Over the last few months we have chartered the impact of COVID on many aspects of private equity investment. In the most recent snapshots, we have observed a cautious return of optimism in some sectors, and even robust deal activity in others. However, challenges remain entrenched in a number of pockets. Our Italian private equity team considers the challenges faced by airport operators, and the efforts of the Italian government to try and assist one of the asset classes hardest hit by COVID.
The air transport sector has been hit hard by the ongoing COVID-19 crisis. As a result of the public containment measures adopted by various European governments in the past months, air travel has collapsed, putting a halt to years of industry growth and causing passenger numbers to fall far short of forecasts for 2020. According to the Italian association of airport operators, Assaeroporti, total traffic (passengers and cargo) at Italian airports fell by 90.6% in May 2020 compared to the same month in 2019.
European Member States' concerns and resources have primarily been directed at supporting the commercial aviation sector and passenger airlines, while less attention has been paid to the financial health and sustainability of airport operators. However, transport infrastructure managers operate in highly regulated areas, and thus enjoy less freedom than players in other industries to use competitive levers to restore profitability. Moreover, infrastructure services characterised as "essential" by public authorities (such as airports) cannot be shut down at their operators' discretion, even when dramatically low levels of traffic cause them to operate at a loss. The result is intense financial pressure on European airports controlled by private equity and infrastructure managers at a time when better-targeted measures could support the air travel industry more widely.
In various European countries, governments entrust the management of airports to an operator (the so-called concessionaire) by means of a concession contract. That contract typically regulates the operator's business in detail, including the tariffs that the concessionaire may impose on its customers – mainly passengers. While contracts are generally fixed for the entire duration of the concession, it is possible in exceptional circumstances to reset the economic terms of the contract.
Italy and Spain Introduce Limited Measures to Rebalance Airport Infrastructure Contracts
Spain was one of the first countries to recognise concessionaires' right to review their contracts in light of the crisis caused by the COVID-19 pandemic. In March 2020, the Spanish legislator enacted new rules to allow a concession's initial term to be extended by up to 15% or its economic and financial clauses to be amended. Italy followed with the Decree-Law May 19, 2020, No. 34 (the "Relaunch Decree", as converted into law on July 17, 2020), which extended the duration of airport and port concessions by 24 and 12 months. In addition, ENAC, the Italian Civil Aviation Authority, proposed that payment of airport concession fees due for 2020 be deferred, and put forward the possibility of suspending the payment of sub-concession fees due by handlers.
The extension of the duration of an airport concession prolongs the period from which an infrastructure manager can generate profits and investment returns, while the postponement of a portion of current expenses can help control cash flows. These measures should be viewed positively as an effort to mitigate the damages suffered by airport and port managers since the start of the outbreak. They are unlikely, however, to make contracts economically viable for concessionaires, or provide the full liquidity they need in the short term.
Airport Operators' Impact on Broader Travel Industry Not Fully Appreciated
European governments seem to have disregarded (or, at a minimum, not fully considered) the impact that the financial health of airport operators can have on the travel industry. Financial interventions to support airport managers could have resulted in the reduction of airport charges. This, in turn, would have created the conditions for a knock-on transmission of public resources to the airline sector, including low-cost carriers (and not only legacy carriers).
A further critical aspect of the Italian concession rebalancing measures is that they may potentially be challenged by the European Commission under state aid control rules. The Relaunch Decree works on a "lump sum" logic and grants all airport and port operators the same benefit, without assessing the individual circumstances of each concessionaire. As a result, it is possible that the EC may decide to investigate the possibility that concessionaires have been overcompensated (although, admittedly, the modest length of the concession extensions could also support the opposite scenario of undercompensation). In contrast, the Spanish legislator's choice to introduce a flexible framework that gives the public authority granting the concession the ability to define the content of any measures on a case-by-case basis seems better placed to avoid potential overcompensation outcomes.
The Italian Government can certainly be praised for taking prompt action to deal with the impact of the pandemic on the performance of infrastructure managers. However, the effectiveness of its public intervention could have been maximised through measures that were more flexible and responsive to the real nature of the critical issues that have emerged. In doing so, they could have benefited infrastructure managers more effectively and the travel sector more widely.
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