17/08/2017 05:47 AST

The President of the General Authority for Civil Aviation (GACA) in Saudi Arabia recently announced all airports in the Kingdom will be privatized.

Jeff Youssef, Partner, Oliver Wyman Middle East, who recently co-authored a report called ‘Leveraging the Private Sector to Improve Airport Infrastructure’, commented: “Air traffic is expected to continue to grow across the GCC by 4.8%, which means it will more than double by 2030. We will therefore see major investments made to increase capacity and improve service delivery over the coming years.”

“Governments in the region will need to ensure money is continuously injected into their airports to achieve forecasted growth in the number of passengers.”

“The benefits of airport privatization, if managed diligently, can be wide-ranging. Privatized airports generally record higher performance across customer satisfaction metrics when compared to their government-operated counterparts.”

“In most cases, airports operated by public entities do not focus on the customer experience. Privatization can allow for better adjustments to market changes and will often provide more innovative solutions to customers, resulting in improved outcomes for all.”

Governments should carefully consider their privatization objectives. By emphasizing specific objectives such as value maximization, preservation of decision-making and creation of a strong private operator, governments are implicitly affecting the overall valuation.

By clearly recognizing the potential upsides and risks of the privatized airport, and how those upsides and risks are allocated, both parties can better accomplish their transaction goals. A thorough feasibility study is an essential first step.

To obtain the maximum value in an airport privatization the seller must make sure that the levers for value creation are clearly understood. Although different bidders may assess the potential for value creation differently, there should be general agreement on the primary sources of value in any airport privatization, specifically including:

• Reasonable returns on aeronautical investments
• Non-aeronautical revenue opportunities
• Operating efficiencies
• CAPEX requirements and returns

Expectations regarding volume growth as a driver will be very different in mature versus developing markets. Future projections should be based on solid traffic forecasts, recognizing the cyclical nature of air-travel demand and the competitive dynamics of the airline industry. The exhibit below provides an example of the methodology used to forecast traffic in a large multi-airport metropolitan area.

Saudi Gazette

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