ACI World’s economics director, Patrick Lucas, considers the financial challenges facing airports and the policy levers needed to support aviation’s recovery amidst the pandemic.
Airports are an integral part of the aviation ecosystem, but they currently face a crisis that they are not financially set-up to experience: a sudden and prolonged collapse in traffic levels.
During business as usual times (or pre-COVID-19), the multiplier effect and positive externalities that airports generate in terms of employment and contribution to local economies is significant.
Commerce, tourism, and an intricate supply chain of large, medium and small businesses thrive and depend on passenger and cargo traffic within the aviation ecosystem and beyond.
The travel restrictions introduced as a result of the pandemic and ongoing quarantine measures — instead of harmonised screening and testing of passengers as a viable alternative — have also meant that the economic multiplier is now in reverse resulting in severe income deterioration and devastating job loss.
As engines of socio-economic growth, airports are indispensable to the markets and communities they serve in support of a global recovery.
Bare bones economics
Airports are also capital-intensive investments. Irrespective of airport ownership model, the large capital outlay and the complexities involved in planning, getting approvals, and constructing new infrastructure means that there is level of risk associated with the long-time horizon of these investments.
That is, capital investments are lumpy over the short-term whereas cash flows and an expected return on invested capital are only perceived over the longer term.
As traffic levels increase over time, average total fixed costs potentially decrease to some minimum efficient scale. Thus, economies of scale are achieved with traffic expansion, which also has an impact on charges for users of infrastructure. The opposite is also true when you have traffic declines. This is the bare bones economics of airports.
Put differently, certain levels of traffic in tandem with the associated necessary unit revenues — aircraft and passenger related charges and revenues from commercial activities — are fundamental in the recovery of costs and to generate a return on invested capital commensurate to this risk.
The high fixed costs, the estimated decline of 60% in global traffic and resultant drastic shortfall in revenues of $104 billion (figures in US Dollars) epitomises the inherent risks that airports face amidst the pandemic.
Policy levers to support the recovery
Airports are an integral to national and global economies. They are essential for trade, business, tourism, and economic growth. The Policy Brief: Path to the airport industry recovery—Restoring a sustainable economic equilibrium puts forward policy and assistance proposals that governments can adopt to both accelerate the global industry restart and ensure a sustained long-term recovery. Several policy recommendations are summarised below.
– Pursuing measures to stimulate air transport demand
- Alleviate travel restrictions — Because of aviation’s direct, indirect, induced and catalytic impact on tourism and employment, governments are urged to alleviate travel restrictions as soon as recommended by national and international health authorities.
- Remove taxes on air transport – The return of passengers should be incentivised and stimulated via the removal of passenger-based taxes on air transport.
- Boosting consumer confidence – Ensuring a healthy passenger experience that boosts consumer confidence and minimises the risk of disease transmission is fundamental to the recovery of air transport.
– Supporting the financial viability of the industry
- Ensuring liquidity in the aviation ecosystem – governments are urged to help airports mitigate defaults on outstanding debt and potential losses to creditors due to the lockdown.
- Concession fee waivers and extensions to concession contracts – Airport rents and concession fees applicable to airport operators should be waived in the form of a one-time measure for a defined period of time, without the requirement for airports to pay back
the waived amounts later.
Similarly, extending the duration of the existing concession contracts for private airport operators to ensure that the remaining time is commensurate with the airports’ ability to recover the costs of capital investments represents another important relief measure.
- Relaxing restrictions on commerce – Regulators should pursue temporary relaxation of limits and allowances for selected duty-free products, to stimulate sales and, consequently, help airports generate revenues from their concessionaires. Duty-free shopping upon arrival should also be enabled where not available together with the appropriate tax legislation and reform.
- Rising costs for users of infrastructure – Financing costs continue to rise in the airport industry due to exogenous shock brought on by the pandemic. Regulators are invited to consider that the rise in the cost of capital will impact users and end-users of infrastructure.
- Market-based solutions to benefit the travelling public – governments are urged to reconsider their models of economic regulation and move towards fostering pricing strategies and commercial agreements as part of the airport-airline relationship which best serve the needs of the travelling public.
Aviation and the Sustainable Development Goals (SDGs)
Supporting aviation also means 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.
Aviation indeed plays a role in 15 of the 17 UN SDGs. Airports, more specifically, have been major supporters of Goals 8, 9, 10 and 13 concerning work and economic growth, infrastructure and building sustainable cities and communities.
With the industry grounded and airports bereft of activity at the moment, there is a risk that the contribution to achieving these goals will be set back.
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 crisis.
Airports are an integral part of the aviation ecosystem, and therefore require a timely and appropriate policy support that will facilitate the recovery of the entire industry.