Presentation title, dark blue, bold · fastest growing markets in the world and major contributors....

Airport EconomicsICAO Aviation Data Seminar

Michael Stanton-Geddes – head of economics & competition

Istanbul, 11 July

ICAO Aviation Data seminar

Traffic (Market)

Data sources

Economics (Performance)

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https://store.aci.aero/products/

4 topics this morning


Demand for the airport

product

Aero & non-aero

revenues

Non-aero revenues

Financial performance


product

Costs Financial performance



product

Aero & non-aero

revenues

Non-aero revenues



product



Demand for airport services

Derived demand

Total worldwide movements, passengers and air cargo evolution (2000–2017)


80

100

120

140

160

180

200

220

Jan-

00Ju

n-00

Nov

-00

Apr

-01

Sep-

01Fe

b-02

Jul-0

2D

ec-0

2M

ay-0

3O

ct-0

3M

ar-0

4A

ug-0

4Ja

n-05

Jun-

05N

ov-0

5A

pr-0

6Se

p-06

Feb-

07Ju

l-07

Dec

-07

May

-08

Oct

-08

Mar

-09

Aug

-09

Jan-

10Ju

n-10

Nov

-10

Apr

-11

Sep-

11Fe

b-12

Jul-1

2D

ec-1

2M

ay-1

3O

ct-1

3M

ar-1

4A

ug-1

4Ja

n-15

Jun-

15N

ov-1

5A

pr-1

6Se

p-16

Feb-

17Ju

l-17

Dec

-17

Inde

x

Passenger Air cargo Movement

Dot-Com Recession & 9-11

SARS Outbrea

kGreat Recession

Eyjafjallajokull

Eruption

Recovery in global

trade

Demand for airport services

ICAO Aviation Data seminar Airport Economics

Alternative transport

modes

GDP

Globalisation

Deregulation & liberalisation

Investment Outbound tourism

Trade restrictions

Airport capacity & curfews

Restricted bilaterals

Higher oil price

Lower oil price

New markets

Economic stability

Economic instability

Currency exchange

Exchange rates


Elasticity of demand

Income and prices are the key economic determinants for demand of a product/service

Need to understand the impact on demand from changes in these variables

Responsiveness of demand is measured by:> Income elasticity of demand> Own-price elasticity of demand> Cross-price elasticity of demand

Estimates of air travel demand elasticities


Airport core KPIs have been strong


Pax, 34.8%

Freight, 18.9%

GDP (constant prices),

9.1%

Change (2013- 2018)


Past 10 years average of 3.6 ratio of pax traffic growth to GDP growth for Europe (2.8 excluding 2013)

Ratio of airport traffic growth & GDP growth

0.020.01

0.020.04 0.04

0.11

0.030.02 0.03

0.04 0.03

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Pax to GDPgrowthratioPassengers

EU28 GDP

Data: ACI World Airport Traffic Report/Forecast; Eurostat; OECD


Contracting from 2.8 to 2.1 for the coming 5 years, according to forecasts

Forecasts show that the multiple is narrowing

0.020.01

0.02

0.04 0.04

0.11

0.030.02 0.03

0.04 0.030.02

0.03 0.02 0.02 0.02 0.02

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Pax to GDPgrowth ratioPassengers

EU28 GDP

Regional trends

Where have we been?

ICAO Aviation Data seminarSource: ACI World Airport Traffic Report, 2018

Global compounded annual growth (CAGR) 2007-2017

Pax traffic: 4.3%


Where are we now?

Burgeoning Pacific:

Strong growth in international traffic

Animal spirits:LCC Market

continued rise;Russian and

Turkish recovery

Recovery:Nigerian and Northern

recovery; Ethiopia double digit growth

Heterogeneous growth:

Mexico red hot;Colombia recovery;

Brazil recovery;

Moderating growth:Weakest growth in years; Qatar crisis; Travel bans

Indian and Chinese market – fastest growing markets in the world and

major contributors

Animal spirits:Strong domestic

demand; rise of the middle of the pack

hubs

Source: ACI World, 2018

Global passenger traffic 2018: 8.8B (+5.9%)

+5.0%2.0B

+5.0%643M

+9.9%214M

+6.2%2.4B

+4.0%407M

+6.6%3.2B


Where are we going?

A doubling of pax traffic within 17 years

0.9 1

1.5Emerging market to advanced economy

pax ratio:

Parity

Source: World Airport Traffic Forecasts, ACI World, 2018

2034


Where are we going?

8.3 B

19.8%11.5%

8.6%3.3%3.2% 3.1% 2.7% 2.5%2.3%2.3%2.3% 2.2%2.1% 2.1%1.9%1.7%

28.4%13.1 B

Forecasted contribution to global passenger traffic by major country share % (2017 – 2027)

Global compounded annual growth (CAGR – 2017 TO 2027):

4.7%

Source: World Airport Traffic Forecasts, ACI World, 2018

Below the average: variance in regional and airport performance

Averages hide the differences


21%17%

39%

21%16%

43%

29%

20%

2%

23%

10%

0%

45%

21%

Africa Asia-Pacific Europe Latin Americaand Caribbean

Middle East North America World

Proportion of airports that that experienced a loss in passenger traffic volume by region for airports with less

than 5 mppa (2007-2017)

<1m 1-5m

Divergent traffic evolution for airports < 1 mppa


-20%-15%-10%

-5%0%5%

10%15%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

% C

hang

e in

TPA

X

Year

More than 1M

Less than 1M

Linear (More than1M)Linear (Less than 1M)

Source: ACI EUROPE traffic statistics

Not all airports grow at the same rate



Number of origin destination pairings served by a connecting flight through selected airports

Hub competition & connecting pax share

The constraintthat these airports impose on one another has increased.

Factors influencing airport selection


• Airport user charges• Financial incentives• Airport reputation• Airport advertising• Freight forwarder presence• Presence of passenger

airline operations• Presence of partner airlines• Flying time and cost• Location of competitors

• Bilateral restrictions• Night operations

capability• Noise regulation• Infrastructure availability• Congestion

Pull Factors Push Factors


Rail / Air modal split (distances between 300 and 600 km)

High-Speed Rail as Competitor

Other airports: local & global

Passenger choice> How much realistic route overlap is there at airports in the

same catchment area?> Transfer passengers have multiple ‘hub’ options

Airline choice> Where can the airline deploy an aircraft for a higher yield?




product

Aero & non-aero

revenues

Non-aero revenues



product


Myth #1

Aircraft-related revenues make-up the lion’s share of airports’ aeronautical revenues


What is the largest component of aeronautical revenues?


Global industry revenue by source (2017)


Europe: distribution of revenues


Aeronautical revenues (2017)

*AIF: Airport Improvement Fee (AIF)**PFC: Passenger Facility Charge (PFC)***Terminal rentals are mainly limited to North America. The Federal Aviation Administration (FAA) classifies;****Includes miscellaneous passenger-, aircraft-, cargo-related charges and all other unidentified charges of an aeronautical nature

Individual charge level


Passenger charges – by category Landing charges – by category

Ratio of aircraft-related to passenger-related revenues by region (2017)


Ratio of aircraft-related to passenger-related revenues (2017)

ICAO Aviation Data seminarSource: ACI Europe 2017

Airports have taken an increasing share of ‘traffic risk’ since the financial crisis

Myth #2

% share of non-aeronautical revenue is growing more than aeronautical as % of total revenue


What is the largest component of non-aeronautical revenues?

Distribution of non-aeronautical revenue by source (2017)



Distribution of non-aeronautical revenues (2017)

North America

16% Africa1%

Asia-Pacific

36%

Europe32%

Latin America

5%

Middle East10%

Distribution of non-aeronautical revenue by source (2017)


• Retail concession leading source in rest of world (Middle East)• Car parking leading source in North America

52.9%40.7%

Non-aeronautical revenue as % of total by airport size (2017)


31.3%34.5% 36.5% 36.8%

43.0% 43.1%

<1m 1–5m 5–15m 15–25m 25–40m >40m

Retail revenue per square meter (2017, US$, per day)

ICAO Aviation Data seminare: ACI Airport Economics Survey (2018)

$0.29 $0.66

$0.97

$1.59 $2.03

$3.14

<1m 1–5m 5–15m 15–25m 25–40m >40mAirport size (millions passengers)


Non-aero revenues are in a period of turmoil:- Online

shopping & price comparison

- Uber- Car sharing- Digital

advertising

Development of non-aero revenue


Reality: Non-aero growth is slowing in some major markets

2005-2017 Compounded annual growth rate (inflation adjusted)

Aeronautical: 5.7%Commercial / non-aeronautical: 4.9%

Some variability for certain years but on the whole:

Evolution of airport revenues by source (2005-2017)

ICAO Aviation Data seminarSource: ACI Airport Economics Survey (2018)



product

Aero & non-aero

revenues

Non-aero revenues



product


Myth #3

Airport costs are constantly decreasing with volume


What does it cost to operate an airport?


Revenues & cost per pax (2017)

AERO

NO

N-A

ERO

CAPITAL CO

STSO

PERATING

COSTS

Ground handling revenue

Non-operating revenue

Passenger related charges

Aircraft-related charges and

terminal rentals

Consistent losses on provision of Aeronautical services recovered through non-Aero business

European airports: total costs


OperatingExpenses


Capital Costs



5-year data on costs per pax in Europe

• Realising efficiencies• Per passenger costs

decreasing• Question of long-term

viability and risks of deferred maintenance.

• Data has shown years with sharp increases in costs resulting from step changes

Economies of scale – only to a certain point


$0

$5

$10

$15

$20

$25

<1m 1-5m 5-15m 15-25m 25-40m >40m

Total costs per passenger (US$ 2017)


High average total fixed costs at lower output levels –Need to reach economies of scale



product

Aero & non-aero

revenues

Non-aero revenues



product



Is the airport industry profitable?

Myth #4

Most airports generate net profits and a positive return on invested capital


Heterogeneous regulations across varied jurisdictions, which affect costs and revenues;

Differing objectives: cost recovery vs. profit maximization

Net profit and EBITDA margins are insufficient measures of profitability and financial health;

Return on Invested Capital takes into consideration the balance sheet (i.e. the capital intensive business of airports)

Caveats on profitability as concept:

Return on invested capital (ROIC)



Improving factors

Cost reduction, vs. revenue growth

(since 2013, per passenger in real terms, European airports)

-17% -10.1%

Return on invested capital by airport size (2017)


80% of airports have <1m pax(93% of them have a loss

Distribution of airports with a net loss*

*Source: ACI Airport Economics Survey (2017) and Official Airline Guide (2017)


Airport data analysis


Interpreting the data

Remain cautious when looking at averages> Maximum/minimum/standard deviation

Challenge idée fixes> Constantly decreasing cost curve> Primary source of revenue> Cost & revenue balance

Understand country & regional differences> Regulatory framework> Airline market liberalisation> Groundhandling market liberalisation

Supplement with additional data> National accounts> Trade (goods & services)> Investment> Monetary

THANK YOUwww.aci-europe.org

www.airportcarbonaccreditation.org

Connectivity

European airport connectivity


Direct connectivity: These are the direct air services available from the airport – measured not just in terms of destinations, but also factoring in the frequency of flights to the same destination.

Indirect connectivity: This measures the number of places people can fly to, through a connecting flight at hub airports from a particular airport.

Airport connectivity: Sums both direct and indirect connectivity from the airport – thus measuring the overall level to which an airport is connected to the rest of the World.

Hub connectivity: Measures the number of connecting flights that can be facilitated by the hub airport– taking into account a minimum and maximum connecting times, and weighting the quality of the connections by the detour involved and connecting times


Connectivity, 1-year and 10-year development

EU AIRPORTS – DIRECT CONNECTIVITY MARKET SHARES BY AIRLINES (EU FSCS, EU LCCS, OTHERS (NON-EU AIRLINES)



Airports above the trendline have more dense operations

Airport size (mppa) and Connectivity Score

Connectivity and pax growth are correlated


DIRECT CONNECTIVITY 2019 VS 2018 BY AIRPORT CATEGORIES – % GROWTH



Direct and onward connections to Gulf & AsiaPac have been the growth area – though absolute volume is greatest still intra-Europe and Transatlantic.

European airports to world regions, 2009-2019


The emergence of new competitors inside Europe

Hub dynamics

Presentation title, dark blue, bold · fastest growing markets in the world and major contributors....

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