Evolving Airport Competition - Competition & Pricing


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The presentation shows the competition that evolves between neighbouring airports. It also examines the strategies which airport operators can adopt to make the airport more competitive for their businesses. The second part deals with User Development Fee (UDF) pricing and application of crystal ball simulation on UDF.

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Evolving Airport Competition - Competition & Pricing

  1. 1. Evolving Airport CompetitionCompetition & Pricing<br />Faisal Khan<br />
  2. 2. Presentation Plan<br />Overview of Indian Airports Industry<br />International Comparisons<br />Secondary Airports in India – Will they be a reality?<br />Multi-Airport Systems<br />Airport Competition<br />Forms of Competition<br />Barriers to Competition amongst Airports<br />Strategies for Airport Competition<br />User Development Fee pricing<br />Calculation<br />Crystal Ball Simulation<br />
  3. 3. Overview of Global Airport Industry<br />Dominance by NA & EU – passengers carried<br />Dominance by AP & NA – Cargo Tonnes<br />Airport market services revenue – 100bn$ (2008)<br />Biggest global players<br /><ul><li>British Airport Authority Limited (BAA)</li></ul>Owns and operates 7 airports in UK<br /><ul><li>Port Authority of New York & New Jersey
  4. 4. Aéroports de Paris</li></ul>Operates and manages 14 airports around Paris<br /><ul><li>Fraport AG</li></ul>Manages Frankfurt airport, EU’s 3rd largest airport and offers airport services both in Germany and abroad<br />Has shareholding of 10% in DIAL, Delhi<br />
  5. 5. History of Indian Airport Industry<br />National Airports Authority + International Airports  Airports Authority of India by AAI Act, 1995<br />Pre-1993 AI and IA were the only Indian carriers<br />Operated with old aircrafts and inefficient work practices<br />No focus on developing traffic and weak aviation growth<br />1993 – 1995 Deregulation and entry of private airlines<br />Start-ups entered and soon exited the market<br />1995 – 2003 Industry went into dormancy<br />Aviation untouched by economic reforms of Govt.<br />2003 – 2006 Domestic open skies policy<br />Announcement of airport modernization plans for Delhi and Mumbai, upgradation of 35 non-metro airports and launching of Greenfield airports<br />Liberalization of international sector<br />
  6. 6. History of Indian Airport Industry contd..<br />2006 – 2007 Traffic levels increased owing to high GDP growth and increasing disposable income<br />Bullish fleet orders introduced @ 6-6.5 aircrafts/mth whereas actual growth was @ 3 aircrafts/mth<br />High congestion at airports and increasing delays<br />Inadequate supply of pilots and engineers<br />2008 – 2009 ATF price hike - oil reached 150$/barrel<br />Slowdown in economy resulted in decline of air traffic<br />AERA formed – to determine tariffs, user charges and monitor set performance standards<br />2009 – beyond More favourable environment for aviation sector<br />Greenfields airports developed and non-metro airports upgraded<br />Projected investment in 11th 5-Yr plan in airport infrastructure is INR 30,968 Crores – 70% to come from private sector<br />
  8. 8. Number of airports covering the population<br /> Source: www.pppinindia.com<br />
  9. 9. Comparison of Average Runway Length<br />Source: Author’s Self-Analysis<br />
  10. 10. Comparison of Aero & Non-Aero Revenues<br />Source: Web Sources<br />
  11. 11. Passenger growth comparison for 20 years<br />Source: Airport Council International<br />
  12. 12. Secondary Airport in India – Will they be a reality?<br />
  13. 13. India would be 3rdlargest in terms of passenger throughput by 2027<br />Source: CMIE database<br />
  14. 14. Source: CMIE database<br />Source: Mint Newspaper, 11th November 2010<br />
  15. 15. Multi-Airport Systems<br />
  16. 16. Set of two or more significant airports that serve commercial traffic within a metropolitan region<br />Multi-Airport systems serving the NY Metropolitan region<br />Source: Journal of Transportation Engineering<br />Multi-airport systems Worldwide<br />Source: Journal of Transportation Engineering<br />
  17. 17. Secondary Airport Comparisons<br />
  18. 18. Porter’s 5 Forces Model<br />LOW<br />MODERATE<br />MODERATE<br />MODERATE<br />LOW<br />Source: Author’ Self-Analysis of level of threats<br />
  19. 19. Forms of Competition<br />
  20. 20. Competition for shared local market<br />Airports in close proximity compete for both passengers and air services<br />Airports in London<br />Heathrow  International Flights<br />Gatwick  Charter Flights<br />Stansted  Low cost Airlines<br />London City  City and Business passengers<br />Luton Domestic and Charter flights<br />Growth of low cost carriers has given opportunity to smaller airports to compete with the established airports<br />
  21. 21. Competition for Connecting Traffic<br />Connecting traffic at an airport is a major component of the total traffic handled at an airport<br />For all connecting traffic there are alternative connecting points<br />A traveller flying from Los Angeles in US to Mauritius can travel via a point in<br />Asia (HK, Singapore, Kuala Lumpur)<br />Europe (London, Paris, Frankfurt)<br />Middle East (Dubai)<br />Australia(Sydney)<br />Connecting traffic can easily shift from one airport to another if cheaper, faster and more convenient connections become available<br />
  22. 22. Competition for Cargo Traffic<br />Cargo traffic can make up a major proportion of an airport’s traffic base <br />ACI estimates that cargo accounts for approximately 17% of annual airport revenue <br />Cargo traffic is highly price sensitive and can easily shift to alternative routings and hence highly competitive<br />Hamilton airport handles approximately 100,000 tonnes of cargo each year that otherwise would likely have passed through Toronto International Airport<br />Hamilton has lengthened its runway it is now competing for intercontinental cargo flights as well<br />
  23. 23. Destination Competition<br />Airports are part of the overall tourism package offered by a destination<br />Quality, cost and scope of service offered at by an airport impacts on the overall attractiveness of a destination<br />Overall attractiveness of the destination served by the airport increases if the scope and frequency increase<br />Convention Markets<br />Tourism through Cruise Liners<br />
  24. 24. Factors influencing emergence of Secondary Airports<br />
  25. 25. Congestion at the Primary Airport<br />creates externalities and degraded level of service<br />decreasing attractiveness ofprimary airport results in increase of attractiveness of closed located airport<br />Air Carrier Entries at the Secondary Airport<br />Entry of Southwest Airlines at Providenceand Manchester airports<br />Airport Infrastructure<br />Wide body aircrafts runway requirement – 7000 to 10000 feet<br />Narrow body jets runway requirement – 5500 to 6900 feet<br />Connecting passengers at the Primary Airport<br />emergence of secondary airport is more likely to happen at an airport where connecting passengers are notpredominant<br />
  26. 26. Barriers to competition<br />EU now has the most deregulated aviation market in the world<br /><ul><li>Any airline with an Air Operators Certificate can operate within the EU at market determined prices</li></ul>Slot Allocation<br /><ul><li>Grandfather Rights
  27. 27. Use of smaller aircraft
  28. 28. Uneconomical passenger numbers
  29. 29. Use profits from other routes to maintain route domination
  30. 30. Exclusive rights to provide Ground Handling Services
  31. 31. Can charge competitor high prices to strengthen its position
  32. 32. Ryanairstopped its service to Rimini airport and moved to Acona airport after a dispute regarding costs</li></li></ul><li>Challenges to Airport Operators<br />Airport Security<br /><ul><li>BCAS - Regulatory authority for civil aviation security
  33. 33. Operating costs increases for airport operators</li></ul>Delivering enhanced service quality whilst working with a tighter cost base<br />Investor demand steady returns in uncertain climate<br />Increased focus on managing costs and delivering efficiency<br />Regulatory changes<br />Enough incentives should be in place for the operator to undertake such huge investments<br />
  34. 34. Strategies for Airport Competition<br />
  35. 35. Airport Product<br />Airport Infrastructure<br />Passenger Facilitation<br /><ul><li>Reduce processing and connection time
  36. 36. Baggage Processing – RFID
  37. 37. Flexible Airport Design
  38. 38. Service Provision and Third Party Vendors
  39. 39. Curfews and Noise Quotas
  40. 40. Operate late night flights from NA to Asia in order to allow passengers to connect onto the morning flights out of Asian airports
  41. 41. Cargo Traffic</li></li></ul><li>Price<br />Airport Fees and Charges<br />Facilitating airline efficiency to reduce costs<br /><ul><li>Lower unit costs due to increased utilization of aircraft
  42. 42. Dual boarding bridge
  43. 43. Swing Gates
  44. 44. Incentive Pricing
  45. 45. Renting the gate for entire day for a fixed sum enabling airlines to reduce its unit costs
  46. 46. Will enable better use of airport capacity
  47. 47. Lower costs can be passed into lower fares for the passengers to stimulate further demand</li></li></ul><li>Physical Distribution<br />Computer Reservation Systems<br /><ul><li>Travel Agents
  48. 48. Airport Websites</li></li></ul><li>Promotion<br /><ul><li>Air Service Development Programs
  49. 49. Much targeted approach which match airline’s needs with the offerings at the airport
  50. 50. Passenger Marketing
  51. 51. Communicate flight options to the tour operators, travel agents, freight forwarders and the public at large
  52. 52. Participation inconferences, road shows and advertising in the local and national press
  53. 53. Advertise on lower cost and more convenient parking
  54. 54. Integrated Marketing Approaches
  55. 55. Branding the Airport</li></li></ul><li>User Development Fee Pricing<br />
  56. 56. Difference between UDF & ADF<br />Source: Author’s Self-Analysis<br />
  57. 57. Assumptions<br />
  58. 58. Methodology<br />NPV of the PAT from aeronautical and non-aeronautical revenues (30%) = NPV of the expected post tax return on the capital employed<br />
  59. 59.
  60. 60.
  61. 61.
  62. 62.
  63. 63. Crystal Ball Simulation<br />
  64. 64. 1st Assumption<br />2nd Assumption<br />4th Assumption<br />3rd Assumption<br />
  65. 65.
  66. 66.
  67. 67. Conclusion<br />
  68. 68. India’s economic growth in trade and business would be crippled if the growth of this sector is not supported by investments in the airport infrastructure<br />Supply needs to be ahead of demand so that expansion and upgradation can take place in a phased manner wherever and whenever required<br />India can begin to see secondary airports emerging in quite a few cities<br />Market forces of competition can start playing between these airports provided government or the regulator doesn’t intervene too much through the regulations<br />Multi-airport systems in India as a whole can benefit the larger region – A win-win situation for both society as well as airport operator<br />
  69. 69. Non-aeronautical revenue brings in significant revenue stream of cash flows<br />There is a 45.24% probability that NPV of INR 181.95 or greater would be obtained given the assumptions made for Ahd airport<br />NPV of PAT is most sensitive to the short term growth (till 2017) in international and domestic passenger growth<br />Long term view of the same would play a key role in establishing the airport operator as a significant player of the industry<br />
  70. 70. References<br />Dr. Michael Tretheway and Ian Kincaid. Competition between airports in the new Millennium – 8th Hamburg Aviation Conference.<br />Jessica Loughnane. The Evolution of the Aviation Sector towards contestability amongst airports – Student Economic Review, Vol. 19, 2005.<br />Richard de Neufville. Low-cost airports for Low-cost Airlines<br />AERA Consultation Paper No.3/2010-11 – Proposal of AAI to levy UDF at SardarVallabhbhai Patel International Airport, Ahmedabad<br />Position Paper on the Airport Sector in India by Department of Economic Affairs, Government of India<br />Indian Aviation: A Review of 2009 and Outlook for 2010 by CAPA India<br />A Vital Role for Airport Economic Regulatory Authority by CAPA India<br />Philippe A. Bonnefoy and R. John Hansman. Emergence and Impact of Secondary Airports in the United States<br />Centre for Monitoring Indian Economy (CMIE) Database<br />CRISIL Research<br />Indiastat.com<br />
  71. 71. Thank You<br />