What is the outlook on the aviation sector next year? How do you think it compares to what was seen this year?
It was a tough year for Turkey in a number of ways. Passenger volume has dropped nearly 20% in Istanbul as an origination point for travel, a drop we haven’t seen in a long time. Luckily, we operate 14 airports in 7 countries, and if you look at some of the other airports we operate regionally – such as Georgia, Macedonia, Saudi Arabia, these have shown double digit increases. Overall, TAV is a 102 million passenger company, and even though we have seen a big drop in Turkey our overall growth by year end will reach roughly 2%, which is acceptable – particularly given the circumstances– but down from previous years, and 5% in other regions where we operate.
Turkey’s aviation sector has over the last 10-15 years put in double digit growth, but this has slowed over the past 4 years, largely due to geopolitical uncertainty.
Next year we are likely to see some improvement, and we expect roughly 4% to 5% overall.
Our focus has always been on smart growth – not just by adding new airports, but new services, as well as more efficiently managing the services we already run. Our ambition is always to deliver both passenger growth potential and commercial growth potential, so anything that can add value in these respects is extremely important.
We are actively working on several new deals as well and controlling costs at a time when traffic is lower than usual.
Acquisition was a theme last year. What’s on the cards this year? Are there any new regions or services the company is looking to grow into?
We are actively working on three key tenders which should be finalised over the next six to nine months. The first is for the international airport in Sofia, Bulgaria, with bids due at the end of November. It’s a key part of our strategy because we are already strong in east and central Europe, and we believe there is a strong chance of winning that. The second is Cuba. There is huge potential there, and we are working closely with ADP and Bouygues to negotiate exclusive rights for the operation of two airports in the country. The concessions are due to be awarded in the first half of 2017.
The third consists of a number of Saudi airports. We currently operate an airport in Medina and are very pleased with our investment there. Overall, the growth potential in that country is huge: airports in Saudi Arabia see 182 million passengers flow through their terminals each year, and the government aims to privatise three or four airports over the next two years, which creates a significant opportunity for TAV, among others. We are also preparing for a range of service tenders for airports in Saudi Arabia including Riyadh and Dammam.
In the medium term, we are looking to expand into Belgrade and Africa.
How is international expansion impacting the company’s capitalisation strategy?
I think it would be fair to call TAV prudently leveraged. All of our debt is at the project company level, and long term, and our net debt to EBIDTA is only 2X, so we have room for more leverage if new deals come up. Most of our assets are mature, so we also have healthy cashflows being up streamed from the project companies to the holding company. We have a 50% dividend policy, so we recycle half of our revenues into new projects – giving us some significant firepower when it comes to winning and being prepared for any new deals.
We refinanced a facility associated with Istanbul Ataturk Airport, US$250mn, through a corporate finance loan three months ago, reducing our interest expenses significantly. We paid down the holding debt and the project company debt and refinanced through two large international banks with two equally-sized facilities. The deal was very successful and our ability to secure good pricing was a testament to the strength of the company.
TAV operates in a range of geographies, mostly emerging markets. That said, what kind of hedging strategy is in place at the company? In terms of financial management, what kind of unique risks present themselves in these markets?
Every geography has its own particular risks, and the key is to excel at assessing all key factors – political risk, regulatory risk, FX risk, and so forth – and catering to them when choosing to make new investments or optimise existing operations. Safety and security concerns are dominating the agenda globally at the moment, and it needs to be factored in to any decision-making process.
We are naturally hedged for the most part. Our revenues are mostly denominated in hard currencies, and so are our leases and debts. We have limited local currency revenues and tend to pay almost all of our OPEX in local currencies. We are often a bit short on the Turkish lira – which is often good for us because most local currencies we deal in trend toward depreciating against hard currencies. We don’t need any hedging instruments to hedge in terms of FX risk, but in terms of managing interest rate risk we do have an interest rate slot (IRS) in place for 75% of our financing, and therefore we are protected from rate hikes. We also refinance under better terms whenever we see the opportunity. The reason we keep some of our revenues floating is because we sometimes pre-pay in order to give us some flexibility to cover any costs associated with unwinding the hedge.