Japan’s Kansai Airport Company considering foreign and domestic investors for Osaka airports
Japan’s New Kansai International Airport Company (NKIAC) president Keiichi Ando revealed the company has started considering foreign and domestic investors to manage the airports for 40-50 years. The company aims to raise USD7 billion to USD15 billion in the privatisation process. This could be the first of 29 airport privatisations there.
Mr Ando commented, “This is the first large infrastructure transaction in Japan and…if it succeeds, the government intends to privatise regional airports as well. In addition, there is also talk that it will be necessary to privatise infrastructure, such as toll roads,” Mr Ando said. The deal, which is expected to be completed in 2015, would involve private investors managing both the Kansai International and Osaka International (Itami) airports, whose managements were integrated into a new company this year to help offset Kansai’s enormous debt burden and in preparation for a privatisation procedure.
The new company is a wholly-owned one that owns the runways at the airports, the land assets of Osaka Airport and Kansai Airport's terminal building. After the successful integration of the management of the airports, the government now aims to sell the right to operate the airports to the private sector.
Uncertain response from investors
It was at the start of 2012 that the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) surprised industry observers when it indicated it was considering plans to enable private companies to acquire 30 to 50-year management rights for, in all, 27 airports operated by the central government. The degree of surprise increased further when an additional 67 airports owned by local governments were thrown into the pot, to a total of 94, only omitting the ‘big four’. While that figure of 94 has quietly slipped away from the immediate agenda, investors and operators globally are looking at the prospects afforded by the first 29 (the 27 regional ones plus the NKIAC two) as Japan continues to recover from the 2011 earthquake, tsunami and nuclear meltdown (allowing for the effects of the more recent earthquake); JAL is back on the Tokyo Stock Exchange and profitable again after its restructuring; and LCCs new and old are thriving in the new environment. But the challenges could outweigh benefits: Japan is a shrinking, not growing society, and airports are larger than necessary, saddled with debt and generally unprofitable.
Airport privatisation in Japan has so far been patchy. Quite apart from economic growth that stalled for over a decade, ultra high airport charges stunted the growth of LCCs until quite recently, thus removing one of the main drivers towards privatisation in the sector.
LCCs shake up the airport sector
However, the emergence of the new breed of LCCs such as Peach, Jetstar Japan and Air Asia Japan, to complement the older existing hybrid carriers like Skymark, Starflyer, Solaseed Air and Air Do – with perhaps China’s Spring Airlines soon to join them, based at Tokyo Narita Airport but focusing on secondary cities – has really shaken up the airport sector. Japan's new LCCs are increasing passenger numbers; travel propensity was historically low in Japan. The seat capacity ratio offered by LCCs in Japan has shot up in 2012, from 2.6% (domestic) and 9.0% (international) in 2011 to 4.4% (domestic) and 20.3% (international) in the period Jan to Dec-2012.
Japan LCC capacity share (%) of total seats: 2001 - 2012*
Source: CAPA – Centre for Aviation with data provided by OAG a UBM Aviation business
* Year to Month indicated
Japan has increased the number of its airports considerably to almost 100, thus bringing the prospect of reasonably priced air travel to corners of the country that had not previously experienced it – if lower-cost airlines can tap into the potential. The high costs and fares of ANA and JAL have not made air travel part of everyday life.
Airports that have opened since 2005 include Kitakyushu, Kobe and Chubu near Nagoya. Ibaraki Airport opened in 2010 with a minimal terminal; it uses the runway of the co-located military airfield. It serves the Greater Tokyo area and prioritised the attraction of foreign LCCs. Spring serves the airport.
As a result of these developments in the airline sector there has been a spate of low cost terminal developments and proposals across the country.
They include:
- Nagoya’s Central Japan International Airport (Chubu Centrair), which supports Japan’s fourth largest city. This airport plans to construct a budget terminal and is currently discussing the proposal with AirAsia, which requested such a terminal in the first place and which intends to operate both domestic and international routes from there as its second base from 2013, after Tokyo Narita. The aim is to have the facility entering service in the first half of 2013, which implies a rapid building programme of an inexpensive terminal;
- Okinawa Naha Airport, where Japan’s first dedicated LCC terminal (LCCT) commenced operations on 18-Oct-2012, after the airline ANA commissioned Naha Airport Cargo Terminal Ltd to transform a cargo terminal there into an LCCT. ANA will be the operator of the new facility, while Peach and AirAsia Japan will also use it (Peach and AirAsia Japan are partly owned by ANA);
- Not to be outdone, Tokyo Narita Airport announced in Apr-2012 that it plans to construct a dedicated terminal for LCCs in order to attract more budget airlines to the airport with construction work on the new facility scheduled for completion in 2014. In this instance the new LCCT will be a conversion from the current fifth cargo area building located near the airport’s Terminal 2. This is a more traditional method of providing an LCCT and has been popular in Europe. Narita Airport hopes to use minimal facilities at the new terminal to lower fees for LCCs. Jetstar Japan and AirAsia Japan launched operations from Narita in Jul-2012 and Aug-2012 respectively. The LCC penetration rate at Narita is still less than 10% (see the chart above for the national picture) but is expected to increase significantly as Jetstar Japan and AirAsia Japan continue to expand.
Kansai LCCT built along European lines
As for Kansai Airport (Itami Airport is a slot-controlled 100% domestic airport that is not served by any LCCs, only full-service and regional/commuter), its own 30,000 sqm LCCT began operations on 28-Oct-2012, and was completed after a 10-month construction period that cost around JPY8.5 billion (USD106 million). To avoid installing heavy electric equipment such as escalators and elevators inside the terminal, which would increase construction costs, the new terminal was built as a one-story building with the iron ceiling frame exposed, and air conditioning system functions only in limited areas. Costs were also cut as much as possible by using cheap flooring materials such as ceramics rather than natural stone and ready-made carpet and furniture. There are some similarities here with howMarseille’s MP2 terminal in France was constructed in 2005 – very much a basic facility that set a benchmark for the model in France and other European countries.
The Kansai LCCT has nine aprons (two international, three joint domestic and international and four for domestic use), no aerobridges and 300 car parking spaces in addition to a sizeable duty free store to be operated by NKIAC’s affiliate company Kansai Airport Agency, and 17 commercial outlets including a varied retail and food and beverage offering. NKIAC will collect a 40% lower facility usage fee from international passengers at this terminal, where charges are set at JPY1,500 (USD19) for the new terminal compared to JPY2,650 (USD34) per international passenger in the other terminal. The LCCT was built for Osaka-based LCC Peach. Rival Jetstar Japan will not be able to use the terminal.
In fact, since the management merger, NKIAC has reduced landing fees overall by 5% (effective Oct-2012), with additional reductions during overnight hours when the airport is underutilised, and further discounts planned for the future, including subsidies for new airlines and routes. This action is intended to bring Kansai's fees closer to the level of Narita Airport, where landing fees are now around 20% lower than Kansai's, and to improve competitiveness with other Asian hubs such as Incheon International Airport in Korea.
Third Kansai terminal to follow, also targeting LCCs
NKIAC aims to increase the portion of LCC international flights at Osaka Kansai from 14.4% to 25% of total international flights by summer 2014 as part of its medium term management plan. Another element to that plan is to construct a third terminal at Osaka Kansai to attract foreign LCCs with the proposed new facility to commence operations in 2015. The plan includes the introduction of discounted airport usage charges on flights arriving or departing in early or late hours, and providing hotels nearby with reasonable rates.
Itami’s future role is unclear
The potential spoiler in all this is the future of the smaller Itami Airport. Since 2008, numerous politicians have been arguing for the Chūō Shinkansen, a planned maglev rail line that is intended ultimately to connect Tokyo and Osaka via Nagoya in a mere hour, making much of Itami's domestic role irrelevant. Arguments are made that Itami's domestic functions should be transferred to Kansai Airport in conjunction with upgraded high-speed access to Kansai from central Osaka (the journey time to the city is presently about an hour).
Nevertheless, it remains a significant asset with close to 15 million passengers annually.
Positive financial results in 1H2012
So potential investors will be encouraged by how NKIAC is responding to the changing paradigm in Japanese aviation. But what of its financials? Well, the company is also targeting operating profit of JPY35,300 million (USD452.6 million) in FY2014 including operating profit of JPY28,800 million (USD369.2 million) from Osaka Kansai.
In its most recent financial report, for the six months ended 30-Sep-2012, NKIAC reported revenues had grown by 17% over the p-c-p and operating profit by 53.7% as passenger numbers grew by 26% at Kansai and by 4.6% at Itami. This will be music to the ears not only of the NKIAC management but also those of potential investors, for whom Kansai previously meant no more than a floating airport that was slowly sinking into the sea. Fortunately, the rate of ‘sink’ has now been stabilised, falling from 50cm a year to around 5cm.
NKIAC financial highlights (USD million*): six months ended 30-Sep-2012
Measure | Amount | % increase/decrease |
|---|---|---|
Revenue | 634.0 | +17.0 |
(Osaka Kansai) | 593.0 | +9.4 |
41.2 | n/a | |
Operating profit | 180.4 | +53.7 |
(Osaka Kansai) | 156.3 | +33.2 |
(Osaka Itami) | 24.1 | n/a |
Total assets | 24885 | n/a |
Total liabilities | 15544 | n/a |
Passenger numbers | ||
(Osaka Kansai) | 8.5 million | +26.0 |
(Osaka Itami) | 6.6 million | +4.6 |
Cargo volume | ||
(Osaka Kansai) | 356000 tons | (-1.2) |
(Osaka Itami) | 59000 tons | +5.8 |
Aircraft movements | ||
(Osaka Kansai) | 64000 | +20.9 |
(Osaka Itami) | 65000 | +6.2 |
As a stand-alone facility Kansai Airport had been deeply in debt, losing up to USD560 million in interest every year. Airlines had been dis-incentivised by high landing fees that were reputedly the second most expensive in the world after Narita's (which have since declined). Excessive terminal rent and utility bills for on-site concessions also drove up operating costs. More recently, after deep discounts, the number of routes is increasing.
Traffic data: Kansai Airport, Dec-2012
Osaka Kansai International Airport scheduled services Network Summary: at 03-Dec-2012
Total Airlines | 47 |
|---|---|
Domestic only | 4 |
International | 43 |
Total non-stop passenger destinations | 53 |
Domestic | 9 |
Africa | 1 |
Asia Pacific | 31 |
Europe | 6 |
Latin America | 0 |
Middle East | 2 |
North America | 4 |
Total non-stop freight destinations | 9 |
Domestic | 1 |
Africa | 0 |
Asia Pacific | 3 |
Europe | 2 |
Latin America | 0 |
Middle East | 0 |
North America | 3 |
Osaka Kansai International Airport international vs. domestic capacity seats share: 03-Dec-2012 to 09-Dec-2012
Source: CAPA – Centre for Aviation & Innovata
Osaka Kansai International Airport capacity share (% of seats) by carrier: 03-Dec-2012 to 09-Dec-2012
Source: CAPA – Centre for Aviation & Innovata
Osaka Kansai International Airport capacity share (% of seats) by carrier type: 03-Dec-2012 to 09-Dec-2012
Source: CAPA – Centre for Aviation & Innovata
Osaka Kansai International Airport capacity share (% of seats) by alliance: 03-Dec-2012 to 09-Dec-2012
Source: CAPA – Centre for Aviation & Innovata
Traffic data: Itami Airport, Dec-2012
Osaka Itami Airport capacity share (% of seats) by carrier: 03-Dec-2012 to 09-Dec-2012
Source: CAPA – Centre for Aviation & Innovata
Osaka Itami Airport capacity share (% of seats) by alliance: 03-Dec-2012 to 09-Dec-2012
Source: CAPA – Centre for Aviation & Innovata
Management contract out at 27 airports by 2014
Looking beyond Osaka, the merger and privatisation plan there re-emphasised the government's willingness to streamline management of the nation's 98 airports generally and, for Japan, matters now appear to be progressing quickly. Undeniably, the government’s pressing need to cut spending is behind the new-found haste, as is the desire to reduce landing fees and attract new airlines. MLIT, in a draft report, stated the rationalisation and reform of management of the 27 government managed airports in Japan are to be made by FY2020. As part of this, during the phase one period, or the five years from FY2014, it is planned to contract out management of as many airports as possible.
The management rights of airports in Sendai and Hiroshima could be sold as early as FY2014. Under the proposal, the government would retain ownership of the land and buildings, while private firms would oversee the runways, terminal facilities and parking areas. The sale of management rights to the 67 airports now held by local governments is also on the agenda. The scheme broadly tracks the actual, shelved or abandoned lease concession proposals for airports in the US (Puerto Rico, Chicago Midway, and New Orleans) and, to a degree, in Brazil. The Tokyo airports (where there has been some limited privatisation already), also Nagoya (Chubu) are excluded for now. The concessions would be for an attractive time-span, namely 30 to 50 years.
With understandable investor nervousness about current deals in the UK (ever-increasing costs to airlines, airports and passengers); Brazil (hints of corruption that might reflect on the previous tranche of airport privatisation activity); and Portugal (excessive government demands), along with the collapse of the SEA IPO in Italy and lack of any progress in Spain, this proposal in Japan is almost certain to bring welcome relief and to stimulate interest in a country where the entire aviation scene is changing rapidly. But careful analysis must be made of potential benefits; Japan is no China when it comes to growth.
Intriguingly, there is a converse possibility that NKIAC could itself look abroad for operational, perhaps investment, opportunities. It plans to establish an ‘overseas strategy’ in spring 2013 to cultivate personnel that are good with foreign languages and are familiar with airport operations overseas ahead of participation in the operation of airports in emerging markets including in Southeast Asia. NKIAC could conceivably be operating non-Japanese airports even before the completion of its own privatisation in 2014 or 2015.
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