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Airports respond to A4E’s hollow ‘revelations’

A4E’s campaign on airport charges is all about boosting the bottom line of the major European airlines – which A4E represents.

BRUSSELS  – At an event in Brussels yesterday organised by the airline association A4E, the findings of a new study on airport charges were revealed… but not the actual study. The findings announced were media-friendly, highly selective and simplistic, but these ‘revelations’ are not about benefitting consumers.

Asked directly by the moderator at their own event, whether lower airport charges would genuinely result in lower air fares – none of the airline CEOs on the airport charges panel would confirm. A4E’s campaign on airport charges is all about boosting the bottom line of the major European airlines – which A4E represents. This, at a time when these airlines are actually posting record profits – on the back of improving pricing power and contained oil prices (which they do not pass onto consumers).

Olivier Jankovec, Director General of ACI Europe commented “Calling airports “connectivity disruptors” as A4E did today, is not just insulting – it is a massive lie. Developing diverse air connectivity is at the very core of airports’ social and business mandates. We aim to provide air travellers with more choice. This is precisely why airports in Europe are perpetually chasing airlines, offering incentives such as rebates on airport charges and marketing support to entice them to develop new routes¹ and add more frequencies from their own location.”

ACI Europe has extensively worked on measuring airport connectivity – providing its members with a set of industry indexes² allowing them to track their own connectivity performance over time.

Jankovec added “The figures speak for themselves. Europe’s airports already subsidise airlines to the tune of 10.4 billion euros every year. This is because of the gap between airport revenues from charges paid by airlines/passengers and airports’ total costs. In fact, airlines and passengers only finance airports’ costs of operating. The totality of the cost of maintaining and expanding airport infrastructure comes from other sources – essentially from the margins on airports’ commercial activities. This is a model that benefits all airlines and that some of A4E’s members have abused extensively.”

ACI Europe also noted that A4E is also basing their allegations on EBIDTA margins. For a capital intensive sector like airports, EBDITA is a rather selective and not necessarily appropriate way of measuring financial performance.

The global airline association IATA has acknowledged this*, stating, “airports are relatively capital intensive, with the level of capital invested (e.g. land) higher than the level of annual revenues. As such, operating profit margins will need to be relatively higher than other sectors in order to generate an equivalent return on capital.”

A more appropriate indicator for capital intensive industry is ROIC (Return On Invested Capital). ROIC for Europe’s airports currently stands at 7.2%, broadly in line with their cost of capital. It should be noted that EU airports are actually underperforming other European airports based on this indicator – not to mention airports in other emerging markets where the ROIC is routinely well above 10%.  

Jankovec concluded “The shallow nature of this latest attack is typical of how some European airlines have decided to lobby for a revision EU airport charges directive. But a closer look only reveals that there is no systemic market nor regulatory failure that justifies such a revision. In the end, it comes down to realising that there is a clear distinction between the interest of the passenger and the wider economy on the one hand – and the interest of airlines on the other. Just consider the fact that most airlines do not even effectively refund airport charges** and other ticket taxes to passengers who do not take their flight. Airport charges should be about airport investment and connectivity – not about boosting airlines’ bottom line”.

European Airline CEOs concerned about “supernormal” returns at the majority of Europe’s largest airports
During the second annual “A4E CEO Forum”, Europe’s largest airline association presented the final results of a York Aviation study on “The Cost and Profitability of European Airports”, which shows that European passengers are paying excessive airport charges, particularly at monopoly airports and airports which operate under a Dual-Till regime.

“The European Commission's (EC) current regulatory evaluation process is an important step in addressing the abuse of market power by some European Airports. We look forward to concrete outcomes from this process, proceeding to the formulation of the new legislation necessary to tackle the supernormal returns by airports, which are bad for consumers, bad for tourism, bad for national economies. We call on the EC to accelerate its evaluation. We must proceed now from analysis to action,” said Thomas Reynaert, A4E’s Managing Director. 

The average EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) margin of York Aviation’s sample of airports was 46%, which is significantly higher than the 23% margin of the top 100 airports referred to by the EC in its 2015 Aviation Strategy, indicating the extraordinary levels of profitability of Europe’s largest airports. 

The study has also looked at returns to an airport business relative to its cost of capital. If returns are substantially in excess of the cost of capital, this is evidence of a situation in which airports enjoy significant market power and are using this to price excessively. The analysis identifies such returns in excess of cost of capital as ”economic profit” or ”supernormal” profit. More than 85% of the entire sample of airports generate what could be called ”supernormal” returns.

“The existence and proliferation of Dual-Till airports demonstrates that airports don’t operate in a competitive market and that they abuse their market power. We are strongly convinced that Single Till is the model which benefits European passengers most and should be introduced across the continent,” added Reynaert.

The study also reveals that neither airlines nor the relevant regulators in each EU member state are provided with sufficient transparency on the level of airport charges. There is little regulatory scrutiny, despite the fact that this is one of the key requirements of the ACD. A4E believes that it is essential that national regulators and competition authorities are equipped with adequate resources and competencies to create a level playing field.

 

¹ Every year, European airports of all sizes attend route development conferences to pitch to airlines, to try to attract them to set up new air services from their airport. Airport pay to attend these conferences. Airlines do not. This year’s WORLD ROUTES in Barcelona has attracted 700 airports from across the world – a large percentage of which are from Europe.
For more info, go to http://www.routesonline.com/events/189/world-routes-2017/

² Download the ACI Europe Airport Industry Connectivity Report 2017 https://www.aci-europe.org/component/downloads/downloads/5115.html

* IATA Economics Briefing No 4: Value Chain Profitability, June 06, page 13. Available online at http://www.iata.org/publications/economics/market-issues/Pages/profitability.aspx
** Getting such refunds usually involves unnecessarily cumbersome administrative requirements and “processing fees” that all serve to ensure that passengers rarely see those refunds. These passengers’ fees thus retained by airlines are estimated to reach up to 3.5 billion euros a year (source: www.airtaxback.com).

Co-Founder & Chief Editor - TravelDailyNews Media Network | Website | + Posts

Vicky is the co-founder of TravelDailyNews Media Network where she is the Editor-in Chief. She is also responsible for the daily operation and the financial policy. She holds a Bachelor's degree in Tourism Business Administration from the Technical University of Athens and a Master in Business Administration (MBA) from the University of Wales.

She has many years of both academic and industrial experience within the travel industry. She has written/edited numerous articles in various tourism magazines.

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