ACI 9th Annual Airport Economics and Finance Conference

So: my job this morning is to give you a quick rundown of the preliminary worldwide 2016 airport traffic results, the 2016 airport key performance indicators and ACI Policy Brief related to airport ownership, economic regulation and financial performance.

Traffic: I think it’s safe to say that economic uncertainty was hanging over the heads of the global economy in 2016. Whether it was caused by Brexit, the American presidential election, the hostilities in Syria, the spectre was there. We also saw the increased rhetoric about protectionist policies in some Western countries – are Open Skies and other liberal air service policies going away? And of course, we experienced terrorist calamities around the globe including direct attacks on our industry, at Istanbul Atatürk Airport (IST) and Brussels Airport (BRU).

Yet, once again we saw aviation adapting and recovering. Other, microeconomic factors acted as catalysts to stimulate demand through lower fare offerings by the airlines: historically low jet fuel prices which helped heighten competition with the low-cost business model. Since the end of the Great Recession in 2009/early2010, global passenger traffic has risen 5.5% on an annualized basis.

That’s continuing according to our preliminary statistics, with international passenger traffic growing at 6.5%, faster than the domestic component of 4.9%, for a combined total of 5.5%. All regions except Africa (-1.9%) posted growth in passenger volumes for the year, ranging from 2.2% in the recessionary Latin America-Caribbean region to over 9.0% in the buoyant Asia-Pacific and Middle East regions. The mature markets of Europe and North America grew 5.0% and 3.9% respectively for 2016 and continued to be well above those regions’ historical growth levels.

Air freight markets experienced a revival in the second half of 2016, with a volume increase of 3.5% for the year as a whole. Despite the long-term uncertainty regarding trade policies, in the near term we see the signs of heightened business confidence with inventory build-ups and increased export orders.

Revenues grew in line with global air transport demand. The slow yet persistent recovery in the Euro area and the United States, combined with the overall resilience of aviation in emerging markets in spite of impending downside risks, translated into gains in airport revenues. Global airport revenues increased 6% reaching almost US$152 billion. On a regional basis, we have the familiar pattern where European airports held the largest share of global airport revenues at 35%, followed by Asia-Pacific at 30% and North America at 19%.

While airports in advanced economies occupy a major share of global revenues, large year-over-year strides in revenues are attributed to emerging markets and developing economies, which also coincides with their high traffic growth. Whereas airports located in advanced economies experienced growth of 4.2% in revenues, airports located in emerging markets and developing economies saw their revenues jump up by 11.1%. Although we saw an absolute change in revenues after factoring in inflation, on a per passenger basis, revenues have changed very little. Growth in revenues coincides with growth in traffic.

We look at the income generated from aeronautical charges in two broad categories: charges related to aircraft and charges related to passengers. Passenger- charges represent a combined 43.4% of all aeronautical revenues. Terminal rentals paid by airlines for space utilization account for almost 10.7% of global aeronautical revenue and are mainly limited to North America.

After adjusting for inflation, the greatest increase in aeronautical revenues came from passenger charges, which increased by 8.6% year-over-year in 2015. Revenues from landing charges, on the other hand, experienced a more modest gain of 3.4%.The analysis of growth of revenues from passenger charges on a per passenger basis and landing charge on a per movement basis reveals very little change in the unit revenues from 2014 to 2015 in real terms with growth of 1.7% and 1.4% respectively.

Non-aeronautical revenue constitutes 40% of airport revenue. Worldwide, retail concessions remain the leading source of non-aeronautical revenue for airports, representing 26% of total non-aeronautical revenue. Car parking revenue and property revenue/rent follow retail concessions as the second- and third-largest sources of revenue at 23% and 16% respectively. These proportions are pretty much what we have seen in recent years.

Airport operators face significant risks in that their time horizon spans over a several decades. Airports incur huge capital outlays on infrastructure in the near term for the provision of benefits to users that extend over the long term. Airline clients, who are users of the infrastructure, have a much shorter time horizon – their own scheduled routes and capacity planning may vary significantly from year to year.  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 network. On the other hand, they must finance and expand their infrastructure capacity to meet growing demand for air transport.

Economists often coin the saying that “there is no such thing as a free lunch.” The fact remains that someone or some entity must pay for the use of the infrastructure.

Except for the United States, where the Passenger Facility Charge (PFC) Program limits the collection of PFC fees to US$4.50 for every enplaned passenger at commercial airports, a majority of airports have put the emphasis on generating revenues by charging passengers as opposed to aircraft operators. In Latin America-Caribbean and the Middle East, an especially high proportion of revenues come from passenger-related charges. 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.  

Looking at the medium term future, we forecast 33% growth in passenger volumes from 2015–2020 which will mean that many countries face a predicament where the surge in air transport demand is outstripping available airport infrastructure.

Established in 2015, the United Nations Sustainable Development Goals (SDGs), call on the international community to set out the plan of action across 17 global targets to ensure prosperity, peace and to eradicate poverty by 2030. SDG 9, “Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation,” is directly pertinent to the airport industry and the economies that it serves around the globe.

Under the umbrella of SDG 9, the ACI Policy Brief aims to provide the state of the industry based on a robust dataset and inventory of the world’s major commercial airports and puts forth several practical policy recommendations to ensure that investment is attracted to the industry. The Brief emphasizes the need for flexibility and consistency in regulatory frameworks that govern airport revenues and capital investments.

Airports no longer operate as a homogeneous group of public utilities but exhibit a range of ownership structures from fully government-owned and operated to partially or fully privatized, that compete with each other to be the gateway to cities, regions and even entire continents. By 2016, there was as many as 614 airports with some form of private sector involvement on a large scale.

There is no “one size fits all” approach to airport ownership and ACI does not prescribe any ownership model per se. Local political, social and economic circumstances dictate the appropriate type of ownership and participation of private capital. But there’s no denying that private investment and entrepreneurship go hand in hand. Over 40% of passenger traffic is handled by airports with private stakeholder involvement. Airports in Europe and Latin America-Caribbean handle the largest proportion of traffic through their respective airports that have private stakes, at 75% and 60% respectively.

Where infrastructure constraints persist and renewal is required, airport companies, private investors and other consortia provide viable solutions to many of our infrastructure problems. Private sector stakeholders bring commercially driven management and expertise, who in turn generate value and innovations for airline customers and passengers, but they also expect a return for the risk in investment. Wherever government financing of airport infrastructure is not an option, well-crafted economic incentives that enables private equity to flow to the airport industry is needed.

At the end of the day, airports are wealth generators for other stakeholders in the air transport value chain and their socio-economic impact and multiplier effect extend to the broader economy. According to the Air Transport Action Group (ATAG), 2014 saw the air transport industry generate an estimated 9.9 million direct jobs worldwide, or US$664.4 billion of the world’s GDP. The airport sector specifically accounted for 5.95 million of those jobs, accounting for US$398.6 billion in GDP.

ACI seeks to work in partnership with governments, regulators and other aviation stakeholders to ensure that we develop a fertile ground for industry investments to achieve the 2030 SDGs.

This year we celebrate the international year of sustainable tourism for development and events such as the Airport Economics & Finance Conference reminds us that aviation should always be considered within a wider context that connects it to other industries, including tourism, as engines for the local economies and communities we serve. It is up to us to stay healthy.