The pandemic has left airports with no commercial reason to stay open. What do they do now?

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After a year of living with COVID-19, Postmedia is taking an in-depth look at the significant social, institutional and economic issues the pandemic has brought to light in Canada — and more importantly, how we can finally begin to solve them. You can find our complete coverage here.

Of all the business problems caused by the pandemic, the disruption to airports stands out.

Last spring, as Canada placed new restrictions on travel, the amount of people taking flights slowed to a trickle, and those who made the decision to get on an airplane generally wanted to spend as little time waiting, and to touch as little, as possible.

“We’ve been trying to get people to go paperless, with respect to boarding passes, forever,” Tamara Vrooman, chief executive of the Vancouver Airport Authority told the Financial Post. “But now they’re happy to, because they don’t want to touch the paper.”

While such trends would seem fortuitous, the overall trend has been grim. In general, revenues have plummeted, but expenses haven’t. And because airports play a vital role in the community, allowing goods to move in, and people to drop in and out to see family or maintain business relationships, they remained open.

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“There was no commercial reason to keep our airport open, but we keep it open because we know it’s essential to our community,” Vrooman said earlier this year, during an address to the Vancouver Board of Trade about the future of her airport.

Toronto Pearson International Airport, the country’s busiest airport for the past few decades, saw a 61.5 per cent decline in air traffic in 2020 compared to 2019, with 280,047 fewer takeoffs and landings during the year. Vancouver International Airport also saw traffic plummet 52.9 per cent, while Montreal/Pierre-Elliott Trudeau in Quebec traffic declined 59 per cent, according to Statistics Canada.

Already, a debate is taking shape about what, if any, legacy effects to expect from the crisis. Did the pandemic land a punishing financial blow to airports that will significantly increase the cost of flying? Or did the downtime provide a once-in-a-lifetime opportunity for them to modernize and reimagine the airport experience?

The plunge in air travel has wreaked havoc on most airports’ businesses. Last July, Pearson reduced its workforce by 27 per cent, as around 500 people were laid off or voluntarily departed and it ended 2020 with a $383-million net loss despite raising its airport improvement fees paid by passengers who are departing or catching a connecting flight, as well as its aeronautical rates for all business and commercial flights.

Deborah Flint, chief executive of the Greater Toronto Airport Authority declined a request for an interview, but Robin Smith, a senior advisor, said via email the financial impact of the downturn has been “significant.”

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At Vancouver, in 2020, revenues dropped 50 per cent but expenses declined only 14.3 per cent, according to Vrooman.

Leaving aside short-term budget deficits, and the question of whether air travel will ever resume — which many in the industry shrug off as they assume a comeback is all but assured — the pandemic has accelerated trends that pose existential questions for airports. Even if people want to pack into a sardine can for nine hours to fly somewhere, will they want to spend time hanging around an airport? Will they cut against all trends and shop there while waiting?

Richard de Neufville, an engineering systems professor at the Massachusetts Institute of Technology who studies airports, explained that many airports, particularly large international hubs, derive a bulk of their revenue from the sales at duty-free shops and concessions, where people spend money while waiting for their flight.

Airport design, he explained, is often driven by the economics of aviation. It can cost around US$100 per minute to operate a modern aircraft between fuel expenses, paying the pilots, flight crew and upkeep, depreciation of the machinery, et cetera.

“Airports are high-end supermarkets,” said Neufville. “We’re going to get money, and make big shopping centres; we’re going to delay the passengers because it’s important they stay in our store.”

This type of business model, in which people shop while waiting, is particularly appealing to airports in large cities, that serve as transfer hubs for passengers on long overseas flights who need to catch a connecting flight. Such airports see large numbers of people passing through their halls, many of whom, it is assumed, have disposable income, plus time to kill, which makes them ideal targets for a retail operation.

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But de Neufville contended — and not everyone agrees — that this design model is flawed because selling anything in an airport is an expensive proposition. Every item, whether it be a bottle of perfume or the beef tenderloin for a plate of steak tartare, has to be inspected by security officials. In addition, workers have to be inspected, which takes time, and the real estate itself is expensive because space is scarce in most airports, de Neufville said.

On top of all this, e-commerce has been eating into bricks-and-mortar retail sales, and this trend was accelerated by the pandemic.

“Malls all across the U.S. are cratering because we don’t particularly want to go there if we can shop with Amazon and get things at three in the morning, or whenever the mood strikes us,” said de Neufville. “People all the more now, are saying I don’t need this kind of experience at all, I can do it better on the internet.”

Vrooman, who took over as chief executive of YVR Airport in July, after spending nine years on the board of directors, said while the pandemic accelerated the trend away from bricks and mortar shopping toward e-commerce, it was already well on her radar.

To her mind, shoppers have been seeking more of “an experience” from bricks and mortar.

“We were thinking about a slow shift I would say to more food and beverage and less retail offering in the terminal pre-pandemic anyway,” said Vrooman. “Now, we will be accelerating that.”

Thus, its renovations have been geared toward a ‘local’ Vancouver experience, with craft beers on tap and fine dining featuring regional cuisine. Thinking more outside the box, they’re considering art installations by local artists and showing movies inside terminals.

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As part of the renovations, the airport created a 300-square-meter ‘living forest,’ inside the terminal — a space that is technically open air and outside, but only accessible from within the terminal.

“One of the most remarkable things about it is the smell, it smells like a rainforest,” said Vrooman.

She said her airport is most concerned about the number of flights, and not the lack of retail spending. As flights increase, revenue will too.

The airport reports three categories of revenue. First, there’s non-aeronatucial sales derived from shopping and dining, but also parking and leasing fees. Second, there’s aeronautical revenue, which includes landing and terminal fees paid by the airlines. Lastly, there are airport improvement fees, which fund capital projects such as renovations.

The non-aeronautical revenues are the largest for Vancouver airport, representing 44 per cent of all revenue in 2018 and 2019. Oddly enough, in 2020, they represented 54 per cent — a larger, not smaller number.

But that share of revenues may be anomalous: one day this February, the airport saw 4,340 passengers compared to 50,000 on the same day one year earlier — a 91 per cent decline.

To lower its expenses, the airport consolidated all flights into a single terminal, and made its food and beverage offerings more efficient, Vrooman said.

“It’s an exciting time, I would not have wished we would have got to this time,” she said. “But it is an interesting time to be operating an airport, when we think about the opportunity to really use technology to improve.”

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Indeed, using technology, particularly to improve the overall efficiency of the airport has been a connecting theme of the pandemic.

At Winnipeg’s airport, for example, chief executive Barry Rempel said they’ve installed apps so that people can call elevators with their phones, rather than having to touch a button; and they’ve seen the same trend among passengers towards touchless border passes and baggage kiosks, all of which are designed to move people through the security screening process more efficiently.

But unlike Vancouver, which under normal conditions sees flurries of international flights, particularly from Asia, the Winnipeg airport’s core function is domestic travel within Canada.

Rempel said that traffic in and out of the terminal has declined to just a few hundred people per day, and like other airports, there is no commercial reason to stay open.

While passenger traffic is down, cargo traffic is up. Rempel partially attributed this to people ordering more goods online. To capture some of this revenue, his airport raised its improvement fee by 42 per cent; and to cut expenses, it laid off 30 per cent of the people who work there, including both employees and contractors.

“I would put the pandemic in terms of its impact in a category all its own,” said Rempel. “We had a waterfall event, which is the river is going along and then all of a sudden, it went a hundred feet down.”

Rempel said he’s concerned that Canadian airports will emerge “less competitive” after the pandemic, given that the U.S. government has already handed out billions of dollars to airports through several legislative packages.

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He looks warily at the airport in Grand Forks, North Dakota, — about two hours away from Winnipeg — which could charge lower fees and start sucking up some traffic that would have flowed to Winnipeg.

If anything, investors see a bright future for Canadian airports. In January, the Winnipeg airport raised $100 million through a bond offering that was oversubscribed. It’s been the same for other airports in Canada and, in December, Vancouver’s YVR raised $600 million through a debenture offering.

Still Rempel said his airport now has $730 million in debt.

“Do I believe we can handle it? Yes,” said Rempel. “Am I comfortable that we can handle that? Not really. Canadian airports are not going to be globally competitive.”

There is of course another line of thought that airports haven’t been taking advantage of their assets, and diversified revenues appropriately.

“Where the wheels came off as it relates to the pandemic was all their revenues were passenger related,” said Rian Burger, an aviation architect at engineering firm Stantec Inc. in Toronto.

Every airport is a magnet, and there are clusters of businesses and industry that grow nearby because they want or need to be in close proximity to the airport, he said. There may be ways to increase their revenue streams by looking more closely at these opportunities.

As technology advances that makes the screening and security process more seamless, he predicted that airports would begin to feel more like public spaces, and less walled off.

Burger said that whatever else happens, once air travel resumes, airports will always have one thing going for them — huge amounts of foot traffic.

“To me airports just need to wake up to the fact that they are these huge magnets that can attract millions and millions of people,” he said. “If you were a developer, how could you not see opportunity in that? I think we’re going to see airports becoming far more entrepreneurial.”

Financial Post

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