ACI EUROPE: Improving yet testing trading conditions for European airports

The theme of this year's event is "Overcoming new economic and operational realities, while improving the passenger experience". On this occasion, European airport trade body ACI EUROPE addressed the immediate outlook for airports.

AIR TRAFFIC OUTLOOK

After slow and uneven growth in air traffic in 2010, the recovery for Europe's airports has gathered some more pace with an impressive +10.8% for passenger traffic and +7.2% for freight traffic the period January-April 2011. However, these figures largely reflect the impact of last year's volcanic ash shock, leaving the adjusted growth at close to +4.9% for passenger traffic and freight traffic.

The air traffic recovery has been held back by several factors, including the sovereign debt crises affecting demand in several European countries, the impact of political unrest in North Africa and the Middle East - two markets which are close to Europe with strong economic and cultural ties, not forgetting the events in Japan and the eruption of the Grimsvötn volcano.

Olivier Jankovec, Director General ACI EUROPE commented "Air traffic has shown some resilience and outperformed economic growth. However, this is not the bounce back analysts expected after the enormous traffic losses of 2008/2009.

New air traffic patterns in Europe which emerged last year, look set to continue.

We are seeing extreme disparities not just between national markets, but also between airports within the same market. This is a tangible sign of the varied performance of European economies and increasing competitive pressures on airports."

FORECAST FOR 2011

Looking at the next 6 months, ACI EUROPE considers that demand for air transport in Europe will continue to be affected by sluggish economic growth, especially in Western Europe. Although business confidence is strong and consumer confidence has rebounded in recent months, ongoing uncertainties surrounding sovereign debt crises and inflationary pressures are likely to weigh on consumers. This will affect the demand for discretionary air travel. Moreover, aviation tax will continue to hold back air traffic growth in the UK and will also affect demand in Germany and Austria. The current level of oil prices is adding to the equation, leading airlines to remain cautious on route expansion and focus on network optimisation to protect yields.

For the full year 2011, ACI EUROPE forecasts total growth of +6% for passenger traffic and +5% for freight traffic. These figures assume continued yet moderate growth in the low cost carrier segment as well as no major disruptions to aviation.

SWITCHEROO: NETWORK VOLATILITY IS THE NEW NORM

Traffic recovery to date has come with a great deal of network volatility for Europe's airports. More than 4,741 new air routes were opened last year between European airports. However, an equally impressive 3,330 air routes were closed.

Jankovec commented "These figures are a sign of the changing structure of the European aviation market and the increasing flexibility of airlines in moving aircraft and crews - shopping around for the best airport-market location. Clearly, the low cost operating model and product offering is becoming the norm for air travel within Europe. Though they would never admit it, airlines are the ones holding the market power."

ECONOMIC & FINANCIAL PERFORMANCE

While the trading environment for European airports has improved, the overall economic and financial environment has not. Air traffic growth has not led to corresponding revenue growth. This is the result of significant pressure exerted over aeronautical revenues (charges levied on airlines and passengers) and growing difficulties in generating non-aeronautical revenues. External costs have remained high, especially in relation to security - the largest functional cost area for airports in Europe2. Capital costs are also a worry, as access to capital markets continues to be difficult for many airports. Significantly, almost all of the major European airports have yet to recover their pre-crisis credit rating levels.

Nonetheless, capital expenditure remains significant with airports set to spend some €44 billion between now and 2015, investing to accommodate future growth and to secure long-term competitive positions.

The combination of moderate revenue growth and a difficult cost environment has limited profitability gains at the largest airport operators. Profits for the top 20 European airport operators in 2010 have decreased by -4% compared to 2009, to €475 million. They remain more than 50% below their 2008 level3.

Jankovec commented "Airport charges paid by airlines only account for 19% of our income and even when we take into account those charges paid by passengers, that still leaves us with unrecovered cost of more than €5 billion. With airlines essentially getting a free lunch, the key to profitability lies in our ability to develop not only air traffic but non-aeronautical activities as these are increasingly paying for the infrastructure."

He added "Trading conditions are extremely tough for smaller airports in the regions, which have been heavily exposed to airline network volatility. Last year, 47% of these airports kept losing traffic. A glut of counter-productive national aviation taxes isn't helping. On top of that, the fact that financial support from cash-strapped governments is receding means that the risk of airport closures is becoming very real in some countries. This ignores the indispensable role that airports can play in defining a region's economic prospects."