COVID-19: Tailoring airport charges to support the economic recovery of airports

Philippe Villard by Philippe Villard | Sep 9, 2020

The COVID-19 pandemic has had a dramatic impact on airport traffic, which continues to record historic low records. The airport industry is anticipating a -60% reduction in passenger volumes in 2020 vis-à-vis the projected baseline and -58% as reduction in passengers as compared to 2019.

Cargo traffic also declined by -17.5% in the first six months of 2020 year-over-year and is facing a downward pressure from the ongoing pandemic, economic fallout and escalating trade wars. The financial situation of airports has consequently deteriorated to an unprecedented level. ACI World projects a revenue shortfall for the year 2020 exceeding $100 billion (figures in US Dollars) for the airport industry at global level.

Airport charges continue to generate essential revenue for airport operators to fund their operations, pay their staff and finance the development of their infrastructure. They represent a vital lifeline to support the financial recovery of the airport industry.

The determination of airport charges

Airport charges are heavily regulated worldwide. National regulations usually build on the regulatory framework contained in the International Civil Aviation Organization’s (ICAO) policies on airport charges in Doc 9082.

Essentially, ICAO’s policies state that airport charges should be non-discriminatory and cost-related. The cost basis for airport charges is the full cost of providing the airport and its essential ancillary services, including airports’ cost of capital, depreciation of assets and operating expenditures. Airport charges are established on yearly basis or for a few years, usually three to five years. Airlines and passengers ultimately bear their full and fair share of the cost of providing airport infrastructure and services.

Such traditional regulatory model for airport pricing is not able to resolve pricing in extreme circumstances. A steep decline in traffic volumes cannot be matched by an equivalent steep decline in the airport cost base, which is largely fixed due to the asset intensiveness of the airport industry. A strict implementation of ICAO’s cost-relatedness charging principle would lead to drastic spikes in unit costs and hence a similar jump in the level of individual airport charges paid by airlines and passengers. Instead of executing implementing these sharp increases in charges, airport operators worldwide are incurring a historic revenue shortfall.

ICAO’s approach inherently acts as a double-edged sword. In a context of robust traffic growth, airline users may benefit from a moderate airport charges growth. However, the model demonstrates its counter-cyclical pricing outcomes in a context of major shock and radical drops in traffic volumes.

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Airport charges ensure the economic recovery of airports

Taking stock of the fact that airports worldwide are engaged in a battle to keep their essential operations afloat and preserve jobs, the ICAO Council Aviation Recovery Task Force recommended that States support stakeholders across the civil aviation sector, including with extraordinary emergency measures to support their financial viability in a manner consistent with ICAO’s policies.

In the case of airport charges, the relevant ICAO policies in Doc 9082 recommend that:

  • Caution be exercised when attempting to compensate for shortfalls in revenue and account be taken of the effects of increased charges on aircraft operators and end-users; and
  • Increased cooperation between airports and airlines is encouraged to ensure that economic challenges and risks are reasonably shared.

Consistently, ACI World has emphasized since the beginning of the crisis that no measure or relief package should disproportionately benefit one stakeholder at the expense of another.

While States are best placed to grant much needed financial support to alleviate the financial burden of airports, airport operators also have a prime role to play and are in the best position to design pricing strategies. It is the airport operator who should determine whether and how discounts, incentives, waivers on charges can support traffic recovery and traffic development. Acute charging strategies and renewed commercial relations with airlines will also be critical to foster the recovery of the air transport ecosystem as a whole.

Depending on local circumstances, airport operators might for instance consider temporary discounts or rebates on charges or deferral mechanisms to recover airport charges over several years. This should come at their own discretion and substantiated in the first-hand understanding of the financial situation of an airport in question. In any case, regulatory authorities must protect the long-term cost-recovery. Airports will need to keep levying charges to ensure the continuity of services required for airport users and passengers. Alleviating the collection of airport charges through an overall suspension or by granting blanket discounts simply shifts revenue and liquidity from airports to airlines and is not a realistic, fair, or sustainable solution.

The way forward: Market-based charging strategies and commercial agreements

Market-based charging strategies and commercial agreements will be instrumental in supporting the economic recovery of airports and in restoring their connectivity for the benefit of their communities, air travellers, and local businesses.

Market mechanisms have already proven effective in:

  • Enabling traffic growth and incentivizing airlines to open routes, grow operations and increase frequencies;
  • Ensuring ‘green’ development of airports and incentivizing environmentally sustainable airline operations at airports; and
  • Encouraging the efficient use of airport capacity throughout the day.

Commercial agreements between airport operators and their airline clients also create opportunities to establish mature, pragmatic, and mutually beneficial relations in the aftermath of the COVID-19 outbreak. Commercial agreements are indeed an efficient way for parties to agree on a way of working together in a non-discriminatory manner and to share risks.

As traditional models of setting airport charges need to evolve, the airport community is committed to open meaningful consultations with regulatory authorities, airport users, and end-users to ensure that the entire aviation ecosystem can recover in an economically sustainable manner.

Philippe Villard

Philippe Villard

Head, Policy and Economics, ACI World
Philippe's main responsibilities include developing airport economic policies; airport slot and capacity policies; and airport charges and aeronautical business development. Prior to joining ACI, Philippe held positions with increasing responsibilities in air transport economic policy development, and airport user charges and aeronautical revenues at ICAO and IATA.
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