Airport Ecosystem in Prolonged Turbulence

WHITEPAPER Airport ecosystem in prolonged turbulence

Sector plummets: COVID-19 hits the aviation industry very hard – the whole sector worldwide comes to a standstill; recovery to the level of 2019 not expected before 2023

Regional airports particularly at risk: Regional and smaller airports had already feared for their survival before COVID-19 – mainly due to lower levels of profitability, declining passenger numbers, stricter regulations of state subsidiaries (2020 amendment to EU State aid rules) and increasing competitive pressure

Crisis affects the entire ecosystem: The survival of numerous service providers such as handling, secu- rity and management services companies depends on the continued existence of the airports. The slump in aviation activities at international airports and the threat of airport closures have grave consequences: market-opening measures and renegotiation of contracts with airport operators necessary in order to secure long-term survival of external service providers

Commitment to long-term perspective: Long-term global trends such as demographic growth, rising economic prosperity and productivity enhancements in air traffic provide impetus to the growth prospects of large market players – some have potential for double-digit growth rates after the COVID-19 crisis has been weathered

GERMANY – AIRPORT ECOSYSTEM CURRENT MARKET TRENDS (EUROPE)

Airlines High competitive pressure between airlines and likely Check-in/ consolidations because of excess supply and dependence on ground handling subsidies

Aircraft manufacturers EU subsidies for airports criticised – even if state aid periods & suppliers are extended beyond 2024, critics increasingly raise the question of opportunity costs

Sustainability trend (“flight shaming”) and CO2 emission targets (e.g. passenger tax, planned ban on dumping prices, tax cuts for long-distance rail transport) favour alternative Restaurants & Mobility & catering means of transport hotels

COVID-19: No full recovery of passenger traffic (tourists and business travellers) expected in the short term

Travelagencies/ operators Retail New work environment: Working from home and digital Airport operators & meetings instead of physical travel; video conferences have Focus of this Whitepaper management become widely accepted

Effects of COVID-19 4

Airport ecosystem

Airports 6

Airlines 10

Check-in/ground handling 11

Retail 12

Mobility & hotels 13

Detailed information 14

AVIATION SECTOR HAS HIT This threat is underpinned by a lack of access to state ROCK BOTTOM support programmes such as the Stabilisation Fund or ONLY CARGO IS TRANSPORTED BY AIR KfW loans due to the fact that most of the airports are DEVELOPMENT PASSENGER AND CARGO The aviation industry is one of the sectors hit hardest by owned by the state (with the exception of Fraport). TRAFFIC (IN % YOY) the outbreak of the COVID-19 pandemic – and the pre- Feb 20 Mar 20 Apr 20 May 20 Jun 20 sent crisis is considered the greatest crisis in aviation CHALLENGES EVEN BEFORE COVID-19 history. Passenger traffic at German airports slumped -4 -5 -8 -12 -15 -11 by almost 100% yoy in April and May. Therefore, While the sector boasted growing passenger numbers, airports lost around € 500 million in monthly revenue especially in Asia, it had already been facing various challenges even before COVID-19. First negative signs (approx. 95%) during this time period, while still having -63 to cover around € 170 million in fixed costs. started to show at the end of 2019: for three months in a row, passenger numbers at German airports were below Passenger -94 -99 -98 traffic NO RECOVERY IN SIGHT the prior-year figures – this was the result of various trade conflicts, an economic slowdown, rising oil prices and the Cargo traffic Hopes for a quick recovery in the sector are dashed as Boeing effect resulting from the 737 Max crashes. current forecasts assume continued negative effects. A return to the pre-crisis level is not expected before 2024 CONSOLIDATION IN THE AIRLINE SLUMP IN AIR TRAFFIC: PASSENGERS (‘000) at the earliest – with grave consequences for the entire ENVIRONMENT AND PAX KM (MILLION) IN MAY, EXAMPLE: sector: A decline in passenger traffic of around 60% in DÜSSELDORF AIRPORT the COVID-19 crisis year and passenger numbers that are Moreover, airports are also being hit hard by the ongoing at least 15-20% below normal level in subsequent years 2.260 903 market consolidation of airlines as demonstrated for -98.6% (Fraport planning) are considered realistic assumptions. example by the insolvencies of Air Berlin, Germania, The reasons for this are manifold: continuing health con- Thomas Cook or Scottish Flybmi. The corresponding 32 8 cerns curb demand, the frequency of flights is reduced. loss of landing fees means that airport operators have 2019 2020 2019 2020 Furthermore, the accelerated digitalisation trend changes lost important sources of revenue. This leads to major the way people work, as can be derived from the introduc- challenges, especially for smaller airports that are tion of long-term work from home policies at many com- highly dependent on a small number of airlines (cluster panies (e.g. Siemens, Allianz, Novartis) and the planned risk). COVID-19 adds fuel to these developments: DEVELOPMENT PASSENGER TRAFFIC EUROPE reduction of business trips (e.g. Deutsche Bank, Deutsche according to an analysis by IATA, only four out of 120 (MILLION PASSENGERS VS. PRE-COVID-19 Telekom, RWE). In addition, many companies reflect an airlines would have covered their costs assuming a FORECAST) increasing environmental awareness in their travel poli- capacity utilisation rate of 60%. IATA therefore expects cies, for example by avoiding domestic flights. that at least 30 airlines worldwide will leave the market 0 -10 Pre-COVID-19 Base scenario(2) And this trend is further supported by regulatory requi- unless saved by comprehensive state intervention. -20 rements with regard to achieving the climate objectives. -30 -40 As such, the EU Commission for example announced Current Risk scenario(3) AIRPORTS ARE ON THE LOSING END -50 a reduction in the amount of free emission allowances -60 -70 allocated to airlines, while France plans to ban domestic The crisis affects the entire industry. But regional airports -80 flights altogether and Austrian Airlines committed itself had already been in crisis mode even before COVID-19. -90 -100 to also shift short-haul flights to rail in order to halve the The losses of German regional airports between 2005 (million) PAX of in no. Change -110 country’s CO2 emissions by 2030. and 2014 amounted to € 1.3 billion , which were usually Jan Mar May Jul Sep Nov Jan Mar 20 20 20 20 20 20 21 21 covered by state subsidies to maintain operations. None AIRPORTS PARTICULARLY AFFECTED of the smaller airports managed to generate operating profit. At the same time, airports must be more profi- Despite measures already implemented such as short-ti- table to make themselves financially independent – as CONTINUED REVENUE LOSSES me work arrangements with the corresponding state bene- required by the EU State aid rules (2014). Because of the NO. OF PASSENGER FLIGHTS WORLDWIDE (MILLION) fits, costs remain high. Aviation companies are required by COVID-19 crisis, airport associations are now demanding policy-makers to maintain a minimum supply of services, an extension of the transitional periods, as otherwise -41% Avg. 2015-18:35.9 even if capacities remain underutilised. Airports are facing state aid for operations will be discontinued from 2024. 2.260 38.9 30.1 challenges that threaten their very existence. The airport At the same time, however, the public sector (and thus, at 23.1 association ADV and the union ver.di estimate that around the end of the day, the taxpayer) is so heavily burdened 180,000 jobs in the airport ecosystem are at risk – and by COVID-19 that critics increasingly pose the question 2019 2020P 2021P Revenue 612 241 389 around one in four of these jobs are at airport operators of opportunity costs of airport subsidies. (USD bn) (around 15% of total persons employed in the sector).

REVENUE BREAKDOWN EUROPEAN AIRPORTS AVIATION REVENUE (€ BN)

Aviation Non-Aviation -67% 28.6 Landing fees, Other, Rental income retail, Other 12.7% 9.1% 13.7% (rental cars, restau- -19.2 rants, advertising, 9.5 catering, etc.), 12.2% 2019 COVID-19 2020

NON-AVIATION REVENUE (€ BN) Passenger fees, Terminal hire, Safety charges, Real estate Parking management, 25.3% 7.1% 4.7% management, 6.3% 6.2% -68% 19.5 58.9%(1) 38.3%(1) -10.5 -2.8 6.2

(1) 2017, indicative, excl. non-operating revenues 2019 Retail / Other 2020 (2) Base scenario: rapid recovery of capacity with declining growth rate restaurants/ (3) Risk scenario: continuous recovery of capacity with moderate growth rate parking Sources: Oxford Economics; ADV, Airliners; ICAO; ACI Economics; The Moodie Davitt Report; ifo Institute; WirtschaftsWoche; Handelsblatt; Andersch analysis

FORECAST BASE CASE: COVID-19 EFFECT ON CUMULATIVE EBIT BRIDGE OF GERMAN AIRPORTS (€ BN)(1)

PRIOR TO COVID-19: FORECAST 2020 COVID-19 BASE SCENARIO: FORECAST 2020

Fixed Fixed 0.2 2.5 0.7 Variable Variable 0.7 0.2 0.5 EBIT EBIT 0.4 0.1 0.2 0.9 1.6 0.3 0.1 0.4 0.1 1.3 0.4 2.0 0.4 0.4 0.4 0.1 0.2 0.5 0.2 0.2 0.6 1.5 0.0 0.8 0.3 0.1 0.8 0.3 0.2 0.3 0.0 0.1 0.6 0.4 0.4 0.5 0.4 0.5 0.0 0,2 0.2 0.3 0.1 0.4 0.4 -0.4

EBIT EBIT costs costs costs Sales Sales Costs Other Other Other Other Cost ofCost ofCost Aviation Aviation revenue revenue revenue revenue revenue revenue revenue revenue materials materials Personnel Personnel Depreciation Depreciation Non-aviation Non-aviation

(1) “International A” airports FRA and MUC not included in the bridges as they are far above average size

RESULTS OF OPERATIONS MODEL REVENUE AND EBIT FORECAST: AVERAGE REVENUE DEVELOP- The COVID-19-related decline in passenger On average, German airports generate around MENT OF GERMAN AIRPORTS BY SCENARIO numbers has a massive effect on the earnings 63% of their revenues in the aviation sector, 2020 (2019 INDEX) situation of German airports in the current and 28% in the non-aviation sector and 9% through 100 101 102 102 subsequent years. On the revenue side, the other income. 100 strong correlation between revenues and flight In the base scenario, revenue of German air- 85 89 69 movements/passenger numbers led to sub- ports collapses by an average of around 48%, 77 85 stantial declines. On the costs side, however, in the best and worst case by around 32% and 53 69 the correlation with utilisation rates is not so 61% respectively. Due to the higher share of fi- Prior to COVID-19 strong and therefore costs remain relatively xed costs, the costs of German airports decrea- Base Case high. The simulated forecasts a potential decli- se by an average of only around 27% (in best 40 Best Case ne in earnings. and worst cases by 18% and 34% respectively). Index 2019=100% Worst Case Operating result and EBIT margin therefore fol- 2019 2020P 2021P 2022P ASSUMPTIONS AND SCENARIOS low a negative trajectory: in the base case, the EBIT margin collapses on average by around 43 Revenue and cost estimates were adjusted PP, in the best and worst cases by around 24 PP FORECAST: AVERAGE EBIT MARGIN SLUMP downwards compared to the pre-COVID-19 or 67 PP respectively. Due to the higher cost OF GERMAN AIRPORTS BY SCENARIO 2020 forecast. In order to calculate the decline due share in revenue, less profitable airports are hit (INDEX 2020) to lower passenger numbers, historical fixed harder in comparison. The individual EBIT mar- revenue and fixed cost shares were allocated to gin forecasts show the decline by airport cluster EBIT 17.9% 9.8% -9.5% -21.6% the individual revenue and cost groups. and illustrate the difficult situation of the Inter margin The further development of the COVID-19 pan- C and regional airports, which had already been before COVID (%) -15 demic is fraught with high uncertainty. In ad- negative on average before COVID-19. -19 -23 -25 dition to the most probable base case scenario, -29 -37 a potential best and worst case were simulated -45 COST COVERAGE -47 -48 to cover the range of possible scenarios of diffe- -60 -74 rent infection curves. The cost coverage ratio, which shows the propor- -78 The base case is in line with current forecasts by tion of operating costs covered by revenue, is an Inter A Inter B Inter C Regional experts and listed airport operators; it expects important KPI for airports. Before the pandemic, Base Case Best Case Worst Case a decline in passenger numbers of around 60% Cluster A and B international airports were gene- in 2020 with a recovery to the 2019 passenger rally able to cover their costs through revenues, level in 2023. The best case assumes a faster while Inter C and regional airports were depen- FORECAST BASE CASE: COST COVERAGE ramp-up (passenger slump of around 40% in dent on subsidies. Forecasts assume that none RATIO OF GERMAN AIRPORTS BY CLUSTER 2020) and a recovery to the 2019 level in 2022, of the airports will be able to cover their costs in 2015-2022 (%) while the worst case assumes an acute second 2020. Once again, smaller airports are being hit wave in the course of the year (slump of around particularly hard – they will require significantly Year Avg. 2015-2018 2020P 2021P 2022P 75% in 2020) and a delay in the recovery to the higher subsidies in the coming years. Inter A 128.1 89.9 104.9 113.8 2019 level until 2024. Inter B 112.5 79.9 96.4 106.1 Inter C 92.3 66.2 79.7 87.7 Regional 84.8 60.0 71.9 78.1 Total 98.4 69.9 83.9 91.8 Sources: Bundesanzeiger; Andersch analysis

POSITIVE DEVELOPMENT PRIOR cantly higher revenue per passenger (€ 42/PAX compa- TO COVID-19 red to about € 12/PAX at regional airports). In addition, THE MORE DIVERSE, THE MORE large airports benefit from economies of scale, which SUCCESSFUL – TOP/BOTTOM AIRPORTS IN This analysis looks at 23 German airports of different si- allow for higher margins on aviation charges, and from a TERMS OF REVENUE COMPOSITION zes based on five assessment dimensions (see “Airport larger non-aviation business, which generates attractive Revenue 2018 Performance Index” graph). This reveals that while Ger- rental income. Regional airports, on the other hand, 1. München 54% 28% 17% € 1.470m man passenger traffic showed stable growth in recent depend on state subsidies in order to cover their costs. 2. Frankfurt 47% 14% 29% € 3.750m(1) years (CAGR 2015-2019: 3.6%), not all of the airports 3. Düsseldorf 59% 20% 21% € 501m were able to benefit from this trend: large airports ma- INTERNATIONAL COMPETITION 15. Dortmund 61% 33% 5% € 24m naged to further expand their market share, but almost INCREASES all of the regional airports suffered a significant decline 16. Karlsruhe 56% 44% 0% € 20m in passengers. As a result of Ryanair’s streamlined flight In addition, Germany’s international airports are under Aviation Licenses & rental income schedule from 2018/19, the decline was especially increasing competitive pressure for transfer passen- Other pronounced at the airports of Frankfurt Hahn (-14.4%) gers; their main rivals are in Europe (e.g. Paris, London, (1) Contains activities outside of the Frankfurt/Main site and Weeze/Niederrhein (-10.4%). Memmingen and Zurich and Amsterdam) and the international hubs in Sources: ORBIS; ADV; Andersch analysis Karlsruhe, on the other hand, showed a positive trend the Middle East. With respect to costs, German airports during the same period, as they benefited from invest- are often at a disadvantage: strict regulations, especially ments in expansion measures and the high demand in with regard to noise/environmental protection and sa- THE LARGER, THE MORE SUCCESSFUL – the catchment area of southern Germany, and also from fety, as well as collectively agreed wages in personnel- AIRPORT PERFORMANCE INDEX (API) a strengthened Ryanair flight schedule with additional intensive ground handling and higher air traffic taxes flight connections. reduce the competitiveness of Germany/EU as airport 1 Operational excellence locations. However, the central locations of European 5 Macroe- AIRLINES WEAKENED airports and the high level of professionalism compared conomic 2 to their competitors elsewhere are seen as advantages. environ- Financial ment The shift in passenger volumes is substantially driven by performance low-cost airlines, which account for a significant share of BUSINESS MODEL AIRPORT business at regional airports. On the one hand, so-called 3 4 Regu- low-cost airlines are gaining bargaining power vis-à-vis Differences can be seen in the income structure, especi- latory Strategic airport operators and service providers, which is reflec- frame- orientation ally with regard to the non-aviation share, which stands work ted in low margins and a lower revenue per passenger; on for around 40% of overall revenue. While international the other hand, the business model of the new, price-ag- airports often generate a significant share of their International A International C gressive airlines involves considerable risks. Insolvencies revenues from rents, license and advertising income as International B Regional such as Air Berlin (2018) or Germania (2019) affect well as parking management, regional airports are more Operational excellence: e.g. customer satisfaction, re- 1 regional airports more than the larger ones; in view of the dependent on aviation as their core business. These revenue/PAX, aircraft capacity utilisation, flight volume market environment, rising kerosene prices and massive venues are mainly generated from airport, handling and Financial performance: e.g. capital structure, profi- 2 cutbacks due to the COVID-19 crisis further insolvencies infrastructure fees and are therefore more dependent on tability, return on capital employed are expected. passenger air traffic, which can be subject to seasonal Strategic orientation: e.g. expansion of infrastructure, 3 fluctuations. Out of the commercial airports considered traffic development, small share of low-cost airlines in this analysis, other than Frankfurt/Main Airport, only Regulatory framework: e.g. shareholder structure and PROFITABILITY THROUGH SIZE 4 Leipzig/Halle and Cologne/Bonn generate significant degree of privatisation, restrictions on night flights At Germany’s larges airports Munich and Frankfurt/ revenue from cargo traffic. A diversified revenue struc- Macroeconomic environment: e.g. distance to other 5 Main, low-cost airlines only account for 8% of all flights. ture provides for strategic leeway and is one of the most airports, COVID-19 effect, catchment area, infras- The vast majority of flight movements are scheduled significant factors determining financial success. tructure around the airport flights with standard prices (including a large share of Airport External business customers), which are reflected in a signifi- performance conditions

MARKET ENVIRONMENT: KPIS OF GERMAN PASSENGER AIRPORTS

(1) International A 59.2m International A (2) EBIT 25% 22% 21% International B(2) CAGR 3.9% margin München (MUC) International C(3) 1.975 2.202 2.494 ROCE 7.8% Frankfurt am Main (FRA) Interest coverage Regional(4) Avg. revenue 2016 2017 2018 3.7x Circle size no. of PAX 2019 International B (6) EBIT 10% 9% 12% 18.4m margin CAGR 3.8% Airports under 1m Düsseldorf (DUS), Berlin-Tegel 349 363 370 (5) (5) ROCE 5.0% p.a. – profitable (TXL) ,Berlin-Schönefeld (SXF) , operations Köln/Bonn (CGN), Hamburg (HAM), Avg. revenue 2016 2017 2018 Interest coverage impossible Stuttgart (STR) 3.1x

International C (8) EBIT -3% -3% -1% 2.3m CAGR 0.8% Hannover-Langenhagen (HAJ), Leipzig/Hal- margin le (LEJ), Dresden (DRS), Nürnberg (NUE), 61 57 69 ROCE -1.0% Bremen (BRE), Münster/Osnabrück (FMO), Avg. no. of PAX 2019 Avg. revenue 2016 2017 2018 Interest coverage Saarbrücken (SCN), Erfurt-Weimar (ERF) (CAGR 2015-2019) 0.0x

Avg. return on capital Regional (7) EBIT -22% -22% -16% 1.4m CAGR -1.5% Employed 2018 Frankfurt-Hahn (HHN), Dortmund (DTM), margin Niederrhein (NRN), Karlsruhe/Baden-Ba- 25 27 27 ROCE -5.5% Avg. interest coverage den (FKB), Memmingen (FMM), Friedrichs- Avg. revenue 2016 2017 2018 Interest coverage ratio 2018 hafen (FDH), Paderborn/Lippstadt (PAD) -4.9x (1) From 50 million PAX or € 1 billion revenue; (2) From 10 million PAX or € 200 million revenue (3) From 0.2 million PAX or € 5 million revenue; (4) From 0.2 million PAX or € 5 million revenue – no provision of air navigation services by Deutsche Flugsicherung (5) Flughafen Berlin Brandenburg GmbH manages both Berlin Tegel Airport and Berlin Schönefeld Airport; closure of Tegel in November 2020 after opening of BER Sources: ADV; Airliners; company information; Andersch analysis

AIRPORT PERFORMANCE INDEX well as the airports Niederrhein (NRN) and Frank- and a relatively long distance to the next closest furt-Hahn (HHN) are also ranking very low with airport. The airports in Berlin (SXF/TXL), which A differentiated analysis of the 23 German commer- declining passenger numbers as they have hardly are financially burdened by high expenses for the cial airports that looks at the individual strengths of been able to cover their costs for years even though construction of the new Berlin airport BER, are also the operators and the appeal of the corresponding their passenger numbers exceed the threshold of allocated to this category. environment indicates which success factors are 1 million passengers p.a. This is aggravated by the decisive for the airport’s positioning in the index. The dependence on low-cost carriers, as they are using 3 RUNNER-UP: ABOVE-AVERAGE results can be grouped into the following clusters: their strong negotiating position to put pressure on margins. The individual airport operators deal PERFORMANCE IN A PEER GROUP 1 REGIONAL VS. INTERNATIONAL extremely differently with cluster risk, which is COMPARISON demonstrated by Friedrichshafen (FDH) on the one In the category of smaller international airports, C: A MATTER OF DEFINITION hand and Memmingen (FMM) on the other: while Nuremberg (NUE) and Hannover (HAJ) are particular- the former strives for independence from low-cost In general, the category of regional airports is not ly noteworthy. Both of them are highly profitable carriers (2019 share in capacity of around 32%), able to cover its costs and thus depends very much with a solid financing structure; in recent years they Memmingen is exclusively served by low-cost on state aid. The fact that in Germany the provision achieved stable passenger growth (avg. CAGR 15-19: airlines. of air navigation services is regulated differently approx. 4%) and solid margins (avg. EBIT: approx. depending on the airport poses a major disadvan- 7%). tage for regional airports: while regional airports 2 SOLID PERFORMERS – NOT are forced to bear these costs themselves due to a ENOUGH PASSENGERS FOR 4 TOP CATEGORY: INTERNATIONAL biased competitive situation, international airports HIGHER RANK are in a position to settle these costs directly with HUBS BENEFIT FROM THE ENVIRON- the airlines as they are classed as DFS locations The airports of Düsseldorf (DUS) and Hamburg MENT (Deutsche Flugsicherung; air traffic control in Ger- (HAM) achieve an above-average financial per- many). At the end of 2019, the Budget Committee formance (avg. EBIT 2016-18: approx. 20%), As expected, the ranking is led by the largest of the German Bundestag gave the go-ahead for which is driven mainly by a high capacity utilisation German airports – in a direct comparison, Munich the assumption of air navigation services costs that benefits from advantageous noise protection (MUC) is more profitable than Frankfurt/Main from 2021, but the relevant legal framework is regulations. Cologne (CGN) and Stuttgart (STR) are (FRA), which is due for example to the top result still not in place. The beneficiaries of the new also in this category as they achieve above-average in terms of revenue per passenger; Frankfurt/Main legislation are regional airports such as Dortmund revenue per passenger (avg. ratio 2016-18: approx. (FRA), on the other hand, comes out top for cargo (DTM) or Paderborn (PAD), as they lag far behind in € 25 per passenger). Furthermore, Hamburg (HAM) traffic, rail connection and infrastructure around the ranking, which is also due to the major cost dis- and Stuttgart (STR) benefit from an attractive the airport. advantages described above. Saarbrücken (SCN) as environment such as a large number of hotels

RANKING OF COMMERCIAL AIRPORTS IN GERMANY(1)

4.0 Circle size shows number of PAX 2019

4 2a 3 FRA 3.5 STR 1c HAJ 2b NUE FMO FMM DUS BRE 3.0 TXL MUC 1b PAD CGN HAM

ERF SXF 2.5 1a DTM

ATTRACTIVENESS OF ATTRACTIVENESS THE ENVIRONMENT DPS International A HHN FKB LEJ

A FDH International B NRN International C 1a SCN Regional

2.0 2.5 3.0 3.5 4.0

B CORPORATE STRENGTHS

A VARIABLES FOR THE ATTRACTIVENESS OF B VARIABLES FOR CORPORATE STRENGTH (EXCERPT(2)) THE ENVIRONMENT (EXCERPT(2)) • Per capita GDP in the federal state • Avg. EBIT margin 2016-18 • Distance to next closest airport • Avg. equity ratio 2016-18 • Degree of privatisation • Revenue per passenger • Ban on night flights • Customer satisfaction • Distance to city centre • Development passenger traffic

(1) 23 German commercial airports with at least 0.5 million passengers or revenue of € 10 million; no military or special-purpose airports (2) For a detailed list of all variables included, see glossary (further information)

Source: Andersch analysis

PROPOSITION FOR FUTURE financial support. Strategic decision-making testing facilities and cooperation with hospitals or ACTIONS BASED ON RELEVANT and funding negotiations need a scenario-based test stations enable efficient implementation of business planning that takes into account any epidemiological requirements. MARKET TRENDS uncertainty with regard to the further course of the pandemic. CHANGED FINANCING SITUATION: The recommendations for airport operators are Reduce operating costs: On of the key challenges very much subject to the further development of COVER OPERATING COSTS INDE- for airports is to reduce the costs of keeping them the COVID-19 pandemic. Depending on their size, open in view of the slump in passenger numbers. PENDENTLY German airports face different strategic, operatio- High personnel costs can be reduced by extending Compensate for declining subsidies: Since the nal and financial challenges, also with regard to short-term work arrangements, in some cases job introduction of the EU State aid regulation (2014), the management of the current crisis. Even prior cuts may become necessary. A consolidation of the financing of smaller airports in particular has to COVID-19, smaller airports had to ask themsel- operations by concentrating on fewer terminals come under pressure. In order to compensate for ves how to operate in a profitable manner below and reducing open spaces offer further cost saving a discontinuation of state subsidies from 2024, a threshold of 1 million passengers p.a., while potential. Moreover, regional airports are well advi- airports should check their business models with international airports pursued other strategies to sed to check whether further cost savings could be regard to profitability and evaluate other financing maximise their profits. Because of the sharp drop in achieved by co-sharing activities with surrounding options as soon as possible. To this end, airport passenger numbers, the airports are now facing the municipalities. operators should approach local chambers of com- challenge of having to comprehensively restructure Secure revenues: Although in the current situation merce to discuss the potential public involvement in their business models from a standing start. In airports are increasingly dependent on non-avia- the financing structure, e.g. in the form of a limited the medium to long term, a decentralised airport tion revenues, it might be advisable to make con- partnership contribution from the municipal econo- landscape cannot be maintained in Germany and cessions to financially troubled external service my. And even after the new EU regulation came into (regional) airports should reposition themselves providers and tenants in order to prevent losing force, the federal government and local authorities now in order to be prepared for possible threats to them as partners altogether. By providing support are still allowed to provide funding for airports: in their very existence. to airlines such as parking and maintenance of principle, this could involve regional subsidies based inactive aircraft (possibly also via external subcon- on passenger or tourist taxes, for example, or federal COVID-19 EFFECTS: tractors), airports can tap into alternative sources infrastructure funding. DEALING WITH THE “NEW REALITY” of income. In addition, spaces that are currently Reduce cost base: Airport operators are well advised not in use can be used for alternative purposes, to carry out a short analysis along the entire value Secure liquidity: Top priority in crisis manage- for example outside areas for open air events or chain to identify savings potential and review plan- ment is to ensure short-term solvency and to raise closed terminals as warehousing solutions. ned investments. The possibility of having certain bridge financing to offset liquidity shortfalls. As Implement hygiene concept: In order to avoid services, e.g. in the area of handling, outsourced to most of the airports are not eligible for COVID-19 further closures, airports have to consistent- lower-cost third party providers deserves particular aid from the federal government, operators have to ly implement and follow social distancing and attention. For airports with more than 2 million pass- enter negotiations with their, as is often the case, hygiene regulations. However, over-investment engers p.a., this is covered by the market opening municipal shareholders to try and get additional in temporary facilities should be avoided; digital required by the EU.

TRENDS IN THE AVIATION SECTOR

COVID-19 Changed financing Continuing Sustainability Increased effects situation digitalisation awareness competition

• In the short term, no • Current subsidy ceilings • Digitalisation trend • Cost base of airports • Strong market dynamics recovery in passen- depend on the size of leads to decline in the and airlines increases driven by so-called ger traffic (tourists or the airports business travel seg- due to climate pro- budget airlines: business travellers) • EU State aid rules from ment: replacement of tection requirements; - oversupply and expected, due to factors 2024 prohibit subsidies physical meetings with challenge: international aggressive pricing such as an increase in for airports that are digital ones, work from competitiveness policies increase the domestic trips by car/ unable to cover their home and online mee- • Increased competition risk of insolvency: train, cancellation of operating costs (under tings/video conferences with other means of market consolida- trade fairs, quarantine discussion) becoming increasingly transportation for eco- tion foreseeable • In the medium term • Investment subsidies accepted logical reasons (flight - Increasing competi- dependent on further continue to be permitted shaming) tive pressure among course of the pandemic airports and service providers

Sources: The Moodie Davitt Report; Airliners; ACI; company information; Andersch analysis

THE SMART AIRPORT: BOOST DIGITALISATION ALONG THE VALUE CHAIN

Data-based asset forecast demand and movement data and digital tracking Personalised, site- multi-channel airlines, exchange management and enhance efficiency optimise routes services for luggage based offers via shopping expe- customer data maintenance (and cargo) smart phones riences

CONTINUING DIGITALISATION: In the context of a sustainability strategy, airports after the lockdown in order to keep their route network BENEFITING FROM DIGITALISATION should define measures to document and, as far as intact. In the long term, however, they will be highly operationally and economically possible, minimise cautious in deciding when and where to add flights – Business travel subject to change: Business travellers environmental impacts. To communicate these efforts leading to strong competition between regional airports. are crucial to the earnings performance of both air- to stakeholders, an official certification is useful, for Furthermore, those airport owners will succeed who lines and airports: on the one hand, they account for a example based on achieving the standards postulated work together with regional companies and the tourism significant share of passenger traffic on domestic flights by the Airport Carbon Accreditation (ACA). industry and successfully market regional travel destina- and particularly valuable scheduled routes; on the other Catalyst for innovation: A close analysis of resources tions in their talks with the airlines. hand, they often use other airport-related services (see used is not only beneficial for environmental protection info box Customer groups). However, the increasing use purposes but will often provide first insights for process CONCLUSION AND OUTLOOK: of video telephony, which has recently been accelera- innovation and optimisation. Minimising the CO2 foot- TAKING FIRST STEPS ted by COVID-19-related travel restrictions, is making print can involve the use of energy-efficient buildings, business air travel, especially domestic air travel, energy from renewable sources and electric vehicles It is not only the current COVID-19 crisis that gives airport increasingly unnecessary. Airports should consider on airport premises (e.g. battery-powered handling operators cause to take a close look at their own strategy: the effects of this trend when they expand their route equipment). following the largely positive development of the German networks and create tangible added value for business airline industry in recent years, driven by robust passenger customers, also in comparison with alternative means INCREASING COMPETITION: traffic growth and considerable financial aid from the of transport. FINDING A NEW STRATEGIC federal and local governments, an increasing number of Smart airport: The digitalisation of airport operations APPROACH (global) challenges are looming that require substantial makes it possible to reduce costs, organise processes operational, financial and strategic changes. The crucial more efficiently and offer improved customer experien- Address customer needs: In view of a pronounced com- question that many of the smaller and regional airports are ces. An analysis of the digitalisation potential along the petitive intensity between the commercial airports in currently facing can actually be generalised as: what con- value chain (see info box Digitalisation) offers clues with Germany, it provides airports with a strategic advantage tribution can airports make to mobility in the future? What regard to the economic relevance and prioritisation of when they develop an individual positioning and identify added value does passenger air traffic offer in comparison individual measures. new potential based on customer needs. A customer to alternative means of transport? What expectations will analysis should be carried out before the strategic orien- customers have with regard to their travel experience? SUSTAINABILITY AWARENESS: tation is reviewed in order to form customer clusters FINDING SUSTAINABLE SOLUTIONS (see info box Customer groups). Based on these clus- It is principally the large and financially strong German ters, individual customer needs can be identified and airports that are already actively tackling these challenges, Sustainable airport operations: Even before COVID-19, potentially fulfilled if the customer group is considered trying to give their customers a special flight experience effects of sustained changes in travel behaviour were relevant to the airport. by offering digital services and a wide variety of shopping already apparent, largely driven by an increasing prefe- Intensify cooperation with airlines: Airports that now opportunities and services. However, also smaller air- rence for sustainable means of transport. And the pan- invest in the cooperation with network and low-cost ports are making strategic moves, like defining ambitious demic further accelerates this trend: on the one hand, carriers and support them when ramping up their flight sustainability targets or closely cooperating with the local many travellers have health concerns when it comes to operations will be able to secure sustainable competi- businesses to ensure stable financing. flying and on the other hand state aid packages for air- tive advantages. Currently, airlines are trying to reopen lines are often linked to climate protection measures. even flight destinations with relatively low frequencies

CUSTOMER GROUPS AT AIRPORTS BROKEN DOWN BY REASON FOR STAY

Business travellers Holiday travellers Transfer passengers Visitors, persons collecting or dropping off travellers, and others • Short stay at airport • Early arrival due to baggage • Limited length of stay • Length of stay depends on • Limited to focused interest in drop-off, long stay • Higher propensity to consume attractiveness of the terminals retail offering • Use of food and beverage and buy • Parking • Increased demand for services offerings • Desire for wellness and leisure • Use of leisure opportunities, like rental cars and hotel accom- • Significant number of sponta- area food and beverages, in particular modation neous purchases (in particular for greeters • Use of airline services (e.g. newspapers and magazines, • Sunday shopping days and public Lufthansa First Class Dining accessories) days at regional and internatio- Experience) • Spending and needs also depend nal C airports provide shopping on flight route, price sensitivity opportunities and environmental awareness

Objective: Increase length of stay for all customer groups to enhance non-aviation revenue by improving customer experience in both landside and airside zones

Sources: SAP; Airliners; ACI; company information; Andersch analysis

COVID-19 AND ITS EFFECTS profitable even before the COVID-19 pandemic and therefore have no liquidity reserves, are likely to disap- CHANGE IN THE NUMBER OF PLANNED TAKE- The COVID-19 pandemic is plunging airlines worldwi- pear from the market in the wake of an accelerating OFFS IN GERMANY (% VS. PRIOR-YEAR WEEK) de into a life-threatening crisis. Even after the end of consolidation process. the lockdown in June 2020, air traffic in Germany was 0 -8.6 significantly below the prior-year level (cf. graphic). DISTORTION OF COMPETITION IS -5.0 The 2020 forecast for global revenue in passenger -8.0 traffic has dropped significantly and is 60% below the IMMINENT No chance of speedy recovery prior-year value (about USD 612 billion). -50 Airlines are fighting for the few remaining passengers Airlines lack liquidity reserves, which was the reason -69.2 with all their might, offering flights at dumping prices. why the Lufthansa subsidiary Germanwings and It is especially the state aid packages that could lead -91.4 Thomas Cook Aviation had to cease operations (both -84.9 to market distortions as the subsidised companies are -100 -93.7 in April 2020). At the beginning of the year, only 25% actually enabled to participate in this price war thanks 6 10 2 20 18 15 20 of the airlines had sufficient liquidity to see them to the financial aid received. However, the state aid Jan Feb Mar Apr May Jun Jul through the next three months. State aid covering packages not only lead to disadvantages for competi- more than USD 120 billion in the form of loans, grants, tors. Lufthansa’s surrendering of slots to other airlines tax relief and wage subsidies is to save airlines world- is to enable competitors to build up a basis with up wide from insolvency. The North America region is to four aircraft at the locations Frankfurt and Munich. Between April and June, the Lufthansa Group the forerunner in this respect, supporting the airlines Moreover, experts consider the COVID-19 pandemic generated an hourly loss of € 450.000; 22,000 with a quarter of their annual income in 2019. Due to offer good conditions for building up new airlines. FTE were cut. to pandemic-induced cancellations, air passengers Insolvencies will lead to less competition in the future, are acting as lenders: ticket reimbursements worth to labour availability, while the prices for aircraft and (Source: Handelsblatt, 06.08.2020) billions are yet to be repaid, the reimbursement within airport fees are expected to be relatively reasonable. seven days as prescribed by the EU Flight Compen- According the Bernstein Research, the potential of sation Regulation is currently not being observed. In new airlines refers mainly to niche business in regional Germany, however, in addition to direct state invest- traffic that will emerge while large airlines concentrate PAX LOAD FACTOR EUROPE ment, aid by the federal government comes with a on long-haul and short and medium-haul flights with number of conditions attached – in the case of the € 9 high passenger volumes. billion stabilisation package for the Lufthansa Group, 2020 2019 for instance, this includes surrendering take-off and Jan 81.6% 79.9% landing rights (slots) in Frankfurt and Munich. Air 80/20 SLOT RULE SUSPENDED France-KLM receives € 7 billion from France and € 3.4 Feb 81.3% 81.7% Following the outbreak of the COVID-19 pandemic, billion from the Netherlands, subject to economic, the EU Commission agreed with the EU Parliament to Mar 67.0% 83.9% financial and environmental undertakings. temporarily suspend the so-called 80/20 rule until Apr 32.0% 85.2% October 2020. If airlines fail to use four fifths of their WHO IS MOST LIKELY TO OVERCOME take-off or landing slots within a flight plan period, May 42.7% 83.7% THE CRISIS? they lose them in the following season. In order to avoid economically and ecologically detrimental ghost Jun 55.5% 87.4% While airlines like Lufthansa and Air France-KLM rely flights, the suspension needs to be extended as long on state aid, other airlines are financing their res- as the restrictions on air traffic continue. In addition, 0 25 50 75 100 ponses to the crisis from their own pockets. Some of the International Air Transport Association IATA re- the so-called low-cost airlines, in particular, have high ports that the airline industry’s global debt is expected Passenger load factor (seat load factor in %) liquidity reserves. According to the research company to rise by about 25% to USD 550 billion. Around 55% Bernstein Research, Ryanair has sufficient liquidity to and thus the major part of the financial aid is made up survive for 106 weeks, whereas – without state aid – of loans and deferred tax, which is why a recovery of Lufthansa can only cover its costs for 17 weeks in the the airlines is impossible to achieve in the short term. MAIN CHALLENGES absence of revenue. According to Bernstein Research, low-cost airlines like Ryanair and EasyJet benefit from their leaner organisations, now that cost minimisa- Streamline airlines and enhance tion and securing existing liquidity has become so important. Airlines, in turn, that were not particularly efficiency, mainly by reducing fleets and personnel

Find agreements with social partners (e.g. unions) REVENUE DEVELOPMENT IN PAX AIR AIRLINE PROFITABILITY TREND and negotiate effective anti-crisis TRAFFIC WORLDWIDE WORLDWIDE packages 60 Prior to COVID-19 EBIT margin 7.5 50 10% 5.7 5.2 Expand digital solutions/techno- 40 Base scenario(1) 0% logies to improve planning and

30 Current -10% -4.2 responses to (COVID-19-related) 20 fluctuations in demand

Revenue (USD bn) Revenue -20% Risk scenario(2) 10 -23.4 -30% Modernise fleet to meet new en- Jan Apr July Okt Jan Apr 20 20 20 20 21 21 2017 2018 2019 2020P 2021P vironmental standards, reduce short-haul flights (in favour of rail), (1) Base scenario: rapid recovery of capacity with declining growth rate (2) Risk scenario: continuous recovery of capacity with moderate growth rate reduce CO2 emission Sources: Airliners; ICAO; Iata; OAG Schedules Analyser; Handelsblatt; Tagesschau; company information; Andersch analysis

Sources: Airliners, ABL-Aviation, BDF, company information, Andersch analysis Andersch information, company BDF, ABL-Aviation, Airliners, Sources:

(5) Excerpt for Swissport Losch München, because consolidated figures are not available. not are figures consolidated because München, Losch Swissport for Excerpt (5)

(4) EBITDA (4)

(3) Entire group including additional activities additional including group Entire (3)

(2) As at 2016 at As (2)

(1) Some airport operators are active through their own subsidiaries – these are not shown in the graph the in shown not are these – subsidiaries own their through active are operators airport Some (1)

2 million passenger threshold prevents entry of external service providers service external of entry prevents threshold passenger million 2

– companies ground-handling third-party

for share market 20% about of avg. only liberalisation market after years 20

Airport parties Third

SXF TXL BRE NUE HAJ STR HAM CGN DUS FRA MUC

future 20

Focus on airports that are fit for the the for fit are that airports on Focus

79 80

95 100 100

80 short license terms license short

lack of market liberalisation and and liberalisation market of lack

100 100 35

23 21

15 5

Hardly any synergy effects due to to due effects synergy any Hardly

GROUND HANDLING MARKET SHARE OF AIRPORTS AND THIRD-PARTY PROVIDERS (%) PROVIDERS THIRD-PARTY AND AIRPORTS OF SHARE MARKET HANDLING GROUND

capacity utilisation after COVID-19 after utilisation capacity (2)

Financial challenges due to low low to due challenges Financial

the employees cannot be avoided. Since passenger passenger Since avoided. be cannot employees the

but income reductions of 13% to 40% on the part of of part the on 40% to 13% of reductions income but

conditions and to create longer-term synergy effects. synergy longer-term create to and conditions

MAIN CHALLENGES MAIN

expenses. This is to preserve jobs for the time being, being, time the for jobs preserve to is This expenses.

ternal service providers to adjust to the current market market current the to adjust to providers service ternal

measure as personnel costs account for 70% of all all of 70% for account costs personnel as measure

- ex allow to prematurely extended and renegotiated

term work arrangements are the main cost cutting cutting cost main the are arrangements work term

he further states, it is vital that license agreements are are agreements license that vital is it states, further he

private ground-handling service companies. Short- companies. service ground-handling private

8 Presently, crisis. COVID-19 the following airports some

COVID-19 pandemic is threatening the existence of of existence the threatening is pandemic COVID-19

passengers per year, which will be hard to reach by by reach to hard be will which year, per passengers

9.1% 2,990 Swissport 3

The slump in global air traffic resulting from the the from resulting traffic air global in slump The (4)

need only be involved from a threshold of 2 million million 2 of threshold a from involved be only need

prescribes that a second ground-handling company company ground-handling second a that prescribes

COMPANIES WITH A FORCE A WITH COMPANIES

John Menzies John 4 4.4% 1,440

conditions across all of Europe. Current legislation legislation Current Europe. of all across conditions (3)

COVID-19 HITS GROUND-HANDLING GROUND-HANDLING HITS COVID-19

the European level, while harmonising competitive competitive harmonising while level, European the

According to him, further liberalisation is required at at required is liberalisation further him, to According

Acciona 1 10.1% 7,510

(3)

involved need to act as partners on a joint market. market. joint a on partners as act to need involved (Aviapartner) or Cerberus (WFS) are also invested. also are (WFS) Cerberus or (Aviapartner)

Service

tion regarding apron handling services, all the parties parties the all services, handling apron regarding tion

that various private equity funds, like 3i (TCR), H.I.G. H.I.G. (TCR), 3i like funds, equity private various that

WISAG Aviation Aviation WISAG 3 -5.2% 236

- competi some is there Although traffic. air reliable their markets in much the same way, with the result result the with way, same the much in markets their

München for passenger and ground handling are crucial to to crucial are handling ground and passenger for relatively low wages. Other countries have liberalised liberalised have countries Other wages. low relatively

43 Losch Swissport 1 2.9%

association ADV, explains that strong service providers providers service strong that explains ADV, association (5) (5) lines put on them to cut prices. Unions criticise the the criticise Unions prices. cut to them on put lines

Ralph Beisel, managing director of the German airport airport German the of director managing Beisel, Ralph - prices, while complaining about the pressure air pressure the about complaining while prices,

to expand their market share by offering dumping dumping offering by share market their expand to 2 0.4% 51 Aviapartner

REQUIRED

are granted 7-year licenses and try during this period period this during try and licenses 7-year granted are

Handling Services Handling

FURTHER MARKET LIBERALISATION LIBERALISATION MARKET FURTHER

providers per German airport. Third-party providers providers Third-party airport. German per providers

11 3.2% 83

AHS Aviation Aviation AHS

ground-handling service providers is limited to two two to limited is providers service ground-handling

services in Germany. Often, the number of licensed licensed of number the Often, Germany. in services

Tegel airport in October. in airport Tegel (€m) in DE in margin

airport-owned providers still control about 80% of of 80% about control still providers airport-owned

ports ports Revenue EBIT of both the COVID-19 pandemic and the closure of of closure the and pandemic COVID-19 the both of

2018 - # Air # 2018 the apron. After 25 years of open market, however, however, market, open of years 25 After apron. the

company, the reduction of 800 jobs is a consequence consequence a is jobs 800 of reduction the company,

ling providers to join the airport-owned companies on on companies airport-owned the join to providers ling

airports Berlin-Tegel and Schönefeld. According to the the to According Schönefeld. and Berlin-Tegel airports

- opening of the market, allowing private ground-hand private allowing market, the of opening

ced to lay off more than half of the employees at the the at employees the of half than more off lay to ced

ground-handling quality, 1996 saw a Europe-wide Europe-wide a saw 1996 quality, ground-handling

- announ and procedure conciliation a with insolvency Number of stations in Germany in stations of Number

license. Intending a reduction in prices and enhanced enhanced and prices in reduction a Intending license.

traffic volume: at the end of July 2020, WISAG opened opened WISAG 2020, July of end the at volume: traffic

8 6 4 2 0 12 10

position and in most cases denied other providers a a providers other denied cases most in and position

vice providers have already reacted to the collapsed air air collapsed the to reacted already have providers vice -8

and their subsidiaries enjoyed a quasi-monopoly quasi-monopoly a enjoyed subsidiaries their and

licenses in the current market situation. The first ser first The situation. market current the in licenses -

WISAG

airside ground handling. Before that, airport operators operators airport that, Before handling. ground airside

-4 to repay them within the term of their ground handling handling ground their of term the within them repay to

traffic finally granted third-party providers access to to access providers third-party granted finally traffic

public loans, it is unrealistic to expect they will be able able be will they expect to unrealistic is it loans, public Avia

EBIT margin (%) air European of liberalisation The baggage. and cargo

proving difficult: although companies are applying for for applying are companies although difficult: proving AHS Losch MUC Losch

fuelling, aircraft cleaning, loading and unloading of of unloading and loading cleaning, aircraft fuelling,

inevitably lead to a loss of jobs. Taking out loans is also also is loans out Taking jobs. of loss a to lead inevitably 4

Menzies

the airside services comprise apron services like like services apron comprise services airside the

allowance as has been requested by the unions will will unions the by requested been has as allowance Acciona

8 check-in and baggage handling at the terminal, while while terminal, the at handling baggage and check-in

ditional expenses like topping up the short-term work work short-term the up topping like expenses ditional Swissport

flight operations. Landside handling comprises mainly mainly comprises handling Landside operations. flight

- ad up, used been already have providers service

handling services are systemically relevant to smooth smooth to relevant systemically are services handling

conditions. Since the financial reserves of private private of reserves financial the Since conditions.

man international airports. Their airside and landside landside and airside Their airports. international man

16 full integration into Hannover airport to achieve better better achieve to airport Hannover into integration full

- generate between 10% and 20% of revenue at Ger at revenue of 20% and 10% between generate

provider AHS Hannover, for instance, are demanding demanding are instance, for Hannover, AHS provider

Airport-owned ground-handling service companies companies service ground-handling Airport-owned

ful strategy. At the same time, the employees of the the of employees the time, same the At strategy. ful

Revenue

that the “sitting out” of pandemic effects is a success a is effects pandemic of out” “sitting the that -

SERVICES

the medium term, not all market participants believe believe participants market all not term, medium the

PRIVATE GROUNDHANDLING COMPANIES GROUNDHANDLING PRIVATE

SOUGHT-AFTER GROUND-HANDLING GROUND-HANDLING SOUGHT-AFTER traffic is expected to remain at a relatively low level in in level low relatively a at remain to expected is traffic CHECK-IN/GROUND HANDLING CHECK-IN/GROUND

Sources: Airliners, Fraport, ARRA, company information, Andersch analysis Andersch information, company ARRA, Fraport, Airliners, Sources:

rings and shopping experiences shopping and rings (2) 2017 average for Europe acc. to ETRC report ETRC to acc. Europe for average 2017 (2)

(1) EHI calculations EHI (1) H1 2020 H1 2019 H1

- offe regional for demand Increased

Lagardère Dufry

about € 21 billion market volume market billion € 21 about

increase profitability increase

947

: avg. 26 shops per airport // avg. 0.5 sqm per 1,000 passengers, passengers, 1,000 per sqm 0.5 avg. // airport per shops 26 avg. : EU

1.491 (2)

1.995

customers generate high revenues and and revenues high generate customers

3.701 Accessories stationery

International and, in particular, Asian Asian particular, in and, International

Press, books and books Press, 17

-52.5%

Clothing

areas as shopping worlds shopping as areas

26 17

-59.7%

Duty-free Increasing establishment of public public of establishment Increasing

Other

(MILLION VS. PREVIOUS YEAR) PREVIOUS VS. (MILLION

rising passenger numbers worldwide numbers passenger rising

H1/2020 IN LEADERS MARKET FLUGHÄFEN DEUTSCHEN (%)

(1) Stable economic growth thanks to to thanks growth economic Stable

EUROPEAN OF REVENUE DUTY-FREE AN WARENBEREICHE DER ANTEIL

productivity and strong margins strong and productivity

Duty-free boasts high retail space space retail high boasts Duty-free or have already done so in the wake of negative COVID-19 COVID-19 negative of wake the in so done already have or

the revival of retail business. retail of revival the

spaces. Some fashion chains are likely to file for insolvency insolvency for file to likely are chains fashion Some spaces.

This could benefit lounges, but will probably further delay delay further probably will but lounges, benefit could This

tructuring, which will also call into question existing retail retail existing question into call also will which tructuring,

higher than in traditional retail traditional in than higher

the long-haul traffic, and business trips before holiday travel. travel. holiday before trips business and traffic, long-haul the

- facing existential challenges and are mostly undergoing res undergoing mostly are and challenges existential facing

Retail space productivity many times times many productivity space Retail noteworthy that short-haul flights are likely to recover before before recover to likely are flights short-haul that noteworthy

have also all but slumped during the lockdown. Retailers are are Retailers lockdown. the during slumped but all also have

markets are expected to recover more promptly. It is also also is It promptly. more recover to expected are markets

highly frequented airports to increase their unit sales, which which sales, unit their increase to airports frequented highly

already the world’s largest duty-free market today) as these these as today) market duty-free largest world’s the already

SOUND BASIS BEFORE COVID-19 BEFORE BASIS SOUND aviation revenue to slump. Retailers, in turn, depend on on depend turn, in Retailers, slump. to revenue aviation

Dubai will also rank high on the list of options (South Korea is is Korea (South options of list the on high rank also will Dubai

from retailers as dwindling passenger numbers cause cause numbers passenger dwindling as retailers from

The diversification of regional activities towards Asia and and Asia towards activities regional of diversification The

Airports are more dependent than ever on rental income income rental on ever than dependent more are Airports

for travellers and better brand awareness will be crucial. crucial. be will awareness brand better and travellers for

THIS SUCCESS STORY? STORY? SUCCESS THIS app integration) and a more targeted customer awareness awareness customer targeted more a and integration) app

the expansion of omni-channel offerings (like pick-up offers, offers, pick-up (like offerings omni-channel of expansion the

IS COVID-19 GOING TO CHANGE CHANGE TO GOING COVID-19 IS

generated by retail space space retail by generated

what is most important to travel retail providers, to whom whom to providers, retail travel to important most is what

61%

of rental revenue is is revenue rental of the customer experience. The customer experience is also also is experience customer The experience. customer the

e-commerce. e-commerce.

the right mix of retail shops and passengers and enhance enhance and passengers and shops retail of mix right the

making it the second strongest growing sales channel after after channel sales growing strongest second the it making

is not easy. They will have to offer an attractive airport with with airport attractive an offer to have will They easy. not is

to a market volume of around USD 75 billion since 2000, 2000, since billion 75 USD around of volume market a to

declining passenger frequency, their negotiating position position negotiating their frequency, passenger declining

Council – global revenues have climbed at a CAGR of 8% 8% of CAGR a at climbed have revenues global – Council

VID-19 crisis ends by offering customised concepts. Given Given concepts. customised offering by ends crisis VID-19

duty-free shops, where – according to the World Duty Free Free Duty World the to according – where shops, duty-free

Airports must endeavour to keep retailers after the CO the after retailers keep to endeavour must Airports -

8 in apparent particularly becomes This currency. foreign in

passengers also includes “using up” their remaining cash cash remaining their up” “using includes also passengers

THE “NEW NORMALITY”? NORMALITY”? “NEW THE -3.377

retailers to ask for higher prices. Frequently, the aim of of aim the Frequently, prices. higher for ask to retailers

WHAT WILL THE FUTURE BRING IN IN BRING FUTURE THE WILL WHAT

to spend, while competition at airports is limited, allowing allowing limited, is airports at competition while spend, to

-2.341

tional retail areas. Passengers have time and are willing willing are and time have Passengers areas. retail tional

customised concepts. concepts. customised - revenue per sqm) that is many times higher than in tradi in than higher times many is that sqm) per revenue

airports that are likely to resume business faster and offer offer and faster business resume to likely are that airports retailers can enjoy retail space productivity (measured in in (measured productivity space retail enjoy can retailers -1.154

focus their business activities even more strongly on larger larger on strongly more even activities business their focus locations, the situation at airports is entirely different: here, here, different: entirely is airports at situation the locations,

-436 Heinemann/Dufry). Retailers might decide to selectively selectively to decide might Retailers Heinemann/Dufry). frequency and strong market consolidation in inner city city inner in consolidation market strong and frequency

to the high revenue share (about 90%, for instance, for for instance, for 90%, (about share revenue high the to brick-and-mortar retail shops have been suffering declining declining suffering been have shops retail brick-and-mortar

duty-free retailers will continue to depend on airports due due airports on depend to continue will retailers duty-free are eager to accept the offering. Whereas traditional traditional Whereas offering. the accept to eager are

tions. Is this a sign of what the future holds? In the future, future, the In holds? future the what of sign a this Is tions. besides flight-related revenues like landing fees. Retailers Retailers fees. landing like revenues flight-related besides

21 21 21 Jan 20 20

- the airport regarding shop spaces, license fees and condi and fees license spaces, shop regarding airport the future growth and establish an alternative source of income income of source alternative an establish and growth future Dec Jun / 20 Dec Jun Jan

regard to future contractual conditions for cooperating with with cooperating for conditions contractual future to regard to invest in expanding the airport infrastructure to achieve achieve to infrastructure airport the expanding in invest to

company stated that they had different expectations with with expectations different had they that stated company demand lower fees. Accordingly, airport operators need need operators airport Accordingly, fees. lower demand

license agreement expires on 31 December 2020. The The 2020. December 31 on expires agreement license

As airlines are subject to massive cost pressure, they they pressure, cost massive to subject are airlines As TAIL LICENSES AT AIRPORTS AIRPORTS AT LICENSES TAIL (USA, IN USD M) USD IN (USA,

Shops at the Cologne/Bonn airport as soon as the current current the as soon as airport Cologne/Bonn the at Shops

CUMULATIVE LOSSES RESTAURANT AND RE AND RESTAURANT LOSSES CUMULATIVE -

WIN-WIN SITUATION WIN-WIN

it would cease operation of its Duty-Free & Travel Value Value Travel & Duty-Free its of operation cease would it

family-owned company Gebr. Heinemann announced that that announced Heinemann Gebr. company family-owned

the US and Europe are badly affected. Only recently, the the recently, Only affected. badly are Europe and US the a duty-free store. duty-free a

8 (airports) Locations be. Especially duty-free retailers with a regional focus on on focus regional a with retailers duty-free Especially be. 42% of EBITDA in 2019. On average, every fourth shop is is shop fourth every average, On 2019. in EBITDA of 42%

400 300 200 100 0 500

70% in 2020 and demonstrates how severe the effects will will effects the severe how demonstrates and 2020 in 70% segment that also includes shopping generated approx. approx. generated shopping includes also that segment

some 20% forecasts a revenue decline between 40% and and 40% between decline revenue a forecasts 20% some letting business is easily proven: the Retail & Properties Properties & Retail the proven: easily is business letting

statements, market leader Dufry with a market share of of share market a with Dufry leader market statements, Taking Fraport as an example, the significance of the the of significance the example, an as Fraport Taking 1

yoy (equivalent to USD 50 billion). According to company company to According billion). 50 USD to (equivalent yoy

effectively covering about 40-80% of the profit margin. margin. profit the of 40-80% about covering effectively Gebr. Heinemann Gebr.

EBIT margin (%) 68% least at of declines revenue global assume forecasts ports generate the highest retail revenue per passenger, passenger, per revenue retail highest the generate ports

The duty-free market has been hit the hardest. Current Current hardest. the hit been has market duty-free The portant contribution to the funding of airports. Larger air Larger airports. of funding the to contribution portant -

- im structurally a make sales retail travel and duty-free

HIT THE HARDEST HARDEST THE HIT

Travel Retail Travel 4

revenue. According to calculations by EHI Retail Institute, Institute, Retail EHI by calculations to According revenue.

Lagardère Lagardère

BEEN HAS SHOPPING DUTY-FREE the largest share of rental income within non-aviation non-aviation within income rental of share largest the

zones (and 48% on the landside) retailers account for for account retailers landside) the on 48% (and zones

Dufry Group Dufry

revenue for airport operators. With about 61% in airside airside in 61% about With operators. airport for revenue

6 passengers to spend is partly massively subdued. massively partly is spend to passengers

Retail is the most important non-aviation source of of source non-aviation important most the is Retail

Revenue flying any more. Moreover, the propensity of the remaining remaining the of propensity the Moreover, more. any flying

particular the wealthy international passengers that are not not are that passengers international wealthy the particular RETAILERS

REVENUE SOURCE REVENUE

expected to materialise before 2024 the earliest and it is in in is it and earliest the 2024 before materialise to expected

COMPARISON OF EUROPEAN DUTY-FREE DUTY-FREE EUROPEAN OF COMPARISON

MOST IMPORTANT NON-AVIATION NON-AVIATION IMPORTANT MOST effects. A level resembling that of before the crisis is not not is crisis the before of that resembling level A effects. RETAIL

Sources: Handelsblatt, Fulda Zeitung, Hilton Report, PS Market Research, company information, Andersch analysis Andersch information, company Research, Market PS Report, Hilton Zeitung, Fulda Handelsblatt, Sources:

veness for employees for veness

(1) Market share 2016 share Market (1)

- attracti increase to have also will hotels

2022P 2020P 2019 2024P 2020P 2019 particularly for smaller hotels; but luxury luxury but hotels; smaller for particularly

Lack of skilled staff life-threatening life-threatening staff skilled of Lack

shows) and private private and shows)

1.684,3

ture, both business (e.g. cancelled trade trade cancelled (e.g. business both ture,

2.868,9

3.150,8 - fu near the in travel to occasions Fewer

100 100 100

-41.3%

-41% market

tourism

-71% services are forcing their way into the the into way their forcing are services International International

Carsharing and other (technical) mobility mobility (technical) other and Carsharing Domestic tourism Domestic

REVENUES REVENUES GERMANY IN COMPANIES (INDEX 2019 = 100) = 2019 (INDEX (€M)

(incl. Airbnb) (incl.

DEVELOPMENT OF TOURISM-RELATED TOURISM-RELATED OF DEVELOPMENT RENTAL CAR OF DEVELOPMENT REVENUE

offers apartment commercial partly

Increased competition from private/ from competition Increased

Tourismus

Ausländischer

Other

MAIN CHALLENGES MAIN

Tourismus

Airport

Einheimischer 77%

45% May Apr Mar Feb

-80

-73

-60 -74

23% 55%

-40

-32

-20 (GERMANY AND ABROAD) AND (GERMANY (GLOBAL) CARS RENTAL

HOTELS HOTELS MOBILITY GUESTS AT HOTELS HOTELS AT GUESTS BREAKDOWN REVENUE

TOURISM INCOME DE IN 2020 2020 IN DE INCOME TOURISM (% YOY) (%

220,000 companies in the hospitality industry are are industry hospitality the in companies 220,000

facing and change the market in the long term. term. long the in market the change and facing Industry experts believe that a large part of the approx. approx. the of part large a that believe experts Industry

event are set to increase the cost pressure providers are are providers pressure cost the increase to set are event federal COVID-19 aid (legal action is pending). pending). is action (legal aid COVID-19 federal

8 (3km) airports German at Hotels

shows organised both as a virtual and traditional on-site on-site traditional and virtual a as both organised shows

Lufthansa who were able to draw on billions worth of of worth billions on draw to able were who Lufthansa

14 12 10 0 8 6 4 2

a higher acceptance of online meetings) and hybrid trade trade hybrid and meetings) online of acceptance higher a 0 to other mobility providers such as Deutsche Bahn and and Bahn Deutsche as such providers mobility other to

changing working habits (more working from home and and home from working (more habits working changing Motel One Group One Motel now facing massive competitive disadvantage compared compared disadvantage competitive massive facing now

250

few years fall short of the record figures seen in the past: past: the in seen figures record the of short fall years few for short-term work for a large part of their workforce, workforce, their of part large a for work short-term for

Steigenberger Hotels AG Hotels Steigenberger

Net revenue (€m) next the in will particular, in travel, business-related that declining demand either. FlixBus, among others, applied applied others, among FlixBus, either. demand declining 500

numbers do not soar again. Nevertheless, it is expected expected is it Nevertheless, again. soar not do numbers low prices, have not been able to escape the effects of of effects the escape to able been not have prices, low

IHG

750 domestic holiday makers, provided that COVID-19 case case COVID-19 that provided makers, holiday domestic popular with young travellers due to their comparably comparably their to due travellers young with popular

Best Western Best It can therefore expect a faster recovery on the back of of back the on recovery faster a expect therefore can It Long-distance coach services, which are particularly particularly are which services, coach Long-distance

1.000

AccorHotels

than in other European countries at about 18% (2019). (2019). 18% about at countries European other in than revenue collapsed by more than 60% yoy to € 711 million. million. € 711 to yoy 60% than more by collapsed revenue

that the share of foreign over-night guests is much lower lower much is guests over-night foreign of share the that the third quarter. In the first half of 2020, group operating operating group 2020, of half first the In quarter. third the 1.250

One factor that benefits the German hotel industry is is industry hotel German the benefits that factor One it seems increasingly unlikely that demand will recover in in recover will demand that unlikely increasingly seems it

1.500

not expect to return to the prior-year level before 2022. 2022. before level prior-year the to return to expect not However, given the continuing low airport revenue levels, levels, revenue airport low continuing the given However,

Number of rooms in Germany in rooms of Number

is likely to take until 2023, and the hotel industry does does industry hotel the and 2023, until take to likely is originally expected business to return to normal in 2021. 2021. in normal to return to business expected originally

In the car rental market, a recovery to pre-crisis level level pre-crisis to recovery a market, rental car the In business customer share amounts to approx. 30%, had had 30%, approx. to amounts share customer business

LARGEST HOTELS IN GERMANY BY ROOMS BY GERMANY IN HOTELS LARGEST

the slump in revenues, despite the fact that Sixt, whose whose Sixt, that fact the despite revenues, in slump the

NO FAST RECOVERY IN SIGHT IN RECOVERY FAST NO

was not able to avoid applying for state aid by KfW given given KfW by aid state for applying avoid to able not was

forced to file for insolvency in its home market. Sixt, too, too, Sixt, market. home its in insolvency for file to forced

concentrated German market. market. German concentrated Dirk Iserlohe stated in an interview with Fuldaer Zeitung. Fuldaer with interview an in stated Iserlohe Dirk cerns: the US car rental company Hertz, for instance, was was instance, for Hertz, company rental car US the cerns:

Enterprise is comparably weak in the highly highly the in weak comparably is Enterprise

the south were also massively eased,” managing director director managing eased,” massively also were south the - is threatening the existence of companies as going con going as companies of existence the threatening is

national champions; the world’s largest provider provider largest world’s the champions; national to 22% by 30 May, the last day before the restrictions in in restrictions the before day last the May, 30 by 22% to market shutdown. Recent industry reports show that this this that show reports industry Recent shutdown. market

Heterogenous European car rental market with with market rental car European Heterogenous

restrictions, this figure first improved to 6% to then climb climb then to 6% to improved first figure this restrictions, COVID-19-related lockdowns were not unlike an actual actual an unlike not were lockdowns COVID-19-related

to a pitiful 2%. By 18 May, the first day of the easing of the the of easing the of day first the May, 18 By 2%. pitiful a to

FIRST VICTIMS FIRST was not bad at all. After this, the average occupancy fell fell occupancy average the this, After all. at bad not was

rate of 55% for all the Dorint hotels at the start of the year year the of start the at hotels Dorint the all for 55% of rate

8 CLAIMS SLUMP MARKET Stations (at German airports) German (at Stations

lockdown in mid-March, our situation with an occupancy occupancy an with situation our mid-March, in lockdown

20 15 10 5 0 25

hotels reports similar COVID-19-related losses. “Until the the “Until losses. COVID-19-related similar reports hotels 0

travellers, both tourists and business travellers. business and tourists both travellers, of all trade shows. The Dorint hotel group that owns 70 70 owns that group hotel Dorint The shows. trade all of

years. Car rental companies and hotels depend strongly on on strongly depend hotels and companies rental Car years. Enterprise

cular, to the lack of air passengers and the cancellation cancellation the and passengers air of lack the to cular,

Avis Budget Avis

Market share DE(%) recent over importance in significantly gained has segment - the higher six-digit range, which is attributable, in parti in attributable, is which range, six-digit higher the

hubs. The situation with hotels is similar: the airport hotel hotel airport the similar: is hotels with situation The hubs. of March alone, his hotel expected a revenue decline in in decline revenue a expected hotel his alone, March of

Hertz

than 10% of the stations are actually located at air traffic traffic air at located actually are stations the of 10% than 15 quences of the massive slump in business. In the month month the In business. in slump massive the of quences

stations account for about 50% of revenues although less less although revenues of 50% about for account stations - Messe hotel gives another example of the financial conse financial the of example another gives hotel Messe

companies. According to industry information, these these information, industry to According companies. and April. The director of the Wyndham Stuttgart Airport Airport Stuttgart Wyndham the of director The April. and

near airports an important revenue driver for car rental rental car for driver revenue important an airports near

Europcar

and a decline of 40% yoy in the months between January January between months the in yoy 40% of decline a and 25 (1)

SIXT

ness of business travellers to pay make car rental stations stations rental car make pay to travellers business of ness accommodation figures 90% below the prior-year level level prior-year the below 90% figures accommodation

- willing the and customers potential of number large The April amounted to -89% yoy. The strict restrictions led to to led restrictions strict The yoy. -89% to amounted April

Global revenue Global

by German hotels and other accommodation providers in in providers accommodation other and hotels German by MOBILITY AND HOTELS AND MOBILITY

short-term work allowance. The revenue decline suffered suffered decline revenue The allowance. work short-term IN GERMANY IN

TRAFFIC ARE KEY DRIVERS FOR FOR DRIVERS KEY ARE TRAFFIC

despite government aid programmes like, for instance, instance, for like, programmes aid government despite

LARGEST CAR RENTAL COMPANIES COMPANIES RENTAL CAR LARGEST

AIRPORTS AND PASSENGER PASSENGER AND AIRPORTS

threatened by insolvency in the foreseeable future, future, foreseeable the in insolvency by threatened MOBILITY & HOTELS & MOBILITY DETAILED INFORMATION

INTERNATIONAL A INTERNATIONAL B

STRENGTH/WEAKNESSES STRENGTH/WEAKNESSES • Large international airports have diversified customer structure and lower • Below-average equity ratio revenue share of low-margin low-cost carriers; they are better able to exploit • Considerable differences in profitability: Düsseldorf’s avg. EBIT margin non-aviation revenue sources like rents (Fraport also cargo; 43% share DE) 2016-18 is 21.9%, whereas the Berlin airports only have 5.8%, also due • Positive performance, in particular in passenger (avg. CAGR 2015-18: 3.9%) to the financial burden from high investment in BER and cannibalisation and cargo traffic (avg. CAGR: 1.6%), driven, amongst other reasons, by being • High efficiency and capacity utilisation (second only to Frankfurt/Munich) located near to densely populated and economically strong locations and • Mostly excellent infrastructure near airport (e.g. hotels and accommoda- international passenger growth tion, car rental) • Strong profitability (avg. EBIT margin of 22.2%) due to large share of high-va- • Coping slightly better on average and compared to other clusters with lue scheduled flights and non-aviation revenues COVID-19-related passenger slump for the time being • Regulatory aspects: strict requirements for night-flying (vicinity to city), among others

Operational excellence Operational excellence 3.8 2.9

3.2 4.2 2.9 3.1 Macroeconomic Financial Macroeconomic Financial environment Performance environment Performance

2.5 2.7 3.2 4.0 Regulatory Strategic Regulatory Strategic framework orientation framework orientation

INTERNATIONAL C REGIONAL

STRENGTH/WEAKNESSES STRENGTH/WEAKNESSES • Nuremberg and Stuttgart as hidden champions; success is due to strong • Regional airports hardly competitive: high annual losses and declining passenger growth (approx. 5% CAGR on avg. 2015-19)positioning of passenger numbers (except for Dortmund, Memmingen)mainly due to Stuttgart as sustainable “fairport”, among others higher costs (e.g. air traffic control), much lower non-aviation revenues • Leipzig benefits from strong cargo traffic (25.2% of total DE), especially and lower capacity utilisation (avg. 51.4% vs. 65.8% at international air- during COVID-19; performance at prior-year level ports) – see also PAX/revenue figure • Hannover: night flying permitted; in 2018, infrastructure investor ICON • Far less attractive for customers: loss-making infrastructure, limited came on board and took over Fraport’s shares destinations, hardly any shopping/entertainment on offer, therefore • Areas with the lowest population on average (main motivation often po- strong negotiation power of airlines, especially low-cost carriers with litical), therefore passenger volume (except for Hannover Langenhagen) the corresponding result on the margin often comparable with or lower than regional airports, but better margins

Operational excellence Operational excellence

2.6 2.2

Macroeconomic 2.8 2.8 Financial Macroeconomic 2.3 2.1 Financial environment Performance environment Performance

2.3 2.3 2.8 2.9

Regulatory Strategic Regulatory Strategic framework orientation framework orientation

Variable (selection of used variables) Definition

Equity ratio Indicator for capital structure and creditworthiness; calculation of avg. equity ratio 2016-18 EBIT margin Indicator for profitability; calculation of avg. EBIT margin 2016-18 Financial Performance Return on capital employed Rate of return; calculation of avg. ROCE 2016-18

Passenger kilometre growth rate Annual growth of passenger kilometres 2017-19 (CAGR)

Revenue per passenger Indicator for value of flight routes, non-aviation revenues and passenger consumer behaviour excellence Operational Utilisation Indicator for demand in passenger traffic and airline strategy

Development passenger numbers Trend indicator for customer acquisition and retention Development of cargo figures Trend indicator for tapping into income sources in logistics; further for weakening of COVID-19 effect Share of low-cost airlines Indicator for growth strategy (price-/quantity-driven), risk of formation of Strategic orientation customer clusters, consumer behaviour Number of destinations Indicator for route network and strategic orientation of the airport

Degree of privatisation Indicator for shareholder structure relevant to financing

Ban on night flights Indicator for capacity and attractiveness for airlines; relevant for hotel industry Regulatory framework

Number of hotels Indicator for share of business clients, attractiveness to customers and competitive intensity with regard to hotels, calculation within 3km radius Availability of rental cars Indicator for share of business clients, attractiveness to customers and competitive intensity with regard to rental cars, calculation within 3km radius Distance to next airport Indicator for competitive intensity; calculation of distance to closest (German) airport in km

COVID-19 effect Indicator for susceptibility to crisis and current financial burden; calculation of cumulative passenger losses 03-05 2020 vs. prior-year period

Macroeconomic environment Macroeconomic Population in catchment area Population in 100km radius

AUTHORS The following persons were involved in preparing this Whitepaper: Dorothée Fritsch, Marvin Menzdorf, David Altenburg, Richard Einhorn, Moritz Schrader, Professor Jürgen Müller (Berlin School of Economics and Law (HWR))

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DOROTHÉE FRITSCH [email protected] +49 160 90658014

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