Even though BHX operates close to commercial optimum, Macquarie says that there is massive unrealised long-term traffic growth available, especially on long-haul operations.

At first glance, the entry of Macquarie Bank into the airports market appears meteoric but the truth is, as with all 'overnight successes', years of history are behind the growth. Martyn Booth, Macquarie director infrastructure and specilised funds division, is quick to point out that while the bank's airport interests are relatively recent, it has years of experience in managing other transport infrastructure, for example toll roads and bridges. Entry into the infrastructure market was initially in the bank's native Australia - spurred by that country's privatisation of its road network - but has since grown to include projects throughout Europe. This success inspired the bank to look at other infrastructure businesses, including airports, as a means of expanding its portfolio.

Meanwhile Booth, a former BAA commercial director, had set up the Portland Group to act as advisers to airports planning privatisation. "We had been involved in a number of offerings since we started and this eventually led to discussions with Macquarie about how our airport experience could be matched to Macquarie's investment banking knowledge." The outcome of the discussions was the acquisition of Portland by Macquarie in October 2000 and the launch of the group's first airport bid. "Although it's fair to say that Macquarie was involved in the re-financing of Sydney Kingsford-Smith as well as the privatisation of Adelaide airport, this was the first venture into airport ownership."

Up to 5600m fund for airport acquisition
By the time of the Portland Group takeover and the Bristol bid, Macquarie had built a 'war chest' of 1360m for airport acquisition. This fund is expected to be increased to a total "in the region of 1560m to 1600m during 2002.

Although the acquisition of Bristol and the purchase of a holding in Birmingham have opened the banks portfolio, both Booth and Marcus Balmforth, associate director infrastructure and specilised funds division, are quick to point out that it is coincidence that both airports are in the UK. "We are not confined to any geographic area and will look at any airport, anywhere, that fits our criteria. In fact, we are investigating possibilities at a number of airports throughout Europe as well as the rest of the world and we expect to be involved when the privatisation of Sydney gets back on the cards later in the year," explains Balmforth

Over the next two to three years, Booth expects the bank to gain holdings in a further four to eight airports - stakes which may be either majority or minority holdings to give the portfolio "reasonable diversity". Both Balmforth and Booth stress that the Macquarie strategy is for long-term ownership. "Our business model looks at a 30-year event horizon, but in reality the Macquarie position is that once we buy something, we never sell it. For liquidity realisation we may open the fund to other investors… everything from large institutional investors to the individual 'mom and pop' player. But the attraction is to the long-term low-risk returns," says Booth. This, points out Balmforth, is a very different position from the majority of banks which have become directly involved in airport ownership. "Other groups, for example Barclays at LTN or Bridgepoint Capital at BHX, have been working from the venture capital position which calls for a four- to six-year investment period."

A formula for success
Balmforth explains that the bank employs a simple model when considering bidding for a holding in an airport. "Essentially, what we are looking for is an airport which has unrealised growth potential, since it is this latent demand which will grow the investment. This, Balmforth notes, is why Macquarie would not become involved with an airport already close to peak commercial performance. In Bristol's case there is commercial retail potential, he explains, while at Birmingham there is a massive potential to win traffic from the London airports, specifically in the M40 corridor where its just as easy for people to turn left and go to BHX as it is to turn right and head for LHR. This also is the thinking behind the rejection of the US as a possible market. "The way airports in the US are funded, added to the fairly developed retail, means that very few are coming up for privatisation and those that are don't fit our commercial or catchment demographic models." says Booth.

Agreeing, Balmforth points to Bristol and Birmingham as prime examples of the bank's model. "Both have large catchments which are prone to travel and are at least 90 minutes from the London airports with all their congestion. This latent demand is clear when you look at what's happened at BRS. We have growth in the order of 30% since Go started operations and, combined with the Brymon/BA CitiExpress routes, the local market has really woken up to the airport as alternative." Balmforth says the same can be said of BHX. "We have a catchment of 7.5m which is underserved, especially in long-haul, and which is responsive to new services and carriers."

11 September has no effect on plans
The bank's strategy of long-term investment means it is not concerned over the decline in traffic in the last four months, Booth notes. "The impact on the industry has to be looked at in context. Compare the impact of the Gulf War - although severe in the short term, this had little impact over even the medium-term. If you look at the history of traffic growth you have to remain confident."

Even though Booth is sure growth will return, he has concerns over the immediate future. "Right now, there is a lot of uncertainty for the whole industry in the UK. With the January holiday booking season underway, we don't yet know what the booking figures are likely to be. For us, especially at BHX, the future for BA regional is still yet to be defined, so that is a concern."

Equally, says Balmforth, when airlines provide routes to underserved markets, they have seen good growth even over the last few months. "Look at what's happened since Emirates started a route to Dubai from Birmingham - it was full and profitable within weeks of starting operation."