The trauma dealt to airports by the pandemic has brought forward a long-needed reform of the airport charging system, argues a new report from Airports Council International.
Tony Harrington reports
Covid’s impact on airlines has been well aired. When borders were closed, and seemingly endless travel restrictions frustrated remaining opportunities to fly, planes were parked, capacity was cut, networks were narrowed, and jobs were jettisoned, as carriers were forced to ground themselves amidst the biggest crisis in the century-plus history of commercial aviation.
Airports, too, were suddenly starved of flights and passengers, as well as the vast volumes of visitors who welcomed them or bade travellers farewell and spent incremental millions in terminals and car parks. Also lost were commercial tenancy revenues, when businesses from cafes to car rental companies suspended, scaled back, or even ceased their operations to reflect their loss of custom. Unlike airlines, however, airports’ experiences did not attract anywhere near the same level of attention.
Now, a global report by Airports Council International (ACI) documents the damage done to airports by the pandemic, the measures many took to save or lure back air services, and the critical new challenges they face in trying to anticipate the scale and speed of recovery, while meeting the costs of vital capital projects and growing requirements to decarbonise – without any certainty regarding income.
But while the cost of Covid is central to the story, it is not the primary objective of the report. “This report is about airport charges,” says ACI, which represents 717 members, operating 1,950 airports in 185 countries.
Titled ‘The State of Play – Competition, Regulation and Airport Charges’, the 118-page document uses the mega-shock of Covid as a springboard into a deeper discussion it has long pursued about airport fees, pricing regulation and infrastructure financing, as aviation continues to evolve well beyond the staid business models of airlines and airports dating back to the pre-jet era, when global policies on airport charging were established.
The ACI document is likely to provoke red-hot debate between airports, airlines and regulators, with IATA already voicing serious concerns about actual or potential increases in airport charges at a time when many carriers are still on their bellies, and some might never get airborne again. Outrage has been well deployed.
But airports want the debate. They say the time has finally arrived for reform of the rules that govern what they can charge, and how they can fund what is expected of them. ACI argues that current charging and cost recovery structures for airports, based as they are on guidelines drafted in the 1940s by ICAO, are seriously outdated. It says they should move towards market-based arrangements, which better suit the dynamics of air transport today.
“For decades,” says the report, “government policy toward airport charges has been based on ICAO’s cost-based charges policies, developed in the 1940s and 1950s, and formally stated almost 50 years ago. Airports today operate in a very different environment than was the case then.”
ACI says that close inspection of airport charges will show that only a small percentage are reflected in air fares, and that far from misusing their monopoly positions to gouge airlines, as is both feared and alleged, airports actually face countervailing pressure from airlines, which have the ability to swiftly move their assets to where they’ll make most money. Indeed, many are not afraid to do just that – particularly the new genre of low-cost carriers, which not only shift capacity regularly and at scale to exploit seasonal peaks, but also to exploit destination-related perks.
Beyond the Covid crisis, says ACI, air traffic will rebound quickly, and by 2040 passenger journeys will number double those recorded in 2019, immediately before the pandemic. The council highlights the impact of Covid-caused losses on the access which airports have to funds for infrastructure maintenance, upgrades, and construction to accommodate the projected regrowth and expansion of air travel as populations continue to increase, middle classes grow in emerging economies, low-cost carriers continue to drive demand for flying and, in the short term, travellers continue to regain the confidence to get back into planes.
ACI warns that without sufficient access to capital for infrastructure development, airports will not be able to handle the significant traffic growth predicted by 2040, citing estimates of up to 5.1 billion “potentially foregone passengers” due to “unmitigated capacity constraints” and highlighting the economic consequences of that reduction in travellers.
It says survey responses from regulated airports indicated that the majority “are not allowed to recover losses incurred during Covid-19, when traffic returns to higher levels”, and quantifies traffic declines, region by region.
“The impact on passenger traffic at airports has been severe and unprecedented across all parts of the globe,” says the report. “Passenger traffic declined 51% in 2021 relative to 2019 (a loss of 4.7 billion passengers), with the worst-impacted regions being Middle East (62%), Asia-Pacific (59%) and Europe (56%). North America experienced the smallest decline (34%) largely due to recovery in the US domestic market.”
Overall, international passenger traffic fell 72%, almost double the 37% drop in global domestic traffic; again, the latter was largely supported by the significant rebound in US internal flying.
“The outlook for 2022 is for some improvement,” continues ACI, “with global passenger traffic expected to be reduced by 28% compared to 2019, with the weakest recoveries expected in Asia-Pacific (down 42%), the Middle East (down 33% of 2019), Europe (down 28%) and Africa (down 25%). North American traffic is expected to recover the most (down 9%) due to recovery in the US domestic market.”
But while passenger traffic is forecast to increase, airport earnings are not, at least in the short term, for just as airlines have discounted their fares to attract passengers back, ACI says most airports have also discounted their charges to attract airlines back.
“Two-thirds of airports (68%) have implemented some form of discount or incentive to their airport charges specifically to address the Covid-19 impacts and recovery,” says the report. With the exception of North America, most airports in each region have introduced targeted programmes, with 53% freezing charges in the short term; 25% implementing blanket reductions of their fees; and 14%, mainly in Asia-Pacific and the Middle East, introducing long-term fee freezes until traffic volumes get back to pre-Covid levels.
The ACI research highlights three key concerns among airports as a result of the pandemic – their inability to adjust prices “rapidly and in a flexible manner”; inability to progress necessary future investments due to inadequate revenues; and inability to attract new financing, either through debt or equity.
“Since 2009, across the sample of airports, average capital expenditure at airports has increased as airports transform to become more passenger-centric, adjust to new aircraft and business models, and expand capacity to meet demand. This future CAPEX is generally related to alleviating congestion issues, adjusting to more environmentally conscious operations, and now adapting to future health measures.”
The report says consumer expectations of air travel have continued to evolve, not just in the air but also on the ground. “Consumer preferences have increased for easier movement through airport processes, the range and choices of airport amenities (including food, retail, personal/professional service), digital connectivity (e.g., WiFi services, mobile phone-based check in, border/security/health processes) and new ground transportation options. This, in turn, requires more ambitious development efforts to increase efficient infrastructure that is fit for purpose and offers consumers both value for money and a pleasurable travel experience.”
ACI forecasts that global capital expenditure by airports between 2021 and 2040 will reach US$2.4 trillion. This will comprise 70% in expansion or upgrading of existing airport facilities and 30% in new airport projects, including costs associated with achieving carbon neutrality – which, based on historic costs, the council estimates will account for 12% of the total.
More than half of the overall projected expenditure (54%) is attributed to airports in the Asia-Pacific region, totalling $1.3 trillion, $578 billion of which will be needed for new projects. It is also forecast that APAC will generate 8.9 billion passenger journeys by 2040.
European airports are expected to spend $427 billion (18% of the global total) on capital projects by 2040, including $77 billion on greenfield projects, to support 4.4 billion passenger journeys; next come US gateways ($400 billion, 17% of the total, $134 million on greenfield projects, 3.1 billion passenger journeys); then the Middle East ($151 billion, 6%, $54 billion greenfield, 1.2 billion journeys); Latin America ($94 billion, 4%, $41 billion greenfield, 1.6 billion journeys); and finally Africa ($32 billion, 1%, $13 billion greenfield, 457 million journeys).
“Attracting US$2.4 trillion in investment will be challenging, especially as the investment needs to be ‘lumpy’ – large amounts required at a time – and will deliver returns over a long period of time,” says the ACI report. “Airports need to be able to set airport charges with a commercial focus, ensuring that they have market-based mechanisms that allow the airport operators to ensure that efficient and needed investments are made. Without this, it will be near-impossible to attract the necessary investment, or the returns will be too prohibitive. It is essential that the return on invested capital in the airport business is commensurate with the cost of its debt and equity instruments, which the evidence clearly indicates have increased post-Covid-19.”
The report also warns: “The impact of the Covid-19 pandemic on airport traffic has caused investors to re-evaluate the risk assessment of airports. There remains considerable uncertainty around the short-term and long-term impacts of the pandemic on airport businesses.”
Pre-pandemic, airport congestion was already critical, with slot constraints imposed at 353 major airports in summer 2021 (compared to 215 in 2003).
“When the aviation industry recovers from the Covid-19 pandemic, it will return to capacity constraints and bottlenecks at many airports,” says the report. “There are serious economic and social implications of capacity shortfalls and associated congestion.
“Based on the relationship between passenger traffic and socio-economic outcomes, for every 1 million foregone passengers due to capacity constraints in 2040, the global air transport industry would support 120,500 fewer jobs and US$346 million less in GDP.
“Estimates of potentially foregone passengers due to unmitigated capacity constraints through airport capital investment suggest that up to 5.1 billion passengers may not be realised by 2040.”
The report argues: “The traditional view that airports are natural monopolies that will inevitably exercise market power no longer holds. Most airports compete in multiple dimensions. Such competition can and does constrain the pricing conduct of airports.
“The cost-based approach considers only one side of the market. It ignores the demand side and the need for airport pricing policies to provide the right incentives and signals regarding capacity utilisation, community responsibility regarding noise and environmental impact, traffic growth to support aviation dependent economic sectors and social connectivity, and non-aeronautical revenue development.”
ACI concludes: “Exceptional cases aside, commercial agreements between airports and airlines are the best way forward.”