As we leave the operational challenges of surging passenger numbers behind in 2022, what does 2023 hold for the aviation sector? John Arbuckle, Partner and Head of the Gerald Eve Transport Infrastructure Team, takes a look.
Global passenger numbers are predicted to recover strongly to 3.1 billion in 2022 (IATA, predicted), and full recovery to 2019 level of 3.8 billion passengers by 2024 (IATA) or 2025 in Europe (ACI), created operational challenges for airports and supply chains to scale up. This is likely to be less of a challenge in 2023 as the rate of passenger growth slows following the initial surge and in the face of economic headwinds. Air cargo has been the bright spot during the pandemic and performed strongly again in 2022, with a predicted global total volume of just under 70 million tonnes for 2022 (Statista), but the economic headwinds of a global recession, the war in Ukraine, and the slow re-opening of Chinese borders has created more uncertainty. So, what do Gerald Eve’s Transport team see as some of the key topics for 2023?
Decarbonisation will become ever more important now the 2050 net zero goal has been endorsed by ICAO. The UK Government has also set a target of 2050 net zero goal for aviation with 2040 for domestic aviation and airports. Governments, public opinion, and investors rightly demand progress against these decarbonisation goals and 2023 will be a vital year for demonstrating this. The practical implications for airports of delivering decarbonisation will take centre stage with renewable on-site generation of electricity and battery storage becoming more viable sources of long-term power supply in the high energy price environment. The development of comprehensive plans, funding and delivery of projects will become the reality in 2023. I will discuss funding challenges later.
The ambition shown in the UK to develop hydrogen generation and distribution clusters represents an opportunity for airports to secure supply infrastructure for the transmission of hydrogen for use at the airport or for excess supply to be redistributed. Manchester Airport signed a memorandum of understanding with HyNet Progressive Energy and Cadent in 2022, securing hydrogen distribution infrastructure that will feature in 2023 as the aviation industry looks to demonstrate progress towards net zero fuel.
Apart from the significant task of decarbonising aviation fuel, there is a more immediate challenge for airports and property owners. The Minimum Energy Efficiency Standards (MEES) will make it illegal to lease commercial property with an Energy Performance Certificate (EPC) rating of E or less from April 2023, and EPC B by the end of the decade. Will aviation real estate and operational assets qualify for exemptions? What are the opportunities to improve the EPC rating cost-effectively? Fortunately, support is available to model EPC ratings and undertake gap analysis to understand investment requirements. This will be a priority in the early part of 2023, to avoid financial and reputational damage.
The amazing progress by OEMs in developing the first generation of eVTOL and UAM aircraft will continue apace, driving towards certification in 2024-26 depending on geography. In 2023 the race will be on for Vertiport development to scale up to meet the launch of passenger services.
The commercial and development implications will play out in 2023 with the AAM industry needing to engage with real estate owners and airports to secure sites, and the necessary rights to develop innovative commercial models to support this fledgling but rapidly expanding industry. A deep understanding of the aviation industry, AAM industry and the property market will be essential in securing the best sites and commercial terms.
The economic shock of the pandemic still affects airports, with depleted funding and fragile balance sheets sitting uncomfortably alongside the requirement to invest in the core operational business. As an example, airports are currently investing to meet the UK Governments new 2024 scanner standard, so how can expensive mandatory projects be funded? Following the pandemic years, how can airports create more revenue and reduce costs in 2023?
Travel retail, widely seen as the go to for revenue generation, will be affected by the economic headwinds in 2023. So, what alternative revenue and value creation opportunities are there? Most airports sit on valuable real estate assets that can generate increased income, or release value for reinvestment in the core business. There are many ways of doing this from simply revaluing assets to full divestment, depending on the risk profile of the airport, opportunities include value release through sale and lease back, income strip or property development through self-development or creating joint ventures to unlock property development potential.
With pressure on revenue, cost will come under increasing focus in 2023. Unfortunately, the 2023 business rates revaluation is also taking place. Most airports will have negotiated their core airport rating assessment by now, but there is more that can be done. Important questions that the airports should be asking is if the rateable values for separate assessments are correct. What is the right amount of business rates the airport should be paying and what needs to be done in 2023 to mitigate the risk of a covid-free revaluation in 2026.
The Gerald Eve Transport Infrastructure Team are industry experts with airport management experience who can help airport operators and investors to navigate all the 2023 challenges. If you are interested in further insight into the solutions to these and other aviation sector challenges, we have a team of over 30 experts who can help.