Over the years we have often been confronted with the task of modeling airport charges and business plans. As pointed out by a recent research from Oxera, to set aeronautical charges many of airports have shifted towards ‘lighter-touch’ regimes. Legislators are moving away from overly rigid schemes and granting flexibility to airport management companies to reflect their differing levels of market power. This has involved regulators setting the framework in which airports and airlines can negotiate, without actively intervening. In other cases regulators determine ex ante price caps, such as in designated UK airports.
This trend creates discontinuity and greater difficulty in planning. Strict use of the regulatory asset base method as a base to calculate airport charges or other cost/investment based methods provide the easiest way to ensure airport sustainability. Applying this method, even allowing for relatively high cost of capital, sizable investments and operating costs, the financial outlook is generating positive value, with visible satisfaction of investors and managers. And at a low risk, as margin resiliency has historically characterized airports’ results even in economic turndowns.
So, this comfortable situation might be over. Several European countries, such as the UK, Germany, Belgium, and recently Italy, are then gradually introducing regulations which mediate the need to base airport charges on the cost and investment levels with the requests of airlines demanding greater flexibility and adaptation to their business models, and more and more refuse to pay unnecessary investment costs. Going forward, the risk of not being able to recover investments costs becomes material.
Investors are questioning whether airports’ investments will repay their cost of capital, and management’s ability to negotiate with airlines fairly will be crucial. But to retain value, airport managers must seize and select the right investment plan, deploying the necessary capacity and offering the requested quality at competitive pricing to make themselves attractive to airlines, commercial operators, sub-concessionaires and other stakeholders.
As we have experienced many times, airport expansion comes at quite a high price. Expensive, glossy infrastructure, the use of archistars, and costly materials are often justified by the role an airport plays as a city’s business card. Often the intention is to astonish passengers and send them a message: power, environmental sustainability, innovation. The BBC recently shortlisted the most spectacular creations, some of them still in the building phase: at [Singapore’s] Changi Airport, Moshe Safdie is creating in the hub part the "Forest Valley" and the "Garden Jewels" in addition to a 40m waterfall called a “Rain Vortex”. The same source says it looks more like the Land of Oz than an air hub. This project is not alone: in the same year, 2018, Foster + Partners will assist in opening the new 555,000 m2 Mexico City Airport enclosed in a lightweight shell. At the same time, Fuksas is shaping China’s Shenzhen Bao’an Airport as a manta ray, Chongqing Jiangbei is going to open a 55 million passenger terminal set within a park, and in Istanbul Grimshaw is building a terminal designed to serve 90 million passengers while mirroring traditional architecture such as the Süleymaniye Mosque.
Those examples will turn out to be successes, no doubt. But in many other cases around the world, especially when stagnation or low economic growth trends set in, high building costs have proved to be far from the demands of the vast majority of airlines: the interest in more sophisticated physical infrastructure is restricted to hub airlines. This creates a big hurdle to flexibility and competition for all other players.
Forcing airlines to pay higher charges just because of recently completed infrastructure irrespective of their requests has led in several cases to abandonment by airlines. History teaches us that in a number of situations the obligation to use and pay for new infrastructure has led low-cost carriers to discontinue a massive number of flights. Most airlines landing at an airport in fact prefer simple infrastructure offering efficiency, speed and sufficient air/ground capacity, and are not prepared to contribute to the sustainability of over-sophisticated infrastructure. For example, loading bridges are built in virtually every new terminal, but it is questionable whether this produces higher value for all. Hub traffic only requires short connections, not costly baggage handling systems, to mention a few investments.
This creates a dilemma. Traffic growth and commercial opportunities certainly require expanding airport infrastructure, yet priorities cannot be taken for givens. Do we have sufficient ground to determine the right investments? Is expanding physical capacity the prevailing solution? Are we sure that investments will be welcomed by airlines, and that maximum value is squeezed from passengers?
We aren't. Almost all will agree on the fact that physical capacity expansion alone is certainly not the solution. But alternative solutions – if not carefully selected – might further raise the risk. In principle, pursuing a digital strategy is no longer an option. But intelligence can effectively reduce the need for physical infrastructure only if its use is wise and restricted to applications that make it possible to downsize investments or with a clear pay-back. Intelligence is in fact costly and careful selection has to be made to translate it into an effective advantage. The idea behind this is to select investments with care, modulating both physical and intelligent infrastructure in order deploy the right investment pattern so as to find a new equilibrium directed at the specific type of traffic targeted by the airport.
According to SITA’s Airport IT Trends Survey, over 5% of revenues in 2014, EUR 134bn, is the annual investment of airports in digital infrastructure. Many of those investments are geared to provide infrastructure and services that can deliver more convenience, control and a connected experience to passengers. Over the next three years, the same source says, more than 80% of airports plan a major investment in either the self-service or mobile areas. Business intelligence initiatives, which will open the way for airports to provide contextual, real-time information and services to passengers and staff, are also a serious investment area, with 41% of airports planning major projects. Geolocation technologies, such as Bluetooth and Wi-Fi, which can be used to improve passenger flows and provide location-based services, are also high on the agenda. In addition, the Future Travel Experience website (http://www.futuretravelexperience.com) provides many examples of advanced robotic solutions for welcoming passengers and providing info, like in Geneva, or miracles of technology like in Düsseldorf, where robotic valets are parking cars.
If this trend is taken to its extreme consequences, we see a risk: adding instead of subtracting costs. Purely following the idea of providing infotainment to all passengers carrying smartphones may be nice, but this hardly pays for its cost. A more sophisticated line of reasoning must be introduced to target specific client areas, evaluating the pay-back and avoiding "me-too" behaviors.
Additional investments in digitalized projects must ensure consistent cost downsizing and savings on costly physical space, efficiency and speed. An example: 60% of airports are increasing the number of check-in kiosks or their availability for other uses. Furthermore, half of airports offer flight updates via mobile. Quality aside, this again reduces space requirements, as passengers do not need to rush to the airport when their flight is delayed, saving extra space. In addition, sophisticated software can optimize the allocation of passengers to terminals, generating an equally used surface by reducing overcrowding in some areas and exerting a vacuum effect in others. In our country, Italy, we are witnessing the development of new technologies that automate tasks and monitor the flow of passengers and goods. To give two examples, at Fiumicino you can find e-gates for controlling electronic passports installed, while at Malpensa, RFID technologies monitor goods in transit. The beauty is that this reduces surface needs, errors and quality blips.
However, all these innovations are still managed in a fragmented way. We do not yet see a systematic convergence between the use of space, machine and the global Internet, which we call Industry 4.0. We really have to leverage technology but avoid planning infrastructure the way we did twenty years ago and adding ICT cost on top. This is hardly sustainable by the airline industry. A contribution might come from passengers and cargo related digitalized projects, producing extra sources of revenue, but it must be a client base size and payback period clarified upfront.