The sale of the rights to run Kansai International Airport to a consortium led by Orix Corp. and France’s infrastructure operator Vinci SA should serve as a test case in Japan to see whether private-sector funds and know-how can turn around the operations of public infrastructure such as airports and expressways. It should be closely monitored to see if efficiency and profitability improves at the main international airport serving the Kansai region, which is currently run by a wholly state-owned operator.
New Kansai International Airport Co. announced earlier this month that it would sell the rights to run Kansai International and Osaka International Airport, which is popularly known as Itami airport and mainly serves domestic flights, to the consortium of 32 companies, which also includes major Kansai-based firms such as Panasonic and Osaka Gas, for ¥2.2 trillion over the 44-year concession period. A formal contract will be concluded next month and the new operator plans to start running the two airports in April.
It marks the first full-scale sale of rights to run Japanese airports to private operators. The government also plans to put the operation of the Sendai Airport in Miyagi Prefecture in private-sector hands next June, with the sale of concessions eyed for several other domestic airports such as Hiroshima, Takamatsu and Fukuoka.
The primary objective of the sale of the rights to run Kansai International is to turn around the airport’s operation with the private-sector know-how and funding. The current publicly-funded operator, created in 2012 to run Kansai International and Itami airports, has officials on loan from the transport ministry as its employees, and needs to get the government’s approval when formulating business plans and making investments on airport facilities and equipment. Keiichi Ando, president of New Kansai International Airport, expressed hopes that the privatization of the airport’s operation would “enable more speedy decision making and accelerate strategic investments.”
The new operator, which will pay ¥49 billion annually for 44 years to run the two airports, is counting on sharp increases in air travel demand in the Asia-Pacific region and expects Kansai International’s operating profit and the number of passengers will increase 70 percent by the time the concession period ends. It reportedly plans to make investments worth some ¥1 trillion — 60 percent more than planned by the current operator, including the construction of a new passenger terminal to attract more flights by budget airlines, a lodging facility for transit passengers and those departing on early morning flights, as well as duty-free shops.
Business has indeed been picking up for Kansai International Airport in recent years, with the number of passengers on international flights growing sharply on strong inbound tourism demand from the fast-growing Asian economies and the weak yen. Orix and Vinci plans to take a 40 percent stake each in the new operator, with 30 other companies from diverse sectors also taking part. Vinci has experience operating 25 airports worldwide, and the know-how of the other firms in the consortium should also contribute to efforts to increase nonflight revenues at the airport through the establishment of restaurants and shops at terminals. Still, it remains uncertain whether the airport under the new operator can reverse the decline in long-range flights to U.S. and European destinations that has taken place since the 1990s.
Another main purpose of the privatization scheme is to transfer the responsibility for repaying the airport operator’s roughly ¥1.1 trillion debt — incurred from the huge cost of building the airport on a man-made island in Osaka Bay more than 20 years ago — into the hands of the new operator. New Kansai International Airport will repay the debt out of the annual concession fees paid by the consortium. The scheme reduces the risk for the state — such as having to extend extra public financial support in the event the airport’s operations take a turn for the worse.
Initially, the current operator planned to choose from among multiple bidders for the concession rights by comparing the proposals by each group. However, the Orix-Vinci alliance turned out to be the sole bidder as other potential bidders were reportedly discouraged by the huge minimum bid price in excess of ¥2 trillion and the risk of the long-term contract to run the airports. Although the operator says it made the decision to sell the rights to the alliance because it highly valued the business plans put forward by the group, the decision was still not the result of competition. Whether the sale does indeed improve the airports’ efficiency and profitability needs to be closely monitored. And the sources of the improvement — whether they come from increased landing fees, nonflight sales or streamlining — should be identified, so that the case of Kansai International can serve as a lesson for the privatization of other public infrastructure’s operations.
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