June 26 (Bloomberg) -- European airports are suffering from a slump in retail sales that can deliver two-thirds of profit at major hubs as a sliding ruble curbs spending among Russians with a shopping budget four times that of the average traveler.
The Ukraine crisis and strength of the euro, pound and Swiss franc against emerging-market currencies has hit retail sales at hubs from London to Frankfurt, with the squeeze worst at airports in the two countries at the center of the conflict.
“We’re feeling the impact,” said Pierre Viarnaud, head of Russian operations at Hamburg-based Gebr. Heinemann SE & Co., which operates 230 shops at 61 airports. “In Moscow, we have a significant drop in spend per passenger. In Kiev, it’s even more dramatic, almost 50 percent lower than last year.”
Russians are staying at home or limiting spending when they do travel after the ruble hit a record low of 51 to the euro on March 14, two days ahead of the Crimea’s vote for rule from Moscow. The Ukrainian hryvnia has slid 30 percent against the single currency this year.
The spending slump comes as airports make shopping a key component of profit generation, with London Heathrow’s expanded Terminal 2, which opened June 4, housing 33 retailers including Burberry and Mulberry luxury goods outlets and the first John Lewis department store at Europe’s No. 1 hub. Fraport AG, which runs Frankfurt airport, meanwhile aims to lift retail revenue per passenger to 4 euros from 3.60 euros in 2013.
Russian travelers, who also flew less during the Winter Olympics in Sochi, have “voracious appetites for European luxury goods,” said HSBC aviation analyst Andrew Lobbenberg, adding that heavily-retailed airport offerings produce particularly “handsome” profit margins.
At Frankfurt, Europe’s third-largest hub, Russians spend almost four times the average on shopping, Fraport board member Anke Giesen said at an Airports Council International conference in the city on June 18. By contrast, local German travelers have a budget that’s less than a third of the average.
Fraport is especially exposed because it owns stakes in St. Petersburg airport in Russia’s second-city, as well as bases in Antalya on Turkey’s Mediterranean coast and Burgas and Varna on the Black Sea in Bulgaria, which are popular holiday destinations for Russians, JP Morgan said in an April 1 report.
Fraport’s retail and real-estate businesses have created 600 million euros ($814 million) in value in the past six years, measured as operating profit less capital costs, its annual reports show. The aviation and ground-handling units destroyed 723 million euros in value over the same period.
Vienna Airport, which has built a business model around flights to Russia and former Soviet states, blamed the ruble’s “massive devaluation” for depressing first-quarter revenue.
“We see ourselves as the gateway to the east, and that in a way is also our weakness,” Chief Operating Officer Julian Jaeger said.
Flughafen Zuerich AG, which has almost tripled shopping space in the past 12 years, is seeing sales of jewelry and watches come under pressure, according to spokeswoman Sonja Zoechling, who says Russians are “very reluctant to shop.” Switzerland is home to luxury watchmakers including Rolex, Omega and Breitling, which all have airport sales outlets.
Among major hubs, Aeroports de Paris, whose Charles de Gaulle is Europe’s second busiest, said exchange rates curbed sales at terminal shops in the first quarter, even as traffic grew on routes to China and Russia -- the latter accounting for as much as 7 percent of retail sales, according to JPMorgan.
ADP’s retail and services arm last year generated two-thirds of group operating profit, with every other euro spent adding to earnings, versus one in 20 at the aviation business.
Deutsche Lufthansa AG, Europe’s second-largest airline, has reacted to the Ukraine crisis by reducing frequencies to Odessa from Munich and suspending the Donetsk route through July. Its Austrian Airlines unit is curbing frequencies to Kiev, Kharkiv and Dnepropetrovsk. Vueling Airlines SA, part of British Airway’s International Consolidated Airlines Group SA, has postponed the introduction of more routes to the country.
Looming large for airport retailers is the prospect of a double currency hit after the Chinese yuan traded at 8.72 to the euro on May 8, the weakest in 2 1/2 years.
Travelers from the world’s second-largest economy shell out 5.4 times more than the average, according to Fraport figures -- ahead even of the Russians. Seeking to sustain that spending spree are five Chinese-speaking personal shoppers appointed by the company to encourage Asian visitors to open their wallets.
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