By Patrick Lucas*
When we look back on the devastation caused by the pandemic, both in terms of the human toll but also the collapse of industries connected to the aviation ecosystem, many of us in the international air transport community will take solace in knowing that these industries forged solutions in a time of crisis.
We are grateful for the International Civil Aviation Organization’s (ICAO) leadership for bringing us together in the darkest days of the pandemic—ACI, IATA, CANSO and many other organizations contributed to the development of globally harmonized recommendations under the Council Aviation Recovery Taskforce (CART), for example. We joined forces to think innovatively for the benefit of the wider industry and aviation ecosystem. Our quick and calculated cooperation will forever be the hallmark of these times.
At a time when the air transport industry has never been more united, it remains of utmost importance that fellow aviation organizations continue on this path of collaboration and cooperation. ACI World and the airport community it represents is committed to strive for a collaborative and constructive dialogue with all stakeholders in the aviation ecosystem. This will be our single and only course of action.
Fact over fiction on airport charges
Like other businesses in the aviation ecosystem, airports are businesses in their own right. However, even with significant cost cutting exercises throughout the pandemic, the financial stress endured by airport operators due to sustained passenger traffic losses is now unsustainable. Fundamentally, airports will always remain infrastructure-intensive businesses—this translates into unavoidable high fixed costs that must be financed. On top of this challenge, there is also no denying the fact that financial support from governments to airports due to COVID-19 has been relatively limited across multiple jurisdictions compared to air carriers.
The industry is also at an important crossroads in how we think about the economic regulation of airports and airport charges. That is, if airports had price flexibility to begin with based on the competitive landscape they face, charges that are levied on airlines would adjust to certain realities and market conditions. Yet, it is important to remind critics that regulated airport charges across many jurisdictions in their current state are inversely linked to traffic levels. In other words, this means that when traffic rises, charges fall (and vice versa).
The data also reflects the theory—the robust passenger traffic growth that we experienced across the globe prior to 2020 has actually been beneficial for airlines and users of infrastructure. In fact, after accounting for inflation, airport aeronautical revenues from charges on a per passenger basis saw a decrease of 4.3% on a per annum basis over the five-year period between 2014 and 20191. Landing charges levied on airlines on a per unit basis saw an even greater average decrease of 4.8% on a per annum over the same period2.
Leveraging IATA’s own data for 2020, at the depths of the crisis, also show clear evidence of a decrease in user charges. The airline association’s analysis of charges, which contain both air traffic control and airport charges, show that these charges are only 5% of airline cost items in 2020. Consistent with the historical data from ACI, IATA’s data also show a decreasing trend in charges as a percentage of airline costs. All of this information is available for easy and quick perusal in the published IATA World Air Transport Statistics (WATS) over the last years.
Similarly, if we use another source such as ICAO, airport charges as a percentage of airline operating expenses on international scheduled services has been in the realm of 4% for almost three decades (with the maximum reaching 5.3% and minimum at 3.8%). In general, across the various metrics, it is clear that airport charges represent a small percentage of airline costs and have shown a real decline during and prior to the pandemic. It begs question—if airport charges are so small with respect to overall airline costs, why do airlines invest resources in this cost avoidance? The reason behind this is because many airline costs are fixed or semi-fixed, like airports. Moreover, airlines are “price takers” on many items in that they have very little or no bargaining power on input prices. An example of this is aircraft fuel and oil, among others. The only place where there is wiggle room or bargaining power is on airport charges that marginally help the airline bottom line. Over the decades, the airline lobby has been quite successful in seeking price controls from regulators which has resulted in a systematic over-application of price regulation at airports even when competitive factors dictate otherwise.
The way forward – consumers at the center of the aviation ecosystem
There is full recognition that both airlines and airports have suffered greatly from this crisis and the resulting financial shortfall. Both need each other to thrive along with many other actors in the ecosystem. We are all connected and airports will continue to support the recovery.
In a recent survey of airport operators spanning all regions of the world and different airport sizes in terms of traffic levels, a majority of airports (68%3) have implemented some form of discount or incentives in their airport charging schemes to specifically address the impacts of COVID-19 and to support a recovery. During 2020, many airport operators deferred or waived certain airport charges in support of their airline clients.
However, under a regulated regime of airport charges that do not adjust to actual market conditions, we need full cognizance of the fact that the “regulated formula” that protect airlines in good times also requires protecting airports in bad times. This regulatory asymmetry needs full consideration and reconciliation in the recovery.
From a policy perspective, and beyond the rhetoric, regulators must consider what is ultimately best for the consumer. It is important to emphasize that airports have invested in not only infrastructure that generates socio-economic benefits but also the passenger experience. While unit revenues from airport charges were decreasing before the pandemic, passenger satisfaction was increasing simultaneously. ACI’s Airport Service Quality program, which monitors consumer satisfaction across hundreds of airports based on a robust methodology, has shown that passenger satisfaction scores have consistently increased year-after-year since 2013.
Even though airport charges represent a small proportion of airline costs, the revenue generated from aeronautical charges represent as much as 55% of all airport revenues (including passenger and aircraft related charges). And 24% of all airport revenues come from charges that are levied on airlines. Even though airline-related revenues rank third after non-aeronautical revenues and passenger related charges in terms of airport revenues source, they are still vital for the financial viability of airports. Revenues from airport charges are the lifeblood of airports needed to recover costs and to finance infrastructure for the benefit of the traveling public.
Earlier this week, ACI held the third in a series of quarterly webinars during which ACI World’s Director General Luis Felipe de Oliveira and Vice President for Economics Patrick Lucas explored the latest state of the industry and the path to recovery.
Regarding the topic of charges, the session featured a presentation by InterVISTAS Consulting Inc. Chief Economist, Dr. Mike Tretheway, who discussed issues around airport charges and economic oversight, as well as policy implications that consider the lessons learned from the pandemic.
[1] ACI Airport Economics Survey, n=850
[2] ACI Airport Economics Survey, n=775
[3] ACI Member Survey – Surveyed airports covered all regions and a variety of sizes (based on passenger traffic), ownership models, and economic regulatory models. Responses to 66 surveys were received, covering 163 airports in total (due to responses from airport systems and networks, responding for all airports in said system and network).
(*) About the author: An economist by profession, Patrick has over 20 years of international experience in analytical posts. In his role as Vice President, Economics, he leads ACI’s policy positions related to economic regulation and charges, privatization, taxation, commercial activities, infrastructure management, and airport slots. He is responsible for ACI’s major flagship publications – The World Airport Traffic Report and the Airport Economics Report. He also oversees the production of ACI’s World Airport Traffic Forecasts and Airport Economics Key Performance Indicators. Lastly, Patrick delivers courses in Airport Economics as a member of ACI’s Global Training Faculty. Prior to joining ACI, Patrick worked for a United Nations statistical office where he contributed to major global reports aimed at monitoring economic and social progress.