All change?

Lufthansa Consulting’s Catrin Drawer and Andreas Jahnke consider what the impact of COVID-19 is likely to be on the investment appeal of airports across the globe.

Does COVID-19 mean that airports have finally lost their mantra of being a safe, long-term investment opportunity for investors?

The short answer is ‘no’, because airport investments have never been a “sure thing” with a guarantee of return. In fact, most of the world’s airports aren’t profitable and never have been.

Indeed, the latest economic data by ACI World shows that around a quarter of all airports worldwide fail to generate enough money to cover their operating and capital costs. Admittedly, usually the smaller and secondary airports, but even some hubs do not always manage to generate profits.

And analyses by air transport specialist, Andy Ricover, presented at GAD 2019 shows that there is no correlation between profitability and an airport’s ownership structure.

The fairy tale of the fabulous wealth of private airport investors is simply not true. It has been nourished by spectacular deals, billions of dollars in profits after a few years of holding, and exaggerated valuations based on market-driven (but not always economically justified) EBITDA multiples.

It is also true that too much inexperienced money – trusting in the supposedly crisis-proof and constantly growing airport investment – has driven prices up, and that trend is now almost certainly over.

The COVID-19 crisis has suddenly shown that an entire industry can be economically destroyed in days. Such a crisis was foreseeable, but hardly any airport has mitigated the risks in terms of processes or, more importantly, with its cost and capital structure – neither private airports, nor those in government ownership.

It is simply not enough to replace public money with private capital from pension funds to generate better returns. Passengers and airlines have the choice of which airport they want to depart from and where they want to fly to. Only a few airports are lucky enough to be located in very attractive destinations with large catchment areas. And even then, they are subject to competition from other airports (for example, London, New York or Moscow).

Even if an airport has developed well over the past few decades, at some point it will reach its limits of growth and then be exposed to governmental decision-making processes, environmental influences and the possible escape of passengers from the crowds.

So, what does it take to manage an airport profitably? Some airports are managed as if it were enough to build a runway and a terminal. The airlines would bring the passengers and with them come the revenues from handling.

Admittedly, these aeronautical revenues still account for 55% of the revenues globally, according to ACI. However, our analysis based on the ACI figures, also show that the costs of airports on average exceed aeronautical revenues – aeronautical revenues per aircraft movement (ATM), for example, only cover about 75% of the operating costs. The possibilities to increase the fees for aircraft and passenger handling
are limited due to government regulation and cost reduction pressure from airlines.

Without additional income from shops, restaurants, parking etc, an airport cannot survive. These non-aeronautical revenues, however, demand prerequisites: attractive shopping offers, a pleasant atmosphere, short waiting times and good processes, a large number of flight connections and attractive transfer options.

Such an airport ecosystem of airlines, shops, restaurants, hotels, suppliers, service companies does not develop on its own; it has usually grown over decades. It requires active promotion, partnership contracts, joint decisions, involvement of politicians and tourism promoters, marketing at home and abroad.

The system partnership between the airport and its suppliers and service providers also ensures distribution of sales, costs and thus risks, and is therefore a key element in cushioning risks and ensuring cost efficiency.

Finally, planning and foresight are the ingredients that ensure that an airport is never too large or too small to serve the number of passengers comfortably and efficiently.

The coronavirus crisis has destroyed the sensitive airport ecosystems, like a fire destroys the rainforest ecosystem. Ground handlers are insolvent and consequently thousands of jobs have been lost. Cleaning companies, caterers, restaurateurs and shop owners, security companies, ticket agencies and check-in companies are bankrupt or threatened by bankruptcy.

And even the airlines are threatened by their collapse and have reacted with flight schedule reductions. Hardly anyone expects air travel demand to even come close to pre-crisis levels before 2023.

And just as 9/11 changed the processes at airports with regard to security checks forever, the COVID-19 crisis will also leave its mark on airports in the long-term. More protection measures, social distancing and health checks will require investments in new technologies, massively reducing passenger throughput and overall efficiency.

But how do you actually rebuild an ecosystem, especially in a short time? How do you balance the need to provide services for airlines and passengers on the one hand, and the losses to be expected during the transition phase (maybe until 2023) on the other?

And how do you manage to convince airlines to fly to your own airport? Why should anyone fly to a city’s secondary airport now if the hub has the route network and the capacity? How can a regional airport prevail against a neighbouring airport?

What role will politicians play, and how many airports are they planning to subsidise over the next few years? Why not open one regional airport and mothball three or close them permanently?

It has never been more important for potential airport investors to choose the right airport. The one with the best ‘recovery’ chances and the strongest growth opportunities. There will be a choice in the coming years.

Airports that have already been privatised belong de facto to the debtors. Usually, airport takeovers are financed by a small amount of equity and a larger amount of debt. Without income, as is currently the case, these debts can no longer be serviced.

The equity investors therefore have to forget dividends and eventually even have to inject additional capital – a nightmare for pension or sovereign funds. That is why they are now calling for the state to help.

But why should a government use taxpayers’ money to take on the financial risk that the private investor deliberately took? Therefore, some investors will inevitably be looking for the exit.

Airports owned by governments are still (partially) public property, on the other hand, and currently accumulating massive debts that will have to be paid back at some point. This narrows the financial scope for other, far more urgent investments, such digital infrastructure, schools, business stimulation.

People want to travel. However, their own job, their children’s education, etc are much more important. So why should a state or a municipality own shares in an airport that might be loss-making?

It is therefore to be expected that the number of airport sales offers will increase. The money to buy is still there, as is the need for ‘safe’ investments. We expect that the sometimes completely exaggerated valuations for airports or their concessions will fall to a crisis-adjusted, adequate level.

Investors have learned what has actually always been clear: airport investments are not a risk-free asset class. The risk must be priced in and actively managed. Passive investors, who relied on existing airport management for lack of their own expertise, have learned their lesson.

And those investors who listen to good advice, select the right airports and actively manage them throughout the lifecycle, will be successful.