THE FUNDAMENTALS OF ROUTE DEVELOPMENT AIRLINE DEALS MODULE 9

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1 THE FUNDAMENTALS OF ROUTE DEVELOPMENT AIRLINE DEALS

2 AIRLINE DEALS Experiences?

3 WHY? AIRPORT / DESTINATION PERSPECTIVE 1. Your airport operates in a competitive environment Airports around you Airports with deeper pockets Airports that provide something you may or may not 2. To reward existing customers for traffic growth 3. To encourage new customers to use the facilities and services Additional frequencies Year round operations Larger aircraft New routes Network development

4 WHAT IS THE AIRLINE TRYING TO ACHIEVE? AIRLINE PERSPECTIVE 1. Mitigate costs / share commercial revenue generated by passenger (their customer) 2. Competitive advantage Minimise/eliminate the cost levied by airports. Realise a share of the incremental passenger revenues at the airport and destination. Improve overall margin Gain a cost differential to enable a competitive advantage. 3. Non binding support To not be restricted if and when the market changes. Be able to walk away if it s not working. Move capacity if a better deal emerges.

5 ROUTE SUPPORT There are broadly three types of support A. Support to boost a carriers revenue through promoting passenger demand B. Support designed to induce carriers to supply air service by reducing costs C. Support designed to mitigate risk

6 VARIANTS OF ROUTE SUPPORT Aeronautical Incentives Marketing Support/ Direct Funding Miscellaneou s Support Subsidies & Joint Ventures

7 AERONAUTICAL INCENTIVES Typically airport aeronautical charges are levied on some or all of the following: Schedule Aircraft type/weight Time of day Season Destination (domestic/international) Facilities Air bridges Parking Ancillary items De-icing, aircraft washing facilities Navigational charges Security Marketing Support/ Direct Funding Aeronautical Incentives Subsidies & Joint Ventures Miscellaneous Support

8 THE CONVENTIONAL AIRPORT AGREEMENT Discounts over a 3-5 year period, reducing over time Discounts are normally on aeronautical charges, sometimes on handling charges Simple, easy to understand Beware though: 1. airline new-route business cases are unlikely to go beyond 2-3 years (at least for short haul) 2. Landing fees account for perhaps 20% of a short-haul carrier s total operating costs, 10% or less for a long-haul carrier. A modest discount has only a small effect on the route economics

9 MARKETING SUPPORT/DIRECT FUNDING Types of Support Direct marketing funds Non-financial marketing information (data, corporate database) Access to marketing (web links, consumer magazines) Apply Conditions Matching funds Minimum frequency/season/aircraft size New destination only Receipts of spend Recourse if route is cancelled Marketing Support/ Direct Funding Aeronautical Incentives Subsidies & Joint Ventures Miscellaneous s Support

10 SUBSIDIES & JOINT VENTURES Airport & Stakeholders Risk Sharing e.g. revenue guarantees Aeronautical Incentives Marketing Support/ Direct Funding Miscellaneou s Support Airport & Stakeholders Joint Ventures i.e. share risk & profits Subsidies & Joint Ventures

11 ROUTE SUPPORT - REVENUE RELATED Revenue related: Minimum Revenue Guarantees (MRG) Agreements that establish a target amount of revenue that a carrier will receive for operating a particular service to a particular destination over a given length of time. Only paid out if passenger demand and target revenues do not materialise. The amount paid is equal to the shortfall. If target met no funds are drawn down (All subject to certain criteria being achieved) Advantages - Carriers like them - Potentially low cost if route works - Cash flow paid at end or at intervals - Easy to admin and track Risks - No guarantees, may lose entire amount - Doesn t motivate demand - Carriers can be wary if it doesn t work reputations are damaged - Changing economics - Difficult to raise the money

12 MISCELLANEOUS SUPPORT Maintenance support Handling Fuel Facilities Office Space Airport advertising Crew base costs GSA availability and costs PR support Marketing Support/ Direct Funding Aeronautical Incentives Miscellaneous s Support Subsidies & Joint Ventures

13 ROUTE DEVELOPMENT FUNDS A route development fund (RDF) is a fund set up by private and / or public sectors stakeholders offered to airlines to help establish new strategically important routes or additional capacity. Examples? UK Regional Air connectivity fund - 56m over 3 years to encourage more flights from airports of less than 5mppa Lithuania Over 1 million Euro s funded under the Route Development Fund and earmarked for 8 airline companies to support regular flights. Northern Ireland State Route Development Fund for Long Haul Flights Canary Island fund for specific target route development

14 DIRECT PASSENGER CHARGES A number of airports have opted to charge the passengers directly and position the tax as a Development Fee Lima Buenos Aires New Delhi, India Knock, Ireland Norwich, UK Most Canadian airports Advantages Can raise large sums of money for specific development projects Takes the airport cost out of the airline negotiation (hence offer kick backs) Allows airport product to be differentiated and the airport may appear less expensive Disadvantages Adverse passenger perceptions among local community and inbound visitors Cost of collection (at point of sale / at airport) Passengers will still account for the cost in the choice of airport

15 TENDERS RFP S Airports and Airlines both issue tenders as buyers and sellers Recent examples: - Canary Island route development tender specific routes - Scoot / Norwegian / Thomas Cook / Condor/Air Asia X / Saudi Airlines - Dublin Airport specific routes - Stockholm Skavsta

16 NEGOTIATING LCCs Characteristics of LCC negotiations Will not pay full aeronautical charges Per passenger basis Seek stakeholder support Demand marketing assistance Assistance with hotel accommodation Subsidised ground transport to City centres Long term deals (5 years +) Country/route specific Require contracts Creative Support, for example website advertising

17 NEGOTIATING LCCs Negatives Financially driven rarely strategic You must agree now or the opportunity will disappear Deadline Driven All your competitors want our business Most aggressive sector particularly ultra LCC s Positives Passenger volume, non-aero income Carrier is tied to growth, which enables clear airport planning Builds your network rapidly Generates year round business

18 NEGOTIATING FSCs Characteristics of scheduled carrier negotiations More facility and product focussed Seek short term agreements Less flexibility to switch capacity to competitors (i.e. secondary airports) Negotiations usually less aggressive than low cost, however, watch out for... Negatives Market support not allocated to specific route lost to a central budget Financials under increasing pressure, becoming more dependent of agreements Generally don t generate large numbers

19 NEGOTIATING TOUR OPERATORS Characteristics of Tour Operator negotiations Seek per pax incentive Landing fee discounts (for integrated charter airline): Based aircraft support/positioning support/parking assistance/shoulder season support (tour operator) Tourism authority support/marketing tools and or fund 50/50 advertising/airport sites/branding opportunities Pitfalls In a vertically integrated organisation, always look to provide financial benefit to the decision maker (tour op) rather than the transport provider (charter airline). Be careful not to double discount Agree in advance of negotiations who is the right group contact who can make top level decisions and maintain visibility of agreed terms/conditions (documented) Ensure regular feedback on progress/sales/new opportunities Substitution of traffic; one operator s growth is generally another s decline

20 NEGOTIATING CARGO AIRLINES Seeking cost reduction wherever possible: Handling charges (may be support from handling agent) Landing fees 24 hour access Crew layover assistance (may be support from handling agent) Self handling permission e.g. express operators (DHL, Fedex) Special procedures/facilities e.g. cold storage

21 NEGOTIATING GUIDELINES Watch for the shopping list approach hear it all first Never commit beyond your business case Never let yourself become time pressured Always be prepared to walk away Remember - Negotiating is a positive sign. It signals an intention to buy.

22 EXAMPLES OF PUBLISHED INCENTIVES Passenger Related Bonus scheme for passenger growth The aim of the bonus scheme is to reward airlines who are contributing to passenger growth for the Avinor group. The scheme is valid from January 1st 2013, and until further notice. Calculation A bonus is awarded for each additional departing passenger from one calendar year to the next, based on the number of passengers for which passenger charge is payable. The bonus is 25 Norwegian kroner per departing international passenger and Norwegian kroner per departing domestic passenger. The scheme encompasses all of Avinor s airports, and the calculation of bonus is made on company level, in effect adding up the total amount of passengers for each airliner for all of Avinor s airports. For calculation of bonus payments, Avinor will use reported data as of the end of the year. Avinor reserves the right to make changes in bonus payments if considerable changes to reported data on passengers occur.

23 EXAMPLES OF PUBLISHED INCENTIVES Charter Flights Related The Charter Fund Northern Norway is a newly launched incentive scheme, managed by the Northern Norway Tourist Board, designed to help tour operators and their charter airline partners establish new tourism products to northern Norway and the Norwegian Arctic Lapland region, by bringing in tourists directly by air transport. Financed by the counties of Nordland, Troms and Finnmark, the goal of the fund is to encourage tour operators to partner with our tourism stakeholders in northern Norway to build new tourism markets.

24 EXAMPLES OF PUBLISHED INCENTIVES Volume Related In accordance with the Katowice Airport list of tariffs, aircraft landing fees and departing passenger charges are calculated in increasing increments throughout the annual settlement period. Upon exceeding a given bracket with regards to the number of landings or departing passengers, fees are reduced. The more operations airlines perform in a given year and the more passengers they transport, the less they pay. Landing fees for aircraft with a MTOW greater than 2 tons, as well as departing passenger charges are provided in the tables below.

25 EXAMPLES OF PUBLISHED INCENTIVES Time of Day Related Off-Peak Period Rates In order to qualify for the PFC Off-Peak Rate an Airline must:- a) operate a minimum of one Service each Week for 52 weeks of a Year, and b) ensure that the departure of the Aircraft in the Off-Peak Periods 05:30 to 05:59, 06:30 to 06:59, 13:00 to 13:29, 19:00 to 19:59 and 22:00 to 22:59 achieves the applicable QC Ratings shown in the table at Section 1.7 For the avoidance of doubt:- a) if an Aircraft does not achieve the applicable QC Ratings that flight will not be an eligible flight for the Off-Peak PFC Charge Rate and the relevant Standard Rate PFC will apply. b) Code F Aircraft are not eligible for PFC Off-Peak Rates. 1.7 PFC

26 EXAMPLES OF PUBLISHED INCENTIVES Seasonality Related The Three-Year Program of Incentives regards the 5 following categories of flights, to be activated by the end of the IATA Winter season : Category 1. New intercontinental routes; Category 2. New flights to hubs (by carriers that have a hub at the airport of destination or business agreements that allow passengers to utilise connecting flights); Category 3. New strategic point-to-point European/Mediterranean routes, meaning those of greatest interest to Naples Airport, based on its evaluations of potential traffic demand; Category 4. New point-to-point European/Mediterranean routes of interest to Naples Airport; Category 5. De-seasonalisation increase in the number of seats offered during the period October-May on existing routes by carriers that already operate flights on those routes.

27 EXAMPLES OF PUBLISHED INCENTIVES Marketing Support

28 EXAMPLES OF PUBLISHED INCENTIVES Volume Related This incentive is provided to all air carriers with more than 50,000 transported passengers paying full passenger service charge (i.e. the sum total of passengers after transfer, transit and exempt passengers have been deducted) upon departure from Prague/Ruzyně airport via regular scheduled connections during a calendar year. The individual rates per one departing passenger paying in full are defined as follows:

29 EXAMPLES OF PUBLISHED INCENTIVES Tender/RFP Flight Development Fund against target new routes for Canary Islands. Lead by PromoTur, collaboratively Islands Tourism Authority. Fund can pay up to 50% of airport charges for up to three years. Airline bids include the specific of the route business plan, operating plan, showing assessment of sustainability and marketing plan.

30 ROUTE SUPPORT CHECKLIST Negotiating checklist: Establish maximum position Let them ask first don t offer Budget Check what is permitted under regulatory jurisdiction, keep up to date with changes Assess impact on existing customers attrition Do your homework - research and prepare Assess competition Seek third party support Assign a negotiator with authority Make sure you are dealing with the decision maker Conclude with a contract (conditions, control) Add in a review period Always keep control of any marketing spend