SPOTLIGHT ON THE ECONOMIC CHALLENGES FACING THE UK’S REGIONAL AIRPORTS
With conservative predictions forecasting a doubling of air traffic over the next two decades, Britain’s aviation sector is rightly bracing itself for a surge in demand, write Daniel Bailey and John Barter.
Even after Heathrow’s long-awaited third runway comes on stream, other UK airports are set to face considerable extra pressure on existing infrastructure and ground support equipment.
For airport owners and operators, as well as the supply chain of service companies they rely on, the challenge is stark.
All things being equal (and let’s assume a managed Brexit process for this purpose), extra footfall should mean improved profits. But the extra strain will mean the real issue is not whether airports can maintain margins, but whether their infrastructure can cope.
According to the latest CAA data, in Q2 2018, there were 611,856 commercial flights in the UK which together transported nearly 79 million passengers, representing a 0.3% uptick on the same quarter in the previous year.
Yet against that backdrop, there has been a steady stream of closures among Britain’s smaller, regional airports. Bristol Filton, Coventry, Plymouth, Penzance and Manston aren’t just a sorry roll-call of casualties – they’re also examples of the acute strain that is being placed on smaller airports and the constant cost, not just of expansion, but survival.
The thinning of their numbers means Britain’s remaining regional airports now face a uniquely paradoxical challenge: simultaneously rising passenger numbers and increased competition.
Driving on through diversification
The more successful smaller players tend to be those that have diversified and invested. Airports like Humberside, which moved into helicopters, have remained relevant. Meanwhile Bournemouth, Bristol and Cardiff have invested heavily in both infrastructure and Ground Support Equipment (GSE), shoring up both their capacity and resilience.
Crucially the way they funded this capital expenditure – typically through leasing and similar forms of asset finance – kept down overheads and protected stretched margins.
Just a few airports have the luxury of the considrable financial backing enjoyed by the Stobart Group owned and operated Southend Airport. So for many smaller players, aviation finance can be an effective way to bridge the funding gap between the reserves they have and the full cost of a necessary investment in infrastructure and equipment.
Such investment allows airports to adapt their business models to evolving demand and keep pace with passengers’ ever higher expectations; and the wide variety of finance options now available gives even greater flexibility to the borrower.
For example, leasing can be used to acquire everything from improved airside security to ground service equipment. Specialist lenders offer products using the equipment as the primary security. The products include fixed-term leases, operating leases or traditional Hire Purchase – and all have features which can be tailored to the equipment.
That extra flexibility can prove especially useful when faced with sudden and unexpected capital expenditure requirements, such as those imposed by new emissions tests and the need to replace fleets of airside vehicles with newer, low emission versions.
With some airports anticipating that their existing airside vehicles – from tugs to Fod cleaners – would have a lifespan of 15 years, the realisation that some of this equipment could need replacing much sooner will have come as a shock.
Buying such equipment outright and en masse is likely to be impractical. However, using leasing or finance to spread the cost over an agreed period will relieve pressure on capital expenditure, and free up working capital and existing bank facilities for other projects.
While the challenges facing Britain’s network of regional and smaller airports are often universal – stretched budgets and increasing demands on ageing infrastructure – each will have individual needs and aspirations in its business plan.
Few will be able to even contemplate investment on the scale of that seen at Southend, which spent years as a shadow of its 1960s heyday until its owners, Stobart Group, invested millions in a new runway, new terminal and a railway station.
But nevertheless the need to invest, both to expand capacity and shore up infrastructure against rising passenger numbers, is a common challenge for the industry.
Against that backdrop, the sheer variety and sophistication of finance options make them crucial to both airports and ground service equipment (GSE) providers.
Coupled with the right advice, the right finance can smooth out financial peaks and troughs and assist in accurate forward budgeting; it should be a major part of any ambitious airport’s financial toolbox.
Variety is the spice of flight
Historically, GSE finance has mainly been provided by commercial banks. But with the growth of specialist asset finance firms recognising the need for diversification and capacity strains, increasing numbers of specialist lenders have entered the fray in recent years.
Leasing and its close cousin Hire Purchase are the most suitable finance options for smaller airports. Leasing can be used to finance almost everything, both airside and landside, from electrical buses to high safety steps.
For smaller airports looking to expand, leasing their GSE makes sense as it allows them to spread the cost of big capital investments, without dipping into cash reserves. It’s often seen as the best way to achieve the delicate balance of simultaneously maintaining growth, safety and profit.
One added benefit of leasing GSE is that you can associate servicing and maintenance contracts with the equipment and match them to the finance term. You don’t have to pay additional fees for maintenance (both repair and dealing with wear and tear) of the equipment, as the company you’re leasing from is responsible for repairing or fixing it.
Another advantage is that you are faced with fewer up-front expenses and are instead able to align the cost to the period in which the equipment will be used, eventually replacing the unit when it becomes economic to do so.
For example, if a small airport requires new GSE, it may not always be feasible to purchase it outright. For example, a set of high safety steps can cost £200,000. Such a sum may seem relatively little for such an important piece of equipment, especially when you’re not buying one every day.
But for many airport operators, liquidity is a constant issue and so by adopting the right finance strategy, it can spread the cost over a series of manageable monthly payments, protecting its cashflow and retaining the flexibility to absorb additional or unexpected cost shocks.
Whatever the equipment, whatever the value, aviation finance or leasing can enable an ambitious airport to invest in vital GSE even when it lacks the funds to buy the equipment outright.
And used correctly, they can also play a crucial part in a sophisticated finance strategy that protects an airport’s cash reserves but still allows it to make the capital investment it needs to survive and thrive.
• Daniel Bailey is managing director of the specialist lender Arkle Finance and John Barter is managing director of the equipment finance specialists Oak Lease