Airports’ futures look fragile without government support, but some opportunities arise

Summary:

• Government support for airports has been variable.
• Some airport developments are continuing, others are being cancelled or postponed.
• Freight airports have prospered in picking up the gap left by passenger services.
• There have been few new transaction deals.
• Environmental sustainability will take on renewed importance as regrowth occurs.

Airports strive to remain open, with little government support

In Mar- and Apr-2020 CAPA published a series of reports on how the pandemic was impacting airports from an operational viewpoint - i.e. just keeping them open, to allow skeleton services. There was a comprehensive response in some instances from governments, for example the CARES Act in the US, which is providing funding to many publicly operated airports (the vast majority of them).

In neighbouring Canada the government response has been more restrained. The main gateway/hub Canadian airports are operated as 'not-for-profit' (a condition most others find themselves in now) public and private sector stakeholder-controlled airport authorities making hefty lease payments to the government. The federal government is waiving the lease payments of the 21 biggest airports until the end of 2020, which is a saving of CAD334 million (USD251 million) for those airports.

In contrast, the UK government was more concerned with keeping airlines afloat, seemingly assuming that will 'save' airports. UK airports, almost all of them privatised to some degree, have been sounding out the government for what they can get. But the newly-appointed Chancellor of the Exchequer, Rishi Sunak, said in Mar-2020 that airports should explore all liquidity options with shareholders and lenders before coming to the government.

That is bound to have an impact on airports planning multi-billion dollar infrastructure investment such as London Heathrow's third runway (which after decades getting to approval stage now looks to be in abeyance at least for another five years) and Manchester Airport's T2 extension, which is half-built, along with its 'airport city' (which is heavily supported by China).

Many airport projects are continuing despite the decline

Where airport development generally is concerned, many projects are continuing, reaching fruition (e.g. Brisbane Airport's new runway officially opened on 12-Jul-2020) or even being instigated, mainly in Asia, while elsewhere they are being curtailed, suspended and even in some cases cancelled outright.

One extreme example is the Philippines, where there are four projects mooted for airports in and around Manila - two existing and two green field. As a CAPA report asked - is this too much capacity, in the new 'paradigm'? (See: New Manila Airport project to go ahead, but - too much competition?)

Outside of Asia, and especially China, which very quickly recommenced construction of new airports and facilities at existing ones, there is no discernible pattern except that as ever it is smaller, regional airports that are likely to suffer the most from a lack of investment in new or refurbished facilities.

The reason is the slowly but surely prevailing theory that it is the low cost carriers that typically make up the majority of such airports' traffic (even all of it) which will come out of this the worst for the simple reason that an essential element of their model - the fast turnaround that guarantees maximum daily utilisation - will be removed by the mechanisms of disease prevention control. In other words everything is going to get a lot slower, and stay that way.

…But most new developments are under review

Firstly, Singapore Changi airport, where the proposed Terminal 5, which would be able to handle 50 million passengers annually, is being reconsidered in the light of events, even though it would not open until the 2030s. (See: Singapore Changi Airport's Terminal 5: government review is ominous).

The UK's Leeds-Bradford Airport, a smaller facility which handled four million passengers in 2019, and where 95% of seat capacity is on LCCs, is adopting a more aggressive approach. (See: Leeds Bradford Airport's plans to compete with Manchester Airport)

The airport rather boldly announced in Jun-2020 that it would shortly commence work on a new terminal even while its main airline and tour operator, Jet2, which is headquartered there, was grounded and with no certainty of the future for its markets.

For example, the British government has since re-imposed its 14 day quarantine rule for any Briton returning from Spain - which is Jet2's main market - to the horror of the industry which was looking to late summer Mediterranean vacations to kick-start the business.

Jet2 had even launched an extensive online (YouTube) advertising campaign on the theme of 'Summer's Saved with Jet2 holidays' only to cancel many flights to Spain because of the reimposed quarantine, thus trapping some of its 'early mover' passengers in the country.

Where privatisation of airports is concerned a number of engrained project series are continuing

In Brazil, the government is entering its final phases of concession deals, now focussing on smaller regional airports, clustering them in groups with one 'anchor' airport where possible. At the same time one of the earliest (first formal tranche) deals, for Campinas Viracopos airport near São Paulo, is formally to be re-concessioned after the operator, Aeroportos Brasil Viracopos (ABV) asked to leave it, and be reimbursed, on the basis of inadequate traffic forecasting which failed to anticipate the effect of the Brazilian recession.

This opens up a can of worms for the regulator there because that operator is not the only one with a gripe and more might follow. Just what the concession would be worth now in a country that had not exited that recession before the pandemic hit it heavily, is anyone's guess. Brazil would like to get rid of all its small airports under concession and the sole job of the state operator Infraero now seems to be to prepare them for privatisation. It has its work cut out.

Serial privatisation also continues in Japan

The Hokkaido island airports began fullscale private operation on 01-Jun-2020, with others such as Hiroshima joining the schedule. Japan seeks to privatise almost 100 airports eventually with the help of foreign capital and is refusing to let a pesky virus stand in its way.

A similar story is true in India, where a privatisation (concession) process resurfaced last year, only 13 years after the first tranche that included Delhi and Mumbai, which is now considered a success, and one that seems likely to step up its pace.

Elsewhere, activity is patchy. The concession of Sofia Airport in Bulgaria was recently concluded after a failed appeal by the unsuccessful bidders. It is likely that other ongoing deals will also be concluded, such as TAV Airports' takeover of and investment in Almaty Airport in Kazakhstan, but not so likely that new ones will emerge. The privatisation of the state's share in Groupe ADP in France, a long-winded process that had already been subject to a referendum has been suspended indefinitely.

As noted in a separate report in this issue, the CAPA Global Airport Investors Database, a bellwether of the business for the last decade, is approaching 1000 corporate entries. But while there was a glut of new ones in 2H2019 it is notable that there have only been a couple of them since the pandemic was declared early in Mar-2020.

However, there are opportunities to be exploited

While there are few new entrants just now, experienced investor/ operators will always have an eye open for opportunities that may arise from either public or private ownership distress and where strong capitalisation and/or ready access to debt and equity funding is available. The fact that they are both investors and operators gives them an advantage presently as distressed operators, and governments (often the same thing), may not be in a position to pick and choose which private entities they attract to take a problem off their hands (as they have been in the case of Japan for example where it is investors rather than operators than have been sought after latterly).

Such organisations include seasoned asset acquirers such as Vinci Airports, which has interests at over 50 airports globally, AENA Aeropuertos Internacional, Fraport, Groupe ADP together with TAV Airports and Corporación América, although the latter's subsidiary Aeropuertos Argentina 2000 has experienced some financial challenges this year as bond repayments fall due amidst yet another government default (its ninth) coupled to a long recession and the impact of the pandemic.

Despite the difficulties that may be faced by LCCs and their supporting airports (see above) it is still possible that investors who specialise in such airports may again be tempted to take a chance on them as more governments and municipalities choose to offload them. There was a hard core of such operators a decade or so ago (the New Zealand-based Infratil fund is one such example, operating budget airports in the UK and Germany) but their number diminished rapidly along with the initial appeal of such airports.

The pandemic is more likely to encourage further the concept of the Public-Private Partnership (P3 or PPP)

Partnerships between governments and the private sector for the delivery of new infrastructure, mainly terminals, was already gaining in popularity worldwide, especially in the US where it is really all that is left of the privatisation 'programme' there, with only one lease deal (San Juan, Puerto Rico) having been successful. After all, most governments are so indebted now that they can't afford to build new infrastructure themselves while a P3 offers the probability of retaining some control over the transaction, the construction, and future operation.

Some airports and airport groups are stock exchange listed

Many airport groups featured had seen their share price fall by up to 50% in the early stages of airline pullbacks, but all later showed some degree of recovery. This might have been as a result of economic stimulus, although airports are not high in the pecking order for such support in some countries.

13 airports and groups were selected and three of them are selected randomly here for further scrutiny - Airports of Thailand; Aeroports de Paris, the operating division of Groupe ADP which is concerned with the two main commercial Paris airports of Charles de Gaulle and Orly; and one of the three privatised airport operators in Mexico - ASUR.

Airports of Thailand (AoT) operates nine airports in Thailand (only) including the two in Bangkok. Its share price was on a slightly downward trajectory before COVID-19 hit home and there are many Chinese visitors for the country's various leisure pursuits. Having been THB69.5 at the beginning of the year the low point was reached on 18-Mar (THB47) since then there was a 'rollercoaster' recovery to THB50.0 on 11-Aug-2020.

In the case of Aeroports de Paris, stability at one of the world's leading airport groups (and one of whose airports, CDG, was forecast to overtake London Heathrow as Europe's busiest perhaps this year) was again evident over the last six months until a staggered fall in Feb/Mar and then an upturn, before a slight but steady decline. The share price has varied from a high of EUR177.2 on 05-Feb to a low of EUR71.55 on 15-May and stood at EUR87.50 on 11-Aug-2020.

Finally, ASUR, (Grupo Aeroportuario del Sureste) the Mexican operator which has nine airports there anchored on Cancun, equity in a number of Colombian airports, and San Juan Luis Munoz Marin Airport in Puerto Rico, the only successful lease under the 1996 US Airport Privatisation Programme that was referred to earlier.

All of the three privatised Mexican operators have prior experience of the impact of viruses on airport operation and finances, namely the H1N1 (Swine Flu) outbreak of 2009, which pummelled air transport in Mexico in particular. But that wasn't able to prevent ASUR's stock price plummeting from a 2020 high of MXN380.63 (11-Feb) to a low of MXN206.18 (03-Apr), while it has since gained to almost MXN300.

There are always winners and losers in this sort of situation. While there are very few winners amongst mainly passenger handling airports (only degrees of 'loser' with small regional LCC-oriented ones coming off worst), there are some winners amongst the cargo airports.

One is the Ted Stevens International Airport (ANC) in Anchorage, Alaska, that had already reinvented itself into an eastwest e-commerce handling role, having lost much of its traditional hub freight to nonstop passenger flights with ample bellyhold space. Of course those nonstop passenger flights dwindled alarmingly between Mar- and Jun-2020 and are only returning slowly now, while the actual demand for freight transport, especially medical supplies, multiplied.

As a result, Anchorage Airport has seen record growth in airfreight tonnage this year, mainly on dedicated freighters. A record setting 900,000 tons of cargo passes through ANC in 2Q2020 compared to the next highest quarter on record of 824,000 tons in 4Q2017. Other airports where cargo is an important part of the mix are also performing well. Take Hong Kong, the world's busiest for cargo volume tonnage for example, where cargo capacity did not dip as severely as did passenger capacity from the end of Jan-2020. By the end of Jul2020 it had recovered to about 55% of that Jan-2020 total.

The pandemic has prompted numerous initiatives from airport operators

One of them featured in an online report into Spanish operator AENA, the world's largest by passenger numbers, which revealed it issued a call for start-up businesses with products related to airport and commercial management to register for AENA Ventures, a start-up accelerator. AENA will provide EUR50,000 in funding to five chosen start-ups. The call is addressed to start-ups from all over the world which are invited to sign up for this first initiative. Spain is heavily reliant on tourism. Up to 15% of the entire GDP of major coastal cities such as Malaga and Alicante and on the Balearic and Canary Islands are dependent on it and in some coastal resort towns it is even more than that.

As the (partially) state-owned airport operator there is much responsibility on AENA to help get the tourism industry going again, especially in the light of recently re-imposed quarantine measures on arrivals from Spain in the UK and other countries, even though there is nothing it can directly do about the spike in virus cases in certain parts of Spain, which appear to have been generated by crowds of Spanish youths rather than visitors.

The question of 'sustainability' continues to linger over the industry, irrespective of the pandemic

It may not be at the forefront of most airports' concerns, but it has not gone away either. Some airports are actively taking measures so that they become industry leaders in sustainability now, while the heat is off. One such example is London Luton Airport, which was the subject of another CAPA online report.

Luton, the fourth busiest airport serving the UK's London and southeast region, has set its stall out to become "the most environmentally sustainable in the UK". It is helped by the fact that it can worry less about getting passengers back. One of its major carriers is Wizz Air, which has been more active in recommencing routes than many of its peers.

But it needs to do so because its plan to increase passenger numbers from 18 million to 32 million annually (this at an airport only just 'out of town', on a hill and with one runway) has not gained much support amongst the councillors whose municipality owns the airport (and leases it to the private sector).

Luton is not the only airport looking to put the environment at the head of its planning. Copenhagen Airport, where the environment will influence the design of a terminal extension, is another one. There will be many more seeking to use this 'opportunity' to get ahead of the game, so that they can assume the mantle of environmentallyfriendly; the intensity of that need has receded recently, but will be back with renewed vigour.