Airport Finance and Investment in the Global Economy
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Airport Finance and Investment in the Global Economy

Anne Graham, Peter Morrell

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eBook - ePub

Airport Finance and Investment in the Global Economy

Anne Graham, Peter Morrell

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About This Book

While there are a multitude of publications on corporate finance and financial management, only a few address the complexity of air transport industry finance and scant attention has been given to airport financial management. This book deals exclusively with airport issues to rectify this. It does this with an analysis of the theoretical concepts relevant to the subject area combined with a detailed investigation of current practice within the industry.

Airport Finance and Investment in the Global Economy bridges the gap between much academic research on airports published in recent years – lacking much managerial relevance – and real-world airport financial management. This is achieved by featuring expert analysis of contemporary issues specific to airport finance and funding strategies, illustrated by worked examples from a wide range of different countries to enhance understanding and create a global perspective.

The book is designed to appeal to both practitioners and academics. Airport-specific topics include: performance measurement and benchmarking, valuation, tools for financial control and management, alternatives of financing, privatisation, competition and implications of economic regulation.

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Information

Publisher
Routledge
Year
2016
ISBN
9781317182856
Edition
1

1
Introduction

1.1 Introduction

This chapter provides an introduction to this book and the subject of airport finance. It begins by considering the broader environment within which airports operate, focusing very much on political, economic and technological developments. This is followed by an overview of airport traffic volumes and patterns around the world and the prospects for the future. Drawing on these general industry trends, an overview of airport investment, airport financial characteristics and airport business models is then provided in the next three sections. Much of this discussion is used as a basis for setting the scene for the other chapters which explore various aspects of airport finance in greater detail.

1.2 The airport operating environment

The airport industry is a very important economic activity which typically operates 24 hours a day, 365 days a year. In 2014, 6.7 billion passengers travelled through world airports and 102 million tonnes of cargo were handled. In total there were 84.4 million aircraft movements (Airports Council International (ACI), 2015a). Moreover it is estimated that globally 470,000 people work for airport operators with a further 4.6 million working in retail, car hire, government agencies, freight forwarders and catering jobs at airports (Air Transport Action Group (ATAG), 2014). This does not include the large number of airline and ground handling jobs at airports.
Airports have often evolved over many years from their original air force and defence role to their current commercial usage. Although nowadays airport operators are responsible for a common set of activities (some of which may be outsourced) to satisfy the needs of airlines, passengers and cargo shippers, the external environment in which airports function can have a significant impact on the nature of individual operations, and the financial characteristics of airports. In particular, any consideration of airport finance needs to be undertaken against a backdrop of key developments related to political, economic, environmental and technological developments.
One of the most significant of these is the deregulation of air services (International Transport Forum (ITF), 2015). Beginning in the US with the domestic market in 1978 and then a number of international US routes, deregulation has now spread to many parts of the world. Europe has a single aviation market, and likewise a single aviation area is being established with the ten Association of Southeast Asian Nations (ASEAN) countries (although not at so liberal a level). A number of other domestic markets, including the large ones of Canada, India, Brazil, Australia and Malaysia, have been deregulated. Moreover, numerous Open Skies agreements have been signed, most commonly with the US or a European country (including the 2008 US–EU agreement) but also in other areas such as Asia, the Middle East and South America. More deregulation will undoubtedly follow but the resulting high growth rates experienced by some airlines, especially the Gulf carriers, have ignited debates as to whether totally free markets are always best and the playing fields are necessarily level (De Wit, 2013).
A major consequence of deregulation has meant that airlines are now freer to choose where they fly to and from, and many now set fares, frequencies, capacities and routes solely according to commercial considerations. This has encouraged growth and opened up many markets to much greater competition (Doganis, 2010). This in turn has had a very significant impact on the air services at each individual airport, increasing the amount of competition between airports and giving rise to new opportunities for airports to market themselves to airlines. Another significant development due to deregulation has been the emergence of new or modified airline business models, most notably the low-cost carriers (LCCs), which have also brought new challenges for airports and given them a strong reason to deviate from past practice. Therefore such changes to the airline industry have had a significant impact on the financial situation of airports, providing them with a greater incentive to be more innovative and proactive with their airline customers.
In addition there have been some major changes in the ownership of the airline industry (Morrell, 2007). Historically almost all the world’s major airlines were state-owned, primarily for reasons of prestige, defence and/or to fulfil wider objectives such as economic development and the growth of tourism. However, attitudes have changed considerably in many countries and many formerly state-owned airlines have been totally or partially privatised. This in turn has had a major impact on the airport–airline relationship, particularly in the area of pricing or so-called aeronautical charging.
Concurrently with this evolution of the airline industry, the way in which airports are owned and operated has changed. In many countries, the sector has moved from an industry characterised by public sector ownership and national requirements, into a new era of airport management where larger airports have become major international companies that tend to be owned and operated by the private sector. The first major airport privatisation of the British Airports Authority (BAA) in the UK took place in 1987 and the trend for airport privatisation has continued since then. This has had many consequences for airport finances, with private airports abiding by commercial and fiscal disciplines just like any other business. Even when airports have not been privatised, more and more are being corporatised, and/or viewed as dynamic commercially oriented businesses with all the opportunities and challenges that this new paradigm brings. New sources of funding are available and far greater consideration is being given to the non-aeronautical aspects of airports, such as the generation of revenues from shops, food and beverage and other commercial facilities. Moreover, one of the most visible consequences of privatisation has been the emergence of international airport companies. These include the traditional operators at airports such as Frankfurt, Zurich and Singapore, and newer airport companies or subsidiaries, such as Vinci Airports and TAV Airports. Without privatisation (which is discussed in further detail in Chapter 8), this internationalisation of the airport industry could not have happened.
In addition to these important developments related to aviation regulation and ownership, there are other key factors which are having a major impact on the financial situation of modern-day airports. One such influence concerns the environment where there are pressures on the whole of the aviation industry to reduce its harmful noise and emission effects, and generally to become more sustainable in areas such as energy/water use and recycling. This can have various financial implications, for example on the airport operator’s charging policy where it may choose to differentiate between airlines according to the environmental performance of their aircraft. Airport costs may also be reduced with the pressure to make more efficient use of resources. However, there may also be negative financial impacts due to mitigation measures that an airport has to introduce to reduce the harmful effects of its operations or due to environmental restrictions being placed on the airport. This may include night closures or a limitation on night flights, which could affect the airport’s attractiveness in the eyes of its airline customers and also limit its ability to maximise its use of its assets.
Undoubtedly in some parts of the world, the most challenging result of such environmental concerns is that it is becoming progressively more difficult to expand airport operations or build new airports. This is particularly the case in a number of European countries and North America, but also in other countries such as Japan and Australia. As a result there are various airports that remain congested and apparently unable to grow because of the strong opposition from local communities and other environmental groups who fiercely oppose airport expansion. However in other regions, for example, the Middle East and China, the environmental impacts of airport expansion tend to play a less dominant role in decisions concerning capacity expansion.
Another high-profile issue is security. Since 9/11 and more recent terrorist threats and events, airports have become subject to more rigid security procedures. This includes restrictions on liquids, aerosols and gels (LAGs), the inspection of shoes and the use of full body scans. This has been costly for airport operators, particularly if they have the sole responsibility for providing security services themselves. Indeed in Europe security costs have risen from less than 8 per cent of operating costs before 9/11 to over double this now (ACI-Europe, 2013). These developments have also negatively affected the passengers’ airport experience, and their ability and preference to fully take advantage of the commercial facilities at the airport, especially if the security measures have restricted their shopping time or the products which they are allowed to purchase.
A major influence on the financial performance of many companies is associated with technological developments and the airport industry is no different here. Typically this will require short-term investment but, if successful, can often result in long-term cost reductions. In addition, there can be considerable revenue and marketing implications associated with various types of technology, ranging from the use of social media to the analysis of Big Data. There are many areas where the a...

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