“Anyone want to get rodgered by Michael O’Leary?” That was how one senior infrastructure banker in 2011 summed up how he saw the prospect of buying London Stansted Airport.
The majority of traffic at the airport is accounted for by Ryanair, and chief executive O’Leary’s fearsome reputation as a brutal negotiator and cost-cutter has never been off the lips of any investor prepared to discuss the prospect of buying the airport that was only sold because its owner was ordered to do so no less than five times by competition regulators. Just as possible buyers didn’t like the asset, so BAA (now Heathrow Airport Holdings) didn’t like the idea of a fire sale.
How wrong they were. Not only have they sold Stansted for a healthy fee, they expect to make more money out of it than at present.
A high price to pay
Two weeks ago, Manchester Airports Group won the bidding to buy Stansted and promptly promised “significant volume growth over the short, medium and long term.” Stansted currently serves about 17.4 million passengers a year.
More telling than the press release, however, is the price MAG paid for Stansted, or rather the EBITDA multiple. £1.5 billion is approximately 15.6 times Stansted’s 2012 EBITDA (earnings before interest, tax, depreciation and amortisation – the standard metric for assessing profitability across assets). That compares to Edinburgh Airport, which was sold for about £807 million or 16.7x EBITDA. (That was a lot higher than the national press were saying, but only slightly higher than sources I spoke to predicted when working at Infrastructure Journal last year. Anyway:-)
The point is that this is a similar multiple and a high price to pay. Edinburgh, although a smaller airport by traffic, is in some ways arguably better “quality” than Stansted. Like Stansted it serves a capital city, but unlike Stansted it is the only airport serving that city, and most of its traffic is not from low cost airlines with a reputation for negotiating landing charges with knuckledusters, and whose passengers are less likely to spend lots of money in the airport.
You don’t pay a multiple that size unless you expect to make a decent return, so that is what MAG intends to do. It’s not hard to think of a reason why. Manchester Airport, by far the biggest and highest-grossing airport in the MAG portfolio, opened its second runway in 2001, but twelve years later it really doesn’t need it: Stansted, with one runway, has similar traffic and spare capacity. They are seeking growth where it’s most likely to appear – in the south-east.
Fasten your seatbelts and pray
But there are problems with Stansted. Although it’s Britain’s fourth largest airport by traffic, passenger volumes have actually been declining for six years: in 2007 23.8 million passengers passed through it, 6.4 million more than the latest annual measure last autumn. The last annual accounts, for 2011, show a loss of £11 million.
This is not surprising. Recent analysis of airports (by Fitch Ratings in 2011, for instance) shows that airport traffic follows economic growth, and moreover that the airports best placed to ride out periods of recession are big hub airports like Heathrow and Paris-Charles de Gaulle. Smaller airports like Stansted suffer most in the bad times.
Then there’s the Ryanair issue. News this week that the airline has lost its legal battle against compensating a woman left stranded by the Icelandic ash cloud is a reminder of the hard bargain it likes to drive.
As if that weren’t enough, Stansted is a designated airport. What is that I hear you cry. Well it means that, even if Michael O’Leary threw in the towel, airport landing charges could not rise higher in a year than CPI inflation. It’s also subject to restrictions on night flying, a brake on traffic growth. And aeronautical income accounts for most of Stansted’s revenue.
So, MAG (of which over one-third is owned by mid-sized Australian infrastructure fund Industry Funds Management) will need to turn around Stansted’s declining growth, pray there isn’t going to be a triple-dip recession and hope that Michael O’Leary is in a good mood. I wouldn’t fancy being in their shoes right now.