COVID-HQ: OPINION – Evolution of the Airport Model Post-pandemic, What Changes are in Store? (Part 1 of 2)

Jacques Follain


April 28, 2020

covid hq v5

The air travel industry is facing an incomparable challenge, a real economic tsunami. Nearly 80% of the world’s airline fleets were grounded by the end of April and the recovery looks like it will start slowly with domestic traffic from June 2020  and start to pick up momentum in last quarter of 2020, at the earliest, according to key airline executives and IATA President Alexandre de Juniac. Realistically, 2019 global traffic figures are not likely to be reached again before 2023, thus lagging behind GDP forecasts of many economists who are foreseeing a bounce back at current GDP level before the end of 2021 in advanced economies.

    World Quarterly GDP

Although airlines are taking drastic measures and governments are evaluating which support they can provide national carriers, many airlines will not survive and an increasing spate of insolvencies and bankruptcies are expected to follow. With this will come reduced capacity and passenger footfall, which will have an obvious and profound impact on airport revenues which are, with the exception of a few activities such as real estate, almost totally dependent on air traffic. ACI World Director General Angela Gittens commented: “The COVID-19 outbreak has resulted in an unprecedented and dramatic decline in air travel this year. Airport revenue generation and growth are directly linked to traffic levels and the global airport industry is expected to lose $76 billion in 2020.” The economic drama resulting from the COVID19 outbreak will be compounded by the P&L structure of airports which have to face quasi-fixed operational costs while their revenues, as mentioned above, highly dependent on traffic. Airport infrastructures are, however, long-term strategic assets. In many countries, airports and air transport are essential for the economic and social connections they create. It’s hard to imagine that governments would accept closing or letting a national or regional capital airport go bankrupt. It is, therefore, realistic to consider that airports, whether private or public, will benefit, in addition to the economic measures already taken in the short-term, from financial support measures either from financial organizations or governments. It is also probable that certain investors will take advantage of the distressed economic situation to invest in airport companies like those with a high domestic traffic share in emerging and/or BRICS countries. In any event, the business environment post-COVID will most likely be very different to what it was before:

  • Traffic will not bounce back immediately and even if air traffic returns to growth, there is no certainty that growth will resume with the energy and intensity witnessed after previous crises whether they were health or financial in nature
  • Airlines bankruptcies will certainly lead to a higher concentration in the market, meaning that future bigger airline conglomerates will have better bargaining power when negotiating conditions with airports
  • Fear of a continued health risks or a new pandemic will remain anchored in the minds of travelers, meaning that airports will have to demonstrate that they are taking convincing, necessary and costly measures to address these risks
  • Lock-down has generated a change in passenger behavior which could affect durably their consumption patterns in favor of a higher use of digital commerce

Among those complex challenges, airports must also see the opportunities that an end to the COVID19 outbreak offers to the industry. It is the right time for airport designers, marketers and economists to reinvent a more efficient and sustainable model, in line with and respectful of the new expectations and behaviors of airlines and passengers. Changes in the Economic Regulation Model Many government and airports will very likely have to rethink their economic regulation models. In a situation where traffic does not bound back for three to four years, airlines will look at any possibility to cut their operational costs, including airport charges, although they  average only  4% to 5% of their total expenses. Will financially decimated airlines continue to accept that the airports are the only beneficiaries of non-aeronautical revenues brought by passenger traffic even if these revenues result in part from the creativity of the airport operators?

Source: Airports Council International 

The current crisis will surely be an opportunity for airlines to successfully retable the longstanding issue of airports economic regulation, advocating – as it has been done many times by IATA – for a single till mechanism while most of the airports are defending a dual till mechanism. New economic regulation schemes might affect the profit margins of the airports, but can we imagine a sustainable development of the air transport industry built on an imbalance between client and service providers? (This is part 1 of a 2 part series. Part 2 can be found here)