Airport Economicsclacsec.lima.icao.int/Reuniones/2007/Seminario-Chile/Presentaciones/PR05.pdf ·...

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Strategic Airport Management Programme9-13 April 2007

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Airport EconomicsAirport Economicspresented by

Eileen PohAssistant Director (ICAO Affairs)


OutlineOutline�� Regulated and nonRegulated and non--regulated Revenuesregulated Revenues�� Price CapPrice Cap--Regulation: Single or Dual TillRegulation: Single or Dual Till�� Financial State of AirportsFinancial State of Airports�� Airports as Business and Activity centreAirports as Business and Activity centre�� Revenue Management, deregulation and Revenue Management, deregulation and

liberalizationliberalization�� Airport MarketingAirport Marketing

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Aeronautical RevenueAeronautical Revenue�� Aeronautical ActivitiesAeronautical Activities

�� Aircraft takeAircraft take--off, landing and off, landing and parkingparking

�� SecuritySecurity�� Passenger servicesPassenger services�� Activities characterized by a Activities characterized by a

natural monopolynatural monopoly

�� Principles of Aeronautical Principles of Aeronautical ChargesCharges�� Based on cost recoveryBased on cost recovery�� Keeping cost competitiveKeeping cost competitive�� Usually regulatedUsually regulated


NonNon--Aeronautical RevenueAeronautical Revenue�� NonNon--Aeronautical activitiesAeronautical activities

�� Airport retail concessionsAirport retail concessions�� Food and beverageFood and beverage�� Rental of offices and Rental of offices and

warehousingwarehousing�� FranchisesFranchises�� Car parkingCar parking�� Other nonOther non--aeronautical services (lounges, spas, aeronautical services (lounges, spas,

hotels)hotels)

�� Principles of NonPrinciples of Non--Aeronautical ChargesAeronautical Charges�� Commercial and market based pricingCommercial and market based pricing�� Surplus to fund infrastructure developmentSurplus to fund infrastructure development

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Price Cap RegulationPrice Cap Regulation�� Single Till Single Till vsvs Dual TillDual Till�� Single Till ApproachSingle Till Approach

�� Takes into account both aeronautical and Takes into account both aeronautical and commercial revenues and costs in the price cap for commercial revenues and costs in the price cap for airport chargesairport charges

�� Dual Till ApproachDual Till Approach�� Distinguishes only the core aeronautical revenues Distinguishes only the core aeronautical revenues

which are regulated, independent of the which are regulated, independent of the performance of the commercial revenues when performance of the commercial revenues when setting price cap for airport chargessetting price cap for airport charges


Price Cap RegulationPrice Cap Regulation�� Enhancing economic efficiencyEnhancing economic efficiency�� Which approach result in better use of Which approach result in better use of

resourcesresources�� Which approach provides better incentives to Which approach provides better incentives to

make appropriate investments over time?make appropriate investments over time?�� Is it feasible to identify the costs and assets of Is it feasible to identify the costs and assets of

the aeronautical business and how robust it the aeronautical business and how robust it would be over time?would be over time?

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User ChargesUser Charges�� Controversial issues, with varying practices around the Controversial issues, with varying practices around the

world; little guidance available; occasional government world; little guidance available; occasional government interventionintervention

�� Chicago Convention (1944), Article 15, Chapter 2:Chicago Convention (1944), Article 15, Chapter 2:�� Uniform conditions for aircraft of all Contracting StatesUniform conditions for aircraft of all Contracting States�� NonNon--discriminatory charges for international air servicesdiscriminatory charges for international air services�� Publish charges communicating through ICAOPublish charges communicating through ICAO

�� Bermuda 2 Agreement (UK/US, 1977):Bermuda 2 Agreement (UK/US, 1977):�� User charges may reflect, but shall not exceed, full costs, but User charges may reflect, but shall not exceed, full costs, but

includes fair return on assets after depreciationincludes fair return on assets after depreciation

�� Useful References:Useful References:�� ICAO Doc 9082/4 (1992, 2001) Statements by Council on Charges ICAO Doc 9082/4 (1992, 2001) Statements by Council on Charges

for Airports and En Route Navigationfor Airports and En Route Navigation�� ICAO Doc 7100 (annual) Manual of Airport and Air Navigation ICAO Doc 7100 (annual) Manual of Airport and Air Navigation

ChargesCharges


State of Airport FinancesState of Airport FinancesTraditional Breakdown of Revenue SourceTraditional Breakdown of Revenue Source

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NonNon--traditional Breakdown of Revenue Sourcetraditional Breakdown of Revenue Source

State of Airport FinancesState of Airport Finances


Total Revenue FY 2005/2006 - $1,034m

Non-Aeronautical Revenue

Aeronautical Revenue

58%

42%

Non-Aeronautical Revenue - $602m

14%

13%

13%

60%

Airport Concession FeeFranchise FeeRental of Office & Warehouse SpaceOthers

ChangiChangi’’ss Revenue BreakdownRevenue Breakdown

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1. Duty free shops1. Duty free shops2. Other retailing shopping2. Other retailing shopping3. Restaurants and bars3. Restaurants and bars4. Leisure services4. Leisure services5. Hotel accommodation5. Hotel accommodation6. Banks6. Banks7. Car rental and parking7. Car rental and parking8. Conference and 8. Conference and

communication facilitiescommunication facilities9. Real estate 9. Real estate

developmentdevelopment

1. Aircraft cleaning2. Provision of power and

fuel3. Luggage and freight

loading and unloading4. Processing of

passengers, baggage and freight

1. Air traffic control2. Meteorological services3. Telecommunication4. Police and security5. Fire, ambulance and first

aid services6. Runway, apron and

taxiway maintenance

CommercialCommercialHandlingHandlingOperationalOperational

Airport ActivitiesAirport Activities


Business Related� Industrial Parks� Retail and� Commercial Uses

Vending Machines� Smart Carts� Business Products� Entertainment (e.g. Ipodmusic)

Access and Exclusivity Fees

Aviation Related� Air Cargo� Aircraft Maintenance� Component Manufacture

Special Events� Super Bowl� Conventions

Passenger Related� Car Parking and Car Rental� Hotel and Conference Centers

Sponsorships� Naming Rights� Branding

Transportation Related� Logistics� Distribution Centers, FTZ�s

Temporary Carts & Kiosks– Out-posting– Licensing Agreements

Outside the terminalWithin the terminal

Revenue DiversificationRevenue Diversification

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Airport Size Airport Size vsvs RevenuesRevenues��Close relationship between airport size and Close relationship between airport size and

revenue generation sourcesrevenue generation sources��Bigger airports with greater capability to exploit Bigger airports with greater capability to exploit

commercial activities and increase revenuescommercial activities and increase revenues��Small airports almost entirely dependent on Small airports almost entirely dependent on

aeronautical revenuesaeronautical revenues

��

��

��

��


Deregulation and LiberalizationDeregulation and Liberalization��Deregulation led to rapid growth, creating major Deregulation led to rapid growth, creating major

strain on airport infrastructurestrain on airport infrastructure�� Increasing demand for major investments to meet Increasing demand for major investments to meet

growth and improvements in quality of services to growth and improvements in quality of services to compete with other airports, far exceeds available compete with other airports, far exceeds available public resourcespublic resources

��PublicPublic--private partnership = source of funding in private partnership = source of funding in exchange for longexchange for long--term leases, concessions and term leases, concessions and contracts for recovery of investmentscontracts for recovery of investments

��Public agencies seek to reduce costs of services, Public agencies seek to reduce costs of services, shifting responsibility to private sectorshifting responsibility to private sector

��Generating businessGenerating business--like performances out of like performances out of utilities and infrastructure under government utilities and infrastructure under government ownershipownership

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�� Economic Ripple EffectEconomic Ripple Effect�� DirectDirect

�� Employment, wages & expenditures from Employment, wages & expenditures from ““onon--airportairport”” businessesbusinesses

�� IndirectIndirect�� Economic activities stimulated by support for Economic activities stimulated by support for

airport businessesairport businesses�� InducedInduced

�� Employment and expenditures of businesses Employment and expenditures of businesses serving households that earn income from serving households that earn income from the airport businesses, directly or indirectlythe airport businesses, directly or indirectly

�� Foreign Direct InvestmentForeign Direct Investment�� Diversifying EconomyDiversifying Economy

Airports Economic GeneratorsAirports Economic Generators


Economic ImpactsEconomic Impacts

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Economic ImpactsEconomic Impacts��Airlines under intense pressure by high fuel prices Airlines under intense pressure by high fuel prices

and competition from low cost carriers to cut costs and competition from low cost carriers to cut costs and increase load factors and increase load factors

��Airlines are less able than ever to pay for airport Airlines are less able than ever to pay for airport operation and infrastructure investment and operation and infrastructure investment and maintenancemaintenance

��Airports operating in an environment that Airports operating in an environment that liberalization will:liberalization will:--�� make airlines and alliances seek efficient hubsmake airlines and alliances seek efficient hubs�� focus on core activitiesfocus on core activities�� run airports as profit run airports as profit centrescentres; yet ; yet �� complement economic development prioritiescomplement economic development priorities


Forces of ChangeForces of Change�� Airports are dynamic and global entitiesAirports are dynamic and global entities�� From: Independent, nonFrom: Independent, non--profit, governmentprofit, government--

owned entities owned entities �� TO: Global commercial enterprises under public TO: Global commercial enterprises under public

and private ownershipsand private ownerships�� Driving ForcesDriving Forces

�� Deregulation allows airlines/airports to set own prices, Deregulation allows airlines/airports to set own prices, travel times and destinationstravel times and destinations

�� Available competitionAvailable competition

�� Increase reliance on nonIncrease reliance on non--airline sourcesairline sources�� Tie up with hotels, dutyTie up with hotels, duty--free shops, catering, retailfree shops, catering, retail�� Consultancy services and management contractsConsultancy services and management contracts

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�� Provide private source of funding for airport Provide private source of funding for airport infrastructure developmentinfrastructure development�� Airport costs for terminal building, runway and air Airport costs for terminal building, runway and air

navigation systemsnavigation systems�� US airports utilize capital bond markets to finance US airports utilize capital bond markets to finance

development.development.�� Europeans more dependent on government budget Europeans more dependent on government budget

allocationsallocations�� Provide technical, management and operations Provide technical, management and operations

expertiseexpertise

Role of the Private SectorRole of the Private Sector


��OptimiseOptimise commercial opportunitiescommercial opportunities�� ProPro--active business expertise to strategically active business expertise to strategically

incorporate national development needsincorporate national development needs�� Divestment of nonDivestment of non--core assets and related activitiescore assets and related activities�� Create alternative high value added activities in place Create alternative high value added activities in place

of nonof non--core activities, recore activities, re--use unproductive assetsuse unproductive assets�� Holistic approach to marketingHolistic approach to marketing

��MaximiseMaximise airport operational efficiencyairport operational efficiency�� Airport costs compounded by: Labor, capital and Airport costs compounded by: Labor, capital and

other operational costsother operational costs�� Western European airports: Labor cost average 42% Western European airports: Labor cost average 42%

of total cost, with handling = 65%of total cost, with handling = 65%�� US airports: Labor costs average 22% of total costUS airports: Labor costs average 22% of total cost

Role of the Private SectorRole of the Private Sector

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�� A A concessionconcession��Private management services contract for fixed Private management services contract for fixed

termterm��When not politically feasible for government to When not politically feasible for government to

relinquish ownership of airport assetsrelinquish ownership of airport assets�� BuildBuild--OperateOperate--Transfer (BOT)Transfer (BOT) model model

��Project specificProject specific��Private sector finance, build and operate airport/ Private sector finance, build and operate airport/

facility for fixed term after which ownership of facility for fixed term after which ownership of airport/facility transferred back to governmentairport/facility transferred back to government

��Shifts commercial, financing and construction risk Shifts commercial, financing and construction risk from governments to private sectorfrom governments to private sector

��Governments retain some control via predefined Governments retain some control via predefined contract scope, pricing, service quality, schedulecontract scope, pricing, service quality, schedule

PublicPublic--Private Management StructurePrivate Management Structure


��Trade SalesTrade Sales�� triggered by a government desire to either pay triggered by a government desire to either pay

back or reback or re--deploy debt in other areas, besides deploy debt in other areas, besides improving commercial management at airportimproving commercial management at airport

��Majority or minority ownership in a Majority or minority ownership in a Strategic Strategic Equity PartnerEquity Partner (SEP)(SEP)..

��Governments may retain some control through Governments may retain some control through shareholding while still introducing added value shareholding while still introducing added value and technical expertise in an airport operations and technical expertise in an airport operations


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�� Initial Public Offering (IPO)Initial Public Offering (IPO)��Alternative to a trade saleAlternative to a trade sale�� Involves full or partial sale of the airport through a Involves full or partial sale of the airport through a

stock quotationstock quotation��Method of raising cash but maintain management Method of raising cash but maintain management

controlcontrol��UnderUnder--performing current management practices performing current management practices

are retained and SEP are retained and SEP ‘‘investor controlinvestor control’’ premium premium in the equity sale price is lost.in the equity sale price is lost.



Airport MarketingAirport Marketing��Airports are natural monopolies?Airports are natural monopolies?��Passengers either want to fly (to our city) or they Passengers either want to fly (to our city) or they

dondon’’t?t?��Therefore, it is waste to spend money on airport Therefore, it is waste to spend money on airport

marketing?marketing?

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Airport MarketingAirport Marketing��More than half of airport services are subject to More than half of airport services are subject to

competitioncompetition�� Diversion to other modes of transportationDiversion to other modes of transportation�� Surface diversion to other airportsSurface diversion to other airports�� Cargo trafficCargo traffic�� Retail/foodRetail/food�� Destination competitionDestination competition

��Decisions by airport operators have significant Decisions by airport operators have significant implications for the marketing and strategy implications for the marketing and strategy development of airlinesdevelopment of airlines


�� Diverse airport client baseDiverse airport client base�� AirlinesAirlines�� PassengersPassengers�� Freight forwardsFreight forwards�� Cargo agentsCargo agents�� Logistics companiesLogistics companies�� RetailersRetailers�� MROsMROs

�� Expansive geographical distributionExpansive geographical distribution�� NationalNational�� RegionalRegional�� GlobalGlobal

Airport MarketingAirport Marketing

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Drivers of Airport RetailDrivers of Airport Retail

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��

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Quality

of PaxQuali

ty

of Pax�

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� Product

� Price

� Promotion

� Place (Distribution)

Airport and 4 PAirport and 4 P’’s of Marketings of Marketing

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ProductProduct� 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


ProductProduct� 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

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PricePrice��Price Strategy (skim, penetration)Price Strategy (skim, penetration)��Price flexibilityPrice flexibility

�� Elastic pricingElastic pricing��Promotional pricingPromotional pricing��Seasonal pricingSeasonal pricing��Discounts and wholesale pricingDiscounts and wholesale pricing��Price differentiationPrice differentiation��Price discriminationPrice discrimination

�� Certain components, Certain components, �� Not for regulated chargesNot for regulated charges

��Market forcesMarket forces�� Supply and demandSupply and demand

��Competitiveness comparisonCompetitiveness comparison


PromotionPromotion��Marketing communicationsMarketing communications

�� Communication about Communication about information of product with goal information of product with goal of generating positive responseof generating positive response

��Promotional strategyPromotional strategy�� Push or pullPush or pull

��AdvertisingAdvertising�� Use of different and appropriate media (multiUse of different and appropriate media (multi--media, media,

brochures etc)brochures etc)��Marketing promotionsMarketing promotions��Public relations and publicityPublic relations and publicity

�� Creating awareness, frequencyCreating awareness, frequency��Marketing communications budgetMarketing communications budget

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Place (Distribution)Place (Distribution)��Distribution is about getting the products to the Distribution is about getting the products to the

customercustomer��Distribution channelsDistribution channels

�� passengerspassengers��Market coverageMarket coverage

�� InclusiveInclusive�� SelectiveSelective�� ExclusiveExclusive

��LogisticsLogistics

Airport Economicsclacsec.lima.icao.int/Reuniones/2007/Seminario-Chile/Presentaciones/PR05.pdf ·...

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