Coronavirus Downdraft Has Airports Scaling Back Renovation Plans

Date: Tuesday, June 9, 2020
Source: The Wall Street Journal

San Francisco, Orlando and Heathrow delay or reduce construction projects; ‘it simply wasn’t required that we do it right now’

As the coronavirus pandemic stifles air travel, major airports around the world are rethinking plans to spend billions of dollars on new terminals, runways and hotels that could sit empty if demand doesn’t return.

San Francisco International Airport is postponing by at least six months a $1 billion terminal renovation formerly slated to start in June. In Florida, Orlando’s airport authority scaled back an expansion to 15 gates from 19. In London, executives at Heathrow Airport say building a third runway isn’t a priority at the moment, and in New Zealand, Auckland Airport is suspending plans for a new terminal and second runway.

Belt-tightening is winning approval from some airlines, which fear such projects could translate into higher fees.

“We don’t need a marble floor,” said Holger Blankenstein, executive vice president of Volaris, a low-cost carrier in Mexico. Keeping airport fees in check, he said, makes it easier for airlines to offer lower fares.

Still, many airports say that it would be expensive to stop a project already under way and that air travel could rebound by the time some expansions are complete. In Australia, work is continuing on a second airport for Sydney, scheduled to open in 2026. Hong Kong International Airport is moving ahead with a new runway. And in Germany, Frankfurt Airport is proceeding with a new terminal.

“We are convinced that we will again see long-term growth in air traffic,” Stefan Schulte, executive board chairman of Fraport AG , the publicly traded company that runs the Frankfurt airport, told investors at its recent shareholder meeting. “A new terminal is not built on an outlook of just two or three years, but rather for the decades to come.”

A new airport in Germany, Berlin Brandenburg Airport, is scheduled to open this fall—after a delay of nine years. In Chicago, officials say work on an $8.5 billion overhaul of O’Hare International Airport is continuing.

As for other big projects, Dubai Airports, which runs Dubai International Airport—the busiest for international traffic—declined to comment on whether the pandemic is affecting plans for a second airport, once budgeted at $32 billion.

Uncertainty over air-travel demand complicates the calculation. Some analysts don’t see it back at pre-coronavirus levels until 2023, but that depends on many variables, such as vaccine development, government travel restrictions and whether people feel comfortable sealed up with a lot of strangers.

Some airports are under pressure to put off big capital expenditures to preserve cash for salaries, critical maintenance and subsidies for struggling retail tenants. Passenger traffic this year is forecast to be 50% lower than was expected before the coronavirus, and airport revenue 56% lower, according to the trade association Airports Council International.

“We think airports will generally wait to assess the stability of the travel market before ramping up capex again,” said Parvathy Iyer, an analyst at S&P Global Ratings. “We would be concerned if airports had not already moved to cut or push out capex in this difficult environment.”

Airports’ revenue sources include per-passenger fees paid by airlines, parking charges and rent from retailers. Fewer travelers means less revenue—and in recent weeks, some of the world’s biggest airports have said passenger traffic is down more than 90%.

In San Francisco, airport officials were close to bringing in construction crews to start renovating part of Terminal 3 to add more dining and retail space. With the project postponed, the city-run airport plans to use the savings to help offset a revenue shortfall, spokesman Doug Yakel said.

“There are sections of Terminal 3 right now that aren’t even in use because of the reduced demand,” he said. “It simply wasn’t required that we do it right now.”

Exactly how much work has been postponed globally couldn’t be learned. Projects costing about $148 billion were expected to be completed at airports this year, according to a December report from CAPA-Centre for Aviation, an analysis firm. It found the level of spending wasn’t increasing substantially, despite concerns from some industry groups that some airports were too congested.

“Airport expansion projects take a long time to design and execute, and planning needs to be done well in advance,” said Stefano Baronci, director general of the Asia-Pacific branch of Airports Council International. “Many countries in this region continue to be in catch-up mode.”

Not every market is the same. In China, where there is a big domestic market for air travel, the government is still pumping money into new projects, said Gary Gibb, chief strategy officer at Landrum & Brown, a global aviation planning firm.

“Our office there has been incredibly busy,” Mr. Gibb said. “It’s almost like an alternative universe to the rest of the world in aviation.”

 

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