INTEGRATED REPORT 2019

GROW FOOTPRINT

Airports Company South Africa sets out to grow core business activities and revenue by responding to changes and opportunities in the international air transport market and ensuring that our business is sustainable in the long term. Our global reputation as a world-class airport operator allows us to further generate non-core revenue through offering airport management, training and advisory services to other airports, as well as investing in international airport concessions to impart our skills and knowledge, thereby strengthening our brand.

Focus areas

  • Drive traffic through our airports
  • Advance our offering of training and consultancy
  • Develop new international routes from South Africa’s three international airports
  • Bolster the Gauteng Route Development Committee structure to drive international traffic through O.R. Tambo International Airport
  • Conduct research that will underpin further revenue generation

Topics raised by stakeholders

  • Performance of concession investments
  • Route replacement on the back of struggles of the national carrier
  • Appetite for taking over airport management contracts
  • Competing countries

Overview

We grow our footprint to increase our capacity and global reach, strengthen our brand and enhance our value creation process. The goal is to grow our aeronautical footprint, while increasing airport advisory services to airports in South Africa and the continent. We continue to build relationships in new markets in Africa, based on our experience and world-class reputation in airport management. We invest considerable energy into translating these relationships into tangible business opportunities that will generate additional non-core revenue.

Non-core revenue in FY2018/19 of R58.6 million (FY2017/18: R59.6 million) exceeded the target of R33 million.

Our KPI target of achieving an O.R. Tambo International Airport Connectivity Index score of 133 (FY2017/18: 135) was exceeded with a FY2018/19 actual figure of 139. This index measures the connectivity to each gateway linked with O.R. Tambo International Airport, and considers the number of one-stop connections within six hours of the final destination. Given the challenges of attrition in the air travel industry during the year in review, we consider this index rating an achievement.

In FY2018/19, a thorough technical analysis on origin and destination markets to pursue has been instrumental in the formulation of approaches to airlines for Cape Town Air Access and Durban Direct.

This research also gives us a better understanding of the passengers passing through our airports, their dwell time, what sort of goods they buy and an appreciation of where these passengers are coming from. All marketing is guided by this research, and it contributes to spatial development plans. Airports Company South Africa is now able to be more targeted in its marketing campaigns, as well as more adept at attaining the correct retail mix within airports to suit a changing international passenger profile.

Domestically, the Group has won several contracts for advisory and consultancy services, as well as providing advisory assistance to other airports where there may not have been a business case to take over management of those airports, but where their continued operation would contribute to the growth of sustainable domestic routes for South Africans to fly more broadly by interacting with our network.

On the international side, while there were no compelling concession investments on offer during FY2018/19, we have secured operational and airport transfer contracts. We continue to believe the African market is ripe for technical advisory services which will bolster our non-core revenue in years to come and are working hard at formalising relationships that may offer opportunities in future.

  Material matter: New growth opportunities

Description

Revenue diversification is an important element of our growth plan. By growing our non-core revenue, we reduce our reliance on traditional aeronautical revenue, helping to mitigate concentration risk. Our reputation as an airport business drives non-core growth, as it influences our ability to provide competitive advisory services to other airports.

Strategic response

We actively seek business development opportunities in South Africa, Africa and internationally to provide alternative sources of revenue and improve our long-term sustainability. We focus on business intelligence, technical advisory and consultancy service capability, process knowledge and other expertise to secure contracts that enable the growth of our footprint.

Impact of the new growth opportunities material matter on our business

.

Strategic pillar

Grow footprint

.
Our response to risks and opportunities in FY2018/19

  • Increased engagement with South African and African airports.
  • Increased provision of advisory services domestically and internationally.
  • Engaging with all stakeholders to develop integrated airport master plans following the aerotropolis concept.

Impact of our response on stakeholders in FY2018/19 and beyond

  • By diversifying our revenue streams we reduce our dependence on aeronautical revenue and strengthen our long-term sustainability.
  • Regional airport growth and expansion stimulates economic opportunities around them and uplifts local communities.
  • By ensuring that non-Airports Company South Africa airports in the country are sustainable, we ensure that South Africans benefit from a broader and integrated regional air travel network.

Strategic pillar

.
Our desired outcome

  • Achieve return on equity target.
  • Generate non-core revenue.
  • Grow non-aeronautical revenue.
  • Increased participation in non-Airports Company South Africa airports in South Africa.
  • Create job opportunities.
  • Increase O.R. Tambo International Airport connectivity.

Trade-offs to achieve our desired outcome

  • FY2018/19 contained a number of challenges in achieving our desired non-aeronautical revenue targets, most prominently in the form of litigation.
  • We have restructured our contracting processes to pave the way for future supplier transformation.

Performance

Business development

Our most significant challenge through FY2018/19 has been attrition of regional operators, from continental Africa and domestically, due to the challenging economic environment. Rationalisation of route networks and the removal of capacity took its toll on revenue, though there has been a positive response from replacement carriers in terms of aggregate growth as they balance supply and demand.

We believe the overall outlook for traffic development is positive, and we continue to engage with carriers to develop new routes, particularly with a view to becoming a hub linking Asia to South America. Currently these linkages are under-served and offer an opportunity for South African international airports to play a role. South Africa remains an attractive destination for international carriers.

Continued route development within the SADC region will make South Africa’s international airports more attractive as hubs, and we benefit from most African countries having fully liberalised their commercial air routes.

Stimulating regional growth

Our engagement with airports not owned by our Group in South Africa is driven by a belief that if more airports are technically compliant and sustainable, they will be able to stimulate initiation of new services between themselves and our airports, to increase safe air travel access to under-served parts of the country. We continuously engage with these airports to assist them with traffic development. We have a MOU pending with Polokwane, and relationships have been formed with provincial authorities regarding Mafikeng, Oribi, Mthatha, Plettenberg Bay, Mossel Bay, Oudtshoorn and several airports in KwaZulu-Natal, where most of their needs are at infrastructure compliance level. We balance our commercial man-date with developmental reward, and act as an implementing agency and funding coordinator when there is no clear business case for the delivery of infrastructure from our balance sheet.

In the southwestern Cape, Mossel Bay and Plettenberg Bay airports are looking at handing airport management contracts to Airports Company South Africa, and technical assessments are under way.

New route development

Airports Company South Africa forms an integral part of structures around King Shaka International Airport, Cape Town International Airport and O.R. Tambo International Airport to drive traffic, anchored by the provincial government. In the case of O.R. Tambo International Airport’s air access structure, one critical stakeholder remains to come on board to anchor and provide funding. This is intended to take place before the end of FY2019/20, allowing us to drive growth in airport linkages to O.R. Tambo International Airport.

Gauteng Route Development

The route development structure was established in February 2018, with a mandate to embed O.R. Tambo International Airport as a key hub in the Southern Hemisphere through the development and enhancement of new and existing route opportunities.

Airports Company South Africa, in collaboration with South African Tourism Agency (SAT), Gauteng Tourism Agency (GTA), the Department of Tourism, City of Ekurhuleni (CoE), and the Gauteng Growth Development Agency (GGDA), leads the structure, although it is the ultimate goal to house the project under one of the provincial entities.

Cape Town Air Access

Cape Town Air Access is a collaborative partnership, with Airports Company South Africa as one of the founding members. The primary mandate of Air Access is to promote, develop and maintain air routes in and out of Cape Town International Airport and thereby enhancing the city’s connectivity and access to global markets. The Cape Town Air Access initiative has since 2015 secured 13 new routes and 19 route expansions, adding more than 1.5 million two-way seats to Cape Town.

Durban Direct

Durban Direct is a collaborative partnership between Dube Trade Port, Airports Company South Africa, South African Tourism and other KwaZulu-Natal provincial entities (government and non-government) with the aim of improving connectivity into the province. The structure’s efforts led to King Shaka International Airport being the fastest growing airport in our network of nine airports, albeit from a smaller base.

Nelson Mandela Bay Airlift

A collaboration between Nelson Mandela Bay Metro, the local business chamber and the Eastern Cape Development Corporation aims to enhance connectivity between Port Elizabeth and Southern Africa. Airlift strategy has been completed with only key elements on incentives and marketing expected for completion by the first half of FY2019/20.

In FY2018/19 the following new routes were put in place:

O.R. Tambo International Airport Cape Town International Airport King Shaka International Airport
Shenzen to Johannesburg – Air China. (Rerouting of JNB – Beijing service with a stop in Shenzen) Vienna to Cape Town - Cathay Pacific (Seasonal) London Heathrow to Durban – British Airways
Rome to Johannesburg – Alitalia. (Added a fifth weekly frequency.) Hong Kong to Cape Town – Austrian Airlines (Seasonal)
Newark (New York) to Cape Town – United Airlines (launching later in the 2019 calendar year)

Iberia terminated its Madrid–Johannesburg service. Airports Company South Africa is working on re-establishing a link to Lisbon to close this regional gap. We are also connecting O.R. Tambo International Airport with East Africa (Dar es Salaam – Air Tanzania) and West Africa (Libreville, Gabon and Douala, Cameroon – ASKY Togo). British Airways removed four weekly London Heathrow flights to Johannesburg, trimming extra capacity and better aligning supply and demand.

We are working on developing a link between Port Elizabeth International Airport and Lanseria Airport, as well as cross-border direct services into Namibia and Harare.

Developing expertise in advisory services

We engage non-Group airports locally and abroad to expand our advisory services offering. These advisory projects have allowed us to benefit from new revenue streams and aligned our activities with our strategy to drive new frontiers and grow our footprint. The aim of Airports Company South Africa Advisory is to provide sustainable and cost-effective solutions to ensure the availability and sustainability of airport infrastructure. We put together expert teams to provide tailored services and assist other airports to operate differently and more efficiently.

Typically, these services include operational readiness and transfer services for existing and new airport infrastructure, engineering design, airport infrastructure design reviews, project management, due diligence studies, compliance and regulatory services and airport operations and management. Other areas include the identification of airport management and concession opportunities where a risk and due diligence assessment is conducted to establish the technical and commercial feasibility of the opportunity. Our advisory man service days target for FY2018/19 was 50, which we exceeded by achieving 243 advisory man service days (FY2017/18: 82).

Commercialising the Training Academy

Airports Company South Africa is in the process of implementing an aggressive growth strategy for its Training Academy. We believe the market, particularly in Africa, is sizeable and have created a business plan accordingly.

Our revenue targets have been set to reach estimates of R32 million in FY2020/21 and R59 million in FY2021/22 in what we see as a significant growth area for the Group.

Equity investments
India

In terms of our existing equity investments, Mumbai’s international airport is expected to generate profits in FY2018/19, but this facility has already reached capacity, reaching 48.83 million passengers in 2019 against a declared capacity of 56 million. Mumbai International Airport has embarked on an efficiency enhancement project to add additional capacity in the short-term. Airports Company South Africa’s participation in the Mumbai International Airport Private Limited (MIAL) consortium, which won the bid for the new Navi Mumbai International Airport, will create new impetus for growth. The Group owns 10% of Mumbai International Airport and indirectly 7.4% of Navi Mumbai. The first 10 million passenger operating capacity at Navi Mumbai is expected to be available in December 2021. This is expected to ease aircraft and passenger congestion at Mumbai International Airport in the long term.

Brazil

In Sao Paolo, Airports Company South Africa is a minority shareholder (10%) in GruPar Consortium which was awarded a 20-year concession to manage the Guarulhos International Airport. Guarulhos has made a series of losses since 2014, but given the Brazilian economy’s emergence from recession, the losses in FY2018/19 have been reduced to R136 million from R480 million in FY2017/18. We expect the airport to return to profitability by 2021 and to begin paying dividends for Airports Company South Africa by 2025. We will continue to search for new concession investments, but our focus is on realising value from our existing positions to alleviate dependence on our balance sheet for further capital injections into other concessions.

Outlook

We believe there is strong demand for our services on the African continent, corroborated by our participation in Liberia, Zambia, and Rwanda. We believe airport authorities across Africa are candidates for our technical services, to either unlock efficiencies or help them better manage their existing infrastructure.

Outside the continent, in terms of concessions, the new Brazilian government is pro-privatisation, which creates an opportunity for new concessions to be auctioned in FY2019/20. In India, the government is looking to issue at least 30 concessions in the next 10 years and has already awarded six. We continue to solicit roles in these concessions and believe the Indian market is poised to grow in double digits in the next five years and beyond.

We also believe other select jurisdictions like Southeast Asia and Eastern Europe, as well as Central and South America, remain places where we should see new opportunities emerging.

TO THE TOP