(a)        Demand based, typically brownfield assets

Airport projects tend to be based on the transfer of an existing business (single or multiple airports) accompanied by an obligation to upgrade the infrastructure. Greenfield projects are occasionally seen which raise questions as to how demand will be allocated between old and new airports.

There is a healthy market interest in single airports with a reasonable passenger throughput (about 1 million passengers being a typical threshold) or in a group of regional airports with a similar throughput. This is supported by a global trend for increased demand, leading to a good pipeline of airport investment projects across the world. Occasionally it may be necessary for a new airport to be constructed at a city – if the existing sites are constrained and will not permit demand growth. If so, the project structure needs to be very clear as to what services will be transferred to the new airport (particularly if the existing airport remains in operation).

(b)        Competing Airports          

Is it possible that the government will seek to create new airports during the term of the concession? What exclusivity protection is fair and reasonable to protect against this risk to ensure that the concessionaire can repay the cost of the new infrastructure?

Given the size of the concessionaire’s investment, it is reasonable and typical for governments to agree to some level of exclusivity protection. For example, this might be a promise not to develop any new airports (or upgrade any existing airports) within a certain distance of the concessioned airport for a certain period of time (e.g. no new airport within a radius of 300km within the next 10 years).

(c)         Aeronautical revenues

How are airport charges regulated? How free is the concessionaire to adjust charges to meet inflation, unexpected costs or future developments?

In many circumstances, the new airport concession may be the first time that the airport has been run on a fully commercial basis, and so there may need to be new laws or procedures brought in to support this. For example, local laws may provide that certain services always be provided in local currency, but an international investor may need to have the right to recover all airport charges in US dollars (and possibly into an offshore account) to be able to service its US dollar financing.

In some cases, the existing operator may still have a supervisory role over the concessionaire as its regulator, which may include the setting of airport charges. The concessionaire for its part may need some contractual protection from the government to ensure that any requests to increase permitted charges are handled fairly and recognise any efficiently incurred expenditure.

(d)         Non-aeronautical revenues and overall revenue share     

What non-aeronautical revenue opportunities exist? Is non-aeronautical revenue subject to any contractual or statutory regulation? What share of gross revenue is allocated to the government? What are the components of gross revenue? Is there a fixed or up-front fee and how is this treated in terms of investment?

Airports create significant opportunity for non-aeronautical revenue growth, through shopping, catering, car parking, hotels and other services. This income is less commonly subject to regulation, but the government may expect to share in the upside of such revenues through a share of gross revenue agreed in the contract. For governments, there is a trade-off between requesting an upfront cost to “buy into” the concession, and requesting a royalty share of longer term revenue. Either way, the total expected return to government should form part of the bidding criteria.

“Gross revenue” is typically defined as including all revenues received by the concessionaire through the airport business, but care should be taken to ensure this does not inadvertently cover some heads of income that are purely compensatory, e.g. liquidated damages received from contractors or late payment interest.

(e)         Rights to fly and Air Services Agreements          

What is the regime surrounding air travel in the host country? Which “Freedoms of the Air” do airlines enjoy? Is service growth constrained by any bilateral or multilateral air service agreements? What protection does the concessionaire get if these are varied? What happens if political steps are required to enable new routes?

The greater the freedoms for air travel, the more likely it is that airlines will be able to create new routes to meet increasing demand. In many cases, air travel between countries may be governed by air service agreements (treaties) which describe what level of services may be made between those countries and between which cities. We have seen difficulties arise if the usage of these rights is not balanced, for example if one country’s airlines wishes to increase the number of flights but the other country does not want to allow this because its own airlines are not in a position to take up reciprocal rights. These are political decisions, and the concessionaire is largely at the mercy of the government to take action here, although the airlines themselves may also be willing to lobby for such changes.

(f)          Expansion rights and obligations           

Is expansion of the airport likely within the term of the concession? At what point will this be triggered as an obligation? What happens if the concessionaire cannot finance this new work due to market conditions?

Given trends in passenger growth, it is likely to be inevitable in many long term concessions that capacity expansion is necessary. The government will want to include this as a concrete obligation, which ideally will be triggered at the point at which the concessionaire needs to start building to avoid a reduction in the level of service at the airport arising through overcrowding. For the concessionaire and its existing lenders, the issue is that it is difficult to predict when funding may be required in the future, and lenders will be reluctant for their concessionaire to be treated as being in breach of contract if it is not possible to raise finance at the relevant time in the future (for example, if financing conditions had changed materially by that point).

(g)        KPIs and performance regime

What kind of performance regime applies to the concessionaire? Are any financial penalties attached to this? What level of poor performance is required to lead to termination? Is performance measured by reference to IATA Levels of Service (e.g. Optimum)? Are there any subjective methods of monitoring such as customer satisfaction?

Most airport concession agreements contain a performance regime of some kind, but these are usually not onerous in terms of financial penalties and only a severe and persistent failure to perform should have termination consequences. Since the concessionaire takes full demand risk on the project, a shortfall in performance can usually be expected to lead to a direct loss in revenue, and so proper performance should be self-policing in that respect. That said, it can be expected that the government would want to have a close eye on the level of service being provided at the airport, usually based on customer-focussed metrics issued by the trade body IATA. Their Level of Service “Optimum” is now the usual standard to be sought for new terminal developments. In addition, some contracts do impose an obligation to take passenger surveys to assess customer satisfaction, but these will not normally be subject to a major financial penalty.

(h)         Government services interface    

Which services are reserved to government suppliers? Air traffic control, customs, security, policing? What space and equipment needs to be provided to be these bodies, and what service levels are required in return? Is performance of these entities guaranteed by central government? Does revenue mostly come through a national (state-owned) carrier? Will government guarantee these payments?

An airport cannot run without certain services, and in many cases these services are reserved to government providers. Air traffic control, border control/customs and policing will invariably fall within this category. Fire fighting and ambulance services may also be reserved services, but sometimes may be delegated to the concessionaire. Where the concessionaire is dependent on such services, there should ideally be a clear service level agreement which sets out the reciprocal obligation on both parties. These services are typically without payment, so if there is a material failure of service, the concessionaire may want to fall back on the government as concession grantor to guarantee the performance of its state agencies.

If the airport revenues are highly dependent on a state-owned enterprise – the national carrier using the concessioned airport at its hub – then the concessionaire needs to be confident that it will receive payment in a timely manner from the airline for the services it is provided with. In the case of a privatisation, there may not be a solid payment history between two state owned enterprises, and so in many cases we do see the government being asked to provide a guarantee of the national carrier’s payments.

(i)         Existing infrastructure/ existing staff / existing contracts 

What is the state of existing infrastructure? Can it be adequately surveyed? What happens if major defects are discovered that impact on performance? How many staff are employed and on what terms? Are they unionised? Are there any unpaid liabilities (back pay, pensions)? What contracts already exist and do they have to be taken over?

These are essentially due diligence issues, but in the case of employees may also be political issues. If the airport is being privatised in order to increase its efficiency, it may be necessary for the concessionaire to have the right to lay off some staff. Who should bear the redundancy cost in this case?