Will Gatwick's Woes Strike Canadian Pensions?

Gatwick Airport has announced 600 job cuts after an 80% fall in passenger numbers due to the Covid-19 pandemic.

The proposed job cuts come as part of the UK's second largest airport’s plans for a significant restructure across its business, designed to further reduce operating and staff costs in light of the dramatic impact Covid-19 has had on its passenger and air traffic numbers. 

The new proposals could result in the region of 600 job roles being removed from across the business, which is approximately 24% of the current number of employees. The company will now enter into a formal consultation process with employees.

Compared to this time last year, the airport is operating at around 20% of its capacity and therefore still has over 75% of its staff on the UK government’s Job Retention Scheme, which is due to end in October. Current traffic and passenger volumes are such that Gatwick is currently operating from just its north terminal. 

In August, usually one of the airport’s busiest months, passenger numbers are over 80% down when compared with the numbers of passengers Gatwick saw that month in 2019. The company took rapid action to protect the airport back in March to preserve as many jobs as it could by reducing costs, managing cash outflows, and securing a £300m bank loan.

Stewart Wingate, Gatwick Airport chief executive officer, said: “If anyone is in any doubt about the devastating impact Covid-19 has had on the aviation and travel industry then today’s news we have shared with our staff, regarding the proposed job losses, is a stark reminder. We are in ongoing talks with government to see what sector specific support can be put in place for the industry at this time, alongside mechanisms which will give our passengers greater certainty on where and when they can safely travel abroad. This support will not only help Gatwick but the wider regional economy which relies on the airport. 

“I want to take this opportunity to thank all of our staff, those who have worked tirelessly to keep Gatwick open throughout the pandemic and those who have had to remain on furlough, for their dedicated tenacity, professionalism and team spirit. We will continue to do all we can to preserve as many jobs as possible.

“Gatwick will recover from this pandemic and we will emerge from the restructuring we are proposing a fitter and stronger organisation which is best placed to offer our passengers and our airlines a modern and innovative airport, ready for growth.”

A bit of interesting history on London Gatwick Airport, the UK’s second largest airport.

In April 2009, major Canadian pension funds were lining up to buy it:

Major Canadian and British funds are understood to be one step closer in their rivalry to purchase London's Gatwick airport after the Competition Commission ordered the British Airports Authority (BAA) to sell three of its airports within the next two years.

The Competition Commission announced its final decision at the end of March and said separating BAA's airports - Gatwick and Stansted and either Edinburgh or Glasgow - under different ownerships was the only way to address the lack of competition, improve the quality of service and speed up investment spending in the airports for passengers and airlines.

Christopher Clarke, chairman of the BAA Airports inquiry, said: "We recognise that in using our powers in this way, we will have a significant impact on BAA's business. However, given the nature and scale of the competition problems we have found, we do not consider that alternative measures, such as the sale of only one of the London airports or greater regulation, will suffice."

BAA, which is partly owned by Caisse de dépôt et placement du Québec, put Gatwick airport up for sale last year and hopes to sell it this year.

Ontario Teachers' Pension Plan, the Canada Pension Plan Investment Board (CPPIB) and Borealis, the infrastructure branch of the Ontario Municipal Employees Retirement System (OMERS), are all reportedly participating in consortiums bidding for Gatwick airport, which is hoped to sell for around £2bn (€2.1bn).

The three consortiums still in the running for Gatwick include Global Infrastructure Partners, Lysander Investment Group and Manchester Airport Group.

The Manchester Group is understood to have called on one of its key investors, the Greater Manchester Pension Fund, to get involved in the deal to buy Gatwick, though officials at GMPF were unavailable for comment at the time of publication.

A consortium made up of the Ontario Teachers' Pension Plan, the Canada Pension Plan and 3i Group withdrew their offer last month, saying the price tag was too high.

Final bids for Gatwick airport were originally due 31 March 2009, however, the Competition Commission has extended the deadline until the end of April 2009.

The Competition Commission published a report in august 2008 revealing competition problems at BAA's seven UK airports - Heathrow, Gatwick, Stansted, Southampton, Edinburgh, Glasgow and Aberdeen.

The report said BAA's common ownership was the main cause, but also argued there were also problems stemming from the regulatory system and government policy.

Global Infrastructure Partners (GIP) ended up winning that bid.

In 2018, CPP Investments and a group of investors made another unsuccessful bid to buy a£3bn stake inLondon Gatwick Airport in an effort to buy out Global Infrastructure Partners (GIP), Gatwick's biggest shareholder since 2009.

In May 2019, Vinci Airports, the world’s leading private airport operator, bought a controlling stake (50,01%) in London Gatwick Airport. The remainder is owned by a consortium of investors and managed by Global Infrastructure Partners (GIP), who have operated Gatwick since 2009.

In July 2019, I wrote a comment on how CalPERS struck gold in Gatwick Airport stating:

Gatwick has been an incredible investment for CalPERS even after accounting for fees it paid out to Global Infrastructure Partners (GIP).

Unlike CalPERS, most of Canada's large pensions buy direct stakes in infrastructure assets through their specialized platforms -- wholly owned subsidiaries (companies) that manage specific infrastructure assets (like airports, ports, toll roads, etc.)

And Canadian pensions have also made great returns on airports. For example, Ontario Teachers' made a boat load on Brussels, Copenhagen, Bristol and Birmingham airports, all of which were marked in the last three years at materially higher values.

But now that airports have been re-rated and are considered core infrastructure assets, the returns going forward are likely to be much lower.

In fact, one expert told me: "Airports used to be on the periphery of what was considered infrastructure and now they are viewed as core and the valuations and expected returns reflect this."

Still, a strong global economy, more baby boomers traveling, the rise of the middle class in emerging markets like India and China, all bode well for air travel in general and that should support strong airport revenues for years to come.

Are valuations stretched and is competition fierce? You bet. Also, as the article above indicates, there are no airports for sale in the United States and they infrequently change hands overseas.

This is the basic problem, lack of supply and fierce competition are driving prices higher and higher and that will impact returns going forward. 

This is where Canadian pensions with specialized airport platforms have an advantage over others who do not have dedicated resources to manage airports properly, adding value-add in every aspect of an airport.

And fast forward to today, Gatwick and pretty much all major airports all over the world are operating at 10, 20 or 30% capacity if they're lucky and investors in these assets are bearing the brunt of the drop in revenues as the pandemic has significantly impacted demand for air travel.

Airports are important to Canadian pensions. For example, who can forget London City Airport. In February 2016, AIMCo, OTPP and OMERS led a group of investors that bought that airport at a steep premium:

According to people with knowledge of the matter, the winning bid, from Alberta Investment Management Corp., Ontario Teachers’ Pension Plan and OMERS, is about 44 times London City’s earnings before interest, tax, depreciation and amortization of 45.8 million pounds in 2014, the latest year with available data. No price was given when the deal was announced Friday.

The average multiple for airport deals in 2014 was 17, including debt, according to aviation consults ICFI. Investment funds are increasingly willing to pay top dollar for assets offering stable long-term returns after years of low interest rates.

When you pay top dollar for an airport asset, you'd better work that asset hard to generate added value over the long run and I remember a lot of experts back then were telling me the premium was "insane".

By contrast, in May 2013, Hochtief sold its 40% stakes of Athens International Airport to PSP Investments for 1.1 billion euros. 

I thought that was a great investment, reasonably priced. I love that airport and tourism in Greece has ballooned every year since then until this year as tourism is down significantly:

The Ending Summer of tourism for Greece is approaching fast with September on the horizon and opening the country to visitors in July has turned out to be a dud, with far fewer numbers than expected and disappointing revenues, people scared off by COVID-19 and restrictive health measures.

The President of the Greek Tourism Confederation (SETE) is asking the government to extend measures such as subsidizing employers’ social security contributions for employees and allowing tourism businesses to suspend contracts, said Kathimerini.

While eager for tourists to get the economy going again to offset losses from a COVID-19 lockdown, Greece barred those from hard-hit critically important countries such as the United States and Russia and restrictive health measures put in place proved such a deterrent that arrivals were way down.

The tourism group said it hoped visitors would bring in as much as 5 billion euros ($5.9 billion,) a huge drop from 2019's more than 18.5 billion euros ($21.82 billion) in another record year brought to a halt by the pandemic.

Instead, only about 3.5 billion euros ($4.13 billion) is expected and the industry didn't hire 160,000 seasonal workers, adding to the unemployment rate that's expected to reach levels unseen since a near decade-long crisis began in 2010.

Tourism is Greece's biggest revenue engine and brings in as much as 18-20 percent of the Gross Domestic Product (GDP) of 169.56 billion euros ($200.3 billion) and in 2019 some 33 million visitors spent 18.5 billion euros ($21.85 billion.)

But the second wave of the Coronavirus has dampened moods and hopes tourists would come, Greece relying on a 32-billion euro ($37.8 billion) aid package of loans and grants from the European Union to offset losses.

Adding to the woes is other countries, such as Norway, saying Greece is not a safe destination although the United Kingdom pulled back on doing the same, which means British tourists in Greece won't have to quarantine on return.

Greece is not a safe destination? Rubbish! Trust me, I'd rather be in Greece right now than any other country even if coronavirus cases are creeping up there and the Turks are up to no good again (free travel tip: September is by far the most beautiful time to visit Greece after the mad summer herd leaves and don't be a fish, there are plenty of other islands apart from Mykonos and Santorini!).

Anyway, the point of my comment is airports have been hit hard, all airports and pensions who paid a lot of money to acquire big stakes in some airports are seeing significant drop in asset values as revenues get hit.

In general, transportation infrastructure assets are getting whacked hard because of the pandemic and that's to be expected. Zero Hedge posted a comment today on how New York's MTA is losing an astounding $200 million a week.

No surprise, these assets and other private market assets (like shopping malls) need volume (riders, shoppers, air travelers) to generate the required revenues for their owners. They can't operate in a zero revenue world, not for long at least.

What about the $3 trillion increase in the Fed's balance sheet? Yeah, great for tech stocks and speculators betting that tech stocks only go up, but it does nothing to ignite demand for airlines and cruise ships during a global pandemic.

Just like the great FAAMG divide, there's a huge divide within private markets and between public and private markets (to be more precise, between tech stocks and private markets as most stocks still registering losses for the year).

Some segments in private markets are getting hit extremely hard, there's simply no way they will recover this year, and maybe not next year.

Airports are one of those segments. What will Canadian pensions with major stakes in airports do?

Well, to be honest, nothing, they will write these assets down and wait for the health crisis to subside and write them back up when the cycle turns.

Also, go read my last comment where OTPP's CEO Jo Taylor told me they have plenty of liquidity to help their portfolio companies this year and beyond if needed. 

OTPP is fully funded, so are other major Canadian plans, they don't need to sell private market assets at a deep discount to meet their pension obligations, so they can easily sit this mess out and patiently wait for the cycle to turn.

Will the drop in airport revenues hit them this year and potentially next year? You bet but that's why they have a diversified portfolio overall and even within their infrastructure portfolios (some infrastructure segments like cell towers and data centers are booming, helping offset losses in airports, toll roads and ports).

So don't fret, Gatwick isn't going under and neither are other major airports, they are just experiencing a mini depression until the world gets one or a few successful vaccines to nip this bloody virus (let's hope so). 

Of course, what remains to be seen is if business and leisure air travel experiences a sustained hit in demand because of the coronavirus,

Still, unlike shopping malls, I am more confident stating airports will bounce back and reemerge as very important investments for Canada's large pensions over the long run.

Below, Gatwick Airport is set to cut 600 jobs due to the "devastating impact" of the coronavirus pandemic. The number of job losses equates to around 24 percent of the current number of employees and the company will now enter into a formal consultation process with employees, a statement said.Passenger numbers are down 80 per cent compared to August last year, the company said.

Trust me, this isn't unique to Gatwick, the pandemic is impacting revenues at all airports and you'll be seeing all airports take similar measures to cut costs as revenues plummet. 

Also, Sven Carlin discusses while many investors have been attracted by airline stocks recently, he thinks it is better to look at airport stocks.

The only reason I embedded this is because I agree with his thinking and analysis, everyone is focused on Air Canada and US airline shares (JETS) but maybe real long-term investors should be thinking airport stocks, not that they're easy to find on North American stock exchanges. 

Anyway, right now, if it ain't tech, it ain't moving, the Fed has succeeded in inflating yet another tech bubble. Hopefully it crashes soon and the rest of the market takes off but I doubt this will happen in a market where large quant funds keep feasting on mega cap tech shares.