IN FOCUS: Europe's airports feel the strain

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It was somehow apt that as Europe's airport operators met for their association's annual AGM in Madrid, EasyJet was announcing the closure of its base in the Spanish capital.

The move was timely not just because it underlined the challenges facing airport executives in some of Europe's hardest hit economies, but also because it illustrates the growing ability of airlines - led by low-cost operators - to be more selective about where they fly.

EasyJet has been highlighting its more rigorous focus on the profitability of routes, aiming to review between 5-10% of under-performing services and redeploy capacity more lucratively elsewhere. Ryanair, through its grounding of aircraft over the winter and its hardball negotiating on airport fees, has driven home its willingness to up sticks and leave. Its chief executive, Michael O'Leary, has talked of using the lull in new aircraft deliveries for more churn of its network.

Even network carriers, while more tied to airports, have some freedom where consolidation has taken place. International Airlines Group, for example, can choose between London and Madrid when considering how to deploy fresh capacity - especially following its acquisition of BMI.

"We are moving from supply driven to demand driven," says ACI Europe director general Olivier Jankovec. "Growth will no longer be a given for all. Because of the fundamental change it's a different game. The fight for the volumes will be much tougher."

While Jankovec says a more selective approach from airlines should benefit airports in the long-term through greater stability, he believes regulators need to recognise this shifting dynamic in the balance of the airline-airport relationship. ACI Europe has commissioned a study by Copenhagen Economics into airport competition in Europe, which highlights the changed dynamic. "[Airlines] have become more footloose; both able and willing to switch away from airports if conditions are not right," the study says, noting that the 2,500 routes opened and 2,000 closed in Europe last year were in each case 500 more than in 2002. It argues that this means the threat of switching has a credibility which gives such airlines a degree of buyer power relative to airports, especially where they are main operator.

"We're not saying no airport has market power," says Harry Bush, former director of economic regulation at the UK CAA, which was steering director on the study. But he suggests the burden of proof for regulators should be based on evidence, rather than assumptions about airport monopolies. "In Europe, the airports can and do compete, and most of them should not require economic regulation," says Bush. "It would be fitting if Europe would now contribute positively to both the curving and refashioning of regulation that this new business reality requires."

One key area of regulation relates to the European Commission's toughening stance on state aid guidelines covering the public financing of airport infrastructure. "The Commission seems to believe that airports can recover their full cost from users and that this will stimulate more private investment in regional airports," says ACI Europe president and London City airport chief executive Declan Collier. "But they ignore the blunt economic and social reality of these airports. Many regional airports depend on public financing for survival and for keeping their communities connected."

Financial figures for 2011 illustrate the problems facing some of Europe's airports. Despite traffic returning - last year saw a record number of passengers at European airports as traffic jumped 7% - this has not translated into profits. While the top 20 airport operators in Europe lifted collective net profits to $1.56 billion last year, nearly half of ACI Europe's airport members lost money in 2011. Indeed, 61% of airports handling fewer than 5 million passengers annually made a loss last year. "The challenge for regional airports is bigger for sure," says Jankovec.

They face this challenge against the backdrop of slowing traffic growth. ACI Europe member passenger traffic was up only 3% in the first fourth months of this year and the prognosis is for growth of just 2% for the full year and for freight levels to decline a further 2%.

In Spain, deep in the heart of Europe's mired economy, airports operator AENA is battling to come to grips with new traffic realities. While traffic lost at Barcelona El Prat due to the demise of Spanair has partly been replaced by other carriers, the operator is still concerned about falling figures at 18 of the country's smaller airports, which serve fewer than 500,000 passengers annually. "We are looking at how we managed small and mid-sized airports," says AENA president Jose Manuel Vargas, pointing to moves such as reviewing opening hours and staff productivity.

Alongside cost saving measures and attempts to lift its non-aerospace revenues, AENA will also raise charges at its airports - notably Madrid Barajas and Barcelona El Prat. "We are very much aware of the difficulties this imposes on airlines, but we have no choice," he says. "This is no time for business as usual as AENA knows very well. After a decade in which we invested €18 billion [$22.6 billion], the wind has changed. We have no option [but] to react and react quickly."

Airlines, though, have already reacted by cutting capacity in Spain, notably including EasyJet's decision to close its Madrid base - a move which it partly blamed on higher airport charges.

In Greece, where the sovereign debt crisis has arguably hit hardest, traffic is also suffering. Passenger numbers dropped 6% in 2011 at the country's main gateway, Athens International airport. "The sovereign debt crisis ... impacts all aspects of our airport business," says airport chief executive Yiannis Paraschis. With Greece facing its fifth consecutive year of recession, he warns: "Demand is going backwards and available income of consumers is going down.

"It's different from the usual aviation crisis; this is much wider," he adds. "It requires a very flexible business model. We are able to resist, but it's a very big challenge.

These challenges have been even more keenly felt at Budapest airport of late. Having lost home carrier Malev in February, it has been hit by the domino effect of losing flights by partner carriers American Airlines and Hainan Airlines, both of which cited the reduced feeder traffic. "It was quite a dramatic morning when Malev stopped flying. We were forced overnight to rethink our business plan," says Budapest airport chief executive Jost Lammers. Malev had contributed 40% of the airport's passengers and movements. "It was a very challenging period. But we were prepared. We had a contingency plan. We recovered much of the O&D [origin and destination] traffic."

Budapest has since witnessed a shift in the balance of operators, with more emphasis on point-to-point, low-cost carriers - including the swift arrival of Ryanair - to fill the Malev void. "We had a low-cost carrier share of 30%; now it is 50%. We recovered point-to-point traffic ... The profile and behaviour of the passenger [mix] has changed," says Lammers. He notes that while it continues to cater for premium travellers - having just opened a new business lounge - it now has more volume-based operators. "You have to manage that under one roof. It's a big challenge and opportunity for us," he says.

The airport has also had to focus on costs, shutting down its older terminal and laying off 250 staff within two months.

Much of the focus for cost-cutting since the 2008 financial crisis has been on capital-intensive, future investment programmes, partly because the immediate need for expansion has eased on weaker traffic. But with the cost of capital still high - ACI Europe points to a 23% increase in capital costs - Jankovec fears there is now a risk airports will lose sight of the need to provide the necessary long-term infrastructure. "Airports have always had a very good focus on the long-term. Now it is clear we are getting more focus on the short and mid-term," he says. "If you look at the long-term there is a risk - with capital costs as they are - it is going to limit our ability to invest in the future."