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ACI Europe – competitive pressures weigh heavily on airports; regional ones fare better than hubs

Analysis

European regional airports have enjoyed a faster return rate to pre-COVID traffic levels than have hubs and major gateways, their businesses expanded by a plethora of LCCs and ULCCs.

But those airlines are the ones most likely to drive the hardest bargains when negotiating user charges, which are down by 13% although airline fares have increased by 26%.

Hence, according to ACI Europe, while general disruption risks have declined, some of those airports are sure to face a tough summer.

The over-regulation of the sector, while airlines fundamentally do as they please, is an anachronism that has to end soon.

Summary

  • European regional airports have a faster return rate to pre-COVID traffic levels than do hubs and major gateways, driven, as usual, by LCCs, and VFR/leisure demand.
  • European LCC seat ratio at 10-year high.
  • Disruption risks declining.
  • User charges down by 13% – whereas airline fares have increased by twice that amount.
  • A positive northern summer is in the offing, but so-called ‘revenge travel’ isn’t infinite.
  • Over 200 airports certified under Airport Carbon Accreditation, but ‘FIT for 50’ and other such schemes could face a public boycott.
  • Airports over-regulated, with price caps and little in the way of commercial freedom.

Regional airports in Europe recover to 93% of pre-pandemic traffic, compared to 87% for hubs and larger airports

In a series of pronouncements in recent weeks ACI Europe, the airports’ representative body, has dealt with: recovering traffic levels at regional airports; a European strategy for sustainable regional air connectivity; renewed airline buyer power resulting in "suboptimal" revenues for user charges at regional airports; and the "constant competitive pressure" European airports are under to find and keep air services.

With regard to traffic, ACI Europe says that regional airports across Europe have recovered 93% of pre-pandemic traffic levels in 2023 to date, compared to 87% for hubs and larger airports.

Still driven mainly by leisure and VFR demand rather than business

This reflects traffic dynamics that are still driven by leisure and VFR (Visiting Friends & Relatives) demand rather than business demand, boosted by the expansion of Ultra-Low Cost Carriers and predominantly relying on the intra-European, North African and trans Atlantic markets.

A very positive northern summer season beckons – but how long with ‘revenge travel’ last?

ACI Europe Director General Olivier Jankovec, speaking at a regional airports conference, described the summer season as looking very positive for regional airports overall, as they are seeing airline seat capacity just above pre-pandemic levels. Passenger demand keeps defying inflationary pressures – in particular, the record increases in air fares.

It's uncertain how long that will last.

Much of it is acknowledged to be COVID-inspired ‘revenge travel’, but the desire for revenge will eventually be tempered by the limitations of the wallet.

Disruption risks on the decline as staffing levels return to normal

At the same time, disruption risks across the aviation eco-system have receded.

This is the result of earlier planning, massive recruitment (to fill serious gaps left by mass redundancies during the pandemic) and improved wages – "...although air traffic management (ATM) capacity and social unrest remain a significant concern in some countries.

Mr Jankovec added, "The traffic recovery has come with more volatility and also more disparity. This is largely down to much increased airport competition on a pan-European level, as the market is shifting towards fewer and ever more powerful airlines – with low cost carriers now very much dictating the fate of regional airports".

European LCC seats reach their highest level in a decade

In 2022 European LCC seats – both ‘to/from’ and ‘within’ countries – reached their highest levels in a decade and in the first five months of 2023 they are running at similar levels: 11.8% for to/from seats, and 46.4% for ‘within’.

Airline seats from 2013 to 2023 for Europe

Financial viability challenge

Achieving financial viability has always been a challenge for smaller regional airports due to a number of structural issues, including traffic seasonality and demand imbalance across the year, as well as higher fixed costs and the lack of economies of scale achieved by larger airports.

But the massive losses accumulated during the COVID-19 pandemic, coupled with the renewed airline buyer power which results in suboptimal revenues from user charges, mean that prospects for improved financial viability are murky – especially for airports with less than one million passengers per year, which is acknowledged to be the minimum figure in order to achieve a break-even position.

User charges down by 13%, whereas airline fares have increased by twice that amount

Mr Jankovec opined that user charges levied by regional airports had been consistently decreasing over the past three years and today, in real inflation-adjusted terms, they are 13.4% lower than in 2019.

Meanwhile, airline fares have increased by 26% so far in 2023.

This is not sustainable moving forward – especially given the way that the current inflationary environment and interest rate rises are weighing on airports’ costs.

“What is at stake is the ability of airports to keep investing in sustainability, digitalisation and capacity. And while we will need to keep the flexibilities afforded by current EU State aid rules, we also need airlines to pay a fairer price for the use of our facilities”, said Mr Jankovec.

Moving faster to net zero regional air connectivity – over 200 airports certified under Airport Carbon Accreditation

Adherence to the ‘user pays’ principle also relates to sustainability, and in particular to decarbonisation.

A record 207 regional airports across Europe are now certified for carbon management and reduction under Airport Carbon Accreditation – the institutionally endorsed global standard – compared to 146 a year ago. Beyond reducing scope 1 & 2 emissions and adhering to their related Net Zero CO2 targets, airports are also increasingly looking at supporting and driving reductions in scope 3 emissions (Other Indirect Emissions).

But there is no escaping the fact that more resources and accompanying measures will be needed to progress faster, especially in view of the ambitions and content of forthcoming EU regulations.

FIT FOR 55 and other such measures could face a backlash

Regional airports are especially vulnerable to the impact of 'FIT FOR 55' (the EU's target of reducing net greenhouse gas emissions by at least 55% by 2030) – as all related measures apply fully to the intra-European routes on which they rely. Research from the consultants Oxera shows that passenger demand will fall by close to 20% at regional airports – thereby inevitably compromising the connectivity they provide to their communities.

Marco Pernetta, Chair of ACI EUROPE’s Regional Airports Forum and CEO of Innsbruck Airport, made an interesting observation when he said, “Whilst FIT FOR 55 is an absolute necessity, Governments and policy makers still need to look at and address the risks involved in terms of cohesion, territorial equality – and ultimately the risk of backlash against climate action.”

It is rare to hear a representative of such an organisation use this sort of language – to refer indirectly to successive surveys that have demonstrated that the general public is unhappy about the dash to fulfil zero carbon targets which might impact too heavily on the public. The most recent one (in the UK) suggested that while most people are happy to support the broad aims of Net Zero, they are not so quick to embrace them when that means they have to pay a price individually.

It is likely that these attitudes will continue to embed themselves in an increasingly sceptical public.

Calls for a European strategy for sustainable regional air connectivity as regional airports now account for 35% of total direct air connectivity

Mr Jankovec said, “As the European Commission failed to provide a comprehensive impact assessment of FIT FOR 55, these have been largely ignored – at our own peril. Regional airports now account for 35% of total direct air connectivity in Europe, up from 29% ten years ago. We need a European strategy for sustainable regional air connectivity which ensures regional aviation can quickly become the test bed for the decarbonisation of aviation, along with necessary compensating measures. This can be done well before rail development could effectively come close to provide any suitable alternative at the scale and scope required.”

ACI EUROPE has encapsulated the analysis on this vital market segment with the publication of its report ‘European Regional Airports: Sustainably Connecting People, Places and Products’.

The report explains the key role played by regional airports in Europe in particular during the COVID-19 recovery, along with key passenger and traffic data.  The report also explores some of the key regulatory hurdles faced by regional airports and the policy frameworks that need to be put in place to address their needs, including financing their decarbonisation.

Airports are outperforming other sectors, and with a positive summer coming, but there is disparity in the response and financial challenges

ACI EUROPE has thus described a market segment that is simultaneously outperforming other sectors, with a positive summer ahead, while also warning of disparities in the pace and strength of recovery and continued financial challenges.

In a further address, this time to the recent Routes Europe event in Łódź, Poland, ACI EUROPE reiterated how European airports are under "constant competitive pressure" to obtain and hold on to air services, claiming structural market changes resulting from the COVID-19 pandemic "have only increased the power of airlines over airports".

"Over-regulated with price caps and little in the way of commercial freedom"

Mr Jankovec said on this occasion, "The reality of airport competition remains largely ignored by national regulators across Europe. The result is airports being over-regulated with price caps and limited commercial freedom". He added: "Meanwhile, airlines enjoy unrestrained pricing power vis-à-vis consumers with no checks and balances whatsoever".

He spoke of the ACI EUROPE analysis, just released, of competition between European airports.  It depicts a new aviation market paradigm where the increasing buyer power of the airlines in Europe squeezes Europe’s airports ever further as they strive for financial stability and resilience.

There are 700 airports involved in competition, compared to only seven group airlines

The synopsis, ‘Fierce Competitors, Fragile Foes’, builds upon a Frontier Economics study published earlier this year, ‘Airport Competition in Europe: Recent and Future Developments'.

Both look at how competition between airports works and has kept evolving, with competition now strongly playing out on a pan-European level.  This takes place across a highly fragmented network of close to 700 airports – with only seven major airline groups being the protagonists in choosing between airports for their routes, aircraft bases and growth. 

The conclusion is that the structural market changes resulting from COVID-19 pandemic have only increased the power of airlines over airports. These include the relentless expansion of Ultra-Low Cost Carriers (ULCCs), accelerating airline consolidation and tight airline capacity management.

The constant level of route openings and closures – the so-called route churn, which is the natural preserve of ULCCs – along with changes in capacity on existing routes all documented by ACI Europe – provides indisputable evidence of airports being under constant competitive pressure to attract and retain air services.

The Routes events are 'essentially a beauty contest'

Referring to the event at which he made the address, Mr Jankovec said: “Routes Europe has at its core the concept of air connectivity, which as we know is the life-blood of our nations and regions, our economies and our societies. The Routes events are essentially a beauty contest – with airports vying to attract the footloose airlines, which can[,] and will[,] leverage bargaining power through size and flexibility. If competition between airports did not exist, neither would the Routes event."

The 'reality of airport competition remains ignored by regulators in Europe'

Further, Mr Jankovec said: "To sum it up, airport competition isn’t a bad thing, quite the opposite. But the fact is that the reality of airport competition remains largely ignored by national regulators across Europe. The result is airports being over-regulated with price caps and limited commercial freedom. Meanwhile, airlines enjoy unrestrained pricing power vis-à-vis consumers with no checks and balances whatsoever."

Let’s be honest here, ACI says: "...these regimes are all about protecting airlines and their shareholders, and they do little to protect consumers. This needs to change – and we look forward to further engaging with regulators on this."

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