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ECONOMICS Last modified on April 12, 2017

Interesting times

ACI World’s director of economics, Stefano Baronci, considers how today’s volatile geo-political landscape creates challenges and sometimes new opportunities for airports and investors.

ACI forecasts a healthy year for airports in terms of passenger and traffic growth, yet it is cognisant that global economic growth remains in a fragile state, and as advanced economies slowly get back on course, the slowdown in key emerging markets is muting overall growth in global output. 

As a result we continue to expect an inexorable rise in demand for air service due to global demographic factors, while remaining mindful of worrying influences that could bring short to medium-term slowdowns.

These include everything from terrorism attacks on aviation-related targets and the always-present threat of higher energy prices to signs of the growing popularity of protectionism in some Western countries that could hinder the trend of Open Skies and air service liberalisation.

The latter risk recently motivated the heads of Hawaiian Airlines, New York-based JetBlue Airways and cargo carriers Atlas Air and FedEx to urge US Secretary of Transportation, Elaine Chao, and Secretary of State, Rex Tillerson, to reject appeals by American Airlines, Delta Air Lines and United Airlines to freeze Open Skies pacts with the United Arab Emirates and Qatar. 

Their call to Chao and Tillerson was made in a joint letter of protest penned under the banner of a group called US Airlines for Open Skies (USAOS).

Meanwhile, the uncertainty of the scope of ‘Brexit’ could produce an array of negative consequences for the sector. In addition to a potentially weakened economic performance and a weaker GDP affecting trade and passenger traffic, it is not yet clear, for example, whether the UK will continue to benefit from current EU negotiated Open Skies agreements. 

The outcome, I suspect, will depend on whether the UK government implements a ‘hard’ or ‘soft’ Brexit. With a ‘hard’ Brexit, the UK might be in a legal position to formulate an aviation policy, independent from the EU aviation rules (at least within the UK), but could lose flying rights and other associated benefits of being an EU member State. Under ‘soft’ Brexit, this dynamic would be reversed.

Similarly, EU or other non-UK airlines that operate in Great Britain might need to consider whether their air traffic rights will be retained following Brexit. Other EU legislation affecting aviation, such as the EU Emissions Trading Scheme; competition rules; and EASA safety regulation, could also be affected. 

Brexit will be just one of the hot topics covered at the 9th annual ACI Airport Economics & Finance Conference and Exhibition in London on March 20–22, 2017. Indeed, panellists from HSBC, Edinburgh Airport, ETRC and ICF will examine some of the many question marks thrown up by the prospect of Brexit, such as traffic rights, regulatory consistency, airline ownership and tax-free shopping. 

Some of the challenges that the airport industry faces in the short and long-term will remain a constant, of course, no matter what the state of the market. At the regional level, for example, airports and airlines globally are facing capacity challenges, and nowhere is this more pronounced than in Europe and Asia. 

If unaddressed, the situation will ultimately impact on levels of competitiveness, economic efficiency and passenger throughput. 

Hong Kong, Beijing, Manila, Jakarta and Mumbai already face significant capacity constraints, while across Asia it is estimated that on average less than 70% of flights depart on time today. 

Airports need to optimise their existing infrastructure and this can only be achieved via the co-ordinated efforts of airports, airlines and States. Additionally efforts must be to improve today’s ATM systems. 

Gaining the permission to grow, obtaining financing and securing suitable land are often the major challenges that airports must address in order to accommodate growth in demand. 

As summarised by a new ACI survey on airport ownership, economic regulation and financial performance that will be launched at the upcoming conference in London, private investors are showing a willingness to accept these challenges and public owners have increasingly accepted a privatised approach to meeting their needs. 

But sustainable success requires a balanced contract framework and a regulatory system capable of incentivising that success. It is against this challenging background that we reconvene in London. 

While there is no one size fits all approach it is important that regulation evolves in step with the industry. Economic regulation must better reflect and anticipate market dynamics, particularly paying attention to the intensity and scope of competition.

This may imply a move toward less economic regulation, where regulators intervene only when necessary for competition sake and even then, where intervention might be proportionate to the problems identified. Such a scenario might, in turn, incentivise airports and airlines to engage in more commercial interaction, allowing them to jointly tackle the challenges ahead. 

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