There are clear risks and opportunities as airports repurpose for a post-COVID world

Australia’s four largest airports saw profits fall to their lowest levels in a decade during the COVID-19 pandemic. This has forced operators into exploring other forms of commercial property that would make them more resilient.

There are clear opportunities, but they introduce new risks that need to be managed.

The Australian Competition and Consumer Commission’s Airport Monitoring Report shows that operating profits at Sydney, Melbourne, Brisbane and Perth dropped by 55 per cent in the final quarter of 2019-20. Even greater impacts are expected in the following financial year’s reporting.

So it comes as no surprise that airport operators are looking to diversify their commercial property portfolios. There are obvious adjacencies with other forms of commercial property from warehouses and offices to hotels and industrial parks.

Some of these sectors performed strongly during the pandemic despite operational complexities like social distancing.

Market research firm ReportLinker estimates the global warehousing and storage market will grow at a compound annual growth rate of nine per cent through 2025, with Asia Pacific accounting for one-third of revenues last year.

Highly-protected risk

Diversifying beyond tightly controlled and well managed airports into third-party warehousing and office space changes the risk profile.

Airport operators are not the only ones assessing changes to their risk profiles because of diversified property portfolios. 

The COVID-19 pandemic has also seen hospitals building smaller clinics and outpatient centres closer to where patients live.

It’s difficult to protect and manage these smaller facilities to the same standards as major hospitals. Operating a series of smaller property assets spread over a larger area also changes the risk profile, especially when considering natural hazards like bushfires and flooding.

Airport operators should explore ways of building a range of highly protected risk investment properties. These well-protected buildings – made using non-combustible materials that are resilient to natural hazards – reduce the risk of losses from fire, flooding, equipment failure and other hazards.

The size and complexity of an airport operator’s risk profile increases as the size and diversity of its investment property portfolio grows. Diversification strategies need to factor in the total cost of risk and the total financial loss likely to be incurred if something does go wrong.

Reputational risk is a major concern for airport operators because there are many things beyond their control that could have a negative impact.

It’s a similar story with cyber risk.

Airports are typically responsible for the airfield and core operations including baggage systems and security, but not airline check-in systems. If hackers were to take those down, the long queues of disgruntled passengers on the evening news would still reflect badly on the airport even though it had no direct involvement in the incident.

Increased adoption of telehealth and online learning during the pandemic have also increased the risk of cyberattacks for hospitals, health centres, universities and colleges.

Reducing diversified risk

There are a number of actions that an airport operator could and should take to reduce the risks associated with a diversified commercial property strategy. One is to build sustainable property designed to withstand natural catastrophes.

Flooding is a major risk because many airports are built on low-lying land near the ocean. This is also true of many commercial properties including nearby warehouses and hotels being considered as part of diversification strategies.

All new builds should include a minimum development level to minimise flood exposure, with climate change projections built into those recommendations.

The minimum development level is the lowest recommended elevation for new buildings and infrastructure. This is set by engineering consultants based on a range of factors including how long the building is expected to be there, current flood levels, predicted sea level rises, and the increased risk of flooding as a result of climate change. This minimises flood risk.

Fire protection systems should be designed to accommodate for the wide variety of materials that are can be stored in third-party warehouses. The fire protection should also accommodate for as many types of activities as possible. It may be necessary to limit or prohibit certain type of storage or activities which cannot be adequately protected by the installed fire protection systems.

Airport terminals and associated buildings typically include cladding unless built very recently, so it’s important to understand what this material is and how flammable it is. What is the potential fire risk and what are the most practical ways to mitigate it?

Replacement with non-combustible alternatives is the best option because fire protection systems won’t normally be adequate.

Key factors that affects risk quality include inherent natural hazard exposures, the frequency and quality of maintenance of critical equipment, having contingency plans and well-rehearsed response procedures and fire risks and occupancy hazards.

These details matter because poorly protected locations are up to seven times more likely to suffer a loss. With operating profits at their lowest levels in a decade, and costly commercial property diversification strategies under consideration, failing to properly protect increasingly diverse property portfolios is a risk that airport operators can ill afford to take.

This article first appeared on Strategic Risk APAC