Business risks and opportunities

Strategic risks and opportunities

Macroeconomic risks and opportunities

• The current high inflation rates may reduce the disposable income of private households. This circumstance, together with uncertainties about the future development of inflation rates, could have a negative impact on flight bookings.
• Interest rate hikes by central banks to curb inflation may have a greater impact than expected on state and corporate refinancing and on global economic development. This would have a negative impact on planned passenger development.
• Overall, global economic development may cool down more than expected and have a negative influence on passenger demand.
• As a result of sustained high energy prices, the competitiveness of German industry could suffer and Germany’s position as an attractive hub for air traffic could be weakened.
• A structural shift toward greater national protectionism could develop in world trade, which could adversely affect the export-oriented German economy.
• Growth could be dampened by weakening of the EU as a result of diverging interests among the member states and the actions they take.
• In addition to the economic consequences of the Ukraine war, there are numerous geopolitical trouble spots around the world that could put a strain on economic development and air traffic.

• Strong geographic diversification and focus on various passenger groups at the Group airports to reduce individual macroeconomic risks.
• Geopolitical risks, restrictive political interventions, and saturation tendencies in air traffic demand in Western countries can be balanced out from regionally different growth potential among the Group airports

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Risk

assessment:

considerable

• Sustained easing of supply chain bottlenecks and the European gas and electricity market may lead to better-than-expected economic development and have a positive impact on demand for air travel.
• A weak euro could keep European goods cheap internationally and thus provide a positive impulse for the export economy, from which Frankfurt Airport could particularly benefit as a hub. Moreover, the weak euro could provide incentives for incoming traffic of international passengers.

Market, competitive and regulatory risks and opportunities

In addition to demand in and level of attractiveness of its domestic market, the competitive situation and attractive infrastructure, the success of an international airport depends on its airline customer structure and the associated global and dense route network, as well as the connectivity between demand markets.

• The Russia-Ukraine war could partly result in sustained reductions in demand and supply due to rising energy costs.
• Rising crude oil and thus kerosene prices could result in higher airfares and an associated dip in air travel demand. If competition is intense, increasing crude oil prices could lead to payment difficulties for less solvent airlines, with a resulting drop in supply.
• The current political discussion around reducing short-haul traffic could prompt a shift to alternative transportation other than aircrafts, which would hamper demand for flights. Passengers who cannot or do not want to use alternative transportation could switch to using foreign airports and Frankfurt Airport would subsequently lose such customers.
• Discussions surrounding climate protection could produce a long-term shift in travel behavior and lead to a reduction in air travel.
• Political and regulatory decisions at the regional, national and European levels will continue to affect the aviation sector. Climate protection and noise reduction requirements and associated taxes and charges could drive up the cost of air travel, and typically involve unilateral action on the market and on competition in international air traffic. Stronger targets under the European Union’s Green Deal (Fit for 55) and the upcoming review of the Emission Trading Directive will place an increased burden on European sites compared to other sites. If the measures are not designed to be neutral in a competition context, there is a risk of structural competitive disadvantages for German and European air traffic.
• Decisions on fleet locations, modified routes and fleet developments, as well as changing customer preferences for source and destination markets when choosing airlines and airports could have a detrimental effect on Fraport.
• The creation of new or further development of existing hub systems in the Middle East and at the new Istanbul Airport will increase supply and potentially result in a shift in global transfer passenger flows after a recovery in air travel.
• The tight financial situation of the airlines as a result of the coronavirus pandemic could lead to further insolvencies and thus to market consolidations. The resulting drop in supply could further weigh on the passenger growth forecast.
• The increased use of digital communication media in the wake of the coronavirus pandemic could lead to a stronger than expected decline in demand for business travel.
• Demographic changes as well as the reorientation of the workforce during the pandemic caused a considerable labor shortage in the aviation sector. The situation could also worsen in the long term, given the decline in migration of EU citizens to Germany. Staff shortages in the air transport industry can have a negative impact on operational service delivery and consequently on the expected business development.
• Terror attacks and hot spots of unrest could affect demand for specific travel destinations.

• Continuous market monitoring and analysis of early warning indicators to identify and address potential changes and trends in travel and cargo flows in a timely manner
• Balanced, demand-oriented expansion planning at Group airports in order to remain competitive in the long term
• Attractive remuneration structures
• Strengthening cooperation with key customers at Group airports
• Strengthening cooperation with Deutsche Bahn and Lufthansa to ensure an attractive intermodality offer at Frankfurt Airport
• Implementation of climate protection measures and sustainability program
• Active participation in industry-related associations

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Risk

assessment:

substantial

• Now that the coronavirus pandemic is over, there is a high demand among consumers for tourist air travel. The opening of international markets may also lead to stronger than expected catch-up effects in business travel.
• Previous development cycles in air traffic show that market turbulence only temporarily burdens the upward development of global air traffic. Long-term forecasts continue to assume growing demand in global air traffic.
• Market exits of airlines lead to a concentration of established airlines at the larger German airports, from which transfer traffic at Frankfurt Airport could benefit.
• High-quality connections to the Deutsche Bahn rail network at the Frankfurt site ensure demand from transfer traffic within Germany even if air traffic is shifted to rail, and this is a major competitive advantage. Improvements to the intermodal product such as end-to-end ticketing and end-to-end baggage transport can strengthen rail feeder traffic and have a positive impact on Frankfurt Airport's catchment area.
• Capacity increases at the Group airports are being implemented or have been completed, which will result in improved quality for airlines and greater passenger satisfaction and will enable the Group to benefit more than expected from long-term growth in the air traffic market.
• A possible liberalization of air traffic rights could open new markets for air traffic and expand existing markets.
• International harmonization of regulatory measures that have so far distorted competition, such as the German air traffic tax, would reduce such disadvantageous distortions.
• There is a chance that airlines will further expand their intercontinental fleet in Frankfurt due to the good existing feeder service, intermodality, and cargo demand, thereby strengthening passenger and cargo traffic.
• Digitalization and innovations offer new opportunities to improve processes, raise efficiency, and increase customer satisfaction.

Further development of the coronavirus pandemic

• The further traffic development in Frankfurt and at Group airports continues to be subject to uncertainty given possible travel restrictions stemming from the pandemic.
• A renewed increase in the number of coronavirus infections worldwide could lead to local restrictions on public life, production limitations and further supply chain bottlenecks, which would also have a direct impact on traffic at Frankfurt Airport and the Group airports.
• In the unlikely event of the emergence of virus variants with a high mortality rate, the recovery of passenger numbers and the positive development of traffic in Frankfurt and at the Group airports could be greatly inhibited.

• Close coordination with health authorities, airports and aviation associations
• Close cooperation with airlines and authorities to secure and strengthen air traffic including safeguarding provisions

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Risk

assessment:

considerable

• Catch-up effects could prompt an accelerated recovery in tourist travel demand sooner than expected for trips that have been postponed so far.
• A lifting of travel restrictions in China in the near term could ensure a speedy recovery in traffic and a quicker return to intercontinental transfer flows

Drainage for the parallel runway system

• In the event of evidence of de-icing substances in the groundwater, the upper water authority could impose a requirement for a qualified drainage system for the parallel runway system at Frankfurt Airport and issue a corresponding water law order.

• Continuous groundwater monitoring and regular measurements to verify compliance with limit values
• Regular review of the composition of the de-icing agents used as well as the operational processes

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Risk

assessment:

substantial

Operational risks and opportunities

Risks and opportunities from capital expenditure projects at the Frankfurt Airport

Capital expenditure on construction at Frankfurt Airport is divided into two separate programs: “FRA-Nord” for projects in existing infrastructure and “Ausbau Süd” for projects to expand or create capacity. The “Ausbau Süd” project, in particular the construction of the new Terminal 3, continues to progress stably within the schedule despite a challenging market situation for construction services (see also chapter “Key Sites”). Strained supply chains and limited material availability can partly be countered with a forward-looking procurement strategy. Nevertheless, the following risks exist:

• Increase in construction costs
• Supplier bankruptcies
• Insolvencies
• Scheduling delays
• External influences from the public, the environment, politics, technological changes, engineering practices, alternative engineering methods within the scope of building permits, or other requirements
• Restrictions due to the coronavirus pandemic, such as the availability of resources
• Changes in requirements related to new market conditions after resolution of the coronavirus pandemic

• Monitoring measures to enable timely countermeasures
• Active market development and consistent change management to counter increases in costs

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Risk

assessment:

substantial

• Greater competition in the procurement market due to weakening demand could dampen price increases
• Execution of construction work on existing infrastructure (FRA-Nord) during low passenger volumes without affecting operating processes at Frankfurt Airport
• Capacity expansion to ensure the ability to cope with the expected long-term growth of the air traffic market

Risks and opportunities from investments and projects (Segment International Activities and Services)

• Unforeseen official intervention in local tariff, tax, and levy structure
• Environmental requirements and social conditions
• Country, market, political, and foreign exchange risks which can lead to a significant impairment of the future earnings outlook or increase expenses up to a total loss of the investment
• Economic sanctions in response to political conflicts with financial implications for investments
• Political instability in the respective concession countries
• Exceeding construction budgets for airport expansion programs and/or failure to meet completion dates under the corresponding concession agreements

• Collaboration with experienced local partners
• Non- or limited-recourse project financing
• Investment protection insurance
• Monitoring measures to enable timely countermeasures

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Risk

assessment:

substantial

• Fraport achieves growth in international business through the profitable development of existing sites and the acquisition of new investments and concessions. In this process, Fraport aims to contribute its expertise in the long term wherever growth and/or optimization potential with good business opportunities is detected. The broad diversification of the investments creates opportunities compared to focusing on one site.
• Implementation of infrastructure programs at multiple Group sites to boost capacity and quality of service
• Group airports with a strong focus on tourist traffic could return to the old growth path in terms of traffic development faster than expected

In the expansion project at Jorge Chávez Airport in Lim (Peru) operated by Lima Airport Partners (LAP), the construction measures for the airside expansion of the airport have now been completed. For the construction of the new passenger terminal, LAP has commissioned a construction consortium which, as general contractor, will take over the EPC services (engineering, procurement, construction) that are commonly used within the industry including all planning, procurement, and construction measures. Project financing for the ongoing infrastructure and expansion measures was concluded in December 2022. Potential risks remain due to the size, complexity, and duration of the expansion project. However, compared to the previous year, these are assessed as “moderate” as of the balance sheet date (previous year: “substantial”). For risks from developments in Peru in the fiscal year 2023, please see the section “Events after the Balance Sheet Date”.

Personnel risks and opportunities

• Loss of know-how resulting from crisis-related staff loss and downsizing
• Staff loss due to reduced salary development (emergency collective agreement, inflation)
• More difficult recruitment due to current labor market conditions
• Training periods for the recruitment of less qualified workers and thus later availability
• Staff shortages in the air transport industry can have a negative impact on operational service delivery and consequently on the expected business development.

• Reorganization and process optimization within the scope of “Zukunft FRA – Relaunch 50”
• Centralized monitoring of personnel management measures
• Temporary granting of labor market allowances for staff recruitment, incentives through above-tariff remuneration schemes
• Improving employer attractiveness through modern work formats

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Risk

assessment:

moderate

• Weakening economy could have a relaxing effect on the labor market and positive impact on recruitment opportunities
• Increased appeal through modern collaboration models and flatter governance structure as part of the strategic program “Zukunft FRA – Relaunch 50”

Additional provision ZVK

For the purpose of granting a company pension under the mandatory insurance scheme based on collective bargaining agreement, Fraport AG is a member of the “Zusatzversorgungskasse Wiesbaden (ZVK)”. The current allocations and restructuring funds are used for the current pension payments (solidarity model). If the requirement for work performance declines, in addition to the demographic development, the number of employees for whom levies and restructuring charges are paid will decrease. Thus, the funding shortfall will grow continuously in the company pension plan.

This increases the risk that the ZVK will demand compensation payments from Fraport to make up for the gaps in coverage.

• Discussions with the ZVK about different solution approaches

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Risk

assessment:

substantial

Risks of exceptional incidents

• Business interruptions due to exceptional local events such as terrorist attacks, accidents, fires, drone flights, technical malfunctions, actions by climate activists, or strikes
• Impact on national and international air traffic caused by natural disasters, extreme weather conditions, armed conflicts, and pandemics

• Implementation of a local central crisis team
• Local plans to maintain critical business and operating processes (business continuity and emergency teams)
• Safety management system
• Drone detection technology and drone defense tests
• Property and business interruption insurance

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Risk

assessment:

considerable

Cyber risks

• Serious business disruption due to a severe IT system failure or substantial loss of data as a result of cyberattacks, computer viruses, or hacker attacks
• Rise in threat level according to increased number of warnings from the German Federal Office for Information Security

• Redundant implementation of relevant IT infrastructure
• Preventative IT security management to protect business-critical IT systems
• IT security policy and IT security guidelines
• Established emergency process with defined roles and competencies
• Interregional collaboration to develop uniform security standards for IT environments
• Compliance with IT security requirements is checked regularly by Internal Auditing, IT security management or external advisors

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Risk

assessment:

substantial

Financial risks and opportunities

“Risk report“ in accordance with section 289 (2) no. 1 HGB and section 315 (2) no. 1 HGB

• In particular occurring from the capital requirements for capital expenditure and from existing floating interest rate financial liabilities and assets
• Future interest rate increases may have a greater impact than expected on the planned refinancing measures
• Increased interest expenses from the valuation of long-term provisions
• Risk of a negative market value of the interest rate hedging instruments due to a decline in market interest rate, if interest rate derivatives are concluded to hedge interest rates where, in exceptional cases, the underlying transaction failed to materialize or has ceased to exist

• Fixed interest rate agreements for most financial debt

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Risk

assessment:

considerable

• Planned revenue not covered by expenses in matching currencies
• Change compared to previous year due to increased foreign currency volume in the planning period mainly as a result of airport expansion programs at foreign Group companies

• Ongoing sale of currencies not covered by matching currencies or conclusion of forward (exchange) transactions

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Risk

assessment:

moderate

• Primary and derivative financial instruments with a positive fair value and the risk that the counterparty will be unable to meet the obligations that are advantageous for Fraport
• In addition to rated investments, investments in unrated bonds are possible in individual cases within strictly defined limits

• Acquisition of financial assets and conclusion of derivatives only with issuers and counterparties rated at least “BBB–”
• Issuer ratings are regularly reviewed to enable any necessary decisions on further dealings with the financial asset or derivative.
• Investments in unrated bonds are continuously indicated in the reporting.
• Limit caps are adjusted, if necessary, to reflect changes in creditworthiness

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Risk

assessment:

low

• The market valuation of financial assets is subject to market fluctuations that do not affect cash flow
• The market valuation of derivative financial instruments at fair value is subject to fluctuations

• Financial assets with a fixed term are assumed to be subject only to temporary market fluctuations that reverse automatically by the end of the product terms because the full nominal amount is repaid

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Risk

assessment:

low

• Risks for the asset, financial, and earnings position of Fraport may arise from the current financial market situation and its effects on the overall economy, particularly on liquidity and other bank lending practices

• “Reserve financing” strategy to guarantee financing, such as for upcoming capital expenditure and repayments.
• The amount of funds from the strategic liquidity reserve is continuously monitored and, if necessary, replenished in the event of reduction
• Due to sufficiently secured inventory financing, the risk assessment decreases.

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Risk

assessment:

low

• Favorable exchange rate and interest rate developments could improve the Group’s financial result. Accordingly, exchange rate effects from the conversion of results that are not denominated in euros into the functional currency of the Group (the euro) could have a positive impact on the financial result
• Overall, Fraport expects to be able to take advantage of favorable developments in the financial markets

Legal and compliance risks

• Changes in aviation law, the German Federal Police Act, planning and environmental law, security-related regulations, general regulations under capital market law, antitrust law, data protection law, and labor law as well as any legal restrictions under sanctions
• Corruption, fraud, or financial manipulation
• Antitrust violations
• Changes to tax regulations, case law, and different interpretations of existing tax regulations with an adverse impact on the tax positions on the statement of financial position and the income statement

• Continuous analysis of legal changes for timely identification of and response to potential negative changes
• Implementation and expansion of a Group-wide compliance organization
• Group Guideline on the Compliance Management System
• Further development of the centralized ICS
• Code of Conduct
• Whistleblower system
• Continuous monitoring of tax changes
• Regular dialog with tax authorities

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Risk

assessment:

considerable

• Legal or tax-related changes or court decisions with positive effects on Fraport Group’s operations and financial indicators