Sofia Airport – unexpected growth for the new century

April 2013 | PROFESSIONAL INSIGHT | SECTOR ANALYSIS

Financier Worldwide Magazine

As a small Eastern European economy, Bulgaria is not often the focus of interest for major investors in the transport sector. Recently, however, its capital city Sofia has attracted the increasing attention of some global airport operators. The reason for this is that the government is preparing a concession procedure for Sofia Airport.

Sofia’s reputation as a small airport is misleading, and can cause investors to look at larger projects elsewhere – thereby missing the opportunity to invest in a growing platform. Sofia Airport was established on 16 September 1937, and throughout the Cold War existed as a small runway with one passenger terminal. In 2000, Terminal 1 was reconstructed to allow it to handle 1.5 million passengers per year. Soon after that the increased passenger stream forced management to initiate further investment. Thus, in 2006 a new 3600m-long runway and a new Terminal 2 were commissioned, allowing the airport to handle 2.6 million more passengers per year, resulting in a total annual capacity of about 4 million passengers. The initial plan was for these investments to make the airport sufficient to meet the needs of Sofia, which has around 1.5 million inhabitants. A few years later, in 2010, it became clear that the new passenger capacity would be exhausted earlier than expected and Sofia Airport required another extension.

This sounds like a great growth story – but it has a darker side. While the increasing passenger numbers fed optimistic expectations for the airport’s future, the joint-stock company – solely owned by the state – was involved in an arbitration proceeding with the construction company that built the new runway for Terminal 2. In early 2012 it was reported that the ICC in Paris gave credit to the contractor’s claims and that Sofia Airport would be forced to pay the Kuwait construction company an additional US$38m for their claims. Shortly after this, the Bulgarian minister of transport, as the principal of the state owned Sofia Airport JSCo., announced that the ICC’s decision, by favouring the contractor’s claims, would deprive the airport of the possibility to invest in the proposed extension.

Pressed by these circumstances, the government saw a possible concession of the airport as a way out of the dead-end in which Sofia Airport found itself following the ICC’s decision. Immediately, preparation of a preliminary economic analysis for the potential concession was initiated; the first step towards the concession procedure.

At the same time, during the summer of 2012, managers of the Sofia Airport indicated that immediate measures would need to be undertaken to extend the airport’s capacity, as the previous year it handled about 3.5 million passengers – more than 85 percent of its existing capacity. Considering the expected annual increase of at least 5 percent of total passengers, management decided to implement reconstruction of the new Terminal 2, increasing the number of passenger boarding bridges from seven to 11. This intermediate measure will allow the airport to serve 200,000 more passengers per year, but will not be sufficient for the airport to achieve sustainable development over the coming decades.

The plan to extend Sofia Airport is not driven solely by the constant increasing number of passengers over the past decade, but also by the general economic growth of the city of Sofia. A 2012 report on Sofia’s hotel industry indicates an increase of 6.3 percent in the RevPAR indicator, demonstrating a tendency towards recovery following the financial crisis, driven mainly by business visits from abroad (mainly via Sofia Airport). Another example underpinning expectations for Sofia Airport can be found in an interesting real estate investment in the city, presently under construction – a shopping mall with total build-up area of 180,000 square metres. This development, financed by a reputable European bank, is on track to become the largest shopping mall in the Balkans. The correlation between this real estate development and the airport is that the developers and their creditors rely, among the other factors, on the site’s close connection with Sofia Airport.

Whatever the future for Sofia Airport, be it a concession procedure to attract a reputable airport operator or to source financing to extend the airport’s capacity, the facility has the potential to hold the interest of transport infrastructure investors for at least the next few years.

Yordan Yordanov is a partner at Hristov | Yordanov & Partners. He can be contacted on +359 887 807 626 or by email: yordan.yordanov@hylegal.com.

Yordan Yordano

Hristov | Yordanov & Partners