7 Financing of airports

7.1 Introduction
Airports have traditionally been relatively profitable, especially those with an
annual passenger throughput exceeding 1 million, and generally able to
cover their operating costs (as was discussed in section 1.5). This has been
true regardless of the fact that the majority were owned by national or local
governments and, at least until more recently, run as public utilities. The
implication of this for financing new investments is that, for many airports,
a large proportion of funds used to finance capital investment can be
generated from internally generated cash flow.
In addition to using internally generated cash flow, which at least in the
past has not been a costly method of financing development,1 airports have
also used alternative sources of finance, the majority of which are as follows:

• Internal funds or retained profits (cash flows)

• Loans or grants from local or national governments
• Commercial bank loans (debt financing)
• Bonds or loan notes
• Loans or grants from EU or other governmental institutions
• Equity finance, part or full privatisation
• Joint ventures
• Leasing/franchising
• Build-own-operate-transfer (particularly in emerging markets where a
short-term skills shortage prevails).

Each of these will be examined in turn, together with their relative impor-
tance in total financing. It should be stated that finance is often required for
reasons other than airport capital investment. This might include financing
the start-up or initial years of operation of an airport, the restructuring
of the stakeholder shares, rescue finance in hard times, and management
buy-outs.
The following sections will largely apply to international airports outside
the US. Finance for US airports will be discussed in the last section of this
 Financing of airports  121
chapter (7.8). Private financing has played an increasing role in Europe
where more and more airports have been privatised or at least operate
as separate commercially run subsidiary companies. Europe accounted for
more than half of airport private equity investment between 2011 and 2015
compared to only 15 per cent in Asia, 14 per cent in Australasia and 9 per
cent in America (The Economist, 2015).

7.2 Internal funds

Financing airport investments out of internal funds has been the principal
source of finance for major airports. This is usually the cheapest and most
efficient means of financing development. For smaller, unprofitable airports,
where cash-flow levels are insufficient to meet capital expenditure require-
ments, there are significant benefits to being owned by multi-airport author-
ities, where expenditure needs can be financed from cash flows generated
from larger, more profitable airports in the group. Examples include AENA
in Spain, the former BAA in the UK, ANA in Portugal and Avinor in
Norway.
The level of revenue from operations depends on the pricing policies
adopted in relation to both aeronautical and non-aeronautical activities.
Airport expenditure includes staff, outsourced activities, depreciation, main-
tenance, materials, and cost of sales and energy consumption (utilities). The
difference between the two provides the cash available for financing. One
question that frequently arises is how far current charges are allowed to pre-
finance future investments. Policies on this vary and regulators will also need
to take a position (see more on this in section 10.5).
An appropriate measure of the volume of funds available from internal
sources can be obtained from calculating the level of cash operating profits.
This is obtained from calculating the level of operating profit before major
expense items not involving a movement of funds. Depreciation is likely to
be the only significant such item, and is added to operating profit to obtain
cash flow. Net interest payments would need to be deducted from this to
arrive at cash flow available for financing investments and/or payment of
dividends. More airports tend to pay dividends than airlines. For example
Malaysia Airports paid a dividend in every year from 2006 to 2013, ranging
from 10 to 20 sen per share. It also had a dividend reinvestment plan which
allowed investors to convert their dividend into shares. On the other hand
Malaysian Airlines last paid a dividend in FY2004.
Airports ranging from the smaller Billund to the medium-sized Hamburg
and the larger Copenhagen Airport have financed all investments from cash
flow. For example, the latter’s 2014 cash flow from operating activities
of DKK1,806m was almost sufficient to cover dividend payments of
DKK957m and investments of DKK922m, with new loans taken out about
equal to loan repayments. Airports that operate as a government department
or civil aviation authority, such as those in Luxembourg, Iceland or Greece,
122  Financing of airports
are financed through a mixture of general tax revenue and airport user
charges, the distinction between the two often being blurred. Norway and
Sweden are operated by a separate authority, and have a much greater degree
of financial autonomy.
Depending on internally generated cash and the degree to which it is
returned to shareholders, interest payment costs vary considerably by airport,
both absolutely and as a percentage of operating expenses. Those airports that
return a large share of profits to shareholders tend to need to borrow more at
times of heavy capital expenditure (for example Heathrow as shown in
Chapter 3). Copenhagen Airport does not always generate sufficient cash for
investments, and its interest payments reflect past borrowings to cover periods
of high investment. Airports such as Vienna, which has financed a large part
of investments out of cash flow, have little borrowing and interest expenses
are relatively low.
Very few airports that are operated as public corporations pay dividends
to shareholders. Düsseldorf and Manchester airports, as well as the Airport
Authority of India, are a few of the rare exceptions. Private or part-privately
owned corporations, however, do generally pay dividends to satisfy certain
investors that require some income on their investments (e.g. pension funds)
as opposed to all capital gain. Of the part or wholly privately owned com-
panies, Vienna currently distributes just under 40 per cent of its net profit
to shareholders, and Aéroports de Paris has a policy, applied over the past
few years, to distribute 60 per cent of net profits. Fraport had paid a dividend
of u1.25 per ordinary share in each of the five years up to the end of 2013;
this amounted to 52 per cent of the group’s net profit in 2013 (payout ratio),
offering a dividend yield of 2.3 per cent based on the share price at the end
of December 2013. Vienna Airport paid a dividend of u1.30 per share in
2013 with a slightly lower yield at the end of the year compared to Fraport
(2.1 per cent), and a payout ratio of 37 per cent. In the Asia-Pacific region,
Auckland Airport moved to distribute 100 per cent of underlying after-tax
profits to shareholders.
Airport investments tend to be very large and sporadic, rather than spread
evenly. This is because of the minimum size of new passenger or cargo
terminals and runways. It is often not possible to add capacity in small
amounts, for example adding a second runway or even a terminal extension.
To do so would cause greater disruption and not take into account the
interlinked nature of the airport system.
Thus, the timing and extent of capital expenditure are judged to be
critical. Too early and the airport has an underused asset; too late and traffic
(revenue) will have been lost due to capacity constraints and/or delays
imposed on airline customers. This often means that internal funds need to
be supplemented by other sources of finance at certain times of heavy invest-
ment activities, even where cash reserves have been built up: for example,
Frankfurt Airport’s second terminal and Brussels Airport’s new terminal both
involved substantial borrowing from banks. It also means that examining the
relationship between internal funds and investments even over the past five
 Financing of airports  123
years will not necessarily give a very true or fair picture of airport finance.
Nevertheless, the airport sector appears to be able to raise debt (loans) on a
reasonably long-term basis with debt maturities often in excess of 25 years.

7.3 Short-term finance

Most companies have bank or overdraft facilities with one or more banks.
Airports are no exception, and larger airports or airport groups tend to have
facilities with more than one bank. For example Auckland International
Airport had facilities with three commercial banks at the end of 2013:
NZ$135,000 and A$47,270 with the Commonwealth Bank of Australia;
N$150,000 with Bank of Tokyo-Mitsubishi; and a N$/A$ multicurrency
facility of N$80,000 with the Bank of New Zealand. These can be drawn
up to the stated amounts, and one of these was undrawn at the end of 2013.
They all had a short-term maturity date but some run until terminated by
either side. Rates of interest ranged from 3 per cent to 3.6 per cent, such
short-term borrowing not necessarily being relatively cheap (and subject
to short-term fluctuation in rates) but offering the ability to access the cash
at very short notice. The purpose of these facilities or short-term loans is
usually to meet unpredictable spikes in expenditure.

7.4 Equity finance and stock exchange listing

Equity finance in terms of issuing new share capital has not been very
common except for new projects and privatisation (discussed in Chapter 8).
There may be a mixture of straight equity and convertible loans available.
This can alter the required rate of return depending on the conversion
options. Preference share capital is also used but this is less popular than in
other industries. Often sovereignty issues dictate that part privatisation and/
or foreign ownership limits prevail. High-profile examples include BAA,
Vienna, Copenhagen (see below) and Aer Rianta taking an equity stake in
Birmingham Airport in the post-Eurohub era. The Australian airport equity
route is, however, regarded in some quarters as being more of a trade sale.
Birmingham Airport’s Eurohub passenger terminal was financed in part in
this way from private sector equity investors. Similarly, 20 per cent of the
new Brussels Airport passenger terminal was financed in straight equity and
convertible loans. Just under 40 per cent of the cost of Munich’s new airport
was financed with new share capital, of which around three-quarters was in
the form of preference shares on which no interest was paid.
The 25 per cent privatisation of Copenhagen Airport merely transferred
the state’s holding to private investors (and airport staff), rather than raising
new equity. Thus the proceeds from the sale of just under DKK700 million
went to the Danish government. A similar transfer occurred with the sale of
the national and regional government’s shares in Vienna Airport, with no
new equity issued.
124  Financing of airports
Equity finance is one of the two main forms of external long-term finance
discussed in this chapter, the other being loan/bond finance. It consists of
various classes of shares which are issued by the airport in return for a
consideration or price. They may be subsequently listed and bought and sold,
usually through a stock exchange, but often direct through a private placing
or trade sale (sale to another airport operator).
A new issue of shares can either be offered to the public (and financial
institutions) or placed solely with financial institutions. The first is called an
‘Initial Public Offering’ or IPO, often followed by secondary and subsequent
offers. A prospectus will be issued, showing past financial performance and
short-term prospects. The issue will need to be underwritten to ensure
success, and this is done by obtaining commitments from several financial
institutions to take a given number of shares at a substantial discount in
return, and for a fee. The second also requires a prospectus but in this
case the shares are marketed direct to financial institutions without inviting
offers by the general public, and sometimes without obtaining a stock market
listing.

7.4.1 Share issues

Various classes of share may be issued by a company in order to raise money
for the business. The holder of the share has various rights, the main usually
being:

• The right to a dividend, if one has been declared

• The right to vote at various meetings and by post
• The right to a share of the assets if and when a liquidation takes place
(although they would only be paid after all the other classes with claims
on the assets had first been paid).

The rights of shareholders are normally described in the Articles of Association

reflected in the company laws of the country in which the company is based.
In some countries (such as China and Russia), company law is less well
developed and shareholders need to rely on government agencies to enforce
their rights, rather than the law courts.
The airport’s balance sheet will show the nominal or par value of the
shares issued, together with any premiums paid on subscription. The total
number of shares that has been authorised by the shareholders is also shown.
Heathrow Airport Ltd had issued (called-up, allotted and fully paid) a
total of 857.6 million shares at the end of FY2011, each having a nominal
value of one pound sterling.2 The proceeds from any issue of shares at above
nominal value are shown as part of reserves under shareholders’ funds as
‘share premium reserve’. Both of these will appear under shareholders’ or
stockholders’ equity, which will also reveal any revaluation surpluses or defi-
cits, other reserves and retained profits and losses from previous years. A less
 Financing of airports  125
common case is Auckland Airport, its 12,000 issued shares having no nominal
or par value, the balance sheet only showing paid-up capital.
Different classes of ordinary share are sometimes issued and these will
be shown separately under shareholders’ equity. For example, Beijing
International Airport had issued a total of 4.33 million shares (all with RMB1
nominal value) at the end of FY2013, split into 1.88 million H-shares, which
could be held by foreign nationals and traded on the Hong Kong Stock
Exchange, and 2.45 million domestic shares for Chinese nationals. The
domestic shares ranked pari passu, in all material respects, with H-shares
except that all dividends in respect of H-shares are declared in RMB and
paid in HK dollars. In addition, the transfer of domestic shares is subject to
certain restrictions imposed by PRC law.
Where an airport is considered too strategic to be controlled by foreign
interests, its government can retain a ‘golden share’ following transferring
the airport to the private sector. This was the case for the UK’s BAA airport
group. The share gave the UK government the final say in major decisions
such as selling a controlling stake to ‘unsuitable’ interests; in 2003, the EU
ruled that such arrangements contravened EU law, and the BAA and other
golden shares issued by EU companies were discontinued.
Capital can be raised from existing shareholders through a rights issue,
where the owner of each share has the right but not obligation to subscribe
to a given number of new shares in proportion to their existing holdings, on
the basis of a given ratio, say, one new share for every three shares held. A
rights issue will need to be priced at a discount to the current share price of
up to 15 per cent, which is why the rights have a value in themselves
even before they are fully paid up. New shares can also be issued in the
form of a free distribution of the company’s reserves (accumulated from
previous years’ profits) by a scrip or bonus issue, but this will not raise any
new capital.
An example of a rights issue was Auckland Airport’s issue of 1 new share
for 16 existing ones in February 2010. The issue was 99.82 per cent subscribed
at the offer price of NZ$1.65, raising NZ$126.4m for the airport.

7.4.2 Initial Public Offering (IPO)

An IPO is the sale of shares to the public for the first time, usually prior to
a stock exchange listing. The shares could then be traded in the secondary
market. The process is often a means for the controlling and possibly founding
shareholders, which may be those who launched or developed the business
such as a public or local authority together with any venture capital firms,
to sell all or part of their stakes. New shares may also be issued at the same
time to raise fresh capital for expansion. It could also be the method of
privatisation of an airport or airport group, as was the case with the BAA
(see Chapter 8). More recently, this was the approach by the Spanish
government for the sale of its group of Spanish airports.
126  Financing of airports
The IPO will normally be priced at a level that ensures that all the shares
will be subscribed. If not, one or more investment bank will underwrite the
issue: agree to take the shares that are not taken up at a preferential price or
for a commission.3 Sometimes, the price is adjusted downwards following
feedback from the market via the lead manager of the issue (investment
bank). This may be because of events that negatively affect the market in
general or factors specific to the industry and company. An example of this
was the IPO of the fast-expanding Indian airline, Air Deccan, in 2006. An
initial price range for the shares of Rs300–325 was suggested by the airline,
but their advisors eventually persuaded them that Rs150–175 was more
realistic. The shares were finally offered at Rs148, but the shares dropped to
Rs98 on the opening day of trading on the Mumbai Stock Exchange, largely
because of factors affecting the Indian market in general. They drifted lower
to Rs85 over the next month (Aviation Strategy, 2006). This is an example
of both over-optimistic pricing (the airline was trading at a loss), and a severe
change of market sentiment too late to withdraw the issue.
IPOs are often marketed to the general public and financial institutions
separately, each being allocated a given number of shares. The price per share
may be determined in advance and bids sought at that fixed price. However,
the prospectus may indicate a price range with bids sought above the bottom
of that range. The public are then asked to submit their bids in terms of a
monetary amount, the number of shares they receive then depending on the
final price. The final price is decided following the results of a ‘book build-
ing’ phase, involving the lead investment bank adviser consulting financial
institutions about demand for the shares and bid price intentions. Once the
book is closed, the price will be decided (there could be two prices: one for
the institutions and one for the public). In cases where the issue is oversub-
scribed, bids will be scaled down pro rata, with public and institutional
allocations often dealt with separately. Oversubscription may also trigger a
‘greenshoe’ option whereby additional shares may be sold for a short period
after trading in the shares starts. Where a small number of founder sharehold-
ers retain a large stake after the IPO, they may sign an agreement not to sell
any of their holding for a specified ‘lock up’ period, usually between six
months and one year.
An IPO is one of the methods of selling government shares to the private
sector (privatisation), with the proceeds helping to reduce the budget deficit.
However, it would be possible to issue new shares in order to provide a cash
injection for the airport (see Table 7.1). The proceeds might also be used to
reduce the balance sheet debt of the airport, although that has often been
done prior to privatisation.
Equity sources can include:

• individual investors
• venture capital companies, and private equity
• investment trusts, pension funds and insurance companies.
 Financing of airports  127
Table 7.1 Large international airports with stock market listings

Airport Share price Market capitalisation

4 November 2015
Europe/Africa:
Fraport u57.34 u5,287m
Aéroports de Paris u113.50 u11,232m
AENA u98.90 u14,835m
Zurich CHF745 u4,241m
Vienna u84.60 u1,777m
Asia-Pacific:
Malaysia Airports MYR8.00 u2,477m
Airports of Thailand THB190.00 u6,072m
Auckland Airport NZ$4.11 u3,084m
Source: Lobbenberg (2015b).

The major question (aside from the expected rate of return) is what level of
control will be handed over to the equity investors, but many pension and
other funds are happy to take a minority position. Pension funds have
recently been a major source of capital for airports, often taking quite large
holdings in individual airports, mainly in Europe: the Ontario Teachers’
Pension Plan jointly controls Copenhagen Airport (together with Macquarie
European Infrastructure Fund), 48.25 per cent of Birmingham Airport, 100
per cent of Bristol Airport (having bought 50 per cent from Macquarie)
and 39 per cent of Brussels Airport; the UK universities pension fund owns
10 per cent of Heathrow Airport; and the Public Sector Pension Board
of Canada acquired the Hochtief portfolio of minority holdings in the
following airports: Athens, Budapest, Düsseldorf, Hamburg, Sydney and
Tirana. Finally, Gatwick Airport has as minority owners the National Pension
Service of Korea with 12.14 per cent of its equity, and the California State
Pension Fund (CalPERS) with 12.78 per cent (see also Chapter 8). Pension
funds as well as insurance companies see airports as having low risk with
almost no bankruptcies, while at the same time yielding more than govern-
ment bonds; they are able to match their long-term liabilities with an
airport’s long-term assets; and they have good growth prospects (Condie,
2016). These investors like reliable cash payments which depend on regular
dividend payments which airports make.
Sovereign wealth funds are also investors in airports with the Abu Dhabi
Investment Authority having 15.9 per cent of Gatwick Airport; Qatar
Aviation Investments has 20 per cent and China Investment Corporation
10 per cent of Heathrow Airport.
128  Financing of airports
7.4.3 Joint ventures
A joint venture (JV) is a specially set-up company that would typically be a
mix of the airport and an outside investor. The advantage of this approach
is that the outside JV investor will bring a blend of additional capital and
management skills to the table. A common or consistent goal on the part of
the various stakeholders is fundamental. Exit mechanisms should be agreed
between the airport and investor as should dividend policies before the venture
proceeds. One such joint venture has been Macquarie and the Ontario
Teachers’ Pension Fund (mentioned above), which together invested in a
number of airports (see also in Chapter 8).
Some of the secondary placings in Table 7.2 were to joint ventures, for
example an airport operator such as Fraport partnering with a major Greek
conglomerate to increase its chances of winning the bidding competition.
Others might be to one or more financial institutions such as pension funds.
The airports involved in these deals may have been previously privatised
through an IPO, as was the case with Vienna and the London airports.

Table 7.2 Full or partial secondary placing of airport shares

Airport(s) Type Seller Buyer Year Value of

sale

Greek Full Greek Fraport and 2015 u1,234m

regional government Copelouzos
airports (14) Group
Vienna Partial Austrian Airports Group 2014 u514.9m
Airport 29.9% government Europe
Aberdeen, Full Heathrow Macquarie and 2014
Glasgow, and Airport Ferrovial
Southamption Holdings
Belfast Full TBI/Abertis ADC-HAS 2013 u297m
International
Athens Partial Hochtief AG Public sector 2013 $2,000m
Budapest Pension
Düsseldorf Investment
Hamburg Board of Canada
Sydney
Tirana
Cardiff (UK) Full Abertis Welsh 2013 £52m
government
London Full Heathrow Manchester 2013 £1,500m
Stansted Airport
Holdings Airport Group
London Full BAA Global 2009 £1,500m
Gatwick Infrastructure
Partners (GIP)
 Financing of airports  129

Airport(s) Type Seller Buyer Year Value of

sale

Edinburgh Full BAA Global £807m

Infrastructure
Partners (GIP)
Auckland Partial New Zealand Various NZ$276m
(NZ) 7.6% Superannuation institutions
Fund
Source: Tretheway and Markhvida (2013) and authors (from various press releases and airport
websites).

7.5 Debt and bond financing

The previous section covered equity finance, describing it as ‘perpetual’
finance that does not have to be repaid as long as the company is trading.
Investors can be reimbursed through dividends and share buy-backs and
ultimately through profits from share sales. Debt and bond finance, on the
other hand, generally has a due date or term by or over which it has to be
repaid, with interest usually charged on the outstanding balances.
In order to cover debt and bond investors against the borrower defaulting
on repaying the debts, a security or charge is often included in the agree-
ment. This could be on any of the assets of the borrower, which would be
transferred to the lenders in the event of default or bankruptcy. Finance for
specific projects can also be secured on the cash flows generated by the assets
financed through the project.
Fixed and floating charges are used to secure borrowing by a company.
Such borrowing is often done under the terms of a debenture issued by
the company. Charges on a company’s assets must be registered at UK
Companies House or a similar government facility and may also need to be
registered in some other way, e.g. a charge on land and buildings must
also be registered at the Land Registry.
A fixed charge is a charge or mortgage secured on particular property, e.g.
for an airport this could include land and buildings, equipment, shares in
other companies, etc. A floating charge is a particular type of security, avail-
able only to companies. It is an equitable charge on (usually) all the company’s
assets both present and future, on terms that the company may deal with
the assets in the ordinary course of business. Very occasionally the charge is
over just a class of the company’s assets, such as its stocks.
The floating charge is useful for many companies, allowing them to borrow
even though they have no specific assets, such as freehold premises, which
they can use as security. A floating charge allows all the company’s assets, such
as stock in trade, plant and machinery, vehicles, and so on, to be charged.
The banking crisis that started in 2007/08 resulted in weaker commercial
banks that became much more strictly regulated. This resulted in a cutting
130  Financing of airports
back of lending to airports or airport-related projects, with remaining
loans both more expensive (higher risk premiums) and of shorter term. This
in turn led to many companies seeking finance direct from savings institutions
such as pension funds and investment trusts, thus bypassing the banking
system. This was called ‘disintermediation’ or the more recent (and easier to
say) ‘shadow banking’. Airports already relied on bonds for some of their
finance, but the trend between 2007 and 2014 was for less lending from
commercial banks and more through the issue of bonds and direct loans
from institutions, under the same terms as banking lending but often for
longer periods.

7.5.1 Bank debt

Bank debt is a way of financing airports through loans made from a bank or
consortium of banks. The bank acts as an intermediary, lending money that
has been deposited with it, together with its borrowings, to industry. The
term of the loan could be short- or long-term, but would be unlikely to
extend much beyond 12 years. Interest will be fixed for the period of the
loan or variable (adjusted periodically with reference to the market LIBOR
or similar rates). Loans are usually in the airport’s own currency, and both
variable interest and foreign currency loans will often require hedging
instruments to be acquired to cover these risks. Three major default events
are included:

• Issuer fails to pay principal or interest or any other amounts due within
30 days after the relevant due date
• Issuer fails to meet all obligations within 30 days
• Cessation of payments or insolvency of the issuer.

Default might also be triggered if any of the following covenants are not
complied with:
Information covenants: The provision of financial statements and other
information within a given time period, typically 150 days after the end of
the financial year.
Operational covenants: Maintaining its corporate and legal status, restricting
the type of business or revenue stream that the airport can target.
Financial covenants: Credit rating downgrades (see section 7.6 below), cash
flow to interest ratio maintained, say, at 1.5 or above, and debt/assets kept
below, say, 0.7.
Breach of any of the above gives the lender the right to demand repayment
and/or to cancel its obligation to make further advances. Another require-
ment in relation to debt could be the transfer of funds to a separate bank
account, out of which debt servicing (payments of interest and capital) can
be made. An example of this is Sydney Airport’s cash balance of A$106.0
 Financing of airports  131
million in FY2013 in a separate bank account which could only be used for
the repayment of its debt.
Commercial bank loans are widely used by airports in Germany, the
Netherlands, Finland, France and Belgium. Rates of interest would be some-
what lower than for the same airport under private ownership, especially
where government guarantees are available. Copenhagen started using these
sources of finance after corporatisation in 1990, with a DKK1.2 billion loan
from the Mortgage Bank of Denmark. A large part (57 per cent) of the new
passenger terminal and associated facilities at Brussels Airport was financed
by bank loans. Amsterdam Airport makes considerable use of loans, in add-
ition to issuing bonds that are tradable and are awarded a high credit rating.
Aéroports de Paris’s bank borrowing at end December 2013 was mostly from
the European Investment Bank (EIB), with u480m of 15-year debt, with a
further u85m from CALYON and other banks. As discussed later, the
airport relies more on issuing bonds.
Smaller airports tend to rely more on grants from public bodies and finance
related to specific investment projects. One of these smaller airports that is
still government owned, but has some shares listed and traded on an exchange,
is Aeroporto di Firenze (AdF). In addition to owning Florence Airport it
also owns smaller airports in the same Italian region at Siena and Pisa (with
1.9 million passengers in total in 2012).
With debt and bond financing it is important for repayments to be spread
out and not experience peaking or spikes. This makes it easier for airport
treasurers to meet commitments without additional short-term borrowing.
Aéroports de Paris provides an example of an airport debt repayment schedule
which contains some gaps without having any serious peaking (Figure 7.1).
The gaps identified in Figure 7.1 can be filled by issuing new debt that
matures in 2018/19, 2024 to 2026 and 2028/29. The airports’ average debt
maturity was 7.5 years, relatively short-term for a company with long-term
assets, but it was up from 6.4 years at the end of 2012. A large part was fixed
rate debt with little need for interest rate swaps.

7.5.2 Bonds
Bonds are securities that are sold directly to investors without the inter-
mediation of banks. Since 2008 commercial banks have been heavily regu-
lated, resulting in the removal of riskier assets from their balance sheets and
a reduction in riskier lending. This has made bonds a more attractive option,
at least for larger airports. Bonds can be issued in foreign currencies in add-
ition to the airport’s own currency and can often be for a longer term than
banks would contemplate. The world’s largest market is in the US, but
investors there clearly prefer US dollar issues.
Bonds are marketed mainly to financial institutions as a higher risk and
higher return alternative to placing funds on deposit with commercial banks.
The issuer generally acquires a credit rating for the bond to help in marketing.
132  Financing of airports

Figure 7.1 Aéroports de Paris debt maturity profile, end 2014

Source: Aéroports de Paris (2015).

Usually one or more banks will market the bonds and agree to take any
securities that are not sold at a slightly more attractive price, in addition to
their underwriting commission (say 0.35 per cent of the principal amount).
There will also be a considerable amount of documentation that will be
found in the prospectus for the sale. This will include the major default
events and covenants that were discussed in the previous section. There are
three types of bond, which depend on the method of calculating and paying
interest:
Fixed rate bonds: a bond on which interest is calculated at a fixed rate
and which is usually payable in arrears on a fixed date or fixed dates in a
year.
Floating rate bonds: a bond on which interest is calculated at a floating rate
and which is usually payable in arrears on a fixed date or fixed dates in a
year; the floating rate is determined with reference to market interest rates
as published on pre-specified dates (for example the six-month US dollar
interbank rate on 1 April).
Zero coupon bonds: a bond on which no interest is payable; the bond
is offered at a large discount to its par redemption value, enabling holders
to be compensated for not receiving interest. Also known as ‘accrual
bonds’.
They can also be either ‘registered bonds’ whose holders are kept in a
register, or bearer bonds which are not registered and interest can only be paid
 Financing of airports  133
if the bond coupons are presented for payment. Bonds are usually issued in
the currency of the issuing airport, with a small discount offered on the full
price (issued at, say, around 1 per cent below par).
Attractive low interest rates in foreign currency can often be more than
offset by exchange rate movements such that borrowing costs are higher.
Most of an airport’s revenues are denominated in its home currency, so it
has little natural hedging capacity in other currencies. Hedging can be used
to offset some of the exchange rate downside risk, but this has a cost. For
example, Heathrow Airport Holdings Ltd took out cross-currency swaps to
hedge currency risk on interest and principal payments on its foreign
currency-denominated bond issues. This raised its cost of borrowing by
just over 1 per cent. Most of Sydney Airport’s A$7.3 billion borrowing was
in Australian dollars, with some Canadian and US dollar debt.
In June 2003, Aéroports de Paris issued u600 million worth of bonds that
carried an interest rate of 2.75 per cent and a term of 25 years (due on
5 June 2028). It was issued at a discount, or 98.841 per cent of par, giving
it a yield to maturity of 2.78 per cent. The airport thus took the opportunity
of securing long-term funding at an attractively low rate of interest. Interest
was to be paid annually, and the bonds are quoted on the Euronext stock
exchange (although not traded very frequently). The purpose of the issue
was to finance the airport’s continuing investment programme. The airport
group had an A+ rating from Standard & Poor’s (S&P) at that time.
Heathrow Airport Holdings Ltd (formerly BAA plc when it was the
holding company for Heathrow, Stansted and three UK airports outside
London) had just over £10 billion of secured bonds outstanding at the end
of December 2012 (Table 7.3). These were due between 2013 and 2041,
with interest rates ranging from 1.65 per cent to 12.45 per cent (average
4.4 per cent). Most of its finance was denominated in UK pounds. It issued
bonds worth a further CAN$450m in June 2014 at a fixed interest rate that
was only 1.17 per cent above the rate at which the Canadian government
could borrow.

Table 7.3 Heathrow Airport Holdings Ltd bonds

outstanding by currency, 31 December 2012

Currency £ million % breakdown

UK pounds 8,686 85.5

Euros 2,214 21.8
US dollars 959 9.4
Canadian dollars 245 2.4
Swiss francs 268 2.6
Total outstanding 10,158 100.0
Source: Heathrow Airport Holdings (2013) Ltd.
134  Financing of airports
On the other hand Aéroports de Paris borrowed almost solely in euros,
with only u163m out of u3.5 billion of bonds in foreign currency (Swiss
francs).

7.5.3 Loans/grants from government

Airports owned by national or local government sometimes make use of
grants or loans from these sources. In France, many airports are financed from
grants from local or regional authorities. In Germany, some airports have
borrowed from local authority shareholders, for example Düsseldorf, although
these have recently been repaid. The new Munich Airport borrowed DM2.5
billion from its national, regional and local government shareholders in pre-
ference shares: this means that interest only had to be paid if the airport made
a profit, and it was some years before this happened. Manchester Airport also
made use of loans from local authority shareholders.
Italian airports such as Milan have also been given state grants of 20 per
cent of total investment amounts. Similarly, state grants contributed towards
19 per cent of Turin Airport’s development programme. Palermo’s new
passenger terminal was entirely financed by the regional government (60 per
cent) and the state (40 per cent).
In the Netherlands, Maastricht Airport’s investments have been 90 per cent
financed from external sources, including regional development and provincial
grants. For Swedish airports on the other hand the converse was true, with
only 9 per cent of finance coming from government grants, the remainder
from internal funds. To summarise the current status on government loans
and grants:

• These can be from local or national government; this varies on a country

by country basis.
• This form of financing was a critical factor in the early development of
the airport industry in Europe.
• The requirement for payback and propensity for write-off can vary
between countries.
• As a source of finance this is reducing in importance as governments try
to put their airports on more of a commercial footing.

However, grants will continue to be a source of finance for regional airports

that are thought to be in the public interest in terms of the wider economic
benefits that they generate.

7.5.4 Loans/grants from EU institutions

Loans and grants tend to be more easily obtainable for airports in regional
development areas in the EU, for example, in Spain, Portugal, Greece and
 Financing of airports  135
Ireland, and more recently Eastern European countries. EIB credit facility
and loans have also been used by airports in the wealthier parts of the EU,
principally Germany. Finance from EU sources can be categorised as grants
(ERDF and the Cohesion Fund), guarantees (European Investment Fund)
and loans (EIB).

European Regional Development Fund (ERDF)

Set up in 1975, the ERDF is one of four structural funds established by the
European Commission to reduce the disparity in economic development
between the EU regions. Since 1975, more than ECU (European Currency
Units) 30 billion has been disbursed on projects in the least developed
(Objective 1) regions. The fund provides financial assistance of up to 75 per
cent of the cost for projects in Objective 1 regions, and up to 50 per cent
of the cost for Objective 2 and 5b regions.
The following airport projects have been financed by the ERDF:

France: Ajaccio, Bastia, Calvi, Figari (all in Corsica) and various overseas
territories
Greece: Athens, Heraklion, Thessaloniki and 26 other airports
Ireland: Dublin, Cork, Shannon and Connaught
Portugal: Madeira, Ponta Delgada, Covilhã, Figueira da Foz and Vi la Cha
Spain: Malaga, Almeria, La Coruña, Vigo, Santiago de Compostela, Alicante,
and the Canary Islands (El Hierro, Lanzarote, Fuertaventura, Gran
Canaria and Tenerife)
United Kingdom: Belfast International, Belfast City

A number of airport projects in Objective 2 regions were also financed in

Belgium (Gosselies and Bierset), France (Metz–Nancy and Charleville-
Mezières), Germany (Dortmund), the Netherlands (Twente), Spain (Barcelona)
and the UK (Manchester, Humberside, Glasgow, Prestwick, Dundee,
Newcastle, Teesside and Birmingham).

European Investment Fund

This fund was established at the December 1992 meeting of the European
Council to promote economic growth and employment in the EU. It is to be
aimed at small and medium-sized firms, and also the Trans-European Networks
(TENs). The latter would include airport and air traffic control (ATC) funding.
The fund provides guarantees for loans or bond issues. The intention is that,
by assuming some of an airport’s project risk, private finance will be more
readily forthcoming. Since its establishment, the fund has provided guarantees
of over u750 million, with u75 million for the development of Milan
Malpensa Airport.
136  Financing of airports
The Cohesion Fund
This was set up in December 1992 to promote social and economic cohesion
in countries with GDP per capita of less than 90 per cent of the EU average
(Greece, Spain, Portugal and Ireland). With the enlargement of the EU
many Eastern European countries became eligible at the expense of countries
such as Ireland. The Cohesion fund is used to finance environmental and
transport-related projects in EU states. The fund supports transport infra-
structure projects aimed at enhancing infrastructure provision within the
framework of the Trans-European Transport Network (TEN-T). Airports
at Athens, Corfu, Palma de Mallorca and Tenerife have benefited from this
fund through grants of around u100 million.

European Investment Bank (EIB)

This was created by the Treaty of Rome to support certain capital invest-
ments that promote projects that meet EU priorities, especially regional
development. In contrast to other EU finance, it is in the form of loans
rather than grants. Such loans are usually for up to 20 years and cover up to
50 per cent of the total investment amount. The cost of borrowing is based
on the rate at which the EIB can borrow plus an administrative charge of
0.15 per cent. The Triple A rating that the bank has means that it can offer
attractive rates in comparison with commercial bank loans.
Loans were made for airport projects between 2005 and 2015. These
totalled just over u5 billion, with a further u868m lending to non-EU
countries. Thus the total lending to airports amounted to u5.9 billion, only
4.2 per cent of its total lending on all transport projects over the same period
(Table 7.4).
It can be seen in Table 7.4 that Spain took the largest share with 34 per
cent of total lending, followed by Germany with 30 per cent. The majority
of non-EU lending went to China for its Beijing International Airport
expansion project (u500m), with Oslo Airport Terminal 2 taking a further
u200m.

European Bank for Reconstruction and Development (EBRD)

The EBRD started operations in April 1991 in response to the collapse of
Communism in the East. Its shareholders are 64 countries, the EU and the
EIB (described previously). It expanded from a Central and Eastern European
focus to countries such as Mongolia, Turkey and Egypt, and most recently
Greece and Cyprus. It provides loan and equity mostly on a project basis,
and usually providing a catalyst for private sector finance. The basis for a
loan is the expected cash flow of the project and the ability of the client to
repay the loan over the agreed period. The credit risk can be taken entirely
by the Bank or may be partly syndicated to the market. A loan may be
 Financing of airports  137
Table 7.4 European Investment Bank lending to EU airports 2005–2015

Project Country Signature date Amount

(um)

Milan Airport III Italy 2006 to 2014 344

Nice Airport development France Nov 2013 100
Amsterdam Airport – security Netherlands Jul 2010 & 550
Sep 2013
Lyon Airport development France Aug 2013 30
Gdansk Airport modernisation Poland Jun 2013 36
Balearic Airports infrastructure Spain 2010/11 300
Canary Island Airports infrastructure Spain Dec 2009 80
ANA Airport extension Portugal Jul 2009 72
Frankfurt Airport A380 extension Germany 2008/09 460
Berlin Brandenburg Airport Germany 2008/09 983
Malaga Airport infrastructure Spain Nov 2008 250
Dublin Airport development Ireland 2008/09 460
Rome Airport II Italy May 2008 80
Vienna Airport expansion Austria Dec 2006 100
Leipzig–Halle Airport Germany Dec 2005 85
AENA V – Barcelona Airport Spain 2006 to 2007 1,100
Total EU 5,030
Source: EIB (2015).

secured by a borrower’s assets and/or it may be converted into shares or

be equity-linked. Full details are negotiated with the client on a case-by-case
basis, but the following gives some idea of the main parameters:

• Minimum u5–15 million, although this can be smaller in some

cases
• Fixed or floating rate
• Senior, subordinated, mezzanine or convertible debt
• Denominated in major foreign or local currencies
• Short- to long-term maturities, from 5 to 20 years
• Project-specific grace periods may be incorporated.

The EBRD has provided loan finance to a number of airports in Russia and
Eastern Europe, notably Pulkovo St Petersburg.

7.5.5 Loans/grants from international development banks

In addition to the EU funding institutions discussed in the previous section,
development banks have been operating in other parts of the world for many
years. The African Development Bank, the Asian Development Bank and the
Inter-American Development Banks have all provided long-term loans to
138  Financing of airports
airports as well as provided technical assistant support for airport projects.
These operate in a very similar way to the International Bank for Reconstruction
and Development (IBDR), commonly known as the World Bank.
An example of a World Bank airport-related loan was US$50m to finance
around half of a new airport at Shangrao in Jiangxi province, China, in 2013.
The loan was repayable over 25 years with interest charged at the reference
rate for the currency (US$) plus a variable margin. In 2010, the World Bank
extended a US$280m loan to help finance a $436m rehabilitation and
expansion of Cairo Airport’s Terminal TB2. This was a 20-year loan at a
margin over LIBOR.

7.6 The role of rating agencies

The role of rating agencies is essentially providing support to those investing
in debt securities such as bonds and loan notes. Companies that issue such
debt often pay a rating agency for providing investors with an in-depth
analysis of the borrower and the likelihood of default. These firms earn their
revenues from companies, including airlines and airports, which wish to issue
securities (bonds, commercial paper or preferred stock), as well as from
selling reports to investors. For example, both S&P and Moody’s received
US$30,000 for rating a $100m unsecured placement of Southwest Airlines’
securities (Morrell, 2007).
The agencies’ analysis aims to evaluate the likelihood of the timely
repayment of principal and interest relating to debt securities, or dividends
for preferred stock. The analysis covers both the aviation industry in general,
and the particular circumstances and prospects for the airport or airport
group concerned. The two major agencies together have over 100 analysts
making detailed analyses of company financial statements, making any
necessary adjustments for variations in accounting practice.
The two main agencies that publish ratings for quoted debt securities,
including those issued by airports, are S&P and Moody’s. A third is called
Fitch. Together they rate just over 90 per cent of all the obligations of all
industries. They have been criticised for not predicting collapses such as
Enron and Parmalat, and more recently Lehman Brothers, but their defenders
argue that in the first two cases they were supplied with fraudulent data.
The rating agencies were not the only ones not to recognise and act on the
acute situation of Lehman and many other banks. It can also be argued that
competition is restricted by entry requirements, but this is being addressed
in the US by Congress and the Securities Exchange Commission (SEC).
However, since the banking collapse they have benefited from the growth
in bond issues which need a rating for successful marketing. The following
shows the grading system used by S&P, together with the corresponding one
for Moody’s, which might rank airports slightly differently:
 Financing of airports  139

Investment grade:
S&P: AAA, AA, A and BBB
(+ and – indicate relative standing within each grade)
All have capacity to pay interest and repay principal, with increased
susceptibility to adverse economic conditions as grades fall.
Moody’s: Aaa, Aa, A and Baa

Speculative grade:
S&P: BB, B, CCC
(+ and – indicate relative standing within each grade)
All have speculative characteristics regarding the payment of interest
and repayment of principal, with increased vulnerability to default
as grades fall. C is highly vulnerable to non-payment, while an
obligation rated D is in default.
Moody’s: Ba, B, Caa, Ca and C

Investment grade rating brings two considerable advantages to the issuer:

firstly, it allows the security to be issued at a lower price than a speculative
grade one, say with an interest rate a few percentage points lower. Second,
some institutional investors can only buy investment-grade paper.
It is worth noting that ratings agencies such as S&P or Moody’s offer
airport bond ratings (long- and short-term) in the AA+ region for airports
in North America and A+/– and even higher in other parts of the world
(Table 7.5). However, where governments retain 100 per cent or majority
control of airports the ratings are likely to reflect more on the government’s
financial record than that of the airport. There are not many airports that
can match this, although it should be stressed that many airports still have
substantial government shareholdings.

7.7 Leasing
Leasing is a form of finance more appropriate to airport equipment than to
buildings, aprons or runways. While many airports may make use of leasing
for smaller items of equipment, both Frankfurt and Stuttgart airports reported
that this had been a significant form of financing for them. Some airports
have been ‘sold’ on what is effectively a long-term lease (e.g. the Australian
airports). An option for outright purchase is built into this quasi-finance lease
structure. US airports lease land to airlines that subsequently build (terminals)
on that land and then renegotiate terms after about 25 years.
140  Financing of airports
Table 7.5 Examples of airport credit ratings

S&P rating Date Debt

Europe:
Aéroports de Paris A+ Dec 2012 Bonds
Amsterdam Schiphol A+ April 2014 Notes
Copenhagen Baa2* May 2015
Manchester Airport Group BBB+ Dec 2014 Bonds
Rome BBB Dec 2003 Senior unsecured
Zurich A+ April 2015 Bonds
Asia-Pacific:
Airport Authority Hong Kong AAA Sept 2013 Senior unsecured
Auckland Airport A– Feb 2015 Notes
Malaysia Airports A3* May 2015
Sydney Airport BBB April 2014 Secured notes
* Moody’s rating.
Source: S&P and airport websites.

7.8 Finance for US airports

Financing US airports is very different from in other countries. There is close
federal involvement in setting user charges and providing grants for capital
investment. Outside the US the approach first depends on whether the airport
is run as a part of central or local government finances, or whether it has been
‘corporatised’ or privatised. In the first case financing airport investment is
part of the national or local government budgetary process; in the second
case, commercial sources can supplement internal cash (which may depend
on economic regulation of user charges and rate of return on assets).
Table 7.6 shows that, excluding issuing tax-exempt bonds, internally
generated funds were the largest single source for US airports, with both
federal grants and passenger charges important sources. Large and medium-
sized airports rely more on Passenger Facility Charges (PFCs) and less on
Airport Improvement Program (AIP) grants (GAO, 2015).

Table 7.6 Funding sources* for US airports average 2009–2013

US$m %

Airport Improvement Program (AIP) grants 3,304 24.9

Passenger Facility Charges (PFCs) 2,744 20.7
State and local contributions 1,121 8.5
Airport revenues 6,083 45.9
Total 13,252 100.0
* excluding bond issues.
Source: GAO (2015).
 Financing of airports  141
Funds are made available by Congress from the Airport and Airway Trust
Fund which receives revenues from taxes on domestic and international
travel, domestic cargo transported by air, and aviation fuel (see Chapter 2).
There is a complex system of allocating AIP funds to airports. Congress
granted commercial airports the rights to raise money from passenger charges
to finance airport development. Most of the money raised from these PFCs
has been from large and medium-sized airports. An increase in the cap of
$4.50 per flight segment and $18 per round trip was allowed in 2000. Nearly
all states provide financial assistance to airports, mainly in the form of grants
as matching funds for AIP grants. These grants are funded by means of a
variety of sources, including aviation fuel and aircraft sales taxes.
After some recent initial interest in privatisation, US airports are still
owned by local government and run as a public utility (this is discussed in
Chapter 8). Private sector involvement has thus far been limited to concessions
to operate terminals and commercial franchises. Financing remains dominated
by tax-exempt bonds issued by the airport authority but often guaranteed by
the incumbent airline lessee, for example where one airline dominates the
passenger terminal whose expansion is the reason for raising funds (they are
also called ‘revenue bonds’). According to the GAO study cited above,
bonds are issued by larger airports to pay for defined capital projects. Between
2009 and 2013 bonds raised an average of US$6.3 billion per year.
An example of a large US airport issuing revenue bonds is Chicago
O’Hare. It does not publish financial statements for the airport as a separate
entity, but details of airport revenues, expenses and balance sheet for O’Hare
and Midway airports can be found in the City of Chicago annual reports and
statements.

7.9 Summary
Airports tend to be consistently profitable and cash positive, but outside
finance still tends to be used for major programmes of terminal or runway
extension, which by its nature tends to be ‘lumpy’. Some airports distribute
more to shareholders in dividend payments and thus need to raise funds more
often. The most common finance is bank debt and bonds, the latter requir-
ing a credit rating to market successfully to financial institutions. Most
airports still retain at least a minority of shares held by government and thus
credit ratings are attractive and interest rates little above government bond
rates. Terms vary from 5–15 years. Longer terms are available from govern-
ment development banks such as the World Bank or European Investment
Bank, especially where airport projects generate broader economic
benefits.
The next chapter covers the airport privatisation process in depth, referring
to and building on many of the financing techniques and types of investor
introduced already.
142  Financing of airports
Notes
1 Its cost is the opportunity cost in terms of interest or return forgone of investing
in an alternative project or placed on deposit with a financial institution. It also
avoids any restrictive conditions or covenants that external finance often imposes.
2 It had also issued 100,000 redeemable preference shares of £1 each, and just under
22 million non-redeemable preference shares of 1 pence.
3 Underwriting discounts and commissions totalled US$1.89 per share for the
JetBlue IPO, or 7% of the issue price (from JetBlue Prospectus, 11 April 2002).