Airports could be staring at single-digit concession fees if e-commerce giants such as Amazon are permitted retail space, delegates were told during the 11th ACI Annual Economics & Finance Conference & Exhibition last week.

Responding directly to a question from TRBusiness concerning reports Amazon Go is exploring opportunities to introduce its cashier-less concept at US airports – and whether the industry should be concerned with a development that could shift away travel retail’s long-heralded emphasis on experience to transaction –  AOE Founder Kian Gould was frank.

“We’ve looked at this very closely – I call US airports retail wastelands, it’s almost all convenience, so of course these are very different. You might argue that maybe for this convenience retail setup, Amazon Go might be a suitable approach.

“However, there is a certain concession structure to doing business at the airport and the moment you let Amazon in you are going to look at single-digit concession fees. It is very challenging to give away expensive retail space at an airport for the kind of concession fee Amazon is willing to pay.

“Putting Amazon lockers at the airport is similarly risky; if you have them at your airports, why buy airside at all when you get things shipped to lockers?. “However, I am not saying there will not be airports who will try it out.”

‘LOW COST NOT LOW BUDGET’ 

A panel session addressing the changing dynamics in passenger traffic, shopping behaviours and the affect that is having on contracting commercial spend-per-head was addressed by Gould alongside Eugenio Andrades, CEO – Africa & Strategy, Dufry; Andrew Perrier, Chief Business Development Officer, National Parking Company (Magwif); and Arturs Saveljevs, Member of the Board (CCO), Riga International Airport.

Session Chair and Senior Manager Commercial & Business Development Hermes Airports Elias Liolios began by reinforcing that low-cost doesn’t necessarily mean low budget, rather, it applies to frequent travellers and those who are particular about their spending.

“Every airport should invest heavily on analysing who their passengers are, their profiles and what they need,” he opened.

Liolios, who is also Chair of the ACI Europe Commercial Forum, then drew on Duty Free World Council and m1nd-set research to demonstrate the shifting nature of the purchasing decision during the travel journey.

Referencing m1nd-set data, he said only 35% of passengers make the decision to buy instore; 47% search online and buy online; and 14% search online and buy instore, among other metrics.

He then raised the importance of exclusivity as a reason to purchase. “People do look at and care about exclusivity; it’s about the ability to purchase something unique – whether it’s the product or experience.”

Referencing ACI data on the passenger experience, Alias said an increase of 1% in passenger satisfaction leads to growth in non-aero revenues of between 0.7-1.0%.

“What we’ve seen and what the data released has shown is basically every year the percentage of pre-mediated or pre-planned shopping has increased continuously,” added Gould. “If you go into the so-called millennials group and Generation Z, it is substantial.”

Commenting on the huge demand for high-end luxury goods from these segments, he continued: “Passengers are interested in the best deals and where they can buy them from. You could argue it is a pricing race, but the point of buying at airports has always been a price advantage and now technology is really catching up and airports need to be ready.”

GLOBAL PAX AT 8.8BN

Opening the confernece, Angela Gittens, Director General, ACI World, began her presentation on a sombre note with news that two ACI Africa members were on the crashed Ethiopian Airlines flight this month.

In 2017, global passenger traffic growth slowed to +6%, with Europe at +6.2% and Asia Pacific at +6.6%, both ahead of the +5.9% global average.

Africa, meanwhile, achieved growth of almost +10% aligned with more stable economic environments in the likes of Morocco and Tunisia together with the recovery of Nigeria’s oil exports.

Continued growth in global air passenger traffic is anticipated in the future as the emergence of large aviation hubs continues.

In an announcement coinciding with ACI World’s preliminary world airport traffic rankings, the voice of global airports said global passenger traffic was estimated to have rise by 6% in 2017/2018 to 8.8bn.

Global airport revenues grew by 6.2% to $172.2bn, lagging behind the +7.5% passenger traffic growth recorded in 2017.

Non-aeronautical revenues accounted for a 39.9% share of total revenue, with aeronautical income standing at 55.8% and non-operating revenue at 4.3%.

At $7.08 per passenger, non-aeronautical revenues remain a vital contributor to passenger revenue.

“Global passenger traffic has reached record levels as airports continue to make a crucial contribution to furthering economic development and global connectivity,” said Gittens.

Airports continue to face challenges in satisfying global demand for travel despite ‘strong competitive forces’ driving innovation and improvements in passenger services, she went on to describe.

“The airport capacity crunch is no longer a figure of speech,” she said. “The question of financing new infrastructure is becoming the most fundamental one for the industry.”

She acknowledges that disparities between large and small airports pose a ‘serious challenge’ when it comes to attracting resources and stimulating investment.

“The challenge for our industry remains that 80% of airports in the world are small, with high traffic volumes concentrated in only a handful of locations. This means there is a wide disparity when it comes to profitability.”

Gittens says the need to develop a strategy to stimulate pax growth and ensure a positive economic return is important in the face of global figures; two thirds of airports are in the red with 94% of all loss-making airports handling traffic volumes of less than one million per annum.

“While smaller airports have space capacity and can easily accommodate additional traffic, most bigger airports are significantly constrained and require immediate expansion contingent upon appropriate financing mechanisms,” she said.

Gittens says changing revenue dynamics means more and more airports are heavily reliant on retail as a source of income.

Retail accounts for the leading share of non-aeronautical revenues at 30% on a global basis but is notably higher in regions including Asia Pacific (45.4%) and the Middle East (52.9%).

However, Gittens sounded a word of warning when she said retail remains under threat from e-commerce and other sources, including health-related concerns in tobacco, confectionery and alcohol segments.

“The old rules of the game no longer apply,” said concluded.

BREXIT CONTINGENCIES ‘FAIRLY GENEROUS’

ACI Europe Director General Olivier Jankovec then delivered an update on European aviation’s fortunes in the past year and assessed the future landscape.

Similar to the global picture, the passenger traffic picture in 2017/2018 was one of growth, up 8.5% in 2017. The result means Europe’s airports have consistently performed above the +5% growth mark in recent years.

Return on invested capital among Europe’s airports stands at +7.9%, but Jankovec says the region underperforms compared to other areas of the world.

With that in mind, Jankovec admitted that future cost reductions are also not guaranteed, and that could sacrifice quality as 49% of Europe’s airports remain in the red.

Interest rates continue to rise – although the European Central Bank recently moved to keep rates unchanged in a bid to stave off recession in the Eurozone.

The most recent January figures reveal traffic was up an average +4.3% (EU: +4.7%; Non-EU +3.1%) and while EU airports’ passenger growth continues to outperform GDP, Jankovec issued caution.

“In the short term we are seeing fading momentum down to economic deceleration in Europe, but it is also a global phenomenon; volatile oil prices, some over-capacity in Europe, increasing geopolitical risks, the rise of populism, security risks and Brexit.”

Despite the continued political mothballing around Brexit, Jankovec says the association is relatively content with the previously announced safeguards in place to protect UK-EU27 air transport links, which have been reciprocated on both sides.

Speaking during a pre-conference media briefing, he said: “We find those contingency measures fairly generous; compared to other sectors, we are in a fairly good position. For us, now the worry is how Brexit is going to impact the economy and demand for air transport in the coming years.

RETAIL -7% SINCE 2013

Notwithstanding the aforementioned challenges, Jankovec stressed that air travellers are shifting from material to experiential consumption.

Passenger demand for air travel is set to nearly double by 2040, with a 53% increase in flight movements.

In 2020, millennials alone will account for 50% of the global travel market. That is not to forget the retiring baby-boomer generation with a higher propensity to travel and rising middle class populations in emerging countries, which are all helping to nudge up air travel demand.

“All of these factors together give us an optimistic outlook for air travel demand,” added Jankovec.

He then identified three disruptive factors: airlines (hybridisation and consolidation), consumers (technology and digital) and citizens (changing values and politics).

An expanding low-cost carrier segment, including the spawn of low-cost long haul, is resulting in more full-service carriers embracing the model.

Non-EU airlines, such as the gulf carriers, are also growing their capacities to Europe. This is stimulating competition, with more of the hub airports exposed to this competition, which in turn draws into question whether the future of aviation will manifest in point-to-point direct services, or indirect services.

“Airports are becoming the new battleground of airline dominance,” commented Jankovec.

Despite retail’s undoubted importance to non-aeronautical revenues as alluded to above, spend per pax has actually declined by 7.1% since 2013, according to ACI Europe data.

Food & beverage on the other hand has experienced growth of +19.8% during the same period.

Car rental (+6%)  was the only other segment posting gains as real estate (-19.7%), car parking (-4.1%) and advertising (-19.9%) all suffered during the period in question.

Jankovec and ACI Europe point to ‘moderated’ yet ‘dynamic’ passenger growth in the past year, yet the above result with regards to retail demonstrates the halcyon effect of healthy passenger numbers and its masking effect on what in reality has been a declining picture for retail and commercial revenues.

Asked directly by TRBusiness whether the situation is getting worse, Jankovec replied: “It’s not getting better and it’s down to the overall economic situation.

“The fact that air traffic is growing but you have a lot of repeating passengers, growth coming from people flying many times per year….  how many bottles of Chanel perfume can you buy? What you see is the trend is going down.”

PRIVATISATION CONTINUES IN ASIA

In a final keynote presentation, ACI Asia Pacific Regional Director Patti Chau provided an update on regional development.

As mentioned above, traffic grew by 6.6% in APAC, ahead of the 5.9% global average.

Despite a series of pronounced challenges, the Middle East still posted growth of +2.1%.

Japan and China continue to bolster their low-cost capabilities and airport infrastructure, the expanded domestic terminal in Phuket; Mactan Cebu T2 and the opening of Muscat’s new airport terminal in November just a few of the highlights.

By 2040, emerging and domestic economies will account for more than 60% of regional traffic, revealed Chau, with a number of important developments in the pipeline including at the new Beijing Daxing Airport.

She commented on the upward trend towards privatisation at Asia Pacific’s airports, with  a tender to operate seven airports in Hokkaido, Japan expected before the summer.

“There is no one size fits all approach to privatisation, but with increasing activities in various degrees in Vietnam, Indonesia and Nepal, governments should ensure there is a clear and consistent regulatory framework.”

Looking ahead, the impact of the China-US trade war and global economic slowdown are factors that will impact Asia Pacific air travel, but opportunities such as the Chinese Belt and Road initiative provide new impetus for growth.