IPO To Help Paris Airports Fund Upgrade

Standing in a control tower 150 feet above Paris's Roissy-Charles de Gaulle airport, the tangled web of rail, road and runway finally makes sense.

Far below, a string of terminals sketches out an elegant figure of eight, above an underground rail station taking passengers across Europe almost from the departure gate.

Crouching above the trains, and wrapped in a mesh of roads, the ship-shaped Sheraton hotel sits on 350 boxes of springs, to damp the vibrations from so much activity.

Charles de Gaulle is the jewel in the crown of Aeroports de Paris, the French state-owned airport operator that is likely this week to launch its long-awaited IPO.

But it is a sadly faded jewel, for all its aerial harmony. On the ground the architect's logic is obscured by outdated services, confusing transfers and less than helpful staff.

The once ground-breaking Terminal One a 10-storey circular building that opened the airport in 1974 is today a drab concrete doughnut, and its futuristic architecture run down and neglected.

Terminal One is only a small part of CDG. But it symbolises the challenges facing AdP.

Under state ownership, the operator of 14 French civil airports, including Paris's CDG, Orly and Le Bourget, has been starved of funds while rivals in London, Frankfurt and Amsterdam have all been investing.

Although the rapid rise in air travel over the past decade has forced investment in bright new terminals, AdP has struggled to fund basic services. A rail shuttle connecting the now far-flung parts of CDG airport will only launch later this year, long after other airports. But perhaps more importantly, AdP's operations have never been run commercially.

Pierre Graff, appointed executive chairman in 2004 to prepare AdP for privatisation, hopes the IPO will accelerate changes he has begun to put in place.

ADP has to "modify its culture and create a service company", he says.

Since arriving, Mr Graff has restructured the company, giving each airport its own chief executive, with divisional managers and the freedom to develop individual profit centres. The moves have revealed a lack of high margin commercial space in AdP compared with rivals. The French operator derives only 25 per cent of its 1.9bn ($2.4bn) turnover from commercial activities versus 40 per cent at BAA of the UK.

This weakness could explain AdP's feeble margins of 31 per cent, against BAA's estimated 44 per cent.

But with debt standing at more than 100 per cent of shareholders' funds, Mr Graff needs money. So the government is selling 30-40 per cent of the group to raise 500m- 600m for AdP and up to 800m for itself.

The funds will go towards a 2.7bn investment programme to open new terminals, renovate old ones, boost retail space by a third and prepare for a near 4 per cent annual increase in passenger traffic to 2010. Luckily Mr Graff does not have to build expensive new runways at CDG to meet this demand, as others must do. Europe's only airport to have four parallel runways allowing simultaneous take-offs and landings, CDG has a significant advantage in flight volumes.

CDG today serves 54m of AdP's 78.7m total passengers a year, out of an airport designed for 47m. But by 2008 it will have the space for an extra 20m.

"Going to the market gives our airports the means for development," says Mr Graff. The combination of AdP's potential and its base in Paris, the world's biggest tourist destination, has already drawn strong interest from investors and bankers have boosted initial market value estimates from 3.5bn to above 4bn.

It helps that the government has clarified future revenues with landing fees set to rise by 3.25 per cent above inflation for the next five years, ending restrictions aimed at helping carriers navigate the recent air travel crisis.

But this is also AdP's greatest risk. Carriers are challenging the fee increase in court and a ruling could take a year. With landing and aircraft fees estimated at almost a third of turnover, an adverse decision could hit hard.

There is also the question of how profitable the investment will be should the air travel industry suffer another crisis. But AdP's executives are confident that the trend which last year saw CDG outperform Europe's long-established leader, Heathrow, can only improve after the IPO whatever the market conditions.

"Roissy is growing faster than all other airports," says Rene Brun, chief executive of CDG. "But we know what the situation is and that is why we are investing."

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