Business-oriented London City Airport anticipating a quick passenger rebound

Summary

• London City Airport is putting its trust in established pre-pandemic corporate travel demand, but is hedging its bets with some new leisure routes.
• There is good and bad news about COVID-19 in Europe, London City's marketplace, with more good than bad in the UK at least.
• The airport has a long and hard climb back, facing the fact that it lost more passengers in 2021 than in the previous year.
• There has been plenty of financial support from well heeled shareholders, but the airport has never had much political support.
• The opening of the Crossrail service that passes through Heathrow Airport later this year will make travel to that airport much easier from London City's environs, and especially while it lacks a Crossrail station of its own.
• So much depends on how British Airways, the major airline, commits to London City in the future.
• Basing a strategy mainly on the way the UK government response to COVID-19 is changing may not be the best policy.

An 'all eggs in one basket' approach may be perpetuated: London City puts its trust in a rebound of the corporate travel market

If there is one airport in the UK - and indeed anywhere - that epitomises the "all the eggs in one basket" approach to airport marketing it is London City, the short take-off and landing facility six miles to the east of the original City of London financial centre, and even closer to the new one that developed from the 1990s around Canary Wharf in the old Dockland area.

Or at least that was the case.

For five years or so before the onset of the coronavirus pandemic the airport had been trying to diversify its portfolio to attract leisure customers to boost its usual complement of corporate travellers, particularly at weekends when business people don't usually travel. As it happens, the success it had in doing that offered a cushion against the worst effects of the pandemic.

Now the airport's CEO, Robert Sinclair, speaking on 'Blue Monday', the third Monday of January and acknowledged to be the 'most depressing day of the year,' says that he is confident that a revival of corporate travel will take place.

Bad and good news from the COVID Western Front

On the face of it that seems an overly optimistic comment to make, given that, according to this week's (commencing 17-Jan) CAPA CEO Briefing:

• COVID-19 infections are still rising in 129 countries
• Global daily new infections have reached over three million (week commencing 12-Jan-2022)
• European air seat capacity has taken a severe hit into the new year due to the Omicron fallout
• (Online) Travel search in all regions has either levelled off or is declining slightly

However, there is some light at the end of that tunnel.

For example:

• ICAO says that global passenger volume outlook for 2022 foresees an 80% recovery by the end of 2022
• New daily cases are slowing and declining in some Western Europe countries
• UK cases appear to have peaked, giving hope that the European winter's wave could be slowing

To add more weight to the latter two bullet points: firstly, the Omicron wave in Europe is moving rapidly, tsunami-like in a west to east direction, but crucially there is no sign of it coming back the other way again.

With respect to the UK - which seems to have thrown caution to the winds since Christmas, with the mantra "we have to live with COVID' being repeated frequently by a Prime Minister under incessant pressure to resign - it seems as if that could be the case this time.

Banking on a state of herd immunity

Irrespective of the Prime Minister's reasons for relaxing COVID regulations, the government appears to be banking on the UK having reached a state of herd immunity - or something close to it.

Statistically, there is some evidence to reinforce that theory.

From a peak of 220,000 cases on 04-Jan-2021, they had reduced to 70,000 on 16-Jan-2022, falling in the past few days by an average of 15,000 a day (and actually exactly as modelled). The COVID-19 case numbers are considerably less than in comparably sized countries such as France, Italy and even Spain. If they were to carry on falling at that rate they would reach zero - which is almost where they were in Mar-2021 - before the next CAPA CEO Briefing.

Of course, chance would be a fine thing, and that will not happen; COVID won't be eradicated that easily. But realistically, 10,000 cases a day could be reached quite quickly, far fewer than infections from influenza and several other viruses doing the rounds, not to mention the common cold, which is the virus king presently.

Consequently, isolation periods have been reduced from seven to five days (although that is mainly on account of severe staff shortages) and it is rumoured that the government's entire 'Plan B', which it adopted in Nov-2021, could be withdrawn, including the much-hated COVID Pass, which was voted against by 99 of Johnson's own party MPs, with more abstaining.

UK COVID cases, to 16-Jan-2022

Source: JHU CSSE COVID-19 Data

'End of the pandemic!'

This, together with Omicron finally being identified as a weaker version of the virus (which is what South Africa has been saying for two months), has prompted several British newspapers to speculate that the pandemic may be coming to an end.

This is something that has been heard too many times before, but it was all the evidence that hordes of Britons needed to seek out holidays for the 2021 summer - either online, or by going back into travel agencies with newspapers claiming they are sitting on GBP1.7 trillion of unspent discretionary income.

Waiting six months for leisure travel is one thing; corporate travel needs to be here and now

So there are good reasons for London City to feel confident about a return of leisure travel in five or six months' time (winter ski holidays are still generally unavailable) - but corporate travel is in the here and now.

Bullishness about corporate travel must emanate from the fact that the airport's current route network lies exclusively in the UK or continental Europe, with the furthest points being Málaga (leisure route) in the south and Vilnius (leisure and business) in the east. No flight lasts longer than three hours.

Those are the regions where travel is likely to return quickest if regulations are relaxed or withdrawn.

London City does not have to worry about trying to entice long haul flights to return as there were none previously.

London City Airport: network map for the week commencing 17-Jan-2021

Source: CAPA - Centre for Aviation and OAG.

Traffic declined more in 2021 than it had in 2020

For London City there needs to be an urgent return of business.

In common with the other main London airports - Heathrow, Gatwick, and Stansted - and regional ones like Manchester, passenger traffic declined even further at London City in 2021 than it had done in 2020.

The chart below is only for the period Jan-Oct 2021.

London City Airport: passenger numbers/growth from 2011 to 2021

Source: CAPA - Centre for Aviation and London City Airport and UK Civil Aviation Authority.

Traffic from Jan-2018 is from UK CAA.

But it is known that 714,000 passengers travelled through the airport in the full year 2021 - less than 15% of the 2019 level and lower even than the 905,000 travellers in 2020, when there was normal traffic in the first two months.

The rest of the chart shows that growth had otherwise been consistent between 2011 and 2021, up to 16.7% (2015), and with only year of regression before the pandemic (2015, -0.3%).

Financial support from shareholders

Moreover, the passenger losses in 2020 and 2021 meant that the airport had to turn to lenders and shareholders to raise hundreds of millions of pounds to respond to the disruption caused by the pandemic. That is despite the collective power of its shareholders. Shareholders backed the airport through new funding, with GBP200 million in loans and a GBP190 million private placement.

The airport was acquired in Feb-2016 by a consortium led by Alberta Investment Management Corporation (AIMCo), which also included Ontario Teachers' Pension Plan, OMERS (both Canadian superannuation funds) and Wren House Infrastructure Management (the global direct infrastructure investment vehicle of the Kuwait Investment Office), from Global Infrastructure Partners and Highstar Capital.

Previously it had been owned by an Irish entrepreneur, Dermot Desmond, having been built and opened in the 1990s by a construction company, Mowlem.

It traded hands on the last occasion for one of the highest earnings multiples in the history of the airports business, and is undeniably a premium piece of real estate situated in the heart of one of the most sought-after locations in the country for both commercial and residential development.

Indeed, there has been speculation as to whether it might be earmarked for alternative purposes, just as the world-famous docks which once stood there are no more.

No political support

Politicians have never gone out of their way to offer support to the airport.

The previous Conservative Mayor of London (Boris Johnson, now Prime Minister) was against any expansion of what he saw as an irritating impediment to his dream of a super-new all singing and dancing airport in the River Thames Estuary.

His successor, the recently re-elected Sadiq Khan (Labour), has not shown much more enthusiasm for it either. Moreover, the two local London borough councils that flights directly affect, Newham and Tower Hamlets, regard it as an environmental nuisance. Even boroughs to the south, such as Lewisham, have objected to further expansion of the airport.

Crossrail opens up Heathrow to air passengers from the financial districts

The company Crossrail remains on track to open the Elizabeth Line (a west-east high-speed rail line across London and mainly underneath it) in the first half of 2022, three years late.

There is continuing public pressure for a Crossrail station to be built at London City. If there is not, it will eventually be almost as easy for someone working or living in either the original financial district or the new one to travel directly into Heathrow, over 20 miles (32km) away, by way of the Elizabeth Line as it will be to get to London City, where frequencies are far fewer.

But London City has persevered with its planned expansion

Nevertheless, London City has forged ahead and completed major parts of its planned capacity expansion while it was closed to traffic for much of 2020.

The airport has added a full-length taxiway, eight new aircraft stands, and some new passenger facilities. It declared the new taxiway operational, which will permit up to 45 flights per hour. Its new remote tower, located 80 miles away at Swanwick, went live in 2021, having been delayed since 2019.

While the remainder of a USD675 million (GBP490) expansion plan will be on hold until traffic recovers, the new master plan released in Dec-2020 anticipates 11 million annual passengers by the mid-2030s - more than double its 5.1 million in 2019.

Seat capacity gradually returning

It will be some time before capacity returns to the degree that expansion anticipates.

The seat capacity chart below shows that it return gradually but progressively throughout 2021, ending the year within touching distance of 2019 levels. The projection for 2022 has capacity again closing on 2019 levels throughout the year, but this is only an estimate.

London City Airport: weekly total system seat capacity, 2019-2022* (projected)

Source: CAPA - Centre for Aviation and OAG

* These values are at least partly predictive up to 6 months from 17-Jan-2022 and may be subject to change.

British Airways easily the largest airline

Although there are five UK routes, the bulk of the airport network is international, currently accounting for 73% of capacity.

London City is dominated by British Airways, which accounts for 76.4% of the capacity (and 61% of movements), which is more than at any other UK airport at which the airline operates, including London Heathrow (46%). London City's modus operandi, with its focus on the higher-yielding business traveller, suits BA's strategy well.

London City Airport: seats per airline, week commencing 17-Jan-2022

Source: CAPA - Centre for Aviation and OAG

The country that accounts for the majority of services - The Netherlands (22%) - is not one that is particularly identified as a financial centre but it is followed by two that are, namely Switzerland (Zurich and Geneva) and Germany (Frankfurt).

The single route with the greatest capacity is Amsterdam (15%).

But there are two routes that could be classified as leisure or part-leisure in the top 10: namely Ibiza and Nice.

London City Airport: top ten destinations by seats, week commencing 17-Jan-2022

Source: CAPA - Centre for Aviation and OAG

With restricted flights, utilisation is still well spread across the day

Within the airport's operational hours utilisation is good right now, meaning that all the hourly blocks are used.

The chart here is for Thursday 20-Jan-2022 and it is typical of utilisation during the week commencing 17-Jan-2022.

London City Airport: system seats per hour for 20-Jan-2022

Source: CAPA - Centre for Aviation and OAG

The CEO is 'optimistic' based on changing attitudes to the pandemic in the UK, but passengers don't only originate there

Mr Sinclair is "very optimistic" that the travel industry will recover rapidly from the impact of the Omicron variant, and he has predicted a "step change" in demand for flying from this summer. At the same time he has been retaining his confidence, in particular, in the corporate travel segment where in the autumn of 2021, when passenger numbers hit their highest levels of the crisis, business travel returned to 35% to 40% of normal levels.

"Two years into this pandemic, I think hopefully we are starting to see the end of it . . . the government's messaging around living with COVID is hopefully resonating with people", Mr Sinclair said.

But those people that the government's message is aimed at are only half the story of course.

Many of the airport's passengers arrive from The Netherlands, as was previously remarked on, and that country reimposed lockdowns in mid Dec-2021 amid record infection rates, although the restrictions are being partially removed (or at least eased) as this is written.

Passengers are fed up with constantly changing regulations

Such mindsets inevitably apply to the way foreign visitors are treated as well, and the regulations remain as likely to change - and become more restrictive - at any moment as they ever did.

Just as the British government relaxed its rules about its own citizens having to have a negative test certificate obtained within 48 hours of arrival to get back into their country, several Nordic countries demanded that such a certificate - in some cases only available on arrival, and irrespective of vaccination 'status' - be provided by foreign visitors. In other words they are saying that vaccination status, the great 'silver bullet', is worthless.

One airport even requires arrival testing to take place by way of one designated provider, which is situated in the departures area.

The prompt arrival of the next strain is confidently anticipated

While restrictions such as these remain in place there is no prospect of a serious and sustained return of passengers, be they travelling for business or leisure purposes.

The vast majority of potential travellers will be wary of the sudden emergence and spread of yet another new strain of COVID-19, and will be confident that that would lead to these same ultra-restrictive travel regulations being reintroduced yet again. It appears that most governments are incapable of coming up with any other response.

Looking at it from that standpoint, it is perhaps a little disconcerting that Mr Sinclair should have opted not to divert the airport's model too far away from lucrative - but missing in action - corporate customers, who have been given more time to refine their videoconferencing skills and to consider climate awareness, which is towards the top of most corporations' ESG focus list now.

And it is even more surprising that Mr Sinclair expects to see a return to close to pre-pandemic levels of flying at London City airport this year.

Perhaps the announcement of new leisure-focused routes for this summer on British Airways, including Thessaloniki and Barcelona, belies the continuing commitment to business routes that is the stated position.