Budapest Airport: profitable and building for the future - with plenty of competiton from its peers
Budapest Ferenc Liszt Airport is Hungary's largest international airport and, after Prague, the second biggest airport in the countries that joined the European Union in 2004. It is also the largest airport to have been privatised in Central and Eastern Europe.
It has been involved in constant skirmishing with neighbouring airports in Central Europe over a period of many years, as they attempt to establish themselves as the pre-eminent gateways to the region, and as collection and distribution hubs. Those other airports comprise Vienna and Prague, both of which lie north of Budapest, possibly Warsaw, and to a lesser degree Belgrade to the south, which although growing rapidly is still some way behind the others. (Bratislava Airport in Slovakia is excluded only because 95% of its passenger capacity is on low cost airlines).
This report looks at present and future growth trends at Budapest, at construction activities, ownership and profitability, and how it matches up to that competition now, across a range of metrics.
To put these five airports into context, the chart below indicates their respective global rankings as represented by various metrics as at the week commencing 09-Nov-2015.
Global rankings by assorted metrics: Budapest, Vienna, Prague, Warsaw and Belgrade airports
|
Airport/metric |
ASKs |
Seats |
Frequencies |
Cargo payload |
|
193 |
188 |
205 |
251 |
|
|
92 |
81 |
73 |
79 |
|
|
175 |
165 |
164 |
219 |
|
|
189 |
185 |
147 |
241 |
|
|
344 |
329 |
308 |
376 |
Location, location, location - the right spot matters to airlines
There are many different measures that have been employed to establish the geographical 'centre of Europe.' It depends on what the boundaries of Europe are considered to be.
The claimants include towns and villages in Poland, Slovakia, Estonia, Lithuania, Belarus and the Ukraine. A glance at a map such as the one below does indicate that Hungary is in the running.
In search of the "Centre of Europe"
Indeed, one of the earliest claims, dating from 1992 before some of the more recent expansion of the European Union, found that the geometric centre of Europe is in the village of Tallya, about 150km east of Budapest.
Such detail could be considered superficial, but this is in the context of legacy airlines continuing to form and consolidate various types of alliances, and while low cost airlines that have a greater propensity nowadays to co-operate with legacy airlines, and each other, seek new markets from a diminishing pool. As ever, a major determinant of success is location, location, location.
Another important consideration here is a political one. At a time when the UK is presenting its proposals for reform of the EU, which could result in that nation's exit in 2017, and when Eastern European countries are reassessing their own position on continuing membership as a result of the immigrant crisis, individual countries throughout that region may soon begin jockeying for position in whatever 'Europe' may become in the latter years of this decade and beyond.
Traffic growth was patchy but is strengthening in 2015
Traffic growth at Budapest Airport has been patchy over the last five years, varying between a low of 8.2 million in 2010 and a high of 9.2 million in 2014, and with two stable years in the middle (8.5 million).
Budapest Ferenc Liszt Airport annual passenger numbers 2010-2014
Passenger traffic fell by 4.7% between 2011 and 2012/13 and grew by 7.5% between 2013 and 2014, representing quite wild swings either side of the stable years.
The reduction between 2011 and 2012 is largely accounted for by the collapse of national flag carrier Malév in Feb-2012, adversely impacting on both O&D and connecting passengers, as well as on cargo. Budapest was Malév's main hub; the airline had accounted for over a third of all passengers, and 40% of revenues.
The situation could have been worse, had the management not moved swiftly to encourage low cost carriers to fill the gap, namely Wizz Air and Ryanair. Latterly, easyJet has also built a smaller but still significant presence.
Budapest Ferenc Liszt International Airport capacity, seats per week/system/all carriers, 09 to 15-Nov-2015
The impact of the two main budget airlines in 2015 is clear from the chart above. Collectively they have over 40% of capacity, while easyJet and Germanwings add another 7.5%. Ryanair has significantly broadened its summer 2016 schedule from Budapest and is now offering 18 routes in total.
On the other hand, important legacy airlines such as Lufthansa, KLM, Air France and British Airways (in that order of capacity) continue to play an important role at what is a capital city airport serving the country's main commercial centre, having also taken up some of the capacity losses from the demise of Malév. As well as point-to-point service they can offer mid and longhaul connections.
The airport expects continued expansion in 2016, and has announced a significant frequency increase with British Airways to London, which will mean an extra 60,000 passengers in 2016.
Traffic growth in 2015 to date has been almost double the 2014 rate, at an average of 13% in the nine month period Jan to Sep-2015.
Table comparison of country, population, pax traffic and growth, 2014 and 1-3Q2015
|
Airport |
Country/population |
Pax traffic 2014 (m) |
Growth 2014 % |
Pax traffic growth % Jan to Sep-2015 |
|
Serbia/7,209,764 |
4.3 |
31.9 |
6.3 |
|
|
Hungary/9,877,365 |
9.15 |
7.4 |
13.0 |
|
|
Czech Republic/10,541,466 |
11.15 |
1.8 |
6.3 |
|
|
Austria/8,623,073 |
22.48 |
2.2 |
0.9 |
|
|
Poland/38,483,957 |
10.59 |
(-0.6) |
6.8 |
Comparison of passenger traffic 2014 at Budapest and three other regional capital airports
Budapest's 2015 passenger traffic statistics compare favourably with its peers
This result compares very favourably with those four main competing airports. The increase in this nine month period at Budapest Airport is the greatest among them, and the third largest turnaround versus the FY 2014 increase.
Conversely, however, Budapest remains the smallest of the five airports, apart from Belgrade, measured by passenger numbers and based on 2014 results. By that measure alone, Budapest cannot be regarded as the regional leader. That title must go to Vienna, despite it being one of only two airports where the rate of increase has diminished in the first three quarters, compared with FY 2014.
Country populations have been inserted into the above table as well. Using these criteria also, Budapest holds its own with Prague, but appears relatively insignificant when compared with Vienna. That said - Austria does have its own national carrier, Austrian Airlines, wholly owned by the powerful Lufthansa Group. On 13-Nov-2015 Austrian Airlines received the first of 17 Embraer E195 aircraft, and bestowed the name 'Central Europe' on it. The 17 jets comprise one of the biggest investment projects in Austria's aviation history.
Passenger seat capacity oriented is very strongly in favour of Europe and the east
Distribution of capacity globally is represented in the map/chart below.
Budapest Ferenc Liszt International Airport international capacity, seats by region, 09 to 15-Nov-2015
Hungary was part of the Soviet Bloc until 1989 and the route network still shows characteristics suggestive of that fact, beyond the concentration of capacity and routes in the EU area. Russia remains strongly represented, and to a (much) lesser degree the Middle East, then China and North Africa. (Note that in the live version of this chart a mouse hovered over specific regions/countries displays the number of seats, and on the scale at the bottom the tan arrow marks where it sits on the scale).
There is hardly any direct non-stop capacity to South and Southeast Asia, sub-Saharan Africa or the Americas, though there are summer services to Canada.
In the absence of a national flag carrier, the only way a passenger can travel to some commercially important regions of the world is by connecting flights through Europe or the Middle East, which puts Budapest into a similar category as a regional airport in a bigger Western European country, such as France, Spain or the UK. It also puts it at a disadvantage with both Vienna and Prague. Vienna has a strong national carrier with worldwide longhaul services, and coordination with its owner Lufthansa and the Star Alliance.
At Prague, Czech Airlines has a less comprehensive network than AUA's at Vienna, but as a member of SkyTeam it can offer connections that Budapest cannot, while there are also additional longhaul airlines operating at Prague such as Delta and Korean Air (a 44% shareholder in Czech Airlines).
The map below shows cities accessible on direct flights from Budapest Airport (red dot) and those accessible indirectly through connections (blue dot). Again, the fact that direct opportunities are limited is emphasised, but there are many indirect (one change) opportunities.
Direct and indirect routes from Budapest Airport
Cargo capacity is mainly belly hold but important cargo airlines operate at BUD
Turning briefly to cargo services, apart from belly hold capacity (68%) there are ten airlines offering cargo flights for the remaining 32% at Budapest, including Cargolux, Turkish Airlines Cargo and (from the parcels business segment) - DHL, FedEx, TNT and UPS.
The distribution of that capacity by region is as follows:
Budapest Ferenc Liszt International Airport, international capacity (cargo payload kg), by region, 09 to 15-Nov-2015
Individually, Germany has the greatest capacity (14.3%), followed by Hong Kong and Luxembourg, both on 13.3%.
This central region of Europe has attracted a number of Chinese investors who regard having a central European access point for airfreight from and to China as high on their priority list,but that fact is not yet reflected in Budapest Airport's ownership.
Shorter stage lengths predominate; there are few over five hours…
Returning to passenger services, the predominance of short inter-European services by LCCs, and by legacy airlines offering connections via established hubs over mid and longhaul services, is emphasised by the chart below, which shows that the greatest number of weekly frequencies consist of flights with stage lengths of 1-4 hours. There are very few with stage lengths between five and 15 hours.
Budapest Ferenc Liszt International Airport frequencies (system) 09 to 15-Nov-2015
…Which impacts on connectivity
And this fact is reflected in the non-stop connectivity, or lack of it, at Budapest Ferihegy Airport compared with its rivals in Central Europe. Budapest trails Vienna and Prague overall by this measure. It also trails Vienna in all the regional categories.
Comparison of non-stop connectivity values of Budapest, Prague and Vienna as departing airports for 09-Nov-2015 to 15-Nov-2015
Capacity peak is at midday
The chart below is representative of the concentration of seat capacity during operational hours, and indirectly representing slot allocation and take-up.
While there are peaks and troughs, they are not so much in the typical morning and evening rush hour period (0700-1000 and 1600 to 1800); rather at midday and mid-afternoon. The lack of any flights in the period 0000 to 0600, the predominance of departing flights from 0600, and arriving flights from 2000, suggests night time curfews and that many aircraft are based there overnight, which will be the case with Ryanair and Wizz Air.
Budapest Ferenc Liszt International Airport, seats per hour, typical day, Nov-2015
Budapest lags Vienna and Prague in infrastructure investment but Airport City plans accelerate
Turning to construction activities at the airport to support envisaged expansion, CAPA is aware of projects related to runway improvements, terminal expansion and airport/cargo city developments at this time. A major problem with the airport has always been inadequate capacity, which was one of the reasons behind its rapid privatisation in 2005 (see later). That privatisation was regarded as enabling the airport to raise additional capital and avoid potentially severe congestion due to funding constraints.
Over EUR2 million was invested into improving the runways and the connected navigational systems of both runways in spring 2014. In Sep-2015 the airport announced that it would invest more than EUR15 million per annum on development works in coming years, as part of which the construction of a new pier will begin to extend the passenger capacity of Terminal 2. The design is under preparation with relevant construction tenders to be announced in 2016. The project may be completed by 2018. There is considerable potential for constructing new logistics facilities, new warehouses and offices for cargo customers, and also potential for development in the MRO sector.
Last year airport management met with Saudi investors as part of a visit by Prime Minister Viktor Orbán, to present details of its planned EUR20 million airport hotel and Cargo City projects. The Cargo City seeks to employ the now mostly unused Terminal 1 at the airport. Originally planned for completion earlier in this decade, the project was put on hold in Mar-2010 after Malév went into bankruptcy. In addition the original Cargo City project has now expanded into a wider Airport City project, and in Jul-2015 the airport signed an MoU with the Regional Economic Development Cluster to accelerate investment to expand economic activity at the airport and assist regional development.
The total amount known to have been committed to physical expansion activity is around USD38 million but clearly cargo and airport cities require considerably more investment than that.
A quick comparison with the two main competing airports reveals that Vienna Airport has ongoing investment of USD1.3 billion through to 2018 on a variety of projects (but not including a third runway) while Prague Airport is committed to expenditure of almost USD0.5 billion through to 2020 on runway and taxiway reconstruction, a potential new runway, and terminal expansion.
(Information source for this section: CAPA Airport Construction Database).
Budapest's ownership stable, profitability very high
Both China and Saudi Arabia have been mentioned as potential investors in the airport in this report, but having changed hands several times in the previous decade, its ownership is presently stable.
75% of the airport was sold to what was then BAA plc in 2005 (subsequently being absorbed by Ferrovial Aeropuertos) for EUR2.6 billion (and at a very high earnings multiple of 29.3), when it was handling 7.8 million ppa. BAA outbid German constructor Hochtief Concessions in the process of securing Hungary's biggest ever privatisation deal.
Two years later the same holding was sold on to a consortium for EUR1.9 billion, representing an earnings multiple of 23.8. The consortium consisted of Hochtief, the Canadian pension fund Caisse de Dépôt et placement de Québec, the German bank KfW IPEX (Kreditanstalt für Wiederaufbau) Bank, and Singaporean sovereign wealth fund GIC, through its investment arm Malton Investment Pte.
At that time passenger numbers had risen to 8.2 million but an economic downturn was clearly coming and Malév's collapse was only three years away. Otherwise, that reduction over two years in perceived enterprise value stands as evidence of the overconfidence that existed in airport infrastructure in the mid 2000s. A confidence that is now returning, but only to a more reasonable degree.
Subsequently, in Oct-2013, Hochtief AirPort was renamed as AviAlliance GmbH, its new owner a subsidiary of the Public Sector Pension Investment Board (PSP Investments) in Canada. At present, AviAlliance holds shares in the airports of Athens, Düsseldorf, Hamburg and Tirana airports as well as Budapest.
The current allocation of equity is as follows:
Budapest Ferenc Liszt International Airport ownership as of 9-Nov-2015
During Jun-2015 rumours surfaced that Prime Minister Victor Ponta had said that he had initiated an IPO process for Budapest Ferenc Liszt International Airport, and that approximately 20% of its share capital would be issued in the first round. That was not the case, and would have been somewhat difficult to achieve anyway, as the airport is now completely privatised and no-one is known to be selling.
Financially the airport is performing well. In 2013 it was doing sufficiently well to avoid what was considered a likely hardship clause payment by the Hungarian government to investors following the collapse of Malév the previous year. In 2014, sales revenues of EUR189.9 million were achieved, of which 31% was from non-aviation sources, together with an EBITDA of EUR137.4 million, which translates into a very high EBITDA margin of 72.4%. (However, neither the sales revenue nor the calculation takes into account fuel supply).
Budapest would appear to be a solid investment for those already in the club. Potential problems could arise from politics (Hungary is not entirely popular throughout the EU because of its attitude to refugees, though it is more accepted by some other countries of the Eastern region of the EU). The perceived threat from Moscow that followed the annexing of Crimea, the war in eastern Ukraine, and rising tension with NATO seem to have diminished, for the moment at least.
The ruling Fidesz party was not supportive of the privatisation of the airport in the past when it was not in power, but does not seem to be making waves about it now that it is, and has been for over five years.
Summary and conclusions: leveraging geography effectively, long haul needed
- Budapest Airport is well positioned in Central Europe, an attractive proposition for airlines and investors, but;
- It is in constant competition with neighbouring airports to secure acceptance as the premier airport for the region;
- Currently it is struggling in that battle with both Vienna and Prague airports, which have their own home-based airlines and better connectivity;
- Most of Budapest's connectivity is eastward facing and direct long haul services are needed;
- Following on from a couple of lean years, passenger traffic growth was strong in 2014 and is even more so in 2015 to date - considerably better than its peers;
- Supply is greater from the low cost segment than the full service one, which contrasts with its peers and a disadvantage for connectivity;
- Most of the cargo capacity is belly hold but there is representation from important cargo and parcels carriers;
- Stage lengths are short on average, reflecting the LCC presence;
- Capacity is well spread out over the day but there are gaps even at peak hours where more could be accommodated;
- Infrastructure is catching up on demand, but some major projects remain at the planning stage while competing airports are well into their programmes;
- The airport is highly profitable by one common measure;
- It is wholly privatised and stable within the existing corporate relationship.
Other recent and related CAPA reports on airports in Eastern Europe:
Airport investment in Eastern Europe: opportunities abound but caution needed amid changing markets
Lithuania aviation Part 1: An innovative charter carrier changes the scene after turbulent years
Lithuania Part 2: Small Planet Airlines focuses on other markets as airport privatisation is pursued