INVESTING IN AIRPORTS
All change? Lufthansa Consulting’s Catrin Drawer and Andreas Jahnke consider what the impact of COVID-19 is likely to be on the investment appeal of airports across the globe.
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oes COVID-19 mean that airports have finally lost their mantra of being a safe, long-term investment opportunity for investors? The short answer is ‘no’, because airport investments have never been a “sure thing” with a guarantee of return. In fact, most of the world’s airports aren’t profitable and never have been. Indeed, the latest economic data by ACI World shows that around a quarter of all airports worldwide fail to generate enough money to cover their operating and capital costs. Admittedly, usually the smaller and secondary airports, but even some hubs do not always manage to generate profits. And analyses by air transport specialist, Andy Ricover, presented at GAD 2019 shows that there is no correlation between profitability and an airport’s ownership structure. The fairy tale of the fabulous wealth of private airport investors is simply not true. It has been nourished by spectacular deals, billions of dollars in profits after a few years of holding, and exaggerated valuations based on market-driven (but not always economically justified) EBITDA multiples. It is also true that too much inexperienced money – trusting in the supposedly crisis-proof and constantly growing airport investment – has driven prices up, and that trend is now almost certainly over. The COVID-19 crisis has suddenly shown that an entire industry can be economically destroyed in days. Such a crisis was foreseeable, but hardly any airport has mitigated the risks in terms of processes or, more importantly, with its cost and capital structure – neither private airports, nor those in government ownership. It is simply not enough to replace public money with private capital from pension funds to generate better returns. Passengers and airlines have the choice of which airport they want to depart from and where they want to fly to. Only a few airports are lucky enough to be located in very attractive destinations with large catchment areas. And even then, they are subject to competition from other airports (for example, London, New York or Moscow). Even if an airport has developed well over the past few decades, at some point it will reach its limits of growth and then be exposed to governmental decision-making processes, environmental influences and the possible escape of passengers from the crowds. So, what does it take to manage an airport profitably? Some airports are managed as if it were enough to build a runway and a terminal. The airlines would bring the passengers and with them come the revenues from handling. Admittedly, these aeronautical revenues still account for 55% of the revenues globally, according to ACI. However, our analysis based on the ACI figures, also show that the costs of airports on average exceed aeronautical revenues – aeronautical revenues per aircraft movement
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AIRPORT WORLD/ISSUE 3, 2020
Key take aways: • Airports have never been a risk-free investment class • The COVID-19 crisis will accelerate airport sales and lower market prices • Not all airports will recover from the crisis; it is important for new investors to choose the right airports and manage them actively (ATM), for example, only cover about 75% of the operating costs. The possibilities to increase the fees for aircraft and passenger handling are limited due to government regulation and cost reduction pressure from airlines. Without additional income from shops, restaurants, parking etc, an airport cannot survive. These non-aeronautical revenues, however, demand prerequisites: attractive shopping offers, a pleasant atmosphere, short waiting times and good processes, a large number of flight connections and attractive transfer options. Such an airport ecosystem of airlines, shops, restaurants, hotels, suppliers, service companies does not develop on its own; it has usually grown over decades. It requires active promotion, partnership contracts, joint decisions, involvement of politicians and tourism promoters, marketing at home and abroad. The system partnership between the airport and its suppliers and service providers also ensures distribution of sales, costs and thus risks, and is therefore a key element in cushioning risks and ensuring cost efficiency. Finally, planning and foresight are the ingredients that ensure that an airport is never too large or too small to serve the number of passengers comfortably and efficiently. The coronavirus crisis has destroyed the sensitive airport ecosystems, like a fire destroys the rainforest ecosystem. Ground handlers are insolvent and consequently thousands of jobs have been