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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:
Stephanie Toomey
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SH&E, Inc.
Phone: +1 617-225-2800
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