The European aviation sector has not been able to make a significant recovery from the financial crisis of 2008. Gary Mason reports on the pressures and opportunities being tackled by the sector’s regional airports and carriers
The European aviation market has had a very difficult time over the last decade with declining revenues for airports and carriers and a number of high profile bankruptcies.But what is underpinning the economic churn in the market and how can airports and airlines work better together to draw in the extra capacity and efficiency cost savings that could re-stimulate the sector?
This was the subject of a seminar held in Helsinki this month by Airport Cluster Finland. Delegates at the conference heard that there is a significant difference between airport sizes within Europe and airport hubs have shown far greater resilience than smaller regional airports to the contractions in the European aviation market between 2011 and 2012 – with hubs still growing in terms of air passenger numbers at a rate of 2.5 per cent while regional airports shrank by more than 3 per cent over the same period.
Morgan Foulkes, Deputy Director General, of Airports Council International (ACI) Europe gave a detailed financial and operational background against which the European aviation market is operating.
“Regional airports are especially affected [by the economic downturn]” he says. “This is also due to the fact that they are very dependent on intra-European traffic, one type of carrier or even one carrier only.”
Record carrier failures
Mr Foulkes says there were a record number of airline bankruptcies in 2012 but this is not the only downward indicator. “Most European airlines have cut capacity on intra-European routes.,” he says. “There is a weak European economy on the back of the Eurozone crisis and looking forward we can see that any bounce back from recession for aviation is likely to be dampened by a number of factors including lasting weak business and consumer confidence as well as damaging aviation taxes in Germany, France and Austria.”
Amid such challenging conditions low cost carriers continue to increase their market share but this comes at a price for the rest of the aviation market and airports, particularly smaller regional operators, who can be vulnerable to the instability in the market.
“We have seen a lot of airline failures since 2012 and a lot airlines are going through a particularly difficult time in Eastern and Central Europe and this is having an impact on airports of course,” he said. “Low cost carriers in particular are very quick to open new routes and close them again when market conditions are not right for them.”
The broader economic picture is also having a direct effect on ownership of airports on the Continent with a drift towards privatisation in some areas but a determination to keep public ownership in others despite the lack of investment capital from the public purse.
“In times of austerity member states are reluctant to spend money on large infrastructure projects such as airports,” `Mr Foulkes said. “But austerity measures have led to the privatisation of some airport networks such as Portugal and Greece is looking to sell its network of regional airports.”
Reports of privatisation
There are also reports of airport sales in Italy and Spain with four concessions earmarked for possible privatisation, he added. “There are a lot of transactions going on in the private sector in the UK but the share of public ownership remains strong and there will be no change in the ownership of Aeroports de Paris for example in the foreseeable future. Meanwhile the Dutch Government refused to privatise Amsterdam’s airport a few years ago.”
(Aéroports de Paris is the airport authority that owns and manages the fourteen civil airports and airfields in the Ile-de-France (Paris) area including Charles de Gaulle International Airport, Orly and Le Bourget. Since its creation it has been a government owned corporation but became a public company on 20 April 2005, although the French Government and the Ile-De-France region have kept stakes in the company. As of 2011, the French Government holds 52 per cent of the shares and hence holds the controlling interest. According to French Transport Code, the French Government must remain the majority shareholder. With this transition, the company became able to engage in international partnerships and investments).
With the uncertainty in the market, pressure on airport costs have increased and this has been reflected back onto the airports by carriers who are more reluctant to bear the brunt of significant hikes in charges. This means that the climate of charges restraint exercised by European airports at the height of the Eurozone crisis in 2009 and 2010 has been carried forward to 2011 and 2012. “On average charges at airports increased by -1 per cent in that period when inflation is taken into account,” Mr Foulkes said. “In addition we are seeing a lot of unbundling in the structure of airport charges at the behest of the budget airlines who don’t want to pay for support services such as baggage systems or air bridges.”
Against this background, European airports’ costs have continued to increase particularly in the investment required for new security equipment and staff in the wake of an increasing regulation agenda mandated by the EU. “We need to keep in mind that a big proportion of airports’ costs are fixed in the form of infrastructure and maintenance costs,” he added. It is estimated that some 42 per cent of airports within Europe are making a financial loss and many of these fall into the regional category.
What capacity increase?
The ACI also sees a “significant” capacity issue within European aviation which is going to be difficult to resolve or add value to the bottom line of airports given the financial and other pressures. “Revenue pressures, high capital costs, lack of political support and poor planning processes are all having a negative affect on airport expansion within Europe,” Mr Foulkes said.
European airports that have added to their capacity have had to wait a very long time to achieve that goal but it is not without political or social consequences the conference was told. One speaker from the floor told delegates: “Frankfurt had to wait years to get the new runway it so badly wanted. Now that is has that runway there are protestors outside the airport every Monday morning protesting against it.”
The results of the inability to fulfill capacity expansion looking forward to 2035 will be a loss of millions of passenger flights each year and the ACI estimates that this will translate into “250 million passengers not being able to fly” over that period.
“The capacity crunch will be far more acutely felt in the UK, Bulgaria and Turkey but will have significant consequences throughout Europe,” said Mr Foulkes. “In particular congestion of air traffic will skyrocket with delays increasing by up to five and six minutes per flight.”
Added to the issues of capacity and financial pressures are significant concerns about aircraft noise and passenger rights surrounding delayed/cancelled flights. “There are concerns about potential confusion on the role of airports and airlines in this area,” according to Mr Foulkes. Looming on the horizon is the negative consequences of the one bag rule for hand luggage and other baggage restrictions which the ACI fears is having a disastrous effect on airport economics. Mr Foulkes says that the one bag rule calls into question “60 years of industry practice.” He added: “It creates emotional stress for passengers by forcing them to pay penalties to avoid forfeiting their possessions. It reduces freedom of choice in terms of where they can shop as well. The impact this has on airports is devastating and puts at risk their viability.”
Non aeronautical revenues make up on average, 40 per cent of the total in Europe as a whole and up to 70 per cent in some cases.
Mr Foulkes pointed out that there was a completely different model for dealing with the security demands faced by airports when you compare Europe to the US for example. In Europe the majority of the burden for enhanced security measures brought in following the 9/11 civil aviation attacks on New York and Washington, has been taken up by airports whereas in the US the Transportation Security Administration (TSA) takes the lead on a national basis.
“What we are seeing is that there are a multiplication of layers and they have become complex, costly regulations which now represent 25 per cent of of an airport’s operating costs.” says Mr Foulkes. “We are seeing major expenditure in this area with hundreds of millions of Euros for explosive detection and baggage detection systems and the ability to scan for liquids, aerosols and gels (LAGS).” Within Europe there will be a phased approach to the removal of LAGS restriction starting in January 2014 but the requirement to procure technology which will add the capacity to screen for these elements will remain.
So how can airports and airlines work better together to improve market conditions enough to help lead to a significant recovery? Simon McNamara is Director General of the European Regions Airline Association. He pointed out to delegates that the average flight time within Europe is one hour and the average size of aircraft is between 85-86 seats. “So what we are talking about is short haul intra-European routes,” he said. “Some 19,000 flights a week are performed by regional operators. There are many low volume niche routes and a high proportion of business and transfer traffic as opposed to the low cost carriers who handle most of the leisure traffic.”
He said the relationship between airports and carriers has historically sometimes been difficult but in a difficult economic climate there is a basic rule “that if it affects us it also affects you [airport operators]. “Low cost carriers have had a big impact on regional carriers who have had to change their business model as a result,” he said. “But we are all working in a market place that is dominated by thin margins, high investment costs, low return on capital, a complex regulatory structure and intense competition.”
He also pointed out that disposing of mobile assets such as aircraft is just as hard as disposing of fixed assets such as terminal buildings.
“I think the consolidation of airline business models will continue and regional airports will remain a major source of capacity,” he said. “But most of the additional new capacity is coming from low cost carriers and they are filling that gap through price alone. As a result of that yields in the market are down overall.”
He said that air travel in Europe was “staggeringly cheap” when you consider the complexity and cost of operations undertaken by airports and carriers. Asked why there was antagonism between airports and carriers Mr McNamara told the conference:
“Most airlines think a lot of airports are making a lot of money and they are not getting a good deal.” But he added there was a big difference between hub airports such as Heathrow who were effectively monopoly providers because demand outstrips supply and regional airports who were not monopolies and often had spare capacity to fill.
For regional airports he said that the significant issue was “don’t sell your soul to the devil” through becoming dependent on one single carrier. “What I mean by that is that regional airports should not put their eggs all on one basket by signing a contract with one carrier who may promise all kinds of things and then suddenly decide to leave. Regional airports are particularly vulnerable to this because they have one dominant carrier.”
Delegates told that historically airlines have been “value destroyers” rather than businesses who can add value. “We are the ones closest to the end user [passengers] in the aviation market but make the least money.” one speaker said.
It was said that Finnair was in a good position because it was closer to Asia than any other European hub. “Asia is a huge and growing market and China’s growing middle class mean that they will become the most frequent air travellers in the world.”
Figures showed that Helsinki Airport’s peak two hours during the day were busier than Heathrow’s but the passenger numbers for the rest of the day were much smaller.