Airports vs. Airlines - a battle with no winners

Not long ago - during the peak of the COVID time - the whole aviation industry (without exception) expressed the intention to work together and create a system to address all the challenges that pandemic had brought to light, highlighting the weaknesses of the industry which it had pre-Covid very poor risk management policies which forced - with a few rare exceptions - almost the entire industry to apply for loans and/or grants from national governments. All stakeholders agreed that only together could the industry could overcome the biggest shock ever.

Well, it is clear the Covid is almost behind us even if there are still the debts that the industry has accumulated in that period but the feeling is that Covid happened 10 years ago and not 1 year and half ago since everything seems to be back to normal, the so-called new normal is just like before with airports and airlines clashing as usual.

Having worked both for airlines and airport operators gives me a certain advantages and a broader knowledge of the processes for both sectors so I know by experience what are the challenges and the needs for the airlines and the airports.This just to say that I have a neutral position and cannot be biased to one side or the other, in this article I will only analyse facts and numbers.

However, it is really a pity this situation because Aviation should focus only on a new “era” of the industry with airports and airlines working together given all the challenges to be faced in the near future for a sustainable industry, an economical sustainability and an environment sustainability.?

Let’s start by taking a look at the figures that ACI and IATA have released on net profits in Europe:

• ACI EUROPE said European’s airports posted a combined net profit of €6.4bn in 2022
• IATA estimates for European carriers a net profit of USD 4.1 billion (€3.76bn) in 2022

It is hard to imagine an airport without flights, so one would expect airlines would to make more profits than airports and instead it is the other way around. This is not an isolated case but a standard of the last 20 years (Fig. 1).

There are several reasons for the above but there are two that are definitely the main ones:

1. Strong competition among airlines put pressure on profitability?
2. Airports - especially the larger ones - still function as natural monopolies.

However, this lower airlines profitability doesn’t happen only with the airports but also with the other aviation players. We can say without a doubt that airlines generate value for all the supply chain. (Fig. 1),

The bubble between airports and airlines burst last week and is linked to the surge in airline ticket prices this year. According to airport trade body ACI EUROPE, ticket prices have risen 30% year-on-year in Europe and the main complaint was that airlines were free to charge whatever they wanted whereas many major airports had their landing fees capped from the regulators. Said like this, it sounds a fair request from the airport trade body.

It’s absolutely true that from June 2022 to date, air fares have increased due to pent-up demand and less supply in the market, perhaps for the first time in the history of airlines they are able to match supply and demand for their services in a way that is both efficient and profitable (except for some rare cases) but this it is exactly the opposite of what normally happens where there is usually overcapacity resulting in reduction of the air fares. This capacity discipline is only apparent and forced by factors external to the airline industry, namely aircraft shortages, late deliveries of the new aircraft by manufacturers and value chain delays in the delivery of spare parts. This perfect scenario won’t last long with a recession expected towards the end of the year and pent-up demand easing so I do not see this positive trend of fare increases in the medium-long term. Also, airlines (especially in Europe) - when we get back to normal times - are unable to keep capacity discipline so air fares will be stable in the best case and go down in the worst scenario.

As far as the level of the air fares is concerned, we can certainly state that technological innovation, increased competition following progressive deregulation and the low cost airlines have been the key drivers pushing down the price of air transport in the last 50 years. In Fig.2?below we can see how average yields at constant value more or less halved between 2000 and 2018 going down particularly fast since 2012. This being said, we can highlight that airlines are now raising fares but in their entire history it has been exactly the opposite.

Indeed, It happens quite often the airlines with the fares are not able to recover even the cost increases (Fig.3)

ACI EUROPE emphasizes the capping of the landing fees but this is a complex issue because there is no standard approach across different countries in Europe. In most European countries the determination of the airport charges is carried out by the regulator and the level of the charges is linked to different parameters such as investments, number of passengers, etc., We have to also clearly say that despite the capping, airports have the possibility to?get an appropriate return on investment (ROI).?

The above allows me to talk about my personal battle which is the reform of the Airport Charges Directive 2009/12/EC (ACD).

In its current state ACD is weak and ineffective in protecting airport users and consumers and a new regulation is absolutely necessary. The new ACD should produce a model similar to what happens in competitive environments preventing excess profits and ensure that charges are based on efficient cost and investments. A possible cost estimate, according to ICCSAI, in the aviation industry related to the inefficiencies of the current ACD could range in Europe from €1.2 to €2 billion. This being said, the reform of ACD needs to have a new regulation for the determination of the airport charges and a new Independent Authority, in detail:?

New regulation for airport charges

• Almost in all Europe, airport charges are currently regulated by the principle of the dual till which doesn’t take into account for the level of the charges, the revenue coming from commercial activities (non-aeronautical revenues).
• The single till principle is the only way to effectively regulate the airport charges and it is the best mechanism to produce charges that are close to the competitive outcome.
• The single till principle clearly shows the connection between aeronautical and non-aeronautical revenues and the interdependency between the passengers that airlines transport to airports and the non-aeronautical revenues that the same passengers generate at the airport.
• Single till is the only mechanism that recognise the airport as a single business entity, by giving to the airport, with the right economic regulation, the possibility to?get an appropriate return on investment (ROI) across the whole airport activity while protecting airport users and passengers.
• An indirect positive effect caused by the application of the single till, it would also be the reduction of the airport incentives given to the airlines from the airports because the airport’s net cost would be lower and it will be easier for airlines to make a route profitable. It goes without saying that airport incentives will continue to exist but they will be better balanced and less costly for airports.

New Independent Authority

• Most Member States benefit from airport profits because they are directly or indirectly involved, therefore Member States often lack an independence process to implement appropriate?regulation.Furthermore most airport regulators in Europe lack the resources and expertise to carry out the right regulator model.
• In order to ensure the right regulation, it is necessary to create independent local authorities that are fully independent, effective, well-resourced and skilled to perform their duties. This independent regulator should report directly to the European Commission.
• Aviation should follow simply the rules of the other regulated industry sectors, for example telecom, energy, etc.?

Working together

The main reason I decided to write this article is because I strongly believe that airports and airlines have to work together to change Aviation for the better and build a new “era” of the aviation industry - regardless of some topics on which they will never agree.

Go Green

The environment is certainly one of the main themes of the coming decades and it obviously also involves air transport and consequently airports and airlines - surely this is a common area in which airlines and airports can work closely together because there is the same goal which is the decarbonisation of the industry by 2050, In this regard, the main European airports are already far enough ahead of the the airlines for the concept of Net Zero emission 2050.

In fact, even if the goal is 2050, there are already some airports that have decided to go Net Zero emission by 2030 whereas airlines are more in line with the Fit for 55 objective which aims to reduce 55% of the net emissions by 2030.

Needless to repeat that the environmental issue is the top priority for the entire aviation industry because we need a sustainable future for new generations and we simply have to act green. New aircraft, new technologies, sustainable aviation fuel, go electric, solar panels, wind turbines, future hybrid, electric or hydrogen-powered aircraft and many other things will help the industry to reduce emissions and meet Net Zero targets by 2050 but all this will be not free and it will come at a cost.

Having said that, it is also important to highlight that global aviation produces around 3,5% of the total emissions in the world with a clear commitment to go Net Zero by 2050 whereas other industries with a greater impact on the environment do not make similar commitments.

Besides the environmental issue there are other touch points between airlines and airports where they have to absolutely work together to mitigate the extra-costs and show politicians that Aviation is a solid and cohesive industry.?

The main common challenges are:

Single European Sky (SES)

• I have been hearing for years that if airlines flew the direct route they would consume less fuel and consequently reduce emissions by 6-10% therefore greater sustainability for the environment. Unfortunately, we are always at the same point due to some local/regional interests of some EU countries -?reducing emissions should be a common goal for all EU state members, as well as for airlines and airports.
• The lack of the Single European Sky has a major impact on the aviation industry for an amount ranging from €4.5 to €8.0 billion due to airspace inefficiencies. The implementation of the SES is vital for a safe, sustainable, and efficient European aviation industry. It is really time that Single European Sky becomes a reality and that airlines and airports work together to achieve this objective.

Sustainable Aviation Fuel (SAF)

• Sustainable Aviation Fuel is estimated to generate 80% fewer carbon emissions than conventional kerosene and have the potential to reduce emissions considerably if SAF production increases.
• However, today SAF account for less than 1% of total EU aviation fuel consumption, both because SAF cost about three times more than kerosene and because there is a lack of infrastructures and as a result SAF production is quite limited. In this regard, airlines and airports should cooperate and push governments together to increase the production of sustainable aviation fuel, this is very important indeed.

Reform of the Emission Trade Scheme (ETS)

• The reform of the the European Union Emissions Trading System (EU ETS) for the aviation sector should include, in my humble opinion, not only EU intra-flights - but also all the other international/intercontinental flights, as well as the contribution of the non-European airlines to the EU ETS scheme in order to contribute and offset their emissions.?
• Unfortunately EU is going in the opposite direction and more bad news is on the way for European airlines. Indeed, among the ETS reforms proposed?by the EU at the end of last year, free carbon allowances for the aviation sector will be phased out by 2026, in line with the “polluter pays” principle. Today, around half of airline carbon allowances are free so ETS EU reform will will have a significant impact on the balance-sheet of some carriers.
• As things stand, the ETS only covers intra-European travel, which means low-cost carriers and low cost units of the big airline groups are among those most exposed to the changes, given the high proportion of their revenue that comes from such flights. whereas all other flights will not be covered by the new ETS scheme, this is quite weird because long haul flights produce more emissions that intra-EU flights.
• It is fair to say the European Union is waiting until 2026 to ask whether the ETS EU should be extended to all types of flights?and not just for intra-European services. Its decision will depend on the assessment of the success or otherwise of ICAO’s CORSIA offsetting scheme for international aviation, which will be launched in the coming years.
• All of the above will put extra pressure on the airline industry to find ways how to compensate these additional costs. It would be nice if Airports Council International could support airlines on this matter.

Homogeneous tax scheme and cancellation of all aviation taxes in Europe.

• European Aviation doesn’t have the same taxation regime and generates extra-cost for the aviation industry so European Union is called to uniform tax scheme for European state members.
• Cancellation of all aviation taxes in Europe because indirect taxes, such aviation taxes, create distortions in the market by increasing the price of the service to which the tax is levied (in this case, flights), leading businesses and consumers to adjust their behaviour to avoid paying the tax, resulting in a lower quantity sold.?
• According to a study, the permanent cancellation of all the country specific aviation taxes would have a positive annual impact between?€1.7 to €3.8 billion without considering the latest increases of the aviation taxes in France and Germany.
• A direct positive effect caused by the cancellation of the aviation taxes it is the passenger charges will be cheaper at airports where aviation taxes are applied and, as a result, airlines will be more stimulated to add capacity in routes already served, as well as to open new routes. The reason is quite simple, aviation taxes are eroding margins at best whereas at worst aviation taxes are increasing the losses or not allowing the breakeven. This will also be indirectly good for airports in terms of Aviation and Non-Aviation revenues so this is another area where airlines and airports can to support each other for a common goal.

Banning of short-haul flights in Europe.

• France has banned short-haul domestic flights where rail alternatives exist, in a bid to reduce carbon emissions,Spain could follow the same example by 2050,
• An excellent?Eurocontrol?study showed that eliminating every single flight in Europe of less than 500 kilometers (many of which cannot be served by rail) you would reduce the number of flights by 24 % but the CO2 reduction would be in the order of 3.8 to 4 %.
• Airlines and airport have to work together to help politicians make the right decisions on environmental issues backed by the numbers and prevent them from making populist decisions such as the banning of short-haul flights that penalise the aviation industry, airlines and airports.?

Conclusions

It goes without saying that airlines and airports overlap their business so each of them tries to protect their own space, in those cases third parties or independent authorities have to find the proper solutions for airlines, airports and consumers. Nonetheless, there are areas where they can cooperate with the common objective of building a new “era” of the aviation industry. It would be a shame if they did not even try…

Comments and views are more than welcome.

Massimo