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THE A380: A GOOD INVESTMENT - FOR AIRPORTS?
By Dr. Christopher J. Smith, Managing
Director, SH&E Limited
Introduction
In the present climate of aircraft carrying low yield passengers and financial
losses of major airlines reaching staggering proportions, this may seem
a perverse question to ask. Indeed, even before 11 September 2001, this
may have been a perverse question, but for very different reasons: with
many airports packed to capacity and addition of new runways often at
best a remote possibility, the A380 was a potential saviour. Nevertheless,
however difficult the short term may be for the air transport industry,
all involved must assume that growth will return. Planning for that growth
must start now: lead times for project development are too long to delay.
This article examines the investment case for the A380 from an airport
operator’s perspective. More than ever, airport operators need to
ensure the financial viability of any of their investments, and the A380
will require significant investment. Although this investigation uses
generalisations and high level assumptions, the figures and numbers are
approximately correct and indicate that the financial justification of
investment for the aircraft should not be assumed automatically.
The aircraft and its first airports
The A380 is intended, by Airbus at least, to be the natural successor
to the B747, and in two key parameters is approximately one third bigger:
555 seats versus 415 seats, and a Maximum Take Off Weight (MTOW) of 548
tonnes versus 396 tonnes . These two parameters are particularly important
for airport economics as for most airports they form the basis for determining
revenues from airport charges.
The airports where the A380 is first likely to be introduced are determined
partly by the airlines which have first ordered the aircraft, and partly
by the routes over which they are likely to be operated. On this basis,
it is likely that the A380 will operate in the main between the airports
shown in Figure 1, and these airports form the basis of the analysis in
this article. This is not an exclusive list, and Frankfurt, Chicago, Hong
Kong, Bangkok and San Francisco to name but a few are unlikely to be far
behind.
Figure 1: The first A380 airports
1. The author has worked in the air transport
industry for his entire professional career, starting with his PhD on
the development of Birmingham Airport, then working for Thomson Travel
for three years before becoming a management consultant. He is an internationally
recognised expert on the economics of air transport and privatisation.
SH&E is the world’s leading, specialist air transport consultancy.
Contact csmith@sh-e.co.uk
2. Figures are for the B747-400.
Revenue generation
If each of the airport operators concerned maintained its aeronautical
tariffs for landing, parking and the use of terminals at current levels,
than while revenues per movement would be about one third higher for an
A380 than for a B747, there would be very little difference in the revenue
per passenger generated between a B747 and an A380 (Figure 2). All the
sample airports are within ±3.5% for the two aircraft types, although
there is a very material variation in unit revenues between the airports!
Figure 2: Revenues per passenger from
airport charges
Capital expenditure requirements
Unfortunately, the A380 may require some significant investments in infrastructure
to accommodate it: wider runways and taxiways, displacement of taxiways,
apron enlargement, more boarding bridges, terminal gate room expansion,
the needs obviously varying by airport. Operating costs may also increase
(e.g. upgrading of rescue/fire services, higher peak flows), while at
all airports there will need to be investment in new Ground Service Equipment
(although this may not always be the responsibility of the airport operator).
Relatively few estimates of the costs of the capital expenditure (capex)
have been published. One of the more comprehensive exercises was undertaken
by the FAA for 20 US airports. Investment requirement was estimated at
US$ 7.5 billion across the airports (an average of US$ 375 million per
airport), although a significant proportion of this figure related to
just one airport, San Francisco. However, even if one assumes a lower
figure for an average airport, the required capex could easily be US$
200 million. This figure translates crudely into perhaps an additional
revenue requirement for airport operators of US$ 30 million per annum
(US$ 10 million for depreciation on a straight-line basis over 20 years
and US$ 20 million financing charges, assuming a cost of capital of 10%).
Do the two match?
So will the operator of the ‘average’ airport be able to generate
such additional revenues? This partly depends on the basis on which airlines
introduce the A380. At slot-constrained airports, airlines are more likely
to do a one-for-one swap of B747s for A380s in order to provide growth
capacity, so that airports gain traffic, and hence revenue from airport
charges, that otherwise they would not. But what about those airports
which are not slot-constrained, and where airlines introduce the A380
in order to benefit from its lower seat-km costs? In this situation, the
airline could use three A380 operations (with 3x555 or 1665 seats), rather
than four with B747s (4x415 or 1660 seats), to carry the same number of
passengers. As noted above, with current tariffs, both aircraft types
generate the same revenue passenger for the airport operator, so that
the airport operator would gain no revenue from airport charges.
This debate ignores, of course, the revenues which airport operators derive
from commercial activities (e.g. retail, catering, car parking) at their
facilities. With “3-for-4” substitution, again there would be
no net gain in revenue, although there would with “1-for-1”
swaps. However, many airport operators, especially in Europe, are arguing
that their airport charges should be related to the costs of provision
of aeronautical infrastructure and should not be cross-subsidised by profits
from commercial activities. In other words, “dual-till” rather
than “single-till” principles should apply. With this philosophy,
it would be inconsistent to justify A380 investment on the basis of increased
commercial revenues.
If we assume a 1-for-1 substitution (the most optimistic possible), it
is possible to estimate the level of capex that might be financially viable,
depending on the number of A380 movements and the additional revenue per
movement that would be generated (Figure 3).
Figure 3: Capital investment viable
for different additional revenue per movement
They may well not!
So what level of capex might be justified by the first airports to receive
the A380? If we assume that 50% of movements currently made by B747s are
in the future made by A380s, than the level of viable capex ranges from
virtually zero at Dubai to US$ 400 million at Tokyo Narita (Figure 4).
However, it is worth noting that no other airport could justify even the
average capex figure of US$200 million mentioned earlier, and indeed most
airports are around a justified capex figure of perhaps US$ 100 million.
Figure 4: Viable capex at first A380
airports
3. The estimate for Dubai is clearly
suppressed since Emirates, the home carrier, would be substituting A380s
for B777s (although on a 3-for-4 or 5 basis) rather than for B747s. Equally,
the scale of investment needed at Dubai is probably very small given its
recent major upgrading, with these investments now being ‘sunk’
costs.
Conclusions
Although this article uses some ‘heroic’ assumptions, the financial
justification of capex investments to support the A380 cannot be simply
assumed. Some effort should be devoted to an investment appraisal based
on more accurate estimates of capex requirements and changes in operating
costs; clear appreciation of sunk costs and whether revenues are truly
incremental; and a better understanding of the extent to which airlines
will be introducing the A380 over the lifetime of the airport assets,
and where the airlines sit on the “1-for-1”/“3-for-4”
spectrum. Having assessed these fundamentals, airport operators will then
be able to consider if a change in the level of airport charges is needed,
and also whether considerations of fairness and equity dictates that there
is also a change in the structure of charges, with A380 operators carrying
a higher burden of the increase in charges.
Contact:
Lindsey Litton
Media and Public Relations Manager
ICF International
1.571.265.1472
llitton@icfi.com
© 1997-2008, SH&E, an ICF International Company
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