On 29 November 2012, Angela Gittens, Director General, Airports Council International (ACI), delivered the ninth annual RAeS Montreal Branch Assad Kotaite lecture at the International Civil Aviation Organization (ICAO) headquarters in Montreal. A report on the lecture. [caption id="attachment_7811" align="alignnone" width="376"] Angela Gittens, Director General, ACI World. (ACI World)[/caption] In delivering ‘The Economics of Airports’, Director General Gittens began by tracing the evolution of airports from origins as early infrastructure and highlighting the dramatic growth and distribution of passenger traffic while striking a cautionary note regarding the more recent slowdown in air cargo traffic.
Dynamic airport marketsIn early times, airports were ‘administered rather than managed’ to serve State-owned airlines. Increased market agility began in the United States (US) with airline liberalisation in 1978. This led to the development of airports from simply necessary aviation infrastructure into outward-facing, business-oriented service providers. Airports now chase airlines for their business and mega-hubs compete to become gateways to entire continents. Together with new concepts in airline and operations management impacting how airports are run, changes in the volume and distribution of traffic are having profound effects on the industry.
Traffic growth and patterns[caption id="attachment_7812" align="alignnone" width="376"] The airline industry is forecast to carry 10 billion passengers in 2030.[/caption] In 2011, worldwide traffic reached 5.4bn passengers. During the first half of 2012, traffic managed to grow by a respectable 5% in spite of global uncertainty. Regionally, strong passenger traffic growth continues in the Middle East, Latin America, Africa and Asia, while the mature markets of North America and Western Europe growth are somewhat stalled. The industry is forecast to cross the 10bn passenger mark by 2030. So, as we have seen over the past 70 years, despite cyclical fluctuations, air transportation is resilient and continues to grow. Whereas world passenger traffic is still growing at relatively healthy levels, the slowdown in air cargo traffic is cause for some concern, especially since in 2008 it was a leading indicator of the economic downturn to come. In 2011 cargo traffic growth was practically flat and during the first six months of 2012, cargo traffic was down by 0.6%. Traffic patterns are changing for airlines, airports, communities and States. One key aspect shaping the industry in the 21st century is the emerging world order, reflected in the top airport rankings. Ten years ago, Beijing was the 33rd busiest passenger airport in the world. Today it is the second largest and on track to surpass Atlanta, the perennial number one, by 2015. In Indonesia, Jakarta Soekarno-Hatta Airport went from the 85th position in 2001 to the 12th in 2012. Eight of the world’s 20 largest airports are now in emerging markets. Hong Kong has unseated Memphis as the largest cargo airport in the world and four of the ten largest cargo airports are now in emerging markets. Impressive developments are evident in other parts of the world as well. In 2011, Latin America was the world’s fastest growing region both in terms of passengers (8.5%) and cargo (7.6%) and remains relatively unscathed by the financial crisis affecting most other regions of the world. The biggest surprise comes from Sub-Saharan Africa. For years one of the quietest aviation markets in the world, the region suddenly woke up and in 2011 it was the second highest growing passenger market in the world and well ahead of the Middle East and Asia-Pacific.
Evolving airport privatisationUntil the mid-1980s almost all international airports were owned and operated by governments, often seen as facilities for the benefit of State-run airlines and often reflected in the underlying economics of their relationship. Privatisation of the British Airports Authority (BAA) in 1986 marked a watershed in airport development, demonstrating that airports could generate value through airport retailing and other associated commercial activities. The global airport sector has since become more commercialised. Indeed, through economic cycles, airports tend to create more value than their airline customers. Private sector involvement in airports has been encouraged either through outright ownership, long-term leases or commercial management contracts. Airport ownership and the need for airports to market themselves efficiently, together with airline liberalisation, growth and congestion and investment needs, are closely related. Both the need and the ability of airports to operate efficiently and market themselves effectively are driven by several factors set to increase pressures. The impetus towards commercialisation and privatisation is driven by the need for private capital, itself in turn driven by growing financial demands for improved and expanded infrastructure. Increasingly efficient and competitive airlines, pressed to grow, seek airports as business partners rather than just capacity suppliers. This requires airports to be more competent in satisfying airline-defined needs and flexible as market conditions evolve. These trends put collective stress on the traditional airport decision-making chain stretching into public institutions at both local and central levels. Links with the State have often hindered airport developments and national interests. This has encouraged relaxation of organisational ties between States and airports. Over time, several successful airport ownership and governance models emerged. Many States found that, under the right economic conditions, they can successfully turn to the private sector for financing and operating airport infrastructure. According to ACI, there are currently 450 airports with some form of private sector participation with Europe leading and the United Kingdom (UK) in particular having the highest proportion worldwide. The second most active region in terms of airport privatisation is Latin America and the Caribbean. Here, the model is one in which the operator virtually owns the airport for the duration of a concession contract, manages and develops it and generates a return on its investment. In the Asia-Pacific region, airports are predominantly run by government entities, albeit often corporatised. However, it is worth pointing out that Asia, and China in particular, has the highest number of airport companies under partial private ownership through stock market listings, such as Beijing Capital Airport and Shanghai. Currently, 25 airport companies are listed on stock exchanges worldwide, of which five are Chinese, three are Mexican and two are from Southeast Asia, with the balance being in Australasia and Europe. Globalisation has allowed Canadian teacher pension funds to own airports in Australia, Australian companies to own airports in the UK, and Indian and South African companies to bid for airports in Brazil.
Economic and social impactAirports have considerable economic and social impact, often extending far beyond their immediate surroundings. ACI studies conclude that airports support, on average, 4,700 direct, indirect and induced jobs per million passengers. According to the Air Transport Action Group (ATAG), of the 5.6 million direct jobs generated by the air transport industry worldwide in 2010, at least 63% (3.5 million) were on-airport jobs. Clearly, airports contribute substantially to the economy of areas they serve. It is important that airports and stakeholders align their interests to ensure sustainable environmental, social and economic development of air transport.
Challenges and constraints[caption id="attachment_7813" align="alignnone" width="380"] Runways are large immovable assets that have not alternative use.[/caption] At their most basic, airports facilitate bringing together airlines and their potential customers. However, airport management and planning are not straightforward tasks. Airports as investment opportunities are unique in several respects. Substantial capital sums must be invested in large immovable assets that have no alternative use, to satisfy demands over which airport authorities have little direct control. It is airlines and not airports that decide where and how the demand for air travel or air freight will be met. The challenge is to match airport capacity and demand while achieving and maintaining airport profitability and an adequate level of customer satisfaction. Airports should compete effectively but a recent study identified three main changes constraining competition: greater airline freedom to optimise their networks by opening and closing hubs and bases, greater choice for passengers, and more active responses from other airports to provide needed infrastructure.
Capacity demands and environmental impactWhile the need to invest in additional capacity is seen as a universal demand on airports, environmental issues are more localised. Planning laws and noise regulations can be as much a source of competitive advantage or disadvantage for an airport as the airport location itself. Airport infrastructure is usually added in large increments, requiring sizeable investments and planning permission which often sparks high-level debate. In some cases, the issue is so politically sensitive that incumbent governments fear for their future. In Europe, opposition is often rooted in environmental arguments, whereas in Asia, where most airports remain under government control, economic concerns are paramount. Capacity limits can be overcome but only at the expense of service standards. One of the most acute examples of this process is Heathrow’s Terminal 5, taking 23 years from inception to opening. Adding new runway capacity is frequently even more contentious and often difficult to provide in a timely way. For example, it took five years for the details of the fifth runway at Amsterdam’s Schiphol Airport to be agreed and for construction to begin. The only new runway built since WW2 was that of London City Airport in 1987. Public concerns over the seemingly inexorable rise in air traffic and resulting need for more capacity are gaining prominence. Environmental regulation of airports is emerging as an important factor affecting growth. The chief differentiating factor is the regulation of noise. Noise is a local issue and its impact is governed by the proximity of the airport to concentrations of population as well as the level of air traffic movements at the airport. In turn, there is wide variation in the noise restrictions imposed upon airports as environmental standards and regulations currently differ among States and communities. The impact of technical advances should not be underestimated as in many cases it has led to the progressive reduction of the noise footprint around certain airports. However, this has not prevented additional localised noise regulations from being imposed. Indeed, noise regulations can impact airport operations and in turn airport economics in three ways: restricting capacity expansion, curbing existing operations and increasing costs.
Airport revenue[caption id="attachment_7814" align="alignnone" width="333"] Airport 'cities' such as Singapore Changhai airport offer enormous potential.[/caption] Airport revenue is categorised as either aeronautical (those revenues arising directly from the operation and landing of aircraft, passengers and freight) or non-aeronautical (those arising from commercial activities in terminal buildings and on airport land). During downturns, diversified airport revenues cushion the impact of lower passenger and freight volumes and safeguard operating profits. Non-aeronautical revenues critically determine the financial viability of an airport, as they tend to generate higher profit margins than aeronautical activities, the latter frequently representing a zero sum game or producing a deficit. Non-aeronautical revenues can significantly reduce airport operating costs. Profits from non-aeronautical revenues are reinvested in airport infrastructure, reducing capital needs and overall costs. Robust profits can improve credit ratings leading to lower borrowing costs. Profits driven by non-aeronautical activities also make airports attractive to private investors when governments are ill-equipped to commercialise the airport or to provide the necessary funds for capital projects that in turn ultimately lead to higher efficiencies and better service. Exploration of non-aeronautical development at airports is only beginning. If the view of airports as basic aeronautical infrastructure providers is shifted to one incorporating multimodal platforms and airport cities, the potential is enormous and not just for the world’s largest airports. Globally, non-aeronautical revenue stands at 47%, although there are marked differences in both portion and sources reflecting regional differences in ownership models and socio-economic profiles. Retail and food and beverage revenues are commercial activities growing faster as a percentage of total airport revenue, a trend expected to continue. Aeronautical revenues represent the most contentious aspect of the business and yet it is probably one of the least understood parts of the industry. Aeronautical revenues comprise charges levied on aircraft (mainly per landing and for parking) and charges levied on passengers (paid to the airport but usually included in tickets for convenience). Charging on a per passenger basis rather than on an aircraft-related basis is a continuing trend in the industry. The crisis it seems has further accelerated the trend as airlines seek lower fixed operating cost. For the first time, passenger-based aeronautical revenues have exceeded 60% of total aeronautical revenue. In 2010 every region generated the majority of its aeronautical revenues from passenger charges with the exception of North America. North America is a special case, as 36% of aeronautical revenues are generated through terminal rental fees and the passenger facility charge (PFC) is capped. In Asia-Pacific the proportion of aeronautical revenues generated through passenger charges continues to rise while, in Europe, the proportion is now two thirds. It is important to highlight the shift away from aircraft to passenger-based charging. Passenger related charges do not become part of airline costs in terms of their balance sheets, as it is only a pass-through item, so the actual operating cost of carriers is reduced by shifting charges to passengers. By applying this charging scheme, airports share the risk of decreasing traffic with the carriers as revenues are more dependent on the actual number of passengers departing from the airport and less on the number of aircraft movements or aircraft size. The shift in this revenue ratio is also a result of the growth in the market share of low-cost carriers whose business model reduces aircraft-related charges to a minimum and transfers responsibility for charges to the passenger. This model puts pressure on the overall charges structure of an airport where aircraft-related charges are usually the same for all carriers but where passenger charges may vary according to the ground services the carrier uses. With airport services becoming increasingly diversified, airlines seek flexibility on the side of passenger charges as a preferred way to pay only for services they choose to use.
Airport expenditureWhat do airports spend their money on? Unfortunately, comparison of airport costs is tricky because of the wide variation in operational models and one has to get into the detail. For example, some airport companies deliver ground handling with their own labour but most do not. Some airports lease their terminal facilities to airlines while others directly incur the labour costs of operating and maintaining terminal facilities. But, capital expenditure is the highest cost item. Some $135bn in capital expenditure is scheduled for the next three years, not including the Middle East or much of China. So: with all this, how are airports doing financially? Well, about 30% of airports are profitable. The major passenger and freight traffic airports are concentrated in a narrow band at the top of the sector, with the top twenty cities in terms of passenger and cargo activity handling 25% of the total world passenger traffic and over 50% of the total world freight traffic respectively. However, 60% of the world’s airports handle fewer than one million passengers and it is unusual for small airports to actually turn a profit.
Economic regulation[caption id="attachment_7815" align="alignnone" width="403"] States are increasingly turning to the private sector to finance aviation infrastructure.[/caption] Few industries are as international as air transport. Yet aviation is still plagued with restrictions preventing it from reaching its full potential. Well-known examples are the air transport bilateral restrictions and limitations on cross-border airline investments. The airport industry also faces its share of regulatory issues which, although not as well known, have a major impact on the industry. Unlike an airline or shipping company, the key distinction of an airport is that its assets are geographically fixed. In this respect, airports share a number of important characteristics with property companies. Their assets are merely leased out with little genuine control over their major customers. The density of airports is to a large extent in the hands of others — notably the passengers and thus the airlines who ultimately determine the destinations and flight frequencies. Regulation is a fundamental factor in determining risk and valuation. The problem is that many airport investment projects are substantial in size and generate a payback over long time scales, yet most regulatory regimes cover relatively short periods. Given already inherent risks in major capital expenditure programs, the need for explicit, long-term regulatory frameworks which provide an element of certainty and minimise investment risk is clear. The regulatory regime may be a dominant feature in determining an airport’s profitability. Increasingly, States are turning to the private sector for development of aeronautical infrastructure, either under outright privatisations or Public Private Partnerships. This suggests a need for States to provide an economic regulatory framework which allows airport companies to generate financial returns attractive to private investors. At an institutional level, our priority is to convey a clear message to airport regulators worldwide that airport innovation in commercial activities should not be penalised by including non-aeronautical revenue in the regulatory till. Commercial activities should not be subject to economic regulation.
Conclusion[caption id="attachment_7816" align="alignnone" width="374"] The 'aerotropolis' of the future? - Al Maktoum International, Dubai, UAE.[/caption] Airports keep the four corners of the world interconnected. In today’s globalised world, social cohesion, trade and ultimately the economic relevance of cities and regions are dictated by its infrastructure for reaching national, international and intercontinental destinations. Aviation gives every indication that, despite economic challenges, it will continue to grow in the medium- and long-term. Certainly, there will be winners and losers — as appropriate to the competitive market that defines our business — but airports have emerged as fundamental instruments of economic strategy worldwide. The right policy and regulatory approach will allow airports to do more to connect regions, serve their communities and citizens, and ultimately the global economy. Strong partnerships with other industry stakeholders and with local, regional and national governments are essential to achieving the full potential of the aviation sector.
Appreciation and closingThe record attendance at the lecture included the Secretary General of ICAO, the First Vice President of the Council of ICAO, representatives of the Council and from across the international civil aviation community as well as the RAeS President. Chris Lyle, FRAeS, Past Chairman, Montreal Branch, expressed appreciation for the Lecture, taking the opportunity to present Ms. Gittens with a token of gratitude. In providing concluding remarks, Phil Boyle, RAeS President, noted that only four years remain until the 150th anniversary of the Society. He noted that acceptance of the Society by the ICAO Council in the list of international organisations that may be invited to attend suitable meetings culminated many years of dedicated effort by the Montreal Branch. By participating as an Observer in selected ICAO activities, the Society will advance expertise and advocate positions at the very highest levels of international civil aviation. A copy of the complete text and presentation is available from the Montreal Branch website
The Montreal BranchFounded in 2002, the Montreal Branch caters to the diverse aerospace community in the Montreal area, notably home to ICAO, ACI, IATA, Air Canada, Air Transat, Bombardier, CAE, Pratt & Whitney Canada, Rolls-Royce, CMC Electronics, SITA, and McGill and Concordia Universities as well as the University of Quebec at Montreal. The annual Assad Kotaite Lecture is the premier event in its calendar of activities. The named lecture organised by the Royal Aeronautical Society (RAeS) Montreal Branch is held each year in honour of Dr Assad Kotaite, HonFRAeS, President Emeritus of the Council of ICAO. Interested members and others are invited to visit the website at www.raes-montreal.org or to contact the Membership Secretary at firstname.lastname@example.org Capt Don Van Dyke, FRAeS, Chairman, Montreal Branch
Angela Gittens Angela Gittens was appointed Director General of ACI World in 2008. She was formerly Chief Executive for two of the largest US airport systems, Miami International and Hartsfield-Jackson Atlanta International, and served as Deputy Director, San Francisco Airports Commission. She was previously Vice President, Airport Business Services, HNTB Corporation. As Vice President, TBI Airport Management, she oversaw the transition of London Luton Airport to private ownership. She has served on FAA and NASA advisory committees, the Executive Committee of the National Academy of Science Transportation Research Board and the Board of Directors, JetBlue Airways. Director General Gittens earned a bachelor’s degree from Fairleigh Dickinson University.This article previously appeared in Aerospace Professional.