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EMRE DELİVELİ > The third airport and rent-seeking

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You probably know that Turks did not rise up at the end of May just for a park being turned into a mall. They were simply fed up with their “big brother” of a prime minister poking his nose into their private lives, telling them not to drink alcohol, kiss on the metro and the ferry, or have abortions.

They were also protesting against Recep Tayyip Erdoğan’s “crazy” projects, which are hastily proceeding without any serious impact evaluation studies, environmental, economic or otherwise. Istanbul think-tank Betam has just published a research note on the economics of the new airport, one of the most notable of these projects.

The consortium that won the auction to build and operate the airport for 25 years will pay 22 billion 152 million euros. A key question is whether they will make a profit. They obviously think they will, but Tuba Toru Delibaşı and Seyfettin Gürsel, authors of the Betam report, go through the math anyway.

The first step is to see whether the airport could reach the planned passenger figures: From 90 million a year when it becomes operational in 2019 to 120 and then to 150 million. Since Atatürk Airport, which the new airport will replace, had 45 million passengers in 2012, these numbers may seem too ambitious, but Toru and Gürsel show that they are feasible if Turkey manages to grow at its potential. As Gürsel has argued before, that’s not a given unless the country manages to implement key structural reforms.

The economists then forecast the income of the new airport using projected passenger numbers to estimate aeronautical revenues. They assume other operating revenues will be twice as large, which is in line with the Atlanta International Airport (ATL) they use as an example, as well as the consortium’s own expectations. If the new airport manages a 30 percent profit margin like the two existing Istanbul airports, the $3 billion annual revenue they foresee when the airport is operational translates into a $900 million profit.

That doesn’t look bad - until you remember that the consortium will have to make payments to the government as well as pay back the loans it will have taken to build the airport. With reasonable assumptions, Toru and Gürsel calculate that the consortium will be losing around $700 million in 2019.

That’s a pretty hefty price tag just to look cute to the PM; I am sure consortium members could manage that much less dearly. Toru and Gürsel calculate that the consortium would need to raise fees by 17 euros per passenger just to break even, but that would decrease the airport’s attractiveness. The only other option would be to earn significant non-operating income on the land allocated to the airport.

Interestingly, they note that that land is very large compared to ATL and other major airports. They also mention that all the firms in the consortium are in construction, and so they may be “hoping” to get some extra income from “extracurricular” rent-seeking activities such as real estate and infrastructure development around the airport.

June/28/2013

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Tekir Feline

6/28/2013 8:41:38 PM

Well I doubt that they can reach the 150 mill. passengers a year since it replaces now an airport with 45 mill passengers/y. At the moment, according to wikipedia, Atlanta with 95 mill. passengers/y is the busiest airport in the world. Keeping in mind that petrol and therefore kerosine is a limited resource, travelling by plane will become more and more expensive. So who will pay the costs for Erdogan's megalomania, the consortium or the Turkish taxpayers?

Chris Green

6/28/2013 4:22:23 PM

It is perfectly possible to construct low cost-eco housing to earthquake resistant standards in conjunction with a Green transport system based on Maglev technology with much of the electricity required to power not only the 'aero-town' but also the system of transport that can be partly utilized to ferry the employees connected with the airport and spin-off trades. Clearly this type of integrated system could transmit elsewhere. This concept is under discussion in Turkey currently.

mara mcglothin

6/28/2013 3:34:45 PM

VARGEN Like the "unexpected events" that came up at the end of May? I would love to see the numbers at Ataturk Airport on May 20th and the same numbers on the same day of the week two weeks later. Help us EMRE BEY with some estimates of your own of the drop in revenue due to the backward behavior of the PM and his cronines?

Emre Deliveli

6/28/2013 2:32:05 PM

@Vargen Vargen: You are right, but Betam's main point is that even with impressive growth numbers, the consortium will be losing money. @K M: Betam doesn't calculate those, but I doubt they would make up all the difference. The key would be the highway to the airport, the rail system and the like...

sonnudagreat

6/28/2013 10:18:38 AM

please use my shoulder to shed your tears :(

Vargen Vargen

6/28/2013 9:45:08 AM

Maybe I am a person without visions, but I am very sceptical to future projections in general and prefer to see facts today. Sure, it is not impossible to grow from 45 million passangers to 150 miljon, but how on earth can it be predicted with some kind of certainty. To play around with growth figures based on the last ten years in a spread sheet anyone can do, but if we look at a country like Turkey, we know that a lot of unexpected events will come up. In fact, that is the ONLY THING WE KNOW.

cezer "çapulcu" skonore

6/28/2013 2:23:09 AM

The most expensive glass of orange juice I had in my life was in Inchon airport, $25. Airport was very new then, though. I think we should be ready for prices like that in Istanbul airport too.

K M

6/28/2013 12:46:55 AM

I thought it was already established that a company town would be built around the airport to house service workers, as well as the usual ancillary services, and international freight firms. I'm curious about airport transit. The Metro services IST, but not SAW. Will there be light rail to the new airport or wiill 150 million people all be put on the roads?
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