Airport Economics presented by Eileen Poh Assistant Director (ICAO Affairs) 1 Outline Regulated and non-regulated Revenues Price Cap-Regulation: Single or Dual Till Financial State of Airports Airports as Business and Activity centre Revenue Management, deregulation and liberalization Airport Marketing 1
Aeronautical Revenue Aeronautical Activities Aircraft take-off, landing and parking Security Passenger services Activities characterized by a natural monopoly Principles of Aeronautical Charges Based on cost recovery Keeping cost competitive Usually regulated Non-Aeronautical Revenue Non-Aeronautical activities Airport retail concessions Food and beverage Rental of offices and warehousing Franchises Car parking Other non-aeronautical services (lounges, spas, hotels) Principles of Non-Aeronautical Charges Commercial and market based pricing Surplus to fund infrastructure development 2
Price Cap Regulation Single Till vs Dual Till Single Till Approach Takes into account both aeronautical and commercial revenues and costs in the price cap for airport charges Dual Till Approach Distinguishes only the core aeronautical revenues which are regulated, independent of the performance of the commercial revenues when setting price cap for airport charges Price Cap Regulation Enhancing economic efficiency Which approach result in better use of resources Which approach provides better incentives to make appropriate investments over time? Is it feasible to identify the costs and assets of the aeronautical business and how robust it would be over time? 3
User Charges Controversial issues, with varying practices around the world; little guidance available; occasional government intervention Chicago Convention (1944), Article 15, Chapter 2: Uniform conditions for aircraft of all Contracting States Non-discriminatory charges for international air services Publish charges communicating through ICAO Bermuda 2 Agreement (UK/US, 1977): User charges may reflect, but shall not exceed, full costs, but includes fair return on assets after depreciation Useful References: ICAO Doc 9082/4 (1992, 2001) Statements by Council on Charges for Airports and En Route Navigation ICAO Doc 7100 (annual) Manual of Airport and Air Navigation Charges State of Airport Finances Traditional Breakdown of Revenue Source 4
State of Airport Finances Non-traditional Breakdown of Revenue Source Changi s Revenue Breakdown Total Revenue FY 2005/2006 - $1,034m 42% 58% Non-Aeronautical Revenue Aeronautical Revenue 13% Non-Aeronautical Revenue - $602m 13% 60% 14% Airport Concession Fee Franchise Fee Rental of Office & Warehouse Space Others 5
Airport Activities Operational 1. Air traffic control 2. Meteorological services 3. Telecommunication 4. Police and security 5. Fire, ambulance and first aid services 6. Runway, apron and taxiway maintenance Handling 1. Aircraft cleaning 2. Provision of power and fuel 3. Luggage and freight loading and unloading 4. Processing of passengers, baggage and freight Commercial 1. Duty free shops 2. Other retailing shopping 3. Restaurants and bars 4. Leisure services 5. Hotel accommodation 6. Banks 7. Car rental and parking 8. Conference and communication facilities 9. Real estate development Revenue Diversification Within the terminal Temporary Carts & Kiosks Out-posting Licensing Agreements Sponsorships Naming Rights Branding Special Events Super Bowl Conventions Vending Machines Smart Carts Business Products Entertainment (e.g. Ipod music) Access and Exclusivity Fees Transportation Related Logistics Distribution Centers, FTZs Passenger Related Car Parking and Car Rental Hotel and Conference Centers Aviation Related Air Cargo Aircraft Maintenance Component Manufacture Business Related Industrial Parks Retail and Commercial Uses Outside the terminal 6
Airport Size vs Revenues Close relationship between airport size and revenue generation sources Bigger airports with greater capability to exploit commercial activities and increase revenues Small airports almost entirely dependent on aeronautical revenues Deregulation and Liberalization Deregulation led to rapid growth, creating major strain on airport infrastructure Increasing demand for major investments to meet growth and improvements in quality of services to compete with other airports, far exceeds available public resources Public-private partnership = source of funding in exchange for long-term leases, concessions and contracts for recovery of investments Public agencies seek to reduce costs of services, shifting responsibility to private sector Generating business-like performances out of utilities and infrastructure under government ownership 7
Airports Economic Generators Economic Ripple Effect Direct Employment, wages & expenditures from on-airport businesses Indirect Economic activities stimulated by support for airport businesses Induced Employment and expenditures of businesses serving households that earn income from the airport businesses, directly or indirectly Foreign Direct Investment Diversifying Economy Economic Impacts 8
Economic Impacts Airlines under intense pressure by high fuel prices and competition from low cost carriers to cut costs and increase load factors Airlines are less able than ever to pay for airport operation and infrastructure investment and maintenance Airports operating in an environment that liberalization will:- make airlines and alliances seek efficient hubs focus on core activities run airports as profit centres; ; yet complement economic development priorities Forces of Change Airports are dynamic and global entities From: Independent, non-profit, government- owned entities TO: Global commercial enterprises under public and private ownerships Driving Forces Deregulation allows airlines/airports to set own prices, travel times and destinations Available competition Increase reliance on non-airline sources Tie up with hotels, duty-free shops, catering, retail Consultancy services and management contracts 9
Role of the Private Sector Provide private source of funding for airport infrastructure development Airport costs for terminal building, runway and air navigation systems US airports utilize capital bond markets to finance development. Europeans more dependent on government budget allocations Provide technical, management and operations expertise Role of the Private Sector Optimise commercial opportunities Pro-active business expertise to strategically incorporate national development needs Divestment of non-core assets and related activities Create alternative high value added activities in place of non-core activities, re-use unproductive assets Holistic approach to marketing Maximise airport operational efficiency Airport costs compounded by: Labor, capital and other operational costs Western European airports: Labor cost average 42% of total cost, with handling = 65% US airports: Labor costs average 22% of total cost 10
Public-Private Private Management Structure A concession Private management services contract for fixed term When not politically feasible for government to relinquish ownership of airport assets Build-Operate Operate-Transfer (BOT) model Project specific Private sector finance, build and operate airport/ facility for fixed term after which ownership of airport/facility transferred back to government Shifts commercial, financing and construction risk from governments to private sector Governments retain some control via predefined contract scope, pricing, service quality, schedule Public-Private Private Management Structure Trade Sales triggered by a government desire to either pay back or re-deploy debt in other areas, besides improving commercial management at airport Majority or minority ownership in a Strategic Equity Partner (SEP). Governments may retain some control through shareholding while still introducing added value and technical expertise in an airport operations 11
Public-Private Private Management Structure Initial Public Offering (IPO) Alternative to a trade sale Involves full or partial sale of the airport through a stock quotation Method of raising cash but maintain management control Under-performing current management practices are retained and SEP investor control premium in the equity sale price is lost. Airport Marketing Airports are natural monopolies? Passengers either want to fly (to our city) or they don t? Therefore, it is waste to spend money on airport marketing? 12
Airport Marketing More than half of airport services are subject to competition Diversion to other modes of transportation Surface diversion to other airports Cargo traffic Retail/food Destination competition Decisions by airport operators have significant implications for the marketing and strategy development of airlines Airport Marketing Diverse airport client base Airlines Passengers Freight forwards Cargo agents Logistics companies Retailers MROs Expansive geographical distribution National Regional Global 13
Drivers of Airport Retail Quality Quality of of Pax Pax Airport and 4 P s P s of Marketing Product Price Promotion Place (Distribution) 14
Product Packaging of the components that define the airport including: runway capacity type of aircraft it can accommodate constrained or unconstrained terminal capacity and design landing fees and charges Passenger processing times Service standards (including customer service) Efficiency defined by turnaround time, connecting times, processing time etc Competitiveness of airport rates and charges Product Packaging of the components that define the airport including (con t): Diversity of facilities and services Cargo and logistics MROs Lounges, Spas etc Retail offerings Shopping mall for luxury goods Wide spread of shops Food and Beverage offerings Gourmet food outlets Banding What is is associate with 15
Price Price Strategy (skim, penetration) Price flexibility Elastic pricing Promotional pricing Seasonal pricing Discounts and wholesale pricing Price differentiation Price discrimination Certain components, Not for regulated charges Market forces Supply and demand Competitiveness comparison Promotion Marketing communications Communication about information of product with goal of generating positive response Promotional strategy Push or pull Advertising Use of different and appropriate media (multi-media, media, brochures etc) Marketing promotions Public relations and publicity Creating awareness, frequency Marketing communications budget 16
Place (Distribution) Distribution is about getting the products to the customer Distribution channels passengers Market coverage Inclusive Selective Exclusive Logistics 17