Airport business model under threat globally

6th April 2018

By: Rebecca Campbell

Creamer Media Senior Deputy Editor

     

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Worldwide, airports are facing a significant challenge to their current business models, S&P Global Ratings infrastructure ratings senior director Mar Beltran has warned. The challenge comes from important changes in the behaviour of passengers using their facilities. Airports have benefited from a boom in air travel over the past 30 years. This has been driven by airlines cutting costs and reducing prices. Airports have expanded to meet the demand, cut their rates to airlines to attract more carriers, and made up the difference with commercial activities in their terminals.

Low-cost carriers, also known as budget airlines, have played a key role in these developments. Today, in Europe, for example, low-cost carriers account for 40% of the short-haul air traffic market. And they are now moving into the long-range sectors, particularly routes across the North Atlantic.

While these developments have brought much more business to airports, the past two years have seen passengers changing their behaviour at the terminals. They are spending less. Around the world, sales of duty free and travel retail outlets declined in 2015 and then stabilised at the lower levels in 2016. “This figure is worrisome if we take into account that, in the face of this stagnation, the volume of passengers continued on the rise,” he pointed out.

Another important source of income for airports is their car parks. But improved public transport links to airports, and the rise of services like Uber, have reduced the number of passengers driving themselves to airports and parking their cars at the terminals. On top of this, the medium to long term increase in the number of electric and self-driving cars will add to the challenges. Airports will have to make investments in their parking facilities to meet the requirements of these vehicles (such as battery recharge points).

“We are therefore facing a situation that seems to threaten the [airports’] current business model,” observed Beltran. S&P expects the returns of airports around the world to remain stable over the next two years. “However, skilful management of this whole series of changes will be necessary to take advantage of the new business opportunities that now open up.”

Separately, the Commercial Aviation Association of South Africa (Caasa) recently released its composite index of aviation activity for the fourth quarter of last year (4Q17). The Caasa Aviation Activity Index (CAAI) comprises 25 different indicators. It is designed to provide a measure of economic activity in the commercial aviation industry that is balanced and objective. Because buying and selling aircraft create short-term volatility, owing to the small numbers but high prices involved, the CAAI incorporates a trend based on a three-month moving average.

Six key overall trends have been identified. The first, as listed by Caasa, is that the value of the index rose a little during 4Q17 to 115.6. This represents an increase of 15.6% over the CAAI base period of 1Q14.

“In the process, the index value has further consolidated its modest recovery from a disappointing first quarter, which saw it slipping below the base period level of 100 for the first time,” noted Caasa in its press release. “A highlight of the latest CAAI is the reversal of the downward trend in the three-month moving average, which is now virtually on a par with the index value.”

The fourth trend identified is that just under a third of the indicators (8 out of 25) showed improvement between 3Q17 and 4Q17. These, however, included indicators with a relatively heavy weighting in the compilation of the index.

Fifth, the CAAI shows that commercial aviation activity in South Africa has, in general, matched the weak performance of the national economy from 2014 to 2017. Last but not least, the main force behind the improvement in the Caai since the start of the year has been the value of aeroplane imports and air traffic movements at most of South Africa’s largest airports.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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