Airports and airlines have held a battle of words over charges in recent years, but are close to developing a common understanding over this thorny issue
The relationship between airport and airlines is still uneasy. With many carriers fighting for survival, the robust profits being turned in by the airport sector continue to raise suspicions and occasionally flare into open hostility. The campaign by IATA over the past couple of years to name and shame what it sees as the worst offenders has clearly soured relations with the Airports Council International (ACI) and its members, but the two sides do appear to be looking at ways to repair relations.
There is no suggestion that the profitability gap has narrowed. Results from this year's Airline Business rankings suggest that the top 100 airports again posted an operating margin of just over 19% in 2003-4. By contrast, the leading 150 airline groups managed a margin of less than 1% last year. The figures come with the usual warnings about the hazards of different accounting standards, not least for an airport sector that is still largely run as a public utility and has to make sizeable long-term investments. But whichever way the figures are cut, the gap is impossible to ignore.
However, for the time being the two sides have agreed a truce, or at least a cessation of hostilities. IATA and ACI say they are keen to avoid public spats in future and move towards a more constructive relationship. That is perhaps best demonstrated by the fact that the two organisations came very close to issuing a joint statement on airport charges at the recent ICAO general assembly in March. This failed at the last minute, according to one observer, because "a few people on both sides blinked at the last moment".
However, IATA has no intention of letting up the pressure for change, as director general Giovanni Bisignani made clear in his address to an audience of French airport managers at the end of October. "Many of you operate as monopolies, without strong commercial pressures to gain efficiency. So it is IATA's job to remind you of the industry's needs… and to challenge you to establish targets for cost reduction," he said.
In fact, some progress has been made on this front, with ACI and IATA working together on the latter's "Simplify the business" initiative, where they are examining examples of best practice around the world. IATA wants to see some sort of benchmarking system for airport charges, similar to that undertaken by the Performance Review unit of Europe's air navigation management organisation Eurocontrol. The airline association has been using figures from the unit to show the worst-performing air navigation providers what others are achieving, while allowing for factors such as air traffic density, size of airspace and so on. It says: "We are not asking the impossible. We want providers to look at their colleagues, to look at who is performing the best, and challenge them to meet that standard."
Although there is at present no equivalent system for airport charges, IATA has been working to try to establish one. The Association of European Airlines recently called for new mechanisms to determine airport charges "so that airports are motivated to reduce cost platforms". ACI also says that a benchmarking system acceptable to all sides is not so far away.
The Air Transport Research Society (ATRS), an international group of academics, has for the past three years made a start to lay down such independent benchmarks with its Global Airport Performance Measurement and Benchmark study, supported by this magazine. Its ultimate measure, dubbed "residual variable factor productivity", is based on a sophisticated view of hard and soft costs (including outsourced labour) with account taken of airport size and constraints.
North America continues to out perform other regions in the latest study, based on 2002 data, with Atlanta Hartsfield, the world's busiest passenger airport, also once again emerging as the most productive. Copenhagen was a clear leader among the major European hubs, and its high efficiency appears to have been rewarding since the airport also emerged as Europe's most profitable with margins above 36% last year.
Sydney Airports Corporation, which has operated Sydney Kingsford Smith since 1998, emerged as the star performer among the Asia-Pacific operators in the study. In particular, ATRS notes its low costs per passenger. The major shareholder is publicly quoted Macquarie Airports, one of the new breed of international airport groups which are expanding fast. Its latest addition is Brussels National airport, which it has won the bidding to run and will now take a 70% stake.
For its part, IATA is still waiting to agree a formal method of benchmarking that can be applied across the world's airports. In the meantime, it continues to campaign against what it sees as individual offenders. Currently it is focusing pressure on the Thai government to reduce charges at Bangkok, where it claims that the airport authority is putting fees up by 20% despite a 60% profit margin. Bangkok is in the process of building a new international airport, and the issue of funding new capital expenditure lies at the heart of the charges debate.
While acknowledging the fact that new capacity is needed, IATA wants to see much more in the way of consultation before airport projects are given the go-ahead. IATA gives Toronto as an example of the sort of situation it wants to avoid in the future, arguing that the airport embarked on a grandiose investment costing more than the airline users were willing to pay.
IATA and Toronto were engaged in a feud last year which saw the airport's chief executive Louis Turpen declare that IATA no longer had any status in the airport authority and is not welcome. With a new management team in place, IATA hopes that the two sides can come to some form of agreement. Bisignani has described the airport's new terminal as "Versailles with boarding bridges". However, ACI notes that airlines seemed quite happy with the new Toronto terminal before the 2001 downturn.
Neither did Bisignani hold back from some tough criticism of Aéroports de Paris (ADP) in his address to the French airport operators. ADP increased charges by 5.5% in 2003 and 2004, and is planning a 6% hike in 2005. "While investments are under way, this is a situation we must protest," warns Bisignani. Airport observers note that the operator has been forced into an emergency building programme after the collapse of terminal 2E, and point out that Charles de Gaulle airport also has a new runway.
Bisignani makes clear that he is unhappy not to have been consulted by the French government over the plan to convert Paris airport operator ADP into a public limited company, the first step on the way to an eventual privatisation. "The approach broke the first rule of the game," says Bisignani. "There was zero consultation with the airlines and no discussion about economic regulation to prevent abuse." ACI agrees that better transparency and openness are worthy goals.
If ADP is privatised, there are also doubts about where the proceeds of the privatisation will end up. Some fear that the answer will be in the coffers of the French government. "Will the funds be reinvested? Will the government recapitalise the company? It's not very clear," says Standard & Poor's primary credit analyst Maria Lemos.
The price hike at Paris has close parallels with those at expanding London Heathrow. The UK Civil Aviation Authority, which sets the charging cap for BAA airports, has agreed that charges for Heathrow can rise at 6.5 percentage points above inflation over the next five years. Airlines have not been slow to complain.
The price hike is designed to support a £10 billion ($18 billion) investment programme through to 2014. That has already seen the BAA record an 86% rise in capital expenditure for the year to March 2004, hitting a record £1.3 billion. The immediate spend is to fund the £4.2 billion development of Heathrow's Terminal 5, which, according to BAA, is on budget and due to finish ahead of the 2008 scheduled date.
BAA's capital investment dwarfs that of other European airports. According to Standard & Poor's, the group's spend in 2004 will be more than twice that invested by ADP, Schiphol Group and Unique Zurich put together. The rating agency also notes that BAA now accounts for 40% of combined debt at rated European airports, and says that this share is likely to rise as BAA continues to finance its capital expenditure. Standard & Poor's Lemos adds that given its financing requirements, BAA's free cash flow is likely to be negative for at least the next three years.
Terminal 5 is not the only capital project in prospect for BAA. Late last year the UK government gave its provisional go-ahead for a second runway at London Stansted by 2011-12. The cost of this is expected to run to up to £2 billion, although Standard & Poor's is relaxed about its likely impact on BAA's credit rating.
The UK's CAA has said that each of the BAA's three London airports at Heathrow, Gatwick and Stansted will have to be self-funding. In effect that means that the airport operator is not allowed to cross-subsidise investment at one hub by raising charges at another. However, the CAA has also indicated that it would be prepared to depart from this formula if this would satisfy three criteria: that it would be beneficial to airport users; not discriminate against any users; and finally that it would not have any negative impact on the airport system across southeast England.
A final decision on this issue will not be made until the next regulatory review in 2008. "The way in which the CAA allows BAA to fund construction will be an important rating factor," says Lemos. However, British Airways and bmi have made clear that they would be very unhappy at such an arrangement at their home base.
For its part, ACI World estimates that capital expenditure by airport groups in the 2003-4 financial year has come in at a record $31 billion, the highest figure since records began in 1995. This is a 27% increase on the $24.4 billion spent in 2002-3, also therefore representing the highest single annual rise in investment. The figures, which do not include new airport schemes, partly reflect the fact that a number of projects that were put on ice after 11 September 2001 are now back on the agenda.
ACI's director of economics, Paul Behnke, notes that while airport group profit margins regularly outstrip those of their airline customers, airports also tend to have much heavier investment levels, so their return on assets may actually often been lower - although admittedly not in the present climate.
While the debate on airport profits will no doubt rumble on, both ACI and IATA seem keen to put the public disputes behind them and work towards a closer relationship. "While we understand that IATA will choose to comment on specific airports from time to time, the working relationship between our two organisations is very strong and getting better," says ACI director general Bob Aaronson, commenting on Bisignani's latest remarks in the address to the French airports. Aaronson adds that communication is now much improved, and says that fall-outs over charges from time to time are an inevitable part of the relationship. Bisignani's speech had also ended on a positive note. "Our destinies are tied. We must co-operate more effectively on all our common issues," he said.
Meanwhile, the emergence of the low-cost sector has added a whole new dynamic to the airline-airport relationship, at least in Europe. The likes of Ryanair and easyJet have made no bones about driving a hard bargain. EasyJet recently pulled out of Zurich and cut some services at Amsterdam after failing to get what it saw as satisfactory airport agreements. Ryanair has similarly pulled out where deals become unfavourable.
Ryanair has taken the lead in striking some very lucrative deals with local airports, often including financial support from local or regional governments, keen to boost the local economy. However, the European Commission is due to issue strict guidelines on such deals in the wake of its ruling against the support offered to Ryanair by Brussels Charleroi. Bisignani points out that with mainline carriers trying to move towards the cost base of budget carriers, the charging differential for the two sectors will also have to narrow. "We cannot accept differential charging for the same service. It goes against all internationally agreed principles," he says.
Some airports have been quick to adapt their cost-base and pricing structure to the low-cost world, with Liverpool's John Lennon airport often picked out as an example. Tim Jeans, himself a former low-cost executive and now the head of scheduled services at UK leisure carrier Monarch Airlines, told delegates at the recent Future of Air Transport conference held by Airline Business in London, that Liverpool "is serving low-cost carriers at cost-effective prices". He went on to note that nearby Manchester has adapted to the challenge by offering some very attractive prices at off-peak times.
While even the top performing low-cost carriers see their margins come under pressure as competition intensifies, Jeans notes that airports have been the clear winners of the low-cost era. "If I was an investor, I know which business I would rather be in," he says.
Source: Airline Business