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Complexity is key to the investment case for airports

By AMP Capital

Why are some airports flying high while others struggle to reach take-off speed?

Customer satisfaction and profitability vary significantly from one airport to another.

Airports are highly complex ecosystems, whose performance is highly dependent upon all their stakeholders aligning to optimize the passenger experience.

Differing levels of success in achieving this alignment go a long way to explain the variation in experiences for passengers and financial outcomes for investors that are delivered by different airports.

Globalisation has transformed the aviation industry as factors such as economic development - especially in Asia, the consequent explosion in the size of the middle classes, increased global trade and international corporate expansion have fueled the demand for air travel.

This has created investment opportunities across the aviation value chain. Yet airports are fascinating but poorly understood businesses, whose complexity is in fact the very essence of an exciting investment opportunity.

An airport may be best understood as an ecosystem, and like those in the natural world, it is comprised of a very large number of entities whose well-being supports the health of the entire system. Therefore, the owner of an airport must invest a great deal of expertise across its operation to ensure that it performs optimally.

This complexity gives rise to two attractive characteristics to investors.

Firstly, in common with other infrastructure asset types, airports are defensive investments. Most are in practice local monopolies, as only the largest cities are served by multiple airports, and even these are differentiated by location, connections and service offering. The capital investment requirement and regulatory obstacles to be navigated before challenging a market incumbent are seldom overcome.

Secondly, airports can deliver a potentially highly-rewarding upside for equity investors when owners understand how to optimize the ecosystem to drive value creation over the longer-term. This factor differentiates airports from utility assets that are bought and held relatively passively for an income stream.

Optimizing an airport’s ecosystem requires a superior understanding of its two principal stakeholders – airlines and passengers. Both are customers of the airport, yet they have very different needs, priorities and timeframes.

Airports are sometimes described as dual platform businesses, and the needs of these stakeholders are thought by some analysts to conflict. However, this is not the case as the best-run and most profitable airports are those that understand that the interests of these two groups are very closely aligned – even if they should be considered separately.

Getting the passenger experience right is critical to the success of an airport as without passenger flow there is simply no business. The passage through the airport must be as attractive as possible, leaving a positive memory that the passenger will wish to repeat and share with others. The experience is likely to depend on a wide range of factors.

The diversity of routes is key, not just in terms of destination choices for travelers, but also regarding different service offerings. Full-service flag carriers, leisure-focussed airlines, budget carriers and charter operators all provide something different, to quite discreet segments of the airline market. An airport able to attract a mix of operators is best positioned to maximise its total potential market.

Retail is critical to driving both a positive customer experience and sustainable revenue growth. This requires collaboration with appropriate retail businesses to attract outlets in the right locations that best meet the preferences of passengers in a particular location. Food and beverage is especially important as a high proportion of passengers use such venues and the airport experience is likely to be more sensitive to good food in an agreeable atmosphere than any other retail interaction in the terminal.

Car parking may appear an unglamorous after-thought, yet an efficient parking experience can strongly influence the quality of the airport memory. Cost drives parking decisions less than is often thought, however a range of services and price points will service more of the potential market. Experience is key though: this may be in terms of sufficient easy-to-use trolleys with good signage to the terminal or premium priced ‘meet & greet’ valet parking offerings that remove much of the arrival stress.

Airport infrastructure is another driver of airport passenger experience. This includes ease of arrival by car or public transport, ease of navigation to the terminal for check-in, passing efficiently through security and the location of facilities and lounges in the right places. Simple housekeeping, such as ample and clean public toilets and a comfortable temperature have a material impact upon the passenger experience.

Airlines may have different service priorities to passengers, but their efficient operation feeds through into the customer experience. Aircraft fueling, on-board catering supplies, gate management and de-icing directly impacts on-time departure rates and thus passenger satisfaction. The air traffic control operation is likely to be a component of a regulated national network, but airports can nonetheless optimize their operations to minimise traffic delays. Baggage handling is another less glamorous function that can determine the passenger memory of an airport experience.

Finally, the quality of engagement with the local community will have a major impact upon the airport ecosystem. The relationships with regional governments, local councils, suppliers, employees and commuters will in time give rise to a level of trust and support that will inform decisions that can determine the long-term growth of earnings. These include new rail and road links, planning permission for expansion or the flexibility granted for late/early flights.

This demonstrates the complexity of airports which must energize a wide range of stakeholders within their ecosystems; to align them so that the passenger experience and the airline operation are optimized. This requires a management approach that places an understanding of customer experience on a comparable level to technical and operational expertise.

The extent to which this approach is embraced varies greatly from airport to airport and goes a long way to explaining the very different passenger experiences and profitability enjoyed by different airports.

  • Airport
  • Infrastructure
  • Investment Insights
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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