Has the trend line shifted? The impact on airport valuations
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Has the trend line
shifted? The impact on
airport valuations
Constantinos Orphanides and Romil Radia
Executive summary In particular, the mid to late 2000s saw
Edinburgh Airport has been sold, numerous transaction multiples at or
and a number of other high-profile above 25 times EV/EBITDA.
European airports may be put up An assessment of passenger traffic
for sale—making airport valuations growth forecasts at the time of
a hot topic. Discussions PwC has these transactions indicates that
had indicate a strong interest in expectations were for continued
these assets. Clearly, understanding traffic growth from an all-time high,
individual airport value drivers and rather than a reversion to the long-
associated risks is key to securing a term passenger growth trends seen in
good deal. previous years.
Airports are a unique class of asset. But unlike more traditional
While they have historically enjoyed infrastructure assets, airports serve
a moderate degree of cash flow airlines as their primary clients and
certainty, they have also offered therefore share in the fortunes and
greater potential for growth than more woes of a highly cyclical industry.
traditional infrastructure assets. Airport valuations are predicated on
expected future cash flows, which are
underpinned by passenger demand
Airports are a unique class of asset. for travel.
Airport cash flows have shown
resilience in previous economic
downturns. But this aspect of airport
Against a backdrop of greater performance may not be as immune
availability of credit and sustained to wider market volatility as observers
passenger traffic growth, these once thought.
prospects were typically reflected
in high enterprise value to earnings With the onset of the global financial
before interest, tax, depreciation and crisis, and as passenger traffic
amortisation (EV/EBITDA) transaction weakened and growth expectations
multiples for European airports. diminished, downside valuation risks
6 PwC | The “new normal” for airport investmentAirports are in the news again. Airport investors
Financial investors in airports such
as infrastructure or pension funds
for airports became apparent. These airports may gain momentum, driven are interested in the stable cash flows
risks were subsequently borne out by by the continuing eurozone crisis. airports offer. And they often invest
airport transaction multiples observed with their eye on the long term. Many
Given current and imminent airport focus on the internal rate of return
since 2008, which, on average, declined
deals, it’s not surprising that airport (IRR). They also try to enhance value
in line with traffic growth expectations.
valuations are a very current topic. by implementing optimal financing
Today’s market is characterised by structures.
modest growth expectations and
Airports are uniquely Trade buyers (such as other airport
significant short-term uncertainties.
appealing assets operators) try to improve operational
For this reason, we don’t expect to see
Many investors see airports as efficiencies, for example by increasing
a return to the EV/EBITDA transaction
relatively safe assets. That’s because commercial yields and by expanding
multiples of more than 20 times for
airports typically offer stable cash the airport’s route network. We are
European airports that were last
flows with the potential to realise observing an increasing trend of
observed in the mid to late 2000s.
significant capital gains upon disposal. airport operators forming consortia
Instead, airport transaction multiples
Indeed, having at times enjoyed traffic with financial investors with the
will likely stabilise.
growth rates in excess of two times aim of boosting value through
We expect regional airports, which GDP growth, listed European airports operational and financial structuring
have higher traffic growth, to transact have on average outperformed the improvements.
within a range of 14 to 18 times EV/ Eurofirst 300 index over the last five
EBITDA and larger, more mature years. (See Figure 1.) The key messages arising from this
airports to transact within a range of paper are relevant and applicable to
Even when air traffic falls during both trade and financial investors.
10 to 14 times EV/EBITDA.
economic slowdowns, airports can
However, once there is greater still deliver growing dividends to
visibility around the strength and pace investors through the deferral of
of traffic recovery, nothing precludes operating costs and rescheduling or
observing the higher level of multiples reducing capital expenditure.
again in the medium term, if there are
asset-specific reasons to justify this.
This article explores the trends in UK Figure
Figure1:1:
Listed European
Listed airport
European shareshare
Airport price price
performance
performance
passenger growth and the movement
250
in EV/EBITDA transaction multiples
for airports over time. It also highlights
airport valuation drivers and risks. 200
Finally, we identify considerations
important for investors to take into 150
account when valuing airports.
Index
100
Airports: A very current
valuation topic 50
Airports are in the news again: Airport
operator BAA recently sold Edinburgh
0
Airport to Global Infrastructure Jan May Sep Jan May Oct Feb Jun Oct Feb Jun Oct Mar Jul Nov Mar Aug Dec
Partners for £807.2 million, and the UK 06 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 11 11
Competition Commission confirmed
Københavns Lufthavne A/S (CPSE:KBHL) Fraport AG (XTRA:FRA)
an order against BAA to sell London
Aeroports de Paris (ENXTPA:ADP) Flughafen Zuerich AG (SWX:FHZN)
Stansted. At the same time, partial Flughafen Wien AG (WBAG:FLU) Listed European Airport Average
or full privatisation of state-owned EuroFirst 300 - Price index
Source: Datastream and Capital IQ
Has the trend line shifted? The impact on airport valuations 7UK traffic: Reversion Figure
Figure2:2:
UK airport
UK traffic
airport andand
traffic GDPGDP
growth
growth
to trend? 250 100%
90%
Tracking growth against the
80%
trend 200
Through
Through Through 70%
Figure 2 shows UK terminal passenger to trend to trend to trend
traffic (“pax”) since 1976, with the ? years 60%
Pax (million)
150 4–5 years 5–6 years
long-term passenger growth trend 50%
superimposed. 40%
100
30%
The graph shows that up until 2008,
20%
it typically took four to six years for 50 10%
traffic to return to the long-term
0%
passenger growth trend following a
recession or other economic shock. 0 -10%
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Thanks to these patterns, it has
UK terminal pax UK real GDP growth (%)
often become conventional wisdom
UK pax growth (%) Long-term UK pax trend
that traffic growth and associated
airport cash flows will revert to the Source: CAA, IMF, PwC analysis
long-term trend after a shock rather
than grow at a similar rate from a
lower base. Indeed, between the late Figure
Figure3:3:UK
UKairport traffic
airport andand
traffic European transactions
European transactions
1990s and mid 2000s, UK traffic saw 350 35.0x
significant growth above the long-
term trend. This was fuelled by a 30.0x
sustained period of economic growth, 300
2006–2008 Avg.
greater availability of credit and the
EV/EBITDA multiple
25.0x
22.4x
emergence of low-cost carriers (LCCs).
Pax (million)
250 2000–2005 Avg.
2000–2002 Avg. 17.1x 20.0x
15.0x
2009–2011 Avg.
Growth expectations and 200 14.2x
15.0x
transactions 10.0x
Figure 3 shows actual UK passenger 150
traffic alongside UK traffic 5.0x
expectations in 2007, the last full year 100
prior to the global economic crisis. 1998 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
In 2007, the expectation was that UK UK terminal pax European airport transaction multiples
airport traffic would continue growing UK pax growth (%) Average transaction multiple
from its 2007 peak at a rate broadly in Long-term pax trend
line with the long-term growth trend.
With hindsight, it’s clear that 2007 Source: CAA, DIT projections, PwC analysis
Note: The graph above combines European transaction and UK traffic data as European traffic information
passenger growth expectations did not dating back to 1976 was not available
materialise.
Take a look at the EV/EBITDA
2000s, peaked in around 2007, and on growth, with the simple relationship
multiples between 2000 and 2012 for
average, have fallen since. being that the greater the growth
European airports in Figure 3. There
potential, the higher the multiple.
are obvious challenges in comparing Perhaps unsurprisingly, passenger
transaction multiples between numbers in the UK have seen a similar In the case of airports, a primary
airports, due to each airport’s specific pattern. The upshot of this analysis driver of earnings growth potential is
operations and individual growth is relatively straightforward: at a passenger growth.
potential. However, it is fair to say basic level, transaction multiples
Back in 2006–2008, observers
that on average, airport transaction are a function of current earnings
expected long-term passenger traffic to
multiples rose in the early to mid and expectations for future earnings
keep growing at the rates seen in the
8 PwC | The “new normal” for airport investmentWhat influences an airport’s value?
Discounted cash flow analysis. While transaction multiples provide useful valuation benchmarks, typically the
discounted cash flow (DCF) valuation methodology is used as the primary approach in valuing airports. This is because
airports generally have long-term projections that offer cash flow visibility. The DCF approach is also more appropriate
for differentiating between an airport’s revenue streams (aviation, retail, real estate, external operations) and the various
regulatory mechanisms under which airports operate.
Airport transaction multiples. There are clear challenges in comparing transaction multiples between airports. This
is due to each airport’s specific operations and individual growth prospects. In addition to market factors and competitive
bidding conditions at sale, key factors impacting airport value and transaction multiples include the following:
• Maturity of the airport. Most large, mature airports • Catchment area penetration. The extent to which
have less potential for increasing traffic than smaller an airport has penetrated its primary and secondary
regional airports and may trade at a lower multiple. For catchment areas affects its passenger growth potential.
a small regional airport starting from a low passenger
• Capacity constraints. Runway or terminal capacity
base, attracting two or three new airlines can transform
constraints tend to depress an airport’s traffic growth
the business—a prospect that’s often reflected in
potential. Alleviating these constraints may require
transaction multiples. Conversely, larger airports tend
significant capital expenditure (capex) as well as
to have a broader airline base, so they’re less vulnerable
planning and regulatory approval.
to customer concentration risk and volatility.
• Airport traffic mix. The makeup of an airport’s
• Potential for yield improvements. Airports with
traffic—the mix of domestic short- and long-haul
nonaeronautical revenues that are lower than those of
as well as business, leisure, charter and low-cost
comparable airports can boost their earnings by improving
traffic—affects airport earnings. For example, traffic
their retail offerings, increasing parking fees, and making
mix can strongly determine an airport’s commercial
other, similar enhancements. This potential for better
revenue spend per passenger. Domestic passenger retail
earnings can also be reflected in transaction multiples.
spending will tend to be lower than that of other leisure
• Regulatory environment. Airports are typically and business travellers, due to shorter airside dwell
subject to regulation when regulators see them as time. Also, business traffic will be more resilient to an
holding substantial market power. Regulated airports’ economic slowdown, compared to other traffic types
risk/reward profiles differ from those of unregulated such as charter.
airports, and they are viewed differently by the
• Airline customer dependence. The degree of
market—for example, investors see regulated airports
airline concentration at an airport will impact value.
as more vulnerable to changes in regulatory regimes.
If an airport is highly dependent on one or two key
Airports are also subject to different regulatory
airline customers, a reduction in aircraft capacity (due,
environments in different jurisdictions. In the UK, for
for example, to reallocation of aircraft capacity across
instance, regulated airports are allowed to earn a return
an airline’s network or airline bankruptcy) will have a
on their regulated asset base (RAB). RAB is therefore a
material impact on the airport. Further, airports typically
key valuation metric, and the market places significant
have to frequently renegotiate tariff increases with their
emphasis on enterprise value to RAB multiples in
main carriers, and single airline dominance at an airport
assessing the value of regulated airports.
will affect negotiating power.
Given the number of circumstances affecting an airport’s value,
investors need to carefully assess airports’ comparability and
adjust transaction multiples where appropriate.
Has the trend line shifted? The impact on airport valuations 9immediately preceding years rather expectation is that UK real consumer sharper than that observed in previous
than revert to the long-term trend. spending is likely to be broadly flat periods of economic recession, a 10-to-
Put another way, they anticipated a during the remainder of 2012 with 12-year period for reversion to the
one-off upward shift in the long-term only modest growth in later years. long-term trend appears likely. Indeed,
traffic trend. if one were to focus on lower passenger
The speed at which traffic may return
growth profiles, it could be argued
These expectations were reflected to the long-term trend line hinges on
that the long-term trend line is shifting
in increasingly higher transaction the pace of economic recovery. Figure
downwards and that the premise that
multiples paid over that period. In 4 sets out current passenger number
traffic always reverts to long-term
effect, investors in airports were expectations for the UK aviation
historical trends must be questioned.
willing to pay high sums for the future market, but also projects a range of
growth they anticipated in 2007. Once potential passenger growth profiles Looking at current growth
investors realised that the expected based on forecasted UK GDP growth expectations and market uncertainties,
growth wasn’t going to materialise— and a range of income elasticities. we don’t expect to see a return to the
and once credit markets tightened— 20+ transaction multiples that were
In Figure 1, we saw that in the early
transaction multiples declined. observed in the mid 2000s in the short
1980s and 1990s, it took four to
Note: The transactions we’re talking about here relate term.
six years for traffic to revert to the
to European as well as UK airports. We believe that
the two airport markets are sufficiently developed long-term trend after an economic However, once there is greater
and similar to draw consistent insights from the data. slowdown. visibility into the strength and pace
of traffic recovery, nothing precludes
The patterns in Figure 4 suggest
Where do we go from here? seeing this level of multiples in the
that even in a high-growth scenario,
In light of the ongoing sovereign debt medium term if there are asset-specific
passenger numbers are unlikely to revert
fears, tighter fiscal policy and credit reasons to justify this. Recent evidence
to the trend line before 2022–2024.
conditions in Europe, the pace of suggests airport transaction multiples
European economic growth remains Given that the drop in UK passenger are stabilising.
uncertain. PwC Economics’ current traffic since 2007 has been markedly
Given current market evidence, we
would expect higher-growth regional
airports to transact within a range of
Figure 14 to 18 times EV/EBITDA, and larger
Figure4:4:UK
UKairport traffic
airport and GDP growthto trend
traffic—reversion
more mature airports in the range of
350 40.0% 10 to 14 times EV/EBITDA.
35.0%
There is certainly significant interest in
300 30.0% the airport assets coming up for sale,
and competitive tensions may increase
Percentage growth
25.0%
transaction multiples observed.
Pax (million)
250 20.0%
15.0%
About the authors:
200 10.0%
Constantinos Orphanides is an airport
5.0% valuations professional at PwC based in
150 London (constantinos.orphanides@uk.pwc.com,
0.0%
+44 (0)20 7213 3929).
-5.0%
100 -10.0%
Romil Radia leads the PwC airport valuations
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
team in London.
UK terminal pax UK traffic expectations in 2007 (DIT)
Key contact for Valuations: Romil Radia, Partner,
Forecast UK traffic (GDP elasticity 2) UK GDP PwC, London (romil.radia@uk.pwc.com,
Forecast UK traffic (GDP elasticity 1.6) (historical and growth % forecast) +44 (0)20 7804 7899).
Forecast UK traffic (GDP elasticity 1.2) Pax growth (%)
UK traffic expectations in 2011 (DIT) Long-term pax trend
Source: CAA, DIT, IMF, PwC analysis
10 PwC | The “new normal” for airport investment1
Cyclicality should be built into long-term
2
cash flow projections
When assessing the value of an airport, it is
essential to recognise the cyclicality of the
industry, consider where we currently sit in
the economic cycle, and build sensitivities Airport transaction multiples are unlikely to
into cash flow projections to reflect economic reach prerecession levels in the short term
downturns and other risks. Recent evidence
Given current growth expectations and market
suggests that airport performance is not as
uncertainty, we do not expect to see a return to
immune to wider market volatility as perhaps
the transaction multiples of more than 20 times
was once thought.
EV/EBITDA for European airports in the short
term. However, once there is greater visibility into
the strength and pace of traffic recovery, nothing
precludes observing this level of multiples again in
the medium term, if there are asset-specific reasons
to justify this.
3
A comprehensive assessment of comparable transaction multiples
is required if used as valuation benchmarks
While airport transactions clearly provide useful valuation benchmarks, it is
imperative to undertake a comprehensive assessment of the comparability of
transactions and make appropriate adjustments if it becomes apparent that
they are incorporating different, or even unrealistic, growth expectations.
4
Reversion to the long-term passenger traffic trend
will take several years
An assessment of historical UK passenger traffic suggests
that growth rates are not constant. With potentially a 10-to-
12-year period before traffic reverts to historical passenger
5
growth trends, it seems timely to revisit the premise that
traffic always reverts to long-term trends.
Airport operators and financial investors are
increasingly joining forces to deliver airport value
improvements
We are observing an increasing trend of airport operators
forming consortia with financial investors with the aim of
delivering value enhancement through operational and
financial structuring improvements. The key messages
arising from this paper are relevant to both trade and
financial investors.
Has the trend line shifted? The impact on airport valuations 11You can also read
