For once Brexit wasn’t on the agenda as aviation leaders and financial experts from across the globe met at ACI’s annual Airport Economics & Finance Conference and Exhibition in London this April to discuss everything from booming traffic trends, airport networks, ownership models and growth incentivising regulation to the economic value of slots.
ACI World also took the opportunity to unveil its 2018 Airport Economics Report and preliminary traffic data for 2017, and there was still time for a birthday cake to celebrate the 10th anniversary of the event.
‘Risk, Return and Regulation: Creating Fertile Grounds for Investment’ was the theme of this year’s event, which attracted a healthy crowd of 257 delegates from 144 different companies in 50 countries across the globe.
After announcing that 2017 was the best ever year for the world’s airports with global passenger traffic rising by 6.6%, ACI World director general, Angela Gittens, talked finance and revealed that the 2018 edition of ACI’s Airport Economics Report – based on 2016 data – showed that airport revenues increased by 5.8% to $161.3 billion.
Globally, aeronautical revenues accounted for 56% of airport revenues and non-aeronautical related activities for 39.4%, with retail concessions (29%), car parking (20%), property and retail estate (15%) remaining the biggest sources of non-aviation related income.
However, Gittens noted that while the growth in revenues appears to be strong, on a per passenger basis, revenues have actually declined over the last two years to a world average of below $18.
Indeed, she was quick to point that average global aeronautical revenues of $10.15 per passenger was less than the total cost per passenger of $13.50, which is one of the key reasons why profitability remains elusive for most of the world’s gateways and almost impossible for those handling less than one million passengers per annum.
“The average of $10.15 generated per passenger in 2016 was insufficient to cover the cost of providing airport services which includes the operating costs as well as capital costs necessary for infrastructure development,” said Gittens.
“As a result, airports used margins from non-aeronautical activities to close the gap. This despite the ICAO provision that airport charges should cover the full cost of using the infrastructure and the services provided.
“The legal requirement provided in some states to use non-aeronautical revenue to reduce airport charges, a practice known as Single Till, goes exactly in the opposite direction and disincentivises airports from building for the future.
“For the industry’s sustainability, all parties should be interested in airports’ development of non-aeronautical activities at their facilities as far as practical, and should generate revenues from concessions, rentals and other commercial activities.”
Talking about the importance of airports to the global economy and the need to be able to meet the predicted future demand in traffic, Gittens said: “As the developers and operators of the infrastructure that our communities and countries need to accommodate the growth that we are forecasting, airports must take a long-term perspective to their business and ensure that capacity improvements are made before constraints occur.
“In the dynamic and competitive environment in which airports find themselves in this era, they are forced to set competitive charges, offer incentives and rebates, and invest in quality enhancements.”
“Quite remarkable growth for a mature market” were the words used by ACI Europe’s director general, Olivier Jankovec, to describe 2017’s 8.5% rise in passenger traffic.
The total of 2.23 billion passengers meant that the continent’s gateways have added the equivalent of an extra 100 million passengers yearly for the last five years ensuring that traffic growth has outperformed GDP by a factor of three.
He noted that the financials of Europe’s airports is also improving, although the upturn in fortunes has had more to do with a 12% reduction in costs per passenger since 2008 than revenue growth, which has actually dropped 2% over the same period of time.
Around 46% of Europe’s airports still operate at a loss, however, which he admitted was not great, but better than the 60% reported in 2013. The figure rises to 63% for airports handling less than 2mppa and 71% for those with less than 1mppa.
Jankovec said the outlook for 2018 is “very good”, particularly in terms of the bounce back in traffic across the non-EU nations, but once again noted that many airport CEOs were asking ‘how long will the party last?’, before going on to list a number of potential disrupters that included geo-politics, terrorism, ‘popularism’ and the continued uncertainties over Brexit.
Beyond 2018 he revealed that ACI Europe viewed ‘continued structural changes in the aviation market’ – such as airline consolidation, evolving business models and increased opposition to airport expansion projects – and game-changing ‘technology’ as the key disrupters going forward.
Referring to the former, Jankovec noted that the LCCs – which have driven 99% of the growth at Europe’s 20 busiest airports – continue to evolve, form new alliances and become bigger players in the long-haul market.
He told delegates that the legacy carriers were responding to this threat by embracing the low-cost model, and stated that the Gulf carriers are set to change from becoming disruptors to incumbents.
“The nature and the intensity of competition between airports is changing, and it is changing very rapidly,” remarked Jankovec. “It is no longer just about competing with your neighbouring airport for passengers, but increasingly it is about competing on a pan European basis with all airports across Europe. So, we are looking at a completely different picture in terms of how airport competition influences our members’ businesses going forward.”
Focus on Asia-Pacific
Not surprisingly, ACI Asia-Pacific’s director general, Patti Chau, used her time on the podium to reflect on traffic growth – Asia-Pacific recorded an 8% rise in passenger numbers in 2017 while the Middle East enjoyed a 5.2% upturn – which continues to outstrip the other regions and be driven by the huge growing markets of China and India.
On an individual airport level, ACI Asia-Pacific gateways now account for five of the top 10 busiest passenger airports in the world (Beijing Capital, Dubai International, Tokyo Haneda, Hong Kong and Shanghai Pudong) and six of the top 10 cargo gateways (Hong Kong, Shanghai Pudong, Incheon, Dubai International, Tokyo Narita and Taiwan Taoyuan).
She noted that the LCCs continue to grow strongly and accommodated 31% of all passengers handled across the Asia-Pacific region in 2017 or 1.2 billion passengers.
Chau revealed that the LLC growth had been particularly impressive in South Korea and Japan where in 2017 they handled 30.6% and 22.6% of their respective country’s international traffic compared to 8.2% and 4.8% in 2012. While interestingly, both Cebu Pacific and AirAsiaX reported a 26% rise in cargo volumes in 2017, a market largely ignored by the LCCs.
She reminded delegates that ACI’s Asia-Pacific region is the busiest place on earth for airport development projects with its gateways being responsible 48.5% of $500 billion global spend on upgrading existing airports and 57% of the $267 billion being invested on new airports.
New airports on the horizon, said Chau, included Vietnam’s $16.3 billion Long Thanh International Airport, which is expected to be completed in 2023; New Manila Airport in The Philippines, which has a price-tag of $14 billion and is expected to open in 2025; and China’s $13.8 billion Beijing Daxing International Airport, which is set to be completed next year.
While China has vowed to raise its number of commercial airports from 229 today to 260 by 2020 and 400 by 2035 as part of its ‘Belt and Road’ initiative and India has set aside $2 billion for airport development over the next 15 years as it looks to make air travel affordable for its people and grow air links across the region.
“Keeping up with the demand for new capacity enhancing infrastructure remains a challenge for many airport operators and governments,” noted Chau. “So, it is very pleasing to see that there has been considerable progress in terms of planned projects and the opening of new facilities over the last year.
“New facilities have included the recent openings of Singapore Changi’s Terminal 4, Seoul Incheon’s Terminal 2, and the new passenger terminal in Muscat.”
She added that airport privatisation remains very much on the agenda in a host of countries that include Japan, India, Saudi Arabia, Indonesia, Pakistan, The Philippines and Vietnam.
ICAO regional director, Luis Fonseca de Almeida, noted that aviation is responsible for 62.7 million jobs generating more than $2.7 trillion in economic activity – roughly 3.5% of the world GDP – and in 2017 handled more than half of the world’s 1.3 billion international tourists and 1% of total volume of goods traded internationally, a figure that translates to 35% of world trade by volume.
He said: “In order for aviation to continue to generate and augment such significant benefits we must create a healthy and dynamic cycle of complementary national aviation economic developments.”
Session one of the conference was labelled ‘Pure Finance and Economics’ and involved a lively discussion between a panel of academics, rating agency experts and consultants around investing in airports, changing business models and the risks involved.
Setting the scene, chair, Charles Schlumberger, The World Bank’s lead air transport specialist, said: “Right now, everything in the world is wonderful and she is growing very strongly, but is this sustainable? If it is, we need to invest as we will need to double or triple airport capacity by 2036. If it isn’t, then we need to think over what we do next, and that is the dilemma and the question that airlines and airports face today.”
A quick poll of the audience showed a hugely positive attitude towards the future with 58% believing that the global world economy is in a better shape now than a year ago and 63% agreeing that the previous 12 months had been characterised by “continued strong air transport growth”. The biggest challenges for aviation were considered to be uncertainty about global stability (45%).
Doing their best to provide answers to a range of questions ranging from assessing the risks of expansion to whether airports need such huge, expansive terminals were Cranfield University’s Keith Mason; Dan Wong from Oman’s Modern College of Business and Science; Arthur D Little’s Mathieu Blondel; Alix Partners’ Jonathan Sandbach; and Fitch Ratings’ Shyamali Rajivan.
Immediately after lunch followed a two-part session on ‘Airport Competition Dynamics’, which involved a debate about the growing competition between airports for new air services, chaired by H2B2 Ltd’s Harry Bush, followed by a handful of case studies outlining airport route development success.
Talking in the latter session, Aeroporti di Roma’s head of marketing and business development, Raffaele Pasquni, said: “What do we do to ensure that we keep growing? Working with the airlines is very important as we recognise that connectivity is key. We understand the importance of explaining our decisions to all stakeholders and we have invested in Rome Fiumicino, which is a very different airport today than just a few years ago.”
While Greater Toronto Airport Authority’s director of business intelligence, Mike Brown, told delegates about the operator’s intention to build a Regional Transit Centre at Toronto Pearson as part of its plans to make the gateway North America’s next mega hub.
Arguably, the best was saved to last on Day One with a lively debate about ‘The Economic Value of a Slot’, with chair Andrew Charlton repeating ACI’s call for airports to have more of a say in the way they are allocated and used to ensure a fairer system and make better use of a scare resource – something Norwegian’s head of government and industry relations, John Hanlon, completely disagreed with, although he admitted that the current slot allocation system is far from perfect.
“The lack of capacity and the lack of productive use of existing capacity is the real issue here and that is where the focus should be instead of blaming the system of slot allocation that is probably the best we can have in an imperfect situation,” said Hanlon.
This year’s Gala Dinner was held in the impressive Marylebone headquarters of the Royal Institute of British Architects which provided an opportunity for delegates to relax and unwind after a busy day or continue their discussions long into the night.
An action-packed Day 2 began with a lively debate about ‘Airport Networks’ with representatives from Aena (Jaime Garcia-Legaz Ponce); Fraport Greece (Alexander Zinell); Airports Authority of India (Seshadri Suresh); and ONDA (Zouhair Mohamed El Aoufir) talking about their own respective airport networks and the advantages of a single operator managing multiple gateways. ACI World’s director of economics and programme development, Stefano Baronci, oversaw proceedings.
Next up was a one-on-one with Aeropuertos Argentina 2000 (AA2000) CEO and ACI-LAC president, Martin Eurnekian, who told interviewer, John Strickland, about the challenges and opportunities facing AA2000’s 37 gateways and the 15 others in Corporación América’s global airport network.
The conference ended on a high with an ‘Investors’ Round Table’ and a debate entitled ‘Regulation: A European Perspective’, the latter discussion focusing on what regulators are doing around the world to adapt to the changing market and the impact this has on regulatory approaches.
The Investors’ Round Table covered a host of issues from due diligence on deals, airport valuations, transaction pipelines and relationships with national regulators to the pros and cons of investing in airport networks and fully or partially privatised assets.
On the topic of valuations, GIP partner, Michael McGhee, said: “Which airports would we really sharpen the pencils for? I think there are two things we’d look at in terms of the price we’d be prepared to pay. One is what I call quality. This is a combination of things such as traffic regulation and the ability of the airport to perform in a downtown and against various negative scenarios. We also look at our own ability to add value to the airport. So, if we believe that this is an asset of quality and feel that we can make a difference, we will do all that we can to acquire it, and this inevitably means paying more than other people.”
In answer to a question about the role of national regulators, VINCI Airports’ chief commercial officer, Pierre-Hugues Schmit, stated that stability was vital to the success of any concession and therefore a good relationship with the regulator was imperative.
“What we value from the role of national regulators is stability and creativity. We don’t mind adaptation and negotiation if needs be, but most important of all is to stick to the plan,” said Schmit.
Ferrovial Aeropuertos’ corporate development project director, Jerónimo Olleros, optimistically stated that he felt we could expect to see more airport privatisation projects in the US in the future, although most deals might be for the construction and operation of terminals and other facilities rather than airports themselves.
He reminded the audience that Ferrovial entered the US market for the first time last year as a member of the Great Hall Partners consortium that has been awarded the contract to transform the Great Hall in Denver International Airport’s Jeppesen Terminal.
Prior to the conference, ACI and The World Bank held their now familiar ACI-World Bank Annual Aviation Symposium, which this year turned the spotlight on PPPs and traffic forecasting in the morning before hosting a series of workshops involving group exercises in the afternoon.
The World Bank’s effervescent lead air transport specialist, Charles Schlumberger, was once again the host for the day.