Themes of the Year: Airports face turbulent recovery

Airport assets are more closely tied to reducing the spread of the coronavirus pandemic than, perhaps, any other sector in infrastructure.

The airport sector was among the hardest hit in infrastructure during the coronavirus pandemic in 2020 – and it still hasn’t been cleared for takeoff.

In fact, the market is still digesting news about a new variant strain of covid-19 circulating in the UK, which has resulted in cancelled flight routes to Europe. In a year that’s seen global passenger traffic fall by around 75 percent, this is not a promising note to end on. In April, London Heathrow serviced 210,000 passengers, down from 6.8 million the same month in 2019. In November, traffic was down 88 percent compared with last year.

And it was a similar story across global markets. Los Angeles International saw a 96 percent decline, while Athens International had only 20,000 passengers in April, compared with nearly two million the year before.

In terms of revenue generation, the pandemic has been catastrophic for airports, a “shock event that is different than others”, said Seth Lehman, a senior director at Fitch Ratings’ infrastructure group, in our June Deep Dive on the sector. “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,” he said.

The year wasn’t an entire bust for airport owners, but only if mitigation plans were implemented quickly. For Morrison & Co, a New Zealand-based asset manager that owns a portfolio of seven airports in Australia, a crisis management process enabled the firm to shore up its assets quickly to prevent major fallout.

“As an example of the depth and effectiveness of this work, and resulting asset-level strategic and financial management, none of Morrison & Co’s seven private Australian airport investments have required equity injections to date; a remarkable feat considering the impact of covid-19 on aviation,” the firm said.

And for investors that have yet to enter the airport space, a massive repricing of assets is likely to create some attractive buying opportunities. That’s how Oaktree Capital Management has approached the market this year, announcing in November a partnership with Netherlands-based airport operator Royal Schiphol Group to target public-private partnership investments in US airports.

Still, even with covid-19 vaccines being rolled out around the world, market participants think it’s likely that airport owners should prepare business models for life in an hyper-health-conscious environment.

“After 9/11, airports became weapons-free,” Shashank Nigam, founder of the air travel strategy consultancy SimpliFlying told us in June. “Similarly, after covid, airports need to become virus-free. That’s what will bring travellers back… We want to come across as an industry that has taken certain steps to ensure that the sanitation level at airports has gone higher.”

That may mean expensive overheard for an industry that’s already extremely cash-strapped to begin with, but it may also be the only way to ensure some of the hardest-hit assets are able to survive, at least without government intervention.