How Future Airports Will Manage Air Travel Capacity ? a Universal Challenge

AEROSPACE & DEFENSE HOW FUTURE AIRPORTS WILL MANAGE AIR TRAVEL CAPACITY ? A UNIVERSAL CHALLENGE The biggest challenge will be capacity as air travel demand continues to rise sharply. Some civil aviation pundits claim the biggest challenge facing airports in coming decades will be security. That’s not exactly correct, according to the International Air Transport Association (IATA), Airports Council International (ACI) and some other industry trade groups. Rather, the biggest challenge will be capacity as air travel demand continues to rise sharply. Commercial air transportation has expanded six times faster than ground modes of transportation since 1960, says former Airbus Chief Commercial Officer John Leahy. Gross Domestic Product (GDP) historically has driven global air travel demand. By that measure, commercial air transportation has grown four times faster than GDP. “Strong growth will continue as wealth levels continue to rise across the emerging economies.” John Leahy, Airbus Chief Commercial Officer. Since 1970, the number of people who fly commercially has doubled about every 15 years, and IATA forecasts that air travel demand again will nearly double by 2037, with about 8.2 billion people using air travel. “Runways, terminals, security and baggage systems; air traffic control; and a whole raft of other elements need to be expanded and cannot be done by industry alone.” Alexandre de Juniac, IATA Director General. The explosive growth in passenger numbers is most evident in Asia/Pacific, where air travel grew more than 9 percent last year and flight delays and cancellations also are on the rise. Across Europe in the late 1980s, an unacceptable spike in takeoffs and landings led to increased investment in Air Traffic Control not just by individual countries, but across the European Union. Europe’s largest aviation markets continue to experience substantial growth in air travel demand, straining capacity. It’s also being blamed for higher airfares, according to Augustin de Romanet, president of ACI Europe. “A recent study by SEO Amsterdam Economics spells it out very clearly,” he says. By 2035, European passengers will be paying about $7.2 billion every year in higher fares specifically due to a lack of airport capacity. The independent scientific institute, which is affiliated with the University of Amsterdam, calculated that passengers already pay an extra $2.3 billion in airfares when they use congested European airports. HOW FUTURE AIRPORTS WILL MANAGE AIR TRAVEL CAPACITY ? 2 Airports are a fundamental component of transportation infrastructure and powerful engines of economic growth. In the U.S., for example, they generated more than $1.1 trillion in annual economic activity in 2019, according to Airports Council International—North America. Enplanements have increased dramatically, growing at a compound average annual growth rate of 3.8 percent between 2013 and 2017, putting further pressure on already overloaded airport facilities. “There’s very real concern across the aviation community. The problem is especially acute for airports serving large European cities. Sometimes situations need to reach crisis proportions before there’s a consensus on the most viable long-term solutions, and that seems to be where we’re headed.” Angela Gittens, ACI Director General. SOURCE OF PROBLEM It would be easy to blame the problem solely on underinvestment. While it may be the chief culprit, there are other factors that have contributed to the problem. These include environmental factors and public perceptions, especially in Europe. In the final analysis, it all comes down to funding, and there’s strong consensus across the commercial aviation community that funding is inadequate relative to growing air travel demand. For example, U.S. airports require nearly $130 billion in new infrastructure upgrades by 2023. However, capital spending at U.S. airports did expand by 24 percent, to $12.7 billion in 2017, compared with the previous year, according to Federal Aviation Administration data. “We’re starting to play catchup on a whole bunch of unmet needs,” says Todd Hauptli, president and CEO of the American Association of Airport Executives, a trade group for managers of the nation’s airfields. HOW FUTURE AIRPORTS WILL MANAGE AIR TRAVEL CAPACITY ? 3 Contrary to popular belief, all airports are not funded with taxpayer dollars or a general tax on all citizens; it varies from country to country. For example, most Canadian airports are operated by non-share capital corporations that are fully responsible for self-funding. That includes all infrastructure costs, and Canada’s airports must invest all profits back into the airport. But in the U.S., infrastructure projects are funded primarily with federal grants through the FAA’s Airport Improvement Program (AIP), a local user fee called the Passenger Facility Charge (PFC), and airport-generated revenue from tenant rent and fees. U.S. airports often turn to capital markets to debt-finance projects, using all of these revenue streams to repay general obligation bonds. Most U.S. airports lack predictable funding sources to keep pace with travel demand, rising construction costs and inflation. In the case of the PFC, airports have committed the money over long periods — in some cases decades — to repay the cost of past projects. As a result, some airports have no new money coming in to pay for future expansion. In practical terms, this means that under the industry’s current funding model most U.S. airports lack predictable funding sources to keep pace with travel demand, rising construction costs and inflation. Since the PFC was last adjusted in 2000 — it’s federally capped at $4.50 for every enplaned airline passenger — its purchasing power has eroded about 50 percent, according to Benjamin Miller, lead author of a current RAND Corporation report on the state of U.S. commercial airports. Moreover, many airports, including facilities with sterling credit records, have reached their debt capacity. “As airports continually work to modernize their infrastructure to improve the passenger experience and spur more airline competition, they face unprecedented challenges in securing much needed financing.” Kevin Burke, president and CEO of Airports Council International—North America (ACI—NA). POSSIBLE SOLUTIONS At a time of mounting concern over federal spending, raising the federal government’s PFC cap would be the simplest and most free-market option for airports. Rand, among others, recommends that the PFC be raised to $7.50 and index it to inflation going forward. “Updating airport-funding options will give airports and their communities control over how to best address their individual needs,” according to ACI-NA. If there were universal agreement about raising the PFC cap, it probably would be easier to resolve the conundrum facing U.S. airports, but no such consensus exists. One of the staunchest opponents is Airlines for America (A4A), which represents major North American carriers. “Airports simply don’t need more money from taxpayers, and travelers don’t want to pay more taxes.” Nicholas E. Calio, A4A President and CEO. Airport construction is booming across the country, according to A4A, with more than $200 billion invested in runway, terminal and cargo-facility expansions and renovations, as well as other amenities, all without a tax hike. To underscore the argument that the PFC should go no higher, the Washington, D.C.-based trade group claims airports are diverting billions of dollars already collected from travelers… to pay for “pet projects” instead of putting that money toward infrastructure needs. HOW FUTURE AIRPORTS WILL MANAGE AIR TRAVEL CAPACITY ? 4 “The inevitable tension between airports and airlines is born out of a fundamental difference between the two groups’ time horizon: airlines are publicly traded companies who are accountable to shareholders and their quarterly expectations, while airports have time horizons of 10 to 20 years, based on projected capacity needs.” John Bacon, executive vice president of the American Association of Airport Executives. AIRPORT SLOTS There’s no direct substitute for physically expanding airports to resolve what most aviation professionals characterize as a problem approaching crisis proportions, Gittens says. However, airports may find some relief in assessing how well they’re managing existing capacity, with IATA’s Worldwide Slot Guidelines one of the possible solutions. Pre-assigned take-off and landing slots avoid chaos at airports where the infrastructure doesn’t match demand. Since the number of capacity-constrained airports continues to increase worldwide, slots helps airports to manage allocation. Some 1.5 billion people, or approximately 43 percent of global departing passengers, begin their air travel from slot-coordinated airports annually. In the summer of 2019, there were 204 such airports. “Today, insightful analysis of capacity and demand is lacking at many coordinated airports, and in the short term it could expose vital additional capacity,” says de Juniac. INNOVATION’S CRITICAL ROLE Some industry observers believe the answer to the capacity crunch is not new tarmac and terminals, but using innovation to eliminate operational inefficiencies, optimize existing infrastructure and better delight air travelers. This includes investing in emerging and maturing technologies designed to make more strategic decisions. HOW FUTURE AIRPORTS WILL MANAGE AIR TRAVEL CAPACITY ? 5 Smart airports are starting to proliferate around the

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