www.pwc.com/gx/en/industries/capital-projects-infrastructure.html Connectivity and growth 2017 edition November 2017 Introduction 1 Aviation growth in a changing world 2 Economic growth and air traffic: developments in Australia and Britain 6 Air connectivity: Why it matters and how to support growth 14 Aeronautical charges and air traffic demand risk: what is within our control? 22 Are European airport valuations taking off? 28 Contents | PwC | Connectivity and growth Introduction This has been a year of record In this, our fifth annual prices and valuations for airport compendium we again open with assets – yet the perfect storm of Andrew Sentence’s observations low interest rates, low oil prices on the potential of the aviation and increasing airline yields market, and the issues that may seems to be drawing to a close. impact growth. We have updated With airline failures, such as our analysis for the key themes Monarch and Air Berlin, and of traffic, connectivity and expectations of tightening airline valuations – core considerations margins from overcapacity and for airport investment. higher oil prices – can the good times last? I hope you find this year’s new and updated articles a source of Yet, passenger demand and growth interest and debate, and I look remain strong, and both airports forward to discussing these issues and airlines continue to innovate with you over the coming year. to improve efficiency and provide new services and revenue streams. With these market headwinds, and the potential turmoil of Brexit yet to impact, signs of any Best Regards, reduction in investor appetite for airports will be closely assessed. Michael Burns Partner, PwC UK Introduction | 1 and both sides seem to have different objectives and strategies. The EU is Aviation growth in a seeking to secure its financial position and the rights of EU citizens. The UK is changing world more concerned with a post-Brexit trade deal and securing a reasonable transition to a new relationship with Dr Andrew Sentance, PwC UK the EU. Talk from senior UK government figures We live in a world of political uncertainty, What do these developments mean for of “No Deal” with the EU is worrying yet the global economy is looking the world of aviation? Aviation has been to many business executives. As long relatively strong. The latest forecasts a major beneficiary of the globalisation as this “cliff-edge” scenario is avoided, published by the International Monetary of the world economy which has been it will not be until the 2020s that a Fund (IMF) in October point to the underway since the 1990s. The opening Brexit agreement will be properly strongest global growth in 2017 and up of major emerging markets like China implemented with more fundamental 2018 since 2010/11. All the three main and India to the global economy, the changes to the relationship between engines of world economic growth – development of the Single European the UK and its European neighbours. North America, Europe and Asia – are Market and other regional trade blocs, firing together for the first time in the and the strong growth of trade and Meanwhile, across the Atlantic in the post-crisis recovery. We can see the investment worldwide, have all United States, the Trump administration impact of this in terms of strong growth benefited the growth of the aviation is still clarifying its policy agenda and of demand in the airline industry. industry in the past three decades. has yet to establish a good working In August 2017, global passenger travel relationship with the Houses of was up over 7% on a year ago and air In the short-term, the aviation industry Congress. The immediate threat of cargo was up over 12% – according is benefitting from the upswing in the new protectionist measures has not to IATA. global economy. But there is still a been realised. But it has not totally possibility of disruption to established gone away either. The tax reforms The political events of 2016 in the patterns of trade and investment over promised by Trump and his team UK and US created a sense of upheaval. the longer term, with the UK set to have yet to attract the necessary The UK referendum vote for “Brexit” and leave the European Union (EU) and a support in the Senate and the House of the election of Donald Trump as the 45th growing threat of protectionism if Representatives. Meanwhile, global US President sent shockwaves through President Trump’s more extreme tensions on the Korean peninsula have the political systems on both sides of proposals were carried through. If this been rising following a series of missile the Atlantic. They have also raised a protectionist threat materialises, the tests by North Korea. Global security new set of economic uncertainties – world of aviation and its future growth concerns are generally bad for air travel particularly relating to the stability and would be very significantly affected. and aviation more generally, though future direction of the world trading they do not seem to be having much system. In 2017, political developments It will take time for it to become clear impact yet on the strong growth in the major western economies have how seriously the aviation industry recorded by the airline industry. been more reassuring – with France should take these protectionist worries. electing the reform-minded President The Brexit negotiations are proceeding Macron and Angela Merkel returned slowly. They were disrupted by the to power in Germany. General Election in the UK in June 2017, 2 | PwC | Connectivity and growth Though these political developments Atlantic, the US economy is forecast to projections1 suggest that the Asia- are creating an air of heightened grow by over 2% this year and next, Pacific economies will account for a uncertainty, the world economy with Canada expected to record a larger share of world GDP than Europe continues to grow well (see Figure 1). similar growth rate. Despite the lack of and North America combined. Also by 2017-18 looks set to see the strongest clarity surrounding the policy agenda this date, China will have overtaken period of global growth since 2010-11 of the Trump Presidency, consumers the United States as the world’s largest when the world economy bounced and businesses have remained confident economy, a position that the US has back from the depths of the Global and the US economy has continued to held for around 150 years. Against this Financial Crisis. The main exception grow steadily. The modest interest rate backdrop, it is perhaps not surprising to this global upswing is the UK, where rises implemented by the US Federal that US politicians are particularly economic growth has slowed from Reserve have not seriously disrupted sensitive about the rise of China and the around 2.5% in the three years 2014 economic growth. role it is playing in the world economy. to 2016 to a projected 1.5% in 2017 and a PwC forecast of 1.4% in 2018. Asia also continues to power ahead, led by the large population economies – Elsewhere within Europe, there has China, India and Indonesia. Chinese been a turnaround in growth in a growth is expected to be over 6% in number of economies over the past 2018 with India growing by over 7%. few years. Spain is the most striking The Asia-Pacific region is already example, where growth of around 3% substantially larger than the other is expected this year, followed by major regions in the world economy – 2.3% in 2018. France and Italy are accounting for around one-third of also reporting better growth prospects, global GDP, compared with the EU’s while most countries in Northern and share of just over 20% and North Eastern Europe continue to report America’s contribution of around a strong growth. Meanwhile, across the quarter. By 2030, PwC’s “World in 2050” Figure 1: Outlook for global economy in 2017 Russia Canada 1.4 UK 1.4 1.9 Germany 1.7 Ireland 3.4 France 1.7 1.6 Greece 2.2 US Japan Spain Italy 0.7 China Mexico 2.3 1.1 1.9 6.2 India 7.4 Australia Key Brazil South Africa 2.8 1.7 X.X = GDP growth in 2017 1.2 Source: PwC Oct/Nov 2017 Forecasts Note: Weather icons are for indicative/descriptive purposes only 1. https://www.pwc.com/gx/en/issues/economy/the-world-in-2050.html Aviation growth in a changing world | 3 Looking ahead to the 2020s, it is How should airlines and airports central scenario – but if such a world possible to envisage two scenarios for respond to these developments in their did emerge, it would be much less the global economy as the current business planning and investment? favourable for the aviation industry. period of political uncertainty plays The most immediate consequence of the So it makes sense for businesses and itself out. The first – and most likely – recent change in the political climate regulators to consider how robust scenario is that the present highly is a rise in risk and uncertainty. That plans and forecasts are to a more globalised economy remains broadly points to the need to consider a wider serious disruption to world trade and intact and countries in the western range of scenarios for growth in the investment and a less positive outcome world adapt to the rise of China and current environment. A continuation from both Brexit and the Trump other large Asian economies. This of recent healthy growth of air traffic presidency in the US. scenario might be characterised as demand should be considered the “adjustment and acceptance”: an most likely scenario for the short-term The fundamentals of planning for acceptance of the changing world outlook (see Figure 2).