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Good morning ladies and gentlemen and thank you for joining us here in London. I am particularly pleased to say that we are welcoming a record number of attendees at this year’s event.
We have chosen our 6th Annual Airport Economics & Finance Conference and Exhibition as the occasion to preview our latest ACI Economics Report, the most comprehensive gathering of data on the business of airports there is, and each year we have been able to add more airports and perform more insightful analyses.
Kudos go to Rafael Echevarne and his team: two of whom are here with us – Patrick Lucas, our Manager of Economics and Statistics and Data Analyst Ilia Lioutov.
This year we include data on 683 airports, representing 70% of the world’s passenger traffic. But, before we look at how airports fared in the 2012/13 financial year, let me give the larger context of worldwide economic conditions and briefly describe airport traffic trends.
While ACI is optimistic about aviation’s growth potential in 2014, we must remember that the global economy remains in a vulnerable state. As many advanced economies continued to experience varying degrees of recovery throughout 2012 and into 2013, with the ongoing risks in the euro area and fiscal imbalances in the united states, emerging markets also felt the burden of the slowdown.
Still, the future of air transport demand and the story of its growth potential stems from the vigorous activity in emerging markets.
That vigor is supported by the sheer weight of numbers. The majority of the world's population resides in emerging markets and developing economies. Some 86% of the world’s population inhabits these markets, although half of the world’s GDP comes from advanced economies.
Of the emerging markets, the BRICS economies represent a major force, both in population and GDP. With 43% of the world’s population and 27% of the world’s GDP, we have reason to expect that they will continue to be a major force.
The combination of large and growing populations of many of these emerging economies combined with rising incomes represents opportunity for aviation since history has shown us that the per capita propensity for air travel increases with GDP.
We can see this starkly looking at the period from 2000 to mid-2013 where the compounded annual growth rate for emerging markets and developing economies in terms of passenger traffic was 8.2% compared to 1.5% for advanced economies, reflecting the relative maturity of the latters’ aviation markets.
And, looking at the preliminary results for all of 2013, the phenomenon continues. Worldwide passenger traffic increased by 4%, somewhat down from 2012 growth rates, with airports in advanced economies growing by 1.9%, compared to 8.1% in developing economies.
As you can see here, the Middle East, Asia-Pacific and Latin America-Caribbean had the highest increases. Bucking the trend was Africa, traffic in which was flat due largely to the ongoing political turmoil in the North African countries.
And one last slide on passenger traffic distribution: Here we can see the proportional share of passenger traffic between emerging and advanced economies over time. In 2000 emerging markets made up approximately a quarter of global airport traffic. By 2013, this figure had grown to 43%.
Air cargo hasn’t shown the same resiliency as the passenger market with an overall increase of 0.7%, distinguished by a high of 5.6% growth in the Middle East and a low of a 5.9% decline in Africa.
With an overall rise in business confidence and the recent improvements in international trade, this rise in air cargo volumes in most regions, however subdued, signals a potential revival. Perhaps it is just a mirage but we shall see.
Alright, let’s now talk about airport economics.
Industry income as a whole in 2012 grew by 4.4% over 2011, reaching over US$117 billion. Regionally, European airports held the greatest percentage of total global airport income at 38%, with Asia-Pacific in the number two spot with 27%, followed by North America at 22%.
Dividing airport income into just two categories—aeronautical and non-aeronautical revenue—we see that there has been an increase in the proportion of aeronautical revenue since 2005 from 51.5% to 57% across the world’s airports.
The income generated from aeronautical charges can be broken down into two broad categories: charges related to aircraft and charges related to passengers. The worldwide ratio of aircraft-based revenue to passenger-based revenue has remained relatively constant over the last three years, with passenger-based revenue having the greater proportion.
However, it is worth pointing out some big differences among regions, with Europe and Latin America-Caribbean standing out with almost three quarters of aeronautical income being generated by passenger-based charges.
Aeronautical revenues alone are not sufficient to cover the cost of running an airport. With market constraints on airport charges, airport managers have increasingly focussed attention on generating non-aeronautical revenue. The move to revenue diversification has been a key to the financial resilience of airports and has been the primary source of infrastructure financing support.
Retail continues to be the leading source of non-aeronautical income for airports at 29% of the total. Property income and rent is tied with parking as the second-largest source of non-aeronautical income at 20% each. Not shown here are some pretty big regional differences, with North American airports generating well over half of their non-aeronautical revenue from parking and car rentals, while retail remains king in the Middle East and Asia.
Regionally, non-aeronautical revenue grew by 10% in Latin America-Caribbean, 6.3% in the Middle East, 5% in Asia-Pacific, 2.8% in Europe, 1.6% in Africa and 1.5% in North America. Despite that strong performance in emerging markets, worldwide growth reached only 3.5% because North America and Europe generate about 60% of the world’s non-aeronautical revenue and their low growth rates brought down the average.
Let’s talk about bottom lines. Overall, airport profit margins rise with traffic volume. We see a slight decline in margins for airports with more than 25 million passengers per year. Margins peak at airports serving a market of approximately 15 to 25 million passengers. The challenge remains that most airports are small, with high traffic volumes concentrated in only a handful of markets.
While the airport industry as a whole is profitable, with airports posting net profit margins in the realm of 13%, a significant proportion of airports are actually in the red.
In fact, as many as 67% of airports globally operate at a net loss, with 80% of airports that service fewer than one million passengers per year posting net losses of 6% on average. Of the airports that reported a net loss in 2012, 93% service fewer than one million passengers annually. Industry profitability is primarily generated from the 20% of airports that carry the bulk of passenger traffic. Size matters.
Due to the sector’s large infrastructure investment requirements, airport finances are characterized by high depreciation and interest costs. As such, analyzing the airport business only from a net profit margin perspective alone can be misleading.
Incorporating long-term investment in infrastructure as part of the profitability measure gives a better sense of how a company is using its money to generate returns on invested capital, including both long-term debt and equity. This paints a more revealing picture of how the airport industry is performing financially.
Taking this approach, we see that airports worldwide had an average return on invested capital of 3.5% with the highest return generated by airports with passenger volume between 15 and 25 million. Similar to what was revealed for smaller airports regarding net profit margins, airports with fewer than one million passengers have a negative return on invested capital of -1.8%.
So, that’s a preview of the full 2013 ACI Economics Report. It’s on sale now and we will be releasing it later this spring.
Just in closing: Despite the fact that our industry is vulnerable to the worldwide business cycle, the overall demand for air transport shows resilience.
The industry is complex. While on the whole, airports appear to be in good financial health, each airport is subject to its own economic, political and environmental conditions. Each airport is different and part of a local community and culture while at the same time participating in an international market. Smaller airports, in particular, face challenges trying to remain economically viable and compete on behalf of their communities in the air service market.
The economic benefits of the airport industry extend beyond the job creation on the platform, generating the multiplier effects of connectivity for tourism and trade.
So, I hope I have properly introduced what will be an informative two days. And I'd like to now turn it over to my colleague Olivier Jankovec, Director General of ACI Europe. Thank you. Olivier?
Click here for the pdf download of this opening address »