Traditionally ACI’s first global event of the year, the Airport Economics & Finance Conference and Exhibition once again proved a big hit with all those in attendance, this year’s event attracting 240 delegates from 120 different companies in 40 countries across the globe.
ACI World’s director general, Angela Gittens, used her opening address to look at the provisional 2016 traffic results for the world’s airports, reflect on last year’s key performance indicators and discuss a new Policy Brief on airport ownership, economic regulation and financial performance.
She revealed that despite the uncertainty hanging over the global economy, in 2016 airports enjoyed their busiest year ever for passenger traffic, and worldwide airport revenues increased by 6% to $151.8 billion.
The capital intensive nature of airports, however, means that rising revenues doesn’t necessarily equate to a profit, with Gittens quick to point out that profitability continues to elude most airports handling less than one million passengers per annum.
“Size remains the main contributing factor whether airports are profitable or not,” she remarked. “High fixed costs for infrastructure ensure that airports which serve fewer than one million passengers per year show a negative return on invested capital of 1.7%.”
Talking about the need to invest in future facilities in a far from certain market, she stated: “Airport operators are often placed in a position where they must engage in a high-wire balancing act.
“On the one hand they are faced with stringent regulations governing their aeronautical revenues and in certain cases must finance small or loss making airports in their network.
“On the other hand they must expand their infrastructure capacity to meet growing demand for air transport. Economists often coin the phrase, there is no such thing as a free lunch, and the fact remains that someone or some entity must pay for the use of the infrastructure.”
And according to ACI statistics that burden is increasingly falling to passengers as opposed to the airlines due to rising passenger related fees across the globe.
With ACI forecasts predicting a 33% growth in passenger volumes between 2015 and 2020, she reiterated previous warnings that for many countries this might mean air transport demand outstripping airport infrastructure.
New Policy Brief
She pointed out that inline with the United Nations’ Sustainable Development Goal 9 (SDG9) to “build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation”, ACI has released a new policy brief on airport ownership, economic regulation and financial performance that it hopes will help attract investment in the industry.
“The Brief emphasises the need for flexibility and consistency in regulatory frameworks that govern airport revenues and capital investments,” said Gittens.
Talking about the types of airport ownership, she added: “Airports no longer operate as homogenous groups or public utilities but exhibit a range of ownership structures ranging from fully government owned and operated to partially or fully privatised.
“They compete with each other to be the gateways to cities, regions and even entire continents. In 2016 there were as many 614 airports with some form of private sector involvement on a large scale.
“There is no one-size fits all when it comes to airport ownership and ACI does not prescribe a specific ownership model, per se. Global, political, social and economic circumstances dictate the appropriate type of ownership and the participation of private capital.”
Traffic boom in Europe
ACI Europe’s director general, Olivier Jankovec, delivered a largely positive presentation about the performance of the continent’s airports, which handled over two billion passengers (+5%) for the first time in 2016, although he did end on a note of caution about the potential negative impact of Brexit.
He noted that breaking the two billion milestone meant that Europe’s airports have handled 300 million more passengers since 2013 years, with the lion’s share of the additional travellers using EU airports, reflecting the recent trend of EU gateways (+6.7% in 2016) outperforming their counterparts in non-EU countries (-0.9% in 2016).
Mid-size airports handing 5-10 million passengers (+10.3%) fared best in 2016, Jankovec revealing that the “low-cost dynamic proved significant” for this group of gateways that is largely made up of secondary hubs or large regional airports.
He told delegates that the outlook for 2017 looks good, even admitting to be being surprised by just how well Europe’s airports have performed in the opening months of the year, but pondered whether performance levels were “at the top of the cycle” due to the upturn in the global economy that had led to a huge increase in airline seat capacity across the continent.
“How long can we continue growing like this?” asked Jankovec. “There is a lot of capacity in the market and airline yields are suffering. Airline costs are also starting to be affected by exchange rates.
“We are also seeing an increase and change in risks, in particular geopolitical risks with our neighbours, and also challenges within Europe, such as Brexit, and new political priorities in other parts of the world. The risk of terrorism also remains.”
Talking about Brexit, he said: “Brexit is crucial for us because it challenges the EU Single Aviation Market, which is based on the freedom to fly and has been a success story that has delivered tremendous connectivity for Europe.
“It is, however, not just about the ability to fly between the UK and the EU as the Single Aviation Market has expanded beyond Europe to other European countries, northern Africa, the Middle East, Canada and the US. As we speak the EU is also in talks with ASEAN countries, Turkey and Qatar, so the stakes are very high.
“Aviation provides nearly nine million jobs in Europe and is responsible for 4.1% of the EU’s GDP. So what’s at stake is our ability to ensure that aviation can continue to be the continent’s engine for economic growth.
“The worst-case scenario is that the UK leaves the EU in two years having failed to agree its exit terms and nobody knows what is going to happen next.”
Future bright in Asia-Pacific
ACI Asia-Pacific’s regional director, Patti Chau, talked about some of the key trends behind the region’s soaring traffic figures in 2016, and revealed that the two dominant players in the Asia-Pacific market, China and India, enjoyed very different growth paths in the past year.
China’s traffic upturn was primarily driven by an in increase in international passenger numbers while India was boosted by domestic growth, which led to most major gateways experiencing double-digit rises in passengers.
Low-cost carriers continued to flourish across the entire region in 2016, said Chau, accounting for 31% of all passengers, and the number of low-cost, long-haul operations is also on the rise.
She also took the opportunity to remind delegates that ACI’s Asia-Pacific region leads the way in terms of airport infrastructure projects, stating that China alone intends to build 136 new airports by 2025 and India plans to double its airport capacity by 2019.
“Most the of new Chinese airports are relatively small facilities being built to improve connectivity to secondary cities, but it does include the opening of Daxing Airport in Beijing in 2019, which once fully open will have the capacity to handle 100 million passengers yearly,” said Chau.
She also noted that the private sector is becoming increasingly involved in the operation and development of airports across Asia-Pacific.
Interactive polling with The World Bank
Next up was The World Bank’s irrespressible lead air transport specialist, Dr Charles Schlumberger, with his annual delegate survey.
The previous day he had chaired the now annual one-day ACI-World Bank Aviation Symposium, which took an in depth look at Public Private Partnerships (PPP) projects from all fronts.
LCC phenomenon and dedicated facilities
The opening morning ended with an interesting and lively debate about ‘Aviation competition dynamics and their impact on airports’ that involved airport CEOs Paul Kehoe (Birmingham), Michael Kerkloh (Munich) and Sheikh Aimen bin Ahmed Al Hosni from Oman Airports Management Company (OAMC).
Talking about the presence of low-cost carriers at German hubs being the new reality, Munich’s Kerkloh said: “We already have Eurowings growing fast and Ryanair is now at Frankfurt and has announced plans to base 20 aircraft there within one year,” he said.
“The LCCs want to operate at hubs because the earning potential is much higher than flying from nowhere to nowhere. Michael O’Leary has stated that he wants Ryanair to become the feeder carrier for Lufthansa. I am not sure if it will be Ryanair, but this will happen in a few years.”
OAMC’s Al Hosni revealed that Oman’s first LCC, SalamAir, and existing budget airlines that include Air Arabia, flydubai and IndiGo will continue to use the existing passenger terminal at Muscat International Airport, which will become a dedicated LCC facility, when the gateway’s new terminal opens later this year.
He said SalamAir had got off to a very good start, enjoying 70% load factors on its routes to Dubai World Central-Al Maktoum in the UAE and Salalah in Oman. LCCs currently account for 27% of the traffic in Muscat.
Always entertaining and pragmatic, Birmingham’s Kehoe warned of the dangers of building a terminal for one particular airline or type of traffic, citing his gateway’s experience of building a terminal for British Airways a decade ago.
Kehoe, who was managing director of London Luton Airport when the complex was built, said: “Had I been here at the time, I would have lauded British Airways who were a major player at the airport.
“We [Birmingham] had a terminal built for them by them, which we called Eurohub, and as a result of this strategy, the management team decided not to pursue any low-cost airlines.
“They did dabble with MyTravelLite, bmibaby and Maersk Air, but British Airways was the God that must be obeyed. Because of that we had no Plan B when, in June 2007, British Airways decided to consolidate all their operations at Heathrow.
“So, we were left with a terminal built for British Airways, operated by British Airways but no British Airways! We also had no LCCs and the challenge faced by the airport was how to get the low-cost carriers in with a cost structure built around British Airways and other legacy carriers.”
Also on the panel was Brussels Airport’s head of aviation marketing, Léon Verhallen, and professor emeritus of aviation at the University of Amsterdam, Jaap de Wit.
Africa, regulation and Brexit
Day one ended with Nick Fadugba, CEO of African Aviation Services providing an overview on ‘Three hurdles to liberalisation in Africa’; a group discussion about ‘New Thinking and Innovation in Regulation’; and an eagerly awaited session titled ‘The Brexit conversation’.
ACI World’s director of economics, Stefano Baronci, chaired the regulation panel, which comprised CEO of the CAA in the UK, Andrew Haines; Heathrow’s chief economist, Jonathan Sandbach; daa’s head of planning, Simon Fagan; and ASUR’s manager of project development for regional airports, David Scholz Moreno.
In answer to the question whether to regulate or not, the CAA’s Haines called the need for regulation “a necessary evil in certain circumstances, but a poor second to effective competition.”
While Baronci noted: “I think one of the fundamental questions for a regulator is how do you ensure that any regulation is proportionate to the needs of the market?”
Probably enough has been said about the potential impact of Brexit to aviation already in this article, so I will just briefly say that the discussion involving Edinburgh Airport CEO, Gordon Dewar; IFC International’s vice president, Kata Cserep; ETRC’s vice president Frank O’Connell; Frontier Economics’ director, Dan Elliott; and industry veteran Rigas Doganis, raised more questions than answers.
Responding to whether she feared air traffic decimation after Brexit, IFC International’s Cserep said: “I think that this is fairly unlikely, and taking the long-term view from an investor or operator perspective, and looking back at the last 20 years, uncertainty and shocks are certainly nothing new.
“While there certainly might be a period of delayed growth or even a decline, and I expect some airports to suffer quite significantly depending on the outcome of all of this, I have to remain relatively optimistic that this is a very resilient market.”
Edinburgh’s Dewar stated: “Aviation touches so many other businesses, tourism, being just one of them, that we really don’t want to mess things up. We need this to be front and foremost in politicians minds when they are at the negotiating table.”
Investing in airports
Day two was all about reaping the economic and social benefits of investing in airports and how flexible business strategies are required to negotiate turbulence and ultimately succeed in an ever evolving industry.
In the session about the true value of airport investment, Michael McGhee, partner at Global Infrastructure Partners, believed that getting the right traffic volume, mix and spread throughout the day and the seasons was key to success as it was a way of getting airport unit costs down to the benefit of the airlines.
He added that to be successful airports also had to have “permission to grow” from the government, invest in operating solutions as well as capital ones, and “deliver the right service, the right facilities at the right price, and predictable costs, to customers”.
While IATA’s chief economist, Brian Pearce, stated that airlines still felt that they weren’t consulted enough on big investment decisions.
The panel also included Airport Authority Hong Kong’s William Lo; CCR USA’s Amit Rikhy; Aeroporti di Roma’s Marco Troncone – who talked about ADR’s €12 billion investment plan for Rome Fiumicino – and Kempegowda International Airport’s Bhaskar Bodapati.
Speaking about overcoming adversity in the final session of the conference, TAV Airport’s director of marketing, Aslihan Cortuk, revealed that although passenger numbers decreased by only 2% at Istanbul Atatürk in 2016, the terrorist attack at the airport and failed political coup massively affected the traffic mix with international O&D numbers declining by around 20%.
As Atatürk’s main source of revenue, this decline hit TAV hard, admitted Cortuk, who noted that Turkish Airlines grounded 36 of its aircraft this winter, which corresponds to about 10% of its fleet capacity.
Experience told her that it would take the market two to two-and-a-half years to recover from last year’s events. TAV’s diversified business interests that include 14 other airports across Europe and the Middle East, a construction arm and other subsidiaries would help navigate the company through the current choppy financial waters, she said.
Former ACI World chairman and CEO of Athens International Airport, Dr Yiannis Paraschis, said he believed that risk was part of the DNA of his airport, which had only been open a few months before 9/11 happened and it has since lived through the collapse of Olympic Airways and the Greek sovereign debt crisis. Each event required a different response, recovery strategy and business plan, he told delegates.
They were joined on the final panel by Airports of Ukraine’s board member, Yevgen Treskunov, and Fitch Ratings’ director of global infrastructure and project finance, Julian Dupont.