Investing in airports: Flying high

IMAGINE owning a shopping centre that your customers are forced to stay in for several hours. Better yet, everyone who visits is relatively rich, and many are in a giddy holiday mood. Now imagine that the number of these special shopping centres is strictly regulated, giving you a near-monopoly. On top of this you get paid a fee per visitor. No wonder buying airports has become something of an investment fad.

Though potentially lucrative, airports tie up a lot of capital, which is why governments around the world are selling them. Some are being listed on stockmarkets, others sold to private investors. The Japanese government is selling 30-40-year concessions to run some of its airports. France is flogging its regional airports: it sold a 49.9% stake in Toulouse airport to a Chinese-led consortium in December. Investors include pension funds, sovereign-wealth funds, infrastructure specialists and private-equity houses.

What sets airports apart from most investments in infrastructure is their dual income stream: they bring in money both on the aeronautical side (landing fees, contracts with carriers) and from passengers (parking, shopping, hotels). If you own a toll road and traffic dwindles, there’s not much you can do. But with an airport there are lots of levers to pull, such as cutting capital costs, firing staff and upping the price of parking. “We love them because they pay a steady income for our retirees, protect against inflation and are a diversifier,” says Andrew Claerhout of the Ontario Teachers’ Pension Plan (OTPP), which is an investor in four European airports including Birmingham and Copenhagen. Best of all is the bonus that comes from being a monopoly. Returns from well-run airports tend to be in the double digits, markedly higher than more boring assets like bridges.

One way to boost profits is to increase the number of passengers who can be herded through the buildings. Investors including OTPP and Macquarie, a bank, as well as the Belgian government, recently helped to upgrade Brussels airport by linking the European and international terminals, thus centralising security and shopping. Ardian, an investment firm that owns a stake in Luton airport, near London, helped to convince the local train company to increase London-bound services during rush-hour. It also removed a bottleneck at security by opening more lanes and hiring “smiling people” in yellow T-shirts to point passengers to the shortest queue. An upgrade of the terminal, aimed at increasing the number of passengers from 12m to 18m a year, is next.

When an airport has been in public hands, the non-aeronautical parts of the business have often been especially neglected. Buyers often invest in good parking (ie, under a roof and close by), which can become one of the biggest single sources of income. But not all airports are created equal. Those serving capital cities tend to be safer bets, with a steady supply of visitors, come rain or shine (unlike holiday destinations). Ensuring the airport is not dominated by a single carrier is another golden rule, as this makes it vulnerable to strikes or bankruptcy. Buying a stake in an airport of which the government owns a controlling share is risky, as public and private interests are not always aligned.

Europe is currently the hub for airport investing, accounting for more than half of all deals since 2011, according to Preqin, a data firm. That compares to 15% in Asia, 14% in Australasia and 9% in America. But European valuations are reaching dizzying altitudes: Ljubljana airport was sold last year to Fraport, a German airport specialist, reportedly for a lofty 20 times annual earnings. Michael Burns of PwC, a consultancy, points out that the number of passengers is growing twice as fast at many Asian and African airports. By 2020 Indonesian airports will have more traffic than British ones, predicts PwC. More adventurous investors may end up flying long-haul.

Source: http://www.economist.com/news/finance-and-economics/21653675-why-buying-airports-has-taken-flying-high

Financing capital goods: Keeping the grease

THE headlines focused on the fact that GE, a big industrial conglomerate, is beginning to sell off its $500 billion finance arm in small chunks. This week it put a $40 billion portfolio of corporate loans up for sale. But not all of GE Capital will end up on the block: GE is keeping the $90 billion division that finances purchases of medical equipment, power-generation gear and aeroplanes, or leases them to users. In part, that is because those fields are critical to GE: it makes all or part of the products being financed or leased. But it is also because the financing of old-fashioned capital goods is a booming business.

 
 

The gear GE sells is expensive; would-be buyers often lack the capital to buy it outright. For GE, therefore, the financial engineering that underpins the use of its wares is as important as the mechanical engineering that created them. Many hospitals, for instance, do not buy expensive scanners from GE, but lease them instead. When it develops improved versions, it helps the hospitals swap the new generation for the old, by passing the outmoded gear to another, thriftier institution, and so on down a long chain. By the same token, the sale of a plane that appears to be from Boeing to an airline may in fact be a sale to GE and a lease to the airline. In 85% of these cases, the plane will have engines made by GE or a joint venture.

Manufacturers have financed purchases of their own products for a long time, with mixed results. General Motors started its own finance operation, General Motors Acceptance Corporation (GMAC), in 1919, which helped it to expand its customer base and thus boosted its profits for decades. Eventually, and disastrously, GMAC expanded into mortgages. Just before the crisis, GM sold half of GMAC to raise money. Its subsequent collapse and nationalisation contributed to GM’s own bankruptcy in 2009.

Yet in 2010, shortly after GM had emerged from bankruptcy and while it was still under government control, it spent $3.5 billion in cash—a vast amount given its straitened circumstances—to purchase AmeriCredit, a Texan subprime auto lender. The company has since been renamed GM Financial. Its assets have grown from $11 billion to $49 billion in five years, an astonishing rate for a financial institution in recent years. China, where car-buyers are beginning to rely more on credit instead of buying with cash, is one area where it is growing fast.

Toyota continues to own a bank in America to help customers finance car purchases. BMW does as well. Car loans, after all, proved much more resilient during the crash than other forms of credit. For companies that do not have such financing arms, often because they use all the capital they can raise cheaply in their core business, a relationship with a finance firm is vital. This is all the more true, says Vincent Caintic of Macquarie, a bank, as ever stricter regulation makes it increasingly expensive for banks to offer car loans and the like.

Element Financial, a Canadian firm, has carved out a lucrative niche financing specific items, such as the railcars produced by Trinity Industries, an American conglomerate, and the small diggers made by Bobcat, part of a South Korean one. It went public in 2011 and its shares are up fourfold since (see chart). Over the same period, the S&P index of North American firms in financial services has not even doubled.

Source: http://www.economist.com/news/finance-and-economics/21653674-why-ge-retaining-one-bit-its-finance-arm-keeping-grease