Before the pandemic, many trips to airports involved rushed, red-eyed car journeys early in the morning, the triple checking of pockets before going through security, followed by a splash of water in the face and a bite to eat. Germs were rarely on the agenda.

How commonplace air travel seemed was a sign of success for the industry and the global economy. But all of that has changed in the era of covid-19.

Suddenly, flying has become something that requires a great deal of consideration about whether trips to see loved ones – let alone vacation and business travel – are worth it.

Both global gateways and regional hubs saw traffic decline by 90 percent and more when governments began shutting their borders and businesses to stop the spread of the virus.

London Heathrow serviced 210,000 passengers in April, down from 6.8 million during the same month in 2019; Los Angeles International saw a 96 percent decline; Athens International had only 20,000 passengers, when nearly two million passed through last April.

“We’re reacting to a shock event that is different than others, which has hit the revenues of airlines and airports at magnitudes never seen before”

Seth Lehman
Fitch Ratings

As the realisation took hold around the world that air travel posed a public health risk, airport revenues fell off a cliff. In May, Airports Council International projected that global airports would lose $97 billion as a result.

“We’re reacting to a shock event that is different than others, which has hit the revenues of airlines and airports at magnitudes never seen before,” says Seth Lehman, a senior director at Fitch Ratings’ infrastructure group.

“During previous events, like the Great Recession, large-market airports were able to hold their traffic bases better and recover quicker. It’s much more difficult to see whether it will play out that way here.”

As airports have reported more passenger traffic data during the pandemic, the picture is becoming clear that the old way of doing business will not fly in the covid era. How airports return to profit – and the options they have to stay afloat until air travel picks up – are among the biggest questions facing the industry today.

Modern airport privatisation began three decades ago in Australia, when the government began allowing private ownership and operation of the country’s crown gateways. Melbourne Airport, which now counts local investors including AMP Capital and Australia’s Future Fund, was among those assets.

Before the pandemic, it was on track to break its record for the amount of annual traffic, set at 31.6 million passengers in fiscal year 2018-19. But in April, three million fewer passengers visited than during April 2019. When another two million fewer passengers during the first quarter of 2020 have been factored in, Melbourne is now 14.6 percent behind last year’s pace.

In a statement reporting April’s traffic numbers, the airport’s chief executive, Lyell Strambi, said it was “positioned to see this out”, notwithstanding the freefall in travel.

Australian airports have not struggled to secure capital for liquidity – either debt from lenders or equity from their private owners – according to a source involved with managing Melbourne Airport, who asked not to be named in order to speak candidly about market conditions.

“We’re in a relatively good position, assuming the recovery is in line with what is being projected,” the source tells Infrastructure Investor, citing a report from the International Air Transport Association projecting global air traffic to reach 2019 levels again in two to three years.

There is really no telling how passenger traffic will ultimately fare through the pandemic, especially considering the warnings from health experts about the potential for the virus’s resurgence later in the year. The best that most operators are doing right now is positioning their assets for further potential disruption.

“Until the end of last year, our main focus was on how to cope with growth,” says Gerhard Schroeder, a managing director at airport operator AviAlliance, based in Germany. “We had a number of business plans approved last December which required a significant amount of [capital expenditure]. Three or four months later, we are thinking about the opposite. Capex is simply not worth thinking about over the next few years.”

Schroeder says interest in airport privatisation in Europe began to take off around the time of the global financial crisis in 2008. He explains that a “run-up” on airport assets began when investors “suddenly saw that government bonds are not risk-free. After 2010, low interest rates and relatively high resiliency brought a lot of interest to airports and other infrastructure sectors”. For more than two decades, AviAlliance, which is owned by Canadian pension PSP Investments, has built up a portfolio comprising five airports: Athens International, Budapest Airport, Dusseldorf Airport, Hamburg Airport and the Luis Muñoz Marín International Airport in San Juan, Puerto Rico.

‘Minimise costs’

Schroeder offers a telling illustration of how popular airports became during this period. When AviAlliance began purchasing its assets, “you could not acquire an airport if you were not an operator. In recent years, no one really asked if you had airports experience before you invested. Just the higher price was relevant. This has driven up prices for these investments”.

“Capex is simply not worth thinking about over the next few years”

Gerhard Schroeder

Ancala Partners had the distinction of completing one of the last airport transactions before the onset of the pandemic. Last September, it invested from its inaugural fund, as well as from a €795 million successor vehicle that went on to close in March, to acquire a 45 percent stake in Liverpool John Lennon Airport. Located in the north-west of England, the airport served five million passengers in 2018. Its other owners are Liverpool City Council, with a 45 percent stake, and real assets manager Peel Group, which holds the remaining 10 percent.

As passenger traffic shrank and revenue dried up, Ancala co-founder Spence Clunie says the initial plan was to “absolutely minimise costs” given the drop in revenue.

“But you can’t shut an airport completely,” he says. “The underlying plan for Liverpool airport hasn’t changed, though it’s obviously delayed and will take a hit in terms of cashflows.”

Clunie notes there have been recent signs of life from the airport sector, with assumptions being that domestic travel will resume quicker than long-haul flights. If this happens, regional airports in Europe, such as Liverpool, will be dependent on securing business with airlines.

“How an airport recovers will depend on what its airline mix is and why passengers fly to and from there,” Clunie says. He adds that EasyJet, Ryanair and Wizz Air are three of Liverpool’s largest customers.

“Airlines will do everything they can to reduce costs,” he explains. “They’re not going to just start flying again. They’re only going to start flying routes that are popular.”

In early March, Liverpool John Lennon Airport announced salary reductions and placed staff on furlough through the UK government’s income protection scheme. In a statement, the operating company acknowledged the airport’s importance to the local economy and noted that the aviation industry “has been hit particularly hard by this crisis as more countries close their borders”.

“We continue to remain open for business. However, with substantial reductions in flights and passenger numbers for the coming weeks ahead, we are now having to implement measures to ensure the sustainability of the business,” the statement said.

Clunie says there is no doubt that Ancala, which targets mid-market infrastructure assets, will continue to invest in airports. “Will I regret doing this investment? I can only answer that in five to 10 years,” he adds. “But I don’t think the investment thesis for Liverpool has changed over the long term.”

The source involved in managing Melbourne Airport adds that one of the key challenges to the sector’s recovery in Australia will be airline competition driving flight frequency. “If a second competitor does not come in fairly quickly, that will have an impact on capacity and volume for years,” the source says.

“In our market, what’s key for us is to restore confidence in consumers”

Graeme Ferguson
AMP Capital

Another source, a partner at an Australian fund manager who also asked to remain anonymous in order to speak openly about the airport sector, says international flights are undoubtedly where the biggest opportunity lies.One trend that Australia’s airports sector is holding out for is the same as before the pandemic: growth in travel from Asia.

Another source, a partner at an Australian fund manager who also asked to remain anonymous in order to speak openly about the airport sector, says international flights are undoubtedly where the biggest opportunity lies.

“The domestic market is bound by the number of people in Australia, but the market for international travellers is the entire globe,” the source explains. “If Australia is able to attract a large portion of that market share, the opportunity set is massive.”

Like others, the source believes “the recovery will initially be domestically focused. The reality is that the international recovery is going to be gradual and phased”.

In the meantime, airport operators are being advised to look at other ways of generating revenue.

“One opportunity may be expanding their online retail offering,” suggests Beata Sperling-Tyler, associate director of transportation infrastructure at S&P Global Ratings. “Another is to look for ways to monetise the tremendous amount of data airports collect.”

Alternative structures

Sperling-Tyler suggests governments could begin to provide equity injections into airports and take larger stakes in the assets in return. She also believes new ways of structuring airport transactions will be a likely result of the current disruption to the sector.

On the one hand, she says the financial hit airports have taken may “trigger changes in the way some regulatory frameworks operate”. However, she adds: “Financially weakened airlines, rather than regulators, may have more of a hand in dictating aviation charges.”

The most traditional liquidity source – refinancing debt – is how Ancala is approaching its investment in Liverpool John Lennon Airport. Clunie says the firm will provide the airport operator with “junior debt to reduce senior debt, and then extend what’s left of the senior debt”.

Other airports may seek debt repayment waivers from lenders, Clunie explains: “Banks will see what’s happened, and they typically allow a waiver for it.”

Infrastructure’s burgeoning secondaries market could also offer liquidity to struggling airport operators.

Richard Sem, a partner at Pantheon Ventures, says that although the “sector [is] seen to have some headwinds compared to others, these assets are always sought after because they typically bounce back very quickly” from financial crises.

Sem describes Pantheon as a “value buyer” rather than an investor seeking distressed assets. He adds that the “investment thesis for airports is still very strong,” notwithstanding the current disruption: “Over the longer term, these assets perform as one would expect.”

Safety first

Non-aviation revenue – which mostly counts as retail, food and beverages – has provided a growing stream of cash for airport operators in recent years. In the covid-19 world, the providers of these revenues will also have to make significant changes in the way they do business.

Graeme Ferguson, who oversees AMP Capital’s European airports portfolio, says that even with airports operating, concession businesses have remained closed because they are not considered essential. Before concessions and other businesses in the UK reopened on 15 June, Ferguson says the firm and its airport management teams were working on how to provide a safe environment for passengers.

“Our airports have had on-going discussions about how we can help our concessionaires through this period, because they’re in the same position that our airports are in: no passengers, no income,” Ferguson says. “Thinking from their perspective, what does a covid-19 restaurant look like? Distancing will have to [ensure] two metres [social distancing]. How can we help with line queuing, for example?”

The one approach every airport in the world will have to take will be to make sanitation efforts visible to help restore passenger confidence.

“After 9/11, airports became weapons-free,” says Shashank Nigam, founder of the air travel strategy consultancy SimpliFlying. “Similarly, after covid, airports need to become virus-free. That’s what will bring travellers back.” SimpliFlying published a report in May called The Rise of Sanitised Travel, which outlined “an end-to-end passenger experience” covering the 77 touchpoints each traveller would interact with while at an airport.

“How an airport recovers will depend on what its airline mix is and why passengers fly to and from there”

Spence Clunie
Ancala Partners

For airports to provide sufficient reassurance for passengers to come back, Nigam argues that operators will have to raise the hygiene levels of their facilities and communicate that message to the public.

“We want to come across as an industry that has taken certain steps to ensure that the sanitation level at airports has gone higher,” Nigam tells Infrastructure Investor. “Visibly, airports should be seen as doing things and taking steps in the direction of increasing sanitation.”

A health and safety check is at the top of the agenda during most of the weekly calls Ferguson is having with board members of the three UK airports AMP Capital manages. He says the Australian firm is focused on “reducing risks and trying to create what we hope is a safe environment for passengers”.

“In our market, what’s key for us is to restore confidence in consumers,” he explains. He says the firm’s airport operators are considering different measures, such as temperature checks, dispensing face masks and hygiene stations to help restore passenger confidence: “What new testing procedures are coming to market? What hygiene facilities are coming to market? All of these things, we discuss on a weekly basis.”

Becoming fundamental again

Given the depth of the economic shock, even infrastructure assets, which many investors back in order to secure steady returns, are facing a substantial impact.

For airports, signs of life are tentatively emerging. As many observers have predicted, domestic travel is starting to tick up again, as the coronavirus recedes in parts of Asia, Europe and North America.

Airport operators have had time to implement additional sanitation measures. Travellers are eager to visit loved ones and the summer months may provide the only chance for people in the northern hemisphere to go on holiday this year, with many health experts warning of the likelihood of the coronavirus resurging there later in the year.

An interim bump in passenger traffic may provide airports with a lifeline for now. But the potential for a durable recovery remains in question.

“The challenge right now is that nobody knows what the full impact will be on this sector,” Pantheon’s Sem argues. “We’ve seen digital infrastructure become fundamental infrastructure during this crisis.

“That’s the current situation. But airports will, again, take their place within the longer-term infrastructure market.”

As the first wave of the coronavirus subsides, we suspect safety – not shopping – will be the key to steadying airports’ revenues as the assets make the return journey to “fundamental infrastructure” status.