"Europe's Airports Have Tough Year"

Friday, November 1, 2002

Low-cost carriers to the rescue
United Kingdom - The Economist


Like the airlines they serve, Europe’s airports have had a tough year.
It would have been tougher still had low-cost carriers not been growing
strongly.
 
FEW businesses are as afraid of the prospect of a new war with Iraq as
international airports. The last time America and its allies went to war
against Saddam Hussein, it took six months for their incomes to begin to
recover. This time, if and when hostilities break out, it could be even
worse. Not only is the effect on air travel, and therefore the airports’
businesses, likely to be more severe than a decade ago. But a war would
hit the airports when they are still struggling to get back to where
they were before the September 11th terrorist attacks.

Airports’ businesses are more resilient than those of the airlines they
serve—for instance, most benefit from the spending that passengers do on
parking, shopping and eating before they board their planes.
Nevertheless, airports depend heavily on airlines and suffer when
passenger numbers slump, as they did after the World Trade Centre
attacks. The downturn has been so severe that most international hubs
are only now beginning to see the passenger levels they experienced two
years ago.

Take Fraport, the company that owns Frankfurt’s airport and Hahn, an
airport about 60 miles from the city. In September, it got within 1% of
the number of passengers it saw during the same month of 2000; but the
volume of cargo was still 5% down on two years ago. BAA, the owner of
seven airports in Britain (including Heathrow, the largest) as well as a
gaggle of others elsewhere, did better: its passenger numbers for
September were 1.6% up on the same month of 2000, but cargo volumes were
down.

Both companies would have fared even worse had the low-cost airlines not
flown to their rescue. The difference between traditional flag-carrying
airlines and their no-frills rivals could not be more marked, says a new
study by Standard & Poor’s, a credit-rating agency. While European
carriers with a lot of business between North America and the Middle
East saw their passenger levels drop by around 12% during the 12 months
after September 11th, the low-cost airlines enjoyed a 30% jump in their
volumes during the same period. This week KLM, the Netherlands' national
airline, became the latest carrier to declare its intention to grab a
bigger share of the low-cost market: KLM wants its Buzz airline to
become one of the three largest budget carriers based in Britain. And
Ryanair, Europe's second-largest low-cost airline after easyJet, said on
October 31st that it had chosen Bergamo airport, near Milan, to be its
third continental European base as it steps up pressure on full-service
airlines.

Some European airports, such as Bristol, partly owned by Macquarie
Airport Group, a private-equity fund, and London Stansted, one of BAA’s,
have seen a surge of new business from low-cost airlines. In 2001, Go, a
carrier recently bought by easyJet, became Bristol’s biggest customer.
Amsterdam Schiphol and Aeroporti di Roma, which owns Rome's Fiumicino
and Ciampino airports, have benefited from the expansion of easyJet and
Ryanair respectively. Low-cost airlines now account for around 7% of
Schiphol’s business, up from 5% last year. Ryanair provides Dublin
airport with at least 30% of its business—a proportion that continues to
rise.

Few airports have seen as big a turnaround as Belfast, which is owned by
TBI, a listed company. TBI feared the worst when British Airways and
British Midland both switched part or all of their flights from Belfast
to Heathrow to save money in the wake of September 11th. Yet low-cost
carriers more than made up the shortfall, contributing in the end to a
16% rise over 2001 in the airport’s overall level of business.

European airports face two main challenges during the coming months. The
first is regulatory. BAA has applied to Britain’s Civil Aviation
Authority (CAA) to switch from a “single-till” system of regulation to a
“dual-till” one. Under single till, the CAA takes into account the
income that BAA generates from retail and other commercial operations
when approving the level of the company's charges to airlines using its
airports. BAA would prefer a dual-till system under which only the
income that it gets from the airlines is regulated, leaving the company
free to generate what extra income it can from retail operations,
parking, property development and the like. The CAA is sceptical about
the merits of dual-till regulation, believing that it could lead to
higher costs for airlines and therefore for passengers. A decision on
BAA’s request is due early next year.

In theory, a move towards dual-till regulation would help the industry
meet its second challenge: greater capital expenditure. At the moment,
most airport operators carry little debt. The airports worry that, if
they take on more debt and thus seek a higher return on their capital
employed, the regulator will penalise them. This has the effect of
holding down the returns for shareholders and limiting the operators’
choices in raising the money needed to pay for expansion.

Airports will have to spend huge sums over the next few years if they
are to keep pace with the demand for air travel. Passenger numbers are
expected to double over the next 20 years. BAA alone expects to spend
more than £8 billion ($12.5 billion) on new facilities and improvements
to existing ones over the next decade or so. Nearly half of this is to
be spent on a new, fifth, terminal at Heathrow, which will cater for
another 30m passengers a year. 

France’s Aéroports de Paris (AdP) has also embarked on a new programme
of investment. To pay for the work, AdP is borrowing from the financial
markets but will benefit from a government guarantee that will reduce
the cost. A fifth runway at Schiphol is also expected to be completed
early next year. This should enable the Dutch airport to meet expected
increases in passenger demand for at least another ten years. 

Low-cost carriers have helped in other ways too. The increase in the
number of passengers flying on low-cost airlines has fed through
directly to higher returns from parking, catering and other retail
sales. The airports' main concern is that this bounty may not last,
particularly if retail spending as a whole tails off across Europe as
economic growth falters. War apart, a slump in retail spending is what
most airports fear most.


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