Competition driving efficiency

Dr Yiannis Paraschis, Chairman, ACI World  & CEO, Athens International Airport; Tan Sri Bashir Ahmad, President, ACI Asia-Pacific & Managing Director/CEO, Malaysia Airports Holdings Berhad; Patti Chau, Regional Director, ACI Asia-Pacific; Angela Gittens, Director General, ACI World; Lye Teck Tan, Executive Vice President, Airport Management, Changi Airport Group; and Olivier Jankovec, Director General, ACI EUROPE.

Dr Yiannis Paraschis, Chairman, ACI World & CEO, Athens International Airport; Tan Sri Bashir Ahmad, President, ACI Asia-Pacific & Managing Director/CEO, Malaysia Airports Holdings Berhad; Patti Chau, Regional Director, ACI Asia-Pacific; Angela Gittens, Director General, ACI World; Lye Teck Tan, Executive Vice President, Airport Management, Changi Airport Group; and Olivier Jankovec, Director General, ACI EUROPE.

The 5th annual ACI Economics & Finance Conference took place in Singapore on 6-8 March – the first time it has been held in the Asia-Pacific region. Held in partnership by ACI EUROPE, ACI World and ACI Asia-Pacific, the event was clearly focused on the question of what airports need to do in order to sustain and grow, in a world of increased pressures and correspondingly decreased certainty.

Although covering a wide number of fields, the common thread of airport competition clearly ran throughout the conference – not only the fact of its existence and impact, but equally importantly, the response required to this new force in the industry. The obvious first reaction of the industry is to argue that economic regulation needs to adapt. This truth remains as valid as ever – regional, national and pan-national economic regulators have a responsibility to regulate proportionately and not to undermine healthy industry interaction.

However the Singapore conference also proved an equally fundamental truth – whether regulation adapts or not, ultimately it is the airport which has to respond to increased competition. And airport economists and financiers have a central role to play in this. Firstly by understanding the environment within which their airport operates. Secondly, by working closely with government to help ensure that regulatory frameworks and ownership structures help rather than hinder the industry. And thirdly, by supporting the evolution of the business to become leaner & meaner profit-driven commercial entities.

Dr. Charles Schlumberger, Lead Air Transport Specialist at the World Bank

Dr. Charles Schlumberger, Lead Air Transport Specialist at the World Bank, delivered an energetic keynote address, in which he argued from two different perspectives – one that global air traffic would double by 2030, and the other that it would in fact shrink.

Understanding the environment

Dr. Charles Schlumberger, Lead Air Transport Specialist at the World Bank, delivered an energetic keynote address, in which he argued from two different perspectives – one that global air traffic would double by 2030, and the other that it would in fact shrink. His arguments were linked to whether the world economy would grow or shrink, and specifically what is going to be done about fuel shortages. So, his argument that traffic will grow was based on the premise that the US has unlocked the potential of shale gas, which will give it energy independence and drive a new wave of cheap energy. On the flip side, he contended that ‘fracking’ technologies are hyped and will not really help us, meaning there will be much higher energy prices. It was a session that stimulated much debate. At the end, delegates were asked to vote for whether they believed traffic will double by 2030, or decline. The result was overwhelmingly positive, with the majority believing that traffic will double, highlighting the optimism that exists despite current economic challenges.

Dr. Rafael Echevarne, Director Economics, ACI World, presented the key findings of the 2012 Economics Report. The study confirms that airports gain considerable economies of scale up to around 2 or 3 million passengers per year, but surprisingly beyond this threshold they tend to experience slight diseconomies of scale – meaning costs per traffic unit may rise somewhat.

Commentating on the outlook for Europe, ACI EUROPE Director General Olivier Jankovec explained that there is a two-speed market. Traffic growth between 2008 and 2012 was +2.2% in EU countries and +38.2% in New Europe. He also referred to declining profitability – 48% of Europe’s airports are currently loss-making. Slow growth is continuing in 2013, with the full-year forecast being a +0.5% rise in passengers and a -1.3% decline in movements. Jankovec also provided a European overview of key dynamics within the industry, emphasising increased competitive pressures on airports, with reduced route opening, increased network volatility, pressure on airport charges, and converging growth rates between low-cost and full-service carriers.

Governance

Mike Toms, Former Regulation Director, BAA and Director, Oxera; Olivier Jankovec, Director General, ACI EUROPE; Kate Lang, Deputy Associate Administrator for Airports, FAA; Dinesh Khanna, Boston Consulting Group; Rafael Scherre, ANAC; and Dennis Chant, Queensland Airports.

Participating in the session on ‘Airport Economic Regulations – What is the Best Model?’ were Mike Toms, Former Regulation Director, BAA and Director, Oxera; Olivier Jankovec, Director General, ACI EUROPE; Kate Lang, Deputy Associate Administrator for Airports, FAA; Dinesh Khanna, Boston Consulting Group; Rafael Scherre, ANAC; and Dennis Chant, Queensland Airports.

Monique Bruinsma-Schouten, Manager Pricing & Regulatory Affairs, Schiphol Group, and Vice Chair of the ACI EUROPE Economics Committee, gave a detailed presentation on Schiphol’s experiences with economic regulation. She emphasised the competitive environment in which the airport operates. Perhaps most tellingly, she outlined how Amsterdam Airport Schiphol systematically recovered less than the maximum operating result allowed by the regulator – a clear example of competitive dynamics trumping the formal regulatory approach. Bruinsma-Schouten also outlined the dual-till model in use, providing analysis of how the differing regulatory tills impact quality, charges and retail across European airports.

This Schiphol example was complemented by Dennis Chant, Managing Director, Queensland Airports, who explained that under light-handed regulation, Australian airports have continued to invest to meet the growth in air travel. They are also free to set their own prices as it’s considered that they are subject to competitive pressures; it is a regime that works very well in Australia and clearly could potentially serve as a model for Europe.

ANA Aeroportos de Portugal’s Luís Ribeiro, CFO, and Isabel Gonçalves, Head of Economic Regulation, highlighted the success of the airport operator’s privatisation. Interestingly, this meant ANA needed to establish a new regulatory regime – perhaps almost a case of the poacher becoming the gamekeeper. This was a complex process, not least as it had to balance offering an attractive proposition with respecting the interests of the smaller airports. The involvement of experienced industry professionals helped ensure that the result was a light-handed, incentive-based regulatory framework, which should complement rather than constrict sustainable industry growth.

Airport privitisation is also a hot topic in the dynamic, fast-growing air transport sector in Brazil, where there is urgent need for infrastructure development. Four airports have already been privatised – Sao Gonçalo do Amarante, Guarulhos International, Viracopos International and Brasilia International – and the next round will see the privatisation of Rio de Janeiro-Galeäo and Confins International. Daniel Aldigueri, Concession Agreement Manager, and Rafael Scherre, Economic Regulation Manager, of ANAC – the Brazilian regulator – echoed the experiences of ANA Aeroportos de Portugal in developing a new regulatory regime and balancing the interests of the larger and smaller airports.

Leaner & meaner

ANA Aeroportos de Portugal’s Luís Ribeiro, CFO, highlighted the success of the airport operator’s privatisation.

ANA Aeroportos de Portugal’s Luís Ribeiro, CFO, highlighted the success of the airport operator’s privatisation. Interestingly, this meant ANA needed to establish a new regulatory regime.

The session on New Revenue Sources to Increase Financial Performance included the participation of Patrick Graf, Senior Vice President Commercial, Zürich Airport and Chairman of the ACI EUROPE Commercial Forum. Changi Airport Group’s Jeffrey Loke, Vice President, Pricing and Commercial Strategy, offered an interesting perspective on the airport’s strategy to grow non-aeronautical revenues; this includes catering to non-travelling shoppers, strengthening the retail offer, and promotions to increase retail sales. A major revamp of Changi’s Terminal 3 took place in 2010, maximising the retail and food & beverage offerings in public areas. Landside concession revenue has subsequently grown by +34% to more than S$30 million (€20m).

Vilnius International Airport’s Simonas Bartkus, Commerce Department Director, spoke about its recovery from the bankruptcy of flyLAL Lithuanian Airlines in 2009. The airport’s strategy included lowering costs to attract low-cost carriers and stimulate traffic, creating different levels of service for different types of carriers. Brian Gabel, Vice President and CFO, explained that Greater Toronto Airports Authority has introduced a system whereby each business unit is responsible for its own costs and profits, making the organisation more efficient.

ius International Airport’s recovery from the bankruptcy of flyLAL Lithuanian Airlines in 2009.

Simonas Bartkus, Commerce Department Director, spoke about Vilnius International Airport’s recovery from the bankruptcy of flyLAL Lithuanian Airlines in 2009.

Meanwhile, Leo Fermin, Deputy Airport Director – Business and Finance, San Francisco International Airport, explained how focusing on a single overriding metric – Cost Per Enplanement (CPE) – has resulted in financial and operational success.

With concerns not only over traffic growth, but also the fundamental economic growth behind it, and increasing competitive pressures from a number of different angles, airports face continued economic challenges. Having fully understood those forces that buffet the industry, the task at hand for airports must now be to ensure that both internal and external changes are made, to adapt to this new reality. All the evidence from the Singapore conference suggests that airports are working hard to doing just that – perhaps explaining why the overall mood at the event was one of optimism for the future, in spite of the difficulties to be faced.


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