No one loves airports. Passengers begrudge waiting for check-in, baggage drop and security. Airlines hate them because they have to pay for runways, terminals and ground services through charges levied by airports that are, more often than not, monopolies. And now, airport investors are feeling aggrieved because their investments are not as stable and low risk as they seemed a few years ago.
Chatting to big European airport investors in recent weeks, the mood was pretty downbeat. The Dutch government has imposed the world’s first environmentally driven cap on the number of flights at an airport. Schiphol will be limited to 11 per cent fewer flights than in 2019. In Spain regulators rejected airport operator Aena’s request to boost charges as a means to recover some €2bn in Covid-19 losses.
And any day now, a row could kick off between the UK’s Heathrow and airlines as the Civil Aviation Authority prepares to publish its final decision on what level of charges the airport can impose. Having substantially raised the price cap to compensate Heathrow for Covid-19, the regulator is proposing they be cut over five years to 2026.
No one is happy with the proposal — airlines because they argue the cap is still far too high at an airport that already boasts some of the highest charges in the world; and Heathrow because it wants significantly higher fees to pay for improved services and an energy transition that will add substantially to its costs. So brace for a new round in a long-running tit-for-tat war. Willie Walsh, head of aviation trade body Iata, set the tone earlier this year when he quipped that “a bleeding airport is music to my ears”.
But what if there were another way? One that puts the burden on airports and airlines to negotiate needed investments and the costs to be recovered? Because even now, European airports dealing with more than 15mn passengers a year do not on average recoup costs through regulated charges on aero-services, according to performance indicators published by the Airports Council International.
Australia did this 20 years ago, ending price caps to allow charges to be determined through commercially-negotiated contracts. Regulators only intervene if agreement cannot be reached or if an airport has abused its market position.
A government-commissioned review in 2019 found no reason to substantially alter the light touch regime. The country’s competition commission, which looks after consumers, admittedly argues major airports have profited disproportionately. But it still concludes that commercial negotiation is preferable to regulatory price setting, and suggests an independent arbitration process could deter market abuse.
Airlines, operating in a highly competitive market, hate the idea. “You are dealing with a monopoly so you cannot have a commercial discussion,” says one airline representative. But Andrew Charlton of consultancy Aviation Advocacy contends that price regulation is not the answer to abuse. “Isn’t that why God invented competition law?” he asks. “If airlines think airports are abusing power, go to court. The issue is not ‘do they have market power’. The issue is, do they abuse it?”
That is exactly what happened in Australia. This year, a court found that Perth Airport had “likely exercised substantial market power in negotiating aeronautical charges in 2018”. No model is perfect and Australia may not hold all the answers. Regulating airports, with different market power, ownerships and histories, is fiendishly complicated.
But investors should know that the days of stable and safe investment are long gone — if they ever existed. “I don’t see why airports should be totally risk free just because they are capital intensive assets of strategic national importance,” says Andrew Lobbenberg, aviation analyst at HSBC. “Why through catastrophic events like the pandemic should airports be fully compensated for losses, whilst airlines take all that risk and now require recapitalisation by shareholders?”
Even before the pandemic, global growth in air traffic was slowing. Now environmental concerns pose serious questions about airport expansion. Perhaps the industry could do more to use existing capacity better, such as cutting delays to free up more take-off and landing slots. This would certainly help to reduce costs and charges. During the 2012 London Olympics, better air traffic management helped to cut delay times by 95 per cent. Now wouldn’t that be a reason to love not just an airport, but the whole travel experience?