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Overview of Aviation Privatization in Europe, African and Asian Country

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ABSTRACT 3 KEYWORDS 3 INTRODUCTION 4 OVERVIEW OF AVIATION PRIVATIZATION IN EUROPE, AFRICAN AND ASIAN COUNTRIES 5 Argentina – Its pitfall and the problems behind it 5 Turkey – A Privatization through BOT 7 Kenya Airways – A Successful Story 9 Malaysian Airlines Considering Privatization 10 Germany-Fully privatized and partially privatized 12 Privatization in United Kingdom 14 IMPLICATION OF PRIVATIZATION 16 RECOMMENDATIONS 17 REFERENCES 18

This paper focuses on the privatization of airports in six different countries which are Argentina, Turkey, Germany, United Kingdom, Malaysia and Kenya. The analysis aims to highlight the objectives, implementation and the government rules towards privatization of airports. This paper also aims to identify to what degree privatization contributes to or enhances the performance of the airports. The study measures the change in any given indicator of performance whether the privatization on the airports are successful or not. For each country, privatization occurred by fully privatized or partially privatized with residual public ownership. Moreover, the study also stress on the implication of privatization towards the countries. One of the implication is it will reduce burden of the government to bear high expenses. Privatization programme also invented so that it can contribute towards growth and development of economy. In addition, this paper also focuses on the recommendation in order to deal with the privatization.

Privatization, airports, Build-Operate-Transfer (BOT), price-cap regulation, International Finance Corporation (IFC), airlines, International Civil Aviation Organization (ICAO)

INTRODUCTION There have been many term in recent times to express the process of converting the scope of the public sector to the scope of the private sector. However it was common to use the term of privatization. This term has appeared numerous definitions of privatization, some say that it’s as a transfer of ownership of the project from the public to the private sector. In direction of this privatization, Privatization Masterplan was established in 1991 in order to enable that both public and private sector to be better informed about policies under this programmed (Economic Planning Unit Prime Minister's Department, 1991). Airport privatization first began in 1987 when former British Prime Minister, Margaret Thatcher, decided to privatize many of the country’s public services to raise public funds (Myers, 2006). For the first time ever it had been spread around the world. Even though at that time only a few that have been successfully privatized, we can expect this trend gradually become increase over time. From a business perspective, airports make a smart investments, since they generally have good credit ratings, earn substantial revenues, and have almost a full monopoly on the market (Myers, 2006). Airport privatization primarily had its own purposes and objectives but somehow not all were successful. In this paper we will look on airport privatization in six different country and it successfulness in achieving the goal.

Argentina – Its pitfall and the problems behind it There are more than 20 international airport can be found in Argentina and about 200 smaller regional or Airfield (ICAO, 2013b). Until 1997, most of the Argentinean airports were under direct administration, regulation and control of the local Air Force (Fuerza Aérea Argentina, FAA). Some provincial and municipal government also had control over regional airports. Since 1997, most of the airports were privatized. The airport divided into several categories and have different characteristic such as international, domestic, touristy, destination, province capital and etc. which explain parts or all that traffic. It was found that two third the flights was focus on two airports that are situated at city of Buenos Aires and they are Ezeiza-Ministro Pistarini (international) and Aeroparque Jorge Newbery (Domestic). As had been mentioned above, airport privatization in Argentina had been started since 1997. This process of airport privatization starts with the issuance of Decree 357/97 and then amended by Decree 500/97. The purpose of airport privatization is to increase the investment in this sector and to create more competition to cover the increase in demand from the consumer. The national system of airports included 58 airports, of which 36 were conceded for thirty years (with a ten year possible extension) to three consortiums and the remaining airports continued under control of the Air Force, as well as some provincial or municipal governments. With the objective of improving the infrastructure of all of them and using cross subsidies, the greater concession pooled eight profitable airports with other twenty-five (Ferro, Garitta, & Romero, 2010). However, the objective of privatization cannot be achieved since the privatization on Ezeiza-Ministro Pistarini (EZE); an international airport has been a very bad deal for the customers. The structure of the lease sale has meant very high charges, under-investment and poor customer service quality and the absence of an economic regulator and the clear conflict of interest as apparent from extremely high royalty fees has led to a very confrontational relationship between Government, airport operator and customer (IATA, 2005). This long term lease sale of EZE had been privatized in 1999 and the total sale was the large single tranche of airport privatization in the world to date. An international consortium of investors and airport operators, Aeropuertos Argentina (AA2000) is the buyers of the 30-year lease that responsible to develop and operate EZE. Government been sued by AA2000 for breach of contract from the start of their lease of concession. This shows that the privatization arrangement on EZE have not been the satisfactory for Government or concessionaire, let alone customer. Behind this failure, there were found that no independent economic regulation was found to restrict the market of the airport operator, who is running a natural monopoly. Plus, Government also imposes high royalties towards the lease, which significantly add to the cost base. Because of that, the airport operator had only paid one-third of the lease royalties by mid-2003 Furthermore, the quality of services provided been declined since only 10% of the investment used for that purposes. The rest of the investment was used to focus more on the developing commercial and not aeronautical services. It results in in poor services quality for airlines and passengers. Just then, the confrontational relationship between airline passengers and airport operator ended up in the courts. Several key problems were identified regarding privatization of EZE. The first problem is sales leases were structured in a way that they almost inevitably led to sharp increase in changes, with no corresponding rise in service. Large numbers of sales were made on the basis of illogically high traffic forecasts and the process of bidding led to high royalties, which both severely damaged profitability. To recoup these losses, airport operators raise the charges on airline customers and cutting back investment plan. Another problem is no effective mechanism for customer interest to be represented in decisions about service charge levels. No effective regulatory body to ensure the monopoly airport takes any notice although this lease contracts specify the customer consultation. In addition, due to the lack of economic regulation or customer consultation had resulted in inefficient in the investment in new capacity. In some airports there has been excessive investment in terminal facilities, while in others there has been under-investment.

Turkey – A Privatization through BOT
The economy in Europe had experienced a remarkable change in the 1980’s with the emergence of privatization procedure, which was started in the UK under Thatcher government, both for firms not only in production economy but also for infrastructure providers and public utilities. The main objective of UK privatization is to reduce government involvement in the industry. Continental Europe started to privatize government companies in various sectors, followed by the UK. As an emerging economy, Turkey was also influenced from this wave and set up the Republic of Turkey Prime Ministry Privatization Administration in 1984 (Humboldt University, 2010). Since the establishment of the republic, several public enterprises have been privatized in different sectors, such as energy, transportation and telecommunication.

In Turkey, the privatization of airports was carried out by the General Directorate of State Airports Authority of Turkey (SAA), which starting in 1994, had been used the Build-Operate-Transfer (BOT) methodology to transfer the operating rights of airport terminals to the private companies, while still keeping the airside operations under state control.

Currently, Turkey has 117 aerodromes, among which 90 airports with paved runways. There are 18 international airports (14 with scheduled traffic), 27 domestic airports, and 16 military airports. Turkey’s busiest airports are Istanbul-Atatürk International Airport, Antalya Airport, Istanbul-Sabiha Gökçen International Airport, Ankara-Esenboğa International Airport, and İzmir-Adnan Menderes Airport (ICAO, 2013a). As we know that BOT is one of the methods of privatization. Since the investment are financed by the private sector, thus this method was one of the interesting option pursued, but however in the long term the government will remain the real owner. It is controversial to transfer the ownership to the private sector especially in developing countries as in Turkey, and therefore it may be one of the motivations behind BOT implementation. When BOT take place, at the first phase the winning operating company is required to build a terminal as per contact and get the operating rights for that period. Then at the end of this period, the operating company is obliged to transfer all the rights or ownership back to the SAA. Since significant efficiency gains are not only observed in the construction process but also in the operation of the terminal, at the end of the contract period, it was natural to continue to operate them in private sector. This is the second phase of the privatization process through BOT method. In this phase, the SAA agreed to transfer the operating rights of the newly acquired terminals through long term leasing back to the private sector. The companies who are interested were asked to submit their bids in the price auction. The one who had the highest bid obtained the operating rights for a predetermined period. This can be seen in the privatization of Antalya and Istanbul airports. The BOT period has already come to an end but then followed by a long-term lease agreement.

Kenya Airways – A Successful Story Kenya Airways is the flag carrier for Kenya. The company was incorporated in 1977 and later privatized in 1996. It is the first African flag carrier in successfully doing so. Kenya Airways, presently, is a public-private partnership. The largest shareholder definitely Government of Kenya (29.8%) followed by KLM, a flag carrier airline of Netherlands with the stake of 26.73% in the company (Galbi; "The Kenya Airways," 2012; Wikipedia, 2013). Kenya Airways was privatized with the view to reduce fiscal burden, develop the private sector, and broaden its ownership (Oyieke, 2002). International Finance Corporation (IFC) was appointed to provide assistance in privatization process. KLM was awarded the privatization of the company. The company then restructured its debt and made master corporation agreement with Dutch Airline. The remaining interest was offered to the public. However, non-Kenyan can only hold at most 49% in the airline. Shares were floated in Mac 1996 and started trading in Nairobi Stock Exchange. The airline, then, was awarded a loan amounted to US$15 million from IFC to modernize its planes. In 1996, the government stake was only 23% while in 2012; Kenya government has increased its stake to 29% thus becoming the major shareholder of Kenya Airways (Oyieke, 2002; Wikipedia, 2013) Kenya Airways and KLM agree on agreement to pool their efforts and strength in order to succeed an economics of scale by sharing resources, combining route networks and assessing new market in sub-Saharan Africa. Kenya willing to undertake IFC’s help to wrench the company out of losses during fiscal years in 1997 for it believe that IFC has the necessity or requisite combination of technical expertise, political and credibility required for difficult environment surrounding privatization. Ultimately, IFC and KLM have helped Kenya Government in going through tricky privatization process and reform as well as rescue the poorly-performing national airlines(International Finance Corporation, 2008).

Malaysian Airlines Considering Privatization Malaysia Airlines System Berhad (MAS) had faced many troubles and undergoes a recovery after recovery since its commencement in 1947. Prior to financial crisis in 1997, the airline suffered its first period unprofitability. The losses was amounting to as much as RM260 million after earning a magnificent record breaking of RM319 million profit in financial year 1996 and 1997. The airlines only recovered in 2002 and 2003 after cutting unprofitability routes such Brussel, Darwin, Honolulu, Madrid, Munich and Vancouver (Mohd Noor Abu Bakar, 2011).
The second period of unprofitability was in 2005. It was reported that the losses was RM1.3 billion. The reason for this event to happen is primarily due to escalating price of fuel which is costing RM10.3 billion (Mohd Noor Abu Bakar, 2011). Other reasons would be the increment cost and maintenance and repair cost, staff cost, low yield per available seat kilometer and inefficient route network. Low yield per available seat kilometer is where a plane is left to take off with few passengers.
A business turnaround plan was carried out in order to bail out the airlines from continuous losses since 2005 until midst of 2006 and 2007 (Jala, 2006). Route rationalizing was major contributor for airline to gain profitability, MAS has cut down its domestic route from 114 to 22 and cancelled all unprofitable international routes such as KL-Manchester. The latter route needs 140% load factor to breakeven (Mohd Noor Abu Bakar, 2011). Then, in 2011 the third period of unprofitability revealed when the airline suffered a net loss of RM2.52 billion due to rising fuel cost and mismanagement (Yusof, 1998). This was recorded as the largest in its history. Further cessation of route was carried out includes routes to Surabaya, Dubai, Johannesburg, Cape Town, Buenos Aires as well as Rome. Then in 28th of February, 2013, MAS improve its performance due to its route nationalization program after net profit of RM51.4 million has been recorded. MAS is listed in Stock Exchange of Bursa Malaysia as MAS System Bhd. Its majority shareholder with 52.0% is Penerbangan Malaysia Bhd. Then Khazanah Nasional holds 17.33% of shares. Non controllable interest or minority shareholder include EPF Board (10.72%), Amanah Raya Nominees Sdn. Bhd. (5.69%), State General Security Sarawak (2.71%), foreign shareholders (5.13%) and Warisan Harta Sabah (2.4%)(Mohd Noor Abu Bakar, 2011). After announcing losses from years to date of more than 25%, many has agreed and want the Malaysia Airline (MAS) to be privatized in effort to improve its structure and return to profitability. Most shareholders also demand for the proposed plan as it could prevention for the company from a violent implosion. Air travel is expected to skyrocket in Asia Pacific. Yet, at the same time, due to international unrest, many costs are more unpredictable. Then, MAS confidence in capital market nearly shrunk. In 2012, there was a cash call where rights issue was issued to the existing shareholder. Worst, its market price was tumbled as much as 20.8% to 80 cent (Mohd Noor Abu Bakar, 2011). Two years ago in February 2012, MAS raised fund of RM3.05 billion by issuing rights issue of 1 for 1. In addition to issuance in 2010 and 2012, in 2007 MAS raise RM1.1 billion by issuance of rights issue (Mohd Noor Abu Bakar, 2011). Perhaps, MAS will do better doing “Ananda’s plans” by being privatized before restructuring and listed at a later date. Billionaire Ananda Krishnan had in recent years practiced and relisted Maxis Bhd., Astro Malaysia Holdings Bhd. and Bumi Armada Bhd. Indeed, no logical prediction that MAS will achieve a sustainable turnaround after this third call. Ultimately, MAS cannot avoid the skepticism from the public and market onlookers.

Germany-Fully privatized and partially privatized
Airport industry in Germany is dominated by three types of ownership structures. First, the public airports are owned by joint local, regional and federal governments and often managed by local governments. Stuttgart and Munich are the most important examples of this type of ownership. The second group is composed of the partially privatized airports, which, next to private ownership, are owned by local, regional and federal governments, such as Düsseldorf and Hamburg. The last group consists of mostly small fully privatized airports, such as Niederrhein (NRN), which are owned and managed by a private company.
In 1982, the Federal Government announced a program to privatize airports against the background of budget restrictions. The objectives of privatize airports are to ensure the airport company able to cover its own entire costs. Moreover, user based financing should be continued without any subsidies of the government. From that, the airport companies are required to be independent in managing their organization.
With annual traffic growth rates averaging between 5% and 10% at major German facilities, and even higher at smaller airports, new and costly expansion is causing some officials to consider privatization of airports to offset the cost of upgrades ("Germany at Crossroads of Airport Privatization," 1995). First privatizations of airports in Germany have started in Berlin. In May 1996, the States of Berlin and Brandenburg and the Federal Government plan to construct a new privatized international airport, Berlin Brandenburg International, at the Schönefeld site. However, the process was terminated in May 2003 as a result of the private investor group pulling out.

In April 1996, there had been a catastrophic fire, and so the owners first had to rebuild the airport completely and bring it into line with the requirements of modern air transport (HOCHTIEF Airport, 2012). No availability of public funds for a huge investment in the reconstruction works has forced state of Nordrhein-Westphalia to sell 50% of the airport. The traditional cost-based regulation continues to be used by the state regulator of this airport. In October 2000, the Hamburg airport went partly into the private hands. Hochtief Airport GmbH and Aer Rianta International which are Hamburg Airport Partners bought 36%, and later increased their stake to 49%. The original owner, the City of Hamburg, still controls 51% of the shares, but may reduce its stake further. In 2000 the traditional cost-based regulation was replaced by a price cap regulation.
The partial privatization of Frankfurt airport occurred in 2001. In June 2001, Frankfurt Airport went to the Frankfurt Stock Exchange with an initial public offering (IPO) after the transformation of its legal form into Fraport AG (ICAO, 2013c). Before that, Frankfurt Airport is wholly owned by the government. 25% of shares were placed in the stock market. These are now held by diverse holders, including a 10% share by Lufthansa (Tarvena & A, 1998). The airport followed the Hamburg model and agreed in 2002 with the regulator and the airport user council to introduce price-cap regulation. In addition to a price cap, the airport must attain the quality of service targets, including availability of aircraft parking positions and availability and punctuality of passenger and baggage transport systems.

Privatization in United Kingdom
The airports in the UK are not owned and managed by a government entity. Indeed, the UK government policy actively promotes and encourages private ownership of airports, and the majority of British airports are either partially or fully privatized. There are three types of airport ownership predominate in the United Kingdom. Most of airports are managed and owned by a private company. Examples of fully privatized airports include Liverpool and the BAA airports. Partially privatized airports, such as Birmingham and Newcastle, are operated by joint local government and private companies. An example of public airport is Manchester, owned and managed by local governments.
The fundamental change in the airport industry occurred after the Airports Act 1986 which was to introduce the privatization and commercialization into the sector with an aim to reduce the financial burden on the public sector through the encouragement of operations efficiency and access to private capital. When the airports were still owned by the public sector, it was difficult for them to borrow and mainly for this reason the government decided to privatize their operations. Humphrey (1999) named access to finance for expansion as the main reason for sale of most UK airports (not belonging to the BAA), which were privatized in course of 1990s. BAA, Peel Airport, Macquarie Airport and the public owned Manchester airport today own most of the regional airports.
The government announced its intention to privatize BAA based on the Airports Policy White Paper of 1985 in the context of the privatization and reform of public sectors. In December 1985, BAA plc was incorporated under the Airports Act 1986, which called for dissolution of BAA and the transfer of its property, rights and liabilities to a newly-formed public limited company (ICAO, 2013d). To operate the airports, several subsidiaries of BAA plc were also established. In July 1987, 500 million shares in BAA plc were offered for sale and the company was listed on the London Stock Exchange.
At the time of privatization, the Government sold its remaining 2.9 per cent stake in BAA plc except for a retained special (golden) preference share, which still exists to prevent a take-over by foreign investors. The state corporation was privatized without restructuring on the grounds that a unified company would have the financial resources to fund future investment needs (Parker). In 2006, a consortium led by Spanish construction group Ferrovial took over BAA plc with the value of £10.1 billion. As a result, the company name was changed from BAA plc to BAA Ltd and the company was delisted from the London Stock Exchange. In August 2008, the Competition Commission proposed that BAA Ltd. sell off two of its three London airports and one in Scotland and sold Gatwick Airport to Global Infrastructure Partners in 2009. Airport | Status | Principal Owner | Aberdeen (ABZ) | Private | BAA | Glasgow (GLA) | Private | BAA | London City (LCY) | Private | AIG/GE/Credit Suisse | London Gatwick (LGW) | Private | BAA | London Heathrow (LHR) | Private | BAA | London Stansted (STN) | Private | BAA | Manchester (MAN) | Public | - |
TABLE 1 : Ownership structure of the UK airports in the sample

The privatizations have taken place mostly because of the need to reduce the burden of public sector and enhance the efficiency in the operation of the airports (Department of Transport, 1985). Privatization is required since privatized or partially privatized airports achieve higher productivity, cost efficiencies and better capacity utilization than public airports.
Moreover, some theories of transactions costs and property rights theory support the view that the change of the ownership structure should result in cost efficiencies and higher profit-orientation. Funds obtained from private sources should help the airports expand their facilities; offer more services as well as explores the option of generating additional revenues from commercial or non-aviation activities.
The changing market environment should also have significant effects, as increased competition in the aviation sector produces cost cutting programmes that make also airports strive for higher efficiency. 100% government owned corporations are likely to realize lower performance due to the lack of control mechanism for their employees and less binding budget constraints, they will run higher costs that can be financed through tax collection.

Traced back from the colonial period, many state owned companies in Malaysia had turn into privatization. These companies, before privatized, were said to be in poor performance which was mainly due to lack of incentives and budget constraints.
Yet, in airline privatization context, numerous factors must be reconsidered over and over again before Malaysian government decides to go for privatization. The objectives of privatizing airline division are as follows:- a) To provide an environment that will ensure that the principal national airports are upgraded and expanded as necessary to assist national economic growth goals, b) To relieve government of the obligation to invest further capital in the airport infrastructure at a time when such capital funds are unavailable, c) To relieve government of the responsibility for supporting the cost of operating and maintaining the airports, and retaining airport employees on the government payroll

Privatizing will not be a success if the third party i.e. the investors is not willing to invest. On the part of investors, their interest would be as follows:-

I. A need to limit capital investment to upgrade and expand airport facilities to a level that can be recovered well before the end of the concession period II. A need to ensure that there is a sufficient revenue base, now and in the future, that can generate revenues that will offset operating costs and capital carrying charges, and provide an overall operating profit and an adequate return on equity

Besides considering everyone’s interest, Malaysian government must have the knowledge, and expertise to identify, assess and mitigate risks pertaining to the airport privatization. Every parties involved in privatization schemes will have to embrace risks associated with the scheme. To the investors there is financial risk. Investors will have to pay up-front payment to cover the operating cost during the concession period before any revenue earned. It is, thus, a financial risk, emphasized that it involves actual capital outlay and financial commitment at the very beginning of the project.

Alex Dichter, F. L., Seelan Singham. (2008). Turning around a struggling airline: An interview with the CEO of Malaysia Airlines.
Blind, & Kaleagasi, P. (2007). Neoliberal democratization: A comparative perspective on Turkey and Argentina. (3376923 Ph.D.), Georgetown University, United States -- District of Columbia. Retrieved from ABI/INFORM Complete database.
Department of Transport. (1985). Risk and Due Diligent in Airport Privatization. 1-28.
Economic Planning Unit Prime Minister's Department. (1991). Privatisation Master Plan. Kuala Lumpur: National Printing Department.
Ferro, G., Garitta, F., & Romero, C. A. (2010). Relative Efficiency of Argentinean Airports. from
Galbi, D. Kenya Raising Revenue with Privatization. Retrieved 5/4/2013, from
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HOCHTIEF Airport. (2012). Düsseldorf International. 2.
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ICAO. (2013c). Case Study on Commercialization, Privatization and Economic Oversight of Airports and Air Navigation Services Providers in Germany. 3.
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Jala, I. (2006). MAS Business Turnarount Plan.
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