When the economy catches a cold, airlines are in intensive care and airports are in an open ward," says Airports Council International director general Angela Gittens. Airports operators may be at a lower risk of fatality than airlines, but their vital signs are not looking good. In 2007 just 13 of thetop 100 ranked airports posted traffic declines. In 2008 that number widened to 53.
As the two patients languish in their sick beds, airlines are fighting for survival while airports are preoccupied with life after the recovery. Gittens says: "It is hard to have a conversation when one party is sitting there, wondering if it will make it through the night, while the other is wondering whether it is going to be able to satisfy the customer it knows it is going to have in five years - and that might not be the person sitting across from them. Airport long-term planning is not based on individual air carriers."
Airports are highly capital-intensive infrastructure businesses, with few variable costs and long development cycles. Traffic is dwindling, access to capital is limited, security requirements are tightening and, despite the downturn, there is a looming capacity crunch. Some projects can be postponed, others cannot. Airports are struggling to secure financing and, for those that do, it is very expensive.
Jean-Michel Vernhes, who represents ACI's Francophone airports, says: "The challenge is we are not building for five to 10 years, we are building for 30 years. We are having to take decisions in a context which is not very well defined."
While striving to adapt to lower revenues and an unrelenting fixed cost base, airports are under pressure to provide pain relief to their airline customers by reducing charges, but a shot in the arm now could jeopardise essential infrastructure projects - vital to future economic development. Airports are trying to ease their airline partners' burden where possible, but ACI Latin America and Caribbean regional secretary Eduardo Flores argues: "Airport costs in isolation, not including air traffic fees, are very small in terms of the economic costs of an airline; they don't have a dramatic impact. It is a matter of principle for airlines to say it is too much and that they must be reduced."
The airport-airline dynamic is a strange one. TAV Airports chief executive Sani Sener summarises: "There has to be co-operation between airlines and airports, but in a way they compete. One side wants to reduce its costs, while the other wants to maximise its revenues. I call it 'co-opetition'."
Gittens adds: "You have two people, individuals or organisations who, to a certain extent, talk past each other; their outlook is so different. This is a key area of tension between airports and airlines."
Airlines are understandably sick of being top of the critical list and are they now calling on their suppliers to share the pain. AirBaltic chief executive Bertolt Flick says: "It cannot carry on like this, where the one creating the value is the last in the profit chain." Although weakened, airlines have bite.
Liberalisation means they can pick and choose their markets and threaten to pull services if they disagree with local taxes or charges. ACI North America president Greg Principato says: "An airline can take their asset and fly at 500mph away from the community. An airport can't just roll a facility back up and put it in the closet."
Gittens questions how the model will evolve, joking that soon airlines will want airports to pay them to land - an ominous suggestion. She continues: "Airports are stuck. They can't go and find a more attractive market; they have to make their market more attractive - to airlines and to passengers."
Consolidation has led to fewer and bigger airlines with greater negotiating strength. But airports feel they are suffering a hangover from their state-owned utility days, when airlines needed to be protected from a monopoly supplier. Airport charges must be fully transparent, unlike air fares. Airlines are merging, while BAA has been told to sell some of its facilities. Peel Airports deputy chief executive Neil Pakey argues: "People need to stop seeing airports as a monopoly and a cash cow."
With the changing dynamic, airports have had to cut their reliance on aeronautical revenues, diversify into non-aeronautical streams and shift their customer perception.Manchester Airports Group chief executive Geoff Muirhead explains: "When we began think of passengers as our customers too, it had a radical impact on our airports in terms of terminal design, investment strategies, our approach to our business partners, colleague engagement and innovation. It is undoubtedly the key to our future success and that of our partners."
But these commercial activities, which support airport modernisation and development, are now facing the worst trading conditions on record and the situation is being further exacerbated by liquids restrictions and new airline cabin baggage limitations. Developing commercial activities with falling passenger numbers is no small feat.
So, aside from lower costs, what areairlines looking for? Bmibaby commercial director Julian Carr says data is essentialfor new routes. He urges airports: "Give us the numbers. Understand the situation; we don't want to miss opportunities, but we don't want to take unnecessary risks." Clickair chief executive Alex Cruz agrees with Carr: "We need tangible opportunities."
Norwegian chief operating officer Daniel Skjeldam says that a single point of contact, marketing support and year-round route potential are more important than ever. He adds: "Dealing with private airport groups is something we like. Privatised companies are more eager to share risk because we are in the same boat. Too often state-owned companies are not willing to share any extra burden."
Overnight a new challenge can emerge, threatening traffic flows. Swine flu is simply the latest example. Based on the experience of SARs in 2002-03, Malaysia Airports managing director Bashir Ahmad is fully aware of how devastating health issues can be to air traffic.
He believes industry partnership will be essential to overcoming the threat: "We realise the seriousness of the situation and the importance of good airport-airline relationship." Just as every partnership is unique, no two airports are the same. Their challenges vary by business model and size. Each region is suffering in its own way.
Gittens summarises: "Everyone has a story. No one has been left unscathed." European airports are facing an unprecedented fall in demand but, unlike their US and Asian counterparts, they have not benefitted from economic stimulus measures.
Despite this backdrop, ACI Europe director general Olivier Jankovec says 70% of Europe's airports have decreased their charges or kept them stable: "We haven't seen a massive increase in European airport costs, contrary to what airlines are saying. Airports have to be very careful about what they do with charges, based on the competitive situation."
By 2030 European air traffic is forecast to double, growth which is expected to result in an airport capacity crunch. But the regulatory backdrop remains a major obstacle for European airports. Jankovec says getting the go-ahead for expansion is becoming increasingly difficult, noting thatthe region's airports must "earn the licence to grow".
European regulators are also pursuing a temporary suspension of the "use it or lose it"rule, which requires carriers to surrender slots which are used for less than 80% of the time. Although those constrained by the rule have welcomed this relief, Jankovec says airports have fiercely opposed the change: "In Europe we have several highly congested airports. Not withstanding the crisis, there is a waiting list of airlines which want slots."
Regional airports are particularly concerned, fearing they will lose key air links. Muirhead says: "Capital city hub airports are better placed to weather the storm than regional airports, as airlines are more likely to reduce their networks into a hub and away from the sometimes marginal services operated from non-hub airports."
At a country-level, Jankovec says Spain has been hardest hit by the downturn, suffering the hangover of an "overheated" economy. The UK comes in at number two, while France and Germany are weathering the crisis fairly well. Among the region's airports, he says Milan Malpensa has been "hurt very badly" by Alitalia's downscaling, its traffic plummeting 32% in February. And, although airport staffing tends to be security-based and therefore inflexible, Milan Airports operator SEA has placed 900 of its 5,000 staff on reduced time. Elsewhere, Amsterdam Schiphol is looking at reductions of 10-25% because of the brutal market conditions.
Unlike their counterparts in other regions, Europe's airports have to meet their own security costs. Prior to 9/11 these formed 5-7% of operating costs, but this has since swelled to 30%. Although the EU is working to eliminate liquids restrictions, Jankovec says new screening technology will add yet another burden to an already largeand inflexible cost base. He adds: "Public financing is urgently required if European air passengers are ever to see the benefits of such technology." ACI North America'sPrincipato agrees that streamlining security processes, such as lifting the liquids rule and shoe screening restrictions, would help airports in the current climate.
He says: "We tend not to learn lessons; we keep doing what we're doing and add things on top. The security systems from post 9/11 need revamping. We need to take account of the practical results from the last eight years. Now is a good time to take a blank piece of paper approach to security."
The financial meltdown first hit in North America and its airports have suffered accordingly. Principato feels that the government has handled the situation well, providing stimulus measures where necessary, but he adds: "All the numbers seem to indicate that we haven't reached the bottom yet. Nobody knows how long this is going to last.The problem, for both big and small airports, is it makes it hard to plan."
A recent ACI NA survey conservatively estimates the region's airports will need $94.4 billion in capital over the next five years, even after recent cuts. Principato says: "It is based on projects which already have, or will, achieve approval. This is not a wish list."
US airports support their infrastructure costs via a passenger facility fee of up to $4.50 per person. Principato says this is not enough, but airport users are resisting a campaign to increase the fee to at least $7.50, itself lower than the $8.55 required for capital needs plus inflation. He says: "The money that we are collecting now is for old projects and projects which are already underway. There is nothing for new projects and many airports have their PFC pledged out over 20-40 years."
The situation in Canada is more stable, but Principato says: "I think from a strategic point of view things are just less bad there. The big cloud darkening is Air Canada's future. Air Canada's financial situation is very tenuous."
Further south, Latin America's airports are also cutting costs, but their challenge is not so much dwindling traffic as accommodating rapid growth. ACI LAC's Flores says: "The Latin American market is very defiant. Globally there may be a downturn, but the market is doing - not well - but fine in terms of operating revenues. Even though there is a crisis, airlines like LAN, Copa and Gol are asking for more aircraft and putting capacity on certain routes. We are a very dynamic region and we have more tools to respond to the situation."
Mexico's airports, with their geographical proximity to the USA, have suffered a greater impact from the downturn. And, as the originating site of the swine flu outbreak, its traffic is under threat of further erosion. Flores stresses that only certain areas of the country have been affected. He urges people to get wise to the real risks and take sensible precautions, adding: "If you stop all flights from Mexico back and forth to other countries, traffic flows will always find different ways to get from one place to another. Trying to put a barrier up would be to try to stop all transport."
Asia was probably worst hit by the crisis in terms of timing, being in the midst of massive capital investment surge when the downturn hit. Sydney Airport Corporation chairman Max Moore-Wilton says fast growth and the emergence of major domestic markets in China and India are placing significant pressure on Asia Pacific airlines and airports.
ACI Asia-Pacific regional director Maggie Kwok says infrastructure projects, such as new terminals, runways, rail link and airport cities, are rife. In China alone there are plans for 97 new airports over the period 2006-20. Gittens stresses: "They absolutely have to continue with their investment in capacity. The recession is going to be over at some point. They will be in huge trouble if they don't continue investing at a very rapid rate."
The region's airports are being proactive. Kwok says Hong Kong is offering a HK$450 million ($58.1 million) relief package, via lower fees and interest-free rent deferrals, while Malaysia has launched a similar initiative, offering all airlines a 50% landing charge discount. Malaysia Airports' Ahmad says this may go further: "We are also currently considering rebates for passengers to further spur the travel industry."
He adds that budget carrier growth has compensated for traditional carrier shrinkage, noting: "We foresee positive growth for our airports despite the grim outlook worldwide."Meanwhile, Airports Authority of India chairman VP Agrawal says capacity across AAI airports will increase from 101.2 million to 178.3 million by 2010. He adds: "We are not slowing down in terms of airport infrastructure development, rather AAI is looking atthis as an opportunity to develop its infrastructure so we can cope with the surge in traffic as and when the economy revives."
Regional challenges may vary, but Principato flags uncertainty as a common theme. Quite simply nobody knows when the downturn will end. Sydney Airport Corporation chairman Max Moore-Wilton adds: "Given the significant structural impacts on capital availability and consumer spending, it is likely to be some time before a generalised improvement in the situation will occur."
But Malaysia Airports' Ahmad is optimistic about the future: "We have recovered from the 1997 Asian financial crisis and we got through SARs in 2003; we are definitely rolling up our sleeves for a full economic recovery. We don't know when this recovery will happen, but we firmly believe that maintaining a healthy relationship with our aviation partners is key to weathering this period of crisis."
Airports have several strategic options to overcome the downturn. They can further diversify their revenue streams, cut costs, postpone capital projects and offer incentive schemes, but Gittens stresses that financial prudence is also key: "If you don't have much revenue due to temporary circumstances, you can get into trouble really quickly if you don't have the financial policies and practices which you need."
Above all, innovation and flexibility will be needed. Gittens says: "There is increasing pressure to keep development and finances stable in what is essentially a non-stable business. I think we will see more and more experimentation with different models."
Partnerships are growing. France's Aeroports de Parisand the Netherlands' Schiphol Group have teamed up, mirroring their incumbent carriers Air France and KLM. At a regional level, three small French airports - Bergerac, Limoges and Poitiers - have forged a co-operation pact and are looking for further partners to increase their chances of survival.
Youssef Sabeh, president of SNC Lavalin which owns and operates France's Vatry Airport says: "Being part of a group you are better prepared to face this kind of challenge. Today what we are offering to airlines is more services for the same amount of money. It is more manageable to give more for the existing fee than reduce fees immediately."
Small innovations also make a difference. Peel Airports' Pakey says his group has boosted revenues by charging passengers a £3 ($4.54) fast-track security fee, an idea inspired by Euro Disney. As an additional benefit, thismove boosts passenger dwell time, maximising airside sales.
Airlines and airports may be on separate wards with different priorities, but they share the same ailment and economic recovery is the common cure. ACI NA's Principato says:"Airport directors are among the best business people I know. As a group I am confident in their ability to manage these tough times."
CASE STUDY: MILAN MALPENSA
Victoria Moores, London
Milan Malpensa Airport was dealt a staggering 19.5% traffic blow last year after restructuring national carrier Alitaliadownscaled itsoperations at the airport.
Giulio De Metrio, chief operating officer and deputy chief executive at Malpensa and Linate operator SEA, says the drop in traffic was unprecedented: "After Alitalia's decision to leave Malpensa, Alitalia passengers fell by over 7.8 million and freight by over 83 million tons." This marked a huge U-turn for SEA, which posted 36.7% passenger and 68% freight growth between 2002 and 2007.
De Metrio says:"This forced SEA to come up with a new industrial plan, aimed at restoring Malpensa's strategic role among European airports and limiting the damage caused by the Alitalia withdrawal."
Through a strong marketing push, Malpensa has attracted 15 new airlines. Together withnew frequencies from existing operators, it has now secured a total of 640 new weekly connections. This means that other airlines' passenger numbers rose by a quarter, or 3.1 million, in 2008.
But the biggest breakthrough cited by De Metrio is the arrival of Lufthansa Italia, which launched operations in February and now links Malpensa with three domestic and eight European cities. More importantly, notes De Metrio, it gives Malpensa a role as part of Lufthansa's multi-hub strategy.
Despite the turbulence of 2008-09, SEA is pressing ahead with its infrastructure investment. With a planned outlay of €1.4 billion ($1.9 billion) by 2016, it is upgrading its freight, runway and commercial facilities.
And, although traffic is still dwindling in many parts of the world, in April Malpensa posted 7.9% growth. De Metrio concludes: "The strategic actions that SEA is taking to face this difficult period are continuing to deliver good results and this makes us confident for the future of Malpensa."
CASE STUDY: LAS VEGAS MCCARRAN
Megan Kuhn in Washington
Plummeting short-term demand is forcing Las Vegas McCarran International airport to shed costs and preserve lower landing fees as it presses ahead with new terminal construction to meet future demand.
The airport's passenger traffic fell 14.1% during the first quarter, with average daily departures down among its biggest carriers: Southwest, US Airways, United, Delta and American Airlines.
McCarran is especially sensitive to fuel and other economic fluctuations because Las Vegas attracts discretionary leisure and convention-driven business, says Randall Walker, director of airport operator Clark County Department of Aviation.
To sustain traffic, McCarran is touting its low operating costs. Average cost per passenger is expected to be about $7 this fiscal year, compared with the US average of more than $10 in 2007.Landing fees have also been kept below the industry average to make the airport more competitive, says Walker.But diminished airline, concession, parking and jet fuel revenues have forced McCarrren to slash capital expenditure by $30 million this year, slicing around $360 million from its five-year plan, including a $215 millionrunway resurfacing.
After McCarren asked its employees to submit cost-cutting ideas, seven unused gates were closed and lesser-used restrooms have been shut during off-peak hours. A further $2-3 million has been trimmed by adjusting terminal heating and cooling by a few degrees. Walker says: "We've stressed to our employees that little things add up, in terms of savings as well as expenditures."
With the upturn in mind, the airport is pushing ahead with its third terminal. Before the recession, in 2007, McCarren's Terminal 1 handled roughly 43 million passengers, already exceeding its 42 million capacity.
While it will take time for service to return to past performance levels, Las Vegas often recovers from downturns more quickly than other markets and when it does, those 14 extra gates will be needed, says Walker.
CASE STUDY: BANGKOK SUVARNABHUMI
Siva Govindasamy in Singapore
Thousands camped out at Bangkok's Suvarnabhumi Airport last November, but they were not the crowd that its operator wanted to welcome. Anti-government protestors took over the terminal building and control tower, forcing the cancellation of all flights for a week and making tourists scramble to neighbouring countries to get out of Thailand.
Suvarnabhumi, built as a rival regional hub to Singapore's Changi Airport and Malaysia's Kuala Lumpur International Airport, opened in September 2006. But just days earlier, Thailand's military deposed the airport's champion -prime minster Thaksin Shinawatra-in a coup. Soon after, repairs were required when cracks were founds on runways and taxiways, and there were complaints that the terminal was already nearing its design capacity due to poor planning.
But the biggest setback came when protestors took over during the peak tourist season. "The confidence of the passengers who wish to travel or conduct business in Thailand has weakened," says Airports of Thailand. AOT says passenger traffic dropped 26% in November and 37% in December.
As the global economic slump bit, it posted a 14% drop in January, 17 % in February and 11% in March. Its revenues fell by 23% to 2.9 billion baht ($82.6 million) for the last three months of 2008, and it suffered a net loss of 1.65 billion baht versus a profit of 780.9 billion baht.
There have been attempts to solve the problem. In April, AOT introduced a relief package withextended payment terms for landing and parking fees until September and reduced concession fees, based on passenger throughput, until December. Thai Airways was also allowed to move domestic operations out of Don Meung, the old international airport, in March and combine them with its international operations at Suvarnabhumi.
However several challenges - mostly beyond its control - remain. AOT lacks direction after having had several presidents and boards, in line with government changes, over the last few years. The ministry of transport is still sitting on a proposed expansion that includes a third runway, an extension to the main terminal and the construction of a new satellite terminal to help increase annual capacity by a third to 60 million passengers. Finally, since the start of the year, several massive anti-government protests in Bangkok and other cities have continued to hit tourist arrivals.
Despite its turbulent start, Suvarnabhumi could still take its place as one of the region's best airports in the future, but itfaces numerous hurdles before it can get there.More on the possible impact of the financial crisis on airport projects