Hot Issues
Airport Duty Free, Retailing & Non-Aero Activities
As the airport sector has become increasingly competitive, driven by pricing demands by low cost airlines, consolidation of legacy airlines and the growing size and scope of alliances, and in many countries the replication of airport facilities in urban areas, so has the need to develop alternative revenue streams. In fact it is no longer entirely accurate to describe non-aeronautical revenue generation as ‘alternative’. Airports Council International for example suggests that airport managements should set 50% of all revenues as the minimum level of revenue generation from such activities.
Neither is it any longer a case (except in the most basic low cost airports) of offering a snack bar and a gift shop. Airport retailing has grown to embrace a myriad of sub-sectors including food and beverage (usually acronymed as F&B); children’s goods; confectionery/fine food; consumer technology goods; cosmetics; destination merchandise; fashion, leather goods and accessories; fragrances; crystal and china speciality gifts; hair styling; jewelry; news and books; wines and spirits; sunglasses/eye care; tobacco products and lighters; watches; well-being; and writing instruments.
In fact it is often difficult to tell an airport terminal (especially airside) apart from a city shopping mall and hardly surprising that some airport operators are prior owners of such retail facilities.
But it is not only by offering shopping that an airport operator can increase revenues. Many innovative measures have been introduced that include hotels and convention facilities; property development; advertising; consumer services; car parking and rental services; foreign exchange; lounges; gambling; loyalty cards; and naming rights.
Airport Finance & Charges
Airport charges are applied to airport users for the use of airport facilities. The way in which an airport makes money is basically divided into aeronautical and non-aeronautical (commercial) means. Aeronautical charges typically comprise landing (usually based on aircraft weight), parking, other infrastructure charges, navigation, passenger and freight handling (on a per-passenger or consignment basis), and fuel provision. Government taxes may also be included. Ultimately, these charges are paid, indirectly, by passengers and freight customers via the ticket price or freight forwarding fee.
Airport charging systems are in many instances imposed and governed by national authorities and can be ‘light’ or ‘heavy’ handed, or somewhere in-between. In a light-handed regime airports may be given carte blanche to set their own fees. At the other end of the scale they will be closely controlled. Some countries control prices at their main gateway airports only. Even where the airports concerned are privately owned, the charges have to comply with whatever regulatory parameters are set by the authorities.
Airports may apply ‘single’ or dual’ till principles. Under the single till principle all airport activities (aeronautical and commercial) are taken into consideration to determine the level of airport charges. Under the dual till principle, only aeronautical activities are taken into consideration; the airport's retail and other non-aeronautical revenue is not taken into account in reducing charges to airline users. Airport charges derived using the single till approach are therefore likely to be lower than they would under a dual till because of the "sharing" of profits generated by commercial activities. There are some variations on this theme, eg excluding parking revenues from the "till".
Charging systems can also work as management tools. By varying certain charges, airports for example can try to increase the use of airport infrastructure or reduce the environmental impact of aviation. In reports issued by CAPA in 2009 (e.g. in Airport Investor Monthly) it was clear how even neighbouring airports responded to the financial crisis by differing methods - in some cases reducing their fees (and/or introducing incentives) and in others by raising them (and/or curtailing incentives).
Airport Ownership and Privatisation
The majority of the world’s airports remain government owned and operated, though a trend towards full or partial privatisation began in the 1990s (the very earliest examples dating back to the 1970s and even earlier in some cases in the US) and continued, with occasional periods of inactivity, until 2009.
Airport privatisation can at one end of the scale mean merely ‘corporatisation’, where a government department is run along commercial, private sector lines, perhaps being turned into a limited company with government shareholders, and at the other an Initial Public Offering (IPO); a stock market flotation of equity. In between it can take the form of a lease (the only way an airport can be privatised in the US momentarily), a trade sale, a perpetual franchise, a build-operate-transfer scheme or one of its many derivatives, a public-private-partnership, a private finance initiative, a management contract or a management buy-out. The main element in a government’s decision making on the method of privatisation is often the degree of control it wishes to continue to operate, which can vary from zero to almost total. As with privatisation in other sectors, new and innovative methods are being introduced all the time and an airport may change hands by different methods.
Britain’s BAA for example was privatised directly by way of an IPO (along with several others in Europe where the IPO has been popular in better economic times), then was bought out by a foreign private consortium and is now being split up, in the first instance by way of a trade sale of one of its airports to a private equity fund.
The main goals of privatisation, inter alia, are: (in emerging markets) to tap domestic and foreign capital markets; to provide independent financing of large scale projects; to reduce the financing requirement of central government; (in existing markets) the avoidance of additional debt; transfer of responsibility or risk; introduction of efficiencies and consequential improvement of financial performance.
The period 2009-10 has been one of the quietest for airport deals in the last two decades, largely due to the credit crunch. Nevertheless there have been some critical ones: London Gatwick, St Petersburg and Pristina being examples of large, medium and small airports where transactions have taken place recently; the Chicago Midway lease may yet re-emerge in 2010 (and 15 US airports have now expressed an interest in privatisation); and at least one sizeable deal is pending in the UK.
Governments are expected to unlock a wave of privatisation activity in coming years as they seek to restore health to publish sector finances in the wake of the global financial crisis.
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See CAPA's new Global Airport Investors Database. CAPA also covers Airport Privatisation and Ownership issues in our exclusive report, Airport Investor Monthly and publishes the management report, Global Airport Privatisation. |
Airport Systems & Technology
Airports are at the cutting edge of technological advance and innovation, from automated check-in procedures via baggage handling, communication systems, air traffic control, safety and security techniques, emergency services, passenger guidance and tracking and flight information provision to passenger leisure services (shopping, refreshment) and even techniques to keep birds away from runways.
On a larger platform the search is on continuously to design ‘the airport of the future’, which might involve locating landside activities at the airport as far as possible near the runway and preferably under the ground; or the co-location of access to the aircraft with access to other transport modes.
On the other hand, and despite the continuous advances in technology, the development of the airside at least of airports has not changed much since air transport started. The way passengers, cargo and aircraft are handled is basically the same as it was 50 years ago, although many processes have been automated. The additional security measures that are needed in air transport today have complicated the procedures at airports. Many passengers will experience time consuming and sometimes humiliating security checks. For the immediate future the focus is likely to remain on minimising the negative image of air transport generated by these measures and on reducing environmental damage through the application of new technology and systems where appropriate, rather than on any ‘grand plan’ for the future.
Ancillary Revenues
Ancillary revenue is a hot topic for the airline industry, as it seeks to cope with pressures on top line revenues from ticket sales amid intense competition. The ancillary revenue (merchandising) revolution centres on airlines unbundling their service offering and charging passengers for items they wish to purchase. Baggage fees are one of the fast growing items in ancillary portfolios that also includes seat allocation, inflight services and products, related travel products (including insurance, car hire and accommodation), inflight advertising, airport lounges access and increasingly diverse opportunities, including concert tickets, mobile phone credits and more.
CAPA also publishes Peanuts! Weekly, which regularly covers ancillary revenue trends and developments.
Ash Cloud
CAPA also provides regular updates in its exclusive report, Europe Airline Daily.
BRIC Emerging Markets
See also the CAPA profiles on Indian Aviation and Chinese Aviation.
China-Taiwan Cross-Strait Aviation
Air services between Mainland China and Taiwan are gradually opening up, as relations between the two sides improve. Regular (scheduled) cross-Strait services resumed on 31-Aug-2009, ending a six-decade absence. There has been steady progress since 2003, which saw the launch of the first cross-Strait charter passenger services since 1949.