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Surviving the downturn
Robert J. Aaronson, Director General, Airports Council International
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For the past 50 years, civil aviation experienced almost uninterrupted growth. Until 2001, the single greatest challenge for the industry was providing enough airport and airspace capacity to accommodate the boom.
The events of 9/11, combined with a global economic slump that depressed travel demand, broke the cycle of growth, although a gradual recovery in both passenger and cargo traffic was gaining strength in mid-2002. More recently, however, war in Iraq and the outbreaks of the deadly SARS virus have dealt further blows to the industry’s recovery. The Asia/Pacific region, which had fared the best since 9/11, is hardest hit by SARS. For Asia/Pacific passenger traffic was down 38.3 percent in April with Hong Kong off 69 percent, Singapore 62 percent and Beijing 31 percent. Global passenger traffic for April 2003 declined 9.0 percent over April 2002.
The current challenge for the air transport industry is surviving the downturn, while still being flexible enough to handle a resurgence in demand once traffic rebounds. Many airports have been hard hit by declining traffic and are now in a dire financial situation, struggling to maintain sufficient cash flow, while seeing their credit ratings tumble, making borrowing on capital markets more costly. Airports fully share with their airline partners in the current industry crisis.
Business realities
Since 1978, airport charges have consistently represented only about 4 percent of global airline operating costs. While this is an average that can vary by airline and by airport, such charges are not a root cause of the airlines’ current financial predicament, nor can changes in the level of charges make much difference in improving the airlines’ situation. Conversely, for the vast majority of airports, the bulk of revenues come from charges to airlines. Only relatively few airports with very high traffic volumes can derive more than half of their income from non-aeronautical sources; thus, decreases in charges at smaller airports, as some airlines and IATA call for, could put the airport’s financial health in peril. Airport operators are sympathetic to the current situation of the airlines and want to help to the extent possible. However, with revenues falling faster than costs, global airport profits dropped 25 percent in 2001 to 1.5 percent of gross revenues and the picture worsened in 2002. Airport operators must make tough choices before considering to decrease or freeze charges, and local circumstances will dictate the viability of any moves of this sort.
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Like their airline partners, airport operators have had little experience in dealing with a sustained period of steeply declining traffic. Unlike the airlines, however, which can quickly shed capacity simply by grounding aircraft, airports are considerably constrained in their abilities to cut costs. Airports are asset-heavy enterprises with high fixed costs and cannot readily be ‘downsized’. Indeed, ACI’s airport economics surveys show that on average, 44 percent of an airport’s expenses are allocated to depreciation, amortization, and interest payments (debt service). That effectively leaves only 56 percent of expenses which in principle might be reduced. Furthermore, many of those expenses are tied to keeping the airport operating safely and therefore are untouchable for cost cuts.
Airport cost–cutting measures
Many airport operators have taken a wide range of cost-cutting measures: reducing staff travel, freezing new hiring, suspending some capital expenditure programs and, in some cases, laying off employees. However, more stringent security regulations at airports have actually raised airport costs and negated cost cuts in other areas.
On the revenue side of the ledger, the picture is equally grim. Normal economic practice (and in some cases existing contracts) would dictate raising charges to the airlines during a period of declining traffic, since the unit cost of each aircraft operation increases. But with many airlines in dire financial straits, and in a spirit of partnership, a number of airport operators have elected to freeze charges, or in some cases, to actually lower charges temporarily.
Communities consider their airports a key to economic prosperity and a catalyst for employment and they will continue to demand the most extensive possible air services. Airport operators therefore are subject to the discipline of assuring that the costs to users are not driving away air services at the margin.
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Impacts of reduced ‘non-aeronautical’ revenues
There is a second problem for airports on the revenue side. Airport operators have been largely successful in diversifying revenues over the years. ‘Non-aeronautical’ revenues derived from sources other than aircraft operators have grown steadily from 30 percent of total revenues in 1990 to 54 percent in 2001. But fewer passengers means that income from retail concessions, rental cars, parkings and food and beverage sales has declined at most airports. These reduced revenues have another negative side effect: they often cause a downgrade in the airport’s credit rating, raising the costs of borrowing funds on the financial markets.
Preparing for recovery
Airports’ commitment to enhancing security has taken precedence over all other activities. Restoring the confidence of the passenger in civil aviation is a pre-condition for the recovery of the aviation sector.
The planning cycle for building airport infrastructure is long and complex, with numerous bureaucratic, political and environmental hurdles to be overcome, not to mention long periods of construction. Once the necessary approvals for capacity expansion are in place, it would be short-sighted to abort these plans. For airlines, the planning cycle is much shorter. Thus, there is a natural airport-airline tension due to these innate differences in timelines. A transparent and open consultation process between airports and their users can be helpful in resolving the differences in management perspectives.
Civil aviation remains an essential driver of the global marketplace, underpinning trade, investment and tourism flows. When the economic recovery does occur and traffic bounces back, capacity issues will rapidly resurface. Airport operators simply cannot afford to backslide on capacity enhancements. They have battled landside, airside and airspace gridlock conditions for much of the 1990s and they are committed to provide a higher level of service and more seamless travel experience in the future.
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