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Would you invest in an Air Navigation Service Provider (ANSP)? Their reputation for inefficiency, government influence and resistance to change would suggest your money might do better stored under the mattress. However, the successful flotation of Italy’s ANSP, ENAV, indicates that many investors see some potential in air traffic management (ATM).
In July, the Italian government offered up 47% of ENAV to potential investors. 10% of these shares were reserved for ENAV employees and individual investors, with the remainder offered to large investors such as hedge funds, banks and pension funds. The Italian government maintains its influence, however, through its majority stake.
ENAV shares have proved to be a popular investment. At the time of flotation, demand for ENAV shares outstripped supply eight times. Since then, the share price has remained above the initial offering of €3.30 a share.
While it is still early days, ENAV could provide a useful case study for other governments, especially those with large public debts. The partial sale of ENAV is part of a program of privatisation from the cash-strapped Italian government that is selling off its assets in a bid to raise revenue and reduce its debt. With a number of other European countries also heavily in debt (most notably, Portugal and Greece), there is potential for further privatisation in European ATM.
ENAV could also be interesting to watch from the perspective of those who champion the case for private investment in ATM. In this regard, ENAV joins a very small club of ANSPs, to date consisting of NAV Canada and the UK’s NATS, which have taken the commercialisation model one step further towards at least partial privatisation. Of those, only NATS has some element of non-aeronautical shareholdership, and neither NATS nor NAV Canada has been floated.
Privatisation cannot be a success without willing buyers. This raises the question of why, despite what we said at the start of the article, investors are eager to buy shares in ENAV. Would they similarly invest in other ANSPs?
One of the main attractions of an ANSP is that they are monopolies. The risk of going out of business due to aggressive competition is therefore not something investors need to worry about, at least not in the short to medium term. As part of the Single European Sky project, ENAV is subject to economic regulation that aims to place some constraints on the prices it can charge and the service it provides. However, as regulators (and governments) tend to be paranoid about ensuring the business they sell to the public remains commercially viable, even regulated ANSPs are likely to earn a steady and fairly reliable return.
There is also potentially scope for significant efficiency savings at an ANSP. It can be safe to assume that, as a previously government-owned monopolist, ANSP has not historically been subject to the same downward pressure on prices (and therefore costs) found in competitive industries. There could be plenty of fat to be trimmed and passed onto shareholders.
Consider also the optimistic outlook for air travel. Air travel demand is expected to grow by over 4% a year over the next twenty years to more than double the current levels. Even in developed markets such as Europe, air traffic demand is expected to increase by around 50% by 2035. More traffic means increased revenue and, in an industry that is characterised by economies of scale, potentially greater profits.
But before you get out your chequebook, don’t expect this to be the start of mass privatisation of ANSPs. The flotation of ENAV was an economic necessity, rather than a reflection of an ideological free-market goal. Further privatisation would generate significant opposition, not least from the airlines. After all, the incentives of a private investor in a monopoly industry must always be questioned.
Note: For clarity, this article is not intended to be and does not constitute financial advice
