DEVELOP AIRPORTS
DEVELOP AIRPORTS
Developing world-class airport infrastructure that responds to the needs of our customers and our industry is the foundation of our value proposition. As airports evolve, we are committed to developing our airports so we can continue to provide world-class facilities for our stakeholders and the country at large. Improving and expanding airport infrastructure unlocks our airports’ developmental potential and grows our footprint, providing significant regional and national economic benefits.
OVERVIEW
Developing airports spans the improvement and expansion of infrastructure as well as leveraging innovation and opportunities. Our current development activities will shape our future as a business and be a key enabler of economic growth within the regions in which the airports are situated. Developing airports underpin the achievement of Vision 2025 objectives, which include initiatives like our aerotropolis developments at O.R. Tambo International Airport, Cape Town International Airport and King Shaka International Airport. In the year under review, our capital expenditure was R1.3 billion, exceeding the target of R1.09 billion, representing a performance of 9%. Many of our major projects are currently out to tender with awards largely expected in due course. We achieved capital expenditure approval for the implementation of certain key projects including the Cape Town International Airport Terminal 2 project and the Passenger Self-Service project. However, these will be subject to review in light of the impact of the COVID-19 pandemic and rating downgrade which will affect the affordability of funding.
Airports are infrastructure-intensive businesses that include a wide range of assets from terminal buildings and runways, pavements and fuel lines, to commercial and retail property as well as digitisation and innovation. Likewise, our strategic objective of developing infrastructure spans a variety of activities such as major infrastructure developments, regular maintenance and the need to address the Company’s ageing infrastructure, property management as well as the introduction and roll-out of technology projects. These activities all contribute to the quality of our passengers’ experience and unlock non-aeronautical revenue. To ensure sustainable, cost-effective and relevant infrastructure solutions are enabled, planned and developed, we consult and collaborate with a broad spectrum of national, regional and airport stakeholders.
We have developed a framework for investment analysis of capital expenditure projects, aimed at ascertaining the accuracy of investment decisions and providing comparison of competing investment options, which is aligned to the National Treasury’s Framework for Infrastructure Delivery and Procurement Management. At year end, we were on the brink of commencing large infrastructure developments to address pressing capacity constraints. Recent changes in demand, however, necessitates that we once again analyse the investment case for capacity development projects.
ACHIEVEMENTS IN FY2019/20
Integrated airport planning
To enhance our property portfolio, we have adopted an integrated airport planning approach to property development. In the year under review, we rolled out a regional integration framework that will promote structured, increased and focused regional engagements and facilitate alignment of regional and airport priorities at strategic, tactical and technical levels. In addition, we revised our commercial planning strategy for Cape Town International Airport, introducing a new and integrated approach to commercial design that will transform the commercial offering and improve the passenger experience while enhancing revenue-generating opportunities.
Property management
Revenue of R877 million from our property portfolio surpassed our targets for the year. Our airport realestate remains attractive to tenants and vacancy rates remain low for both commercial and retail properties, despite the difficult economic climate. We have further strengthened our portfolio by converting month-tomonth leases to long-term arrangements to improve lease tenure and ensure long-term revenue generation.
With our new office complex taking shape, efforts are underway to secure a tenant for the remaining space. During the year, we concluded contractual frameworks for an airline and commercial lounge that will boost lounge revenues through the implementation of a market-related rate plus a percentage turnover or user-fee charge. In addition, we are developing a proof of concept for a newly conceptualised Company-owned and operated lounge product at O.R. Tambo. A pronounced increase in demand for airport lounges is driven by a maturing middle class in South Africa, which is taking advantage of loyalty programmes and often seeks hospitality services rather than retail during their time at an airport.
Enterprise asset management
In FY2019/20, we introduced new elements to our asset management programme as well as efficiency and safety programmes.
We contained maintenance and repairs costs, realising a consumer price index-related increase. Maintenance and repair costs of R371 million for the year represent a 5% increase compared to the previous year (FY2018/19: R352 million).
This has been achieved through two management interventions:
- The implementation of asset classification, which aims to align the service management approach relative to the risk and impact on airport operations. This does not compromise general machinery regulation needs or original equipment manufacturer maintenance requirements. We optimise service management parameters such as on-site presence and assess the merits of intensified maintenance regimes.
- The completion of technical due diligence and activation of refurbishment and replacement capital expenses, in place of tending to breakdowns using operating cost. People movers, X-ray machines, electrical equipment and passenger loading bridges are the major classes of assets due for such investment.
We also note with concern that in the FY2019/20, a third of our assets entered the wear-out phase. Assets in this phase of their life-cycle are known to become unpredictable in terms of breakdowns. The asset management treatment, in this case, is the implementation of a rolling capital management programme. This entails a cyclical renewal of assets or infrastructure using replicable implementations standards and procedures. This eliminates duplication in engineering design and accelerates execution based on lessons learnt from prior projects.
Guiding principles for our rolling capital programme
- Our capital programme across airports should be routine as we have similar equipment and infrastructure
- The decision to defer capital projects should be made against the backdrop of asset availability
- The ultimate capital programme for an airport should be a combination of new development and asset management drivers. This is to rationalise the cost
- Ideally, the asset management capital programme should routinely be implemented
Drivers for capital investment
- Lifecycle
- Technology obsolescence
- Modernisation
- Regulation and risk
- Refurbishment
- Efficiency and reliability
- New capacity and new development
- De-bottlenecking
The sequence of projects undertaken will be determined by the guiding principles and drivers of capital investment, as well as prioritising work to affordability. Where similar classes of projects require replacement or refurbishment, a generic solution will be engineered and implemented with minor adjustments to the specific airports. In the long term, this simplifies the number of technologies in use, which in turn reduces inventory, number of original equipment manufacturers and working capital.
The Group was not negatively impacted by load shedding in South Africa, in the year under review even during stage 6 load shedding in the latter part of 2019. Our electrical generator configurations, diesel storage and switching to LED lighting prevented business interruption. There was an all-round improvement in ASQ results for airport infrastructure compared to the previous financial year and the Board KPI of a 4 rating has been met.
New technologies such as gas-to-power and energy storage steadily progress. We have experienced procurement challenges in securing service providers for the LED replacement programme at some airports. These tenders have been revised and issued to market.
In FY2019/20, we identified commercial assets in need of refurbishment at most sites. This work has commenced and despite initial challenges in securing competitive prices, the refurbishment of two assets has been completed. These designs, bill of materials and competitive end-of-job costs set the benchmark for future projects.
Within facilities management, we completed the implementation of our revised cleaning specification at all airports, except Cape Town International Airport, which will be implemented later in FY2020/21. Restructuring the service offering, specifying the use of mechanisation in certain areas and moving to higher cost transparency improved cost competitiveness. Cleaning costs increased by 3% in the year under review compared to previous years in which cost increases ranged from 7–10% per annum. We expect to yield a R10 million per annum saving through the revised cleaning specification. Revised service management strategies for waste management and vegetation management were also completed. The waste management strategy will be implemented at King Shaka International Airport and Cape Town International Airport in the coming year. The vegetation management service strategy has been implemented at Cape Town International Airport and is expected to result in a R4 million per annum saving. During our building and facility inspections, we noted unusual corrosion at King Shaka International Airport. Coastal airports experience crevice, pitting and erosioncorrosion as a result of proximity to the sea and the particles in the air, particularly during a wind spell. We have commissioned expert analysis and advice on a refurbishment programme.
We are set to perform an ISO-55000 due diligence for asset management at King Shaka International Airport and Cape Town International Airport, to obtain expert opinion on the implementation of our asset management programme. We are determined to achieve an ISO-55000 Asset Management accreditation in the next 12–18 months at these airports. This would be an admirable achievement as just 11 airports in the world can claim such an accreditation.
PROPERTY AND INFRASTRUCTURE ASSET MANAGEMENT DEVELOPMENTS
New corporate offices
The construction of our new head office is underway on a site adjacent to O.R. Tambo International Airport. The project commenced in February 2019 following the award of the contract to ACSA Western Precinct Consortium in December 2018. Construction is progressing well, with more than half of the first phase completed on schedule. Construction is on track for completion by March 2021. The 33 000m2 project comprises three buildings that will house Airports Company South Africa, the SACAA and a prospective tenant. As the first major development undertaken by the Company in the past 10 years, this project is a testament to our ability to manage a large infrastructure development project.
Airports
In FY2019/20, we focused on conceptual and detailed infrastructure design work, scoping, programming, business case development, stakeholder consultation and securing funding by obtaining positive investment decisions for the applicable developments. The intensity and complexity of the activities were varied across the network of airports and based on the airport level portfolio of projects.
O.R. Tambo International Airport
A number of planned developments at the airport gained traction during the year under review, such as the Midfield passenger terminal development, terminal A redevelopment, the Denel precinct plan, rapid exit taxiways and by-pass taxiway busing gates phase 1 and 2, new cargo development and the additional capacity for domestic departures security.
Cape Town International Airport
Work has commenced on terminal 2 enablement works and the following projects have progressed well through design development phases and are either in detailed design stage or tender preparation stages: terminal 2, new domestic arrivals, Alpha 13–15, international lounge expansion and apron development projects. We are finalising the engineering required for the rehabilitation of the current main runway which will extend its life while awaiting the implementation of the new re-aligned runway.
King Shaka International Airport
The construction of additional code-F aprons and the extension of Bravo Taxiway is in progress and is scheduled for completion in October 2020. The landside precinct plan has commenced and is currently still in progress.
East London Airport
The conceptual design for the East London terminal expansion was concluded and the detailed design for the lounge expansion project is in progress.
Regional airports
Good progress was made in developing master plans and precinct plans. Four integrated airport master plans for George, Bram Fisher, Kimberley and Upington airports and two precinct plans for Port Elizabeth International Airport and East London Airport were initiated and the scoping phase, strategic scanning phase and scenario planning exercises have concluded. These development frameworks are informed by region-specific information, and will provide phasing, flexibility and expandability for the unknown future growth of these airports.
PROGRESS ON DEVELOPMENT OF OUR AEROTROPOLIS CONCEPT
All our master development plans follow the aerotropolis concept, which incorporates the communities around the airport with the aim of generating economic and social benefits for the region. Despite the impact of COVID-19, we remain resolute to continue our development of the aerotropolis concept as it is a key growth opportunity for us in the medium and long term and a lever for stimulating economic growth in the country. Connecting cities and countries by air will remain critical for the recovery of international trade, supply chains, investment and tourism, providing the opportunity to boost local economies and stimulate job creation.
In the O.R. Tambo International Airport aerotropolis plan, 22 catalytic projects were identified that would effectively impact economic development in the short term. The Midfield Cargo Development and the Western Precinct Commercial Development are two of the projects we are spearheading. During the year, we completed the tender document for design services for Midfield Cargo Development and are preparing to commence the tender process. Consultants have been appointed from the Airports Company South Africa panel to scope the project and obtain an environmental impact assessment approval. The preliminary design is in progress and practical completion for the development is provisionally planned for August 2024. We remain committed to furthering these projects and supporting the Gauteng province and City of Ekurhuleni leadership to see the aerotropolis initiative gain even greater traction.
At Cape Town International Airport, the Swartklip development remains the driving catalytic project. The environmental impact assessment process and stakeholder engagements – including all impacted and affected communities on Swartklip land in Cape Town – continues. King Shaka International Airport serves as the gateway to the 32 000ha Durban aerotropolis development, managed by Dube Tradeport Corporation as the implementing agent. Once implemented, it is estimated 750 000 jobs will be created through this initiative. The La Mercy Joint Venture Company, a partnership between Airports Company South Africa and Dube Tradeport Corporation, is in the process of developing a site-wide master plan to guide developments surrounding the airport.
ENTERPRISE PROJECT MANAGEMENT OFFICE
During FY2019/20, we developed and implemented a project management lifecycle tool to guide employees in managing projects from conceptualisation through each stage of development, in line with the National Treasury Standard for Infrastructure Procurement and Delivery Management. We are confident we have the appropriate governance structures in place to ensure the planned infrastructure development will run in terms of project timelines, management of scope deviation and budget.
INNOVATION
Innovation implies changing and creating more effective processes and exploring initiatives to develop or improve products or services for organisations. IT readiness and enablement capability are essential to ensure the agility and capacity to transform the Company to a digital business and infuse digitisation in infrastructure solutions. To ensure relevance for the future, the formulation of all our airport development plans is informed by technological advancements, which influence the perception of how airports of the future must look and operate. During the year, we embarked on a journey to foster innovation, to enhance the Company’s value proposition of becoming a global competitor and maintaining its sustainability. Notable innovations in the year under review include smart security, e-gates and self-service (bag-drop).
In FY2019/20, the Board approved our Innovation strategy. We are developing policies, standards and procedures that will shape the mechanism of implementation.
In FY2019/20, we initiated a project using drones for runway, taxiway and apron inspection. This required extensive engagement with aviation authorities and the Aviation Training Academy to allow the controlled use of drones in an aerodrome zone. In collaboration with our aviation partners, we are embarking on a pilot project and are in the final stages of awarding a tender to a licensed drone operator. The controlled use of drones offers the benefits of enhanced efficiencies, improved safety and security.
OUTLOOK
The current adverse economic climate, at both local and global scale – compounded by the downgrading of the sovereign’s credit rating and the COVID-19 pandemic outbreak – will adversely impact our ability to attract affordable funding. Moreover, the COVID-19 outbreak has significantly impacted air travel and is likely to bring a new era in the aviation sector with different demand dynamics. While adapting as necessary, we will continue to focus on optimising the utilisation of our assets to co-create value for our shareholders and stakeholders in our localities.
In FY2020/21, our infrastructure development programmes were set to gain momentum as we planned to break ground on several projects. Considering COVID-19 and Moody’s downgrade of Airports Company South Africa, we will, however, review the affordability of these projects. Expansion programmes will therefore be revised or deferred as we reduce our airport footprint to fit demand. Our infrastructure replacement and refurbishment programme will be aligned to a combination of short-term need asset condition and lifecycle. Maintaining our high standards of passenger infrastructure experience may be challenging. However, our asset management strategy will be revised to protect the operating licence, heavy machinery and continue with regulated maintenance.
Although we are changing gears in our approach to infrastructure development in the year ahead, we will remain resolute and focused on embracing a responsible approach to airport planning and development, ensuring environmental responsibility and supporting transformation imperatives in all we do.