new freedoms and access to financial markets, it was able to borrow to invest in airport infrastructure in a way its predecessor was not able to. The removal of the state also provided it with the impetus to focus on customers – both passengers and airlines. BAA quickly realised that customer demands had to be satisfied if it was to continue generating commercial returns into the future.

The third reason for the UK privatisation was political. In the 1980s, privatisation was a fundamental ideological philosophy of the UK Government and under its auspices the UK saw a succession of major state entities transferred to the private sector. The British Government at the time privatised the British Airports Authority, British Airways, utilities such as water, gas, electricity, telecommunications and the oil giant, BP.

Global outlook

However, other global airport privatisations were initially few in number. Despite the privatisations of other utilities and industries being increasingly commonplace, seven years after the privatisation of the UK’s airports only nine other major airports had been transferred into private hands. Today’s picture is markedly different though, with a significant number of airports now in private hands. There have been airport privatisations in Australia, South Africa, Europe, North America and South and Central America.

An indicator of the strength of privatisation is that BAA’s airports now handle more than 200 million passengers a year. Using skills honed in the UK, the company has developed a successful international business, acknowledged by many as one of the world’s leading airport companies. For instance, as well as its seven UK airports, including the world’s busiest international airport – Heathrow – BAA has interests and manages operations at Naples in Italy, at six Australian airports and at four airports in the USA.

Indeed, it can be said there are characteristics which differentiate its international investment strategy from competitors. For instance, its investments are not driven by a desire to generate short term returns from construction or from a desire to extract short term cash flows for financial investors. The company’s strategy is to ensure its investments develop into successful and profitable airport operations, which deliver long term value and excellent customer service to passengers and airlines. It is this long term approach that typifies BAA’s international investment strategy.

The clearest example of this approach can be seen in Naples. In 1995, a 65 per cent stake was acquired in what has become southern Italy’s premier airport. Instead of looking to generate short term returns by slashing costs and reducing functions from the airport, the focus was placed on training staff and transferring experience. The result has been productivity gains and an airport that now handles 4.6 million passengers a year and delivers operating profits of £6 million (for the year ended March 2005).

Investment rules

The growth in air travel around the world has made airports an attractive proposition for investors. However it has also meant that there is often a requirement for heavy investment in new facilities to ensure that additional passengers are handled efficiently and receive a suitably high standard of service.

During the last 17 years BAA has invested more than £8 billion in its airport infrastructure, with a further £8 billion earmarked for investment over the coming decade. It has funded all of its investments from its own resources without recourse to taxpayers. In the UK, it has also recognised the importance of efficient public transport networks to airports. The Heathrow Express rail service, a high speed rail service that links Heathrow to central London, has been built. It is not surprising that BAA is keeping a close eye on the rail developments at Budapest.

Despite the fact that more than £2 million daily is invested by BAA in its airport infrastructure, BAA’s airports are a commercial success. In 1987 the company’s pre-tax profits were just over £100 million. Today they are more than £550 million. The fact that its airports are also setting standards in safety and security is proof that private sector operators do invest in safety. To BAA, ensuring its airports are safe and secure is the first priority. It is this approach that led the U.S. Congressional Reviews to approach BAA for security advice following 9/11.

Not only airports but also the airlines have benefited from privatisation. BAA’s charges have declined by around 13 per cent in real terms and are among the lowest of any major airports in the world. In the latest world rankings, Heathrow comes in at 27 despite being the world’s number one in terms of international passenger volumes. The company has also been at the forefront of the low-cost airline growth revolution in Europe, with London Stansted growing from around 1 million passengers in 1991 to more than 21 million passengers today. Stansted is a major base to Europe’s largest low cost airlines – Ryanair and easyJet.

Productivity is also up. Despite the rise in passenger volumes, from 55 million in 1987 to 140 million today, the number of staff employed by BAA has barely changed. Today, just 500 extra staff are employed. Additionally nearly all of this productivity improvement has been achieved through investment in technology, improving processes and natural wastage – there have been no compulsory redundancies.

Another first since privatisation has been a commitment to responsible development. Innovative strategies have been put in place to ensure that the company operates as a good corporate citizen. For example the company is recognised as Europe’s leading aviation advocate of emissions trading as the best solution to air travel’s carbon dioxide impacts. BAA’s strategies look to ensure communities around its airports reap the maximum benefit available from the airport and suffer as little as possible from negative impacts. The activities cover a wide range of issues including noise, waste and pollution.

Passenger focus

A major factor in BAA’s success in improving customer service has been to focus on passengers requirements. BAA has therefore endeavoured to increase its understanding in this area by surveying more than 100 million passengers every year. This has resulted in a change in approach to airport retailing. Today’s passengers are looking for a genuine choice of things to do, places to shop and eat. Increasingly they are also looking for access to aspirational brands and services at a guaranteed fair deal. Privatisation gave BAA the spur to turn from a supply-focused organisation to the customer focused operator it is today.

In summary, as well as being the first airport privatisation, BAA has also been one of the most successful. It has delivered more efficiency, lower prices, higher investment, better service, more choice and consistent returns for investors, while at the same time improving safety and security.

Since BAA’s privatisation, the family of privately owned and operated airports has grown in number and in diversity. But today’s Governments and public owners are increasingly opting for a half-way house. Part flotation, trade sales, strategic partnerships and management contracts have emerged as alternative forms of privatisation. Whilst all operators prefer effective management control, BAA’s success demonstrates that if newly privatised businesses are also registered as stock exchange listings positive results are possible not only for airport performance, but also for investors. The listing ascribes value to the airport and allows staff and members of the local population an opportunity to share in the airport’s success.

With this perspective it can be seen that the privatisation of Budapest airport presents a unique and never-to-be-repeated opportunity; to create a leading airport that will cement Hungary’s position at the heart of Europe.

Sarah Hunter

Sarah joined BAA in 2004 as Head of Investor Relations. Prior to joining BAA she spent two years at the Royal Bank of Scotland in investor relations. A commerce graduate of Bond University in Australia, Sarah is currently responsible for BAA’s relationship with the city and investment community.

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