The smart airport

From Vancouver, YVR is building a global business.

In his office overlooking the Fraser River Delta and the Strait of Georgia, Larry Berg is contemplating his company's bid to win an airport expansion and management contract in Cyprus. Why is Berg, chief executive of the Vancouver International Airport Authority (YVR), a not-for-profit with $300 million in revenue, interested in an airport halfway around the world? “It's good business,” says Berg simply. “Cyprus wants two new, modern airports built with private-sector financing, and we've been selected as the preferred bidder.”

Surprised? Well, running Vancouver's airport is just one part of YVR's business. A subsidiary, Vancouver Airport Services (YVRAS), has become a major player in the global airport management business. In fact, it is the only North American company to succeed in an industry dominated by such heavyweights as the British Airport Authority, Amsterdam's Schiphol airport and Aéroports de Paris. “Vancouver is a spectacularly managed airport,” says Stanley Hartt, an investment banker with Citigroup in Toronto who specializes in transportation. “Other companies use size to win deals; Vancouver uses smarts.”

Global airport management has become one of the 21st century's most strategically important industries, as a growing number of governments, including Germany's, Australia's and China's, see the wisdom of handing over to the private sector the development and operation of airports–a highly capital-intensive undertaking. In exchange, they garner lucrative revenue-sharing deals. Transportation analyst Mike Tretheway, of Vancouver-based InterVISTAS Consulting Inc., estimates that private-sector management of airports is a US$5-billion industry, and that it could top US$10 billion over the next 10 years.

Since its formation in 1994, YVRAS, which has annual revenue of $30 million, has clinched 19 airport management contracts in six countries, including Chile, Jamaica, Dominican Republic–and Canada. Domestically, YVRAS operates regional airports in Hamilton, Moncton, N.B., and British Columbia (Fort St. John, Kamloops and Cranbrook). “YVRAS has the potential to grow into a company as large as its parent,” says Tretheway. “It's just a question of how much capital it wants to invest.” Hartt, who has discussed financing options with YVRAS, is even more bullish. “YVRAS could become way bigger than its parent,” he says. “Over the next few years, it will grow exponentially. The only thing holding it back is access to capital.”

Frank O'Neill, chief executive of YVRAS, has little doubt about his company's strengths. “We have one of the best track records in the business,” he says. “We've gone against all the big players and succeeded, in most instances.” Why is Vancouver excelling? One reason is that it has found a niche: airports with one million to 10 million passengers per year. “Mid-size airports have the most opportunity for upside,” says Berg. “We have a reputation for going into underperforming situations and creating value.” As well, YVR has turned its home base into an effective marketing tool. When a regional government selects YVR to lead an airport expansion and management program, it knows it will get a strong regional identity. But perhaps most importantly, YVR is on the leading edge of airport technology.

When YVR introduced self-service kiosks for boarding passes at the airport and downtown hotels in 2003, it was a world first. Sounds like a simple idea, but in fact the move involved merging the reservation systems of 22 airlines into a single device. Now, with the help of satellite technology, the kiosks are being used by cruise ships that operate out of Vancouver Harbour, enabling passengers to print boarding passes before they arrive at the airport for their flight home.

Kevin Molloy, vice-president of simplified passenger travel, is the main force behind Vancouver's tech-forward thinking. One of the most daunting challenges the 41-year-old native of Northern Ireland faces is still five years away: opening the bottleneck that is sure to occur at Vancouver's airport after closing ceremonies of the 2010 Winter Olympics. Drawing on his experience with cruise ships, Molloy plans to provide self-serve check-in facilities at key Olympic venues, including BC Place and Whistler. “I realized it was easier to look at the problem in terms of where do we process passengers, rather than how,” he says. Last year, YVR marked another milestone when it introduced biometric readers, which speed up traffic between Canada and the United States by allowing pre-screened passengers to opt for an iris scan in place of an interview with a customs and immigration official. “Using the web, we can deliver technology from Vancouver to anywhere in the world, even airports we do not manage,” says Molloy. Airports in Edmonton and White Plains, N.Y., have secured use of YVR's proprietary kiosks.

In fact, the kiosks have generated so much buzz that reps from five major U.S. airports, including Seattle, Houston and Philadelphia, recently spent a day in Vancouver studying them in action. “Optimizing the location of kiosks is essential to shaving seconds off check-ins,” says Molloy. “One foot forward or one foot back makes a huge difference.” The beauty of the kiosks, adds Tretheway, is that they reduce the floor space needed in a terminal by moving people through more quickly. That translates into a smaller building–and lower costs.

The airline industry, including YVR, has been battered in recent years by a host of factors, from the terrorist attacks on the United States in 2001 to the SARS outbreak of 2003. But YVRAS has sailed through this difficult period with relative calm. It is in the midst of building a US$180-million airport in Montego Bay, Jamaica, and has been selected as the preferred bidder for a similar project in Nassau, Bahamas. For the Cyprus job, Vancouver and a consortium of partners in September 2004 beat out BAA, which operates the largest airports in the U.K., and a rival group that included Singapore's Changi airport. Now, the Canadian company will be responsible for developing two Cyprus airports, Larnaca and Paphos, at a cost of US$780 million. Over the next six months, it has to hammer out financial details of its 25-year concession agreement, and will also have to secure debt financing with international banks.

Going forward, the challenge is to take a bigger slice of the airport projects it brokers. In Cyprus, for example, YVRAS has an 11% stake in a consortium of equity investors, including a French construction company and an IT equipment supplier. Why does it take a financial backseat? Despite doing most of the leg work, YVRAS is short on working capital. Part of the reason lies with parent YVR, which as a not-for-profit cannot bankroll aggressive growth at YVRAS. YVR's chief financial officer, Tony Gugliotta, remembers the early days when YVRAS relied on “sweat equity” to earn a tiny share of operating profit above its management fee. “Today we could theoretically take as much as a 51% stake in a project,” says Gugliotta. If that were to happen, YVR could start consolidating the results of airports it operates into its financial statements.

A majority interest in developing and managing an airport is still some time away, but O'Neill says YVRAS will look to take at least a 20% interest in the future. In fact, he and Berg may even consider taking YVRAS public to obtain better access to equity financing. “If we continue to have strong earnings and good growth potential,” says O'Neill, “we will have an interesting story for public listing.”