Road to recovery: discussing policy change with ACI World

Frances Marcellin 16 July 2020 (Last Updated July 17th, 2020 09:22)

Airports Council International (ACI) has recommended six areas of policy that should be implemented to support the airport industry’s recovery during and after the coronavirus crisis. ACI director of economics Patrick Lucas explains why government help is so critical.

Road to recovery: discussing policy change with ACI World
Frankfurt airport, empty during the pandemic. Credit: Pixabay / geraldfriedrich2.

As the Covid-19 pandemic continues to wreak havoc across the globe, aviation has been brought to a standstill in what Airports Council International (ACI) describes as a “full-scale transportation crisis”. 

The second quarter of 2020 has witnessed 64% of the global air fleet grounded and passenger traffic declining by 90% in April. What has unfolded is an unprecedented lack of supply and demand, the result of global travel restrictions, flight suspensions and loss of passenger demand.

According to the United Nation’s World Tourism Agency, restrictions now exist in 100% of destinations. The organisation reports that 45% have closed their borders for tourists; 30% have suspended international flights; 18% have banned entry for passengers from specific countries of origin; and 7% have different measures, such as quarantine and self-isolation requirements. 

Airports are dealing with potentially devastating revenue losses, which are estimated at 60% in Europe for 2020 (and only assuming there is an uptick in demand during the summer), yet still have high fixed costs. Runways, parking stands, terminal buildings and taxiways are just some of the major infrastructure that airports are maintaining and operating – around one third of airport costs are capital costs.

In a bid to help alleviate the unsustainable financial pressure on airports and support a global recovery, ACI released six proposals for governmental policymakers. These included: protecting revenues and airport charges; granting comprehensive tax relief; waiving airport concession fees; waiving slot allocation rules; fostering continuity of air cargo operations; and comprehensive financial relief.

Frances Marcellin finds out from ACI director of economics Patrick Lucas.

Frances Marcellin: Why is it crucial that governments and airports work together and what could the consequences be if these policy proposals are not followed?

Patrick Lucas: The global lockdown has resulted in massive revenue shortfalls. This has meant that airports are operating at a significant loss. It is a situation where you have high fixed costs that remain constant irrespective of a shutdown or downturn. As a business per se, airports are not designed to be closed and shut down. Certain levels of traffic are required to even break even.

There is a huge correlation between traffic and revenues – and, yes, you can argue good intentions and that health takes precedence over everything else – but regardless of that, it has huge ramifications.

The consequence is that the industry is threatened in terms of liquidity and solvency. We have already seen credit rating downgrades by Moody’s, Standard and Poor’s and Fitch on airport debt. The cost of capital will rise, which in turn will raise the cost of providing infrastructure.

Another consequence is the significant loss of jobs and a domino effect on other industries. Personnel employed by both airport operators and outside entities represent more than 6.1 million jobs globally. The entire aviation sector accounts for 10.3 million jobs so 60% of employment in the aviation sector is generated “on the ground” at airports.

FM: What are other ways airports can reduce their operating expenses?

PL: Certain airport operating expenses might be easier to adjust as they include more variable costs. The largest categories include personnel expenses, contracted services, utilities and energy. To offset their personnel expenses to sustainable levels considering their revenues, airport operators worldwide are implementing unpaid leave plans as well as temporary and permanent layoffs across all areas of their business.

FM: What could the consequences be on jobs in aviation globally?

PL: Another consequence is the significant loss of jobs and a domino effect on other industries. Personnel employed by both airport operators and personnel employed by outside entities represent more than 6.1 million jobs globally. The entire aviation sector accounts for 10.3 million jobs, so 60% of employment in the aviation sector is generated “on the ground” at airports.

According to the Air Transport Action Group (ATAG), aviation’s direct, indirect, induced and tourism catalytic employment effect is in the realm of 66 million jobs. This is comparable to the populations of France or the UK.

For decades, aviation has remained a major catalyst in supporting growth in other industries such as tourism. In fact, as much as 57% of international tourism is supported by air travel as the leading mode of transport.

The industry is hugely important to the social and economic welfare of millions of people across the planet. According to the United Nations World Tourism Organization (UNWTO), tourism accounts for 10% of global GDP with one-in-ten jobs linked to tourism.

FM: The first policy response urges “civil aviation oversight authorities to protect revenues such as airport charges” – can you explain more?

PL: Having a blanket waiver on all airport charges – meaning those charges that are levied on passengers and airlines – just doesn’t make financial sense in terms of the sustainability of the business.

Recognising that airlines are also in financial distress, many airport operators have removed parking charges for grounded aircraft to help alleviate airlines – airport infrastructure is not designed for all of this grounded fleet.

Therefore, whatever little revenues are available in terms of cash flow, airport operators need this to sustain themselves through the crisis.

FM: What effect would governments granting tax relief on airports have on the airport industry and why would it provide “financial oxygen” to airport operators?

PL: During business as usual times, when we look at taxes in comparison to all costs which include operating expenses and capital costs, taxes and related fees account for ~10% of total costs.

Private airport operators tend to pay an even higher stake. Tax relief means cash savings which could go against the cost of airport operations. It is the sum of various cost alleviation measures that will help airports to sustain themselves.
It’s many little ingredients to support and every little piece helps.

FM: Why is the preferred deferment period at the end of 2020 and not afterwards?

PL: The original reasoning is based on the idea that the situation would improve in the second half of the year. While we still see an uptick in traffic as travel bans are lifted over the summer months, the revenue shortfall will persist. We are estimating that it will take three years to get back to 2019 levels of traffic and up to ten years to get back to the underlying trend. Thus, to answer the question, longer-term support would need to be considered or extended deferrals on corporate taxes and payroll taxes.

FM: Why will the removal of passenger-based taxes (air passenger duty taxes, tourism taxes, entry taxes, and so on) have a positive impact on traffic development once the recovery starts?

PL: Part of what governments need to do is help the industry stimulate demand and in rebuilding consumer confidence. Airports and airlines are significantly restricted in what they could do given the liquidity crunch they are facing. Some taxes levied on passengers in certain jurisdictions represent a more significant proportion of airfares in the double digits (in terms of percentage). The reduction of taxes induces traffic gains, which results in employment gains and contributions to national income (GDP). Thus, any tax policy should take a cost-benefit-analysis in terms of its implementation or removal.

FM: Do you think that governments will agree to consider waiving or postponing airport rents and concession fees?

PL: Airport operators are often required to pay a fee to governments against the right to occupy land and/or to operate irrespective of their ownership status. This is especially true for airports operated under the build-operate-transfer (BOT) model and its variations, whereby the concessionaire of the airport is generally required to make ongoing payments to the government.

While every airport operator requires financial alleviation to speed up the industry recovery to deliver on the economic and social benefits that it brings, airport operators with some form of private sector involvement are bearing the brunt of the financial shortfall with very high fixed costs as a proportion of their total costs. The higher fixed costs are not due to inefficiencies. The fixed cost these operators face is largely exogenous to business operations and mainly due to higher payments to government or related financing costs.

The vast majority of concessions that have private stakes are found in LAC and Europe both in terms of airports but also in terms of traffic handled by private airport operators.

FM: What do you think are the best ways governments can help foster the continuity of air cargo operations?

PL: I think air cargo operations should probably be exempt to some of the stringent quarantine rules, so exclude air cargo operations from any Covid-19-related travel restrictions and exempt air cargo crew members, who do not interact with the public, from 14-day quarantine requirements.

The best thing to do is not to engage in trade wars and heighten economic uncertainty regarding tariff increases. High value-added goods are flown by air, including consumer technology goods, pharmaceuticals, medical supplies and perishables.
Air transport carries around 35% of world trade by value and less than 1% by volume.