Tuesday, 2 February 2016

The Great Cardiff Airport Swindle?

Were the Welsh Government diddled when they nationalised Cardiff Airport in 2013?
(Pic : Wales Online)

As others have said, the Welsh Government's reputation when it comes to spending public money has taken a big hit over the last few days, and brings what I said in Wales reacts to steel job cuts all the more into focus:
"If politicians turned up on their (Tata's) doorstep with a big sack of money on our behalf....we'll be taken to the cleaners and every anchor company will expect it in the future."

The big difference between Tata and Cardiff Airport is that while Tata are victims of circumstances largely beyond their control but are, at heart, a soundly-run business, the airport was being run into the ground by its owners, who had completely failed to invest in it and seemed oblivious to the fact it was hanging over a precipice.

Had the government not made an intervention there's a pretty good chance Cardiff Airport would've closed completely; needless to say that for any nation where tourism is considered to be an important part of the economy, not having an international airport would be beyond humiliating.

So the decision to nationalise Cardiff Airport was correct, but that doesn't necessarily mean it was done correctly, and that was the focus of a Wales Audit Office report published last week (pdf).

Before the Purchase

Cardiff Airport's previous owners, Barcelona-based Abertis, refused to invest in airport facilities
due to excess capacity - something which greatly worried the Welsh Government.
(Pic : efeempresas.com)

The turning point in Cardiff Airport's fortunes appears to be 2007 - and not necessarily because of the Great Recession. Prior to this, passenger numbers had doubled to 2.1million a year and the airport was also connected to the rail network at Rhoose in 2005.

The airport's ownership transferred from TBI to Catalonia-based Abertis in 2005, and with the departure of senior managers, engagement with the Welsh Government on things like tourism promotion declined. A subsequent decline in passenger numbers between 2007-2012 to just above 1million a year was blamed on the loss of low-cost carriers like BMI Baby.

Regardless of the smaller catchment area, the Welsh Government became increasingly concerned that the airport was under-performing compared to its benchmark rivals. The Welsh Government's priority was to improve transport access, with plans including improved road links, introduction of an express bus service and an increased number of trains on the Vale of Glamorgan line.

The Welsh Government also pressed for :
  • Devolution of air passenger duty (a call repeated by the new CEO of Cardiff Airport, Roger Lewis – more from Borthlas).
  • Attracting new carriers to the airport (like Vueling).
  • Promoting Cardiff Airport as a way to relieve pressure on airports in southern England.
  • Improved road links to the St Athan enterprise zone.

In 2011, the Welsh Government offered a grant to Abertis – with state aid approval from the EU - to upgrade the airport terminal, but Abertis refused to match-fund the investment, so the offer was withdrawn. The First Minster  met with Abertis officials to express his concerns about the under-performance of the airport and the absence of any willingness on Abertis's part to invest.

Abertis believed there was no need to invest while the airport had extra capacity, and instead wanted Welsh Government assistance on route development – but changes in state aid rules made that difficult in some circumstances.

A task force was established, and the Welsh Government also entered into a £4.3million commercial sponsorship contract with the airport as part of its tourism and business promotion schemes, which ran until November 2014.

Buying the Airport

After four months of negotiations, the Welsh Government settled on a price that Abertis would accept - but it was significantly higher than a valuation by KPMG. There are good reasons for that.
(Pic : Wales Online)

The WAO were satisfied that the Welsh Government undertook the appropriate "due diligence" before making an offer. Their case was deemed sound and seems to have largely followed Treasury guidance.

With Abertis rejecting a proposal for a joint venture, the Welsh Government's rationale was that the airport was failing under Abertis, and that "public sector ownership would give the Airport the stability and commitment it needed in order to develop over the longer term."

The airport's poor performance was impacting inward investment, and there was a real danger that more airlines could leave, possibly resulting in the airport's closure – which could cost 1,600 jobs at the airport site and put the future of the British Airways maintenance facility at risk.

The Welsh Government clearly identified possible risks, but the WAO believe their passenger growth and cash requirement projections, were "too optimistic". Also, they failed to undertake a proper appraisal of the wider economic benefits of buying the airport.

When negotiating the price, the Welsh Government "accepted a commercial valuation based on specific assumptions about the commercial performance of the airport" as well as its wider value as a public asset – which under Treasury guidelines would be £472million.

In December 2012, the Welsh Government tabled a non-binding £55million offer for the airport, when the airport was valued by KPMG at between £20-35million (based on the airport's weak performance, so they were particularly conservative figures). The Welsh Government originally offered £35million, but Abertis were holding out for an offer closer to its "enterprise value" of up to £58million.

The Welsh Government had no written negotiation strategy, and officials believed the £55million was the minimum Abertis would accept before entering negotiations. The Welsh Government accept they had a weak negotiating position because they have a statutory obligation to economic development and couldn't invest in the same way as a private investor – which meant Abertis always had the upper hand.

After some extra work on the valuations, the Welsh Government made another offer of £41million – still higher than the independent valuation of the airport, but lower than the previous bid. Abertis rejected it, believing it to be "too pessimistic" of the airport's potential.

Subsequently, based on advice from Arup, the Welsh Government negotiated a £52million purchase price, alongside £3.3million in working capital – which Abertis accepted. The deal was signed in March 2013 (The deal's done, so what next for Cardiff Airport?).

Running the Airport

There are few criticisms of how the arms length company are running the airport, but the WAO did
have concerns on monitoring as well as over-optimistic estimates on profits and passenger numbers.
(Pic : Wales Online)

The Welsh Government took the appropriate legal advice and established an "arms length" holding company to oversee the running of the airport, similar to the Scottish Government's ownership of Glasgow Prestwick Airport.

The WAO's main criticisms are that, firstly, while it's predominantly staffed by demonstrably competent civil servants, it could do with some external independent members. Secondly, there was no open appointments process for the first chair, David Rowe-Beddoe – but as it was a private company, an open appointments process wasn't required.

There are very few criticisms of how the holding company is running the airport; they've developed a close working relationship with operators, but there were calls for more robust monitoring in order to properly judge performance.

One big concern flagged up by the WAO is that the airport needs more capital than was first envisaged. The long term goals are to reach 2.2million passengers by 2020 and 3.3million by 2037. To support this, the Welsh Government has provided a £23million commercial loan, but operators believe they'll need extra.

In terms of that key measure of performance – passenger numbers – they've "fluctuated" since nationalisation and are hovering around the 1.1million a year mark. They're widely expected to increase substantially after FlyBe offered new routes from Cardiff and agreed to base themselves there for 10 years. Operators are continuing to seek to attract routes to the Middle East and the east coast of North America (presumably New York).

It's now expected that passenger figures will rise to 1.4million in 2017-18, but these are below the expectations at purchase. Profit projections have also been missed; Cardiff Airport made just £41,000 profit in 2014-15, although overall commercial incomes (car parking fees, retail, catering) have risen.

There's been well-publicised criticism of the express bus service between Cardiff city centre and the airport due to the amount of subsidy, but passenger numbers have increased dramatically to 98,000 a year - following frequency changes - while the cost of running the service has fallen. It's actually the shuttle bus from Rhoose railway station that's under threat, with a subsidy of £4.50 per passenger for a journey that's around two miles.

Caveat emptor?

Sorry to disappoint but, while this certainly looks bad because of the numbers involved, it's nowhere near as bad as RIFW. Being able to take a more objective view of such things is one of the main reasons why I'm not in a political party (and probably why I wouldn't be welcomed in one either).

I don't doubt for a second that Abertis executives must've seen them coming, but the issue of poor negotiating skills in the public sector is a long-standing one that's not restricted to Wales. Ideally you would have one or two senior civil servants who are experts at commercial negotiation, but those kind of skills are pricey and most opportunities are in the private sector anyway.

If you had a faulty piece of equipment at home, like a boiler, that still works but is on its last legs as winter approaches, you're not going to get so hung up on the price – you just want a new boiler. That's sort of what happened here.

The Welsh Government could've waited until there was an imminent threat of closure, or another airline threatening to leave – but the political pressure on the Welsh Government "to do something", following the airport's well-publicised problems, perhaps showed their hand/desperation to Abertis and prompted a hasty purchase. In the end both sides got what they wanted.

The quoted valuation of £20-35million was, as said, quite a conservative estimate that was based on public sector values, which often don't have the same capital pressures or costs as the private sector. I'm no expert obviously, but with the right help the Welsh Government could've negotiated the price down, maybe to a more reasonable ~£40-45million (not including the £3.3million working capital).


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