By Jon Sindreu

Hungry travelers may determine the future of airport finance.

In 2024, more fliers than ever passed through London's Heathrow Airport, spending more at its stores, the company running it said last week. Yet total revenue declined as Britain's aviation regulator lowered the maximum fees the airport can charge to airlines.

This comes as Heathrow -- owned by private-equity firm Ardian and sovereign-wealth funds in Qatar and Saudi Arabia, among others -- prepares for an investment spree, including a third runway. Funding remains a question, as airlines such as British Airways and Virgin Atlantic complain about aeronautical fees being too high.

Globally, expanding airports face huge bills and will rely on passengers splurging to cover costs. Their big pitch: cocktails and fine dining.

JFK International Airport's Terminal 4 recently announced a New York-themed lineup of food and beverage concessions, including Dos Toros Taqueria and Villa Russo Café. Orlando International Airport in January awarded Barcelona-based caterer Areas a $10 million tender for six new establishments.

European airports undergoing refurbishments, including Frankfurt, Vienna, Edinburgh and Madrid, are making similar moves.

Despite pandemic-era worries that people would stop eating at airports, the opposite has happened. Two weeks ago, Lagardère reported a 25% jump in earnings before interest and taxes in its Travel Retail division, which operates in airports in the U.S., Canada and Europe. Figures from earlier in the year suggest that the largest bump happened in restaurants, outpacing "duty free" stores -- which also sell snacks and drinks -- and fashion.

More travelers are also frequenting VIP lounges, no longer reserved for business-class fliers and elite frequent travelers thanks to credit-card perks, paid memberships and airline day passes. Airports and airlines are investing heavily in these spaces, offering tiered experiences from basic comfort lounges to ultrapremium dining areas.

In some cases, food and beverage are replacing lost demand for luxury and apparel, largely from China. The clearer trend, however, is toward blending dining with shopping.

Swiss firm Avolta, formerly Dufry, is behind several of these coming launches, including an Eataly market at JFK and a Starbucks market at Sacramento International Airport. Lagardère helped launch a "hybrid" offering in the Lego store at Barcelona's airport and is joining with Groupe ADP, the owner of Paris's Charles de Gaulle, to blend retail and eating spaces. Excluding one-offs, ADP's profit rose 16% last year, the company said in February.

Meanwhile Aena, the operator of Spain's airports, announced last Wednesday that net income grew 19% in 2024. Since 2019, revenue has increased 29%, with fees rising 8% and commercial sales, a whopping 41%. Sales per square meter have risen 23% in duty-free stores, 21% in other stores, and 30% in bars and restaurants.

Aena's commercial business rose to above 30% of revenues for the first time. And, because it is the highest-margin business that airports have, it is now half of the company's profit. As airlines push back against higher airport charges, analysts expect this dynamic to continue.

Is there a way for investors to play the trend? Unlike in the U.S., where airports are mostly government-owned, many European airports are privatized and some operators, such as Aena, ADP and Fraport, are listed.

While their shares have struggled since the pandemic, they remain a better bet than travel retailers such as Lagardère, Avolta and SSP Group. Many of those stocks also missed out on the late 2010s air-travel boom, a telltale sign that airports have leverage over their retailers.

The risk is that, even if passenger numbers surge, extra income will go toward airport infrastructure. Debt issuance among U.S. airports has tripled in the past decade. Even accounting for passenger fees and federal funding, the required expansions and maintenance still leave an $18 billion annual funding gap between 2023 and 2027, according to a January report by Morningstar DBRS.

Some European operators have more flexibility to raise fees, but their aggregated capital-investment needs are projected at a massive 360 billion euros (equivalent to $378 billion) by 2040. The key question, then, is whether revamped retail spaces will squeeze more spending out of each passenger. At the moment, airports seem to be betting that the answer is yes.

"Back when I started, I was shown a few spare square meters and told to do what I could," said Maria José Cuenda, Aena's commercial and real-estate head, who has been with the company for more than 30 years. "Now I am involved from the start of a terminal being designed."

Stock in Spain's Aena is up around 150% from a decade ago and is narrowing the gap with broader European indexes measured since the end of 2019. Perhaps airports in culinary hot spots will serve up the best returns.

Write to Jon Sindreu at jon.sindreu@wsj.com

(END) Dow Jones Newswires

March 04, 2025 05:30 ET (10:30 GMT)

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