Keep your eyes on the prize

A report by Rod Oram in NZ’s Sunday Star says that politicians and the public are completely missing the point about Auckland Airport, with the nationality of the cornerstone shareholder irrelevant and the only issue being the quality of the shareholder. 

Worse, their myopia will seriously damage the very asset they seek to protect.

If their opposition denies the airport the best owner it could have, it won’t be the superb international gateway the nation needs. Then we would all suffer, not just the shareholders.

Quite simply, do we want to own 65% (the other 35% is already owned by foreign shareholders) of an OK asset with limited growth potential here?  Or 40% of an excellent one with abundant potential here and overseas in partnership with a 60% cornerstone shareholder?

This is exactly the choice facing so many owner-operators of small New Zealand companies. Far too often they make the wrong decision. They stick with 100% ownership because they’re too scared to try to work with other investors. But in doing so, they are failing to maximise their potential. Then they and the country end up poorer for their parochial and paranoid behaviour.

Oh, but the airport’s different, some will argue. It’s running very nicely, thank you. All we have to do is hold on to the shares and keep clipping the tickets.

Wrong.

International travellers say the welcome and service is often good but never the best in the world. We sell our country as a wonderful place to visit, put people to great expense and effort to get here and then fail to deliver fully the moment they step off the plane.

That’s the harsh truth that comes through time and again in the surveys the airport runs to benchmark itself against the best in the world. Responsibility for that failure rests mostly with current shareholders and to a lesser extent with management. In the typically dysfunctional Kiwi way, the airport’s shareholders have never built for the future. Yes, the airport has long-term development plans but shareholders have grudgingly supported capital spending and only a bit at a time when they had to.

For example, the current upgrade of the domestic terminal is years late and service has suffered as a result. Worse, the upgrade will have a life of barely 10 years before a new one has to be built the other side of the international terminal.

So, change the management and liven up the shareholders, some will argue. Well, management has changed in recent years. First they refined the 20-year master plan, then over the past 18 months they have developed a much more ambitious five-year plan.

Essentially, it has an internal and external component. The first focuses on providing high quality service that gives travellers a uniquely New Zealand experience. Rather than being a bland chore, arriving here will become part of their Kiwi experience. They will have no doubt about the personality of our country and us. Of course, excellent security, safety and efficiency all underpin the airport’s operations.

The second component focuses on building the airport’s external role in two ways: building tourism and routes; and taking the skills of the airport company beyond the one site it runs now. This would enable the company to grow in scale, scope and sophistication, thereby feeding back enhanced skills to the airport and economic benefit to its shareholders.

These two thrusts represent a significant strategic shift: from responding to growth to driving growth. The shift requires development of different business skills and investment of more capital. This will then ensure the company can always build ahead of demand so service levels become and then remain world best. Up to now, service has deteriorated every time growth or the likes of new security procedures have caused capacity to tighten before further investment was made.

Clearly, the current management can learn new skills, hire new people and find expertise and partners to help them achieve their goals. But current shareholders are the roadblock. They don’t value this potential. They see it as essentially a single-site utility. They don’t understand the strategic shift worldwide in airports from chunks of infrastructure to customer experiences. As a result, the airport’s share price languished before it began to attract interest from overseas investors who do understand.

Here’s the acid test. If Auckland and Manukau city councils were not shareholders and were each offered a 10% stake for $500m, would they buy?

Would voters approve of the investment, and thus slightly higher rates? Judging by the views of politicians and voters, the answer is no. They would consider it non-core investment.

But if the airport had a cornerstone shareholder that did believe in its potential, was committed to investing time and money to achieve it and had the skills to do so, then we would get a much better airport that delivered a far bigger economic benefit to Auckland and the country.

Thus, it’s the skills, not the nationality of the shareholder that’s crucial to its future.

Does Dubai Aerospace Enterprise have the skills? That’s not yet clear. Essentially the group is little more than six boxes, each representing a future line of business, on a hugely ambitious plan drawn up by AT Kearney, a US management consultancy, and backed by a $US15 billion ($NZ20b) pledge of capital from Dubai’s government and private sector.

Each business has at least a skeletal management team but only some so far have acquired a few big assets. For the airport team, Auckland would be its first operation. But led by Kjeld Binger, a Dane credited with making Copenhagen an excellent airport, the team has a reasonable range of international experience.

More importantly, as part of its offer to buy up to 60% of Auckland Airport, DAE has signed a co-operation agreement with it. DAE pledges support for Auckland’s strategic plans. Crucially, it looks as though the skills, capital and drive necessary to achieve the plan’s goals will be available to Auckland through Dubai Inc, the business-government nexus backing DAE.

No one can doubt Dubai Inc’s towering global ambitions and its success to date such as building an international airline and a trading/ transport/tourism hub that plans to rival Singapore; many will see the wisdom of New Zealand aligning with them and retaining 40% ownership of a bigger and better business; and no one can argue New Zealand has enough resources or ambition to go it alone.

But more due diligence of and commitment from DAE is essential before its bid deserves unequivocal backing. In particular, there is ample scope for DAE to invest beyond the airport out in the wider aviation sector in New Zealand.

The local industry recently launched a bold strategy for building up training of flight and engineering staff; maintenance, repair and overhaul activities; and flight, airport and other services.

In addition, Airways, the SOE that controls a 15th of the world’s airspace, has long been a leader in innovation in air traffic technology and management. It is a key player in the consolidation of global air traffic control into far fewer but more sophisticated systems. But to achieve more, it needs bigger, stronger partnerships.

Thus a deeper relationship between New Zealand and Dubai could see our skills helping to build a series of truly global aviation businesses within DAE’s strategy.

That’s the true prize. But if politics and paranoia prevail, we’ll be the poorer.

Report by The Mole