The third airport and rent-seeking

The third airport and rent-seeking

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.