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Joe Bates picks out some of the highlights of the recent ACI Airport Economics & Finance Conference and Exhibition in London.

Paradigm shifts in the airport business’, was the theme of this year’s Airport Economics & Finance Conference and Exhibition in London, which started with keynote addresses from ACI’s leaders and ended with lively debates about crafting concession agreements in foreign lands and route development.

In between there were sessions on economic regulation; the changing dynamics of airport commercial revenues; and slots. We also heard from Malaysia Airports Holdings Berhad (MAHB) CEO, Raja Azmi Raja Nazuddin, and, of course, got to participate in the traditional polling session with The World Bank’s effervescent lead air transport specialist, Dr Charles Schlumberger, which he used to determine that the audience felt cautiously optimistic about the future for aviation.

Over 300 delegates squeezed into the conference hall for the opening session, which involved a global overview from ACI World director general, Angela Gittens, followed by regional perspectives from ACI Europe director general, Olivier Jankovec, and ACI Asia-Pacific regional director, Patti Chau.

Gittens began by revealing that preliminary figures for 2018 show that passenger traffic at the world’s airports increased by 5.9% to an all-time high of 8.8 billion, with only the Middle East (+2.1%) failing to register an upturn of 5% or higher. Africa led the way with a 9.9% rise in numbers followed by Asia-Pacific (+6.6%), Europe (+6.2%), Latin America-Caribbean (5.3%) and North America (5.1%).

According to Gittens, contributors to Africa’s growth have been the continued recovery of the tourism sector in North Africa (Egypt, Morocco, Tunisia) due to growing demand from European source markets and a more socio-political stable environment; the recovery of the Nigerian economy, mainly based on oil exports; and the expansion of Ethiopian Airlines within Africa and across the globe.

Global cargo volumes also increased in 2018, rising by 3.3%, with Africa (11.5%) once again the outstanding performer, followed by Latin America-Caribbean (+7.5%), North America (+5%), Asia-Pacific (+2.4%), Europe (2%) and the Middle East (0.3%).

ACI’s long-term passenger forecast expects global traffic to rise by 4.1% per annum to 2040 with demand for international travel outstripping demand for domestic travel.

And with global demand showing no sign of slowing down, Gittens remarked that coping with growth remains one of the key challenges facing airports and the aviation industry. She mused: “As we navigate through geo-political tensions and uncertainty in global trade, the core issue for our industry remains how do we respond to this demand at a local, national and international level as infrastructure limits pose challenges to accommodating tomorrow’s, and in many cases, today’s travellers?”

Airports continue to face financial challenges, too, as despite a healthy 6.2% rise in total airport revenues to $172 billion in 2017, most rely on non-aeronautical related income to keep them in the black as aeronautical revenue fails to cover their capital and operating costs.

Indeed, at a global level, total costs to the airport per passenger was found to be $13.69, which is significantly more than the global aeronautical revenues per passenger of $9.95.

This, she said, illustrates the importance to airports of non-aeronautical revenues – currently standing at $7.08 per passenger – and showed why airports need to be mindful of current and future disrupters to key revenue sources such as retail, car parking, F&B and rental car concessions.

“Airports very much rely on non-aeronautical revenues to strengthen their financial viability,” she commented.

Talking about the financial pressures on airports, Gittens told the audience: “The volume of traffic is the major contributing factor to whether an airport is profitable or not. Because airports are faced with high fixed costs, like other infrastructure-intensive businesses, airports that serve fewer than one million passengers per year have a negative return on invested capital of 2.6%.

“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 the smaller loss-making airports in their respective networks. On the other hand, they must finance and expand their infrastructure capacity to meet growing demand for air transport.

“As such, there is a built-in dilemma whether to maintain competitive aeronautical charges in the short, and medium-term, while depleting assets or implement a level of charges that will not only cover the current costs but generate sufficient funds for infrastructure development in the long-run.”


European perspective

ACI Europe’s Jankovec hailed the region’s solid annual passenger growth of 5%+ over the last five years, but admitted that continually rising demand – a record 2.34 billion travellers passed through the continent’s gateways in 2018 – does bring a lot of pressure on existing facilities and staff.

He noted that passenger traffic in Europe has soared by 36% since 2013 and listed a host of airports which have experienced significant growth since. The “fast and the furious” as he put it, includes Athens (+92.8%), Keflavik (+205%), Madrid-Barajas (45.7%) and Tbilisi (+165%).

“With better traffic comes better financials,” said Jankovec, who revealed that Europe’s airports currently enjoy a Return on Invested Capital (ROIC) of +7.9%, which although good, meant that the continent’s airports “underperformed compared to other parts of the world, especially in the emerging markets”.

He also warned that Europe’s airports cannot keep cutting costs, which have been reduced by 17% since 2013 despite rising traffic, “as there was only so much you can press [squeeze] the lemon”.

“If you keep decreasing your costs, especially when traffic is growing fast, you risk compromising your ability to provide quality for customers,” said Jankovec.

The estimated €15 billion cost of installing required new hold baggage security equipment by 2022, and the threat of a rise in interest rates, are also a concern to the financial health of the region’s airports, said Jankovec, particularly as 49% of them are already loss making.

However, like Gittens, he remains optimistic about the future, if airports are able to overcome airline opposition to adding new infrastructure and continue to evolve as businesses to meet new market dynamics and challenges such as changing airline business models and evolving passenger demands.

Placing a renewed focus on sustainability, innovation, quality and customer satisfaction should also be a priority for airports going forward and ensure their “licence to grow”, said Jankovec.


Spotlight on Asia-Pacific

ACI Asia-Pacific’s Chau chose to focus on another year of success for the region’s airports in terms of traffic growth and new infrastructure coming onboard.

The huge markets of China and India remain the driving force behind the 6.6% rise in passenger numbers across Asia-Pacific, said Chau, while soaring numbers at the world’s busiest international gateway, Dubai International Airport (DXB), helped ensure a 2.1% upturn in traffic in the Middle East in 2018.

She revealed that despite a declining growth rate, China accounted for 1.26 billion passengers (+10.2%) and India for 340 million passengers (+25.6%) in 2018, and that the region’s low-cost carriers now account for half the world’s LCC aircraft orders and a rapidly rising share of the market in South Korea and China.

“Fortunately, global economic uncertainties didn’t dampen the rapid expansion of airports in our region,” said Chau, citing new terminals in Phuket, Mactan-Cebu and Muscat as exciting new additions and India’s planned new Jewar and Navi Mumbai airports as examples of “projects in the pipeline”.

Indeed, Asia-Pacific and the Middle East will account for 40.6% and 13.6% respectively of the global investment in new airport infrastructure between 2017 and 2045. The figures equate to $314 billion in Asia-Pacific and $105 billion in the Middle East and include a combined total of over $140bn on new airports.

And the new infrastructure will be needed as China is forecast to account for nearly 20% of the global passenger market by 2040 and Asia-Pacific and Middle Eastern nations are expected to make up eight of the top 10 fastest growing countries for passenger traffic (handling over 50mppa) during this time period.

She noted that the trend to privatise airports in the Asia-Pacific region “continues to dominate discussions”, especially for those situated in the major markets such as Japan and India, and stressed that it was crucial that the right regulatory framework was in place to ensure that all current and future concessions are a success.


Polls, panel discussions and interviews

Next up was the traditional Polling Session, which once again showed a hugely positive attitude towards the future, although this year the majority of the audience (69%) felt that the airport transport industry was “growing, but slowing” whereas in 2018, 63% predicted “continued strong growth”.

Touching on BREXIT and whether the outcome will affect aviation growth, 60% of the audience felt that it would, although half believe it would only be temporary and 15% believed that BREXIT will never happen!

The first debate of the event centred on ‘Economic regulation in the era of airline consolidation and airport competition’, and featured Mumbai Chhatrapati Shivaji International Airport CEO, Rajeev Jain; ANA Aeroportos de Portugal director, Thierry Ligonnière; ANAC Brazil’s manager for air services operations, Roberto Costa; and the European Commission’s head of unit, Christophe Dussart.

The morning ended with a one-on-one interview with Malaysia Airports’ Nazuddin, with KPI AMS’ director for strategy and privatisation, Waleed Youssef, asking the questions.

Nazuddin talked about the challenges of operating and developing 39 airports in Malaysia, changing regulations and global assets such as MAHB’s 100%-owned Sabiha Gökcen International Airport in Istanbul, which handled 34 million passengers in 2018.

The ‘changing dynamics of airport revenues’ was on the agenda after lunch with a number of different industry players expressing opinions on everything from the impact of e-commerce and digitalisation to potential new revenue streams.

Panel chair, Elias Liolios, Hermes Airport’s senior manager for commercial and business development, set the scene by revealing that the global travel retail market is contracting and passenger spend per head across all channels (airport shops, airlines, ferries and other outlets) is decreasing, dropping by a significant 13.5% in the Middle East, 11.5% in the Americas, and 8% in Europe in 2017.

Contributing factors to the decline, he noted, included better retail experiences downtown than at the airport and a decline in impulse buyers.

However, on the plus side, he told delegates that 47% of passengers still considered airport duty free shopping to be part of the travel experience and 45% were motivated by exclusive offers, which he believes is a key area for airports to exploit.

“People do care about exclusivity with research showing that passengers are increasingly looking for something that is unique, whether it’s the product or the experience,” said Liolios.

Still on the topic of the airport experience, he reminded the audience of ACI’s ASQ research that shows that a 1% increase in passenger satisfaction levels on average generates a 1.5% rise in non-aeronautical revenues.

AOE founder and chief executive, Kian Gould, who noted that 93% of millennials research online before they decide to purchase anything, said: “People no longer go blindly into a store and hope to find what they want to find there.

“They do their research in advance, especially the high spending shopper who wants to know beforehand what products are available and whether they are price competitive.

“The point of buying at airports has always been the price advantage. One of the most downloaded apps in China is a price comparison one that tells users the price of luxury and duty free items at airports. So, now the technology is really catching up with this and airports need to be ready for the pre-planned purchases much more than they have been in the past.”

The panel also included Dufry’s CEO for Europe, Africa and strategy, Eugenio Andrades; Magwif’s chief business development officer, Andrew Perrier; and Riga International Airport board member, Arturs Saveljevs.


The final session of the day was a good one, the Port Authority of New York and New Jersey’s chief aviation strategy officer, Patty Clark, revealing that the authority has spent millions of dollars on airfield enhancements and still lost two slots!

Clark, passionately addressing the audience in the session entitled ‘Roadmaps to manage scare capacity – the economics and politics of slots’, said: “I have no say in the capacity of my airports. The three commercial airports around Manhattan [JFK, Newark-Liberty and LaGuardia] are all limited in some way, and so I have the most anti-competitive airport system in the country.

“I’ve spent $200 million in capacity enhancement programmes. I’ve done high-speed. I’ve done multi-exit taxiways. I’ve widened a runway for the largest aircraft. I’ve straightened the runway for the A380, and what did I gain? I lost two slots,” said an exasperated Clark.

“How can I not have a say in that? I should have a say in that. And if you look at how those decisions were made, it’s not transparent. If 1,200 slots are allocated, I expect 1,200 scheduled operations, but I don’t get that. I get what the Government Accountability Office calls babysitting. So, I am not even getting the full value of my assets.”

The rest of the panel comprising Eric Herbane, managing director of COHOR; Gunter Heinrich, Fraport’s head of flight schedule management, traffic and terminal management; Denis Sparas, case handler at the European Commission, DG COMP; and Andrew Charlton, managing director of Aviation Advocacy, all empathised with her predicament and support ACI’s campaign for airports to have more say on slot allocation.

This year’s Global Infrastructure Partners (GIP) sponsored Gala Dinner was held at London’s stylish Smith & Wollensky restaurant, which provided a unique 1950s style venue for delegates to enjoy after a busy day.

A short, but eventful Day 2, comprised the investment focused debate called ‘Risky business – crafting the concession agreement in foreign lands’ and ‘Competing for passengers – route development and incentives’.

In the former, panel chair, ACI World’s economic director, Stefano Baronci, noted that 51% of the 100 busiest passenger airports in the world had private sector participation, although he was quick to point out that the organisation doesn’t take a position in terms of airport ownership.

He revealed that 85% of airport privatisations utilise an open bid process, the average number of bidders submitting a financial offer is four, and two-thirds of privatisations involve the participation of at least one international firm. In terms of contract lengths, a typical trade sale/lease contract is for 64 years and a BOT concession for an average of 35 years.

Asked about what types of risk and constraints would Fitch Ratings pay most attention to when assessing an airport transaction, the company’s global infrastructure and project finance director, Shyamali Rajivan, stated passenger volumes; the ability to raise prices (aeronautical and non aeronautical); the CAPEX requirements; and how well the investor(s) is protected in the debt structure.

“Consistency, transparency and predictability tend to be much better than significant positive decisions followed by significant negative decisions,” she said.

In response to discussions on the importance of regulation, fellow panellist, the ICF’s vice president, airport advisory, Simon Morris, stated that ideally economic regulation should be embodied in concession agreements as it provides potential investors with a clearer picture of what lies ahead and allows them to value their bid accordingly.

Ferrovial’s commercial director, Gabriel de la Rica, stated that from an investor perspective he felt that a dual-till regime was probably better for all stakeholders as it encouraged greater efficiency and economic benefits for the concessionaire, which in turn, can be passed on to the airlines, passengers and local communities.

Different route development strategies adopted by the world’s airports came under the microscope in the final session of the conference with Athens CEO, Yiannis Paraschis; Moscow Domodedovo’s deputy airport director and director for external relations and business development, Daniel Burkard; Dubai Airports’ senior vice president of communications and reputation, Anita Mehra; and TEMES marketing director, Marina Papatsoni, in the spotlight.

Prior to the conference, ACI and The World Bank held their now customary ACI-World Bank Annual Aviation Symposium, hosted by Charles Schlumberger, which covered private capital investment and the changing world in the morning before hosting a series of workshops involving group exercises in the afternoon.

Next year’s Airport Economics & Finance Conference will be held in Kuala Lumpur, Malaysia, for the first time and Malaysia Airports’ Nazuddin promised delegates that it would be an event to remember.

See you all in Kuala Lumpur in March 2020 when, hopefully, the weather will be a little warmer than in London!


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