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Airports in Poland – a €1.2bn business opportunityby Bartlomiej Sosna and Richard Lucas

Source: Polish Construction Review

February 2007

www.constructionpoland.com

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Airports in Poland – a €1.2bn business opportunity

Airports in Poland are currently experiencing very rapid growth, with the fastest increase in passenger numbers in the world. However, Polish airports still suffer from underinvestment, inadequate infrastructure and limited capacity. The sector is expecting investments worth an estimated €1.2bn between 2007 and 2013, with credible plans to establish several new civil airports in Poland.

Polish airports’ impressive growthIn 2006 more than 15.3 million travellers visited Polish airports, over one third more

than in 2005. In the same period, average airport passenger traffic in Europe grew by some 7%. Warsaw airport experienced the steepest increase, handling over a million passengers more in 2006 than in 2005; Krakow ranked second (784,000) ahead of Gdansk (572,000), Wroclaw (404,000), and Katowice (355,000).

According to the Regional Airports Association, in 2007 Polish airports will serve approx. 18 million passengers – significantly more than the 16.4 million forecast by the Civil Aviation Office (CAO). The long-term forecast prepared by the CAO at the end of February 2006 underestimated the pace at which Polish airports will grow. Their forecast, however, is still useful for formulating the low growth scenario for passenger traffic growth.

Source: Civil Aviation Office, 2007 www.pmrpublications.com

Number of passengers at Polish airports (’000), 2005-2006

8,102

858

637

207

207

177

133

80.4

39102

1891399

454

6781,564

7,072

1,0842,368

1,458

1,250

Warsaw

Krakow

Katowice

Gdansk

Wroclaw

Poznan

Rzeszow

Lodz

Szczecin

Bydgoszcz

ZielonaGora

2005 2006

Source: CAO, February 2006 www.pmrpublications.com

Number of passengers at Polish airports (million), 2005-2030

11.5 15.3 16.4 18.4 20.3 22.330.4

41.551.4

63.8

2005 2006 2007f 2008f 2009f 2010f 2015f 2020f 2025f 2030f

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The International Air Transport Association expects passenger traffic in Poland in the years 2005-2009 to increase by more than 11% yearly – the highest growth rate projected for airport traffic for anywhere in the world, from among countries which have more than 2 million persons travelling on air carriers each year. Such robust forecasts for passenger traffic mean that investments in airport infrastructure are a necessity, as without them Polish airports will not be able to cope. Furthermore, the growing number of air carriers will also necessitate investments in the required navigational infrastructure, including radars, communication systems, runways lightening etc.

Low-cost airlines and regional airports on the way up

The structure of air travel in Poland has changed visibly in the last two years. Considering the number of passengers they process each year, Poland’s regional airports are catching up with the country’s main airport in Warsaw. In 2006 regional airports checked in nearly two-thirds more passengers than in 2005; at the same time, passenger traffic in the Warsaw airport rose by less than 15%. Thus, the share of the country’s central airport in the total civil air transport market has decreased to just above 50% and will shrink further to reach some 40% by 2020.

11.2%

9.6%

9.5%

9.2%

8.9%

8.5%

8.4%

8.4%

7.6%

7.4%

6.8%

6.8%

6.7%

6.7%

6.6%

6.6%

6.5%

6.5%

6.4%

6.4%

Poland

China

Czech Republic

Qatar

Turkey

Romania

Malaysia

India

United Arab Emirates

Pakistan

Republic of Korea

Jordan

Australia

Thailand

Macao

Iran

Kuwait

Taiwan

Ireland

Egypt

Source: International Air Transport Association www.pmrpublications.com

Countries with over 2 million air passengers a year rankedby average annual growth rate in 2005-2009



During the three years they have been present in Poland, low-cost airlines have expanded rapidly. In 2006, for the first time, they served more passengers than the biggest traditional Polish air carrier – PLL LOT; their further strong expansion is anticipated for the next few years. From among the low-cost air carriers operating in Poland, the Hungarian WizzAir – with its major air base in Katowice – has the biggest market share (approx. 2.1 million passengers served in 2006). The Irish Ryanair (1.6 million passengers in 2006) ranks second. In 2007 both carriers are going to increase the number of passengers they serve, to 3 million and 2 million respectively.

Poland’s regional airports owe their dynamic growth mostly to the low-cost carriers. To support further expansion, competition among airports and carriers is expected to intensify, leading to an estimated 10% drop in airport charges.

A huge investment gap to fillPoland has a six times less dense network of airports than in more developed European

countries. On average in Poland there is one civilian airport per almost 3.2 million inhabitants; while in the EU15 this ratio stands at around 460,000 citizens per airport. This means that in some regions of Poland, people must travel more than 200 km to get to the nearest civil airport. Given these statistics, there is no doubt about Poland’s need for several new airports handling passenger traffic.

4.9 5.2 6.1 7.1 8.1

1.6 1.9 2.7 4.47.3

24.0

16.0

2002 2003 2004 2005 2006 2020f

Warsaw-Okecie airport Regional airports

Source: CAO, 2007 www.pmrpublications.com

Number of passengers at Warsaw-Okecie airport and at regional airportsin Poland (million), 2002-2020

Source: CAO, PLL LOT, 2006 www.pmrpublications.com

Shares in passenger air traffic in Poland, 2004-2006

59.8%42.9% 34.0%

12.0%31.7% 44.3%

28.2% 25.4% 21.7%

2004 2005 2006

PLL LOT Low-cost airlines Other carriers



At the beginning of 2007, the Ministry of Transport prepared a programme for developing the national network of airports and airport ground facilities. The programme envisages the creation of several new airports, with priority given to the less developed regions of eastern Poland, i.e. Warminsko-Mazurskie, Podlaskie, Lubelskie and Swietokrzyskie voivodships. With the exception of Podlaskie, which has only one potential location for a civil airport (Bialystok-Krywlany), each of the remaining three voivodships have two possible locations for civil airports – with an option of either adapting an already existing sports or military airport or building a new airport (the latter option being significantly more expensive to implement than the former). Thus, we expect that in the Lubelskie voivodship, the Swidnik location will be chosen over a site in Niedzwiada where an airport would have to be built from scratch.

Existing and planned civil airports in Poland

Note: for Lublin, Olsztyn and Kielce only one out of two locations will be chosenSource: PMR Publications, 2007 www.pmrpublications.com

Warsaw-Okecie

Krakow-Balice

Wroclaw-Strachowice

Gdansk-Rebiechowo

Katowice-Pyrzowice

Lodz-Lublinek

Poznan-Lawica

Rzeszow-Jasionka

Szczecin-Goleniow

Bydgoszcz-Szwederowo

Zielona Gora-Babimost

Szczytno-SzymanyPila

Rybnik

Koszalin

Kielce-Obice

Lublin-Niedzwiada

Olsztyn-Olsztynek

Nowy Dwor Mazowiecki-Modlin

Minsk Mazowiecki-Janow

Sochaczew-Bielice

Lublin-Swidnik

Opole-Kamien Slaski

Kielce-Maslow

Bialystok-Krywlany

Gdynia-Oksywie

– Existing civil airports (2007)

– Sports or military airports to be converted into civil airports (by 2010)

– Civil airports to be build from scratch (by 2011)

– Other considered civil airports locations (by 2013)

Czestochowa-Rudniki

Nowy Sacz



And in Warminsko-Mazurskie, the currently unused Szymany airport is likely to be selected rather than the region financing the construction of an expensive new airport in Olsztynek. In the Swietokrzystkie voivodship, the construction of a new airport (in Obice near Kielce) is more plausible because the local municipality has already started buying land for the airport which will cost nearly €130m. Taking into account Polish realities, we estimate that construction of a brand new civil airport in Poland is some €80m more costly than converting an existing airport. For that reason other cities, including Nowy Dwor Mazowiecki, Minsk Mazowiecki, Sochaczew, Radom, Opole, and Gdynia have expressed their enthusiasm for establishing local or regional civil airports through converting already existing sports or military local airports. In addition, other cities, including Czestochowa, Koszalin, Pila, Rybnik and Nowy Sacz, are also considering similar investments.

Despite the fact that the new airports are only in the planning phase, they have already begun to compete among each other. Within the next few months, the race for money and investors will intensify further since the investors are waiting for new locations in which to invest. Rynair is an excellent example. It has already declared its willingness to invest in its air base and wants to channel its money into the cheapest and the soonest-to-be-completed airports. At present the Modlin airport seems to be the most likely location for Rynair’s hub – an investment estimated at €100m. The new airport in Modlin should open its doors to the public by October 2008. In the first full year of operations (in 2009), Modlin expects to handle a million passengers, and by 2011 this figure should rise to 2 million passengers a year. This airport in Modlin, along with Sochaczew and Minsk Mazowiecki, will function as regional airports, complementing the services provided by Warsaw’s Okecie airport, with budget airlines as their main clients. In the future, all airports in Mazowieckie are to be incorporated into the Mazowieckie airport network. According to PMR’s calculations, the total value of investments in new civil airports within the next few years will reach at least €425m.

In addition to the new airports, existing airports also have major investment plans for the years 2007-2013. The biggest investment plans have been unveiled by Krakow airport, followed by Wroclaw, Warsaw, Katowice, Gdansk and Rzeszow. We estimate that the existing airports’ investment plans for 2007-2013 will necessitate expenditure of approx. €775m. Considering the investments planned on new airports, between 2007 and 2013 as much as €1.2bn will be spent on civil airports in Poland. Afterwards, between 2013 and 2020, further large investments are also expected. Though these are not exact figures, according

Source: PMR Publications based on information from airports, 2007 www.pmrpublications.com

New civil airports in Poland: completion costs and timetable

Cost (€m) CompletionOlsztyn-Olsztynek -Kielce-Obice 2011Nowy Dwor Mazowiecki-Modlin October 2008Minsk Mazowiecki-Janow 2009Sochaczew-Bielice 2010Lublin-Niedzwiada -Lublin-Swidnik 2009-2010Bialystok-Krywlany -Gdynia-Oksywie -Radom-Sadkow 2009Kielce-Maslow -Opole-Kamien Slaski

25012866515150392626211818 2009-2010



to preliminary calculations prepared by the Ministry of Transport, at least €500m will be allocated to the country’s civil airport infrastructure in the years 2013-2020.

Financing from the EU and the Warsaw Stock Exchange

Finding cash for these investments will not be an insurmountable problem as the EU will put up a sizable proportion of the necessary resources, including €350m from the Cohesion Fund and the Infrastructure and Environment Programme, €372m from the Regional Operational Programme, and €45.5m from the European Fund for Regional Development. These are investments which meet a clear market demand and are good for the regional economies in which they located.

EU funds will cover at least half of the costs of the planned investments. The rest will have to come from local governments and airports’ own investment funds. To finance large investment projects, some airports are planning to raise capital from outside private investors. One route for so doing could be the Warsaw Stock Exchange. It is highly likely that the Wroclaw airport will be floated on the WSE in 2008. The management of the Gdansk airport is very close to making a similar decision. Both airports count on raising in excess of PLN 450m (€115m) via this route. The airports in Bydgoszcz and Rzeszow are also planning to raise additional cash for their investments on the capital market. Some airports might also decide to look for a strategic investor from within the sector. Furthermore, according to the representatives of the Ministry of Treasury, Poland’s largest national carrier LOT and its low-cost subsidiary, Centralwings, are planning to list on the WSE in Q1 2008.

Additional investmentsAlong with the expansion of airports and the construction of new terminals, other

additional investments will also be carried out at the airports, including the construction of hotels, parking spaces, railway links and improved road links from airports to nearby cities, logistics centres, and cargo hubs, which could be of key importance to factories that will be built in the nearby special economic zones (for example, near Katowice).

* The Warsaw-Okecie’s investment needs for 2014-2020 dependon whether the new Central Airport for Poland will be constructed.Source: PMR Publications based on information from airportsand the Ministry of Transport, 2007 www.pmrpublications.com

Investment needs in existing Polish airports (€m), 2007-2020

2007-2013 2014-2020Warszawa-OkecieKrakow-BaliceKatowice-PyrzowiceGdansk-RebiechowoWroclaw-StrachowicePoznan-LawicaSzczecin-GoleniowRzeszow-JasionkaBydgoszcz-SzwederowoSzczytno-SzymanyLodz-LublinekZielona Gora-BabimostTotal

90.5146.484.083.092.439.815.981.857.550.025.09.0

775.4

n/a*108.957.5117.2n/a

168.2n/a29.9n/an/a8.53.1

493.2



Over the last few months, the investments have already resulted in contracts being awarded, including: Ferrovial-Budimex consortium (construction of Terminal II at the Warsaw airport – €190m), the Franco-Polish consortium led by DTP (won the order for the construction of a new flyover to the Warsaw airport – €30m), the construction giant Vinci subsidiary Warbud (work on expanding the Gdansk airport’s departure and arrival lounges – €2.3m). The growing number of air passengers has make airports very attractive investment locations for developers, which means new contracts for construction companies, not just at the airport itself but in the surrounding area. For example, Warbud is carrying out a €15m general construction work contract for the Okecie Aeropark Business Centre, a new venture of the leading Polish developer Globe Trade Centre, located near the Warsaw airport.

On Airport Commercial Activities The services and retailing possibilities at airports are well understood: car rental, duty

free sales, newsagents, bookshops, fast food, pubs, restaurants, other retailing, travel agents and others. The opportunities for service, maintenance, gasoline, contract cleaning, in flight catering and other services to the airlines vary country by country, and airport by airport.. The presence of (frequently inefficient) state owned companies can mean that the opportunities are blocked by well connected locals, at least until these companies are sold off or closed down. Sometimes the converse is true, and these companies can be lucrative customers, who are bad at negotiating good terms and conditions. It pays to check, and get local advice.

Clearly with each airport expansion, or new airport project, new possibilities exist. Being in contact with the promoters of projects who need to secure private sector financing is highly advisable for companies interested in establishing a presence, Committing to rent space can facilitate the promoters’ capital raising.

PMR leveraged its contacts in the Central European airport industry to discuss with airports the possibilities of renting space. For those experienced in the business the response was unsurprising. All space is taken and if any becomes free it goes to tender. This is the norm. It isn’t easy to “get in”, a problem familiar to those interested in expanding in other fast growing regions of world.

The strategy of buying companies that have already got space is widely understood, and the owners of some existing players are known sometimes to be interested in JVs with well capitalised international partners with deep pockets. A local consultant with the ability to develop good contacts, to monitor airports of interest is a wise move for any company that it interested. Getting in early, convincing the airport authorities of the quality of the bid, and developing good relationships with the decision takers is strongly recommended.

The leading international companies active in “on airport” commercial activities are well aware of the opportunities and their visits to the region to explore the possibilities, or use of local consultants, reflects this knowledge and underlines how seriously these companies take the opportunity.



SummaryFor the Polish regions, the development of airports is an opportunity for better regional

accessibility, a higher ranking as investment and travel destination, higher capital expenditure both on airports as well as their immediate and more remote vicinities, new jobs in air transport and passenger services at the airports as well as in regional tourism. Airports have become a material factor underlying development of cities and regions. Good transport access is a basic prerequisite for any region to be considered a viable localisation for a new business venture. A high number of flight connections means better regional economic growth which, in turn, spurs higher demand for new connections.

PMR’s forecast of a €1.2bn business opportunity is conservative, and well documented. If economic growth accelerates, as may well happen, the figure may even be higher. As with so many other developing country business opportunities, It is the well prepared, flexible and pro-active international companies that will succeed.

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About PMR

PMR Publications www.pmrpublications.com provides reliable market intelligence for business professionals interested in Central and Eastern European countries. Publications by PMR analyse the business climate in the region, in particular in the construction, retail, IT, telecommunications and pharmaceutical sectors. PMR Publications offers both free and paid subscription newsletters, internet news portals, and in-depth reports.

To find out more about Poland and Central and Eastern European countries please visit www.polishmarket.com and www.ceemarket.com, as well as the regional and national sector portals dedicated to construction (www.constructionpoland.com), IT and telecom (www.ceeitandtelecom.com), retail (www.retailpoland.com, www.ceeretail.com, www.russiaretail.com) and pharma (www.pharmapoland.com).

PMR Publications is a division of PMR Ltd. (www.pmrcorporate.com)a publishing, consulting and market research company providing information, advice and services to international businesses interested in Central and Eastern Europe. With highly skilled staff, top ranked web sites and over ten years of experience, PMR is one of the largest companies of its type in the region.

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You are welcome to contact the authors of the article:

Bartlomiej Sosna, Construction Market Analyst, PMR [email protected]

Richard Lucas, Managing Director PMR Ltd

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