Industry outlook – past, present and future
ACI World’s vice president for economics, Patrick Lucas, considers the impact COVID has had on the finances of the world’s airports and the economic challenges ahead.
Every couple of years ACI World, and its industry partners under the umbrella of the Air Transport Action Group (ATAG), release the Aviation: Benefits Beyond Borders report, a publication that quantifies aviation’s socio-economic impact.
Typically, the team of economists tasked with analysing aviation’s multiplier divide this ecosystem into four interrelated parts that measure the direct, indirect, induced and catalytic impacts on economies.
In better times, the direct impact from airlines, airports, air navigation service providers and civil aerospace was comparable to the GDP of Indonesia or the Netherlands. Thus, with as much as 57% of tourist arrivals coming by air in pre-pandemic times, it is not surprising to observe aviation’s positive impact and its interconnection to a vast array of industries and the broader economy in terms of wealth and job creation. After all, at its core, aviation connects people, commerce and cultures.
In terms of job creation that is ‘directly’ related to the aviation sector, jobs with airport operators and on the actual airport site make up the largest share. Historically speaking, this has always been in the realm of 55%-60%. Beyond the employees working for airport operators or airlines, many of these jobs are in duty free, retail, car rental, maintenance and other government related services.
Of all the sectors within this ecosystem, the largest impact was felt by those working on the airport site during the COVID-19 crisis.
With travel coming to a halt in 2020 due to government-imposed lockdowns and travel restrictions aimed at curbing the spread of the virus, the ecosystem experienced the multiplier effect in complete reverse, devastating not only the direct aviation operators but also booking agents, hotels, museums, cultural events and so on.
After considering the interconnections across multiple sectors, this ripple effect and resultant catalytic impact from the collapse in passenger traffic saw employment drop by 50% in 2021 as compared to 2019. A loss of $1.7 trillion aviation supported economic activity is also estimated in 2021 relative to the pre-pandemic scenario.
As engines of socio-economic growth, airports are indispensable to the markets and communities they serve in support of a global recovery.
Fig.1 – The socio-economic multiplier of aviation and airport infrastructure (pre COVID-19)
Source: Aviation: Benefits beyond Borders (2020), Air Transport Action Group (ATAG); 2018 data.
The impact of the pandemic on airport traffic
The crisis removed almost six billion passengers by the end of 2020 compared to the projected baseline (pre-COVID-19 forecast for 2020), representing a decline of 62% of global passenger traffic.
Despite the resumption of air travel in 2021, many international markets remained suppressed with declines of 60% compared to the months of September and October in 2019.
Yet, there is an appetite for travel. Domestic markets experienced an ongoing recovery with a decrease of 30% compared to 2019 over the same period. In some markets a form of vaccine optimism is present and what has been coined as vacation deprivation in the media and other spheres.
As final numbers come in for 2021, the industry is expecting to be in the realm of 45% of 2019 passenger numbers. There is no doubt that the current restrictions in many Asian markets pose a major challenge for international connectivity and a speedy recovery.
On the other hand, there are some important regional differences across different route corridors. While intra-Asia traffic remains flat in terms of traffic numbers, the North America–Latin American route corridor has shown great strength surpassing pre-COVID levels. This a testament to the willingness to travel and the pent-up demand that exists for air transport which has been artificially suppressed due to restrictions.
The Intra-European market strengthened in the second half of 2021 thanks to some harmonised health protocols that helped kickstart aviation. The North Atlantic corridor has also seen a surge with the easing of travel restrictions.
Fig.2 – A tale of two markets – domestic versus international markets
Source: ACI World.
The Omicron variant and outlook for recovery
ACI World’s forecasts over the short-term, which feed into the medium term (five years), continue to hinge on the uptake and effectiveness of vaccines to a significant proportion of populations in many of the world’s major aviation markets.
Other key determinants, from a recovery standpoint, relate to the containment of variant viruses as well as a continued easing of travel restrictions. All of these factors also influence consumer confidence and propensity to travel in the near-term.
There is no denying the fact that the Omicron variant of COVID-19 and the additional restrictive measures imposed on international travel will diminish the prospects of a speedy recovery in the near-term. While the safety of populations and the travelling public is paramount, there is no conclusive evidence that shows that border closures to international travel reduces COVID-19 cases.
Indeed, the World Health Organization (WHO) advice for international traffic in relation to the SARS-CoV-2 Omicron variant states that: “Blanket travel bans will not prevent the international spread, and they place a heavy burden on lives and livelihoods”.
If anything, risk mitigating measures that relate to vaccine protocols for travel and testing have the greatest impact without having to shut down international travel or impose quarantine requirements.
Based on the epidemiological situation, the ongoing spread of variants has more to do with heterogeneous populations (i.e. unvaccinated populations within jurisdictions and across jurisdictions). In particular, a wedge between rich and poor countries exists in both vaccine deployment and uptake, which exacerbates the mutation and spread of variants.
In a more subdued scenario, overall passenger traffic (domestic and international) is expected to get back to 2019 levels by the end of 2024, with international traffic potentially lagging to 2025.
The uncertainty range for 2022 shows that passenger traffic could be in the realm of 60% of 2019 levels. Again, because there is pent-up demand, the recovery curve could steepen the slope bringing us back to 2019 levels sooner.
This follows an assumption of eased travel restrictions in the first half of 2022 on some key international markets with significant traffic weighting.
Fig.3 – Outlook for passenger traffic recovery
Source: ACI World.
The airport business – challenging the conventional wisdom
Like other businesses in the aviation ecosystem, airports are businesses in their own right. However, even with significant cost-cutting exercises throughout the pandemic, the financial stress endured by airport operators due to sustained passenger traffic losses could have longer-term consequences in terms of slowing down future infrastructure development.
Fundamentally, airports will remain infrastructure-intensive businesses for the foreseeable future – this translates into unavoidable high fixed costs that must be financed.
On top of this challenge, there is also no denying the fact that financial support from governments to airports due to COVID-19 has been relatively limited across multiple jurisdictions compared to air carriers.
The current crisis represents an unprecedented challenge for the industry’s financial viability as airports have had to refinance and negotiate terms with creditors. Debt levels continue to balloon. As airports remain an immovable asset with limited or no alternative uses, the heightened debt levels and the changing risk profiles of the industry has meant that financing costs are increasing.
Fig.4 – The airport business amidst the pandemic
Source: ACI World; *Based on industry sources subject to variance across jurisdictions and historical elasticities between operating expenditures (OPEX) and airport traffic levels.
Airport charges – turning the page on the regulatory relics of the past
The industry is also at an important crossroads in how we think about the economic regulation of airports and airport charges. That is, if airports had price flexibility based on the competitive landscape many of them face, charges that are levied on airlines would adjust to certain realities and market conditions.
Yet, it is important to remind critics that regulated airport charges across many jurisdictions in their current state are inversely linked to traffic levels. In other words, this means that when traffic rises, charges fall (and vice versa).
Even though airport charges represent a small proportion of airline costs and have a minimal impact on passengers (see Fig. 5), the revenue generated from aeronautical charges represent as much as 55% of all airport revenues (including passenger and aircraft related charges). And 24% of all airport revenues come from charges that are levied on airlines.
Fig. 5 – Airport charges are small % of total air fare (2019 USD)
Source: ACI World Policy Brief – Modernizing Global Policy Frameworks on Airport Charges: Ensuring the Efficient Use of Infrastructure for the Benefit of the Traveling Public with InterVISTAS
Analysis of Sabre MIDT Airfare Data, Ancillary Revenue Data from IdeaWorks, and ACI Economics Data.
Even though airline-related revenues rank third after non-aeronautical revenues and passenger related charges in terms of airport revenues source, they are still vital for the financial viability of airports. Revenues from airport charges are the lifeblood of airports needed to recover costs and to finance infrastructure for the benefit of the travelling public.
Fig. 6 – Global airport revenues by source (2019)
Source: ACI World Airport Economics Survey.
There is full recognition that both airlines and airports have suffered greatly from this crisis and the resulting financial shortfall. Both need each other to thrive along with many other actors in the ecosystem. Thus, developing models of airport charges that allow better risk sharing between airports and airlines will be an important consideration going forward.
Such transactions and commercial agreements are more apt at dealing with market realities and ensuring that infrastructure is used efficiently for the benefit of the travelling public.
Exceeding expectations – non-aeronautical revenues in the new normal
The travelling public’s expectations have changed as a result of the pandemic. ACI World’s latest Airport Service Quality (ASQ) 2021 Global Traveller Survey – COVID-19: Evolution of Sentiment and Behaviors, summarises some of the key managerial implications.
It states: “The redesign of the passenger journey due to new behaviours and expectations may actually also open new opportunities to improve overall levels of satisfaction, and even possibilities to increase non-aeronautical revenues. For example, the need for social distancing measures and creation of touchless and frictionless experiences have increased passenger interest in personalised, decentralised, and premium experiences throughout the journey.”
Earlier quantitative studies have shown that an increase of 1% in global passenger satisfaction, as defined in the global ASQ survey, generates on average a growth of non-aeronautical revenue of 1.5%.
Put differently, for a given unit increase in passenger satisfaction there is a more than proportional increase in revenues. In essence, happier passengers tend to spend more.
Fig. 7 – The link between passenger satisfaction and revenue generation
Source: ACI World Report – Does passenger satisfaction increase airport non-aeronautical revenue?
Altered business models
Even before the pandemic, conventional business models that have relied on brick-and-mortar shops faced fierce competition from the digital disruptors – airport non-aeronautical revenues on a per passenger basis were showing an incremental decline in some mature markets.
The pervasive access to online retail and e-commerce platforms, and increased retail competition outside the purview of the airport, has limited the growth prospects for airports’ non-aeronautical revenues.
The rise of the ‘sharing economy’ and transportation network providers has also meant that airport managers had to rethink their conventional non-aeronautical revenue streams. Optimal use of real estate around the airport has also made managers rethink how they could diversify revenue streams amidst the pandemic.
Airports continue to innovate based on both competitive pressure but also the need to adapt to the new normal. Many of them focus on leveraging a unique and seamless passenger journey by embracing digital technologies to their advantage.
They have adopted their own ecommerce platforms to allow for customised experiences – since 70% of non-aeronautical revenues come from passengers, a huge focus has been on creating an unmatched customer experience for passengers both physically at the airport and digitally customisable throughout the journey.
Charting a path for a sustainable future
Looking beyond the short and medium-term, and past the noise and fury, it is important to remind the detractors that the longer-term fundamentals still apply.
We need to be cognisant of the demography of aviation – many markets have seen aviation open up over the last decades and the propensity to travel has risen quickly with rises in income. And as we get back to 2019 levels, there will be airport capacity constraints in many major markets.
Airport infrastructure is key to the continued development of air transport, which supports millions of jobs and provides social and economic development for the global communities that airports serve.
More broadly, aviation plays an important role in supporting the United Nations’ Sustainable Development Goals (SDGs).
Established in 2015, the SDGs call on the international community to pledge a plan of action based on 17 global targets that aim to ensure prosperity, peace and eradicate poverty by 2030. Airports, more specifically, are important contributors to Goals 8, 9, and 13 that concern work and economic growth, industry, innovation and infrastructure.
Climate change is a global challenge requiring an urgent global response given the Intergovernmental Panel on Climate Change’s (IPCC) recent call to reach net zero carbon emissions by 2050.
The airport industry has also charted its own path to decarbonise by 2050 as stated in the ACI Long Term Carbon Goal study. ACI’s long-term carbon goal relates to the carbon emissions under the
direct control of airport operators and will be a crucial component of the aviation industry’s contribution towards this global effort.
Airports will be important partners in the sustainable transition of aviation as a whole and have also joined a sector-wide 2050 goal of net zero emissions along with airlines, aircraft and engine manufacturers as well as the air traffic management industry. Achieving this will take collaboration across the aviation ecosystem and support from governments.
Overall, the recovery of air transport is indispensable to the recovery of the global economy, to the reconnecting of the world and the return of many jobs lost because of the COVID-19 crisis. Airports are an integral part of the aviation ecosystem, and therefore require timely and appropriate policy tools that will facilitate the sustainable recovery of the entire industry.