Reshaping Aviation In The Wake of Covid-19
ITF Roundtable, Session 3: Airports
7 May 2021
Confidential

Contents
1.

Scope of this presentation

3

2.

Outline of the current situation – traffic and finances

5

3.

Policy discussion

9

dan Elliott
dan.elliott@frontier-economics.com

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1.

Scope of this presentation

3

2.

Outline of the current situation – traffic and finances

5

3.

Policy discussion

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Introduction

Topics I will cover Airports charges and airport revenue post-pandemic: Whatare the solutions?
 Regulation of airports: How to design airport regulation forrecovery?
 How to safeguard essential connectivity?

 I will start by summarizing the current position for airports
as a consequence of the pandemic
 Will then consider commercial, regulatory andgovernmental interventions to help with recovery
 Michael Stanton-Geddes from ACI Europe will respond,presenting what steps ACI has seen governments take todate, and identifying gaps

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1.

Scope of this presentation

3

2.

Outline of the current situation – traffic and finances

53.

Policy discussion

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Passenger traffic in 2021 remains a fraction of 2019 levels

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6Hit to airport finances has been huge
 European Airport Revenue down
€30bn in 2020 compared to2019
 Although traffic recovering,
revenue shortfall expected to besimilar in 2021
 Increasing competitive pressuremeans revenues will recovermuch more slowly than traffic
 Not feasible for airports toreduce costs in line with thislevel of traffic reduction

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Pace of recovery extremely uncertain

Recovery could
take 5 years orlonger

Most forecasts so far have proved
over-optimistic
Huge uncertainty:- Impact of vaccines- Future precautionary restrictions

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1.

Scope of this presentation

3

2.

Outline of the current situation – traffic and finances

5

3.

Policy discussion

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9Key policy questions

Addressing past(and ongoing)
lossesfrontier economics │ Confidential

Support toencourage
recovery /preserve
connectivity

The need for
wider regulatory
reform10Addressing past (and ongoing) losses
Key concerns arising from the damage of 2020
(and ongoing)

Reasons for retrospective government
intervention (i.e. for past losses)

 Weakened balance sheets affect ability to invest infuture Loss of expertise inhibits capacity and capabilities whenrecovery starts to accelerate Funding situation likely to be particularly acute forsmaller regional airports, potentially putting connectivity
at risk Loss of regional airports may exacerbate loss ofconnectivity

 Loss of traffic overwhelmingly due to travel restrictions(for good reasons), not fall in demand Pandemic is the crystalization of a risk that has always
been there, but perhaps disregarded
 In future will travel restrictions be an early or late policy
intervention when faced with pandemic threats?
 Without recognition there is potential for substantial
increase in future airport financing costs

Issues Aid should not be selective: airport ownership varies
considerably from fully public to fully private, with manyin mixed ownership Loans can be an effective emergency survival /continuity measure, but do nothing to rebuild balance
sheets Private equity injections require ability to quantify (to anextent) future risks
 Public equity injection should be used with caution
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Support to encourage recovery / preserve connectivity

Average airport costs likely
to be higher for many years
Capacity planning could notfactor-in pandemicNeither operating nor capital costs
can fully adjust down to lower
traffic
But high level of likelihood
capacity will be needed, only later
than originally expected

frontier economics │ ConfidentialWeak commercial airline
market will not absorb
significant cost increases
Travel restrictions and travelanxiety make for weak demandIn these conditions airlines
probably cannot pass on higher
costs in higher fares
This will not last forever, but will
apply possibly for 1 / 2 years
Airport charges therefore cannot
follow costs upwards now for in
the near futureVarious possible
complementary approaches
Continued (time-limited) financial
support to loss-making airports toallow charges to be set below
average cost for the time-being• Allow more pricing flexibility at
airports to target support toweaker routes• With specific support for“essential” connectivity?
• New regulatory arrangements(where appropriate) to allow
recovery of current losses in futurewhen aviation is thriving again

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The need for wider regulatory reform

Most pricing regimes
for regulated amountto some form ofaverage price cap

These arrangements
not fit for purpose
for pandemic-scalelossesRegulation often
hamstrung byinflexibility

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 Some build in risk limitation:
 prices recalibrated if traffic is above or below predetermined “tramlines”
 Assumes minor divergence from expectations
 Passengers (via prices) absorb the “risk” of traffic variation (up or down) in theshort- to medium-term

 The implied charge increases would be very substantial
 Future level of traffic highly uncertain so revenue risk extremely high In short-run implies passing airport losses to airlines (i.e. fares will not adjust) Moreover, the experience so far is that even modest increases have been rejected byregulatory authorities, meaning airports do not even have this protection Simplistic “building block” approaches lead to a rigid in-period “cost recovery”
approach incompatible with the flexibility required to address the current situation
 Failure to address this situation will lead to: Under-investment
 Sharp rise in cost of airport finance13

Outline of new regulatory approaches

A new approach to risk inregulatory arrangements• Explicit limits to the risk borne by investors, incl. how to address future
shutdowns• Acknowledge the impossibility of forecasting demand accurately

More commercial flexibility inairport pricing• Airports have a strong incentive to encourage traffic growth by sharing
commercial risk with airlines• Demand conditions likely to vary a lot by route and airport• Requires greater tolerance of “disaggregation” & “demand led pricing”

A new “inter-temporal” flexibility• “Recoverable” losses need to be deferred by allowing airports to capitalise
them in regulated assets (RAB)• Cost recovery over outputs, not by time-period (consistent with some flexible
concession models and project finance agreements)• Cost deferment window needs to be agreed, in which fares can reasonably
absorb increase

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Economics Ltd.