Services

Annual Report 2005

SERVICES ARE A STRATEGIC AREA FOR FERROVIAL SINCE THIS IS A STABLE BUSINESS WITH RECURRING EARNINGS AND SIGNIFICANT GROWTH POTENTIAL. FERROVIAL'S SERVICES STRATEGY IS TO GROW AND REINFORCE ITS THREE BUSINESS LINES (MUNICIPAL SERVICES, FACILITY MANAGEMENT AND INFRASTRUCTURE UPKEEP) AND TO EXPAND ITS INTERNATIONAL PRESENCE. AS A RESULT OF THAT STRATEGY, FERROVIAL ENTERED A NEW SEGMENT –AIRPORT SERVICES– BY ACQUIRING SWISSPORT, THE WORLD'S LARGEST INDEPENDENT HANDLING OPERATOR.

 

That deal enabled Ferrovial to continue the process of internationalisation and reinforce its position as one of Europe's leading services operators. In 2005, 63.5% of revenues and 59% of the services backlog were generated outside Spain.

COMPETITIVE SITUATION

Spanish market

Municipal services companies' actions are shaped by continuous development of new environmental regulations and by market trends. As a result of growing environmental awareness in Europe, new regulations have been implemented that are applicable to the sector.

Spain's municipal services market (i.e. grounds management, street cleaning and waste collection, industrial waste treatment and services) is very dynamic, with a steady flow of contracts and development potential. The outlook for 2006 suggests that the industry will grow by over 6%. However, grounds maintenance and services for private customers will grow slightly more slowly.

Large business groups are reinforcing their position in the industry, mainly in services that require major technical and financial capacity.

The facility management market (with over 6 billion euro in the building and industrial maintenance sector alone) continues to grow. The cleaning market is very fragmented: there are over 6,000 companies that generate revenues of approximately 4.6 billion euro and employ 420,000 people.

Eight large companies have 25% of the market and the necessary financial capacity to bid for large contracts. Those large companies have also started to diversify into other labour-intensive businesses in order to offset the market's maturity.

Infrastructure maintenance and upkeep is a mature market in Spain, with steady annual growth, since the central government and now, to a greater extent, regional, provincial and municipal governments are outsourcing those activities.

The need to undertake major improvements in Spain's road network in recent years has boosted public-private formulas, which have already been implemented in other European countries and have come to Spain as "road surfacing, upkeep and maintenance" contracts. This formula will be used by the Development Ministry in 2006 when awarding 20-year concessions for the surfacing and operation of first-generation roads. Other governments have implemented similar projects, such as Madrid Calle-30, a 35-year contract awarded to Ferrovial as part of a consortium in 2005.

Other countries

The UK services market, one of the world's most advanced, is characterised by long tender processes, with large associated costs, but with major investments and long concession terms, in most cases under PFI (Private Finance Initiatives) and PPP (Public Private Partnership), which favour close alliances between the various administrations and the private companies that execute those contracts. Within those general parameters, the progressive trend is that broader, custom solutions are being sought in order to bring more activities into the same contract so that services improve and management costs are eliminated.

The infrastructure maintenance market (central and local government contracts to manage roads and railway) includes a broad variety of services, ranging from conventional road maintenance to innovative solutions, including managing all the road transportation assets of a large city.

In recent years, the governments of England and Scotland have awarded trunk road maintenance contracts, dividing the country into 18 zones. In 2005, the second contract phase began in which there was an increase in the number of services to be provided (e.g. combining operating and professional services in the same contract).

Local authorities' investment plans continued to increase. The market expects significant growth in this segment due mainly to three reasons: growing social pressure regarding service levels; greater sophistication on the part of local authorities when awarding services contracts by grouping investment and maintenance and by lengthening contract terms, and growing pressure to manage funds efficiently, as set out in the "Gershon Agenda", fostered by the central government and justified by a foreseeable lower contribution of state funds to local authorities.

In the railway segment, the trend commenced by public-sector body Network Rail to in-source maintenance services continues. That strategy was changed somewhat in relation to track renewal services and other value-added services.

The UK has a long tradition in facility management, in which large groups linked to the construction sector and small services companies compete in an expanding market. Growth is expected due to rising demand by the private sector and the ambitious PFI development programmes, particularly in education.

In this segment, the governments of England and Scotland, in collaboration with local education authorities, have developed a number of improvement programmes, especially BSF ("Building Schools for the Future") in England and Wales, and the "Scottish Schools" programme. Both programmes are aimed at rebuilding and renewing primary and secondary schools to increase quality and incorporate technology into education. The programmes will be executed via PPP projects where local education authorities will collaborate with private companies. The first two projects were awarded in 2005 although the BSF programme aims to cover all schools in England in the next 10-15 years.

Airport handling services have always been linked to airlines or the airports themselves. This trend has been changing in recent years: handling services are now being outsourced to independent operators in order to improve efficiency and reduce costs.
The potential of this industry, with an estimated size of 26 billion euro, depends on the growth expected in air traffic in the coming years, on the worldwide liberalisation of handling services, and on the increasing trend of outsourcing by airlines.

The aviation industry has recovered worldwide in recent years: passenger numbers increased by 11% in 2004 and by 8% in 2005. Passenger and cargo traffic are projected to grow faster than GDP in the next 20 years. In recent years, the industry has consolidated, budget airlines have outperformed the industry average, and there is a clear trend towards outsourcing a larger number of services.

In that context, each region responds to its own development characteristics:
• Europe: a market experiencing progressive liberalisation (in line with EU Directives), greater outsourcing, and fierce competition between global operators;
• North America (over 35% of total air traffic): a market with low entry barriers, fierce competition, and still in the hands mainly of local traditional airlines (75% of passenger handling and 30% of cargo);
• Latin America: a market with little outsourcing, large local competitors, and uncertainty about future legislation;
• Asia: a market with greater growth projections, especially cargo; where contracts for the main airports are expected shortly; and where the main competitors are local airlines or associated companies;
• Africa: there is potential growth in South Africa and some countries in northern Africa.

STRATEGIC POSITIONING

As one of Europe's leading services operators, Ferrovial's general strategy is to reinforce its position and expand in municipal services, facility management, end-to-end infrastructure upkeep and airport handling services, and to constantly analyse complementary business opportunities with growth potential.

Accordingly, in the fourth quarter of 2005, Ferrovial acquired Swissport, the world's largest airport handling operator.
That acquisition redimensioned the services area once again and increased its presence in developed markets with higher growth prospects.

Reinforcing and expanding the activities in which we operate, increasing the number of PFI services concessions, capitalising on synergy among activities, and seeking complementary business opportunities define the policy of an area with other specific objectives in the Spanish market:

• municipal and industrial services: maintain our leading position by increasing our market share; invest in RDI (research, development and innovation) and cutting-edge technologies in order to optimise processes; focus on long-term contracts and new types of administrative concessions; foster source sorting and specific treatment of waste, in line with EU guidelines; reinforce end-to-end service management for large industrial groups; and expand alternative treatments;
• facility management: in addition to PFI projects, promote vertical integration with customers; and focus on industrial maintenance;
• infrastructure maintenance: seek opportunities in emerging, complementary businesses and reap synergies among businesses in the markets where Ferrovial operates.

Outside Spain, growth is a priority in the infrastructure maintenance and facility management business – conducted in the UK through Amey – via a greater variety of services and new business opportunities. The strategy in the business lines is as follows:
• infrastructure maintenance: build on competitive advantages in order to increase contract size and market penetration and to remain the leading end-to-end services company; and provide custom solutions in projects with local authorities;
• Tube Lines: accelerate investments and maintain high standards when meeting objectives. The investments are being made on schedule and within budget: around 36 million pounds are being invested every month at present, i.e. triple the historical amount invested in London Underground;
• facility management: maintain our market share in an expanding business, mainly with private customers and in education.

In airport handling services, Swissport's global presence, its broad product and service range, and the variety of its customer portfolio are key factors in maintaining its position as the world's largest airport handling operator.

Its leading position will be enhanced and reinforced by:
• diversifying its customer portfolio: Swiss customers accounted for 100% of revenues in 2002 and under 20% now;
• taking control of its main affiliates
• participating in the industry consolidation process in its three core business lines:
- passenger and boarding ramp services (ground handling): maintaining the principal customers; developing collaboration formulas or joint ventures; providing regional outsourcing solutions or global service packages; and participating in the future liberalisation of the European and Asian markets;
- cargo services: increasing capacity in key locations and entering selected areas in Western European and North America; operating in fast-growing markets in Asia, Latin America and Eastern Europe; and cooperating with cargo airlines in areas with greater business potential;
- new businesses: selectively seeking opportunities in security, refuelling, aircraft maintenance and executive aviation services.

Recently, Swissport decided to restructure its organisation (effective April 2006), moving away from its previous geographical approach in favour of a product-based structure which, combined with increasing resources for business development, will expand its capacity to seize new market opportunities.

SIGNIFICANT EVENTS

Spanish market

Through subsidiary Cespa, Ferrovial's municipal services division serves a total of 795 municipalities in Spain, including A Coruña, Alicante, East Barcelona, Granada, Huelva, Madrid (several districts), Murcia, Pontevedra, Vigo, Vitoria and Zamora. In Portugal, the company serves Albufeira, Valongo, Terras Frías, Parque Expo, Torres Novas, Planalto Bairao and Quarteira. The division also maintains 26.8 million square metres of green areas in cities such as Barcelona, Bilbao, Burgos, Cádiz and Madrid (in Spain), and Porto and Cascais (in Portugal).

In 2005, the division bid for over 560 contracts totalling nearly 2.7 billion euro. A large number of waste collection, street cleaning and grounds maintenance contracts expired in 2005, practically all concessions were renewed, and the backlog exceeded 212 million euro: waste collection and street cleaning in Tortosa, Oiartzun, Santurtzi, Mancomunidad Alto Deba and Tomares; street cleaning in Canet de Mar, Vic (contract extension), Plentzia and Bailén; grounds maintenance in zone 5 of Madrid, Zaragoza University, Cerdanyola del Vallès and Valladolid; waste collection in Barakaldo and San Agustín de Guadalix; and bin cleaning in Huelva.

New contracts were also obtained, including street cleaning in Sant Vicent del Raspeig and Tudela; waste collection in Consell Comarcal de l'Alt Camp, l'Ampolla and Consorcio As Mariñas; waste collection and street cleaning in Sarria; and selective waste collection in Humanes.

In 2005, Cespa became the leading waste treatment company in Cataluña after obtaining the Ecopark IV contract, with a backlog of 550 million euro and committed investments of over 68 million euro. The project, which is in addition to the other two that Cespa has in Cataluña, will be built in the Els Hostalets de Pierola installations, and will provide end-to-end waste management, from sorting and composting to final elimination (300,000 tonnage of waste per year are estimated).

Other contracts obtained were as follows: waste treatment and transportation in Huelva province, with a backlog of 100 million euro and committed investments of over 13 million euro; operation of the Soria province waste treatment centre; and operation of the MSW sorting and composting centre in Ulea. Those contracts enable Cespa to increase its capacity to manage household waste by approximately 41% with respect to the tonnage received in 2004.

Ecopark III in Greater Barcelona was completed in 2005 and became operational in January 2006, as did the composting and biomethanisation plant in Tarrassa and the biomethanisation plant in Vitoria.

Outside Spain, Cespa became Portugal's second-largest private-sector waste manager. One of the largest contracts in this market was the REN (Rede Eléctrica Nacional) end-to-end waste management concession between 2006 and 2008.

In 2005, Ferrovial reinforced its position as one of the leading facility management companies, with 20% growth, boosted mainly by maintenance of industrial facilities. In Spain alone, subsidiary Ferroser manages 2,700 buildings (over 4.4 million square metres), including hospitals, museums, universities, prisons, shopping malls, sports facilities, factories, offices and landmark buildings.

In 2005, the company obtained over 20% of the contracts it bid for, and significantly increased the backlog. Moreover, the backlog is balanced: 57% is public-sector customers and 43% private customers.

Highlights:
• the company reinforced its position in the prison market: it now has prison concessions in Galicia, Asturias, Cantabria, the Basque Country, Aragón, Navarra, La Rioja, Castilla y León, Madrid, Castilla-La Mancha, Andalucía, Valencia, Extremadura and the Balearic Islands;
• it assessed the status of the schools that the central government devolved to the Castilla-La Mancha government: technical auditing of schools, analysis and prioritisation of investments to be made, and drafting of school evacuation plans;
• the industrial business–one of the area's priorities–grew considerably: maintenance contracts with DaimlerChrysler, John Deere, Faurecia, Bridgestone, TRW Automotive and L'Oreal.

Cleaning subsidiary Eurolimp maintained the number of contracts awarded and improved profitability. The main contracts obtained were as follows: cleaning of the Agbar tower (Barcelona), cleaning and maintenance of Almería airport, cleaning of the Valme hospital (Sevilla) and Virgen de la Luz hospital (Cuenca), and specialised industrial cleaning of factories of Celéstica (Valencia), TRW (Navarra) and Bridgestone (Basque Country).

With more than 25 years' experience, Grupisa is the leading Spanish company in its sector (15% market share). It specialises in end-to-end infrastructure maintenance, manufacture and installation of marking and signage on roads, at airports and in cities, plus road traffic management.

In 2005, the company provided comprehensive maintenance on 7,840 kilometres of roads in Spain and it installed over 49,000 road, city and airport signs and more than 14,000 square metres of traffic signs. In addition to its core businesses, it entered other areas by developing and implementing traffic light controllers using proprietary technology. It has developed latest-generation traffic light controllers, which are already in place in Aranjuez (Madrid) and should enable the company to make significant inroads into this market.

The main contract obtained in 2005 was the Madrid Calle-30 concession. In a joint venture, Ferrovial acquired 20% of the concession company (the remaining 80% is owned by the Madrid city government) that will manage the reform, upkeep and operation of the M-30 road over 20 years.

In Portugal, Ferrovial continued to reinforce its position as a leader in the markets in which it operates: road upkeep, machinery repair and maintenance, and the manufacture of bituminous emulsions.

International market

Since February 2005, Amey owns 66% of Tube Lines, after acquiring an additional 33% for 139 million euro, and manages the entire contract to provide technical assistance in operating and maintaining the lines managed by this concession company. Tube Lines has a 30-year contract to manage the refurbishment and maintenance of London Underground's Jubilee, Northern and Piccadilly lines, representing a total projected investment of 2.2 billion pounds in the first phase. Tube Lines manages 100 stations and 335 km of track, which carry 246 trains and 1.75 million passengers every day. The company has 2,590 employees.

In 2005, Tube Lines implemented the following improvements: an extra carriage was added to each train on the Jubilee Line, thus increasing the daily capacity by 60,000 passengers; ten stations were improved and the Wembley Park station's capacity was increased by 70% in order to meet the demands of the new national stadium; improvements on the Piccadilly Line have reduced infrastructure failures by 50%; and the time taken to replace most of the escalators was halved.

In July, London Underground suffered terrorist attacks that caused numerous deaths and property damage and which interrupted service on the lines maintained by the two operators (Tube Lines and Metronet). Tube Lines experts played a major role in restoring the service on the affected lines under the supervision of Transport for London.

In 2005, Amey maintained its leading position in the road infrastructure maintenance sector, where it has five of England's nine maintenance contracts, representing 25% of the total value of its projects. Amey has 50% of the Scottish market. Amey is also one of the top ten suppliers to the railway industry, with contracts in excess of 200 million pounds.

Amey's activity was also affected in 2005 by three other factors:
• financial completion of the C-Vehicles contract (600 million pounds and a 15-year concession): the contract includes maintaining the British Army's vehicle and construction machinery fleet worldwide;
• award of the Bradford contract as part of the "Building Schools for the Future" (BSF) programme: a pioneer project in education, which strengthens Amey's position in this market and is Ferrovial's first construction project in the UK; worth 400 million pounds, it includes a first phase to design, finance and build three schools, and provide services over 30 years;
• reinforcement of Amey's position in the infrastructure market with local authorities, through the Bedfordshire and Cumbria contracts. The latter contract involved the transfer of employees from Cumbria County Council's Contract Services Construction Unit to Amey, which will provide new business opportunities. The contract increased Amey's backlog by 110 million pounds and marks a strategic improvement in its presence in the local authorities market.

Other projects were obtained in 2005:
• roads and railway: Ebbw Valley Project (to design, manage and reinstate rail lines in South Wales); the trunk roads network in South-West Scotland (a second 5-year concession to manage and maintain those roads for 150 million pounds); 1-year extension to three contracts with the Highways Agency and one with the Scottish Executive, worth 85 million pounds;
• education: Renfrewshire Schools (PPP for 10 new schools); Northampton Schools (a 250 million pound contract to manage services at 41 schools over 32 years); EduAction (the contract was extended until March 2008);
• facility management in the private sector: QinetiQ (a 5-year extension to the Total Facilities Management contract for 30 establishments in the UK).

In January 2006, Amey acquired professional services group Owen Williams in order to enhance its ability to provide comprehensive support services, from design through management to O&M. The acquisition reflects a growing desire from public sector procurement professionals in the highways, rail and central government sectors to work with one-stop-shop support services companies in long-term contracts. Backed by over 80 years of heritage, Owen Williams is a leading professional support services provider to a wide range of public sector bodies. Its track record includes some of the UK's landmark projects, such as Wembley Stadium, and the Daily Express Buildings in London, Manchester and Glasgow,

In October 2005, Ferrovial acquired Swissport, the world's leading independent handling operator (not associated with any airline or airport), which operates at 175 airports in 41 countries. The company provides services to around 70 million passengers travelling on over 650 airlines worldwide. The cargo division handled over three million tonnes of cargo in 2005.

The transaction valued Switzerland-based Swissport at 1.002 billion CHF (646 million euro): Ferrovial paid 520.8 million CHF (336 million euro) for Swissport's shares and assumed debt of 481.2 million CHF (310 million euro). The acquisition positioned Ferrovial in an industry with strong growth potential and was a major step forward in internationalisation, mainly in Europe and the US, which account for over 90% of Swissport's revenues.

In 2005, Swissport reinforced its leading position in passenger and boarding ramp services and cargo handling, and continued to develop other related services.

In 2005, new passenger and boarding ramp services commenced in Europe (Glasgow, Rome, Milan, Rhodes and Cyprus), Asia (Singapore and Seoul), Canada (Toronto, Vancouver, Montreal) and Mexico. Commercial agreements were also signed with airlines to manage their handling services: First Choice Airways in the UK, and EasyJet in Basel, Geneva and Paris. A global partnership programme was signed with Air France-KLM and the company obtained the third handling licence at Singapore Changi airport.

In the cargo segment, Swissport's global agreements with Swiss WorldCargo, ABC and Air France show that the general trend is towards greater collaboration between airlines and independent handling operators. New operations were also established in Amsterdam, Seoul and Singapore airports.

In new services, refuelling operations commenced at Newcastle airport and private aviation services began in Málaga airport (Spain). Swissport implemented new solutions and systems such as on-line check-ins and self-service check-in kiosks in close collaboration with SITA, and made major progress in passenger biometric identification systems.

 

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