Airports today are operating in an evolving environment: although passenger volumes are soaring, today’s fliers are increasingly cautious about their spending when in the terminal. What’s more, a higher volume of passengers using low-cost carriers (LCCs) could mean higher parking and food and beverage revenues – but it also means discounted aeronautical charges and diminished appetite for higher-priced duty-free and luxury goods. And the negative effect on revenues is already being felt: after decades of sustained growth, global duty-free and travel retail (DF&TR) sales contracted in 2015 and then flattened in 2016, even though tourism growth remained buoyant.
Pressuring airports’ revenues further is the prospect of technological disruption. Currently, the rise of both ride-hailing apps and online shopping outlets could threaten airports’ commercial and ground transportation business models. And threats to airports’ transport infrastructures will likely emerge in future decades, too, from the development of electric and autonomous vehicles. Of course, such factors can also carry significant opportunities for airports to increase revenues but the onus remains with airport operators to seek these openings – and to exploit them.
Soaring passenger volumes: a double-edged sword?
Indeed, for the past three decades, airport passenger numbers have soared, largely thanks to increasing worldwide wealth and population growth and, more recently, from both an international tourism boom and falling fuel prices. S&P Global Ratings expects this trend of stable returns to continue for the next one-to-two years.
According to figures by the International Air Traffic Association (IATA), year-on-year global air traffic growth at the end of 2017 stands at around 7 percent – which is double the worldwide average for projected economic growth. And the growth outlook appears positive: the International Civil Aviation Organization (ICAO) predicts that passenger numbers will nearly double in the next 15 years.
Also contributing to the aviation industry’s expansion is the enduring rise of LCCs. By the end of 2016, LCCs’ market share averaged 24 percent globally, with Europe and South America leading the way (with LCCs enjoying a 34 percent share in both geographies). This more diverse landscape of airlines is only intensifying competition – and is causing aeronautical revenues (per passenger) to stagnate.
In 2017, airport revenue per passenger averaged $20 – down from $21.22 in 2014 – according to the Airports Council International (ACI), the trade body representing over 800 airports and above 70 percent of global passenger traffic. And given that the ratio between aeronautical and non-aeronautical revenues has remained the same, it appears that airports’ revenue growth is falling across both commercial and aviation businesses.
Challenges for commercial operations
So, why are airports’ commercial revenues also trending downwards? Certainly, the deep structural transformations in the retail and mobility industries play a significant part – namely online shopping and the rise of alternative mobility options to the private car (such public transport, car or ride sharing).
After decades of sustained growth, DF&TR sales contracted in 2015 and were flat in 2016 – a possible concern given that global tourism figures were resilient during this period. The rise of online shopping is markedly changing consumer behaviour, and dissuading passengers from spending in the terminal. The challenge for airport operators is that – should commercial revenues continue to trend downward – aeronautical tariffs will need to increase if they are to sustain their current margins.
Disruption to airports’ ground transportation business models could also weigh on airport revenues in the future, and for some airports they represent a significant share of total revenues. For instance, parking and ground transportation fees (paid by taxi, bus, and car rental operators) currently represent 41 percent of U.S. airports’ commercial revenues.
But, for airport operators, the car parking segment is facing new challenges. At some congested airports, there is a shift from private cars and taxis to public transport and ride-sharing operators (such as UberX and GoCar). In turn, airports may find that their car parking and ground access (public transportation and taxi) revenues become partially cannibalised – meaning lower returns for their car parking facilities. This could encourage airports to manage their car parking services and ground access yields to stimulate demand, and to create dedicated waiting areas for ride-sharing drivers – comparable to existing waiting areas for taxis.
Finding opportunities amid disruption
That is not to say airport operators cannot benefit from these disruptive forces: though they may need to develop strategies that balance the interests of both airlines and passengers – and cross-subsidise aeronautical and commercial revenues to a degree that maximizes their overall margins and credit quality.
Although their margins are stable for now, airports will need to reinforce their competitive positions. In our view, it will be those airports with strong competitive positions (characterized by diverse airline base, full capacities, supportive regulatory frameworks and a lack of environmental or social constraints) that will soar.
In the retail space, opportunities may come in areas where consumer spending growth is still holding up, such as in food and beverages and recreational services. Alternatively, opportunities may arise from preparing for – and subsequently exploiting – the next wave of disruption: electric and autonomous vehicles.
Indeed, new investments will be necessary to realise the opportunities. Assisted parking technologies, for example, have the potential to increase car parks’ asset utilisation, while a fleet of electric vehicle charging points may be necessary. For now, while soaring passenger numbers are still providing high flying returns for airports, operators may need to adapt their business models if they are to maintain their current levels of stable returns.
Mar Beltran is the senior director, infrastructure sector lead, EMEA at S&P Global Ratings. She previously worked at Australia-based Global Infrastructure Hub, where she led policy work to identify reforms in infrastructure markets. Beltran has also advised governments in both developed and emerging markets on governance, regulatory frameworks, planning and delivery of infrastructure projects.
