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Outlook 2023: airports need to change with the times – investment and strategy insights. Part Two

Analysis

2020 and 2021 were terrible years for the airport sector.

2022 has been better, but no sooner did the COVID-19 pandemic start to wane (in most places, but not Asia Pacific) than the Ukraine war set off a series of events that helped plunge much of the western world into a dystopian nightmare of power shortages, high utility prices, inflation (the dreaded stagflation in some cases), and industrial unrest.

Against that background the sector is expected to 'recover' in 2023, while remaining in the grip of global influencers for whom every rotation off a runway is another nail in the planet's coffin. It is going to be another very difficult year, and who knows what additional problems lie in wait around the corner?

However, there are still some bright spots, nationally, regionally and globally.

When peace finally comes, Ukraine, its airports and tourism infrastructure will present the world with its greatest rebuilding challenge for more than 70 years.

While it is also possible that more airports could close, many have taken the opportunity to design or redesign new terminals in ways shaped by the pandemic. For the first time they will actually be in a state of preparedness for a 'Black Swan' event.

More airports need to follow the lead.

Summary

  • The mistakes of 2022 must be avoided and airports become more resilient than ever.
  • Foreign investors may look increasingly to India, which is likely to be building more airports than China.
  • The new and privately financed Bugesera Airport in Rwanda could be a catalyst for awakening investor interest in Africa.
  • A possible increase in 'airport alliances'.
  • New terminals will open that were spawned during the pandemic, but more airports could yet close.
  • The repair of Ukraine, including its airports, will be the biggest task since World War 2.
  • It should never be assumed that public commitment to 'net zero' in the aviation business or generally, is set in stone.

Passenger memories are long; the mistakes of 2022 must be avoided

In part one of this report CAPA observed that 2022 had been an even more difficult year for airports than it had been for airlines, with a multiplicity of staff needed to be found to man not only fundamental airport functions, but also the paraphernalia of daily operations by third parties such as shops, restaurants, duty free stores, car parks, airline catering, security, border control, and so on.

In such circumstances it can be difficult to predict events for a new year, but at least there were identifiable trends in 2022 that have provided a degree of foundation for speculation.

We continue our observation.

More Indian airports to be built

At the beginning of Aug-2022 India's Minister of Civil Aviation reported that the number of operational airports in India had increased from 74 in 2014 to 141 at present, including eight heliports and two water aerodromes. The government plans to increase this to 220 operational airports by 2027.

That is a huge development programme, increasing the number of airports by over 60% in five years, but it would bring India back into the same league as China, where there were 248 operational airports reported in 2021 - 75% more than there are in India now for a similarly sized population.

Airports in India

China failing?

The positive position in India stands in some contrast to that of China, where the country continues to be impacted by COVID-19 pandemic lockdowns (although they are being lifted as this is written), associated protests, and a precarious economic position where the economy could be brought down by failing real estate companies.

There are few foreign airport investors left in China now, although they are not encouraged anyway.

Earlier in the year Fraport made available its 24.5% stake in Xian Airport after 16 years, expressing "satisfaction but disappointment" about its investment, which does not send out a positive message to other companies that might be attracted to the Chinese marketplace - assuming they were permitted to enter it.

Moreover, as CAPA has reported recently, several airports have taken a heavy financial hit from this combination of events; notably Beijing Capital Airport, right at the centre of government.

And worsening relations with western countries such as the US, UK and Australia will not help matters either.

None of this means that airport construction and investment will end or even diminish; only that China may not be the centre of attention in Asia Pacific in 2023 as it has been for the past two decades, with that attention shifting more in the direction of India (as above), Indonesia, Vietnam and the Philippines.

Airports in China

More Greek concessions on the cards

One country where a privatisation process has been a surprising success is Greece, where 14 mainland and island regional airports were concessioned in 2017, to Fraport. This was despite initial difficulties, and despite the deal being resented as being an outcome of the Greek debt crisis.

Fraport has invested heavily in upgrading and improving the management of the airports, improving capacity and service levels.

Now a further 23 airports are being lined up for similar treatment, with Kalamáta International Airport being the 'test bed.'

And it could be linked to an equity sale at Athens Airport, where a stock market float is the likely outcome for 30% of the remaining 55% that is held by the government.

Athens International Airport: ownership - listing largest shareholders

Finally some movement in Africa?

Year after year in these 'Outlook' reports CAPA reflects on the lack of 'developed world' interest in Africa's airports. The reasons are many and well documented.

Africans, 17% of the world's population, accounted for only 3% of air passenger figures in 2019 before the coronavirus outbreak. Passenger load factor was the lowest in the world.

Africa has not moved with the times, for example, in the development of low cost airlines, with only 2.4% of the 'Within Africa' seat capacity being on LCCs in 2022 - compared to 47.7% in Europe.

The potential to build non-aeronautical revenue streams is often limited, and in many places there is still little urgency in daily trade. As the British comedian Alexei Sayle once observed, an African farmer doesn't have to get his goats to market bang on the button.

And Africa has been unable to shake up the cloying stench of past corruption, even though there have been huge strides made to nullify it.

There is still a paucity of east-west services and there has been the emergence of only one major new hub, in Addis Ababa, to supplement the southern one in Johannesburg.

Connectivity is thus poor.

But the times are changing. Africa is in the spotlight increasingly because trade body surveys (IATA, ACI et al) have identified it as a long term growth region, although progress was held back by the COVID-19 pandemic, which isolated individual countries.

Moreover, there is now an open-skies initiative of the African Union, the Single African Air Transport Market (SAATM). And 34 countries, accounting for 80% of the continent's aviation activity, signed up for it in 2018, effectively sidelining the moribund Yamoussoukro Agreement.

Non-African interest in the continent's airports will receive a boost from the imminent completion of the USD400 million Bugesera Airport in Rwanda, in which Qatar Airways is an investor. The airport is one of several such greenfield capital city airports across the continent and it is expected to be 'state of the art' for Africa.

Elsewhere, CAPA has reported on the possibility of further unsolicited offers to acquire a stake in Airports Company South Africa; in TAV's bid to operate Lagos Airport in Nigeria, the first of numerous long-anticipated concessions there; in Oman Airports' MoU to develop Kilimanjaro Airport, and in ambitious plans to develop a southern Africa hub in Harare, Zimbabwe.

All of these point to more, rather than less, activity in the sector in Africa in 2023.

Airport 'alliances' on the increase?

Before the COVID pandemic rumours were growing that the system of airline alliances was under threat, as some participants were questioning their value in several ways, but they survived the pandemic.

Now there is some evidence of airports increasingly joining together in alliances - or at least engaging in 'sister airport' agreements.

Two such announcements were made in 2022.

In the first, Istanbul Airport (IST) signed a sister airport agreement with Airports of Thailand, following one with Airports Corporation of Vietnam, with the goal of being the first destination in Europe to receive direct flights.

Previously, Airports Corporation of Vietnam had reached a similar business development agreement with Italy's SEA Airports.

With Asian airports remaining heavily impacted adversely by the pandemic, there is the likelihood of more such deals between them and European group operators.

On the other hand, the long-standing cross-shareholding between Royal Schiphol Group (RSG) of the Netherlands and Aéroports de Paris (ADP) is starting to unwind, as RSG declared that it would repurchase 296,882 shares, resulting in a full exit of RSG from ADP's share capital.

As 2023 progresses it will be interesting to observe who courts who to find a more rapid exit from the pandemic's impositions.

New terminals opening that were designed during the pandemic, with the next one in mind

Another intriguing outcome of the pandemic is the opening of terminals that were designed during its main impact (Mar-2020 - Mar-2022), or which had been designed previously but had that design altered to take into account the demands it placed on airports, both now or in the future.

Notable among them are Pittsburgh in the US, the first terminal in the country to be built from scratch after COVID-19. Its main focus will be on public health and technology, with new facilities prioritising social distancing, clean air ventilation and outdoor spaces.

Another is Clark International Airport in the Philippines, described in a CAPA report as a 'child of the pandemic', and one that had been designed before it, with a new design having to be applied even during its construction.

Everything is now 'contactless', including self-service check-in kiosks and bag drop systems, restrooms and nursing stations, and contactless ordering for restaurants. The changes had to be made within a framework under which the airport lost much of its 'low cost' tag in favour of full-service operations.

Clark Airport, Philippines: new terminal

Airport construction activities were often put on the back burner, or were at least temporarily curtailed, during the COVID pandemic.

Now that they are resuming, it behoves management everywhere to ensure that they are 'pandemic-ready'.

COVID-19 might have been a once-in-a-century infection. Or something even worse might appear.

Airports to close?

The industry escaped the ultimate impact of the pandemic - closure of airlines and airports - fairly lightly. At least, so far. And the airline sector saw numerous new entrants.

However, many airports, especially smaller, low cost-oriented facilities which may have subsequently witnessed those LCCs congregating their services more centrally, remain at risk in the 'post-pandemic' climate of war in Europe, recession, inflation, potential stagflation (the worst case economic scenario), and airline schedules that are again reduced - for the (northern) winter season, especially.

CAPA reported on the demise of Doncaster-Sheffield Airport in the UK in Jul-2022.

The facility was functional for only 17 years and had at one stage thrived, despite industry concern about its viability subsequent to its conversion from a military base by Peel Airports. It achieved 1.4 million passengers in 2019, which was its highest ever total. Services included long haul charter flights.

That viability, as principally a low cost and charter airport, should not have been in doubt, because it had an adequate catchment area to feed off, specifically serving a metropolitan region of 1.4 million people and a wider region of over two million.

Despite concerns that Peel Airports, part of a larger real estate group, could always find alternative uses for the airport, the straw that broke the camel's back was the sudden withdrawal of services by Wizz Air, the main airline there, on the basis that the airport "could not guarantee the terms of its commercial agreement".

Within five months of an announcement by the South Yorkshire councils that they were searching for a new investor, the airport closed to commercial flights (04-Nov-2022).

Despite hopes that a 'credible investor' had been found - ultimately there were none.

This episode highlights two outcomes that all airports must be wary of in 2023.

The first is that of not putting all your eggs in one basket, but there is nothing new there.

The other is that this segment of the industry is going to find it very hard to attract new investors for several years to come.

Long gone are the 'glory years' of the late 1990s and early 2000s - when real estate companies, train companies, bus companies, gaggles of retired staff from major airports, venture capitalists, Uncle Tom Cobley and all were buying up second tier airports like there was no tomorrow.

Post-Ukraine war scenario

The Russian invasion of Ukraine has become a war of attrition, with destruction of the power network high on the agenda of the aggressor.

Although at this stage it is difficult to foresee an end to the conflict, a dramatic change of circumstances, such as the retaking of Crimea or a change at the top of the Russian government, could prove to be the catalyst for meaningful negotiations.

When the time comes to rebuild Ukraine it will be the biggest such undertaking since the end of World War 2. And it will, of course, include the airports and supporting transport infrastructure. Many agreements will already have reached the MoU stage.

In a report earlier in the year CAPA suggested how an existing 'tourist' city such as Odessa, which has so far avoided severe damage, could lead the way in helping to revitalise tourism for the entire country.

Many will want to visit, if only to 'do their bit' towards its renaissance.

Concern for the environment will increase, not decrease...or will it?

The 2022 United Nations Climate Change Conference (COP) has become an annual event, and the 27th in the series took place in Egypt in Nov-2022.

As was the case at its predecessor in Glasgow, no major decisions were taken that were directed specifically at aviation, since the conference became fixated on reaching an agreement on establishing a fund to compensate vulnerable nations for 'loss and damage from climate-induced disasters'.

In a landmark speech ICAO Council President Salvatore Sciacchitano advocated for the realisation of the ICAO Assembly's decision to reach net zero emissions from air transport by 2050. That's about the measure of it.

That does not mean aviation is 'off the hook.' The industry is on a self-perpetuating roll to 'play its part' in combating perceptions of climate change, come what may. University degrees are dedicated to it. Careers depend on it.

It is an industry in its own right, and it won't be long before there are many more 'carbon billionaires'.

And while the emphasis is on the search for alternative power sources for aircraft, such as hydrocarbons and electric batteries half the size of the cabin, airports will have to match the measures taken by airlines every step of the way.

That means far more of them facilitating the provision of Sustainable Aviation Fuels (SAFs) on site because they will become cheaper, and the industry anticipates that these fuels will eventually form 65% of its net zero emissions goal.

There will be an increasing demand for new terminal infrastructure to be built to LEED (Leadership in Energy and Environmental Design) standards, even at the smallest airports.

Then there are contradictory trends to be taken into account.

For example, the pandemic was supposed to have been the end of the line for the A380. But while some airlines have written off the model, others are bringing it back into service. Airports that had A380-compliant handling facilities but started to dismantle them, or to disengage them from future planning, have some thinking to do.

Airports will thus need to react on operational, tactical and strategic levels in design of new terminals, to an ever-changing set of circumstances and challenges.

But if there is a 'big picture' to keep in mind, it is that the entire world faces economic challenges for several years hence, and in many cases they will be severe challenges. In such circumstances, idealism and pragmatism need to be balanced.

Many passengers will become highly reluctant to pay any form of environmental premium. There are public surveys (UK) indicating clearly that some voters have signalled that they are revisiting their view on 'net zero' in particular, and its cost (estimated by McKinsey to be USD275 trillion to 2050).

Airports and airlines alike need to read the runes.

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