Planning for restart:Economic impact and projected recovery

3 June 2020

Patrick Lucas — Director, Economics

ACI World

Montreal, Canada

Roadmap

• Pre COVID-19 industry backdrop

• COVID-19 impact on industry/airports

• Consumer sentiment and passenger perceptions

• Predicted shape of the recovery

• Risk and resilience

The way we were —Airport non-aeronautical revenues — Size matters

Aero56% Non-aero

39%

Non-operate5%

13.8%

21.0%

31.1%

42.8%

51.8%

10thpercentile

1st quartile 2nd quartile(median)

3rd quartile 90thpercentile

Non-aero as a % of total revenues (2018)

Small airports

<1 million paxWorld’s largest hubs

>40 million pax

Source: ACI

Non-aero: 4.8% 10-year CAGR

Aero: 5.7% 10-year CAGR

70% of retail concession revenues come from duty free

Retail concessions,

28.9%

Real estate and rental

income, 14.9%Car parking,

20.4%

Food and beverage,

5.7%

Rental car concessions,

5.9%

Advertising, 2.3%

Other non-aeronautical

revenue, 21.9%

The way we were —

$3.33

$6.56

$5.65

$3.82

$7.59

$3.00

$5.38

Africa Asia-Pacific Europe LAC Middle East NorthAmerica

Global

$1.71

$7.15

$2.53 $2.57

$6.17

$1.14

$4.06

Africa Asia-Pacific Europe LAC Middle East NorthAmerica

Global

Duty free revenue yield per intl pax (USD, 2018)

Retail concession revenue per sq. meter of retail

space (‘000s USD, 2018)

Source: ACI

% of non-aero revenues

(2018)

Where are we now Q2 2020?

Supply side —

Bans all visitors

not from Schengen

or UK

Bans on 90

countries and

certain Chinese

provinces

Bans all foreign

travelers

Bans all foreign

travelers

Bans foreign travelers some

partial restrictions

26 European countries,

Mainland China, Iran

Bans foreign travelers

some partial restrictions

Bans foreign travelers

some partial restrictions

Bans foreign travelers

some partial restrictions

In May, 100% of global

destinations have COVID-19

travel restrictionSource: IATA

Recession has begun…

Demand side —

Source: US Department of Labor

Leading indicator:

Stock market —DJIA

Leading indicator:

Jobless claims

6.87 million jobless

claims in a week — more

than 10x the previous

record set in 1982

-6.0%

-3.8%-1.0%

2.8%

Global Financial Crisis 2020 Great Lockdown 2020

Advanced economies

Emerging markets and developing economies

Lagging indicator:

GDP —projected output growth

Source: IMF

Global Financial

Crisis 2008Great Lockdown 2020

What is the impact on the airport sector?

Airport passenger traffic Pre-2020 and 2020 Q1(compared to forecasted baseline)

5.66.2

6.8

7.7

8.8 9.1

2010 2012 2014 2016 2018 2019

Source: ACI

-4%

-20%

-59%

Jan-20 Feb-20 Mar-20

The Good The Bad

Passenger traffic in 202050.4% decline projected as compared to the projected baseline

-28.4%

-88.4%

-50.8%

-31.1%

Q1 Q2 Q3 Q4

pax

yae

r-o

ver-

year

% c

han

ge

0

500

1,000

1,500

2,000

2,500

3,000

Q1 Q2 Q3 Q4

Pax

(m

illio

ns)

-2,083

Baseline

Estimated under

COVID-19

The Ugly

Source: ACI

Estimated airport losses for 2020

Total airport

industry losses

97.4 billion USD

57% decline in

industry revenues

Revenue losses (billions USD) compared to projected baseline

Source: ACI World, OAG

-51%

-63%

-59%

-51%-53%

-47%

• Huge proportion of non-

aeronautical revenues is

directly passenger-

related (>70%)

• Chinese traveler higher

spending propensity

especially in the travel

retail space (unrealized

expenditures)

What does 97.4 billion USD in losses look like?

Typical hub airport with over 40 million pax generates 1.3 billion USD per annum

Revenues of the 75 busiest hubs in the world completely wiped out

Source: ACI World

Projected airport revenue shortfall (billion USD)

Airport

cutbacks on

personnel

and other

operating

expenses

Source: ACI

Relief measures on taxes and fixed costs:• Corporate and payroll taxes

• Loans and cash injections to support debt

• Waivers on concession fee payment to govt or deferrals

**Projected airport industry revenues in 2020

*Estimated airport industry costs in 2018 (Airport Economics Survey 2019)

Aero:

Protecting baseline airport

charges and other revenue

sources

Non-aero:

• Increase duty free

allowances (multiple bags)

• Increased use of e-

commerce platforms for

seamless pick-up

• Off-site duty free

-56.7% decline in 2020>170 Billion USD

Increased

sanitization,

cleaning

costs and

technologies

-97.4 Billion USD

*

Protecting jobs – airports are engines of growth and generate employment

Relief measures to support livelihoods

• Employment from airport operators and on airport site employment -retail,

car rental, govt customs, etc.” accounts for over 6.1 million jobs globally.

• The entire aviation sector makes up 10.2 million jobs. Therefore, “on the

ground at airports”, we are talking about 60% of employment in the

aviation sector is somehow related to airports

• Aviation’s direct, indirect, induced and tourism catalytic employment – 66

million – comparable to the populations of France or the United Kingdom.

• Aviation has a role to play in 15 of the 17 United Nations’ Sustainable

Development Goals. Airports, more specifically, have been major

supporters of Goals 8, 9 and 10 concerning work and economic growth,

industry, innovation and infrastructure, and reduced inequalities

Source: ACI World, ATAG

.

Consumer confidence and propensity to fly?

Chinese consumers’ optimismConfidence in own country’s economic recovery after COVID-19 (% of respondents)

1% 6% 5% 2% 3% 4% 4%

56% 46% 48%45% 41% 44% 39%

43% 48% 47%53% 56% 52% 57%

Feb 21-24 Mar 20-23 Mar 25-30 Apr 1-6 Apr 8-13 Apr 15-19 May 5-11

Optimistic: The economy

will rebound within 2-3

months and grow just as

stronger than before

COVID-19

Unsure: The economy will

be impacted for 6-12

months or longer and will

stagnate or show slow

growth thereafter

Pessimistic: COVID-19

will have lasting impact on

the economy and show

regression/fall into lengthy

recession

Source: adapted from McKinsey & Company

n=1,257

Chinese recovery*Domestic Scheduled Seats

2019

2020

* Mainland China, May 25th, planned actuals (Jan – May) and planned schedule (June – July)

Planned schedules are subject to change based on the actual demand

Source: OAG

0

2

4

6

8

10

12

14

16

(mill

ions)

Seats (2020) Seats (2019)

Optimism versus spend propensity (near term-expectations over next 2 weeks)

0

10

20

30

40

50

60

70

-45 -35 -25 -15 -5 5 15 25 35

Optimism about country’s economic recovery after COVID-19

% of respondents

Less

optimistic

More

optimistic

More households planning to increase spendingMore households planning to decrease spending

Source: adapted from McKinsey & Company, COVID-19 Consumer Pulse Surveys Mar. 15 – May 3 2020

Passenger confidence to post-COVID-19 recovery in air travel

Source: IATA

Majority of

passenger will

likely wait slightly

longer than before

to return to travel

after the

containment

orders are lifted.

Survey conducted

in 11 countries.22%

45%

23%

6%

30%

13%

47%

28%

8%

40%

0%

10%

20%

30%

40%

50%

Not wait at all Wait a month or two Wait six months or so Wait a year or so Not travel forforseeable future

February Survey April Survey

Returning to travel after containment announcement

Customer experiencePassenger satisfaction scores in Q1 2020

4.634.60

Africa Asia-Pacific Europe MiddleEast

NorthAmerica

LAC

Q1 2019 Q1 2020

4.61

4.64

4.62 4.62

Feeling of being safeand secure

Cleanliness of airportterminal

Q1 2019 Q1 2020

• Comparing with Q1 2019, only Asia-Pacific had a slight decrease in passenger satisfaction in Q1 2020

• Slight decrease among major hubs as well as a slight decrease on perceived cleanliness of airport terminal

Out of 5

Out of 5

Source: ACI, Airport Service Quality (ASQ)

What are we expecting in terms of pax recovery path?

Economic recoveries 101recession and recovery

• V shaped➢ Sharp downturn and quick recovery

• U shaped➢ Downturn and prolonged recession

• L shaped➢ Sharp downturn with lengthy recovery period (years)

Passenger traffic recoveries9/11 and SARS global impact and recovery

90

95

100

105

110

115

120

125Ja

n-0

1

Mar

-01

May

-01

Jul-

01

Sep

-01

No

v-0

1

Jan

-02

Mar

-02

May

-02

Jul-

02

Sep

-02

No

v-0

2

Jan

-03

Mar

-03

May

-03

Jul-

03

Sep

-03

No

v-0

3

Jan

-04

Mar

-04

May

-04

Jul-

04

Sep

-04

No

v-0

4Ind

ex o

f p

asse

nge

r tr

affi

c (J

anu

ary

20

00

= 1

00

)Se

aso

nal

ly a

dju

ste

d

9/11

26 months (>2 years) to pre-

9/11 levels

• Structural shift with L-

shaped properties

SARS:

6 months to pre-SARS levels

• Classical V-shaped

recovery

9/11

-15%

SARS

-10%

Source: ACI World

130

132

134

136

138

140

142

144

146

148

150

Jan

-07

Mar

-07

May

-07

Jul-

07

Sep

-07

No

v-0

7

Jan

-08

Mar

-08

May

-08

Jul-

08

Sep

-08

No

v-0

8

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Ind

ex o

f p

asse

nge

r tr

affi

c (J

anu

ary

20

00

= 1

00

)Se

aso

nal

ly a

dju

ste

dPassenger traffic recoveries cntd

Great Recession global impact and recovery

Eyjafjallajokull

Eruption

(ash cloud)

Great Recession

-7%

Great

Recession:

22 months to

pre-recession

levels (<2 years)

• U-Shaped

recovery

Source: ACI World

Quasi-

U Shaped (near term)

L Shaped (long term)

Potential scenario…for pax under COVID-19 Outbreak (2020 and beyond)

Q1 and Q2

2020Q3 and Q4

2020

2021

& beyond

2019

International

travel bans

relaxed

Expectation:

3 year recovery or

more to get back to

2019 levels

Reasons for quasi U-shaped L-shaped recovery

• Time to regain consumer confidence (safe to fly):

➢ The diagnostic criteria for COVID-19 Testing (Have you traveled by air?);

➢ Air travel has been unfortunately associated with the spread of COVID-19;

➢ Combatting the “economics of fear”

• Behavioral changes:

➢ Potential declining trend in business travel exacerbated;

➢ Growth of virtual meetings;

• We are presently in a recession

➢ Loss of income and rapid rise in unemployment

However, we will likely see a substitution effect away from

international travel to domestic travel in the recovery phase

➢ This was the case with 9/11 and SARS in the recovery phase

From short term to long term recovery

0

2

4

6

8

10

12

14

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Bill

ion

s

2019 pax traffic level

Business-as-usual pax forecast

Historical pax traffic

Quantitative forecast + delphi method

Passenger traffic beyond 2020

50.4%

70.9%

93.6%

3.7% CAGR

Source: ACI World

That was then. This is now.

Passenger traffic over the long term

0

5

10

15

20

25

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

20

21

20

23

20

25

20

27

20

29

20

31

20

33

20

35

20

37

20

39

Bill

ion

s

2019 pax traffic level

Business-as-usual pax forecast

Historical pax traffic

Quantitative forecast + delphi method

Great Lockdown:

• Pax in 2021 will amount to about ~70%

of the 2019 volumes (dashed line)

• Pax expected to recover to 2019 levels

in 2023 (red line)

• It will take up to 10 years to get back to

trend (green line)

9/11

GFC

SARS

Source: ACI World

From short term risks to long term

fundamentals

Risks to swift a global recovery

The Chinese Case

• “Re-ignition” or “Re-importation” of the virus

• Asynchronous recoveries:

Exporter

recovering

in Q2

Importers

US Projected GDP Growth

Source: Goldman Sachs

-5%

-39%

19%

Q1 Q2 Q3

Economic recoveries 101The double-dip and double jeopardy

• W shaped recovery

➢Risk of volatile recovery as economies open up

➢Pandemic “re-ignition” or 2nd wave of outbreak with prolonged recession

Cruel summer?

31%

Q1 Q2 Q3 Q4

Asia-Pacific Europe World

Higher exposure to seasonality in Europe

% of annual traffic

Lower exposure to

seasonality in

Asia-Pacific

Risks to seasonal markets for pax traffic (Q3)

Resilience –Long term fundamentals still apply

Forecasted evolution of global passenger market shares (%)

40% of world’s

population presently

resides in these

countries:

China

India

Indonesia

Viet Nam

India’s working age population is expected to peak in 2040

Summary –• Huge losses in traffic and revenues

➢ Especially pronounced in Q1 and Q2

➢ Uptick later in summer but below baseline

• Consumer confidence

➢ Heterogeneous markets – Chinese market rebounding but some consumers still not ready for the “re-opening” in other markets (spending reductions)

• Recovery path faces a challenge

➢ Embedded U-shaped within an L-shaped recovery – >3 years to get to pre-COVID levels

➢ COVID-19 and a faltered economy (several compounding factors)

➢ “Economics of fear” – Regaining consumer confidence

➢ Risk of a double-dip

• Policy measures for all stakeholders

➢ No measure or relief package should benefit one actor at the expense of another one

• Resilience – Long term fundamentals still apply (population, income and

market dynamics)

I truly hope we

are wrong…

Thank you

Airports are points of connectivity

Aviation continues to

be the hallmark that

connects people,

places, culture and

commerce