Over the past 15 years, €666m has gone from taxpayers’ pockets for the construction and expansion of various airports across the EU – many of which still lie empty and unused

A disappointing truth has hit taxpayers in the form of a 2014 report by the European Court of Auditors (ECA), which examined the financial sustainability of 20 EU-funded airports. Of the €666m ($756m) that has gone towards the construction and refurbishment of 20 airports in Estonia, Greece, Spain, Italy and Poland, auditors found that at least seven of those aren’t yet profitable, and around 28 percent – €129m ($146.4m) – of the capital went towards improvements that “were not needed at all.” And it’s not over yet – those that have failed to turn a profit thus far will continue struggling to remain operational unless they receive further injections of public money.

Essentially, the EU has invested millions of euros in failing enterprises; some of which have never seen their daily flights reach double digits, even at the height of summer. Not only are passenger numbers and revenues at astonishingly low levels, but perhaps most puzzling of all is just how far out the proposed forecasts are. Figures for all three of Poland’s refurbished airports – Lodz, Lublin and Rzeszow – show that three million passengers were predicted to pass through their doors every year, yet in 2013, that figure was just over 1.1 million. Forecasts are very rarely entirely accurate, granted, but two million is a rather significant overshot, all external factors considering.

This of course begs several questions surrounding why the funding was provided in the first place when so few advanced plans had been presented, and how such incredibly faulty forecasts could have been produced. Chris Chalk, Aviation Practice Leader at Mott MacDonald and Chairman of the British Aviation Group, pointed out a central issue that the report sheds very little light on: the investment start dates on the various airports ranged from 2001 through to 2012, yet in the report, barely any regard is given to the global financial crisis of 2008-09.

Disregarding the facts
“What I have an issue with is that the report hasn’t reflected on the recession, it basically says ‘these people can’t make a decent forecast’, but to be truthful, I don’t think anyone could have forecast the length and depth of the recession”, said Chalk. “The actual ability to develop traffic for most of these airports was out of their control because of the effects of that recession, and that simply doesn’t come through in the report.” When the financial crisis hit, it was around the time that many of these member states expected air travel to kick off, yet traffic across Europe fell sharply as people looked to cut costs, with many opting for domestic travel instead.

Not only were less people flying during that period, but as 2008 alone saw more than 30 airlines go bust, the remaining survivors began looking to streamline their destination inventories in an attempt to narrow profit margins. Budget carrier Ryanair slashed 44 flights to nine European destinations per week in 2009, affecting around 600,000 passengers over the year. Carriers naturally chose to continue flying to more financially viable ‘hub’ airports – which together capture 78 percent of total European air traffic – as opposed to regional airports in remote areas. Given that many of the airports mentioned in the report fall into the latter category, having been built for the socio-economic benefit of connecting more isolated, outlying areas with centres of economic activity, it’s understandable that many would be adversely affected by this industry wide move.

Of course, it’s incredibly difficult for auditors to take into account every external factor potentially impacting the success of a business or enterprise. However the report seems to look at the airports in total isolation: separate from the state of both the global economy, and that of where it’s located. Greece is a victim of this – its economy has been deeply troubled for years now as it finds itself in the depths of a dark recession that almost pushed the country out of the euro. Considering this, to say that the airport’s failure to attract passengers lies solely with the authorities behind it is an unfair judgment.

The public safety net
However, that’s not to say that mistakes weren’t made. Historically, state-owned and/or funded facilities have never been as financially sustainable or successful as private enterprises. This is for a variety of reasons, but mainly because the decision-makers aren’t spending their own money: there’s less at stake by default, so less time and effort goes into everyday operations.

Private-for-profit business models often enjoy superior consumer-orientated management and marketing strategies, as well as more sound investment decisions, all of which originates from their corporate-style governance. Because all operations are centred on returning a profit, far closer attention is paid to cost-cutting measures, and procurement procedures are both more efficient and cost-effective. This was proven when the move to privatise France’s airports was first made back in 2005, and as a result they have become far more successful, undergoing a rapid transformation into profitable enterprises that boast proven sustainable business models.

Before considering building or expanding upon a major enterprise like an airport, Chalk says a 15-20 year plan must be produced, outlining how much traffic will grow in that time, how that growth will be accommodated, and how it’s going to be funded. “Just building something like that doesn’t necessarily mean that the business will come”, he said. “There’s countless examples around the world where these things aren’t properly thought-out, and they simply end up being a long-term drain on local economies.”

Heated competition
A central issue highlighted by the ECA within the report is that many of these airports were built in unnecessarily close proximity to each other. “For 13 out of 18 audited airports, significant overlaps exist with the catchment areas of neighbouring airports, and in many cases there are overlaps with several catchment areas”, reads an excerpt. It goes on to explain that several of these overlapping airports went on to invest in similar infrastructure, such as terminals and runways, without considering the improvements made to neighbouring airports – “which would have been necessary for rational planning and optimising the use of EU-funds.”

So a lack of planning is evident, on top of a lack of cohesion between the member states in question. While some did carry out catchment area analysis, no common catchment area had been established so the results were simply unreliable and sloppy. For example, the plans for Catania and Comiso airports in Italy, both of which received significant EU funds, double-counted a huge chunk of their catchment areas’ population.

In Spain, the proximity issue came down to competitiveness between electoral communities, whereby airports began springing up as a way of proving each community’s worth over its neighbours, and saw each airport “cannibalising each other’s traffic”, as Chalk puts it. He suggests grouping the airports as a more financially sustainable solution; another strategy that was proven to significantly reduce overheads when put into practice in France. However with issues of civic pride rife, the grouping of these enterprises would be a big political step. This was also an issue in Poland, where decisions on the location and size of new airports were left to local governments. Andrzej Korzeniowski, who was responsible for drafting the civil aviation plan for Poland, told Reuters in December 2014: “That was the biggest mistake, for which we’re now paying the price. The local governments decided, ‘I’m a prince in my domain, the government doesn’t tell me what I’m supposed to do, we do what we want.’”

It’s not just other airports they have to compete with. AVE, Spain’s high-speed railway network, has been expanded upon drastically in recent years, with connections to France having launched in December 2013. And although air travel is often the cheapest mode of transport within Europe, there are countless reasons why customers would opt for alternatives. This was seen most notably when the HSR service Eurostar began connecting London and Paris via the Channel Tunnel in 1994, snatching up a mammoth 66 percent of the London-Paris rail/air market by the early 2000s.

While the report doesn’t at any point hint at suspected corruption or foul play, it reveals a huge discrepancy in planning which is in itself immensely problematic. The auditors advise member states to ensure they have “coherent regional, national and supranational plans for airport development” from this point onwards, but in so many of these cases, the damage has been done. Authorities urgently need to reassess the financial sustainability of the projects already undertaken, and seriously consider overhauling operations – perhaps by grouping neighbouring airports together, to start with – to ensure they begin turning profits soon. With the eurozone economy’s future uncertain, the local communities affected simply cannot continue to prop up what are essentially multi-million euro failures.

 

worldfinance.com