Keynote from the ACI 8th Annual Airport Economics and Finance Conference by Angela Gittens, Director General, ACI World (London, England)

So: my job this morning is to help frame the discussions over the next two days by giving you a quick rundown of the preliminary worldwide 2015 airport traffic results and the summary findings of the 2015 ACI Airport Economics Report, which analyzes data from the 2014 financial year for 818 airports. The report, along with ACI’s 2015 Airport Key Performance Indicators, was just released yesterday and you will have received a preview edition of the report on your chair.

The traffic headline is that in 2015 passenger growth was strong across all regions except for Africa, while air freight growth was weak across all regions except for the Middle East. The economics headline is that overall the airport industry in 2014 was healthy, with mature markets bouncing back and emerging markets remaining resilient in the face of weaknesses in their countries’ economies.
According to our preliminary statistics, global passenger traffic grew by 6.1% in 2015, with equally strong growth in both international and domestic passenger traffic—+6.2% for both. Because transit pax is included in the total and it was in decline, it drags down the total growth at the decimal level.

This represents the highest growth rate in passenger traffic since 2010, when passenger traffic grew by +6.6%. As you can see here, the numbers range from a drop of 0.1% in Africa to an increase of 11.3% in the Middle East.

Air freight markets were weaker compared to the passenger figures, with a modest 2.3% growth in total freight volumes for the year, largely due to subdued growth in emerging markets and developing economies, along with a more modest recovery in advanced economies. This growth is comprised of +2.5% in international freight and +1.8% in domestic freight.

Reflecting the weak spots in the emerging markets, we saw business confidence go into limbo in 2015. As we’ve seen before, this resulted in a build-up of inventories and a reduction in orders by air. Downside risks will continue to persist in 2016. While the prospect of future global economic growth is cause for optimism, there are two forces at play that continue to move in opposite directions. As key regional economies such as North America get back on course, a slowdown in emerging markets dampens the potential for significant advances in the global air freight market.

Due to an economic slowdown in several of the most important emerging markets such as Russia and Brazil, this category did not generate the traffic growth of recent years. While we do not know exactly when emerging markets will return to strong growth, we know that they will and, when they do, traffic growth will outpace even strong economic growth. The reason is market demographics— these are countries with large populations with large land masses or multiple islands, such as Indonesia, with a growing middle class with a greater propensity to travel, and travel by air.

And as these markets deliver airport investment, air traffic control modernization and liberalization of air markets, that propensity gets realized and traffic soars. Right now, the US has 25 more airline trips per capita than India. It wouldn’t take much of a change in that ratio to produce millions more trips in India. That country needs more airport investment and ATC modernization. China and many African countries have relatively closed air service markets. The impact of removing the constraints will have a big impact.

Let’s move from traffic to economics. Industry income as a whole in 2014 grew by 8.2% over the previous year to US$142 billion. On a regional basis, European airports held the largest share of global airport revenues at 36%. This was followed by Asia-Pacific at 29% and North America at 19%.We saw the highest revenue growth in Latin America-Caribbean and Africa, followed by the Middle East.

Aeronautical revenues and non-aeronautical revenues, which are the main components of a typical airport’s income streams, experienced sound growth rates in 2014 as compared to the previous year.

We look at the income generated from aeronautical charges in two broad categories: charges related to aircraft and charges related to passengers. Passenger- and aircraft-related charges represent a combined 66% of all aeronautical revenues. Terminal rentals paid by airlines for space utilization account for almost 11% of global aeronautical revenue and are mainly limited to North America.

After adjusting for inflation, the greatest increase in aeronautical revenues came from passenger and landing charges.

A word here about all the heat that’s being generated in certain quarters lately regarding airport charges. We have analyzed the trend of charges compared to overall airline operating expenses using data provided by ICAO and the reality is a long-term declining trend: airport charges to airlines are a lower percentage of airline costs than they were two decades ago.

Continuing with facts, ACI’s data also show that worldwide passenger-related revenues constitute approximately two-thirds of total airport revenue, with aircraft-related revenues making up the remaining third. In recent years this proportion of passenger-related revenues has continued to increase, and with airports demonstrating disciplined management of their costs, we can anticipate that airlines worldwide will contribute an even lower share of overall airport revenues than they did in the past.

As we discussed at our December Economic Regulation conference in India, airports continue to have every incentive to increase passenger throughput, providing regulators with the opportunity to shift to light-handed and facilitated regulation. Introducing these efficiencies will provide more capital and enable growth.

Worldwide, retail concessions remain the leading source of non-aeronautical revenue for airports. Car parking revenue and property revenue/rent follow retail concessions as the second- and third-largest sources of revenue.

And finally, let’s look at airport bottom lines. Given that airports are asset-intensive businesses, they require large minimum investments to accommodate a single landing. Thus, there is a critical mass that must be achieved before an airport can start recovering its large operating costs and infrastructure investments. Their capital-intensive nature is the main reason that the majority of smaller airports are loss-making—they don’t generate enough revenue to cover their capital and operating costs.

Return on invested capital is a robust measure of profitability because it not only considers the effective management of total revenues and total costs for a calendar year, but incorporates invested capital. The global return on airports’ invested capital was 6.3% in 2014. However, there are differences between airports in advanced economies and airports located in emerging markets.

Furthermore, as mentioned, size is a major contributing factor to whether an airport is profitable or not. The sweet spot for return on invested capital is for airports that serve between 5 and 15 million passengers per year. Airports that serve fewer than one million passengers per year have a negative return on invested capital—in other words, this represents an actual economic loss.

In closing I would note that an important thread that runs through our Economics Report is the economic benefits that airports bring to their communities. These benefits extend beyond the direct benefits of job creation at the airport, to the benefits provided by suppliers and to the multiplier effects of connectivity for tourism and trade.