Can American Airports Continue to Soar?

Mar Beltran

Promising growth of global tourism and passenger volume has allowed U.S. airports to fly high. But how long can it last? Amid threats of disruption from rapidly changing consumer trends, operators may need to adapt their models and reinforce their competitive positions. 

While increasing passenger volume on low-cost carriers (LCCs) is boosting airport revenues from parking and food/beverage concessions, operators are simultaneously discounting aeronautical charges and posting less retail sales. Such yields have suffered two years of lackluster growth. 

Mar Beltran is the senior director, infrastructure sector lead for Europe, the Middle East and Africa at S&P Global Ratings. She previously worked at Australia-based Global Infrastructure Hub, where she led policy work to identify reforms in infrastructure markets. Beltran has also advised governments in both developed and emerging markets on governance, regulatory frameworks, planning and delivery of infrastructure projects.

Furthermore, there are additional challenges ahead: The industry can expect a raft of disruptive forces from ride-hailing apps and online shopping outlets, which could cannibalize parking and commercial revenues, respectively. Further down the line, electric and autonomous vehicles could markedly change airports’ business models. That said, industry disruptions also bring substantial growth opportunities. And this should encourage airport operators to find ways to future-proof their business models.

LLCs & Aeronautical Revenue  

Airport performance has generally trended upward for the past 30 years, thanks to increasing passenger volumes. What’s more, annual growth in North America’s passenger traffic should remain level. Data from the International Civil Aviation Organization show that North American airlines’ international revenue passenger kilometers increased by 4.3% in the first half of 2017—up from 2.1% in 2016. This could secure airports stable returns for the next 24 months. 

Benefiting from lower fuel prices, U.S. airlines have increased passenger volumes via the LCC model. In America, LCCs represent almost 30% of the total domestic market, with four airlines controlling 83% of domestic capacity. An ultra-LCC class is even expanding: The likes of Spirit Airlines serve over 59 destinations in the U.S., Caribbean and Latin America. We believe these LCCs and ultra-LCCs could provide carrier diversity in certain markets, but they are unlikely to influence airport credit quality. To date, increased network carrier concentration has not negatively affected airport credit ratings.

Yet, with airline charges falling to accommodate this lower-cost market, aeronautical revenues are trending downward, too—creating concerns regarding airports’ longer-term revenue forecasts. The Airports Council International reports that last year, average per passenger revenues fell to $20, from $21.22 in 2014. Further, it found that the average revenue split remained stable at 60% aeronautical/40% commercial—implying that the decrease in growth is happening for both commercial and aviation revenues.

Risks & Opportunities 

Pressure on commercial operations is on two fronts: retail and ground transportation. First, the consumer shift toward online shopping is largely responsible for the decline in global duty-free and travel retail sales—which contracted in 2015 and flattened in 2016, despite buoyant tourism figures.  

Secondly, consumer behavior regarding ground transportation appears to be evolving, too. Today, parking and ground transportation fees (including applicable taxi, bus and car rental operators) represent 41% of non-aeronautical revenues for U.S. airports, with origin and destination airports seeing higher parking revenue per passenger ($6.50) than hub airports ($3.60). Car rentals, meanwhile, account for 19% of non-aeronautical revenues. Thanks to initiatives to improve concession yields, we anticipate non-aeronautical revenues to grow more or less in line with passenger traffic. These revenue streams may not be secure in the longer term, however. 

For airport drop-offs, more passengers are using ride-hailing apps, such as UberX and GoCar, instead of taxis or their own vehicles. The potential ramifications are clear: Increased use of ride-hailing apps could threaten airport ground access revenues, forcing operators to provide cheaper car parking options and/or dedicated waiting areas, where drivers hailed via apps can pick up passengers. 

In the longer term, operators will face a dilemma: With commercial revenues falling, aeronautical tariffs will need to rise. Again, disruption brings with it a host of revenue-generating opportunities. In retail, for instance, revenues in the food/beverage sector and recreational services remain robust. 

Then there are openings for the early movers on electric and autonomous vehicles. Although investments in electric charge points and adaptation will be required, technologies such as assisted parking could optimize asset utilization of parking garages. 

While operators are delivering returns for the time being, the future could be awash with disruptive factors that require attention. How U.S. airports position themselves ahead of these challenges and opportunities will be crucial to remaining profitable. By boasting a diverse range of airlines and high capacity levels—alongside favorable regulatory conditions and a willingness to embrace consumer changes—they can continue to thrive.

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