III.4. Air traffic and ownership of airports in Europe

III.4. Air traffic and ownership of airports in Europe

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We analysed also whether are there considerable differences between the structure of ownership of airports between the EU and non EU states. In France, Greece are several airports part of the public administration meanwhile in the non-EU member states only few of them although in some countries the only one airport is part of the public administration (Belarus and Moldavia).Both in the EU members and in the non-EU member countries only 1 of 5 airports are completely or in major part private owned. But the difference is considerable if we analyse the share of passengers served in mostly private owned airports: Istanbul Atatürk Airport, Zürich Airport, Moscow Domodedovo Airport and Antalya Airport are mostly private owned and they represent around 40% of the non-EU airport's passenger traffic. This share in case of the mostly private owned airports is only about 25%.

The shape is different if we classify the airports by the passenger volume (see . figure). The airports, which serve more than 10 million persons yearly, none of them belong formally to the public administration meanwhile 6% of the smaller airports are part of the public administration formally as well. Almost 1/3 part of the larger airports are totally or in major part private meanwhile only 1/6 part of the smaller airports belong mainly to the private sector. Due to this phenomenon more than 30% of the passengers of large airports take off in mostly private owned airports but only 20% of passengers of smaller airports use the services of private enterprises.

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If we are analysing that airports which have less than 5 million passengers in a year, the dominance of the public ownership is more characteristic. Only 15% of them are mainly private owned and they serve only less than 13% of the passengers of this small airports. Part of these smaller airports serves mainly those public transport needs in outer regions of Finland, Norway or Sweden which couldn't be satisfied more effective with train or coach. In case of islands (Greece, Portugal, Spain) also could be better to serve transport needs with aircrafts as with other way. But the rest of small airports in France, Germany, Italy and in the United Kingdom have to compete with other transport modes

Also the recent ACI yearly reports state that those airports which have less than 5 million passengers in a year are not profitable (see . figure), they cannot cover their cost by their revenues¹⁵. The study was elaborated on the basis of economic and financial results of 213 European airports which supported the work. These airports represent 72,4% (1.362 million passengers) of total European air passenger traffic in 2011.

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Airport is a high level capital intensive activity where the time of return of investment – due to large construction works – is very large and these investments can’t be extended or demolished in small steps. It could be one of the raisons why the smaller airports are, or remained in public ownership. Therefore is very important to study the particularities of the small regional airports whether have any speciality to offer to enable them to convert to a profitable airport operation.

To find new financial sources for the smaller airports is even more crucial as these airports which typically have less than 1 million passengers in a year cannot even cover their operating costs from this revenue. The airports which have 1 – 5 million passengers in a year also cannot finance all their costs, mainly the capital costs of the airport, meanwhile the fixed cost are more than 80% of the total airport costs and of which more than 30% are capital costs!

IV. MARKET CHALLENGES FACING AIRPORTS

IV.1. Competition as a new driver of the changes of the airports

One of the conclusions of the study is, that “European policy makers and regulators have yet properly to appreciate the extent of the changes that have taken place. This is partly a matter of catching up with a still fast moving market but it is also because the data have not been brought together in a comprehensive way at the European level…”

The airports in Europe, but in other places of the world have double character: on one hand these are fundamentally local businesses, on the other hand they represent the most strategic key assets for the communities they serve. This business cannot be moved to a better location if the demand decreases, all they can do is aim to make their geographical position better, more competitive and more attractive as their competing airports.

Due to the capital intensive nature of the function of airports, fixed costs represent a large proportion: first of all the maintenance and replacement costs of infrastructure, but also the extensive regulatory obligations in areas such as security, fire fighting and airfield safety are not cheap either. But the most crucial loss for an airport is when an airline ceases operations at that place. An airport cannot reduce its costs correspondingly because this large infrastructure cannot be changed (in small) step by step: the airport cannot shut down half a runway or lease its terminal for another airport.

To lose every unit of traffic means not only that it will miss out the aeronautical revenues from airport charges, but it also means loses on the non-aeronautical revenue side as well, revenues from business areas such as shopping, food and beverage, car parking and so on, as a result of the decreasing number of passengers using its facilities. It should not be forgotten that today non-aeronautical revenues account for almost half of airports’ incomes in the case of a large number of airports.

Lost revenues conspire to create an intense competitive pressure on airport business. Therefore a good volume of passengers travelling through an airport is vital for survival and financial sustainability. It is a natural incentive for the airport to seek to enlarge its catchment area.

Airports, like any businesses, want to minimise their exposure to revenue loss. What can be done in such a situation? What is the best way they can do that? There are a lot of different solutions: roll up its sleeves, collect regional economic data, aim for traffic incentives, introduce competitive (low) airport charges and work on marketing, go out and get more clients. The good solutions vary airport by airport: focus on a special activity like cargo, offer special services to passengers or to airlines or work together with the shareholders (municipalities use to be shareholders of airports) and offer not only airport services but attract investors to the surrounding area by special spatial development policies.

Nevertheless European airports increasingly find that when they do that, they face tough competition from their peers in what is now an expanded airport market. The competitive pressures within the air transport sector have been underlined by broader consumer empowerment thanks to the internet and better surface access links. In other words: airports have a natural incentive to provide the best deal possible and most efficient infrastructure if they want to attract passengers and airlines and avoid those painful financial losses as consequence of large traffic losses. But the reality today is that airports can and do lose costumers. In the nowadays liberalized market the airlines and their passengers have far more choice when considering which airport to use. When airports lose a customer, the nature of airport economics ensures that the impact is extremely painful.

The scope of the changes, which have been realized on the aviation market over the last twenty years, the deregulation of airline markets included, made airline business models more focussed on the costs. In the meantime the technological developments achieved have increased the operational flexibilities of airlines as well as the information and choice available to passengers. Airports became more commercially focussed entities, often privately owned or run at arm’s-length from government.

Twenty years ago, before the liberalization process, European airports were still operated in an environment where national and state-owned airlines were strictly regulated, with limited freedom to compete across borders. There were only a few exceptions. Very much has been changed since then, with the liberalisation and extension of the European aviation market. In a way this could be one of the clearest success stories of a single European market. It has to be considered that this fierce airline competition for passengers has implications for airports too.

The former beneficiaries of the regulated airport and airline market must now compete with each other for passengers and airlines and these have now significantly more choice than in the past. Even therefore the airports have had to become more commercially focussed. The result of these changes is a more competitive and dynamic airport market. However, airports are still too often regarded as monopoly infrastructure providers. But the commercial reality is evidently very different.

The competitive pressures on airports, resulting of the changes described above, have to be seen in the context of the economic nature of those businesses. A large part of airport costs are fix costs, partly a result of investment in infrastructure but also because of associated operating costs. The bigger part of costs on safety and security vary little with scale of traffic. This gives airports a natural incentive to attract traffic to defray those costs, an incentive which has been accentuated by the growing importance of commercial revenues. This transformed the whole concept of the structure of airport’s infrastructure (buildings, roads etc.) setting up from airport retail spaces or car creating large parking areas, which activities and the revenue originating of those business now almost are as important overall as aeronautical revenues. Airports are indeed two-sided businesses, engaging in a commercial relationship with both airlines and passengers.

The profitability of an airport is therefore crucially dependent on traffic volume. Revenues – air traffic, airport service and commercial related – increase in proportion to passenger numbers while airport’s costs increase more slowly because of the high fixed cost element. Airports therefore have to respond to increased passenger and airline choice by competing to both retain and attract traffic, although they cannot forget about cost reduction.

In many cases most airports cannot achieve the needed scale of passengers despite their geographical position, which may confer some advantage relative to consumers who live nearest the airport, they can attract only those people who live very close to the airport. As a result, the competition will play out amongst the increasing number of those passengers who have a choice between airports and amongst the airlines, the latter now free to fly between any two points in Europe.

As a consequence of all above, airport behaviour is constrained by the presence of competing airports and by the willingness of sufficient passengers and airlines to take their business elsewhere if price or quality is not satisfactory. Although this sensitivity of consumers to changes in price or quality, and any associated assessment of market power, will vary from airport to airport there is substantial evidence that the competitive pressures on airports generally are increasing, with a disciplining effect on their behaviour.

The study has tested the strength of – and trends in – the competitive constraints on airports using empirical data and models for the European aviation market and as a result they were identifying three main changes driving competitive constraints on airports:

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  more footloose airlines,
  
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  more choice for passengers and
  
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  more active responses from other airports.
  

Airlines are making use of the freedom they have to fly between European airports and they have become more footloose, both able and willing to switch away from airports if conditions are not right. Analysing all scheduled airline capacity in Europe between 2002 and 2011 the research shows a high degree of switching by airlines as follows:

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  Many routes open and close: around 2,500 new routes were opened in 2011 while 2,000 were closed (an increase in both cases around 500 over the data of 2002).
  
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  A high degree of churn: the new line openings were around 20% of the total stock of routes while some 15% of existing routes were closed every year.
  
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  Route closures mean durable traffic loss: because the lost traffic is not usually readily replaced when routes close. In particularly where the airport has been dependent on a single carrier to operate a route it is or could be an enormous problem. Even where multiple carriers have operated a route the withdrawal of one usually leads to a continuing traffic loss for many years because of timetable variations, because passenger’s behaviour etc. As a result of all these variations the airport’s profitability suffers.
  
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  Bases and hubs: nowadays airlines do not only open and close individual routes but also open and close bases – or vary their size – at individual airports. Such changes in airport bases have even greater impacts on airports than the gradual and continuous modifications of routes. Although only few hub and base closures occur in an average year, airports should to be ready to compete both to defend existing base and hub operations but also to win additional based aircraft. The problem is that the market is not boundless therefore as a consequence if somebody attracts route(s) or base(s) somebody else (one or more airports) is/are losing them.
  

It can be stated that Europe’s airports are now more commercially focussed. Their ownership structure and as a consequence their management has also been transformed over the last few decades. During this period in total 80% of Europe’s airports have been reorganized as corporations. Most publicly owned airports now operate as commercial entities although only at arm’s-length from government. But private ownership is also a common feature of the largest airports: nearly half of European passenger journeys now start at an airport that is fully or partly owned by private shareholders. Therefore is not surprising that airports now undertake greater marketing and route development activities as ever: 96% of all European airports, small or large, are actively marketing their airports to airlines in order to capture as large share of the market as possible . There is evidence of an increased marketing spending as well. Airports have also, through incentive schemes and targeted investments, sought to differentiate their products, so as to cater for different airline types. New airports have also entered the market. There were 81 more airports in Europe with commercial jet services in 2008 than in 1996. And, there have also been significant increases in capacity on existing airports. This shows evidence that airports both spur competition and respond to it in a market where customers have choice.