This the fourth article in a series about how the coronavirus will transform the aviation industry.
Last time, we looked at how COVID is changing the airport business model. Today, we’ll take a deeper look at how the pandemic is disrupting one of the airport’s key revenue sources: real estate.
Corona taught airports an important lesson: if you want to survive, diversify your revenue. With air traffic down for the foreseeable future, airports are anticipating a shortfall in passenger facility fees and airline charges. While the situation remains dynamic, most industry experts agree that we’re facing a multi-year slump that may last into 2023. In the meantime, airports will face tough questions from lenders, shareholders, and regulators about how they plan to return to financial solvency.
To better understand the pandemic’s implications for the airport business model, it’s helpful to divide revenue streams into two categories: passenger-related revenue and non-passenger revenue. As the name suggests, passenger-related revenue depends on air travelers for growth: when passengers disappear, that revenue does too. Key examples include pax facility charges, parking, car rental, and access fees, and travel retail.
By contrast, non-passenger revenue sources are immune to sudden changes in passenger numbers. Key examples include cargo and real estate. When travelers evaporate, they keep generating income for the airport. In fact, cargo and real estate have been the only reliable money makers throughout the pandemic: rising stars at a time when most revenue sources have plummeted.
To remain competitive in the coming business cycle, successful airports will need to strike a balance between passenger-related revenue and non-passenger revenue. As the post-COVID business model begins to take shape, prioritizing non-passenger income will deliver substantial benefits to the entire aviation industry. Above all, airports will become more resilient: by diversifying their revenue, they’ll be in a much better financial position when the next major disruption—be it a public health crisis, a terror attack, or an airline bankruptcy—wreaks havoc on their core business. (If recent history is any indicator, we’re due for several more disruptions in the coming decade.) Moreover, creating a concrete action plan to increase non-passenger revenue will significantly improve airports’ standing with shareholders, lenders, and regulators.
Landside real estate is a powerful tool for increasing non-passenger revenue. But the crisis is also forcing airports to rethink their approach to property development. Before corona, most airports focused on one or more of the following real estate strategies:
--passenger services, e.g. airport hotels and parking garages
--business services, e.g. office parks and MICE facilities.
--cargo infrastructure, e.g. warehouses and logistics centers
--energy infrastructure, e.g. solar farms and microgrids
As airports prepare for the next business cycle, it’s critical to ask how resilient each of these strategies will be moving forward. Passenger-related facilities like hotels will undoubtedly continue to generate revenue for almost every airport out there. Some income sources, like parking, may also see a COVID-induced boost, as more travelers will prefer to drive to the airport rather than take mass transit. But until we see a recovery in pax figures, hotels, parking lots, and car rental agencies will struggle to fill existing capacity—that is, unless airports can attract new types of customers.
Some are better prepared for that than others. Fancy airport hotels and plush resorts at hubs like Singapore and Incheon have long positioned themselves as staycation destinations and event locations for local consumers: hosting everything from weddings to dance competitions. That will be a tougher sell for airports that have mediocre hospitality facilities, located in unattractive surroundings. The smart ones out there are finding creative ways to adapt existing assets for new purposes: turning parking lots into drive-in movie theaters, for example (see here and here).
What about airport office parks? With the entire commercial real estate industry in flux, they face a battle on many fronts. During lockdown, many companies asked their staff to work from home. Some employees loved the idea; others hated it. Either way, the crisis forced companies to become more flexible about remote work arrangements. Many are now reevaluating how much of their staff actually need to come back to the office, and for what purposes. For cash-strapped companies, working from home is a tantalizing way to cut costs. While it’s unlikely that offices will entirely disappear, businesses’ spatial requirements will inevitably change. Successful airports are already communicating with their tenants to anticipate those needs.
The future of commercial office space is an evolving discussion that needs to be considered from two perspectives. First, while working from home is a feasible option for advanced service industries like tech, finance, and insurance, it’s much harder to implement in sectors that require sustained physical presence, such as transport, construction, and hospitality. Second, no matter how much we go digital, some activities will still need to take place face-to-face. That’s especially true for tasks that involve extensive teamwork or require a high level of trust. Offices will also continue to play an important role in maintaining employees’ work/life balance—and by extension their sanity. While many working parents have enjoyed spending more time with their kids this year, it can be challenging to concentrate when they’re around. Office parks that offer quiet areas and flexible childcare options could be a big draw.
How about MICE facilities? Their future depends on how quickly business travel bounces back—and right now, that’s looking shaky. Even after the pandemic subsides, tight budgets and liability issues will prompt companies to take a harder look at employee travel requests. Is attending that big conference absolutely necessary to connect with clients, or would a video call suffice? How effective is that training program? Tough questions like that will negatively affect business meeting facilities. At the same time, organizers’ spatial and technical needs will evolve. Blockbuster expos hosting thousands of delegates may give way to smaller, more targeted events. Some participants will attend in person, while others will join online. That will require much better videoconferencing facilities.
These prognoses may sound bleak—but for airports, the news isn’t all bad. The pandemic is changing how companies choose where to locate—and airports stand to benefit. For decades, knowledge-intensive firms preferred lively inner-city neighborhoods, citing the many conveniences of a high-density work environment. COVID led to a major shift in priorities. With public health (and costs) front and center, those same neighborhoods are starting to look too crowded, too expensive, and too difficult to reach by car. That may lead to a renaissance of the much maligned suburban office park. Before corona, they were often criticized for being boring, sterile, and antiseptic. After corona, those qualities suddenly seem more like an asset than a liability.
Successful airports will leverage that change in attitudes by positioning themselves as experts in biosecurity. Having implemented enhanced hygiene precautions and contactless technologies in the terminal, they’ll apply those same measures to their landside real estate ventures. For airport-adjacent commercial property, that could be a major selling point.
As airports adapt their business model to the post-pandemic operating environment, they will take a two-pronged approach: seeking to recover as much passenger-related income as possible, while at the same time expanding their non-passenger revenue sources. Successful airports will approach that task with an open mind—and with an attention to history.
For more than a century, airports have doubled as both providers of commercial air service and as a destination for non-aeronautical activities. In the early decades of civil aviation, driving to the airport was a common weekend outing for families. Rooftop restaurants catered to throngs of visitors. After WWII, the airport became a heavily militarized space, as Cold War tensions drove the development of defense industries and air force training grounds. Those military facilities disappeared in the 1990s, as airport terminals transformed into shopping centers, and office parks developed on the landside.
The coming decade presents airports with a range of unknowns. It would be foolhardy to assume that the real estate strategies that worked for the past 30 years will continue to do so after such a major shock to the system. Successful airports will evaluate how they can update their existing approach to property development—and to do that, they’ll focus on the needs and desires of their customers. Now is a crucial time for airports to ask themselves: how are our customers changing, and how are their needs changing?
At the same time, successful airports will seek out new landside development opportunities by embracing innovations in the cargo and energy sectors—more on that after the summer break.
Until then, a few questions for you: how is your airport pandemic-proofing its commercial real estate strategy? And how are property developers adapting to the new investment environment? Write to me here.