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ECONOMICS Last modified on December 9, 2009

The price of success

Investing nearly $50 billion per annum on upgrading their facilities proves that airports haven’t forgotten about the capacity crunch, writes ACI’s economics director, Andreas Schimm.

Many people could be fogiven for believing that the recession and two dismal years for the aviation industry meant that the ‘capacity crunch’ was no longer a major issue for airports – they couldn’t be more wrong.

There is, of course, no denying that today’s more sombre mood as a result of declining passenger numbers, freight volumes and aircraft movements since mid-2008 has led to congestion dropping off the top of everyone’s agenda. But ACI never lost sight of the potentially crippling capacity problems ahead, which is why even during the height of the economic crisis, we insisted that airports needed to maintain a long-term view and remain confident about the resilience and growth prospects of aviation.

And I am glad to say that after 14 months of global traffic decline, the industry seems to have returned to the growth trajectory.

In September 2009, for instance, monthly global traffic grew for the first time since July 2008 and in November 2009, for the first time since March 2008, all regions registered passenger growth.

So we start the New Year with renewed optimism, and unless the global economy experiences a major setback in the months ahead, traffic can be expected to grow solidly in 2010.

The Middle East, Asia-Pacific and Latin America regions are expected to lead the recovery while the mature economies and markets of North America and Europe struggle to keep pace.

The upward trend seems firm and sustainable, and is backed up by economic data and sentiment. Indeed, depending on the pace and strength of the recovery, 2010 traffic volumes may return to 2007/2008 levels and global passenger numbers are likely to pass the five billion mark in 2011.

If the best scenarios play out, it could mean that the global economic crisis may now turn out to be milder and shorter than many would have thought or feared.

Any rise in traffic will inevitably ensure that the issue of congestion and capacity begins to work its way back up the industry agenda.

ACI’s 2009 Airport Economics Survey reveals that airports continue to invest close to $50 billion per annum on upgrading their facilities.

The latest survey, which was based on the responses of 709 gateways across the globe, discovered that airport capital expenditure (CAPEX) reached $46 billion in 2009 and is expected to stay at that level in 2010. The figures are actually 4.5% up on the $44 billion invested in airport development in 2008.

Europe and North America between them account for two thirds of the investment followed by Asia-Pacific, Latin America and Africa.

The numbers appear to indicate that investment levels at airports have been largely unaffected by the economic crisis, despite the uncertain outlook and difficulties gaining access to credit markets.

This arguably confirms two things – that airports continue to adopt the long-term perspective and that it is difficult to shelve master plans or alter ongoing projects at short notice.

Indeed, pulling the plug on a project already underway might not produce any immediate positive benefits and could eventually prove more damaging to the airport if it means that it lacks the capacity to meet demand when the market picks up again.

In terms of cutting costs to compensate for falling revenues as a result of the global decline in traffic, airports instead appear to have concentrated their efforts on reducing overheads and operating expenses.

Overall, the airport industry will have lost three years of growth due to the financial crisis. Some regions or airports may have even lost four or five years, but despite this significant setback, the long-term future for aviation remains good.

In fact once it becomes clear that the crisis is over, passengers are expected to return in greater numbers than ever before as everyone makes up for lost business trips, postponed holidays and cancelled visits to see family and friends.

Add to that the number of new aircraft due for delivery over the next five to ten years, then robust growth can surely not only be expected but needs to be planned for.

In such circumstances then it is extremely unlikely that the amount of capital spending will go down, with the airport industry expected to continue to spend between $40-$50 billion annually on infrastructure development projects for the foreseeable future.

Capital development projects are, however, not all about new capacity enhancing runways and terminals. Indeed, the bulk of the CAPEX projects taking place today involve improvements to existing facilities and equipment in a bid to enhance their value and lifespan for the benefit of aircraft operators and passengers.

Projects could include anything from the renovation and modernisation of an existing terminal to investment in new security technology (an area where CAPEX will increase after the recent Detroit incident), airside vehicles and baggage handling systems.

These items do not per se increase the capacity of the airport but are necessary investments to improve safety, security, efficiency and service quality.

Another aspect of increasing importance that requires substantial investment is environmental protection and carbon neutrality. Airports worldwide are acting to reduce carbon emissions and this effort often requires new technology and equipment to save energy and reduce emissions.

Continuous capital expenditure of this magnitude naturally results in substantial levels of debt. In fact the long-term debt of the airport industry currently stands at $240 billion and every year the capital costs (depreciation and interest) amount to 30% of gross industry revenues.

As the annual capital expenditure is significantly higher than the capital costs, the debt load is going to rise and so will the cost of capital.

It is a difficult situation and airports are actually bending over backwards to spare the airline industry from these costs as much as possible. In fact, revenues collected from airlines in the form of aircraft related user charges represent a third less than the annual capital cost of airports, or 20% of airport industry gross revenues. While aircraft related revenues proportionally shrink relative to total income, capital costs go up.

Despite all the legitimate confidence in the future of the aviation industry, capital investment in and at airports does entail an element of risk as aviation will always be vulnerable to global events.

Fundamentally, measures to protect the environment (actively restricting air travel, for instance) could have the most radical and lasting consequences for aviation’s ability to grow, a scenario that the industry needs to be wary of over the next ten to twenty years.

Other threats include recessions, terror, war and pandemics, all of which have an adverse impact on passenger traffic, although the effect is usually only temporary. The aviation industry simply has to adapt and deal with them, as they are unlikely to ever go away.

Invariably as one economic risk fades another emerges, and true to form just as we begin to see some light at the end of the tunnel a renewed surge in oil prices, commodities and raw materials threatens to make flying more expensive and drive up building and operational costs.

Another danger is inflation as a result of the massive fiscal injection given to economies around the world. As well as driving prices up it would cause interest rates to rise making borrowing for airports more expensive and once again increase a gateway’s capital costs.

ACI is also concerned about the obstacles regulatory interventions may pose to capital investment at airports and the construction of key new infrastructure.

Any regulatory framework should be designed to incentivise airports to invest to maximise safety, increase efficiency and improve service quality, and airports need to be remunerated for commercial and non-aeronautical initiatives that ultimately fund an airport’s development, reduce capital costs and hold down airport user charges.

The bottom line; airports are capital-intensive investments that are expensive to maintain and expand. The clock is ticking when it comes to building the infrastructure that will avoid a massive shortfall in capacity in the not too distant future.

Airport World 2009 - Issue 6

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