Written by René Armas Maes, Vice President Commercial, Jet Link International LLC and ACI Instructor
The drastic fall in passenger volume is having a major impact on airlines, airports, and air transportation suppliers. Landing fees, improvement and passenger facility fees as well as other aeronautical and non-aeronautical revenues are the main source of income for airports. For the past few months, airports have been operating near a zero-revenue environment that has negatively impacted the ability to generate cash and preserve liquidity. Fixed costs of an airport expenditure remain intact while other airport COVID-19 associated costs have continued growing. A few examples of associated costs are new terminal and facility disinfection and cleaning costs, installation of protective barriers at counters, and investments in touchless or low touch technologies.
The impact of COVID-19 brings new challenges for airports. Global passenger traffic started collapsing. By year-end, it is expected that traffic might still be down 50% or more depending how soon passengers want to fly again and how the virus is contained. Recently and in order to alleviate the exceptional financial shortfall of airports, ACI World has issued a policy brief focusing on relief measures to ensure the survival of the airport industry.
But how can airports survive under the current lackluster demand and diminished revenue environments? Executing a seven pillar airport survival strategy may be the answer.
To further reduce costs, evaluate closing terminals partially or completely as well as runways, aprons, air bridges and other dedicated areas and services such as remote parking facilities and valet parking. For example, Singapore Changi airport closed Terminal 2 for 18 months while Heathrow airport closed one runway. The end goal is to keep the airport open but with limited services to reduce overall cost. This initiative can help not only airports but also partners (for example ground handlers) to reduce night shift personnel costs. To execute a successful bare minimum cost operation while still be able to provide safe operations, airports should review all commercial scheduled flight itineraries as well as cargo, medevac, charter, humanitarian, and military activities.
Evaluate all potential funding sources. On the private side, extend existing lines of credit and consider raising cash through share issues targeting large institutional investors and existing shareholders. Offering it at a discount as an extra incentive to close the transaction sooner than later. Remember cash is king during these uncertain times. Exploring mandatory (or not) convertible bond mechanisms. A convertible bond can be exchanged into a predetermined number of common stock shares. It is a good strategy when share dilution is a key concern as it can minimize negative investor sentiment surrounding an equity issuance. Focus on negotiating waivers with local and foreigner lenders to avoid any loan condition breach. Likewise, negotiate with entities that have bought debt securities from the airport.
On the public side, cash advances, state and bank guarantees, grants and subsidies can be negotiated. Evaluating government tax relief initiatives such as payroll taxes and corporate taxes are also useful. Other initiatives include anticipating receivables, managing working capital, renegotiating, and deferring airport land lease payments, borrowing money to cover operating costs with government subsidized (or not) interest rates and discontinuing dividends payout programs. Ultimately, raising airport rates to cover debt and interest payments should be on the table if there are no other alternatives while staying afloat.
It is important that airports use all financial means raised to pay debt and manage operating cashflow. It is expected that airports that were cash secured ahead of the crisis may be in a stronger position to weather this crisis than those that did not.
Any government relief package must focus on targeting the entire air transportation ecosystem including airports and its valued partners such as airport retail tenants. Therefore, evaluating with government financial assistance to airport concessionaires including retail shops, restaurants, lounges, airport offices, car rental, and parking operators – among others. Airports should evaluat directly with airport tenants what win-win strategy can be executed in terms of rent adjustments, rent deferrals, and contract extensions.
It is expected that airlines will add capacity soon but there is significant caution when it comes to frequencies. In fact, a large European full-service carrier and its airline group, plan to serve many destinations using smaller aircraft and operate lower frequency patterns on high demand markets for the next 12 months but still expect that 39% of its fleet or 300 aircraft stay grounded in 2021. The carrier and its group expect that still 26% of its fleet remained grounded in 2022. Thinking in a win-win formula by which rental rates could also be designed to vary according to passenger traffic is a sound partnership strategy. Always remember to be flexible as a number of concessionaires may require a specific size in terms of space and operations. Looking for opportunities to optimize retail space configuration and density integrating both tenants and airport expertise is the best approach.
Reduce, postpone, or cancel large investments and capital projects. Major and regional airports that were already facing runway and facility constraints may want to continue their capital plans. A one-time “pause in demand” as this one might be the perfect opportunity to continue, accelerate, and finalize existing capital improvement projects. Not only cost savings can be anticipated as contractors might be more open to renegotiate conditions (rather than to hear the project is postponed) but also to position yourself ahead of competitors while being ready to optimize revenues when traffic recovers. For example, Auckland airport is planning to continue its ongoing upgrade work to its main runway.
Consider reviewing capital expenditure projects and deferring the purchase of new equipment but look carefully at those multi-million-dollar cost saving and productivity enhancement projects as they could optimize margins during and post-pandemic era.
A recent McKinsey & Company study shows that companies that wait until all lockdowns are lifted and growth recovery takes place, may have waited too long and will miss the opportunity to position for growth. Even if a business is navigating through the current economic shocks, planning ahead for the next stage of the crisis and beyond the pandemic is key. The historical data study shows that successful outperformers were able to contain their spending in the short term, pull back expenditure in a number of areas but able to ramp up in others while remaining committed to their long-term growth plans as figure 1 shows.
Complete a bottom-up item-by-item budget analysis while focusing on zero budgeting techniques and rethinking your business. The 4Rs framework might be useful. Think in terms of re-adjusting and resizing costs, re-learning (as historical cost data will most likely not be a good indicator of future looking cost behaviour), and re-positioning your business for growth. Match and realign your revised cost framework with current sluggish passenger numbers. In terms of forecasting passenger volumes during and post-pandemic era, there are more than 40 uncontrollable variables and “what if” scenarios impacting passenger demand as figure 2 shows.
Figure 2: Selected variables impacting passenger demand during and post-pandemic. Source: Consultant analysis
Even though forecasting the future is impossible, preparing for it is essential. Surveying your schedule airline operations will be key but be aware that that traffic recovery will differ by country, market, and region.
Domestic markets are expected to recover faster than international. As a result, airports serving large domestic markets could expect a faster recovery than those serving small markets and countries with large domestic markets will have an advantage. In the Latin America region, Mexico, and Brazil might benefit while Panama may struggle. In the Asian market , Japan, and China are expected to have an advantage over Singapore which as an international hub is handling mostly international traffic. Safe travel corridors coordinated among states, might be the answer for both Panama and Singapore. In fact, it is expected that a selected groups of countries showing stabilized and low virus case numbers such as New Zealand, Australia, Greece, Denmark, Costa Rica, and Norway among others may continue pushing to reactivate international tourism through “tourism bubble” corridors.
Today, safety, sanitation, corporate responsibility, and sustainability are perceived by passengers’ important top-of-mind awareness. Focusing on building and engaging your target audience with those in mind while satisfying your customers before the competitor does and stimulating future demand.
To drive more value airports should concentrate on loyalty programs, strategic pricing, and partnerships with employees/communities/governments/tourism associations and chambers of commerce. Airport retail partners could focus efforts on promotional vouchers, instant discounts, and return passenger vouchers targeting their next purchase.
During and beyond COVID-19 times, airports should expand target groups to include non-travellers and arrival passengers while diversifying distribution channels. Reviewing communication (both internal and external) and media strategies is essential. What airports do today will continue to define their brands and market positioning in the months or years to come. Airports need to use this opportunity wisely to tap new sources of revenue, lower sales channels cost, and further build their brands.
Focusing on these key items will create demand and a revenue boost while reducing overall costs. For example, Gatwick airport is working with an airline to test a new boarding procedure aiming at reducing queue times by 10%.
It is expected that touchless technology will accelerate in the near future including touchless biometrics to verify passenger identity. It will help to reduce wait times while improving passenger experience. Wi-Fi opportunities and its touchless in-flight interaction are expected to be further deployed by a number of airlines. In terms of E/Mobile commerce world, both airports and airlines need to start working closely together to boost retailing opportunities.
Innovation, data exchange, and digital cooperation between airlines and airports needs to occur if both want to maximize revenue per passenger.
A low cost but effective solution such as an airport oath as implemented by Bangalore International airport during and beyond COVID-19 times is a clever idea to protect passengers and airport staff while building travel confidence. This oath ensures that the proper vigilance and procedures are being met to staff and passengers, guaranteeing a COVID free environment. Figure 3 shows other innovative ideas and solutions.
In today’s cost cutting environment, many are discussing what role innovation teams play and will play in the coming months to rebuild travel confidence and improve the end-to-end travel journey. Technology, automatization, and innovation will play a key role to relaunch operations and differentiate one airport offer from another. [AJ7] Additional and upcoming innovation ideas and solutions will need to be developed, tested, and implemented. To meet the future demands and the current ones due to COVID, innovation thinking teams are a key resource to keep and hire.
Surveying passengers and employees, using an innovation framework, and rethinking a business is a good start to create solutions that are needed and wanted. In addition, re-mapping all passenger touchpoints while understanding what can be enhanced or what other areas should be digitalized to improve the travel experience. The end goal of a digital journey is multi-fold: Drive costs down, gather and have timely data for decision making and optimize revenues, productivity, and customer satisfaction.
Airports need to work with internal and external stakeholders to boost travel confidence and recovery. In those lines, ACI issued a cooperation paper between airlines and airports that identifies a roadmap for resuming air transport operations, Safely Restarting Aviation – ACI and IATA Joint Approach.
The next figure shows the seven-pillars airport survival strategy. Keep in mind that collaboration among valued stakeholders is vital to optimize revenues and productivity (both asset and human capital) while containing costs.
The COVID-19 crisis brings a real opportunity for meaningful innovation and transformation to be accelerated at airports. It is unlikely airports will be met with the same conditions, allowing them to review their businesses top-down, bottom-up and to transform their operations and processes for the better.
It is expected that the most successful airports going forward will be those that are able to contain costs and execute a number of the pillars, while preparing to ramp up operations in the most cost efficient manner once travel restriction are lifted. By adding excess operational capacity (and its high related costs) too soon while getting a wrong pulse of passenger demand could mean putting a business at a higher risk of insolvency. Careful planning and strategy is needed in order to meet the future successfully.
René Armas Maes is Vice President Commercial at Jet Link International LLC, an ACI instructor and an air transportation consultant. He focuses on commercial strategy, business restructuring, strategic planning, cost reduction, and revenue optimization. Recently, René was invited as an online speaker to Embry-Riddle Aeronautical University. In addition, he delivered a technology, digitalization, and innovation trends online presentation to the entrepreneurial program at the University of Barcelona, Spain.
The article was provided by a third party and, as such, the views expressed therein and/or presented are their own and may not represent or reflect the views of ACI, its management, Board, or members. Readers should not act on the basis of any information contained in the blog without referring to applicable laws and regulations and/or without appropriate professional advice.