There are lots of myths about airports. Only some are true

We need to get this business right.

The global airline industry is one marked by change and contrast. There’s increasing pressure for legislation to tackle carbon emissions, competition from low cost airlines have driven consolidation among full service carriers (such as BA and Iberia and BA and BMI), and new technology is promising to reduce the time it takes between entering an airport and boarding a plane, while meeting increasingly stringent security requirements.

There’s also a significant disparity between the prosperity of major high profile international airports and smaller more regional operators. Passenger numbers at Heathrow, Europe's busiest airport for example, hit a new September record of 6.3 million last year. When compared to September 2011, European scheduled traffic at the airport rose by 0.2 per cent and North Atlantic numbers 4.5 per cent, while Brazil and China numbers increased by 14 per cent and 5.9 per cent respectively.  Elsewhere, Asia-Pacific is somewhere that’s enjoyed particularly rapid growth, with Airports Council International announcing that 16 of the 20 fastest growing airports in the world were in this region.

Despite the many variations however, there are, broadly speaking, encouraging indicators of future growth and demand across the industry. Business travel is predicted to increase by a further 1.5 per cent throughout 2013, while competition between low cost airlines continues to result in cheaper flights, making air travel more accessible in emerging markets and generating new untapped demand in mature markets.

Furthermore, the greatly improved connectivity between airports, cities and other forms of transport is spearheading change. Higher-speed connections like the Heathrow Express in London, the City Airport Train in Vienna and the AirTrain connecting JFK to Manhattan illustrate how road, rail and air are becoming better integrated, delivering an accessible, ‘multi modal’ transport network across the world to reduce the total journey time of travellers.

Mirroring the growth Heathrow has seen; investment, and the desire to invest in major airports is thriving. Mature airports such as Heathrow are seen as solid long-term investments because they require low investment volumes, are fairly low risk and assets are long-lived. This makes them very attractive for private investors such as pension funds, which are generally more risk-adverse.

Airports are also attractive for investment as they usually have backing from a diverse range of businesses, which brings with it a variety of different levers to pull to increase revenues and reduce costs for those involved. The concept of the airport as a city itself – complete with hotels, conference centres, public transport interchanges, retail parks, banks and postal services – is gaining momentum. It’s true that airports generally focus their retail offerings airside where passengers are more relaxed and therefore more inclined to shop, but there are still significant real estate opportunities that come with the ever-growing number of facilities and services contained within these sites. Major airports can now act as powerful commercial hubs with the ability to generate substantial revenues and create jobs across the world. This makes them, on paper at least, an extremely attractive and rewarding case for investment. 

Airports also have a relatively fixed cost base and therefore a high degree of operational leverage as passenger numbers increase. They are GDP and inflation linked assets with traffic growth showing a strong and proven link to economic growth, and revenues, in particular aeronautical related revenues, driven by annual inflation linked adjustments to the tariff. As a result, investments have the potential to deliver consistently high and stable returns. Well-run privately managed airports should be looking to achieve EBITDA margins around the 50% mark and deliver a significant return on investment to those that have provided financial backing.

Investors must be shrewd, however. They have to understand the risks associated with airport infrastructure and be able to prudently plan to minimise their exposure to these wishes, whilst maximising the revenue generating opportunities. Managing the balance between capacity supply and demand must be done carefully. Airports are generally capital-intensive businesses, especially those that are experiencing a period of strong growth. What’s more, airport infrastructure, in particular the terminal facilities and runway, can only deliver so much financial return before they need to be expanded. This return is governed by a broad range of factors, including the daily and annual profile of demand, the size of the terminal, the length of the runway, the type of aircraft using it, and the skill of the Air Traffic Controllers, for example.

It is also a common misconception, borne by the success of large, high-profile international airports, that all airports are profitable organisations. Due to their operational and financial structure, airports require a certain number of passengers to break even and move towards profitability. This level has historically been around 500,000 to one million passengers per annum, however, with the advent of low cost carriers and significantly lower aeronautical yields, this has in a number of cases increased to nearer two million. Hence the importance of prudent capacity and investment planning to deliver infrastructure that is in line with the type of operation.  An airport wholly dominated by low cost airline operations, for example, will be unable to sustain the level of investment that can be supported by a full service airport. 

The above is not intended to dissuade investment in major airport infrastructure – far from it. It should simply indicate that, to generate a satisfying and significant return, there needs to be an awareness that investment opportunities are by no means homogenous and can range in terms of size, characteristics and investment categorisation. Today’s airport opportunities are generally focussed on larger scale and greenfield opportunities, as interest from financial, trade and construction investors has established these as an attractive asset class with a good balance of risk and reward.

With the above considerations taken into account, the appetite for shrewd investment should only grow stronger, alongside the demand for air travel across the world. And it’s an important point that this is the case. In addition to offering stable and rewarding investments for those involved, a successful airport has the potential to enhance the surrounding area’s international prestige; opening doors to new markets and industries, cementing the area as a "destination of choice" and thereby helping secure future revenue generation. With this in mind, the balance between risk and reward is well worth looking into.

Photograph: Getty Images

Dervilla Mitchell and Crawford Burden are Transport Directors for Arup

Photo: Getty Images
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What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.