Financing of Baggage Operations, baggage charges and OPEX vs CAPEX

1. A case of money
Financing of Baggage Operations
Copyright © 2019 – Julian Malins

2. OPEX vs CAPEX
Baggage Operations requires a
careful balance between Capital
and Operational Expenditure.
It is not always
straightforward however
as to who owns the
expenditure.

3. OPEX vs CAPEX
Most readers will have a general understanding
of the terms OPEX and CAPEX, however there
may be some ambiguity to the exact scope of
these terms and how they affect an airport’s
financial model.

4. OPEX vs CAPEX
CAPEX
 BHS equipment
 Baggage Hall and associated
areas
 IT infrastructure
 EDS screening machines
 Baggage Processing Equip
(ATRs, RFID)
OPEX
 Staff Costs
 Maintenance Costs
 Utility costs
 Rents, fees, charges
 Depreciation

5. OPEX vs CAPEX
REPEX
Renovation and replacement, also known as REPEX, rather
than creating new assets, a replacement or major overhaul
of assets due to wear & tear or end of useful life.
Examples of REPEX are, sorter refurbishment, energy
efficient motor replacements, replacing obsolete IT
infrastructure.
REPEX is normally a form of CAPEX, although
consumables would fall under OPEX.

6. Whose Expenditure?
 Generally, it can be seen that the
Airport Operator holds the bulk of
the CAPEX.
 Whilst the Airline / Handling Agent
expenditure is mainly OPEX

7. Whose Expenditure?
Airport Operator
 BHS equipment
 Baggage Hall and associated
areas
 IT infrastructure
 EDS screening machines
 Baggage Processing Equip
(ATRs, RFID)
 Staff Costs
 Maintenance Costs
 Utility costs
 Fees, charges
 Depreciation

8. Whose Expenditure?
Airline / Handling Agent
 Staff Costs
 IT infrastructure
 Rents, fees, charges
 Depreciation
 Baggage Processing Equip (Hand Scanners,
IT equip, Logistic equipment)

9. Whose Expenditure?
Airline / Handling Agent
 Staff Costs
 IT infrastructure
 Rents, fees, charges
 Depreciation
 Baggage Processing Equip (Hand Scanners,
IT equip, Logistic equipment)

10. The importance of
expenditure in the
financial model
Both OPEX and CAPEX play a key role in shaping the airport
financial business model.
A correct analysis of OPEX and CAPEX will serve to assess the funding
requirements (either through loans or with own funds), the asset
replacement strategy, return on investment, charging mechanism and above
all profitability.
The balance of OPEX and CAPEX assessment requires an in-depth
knowledge of the airport business, as well as the local variables specific to
the airport (airport location, regulatory model, legal and financial constraints,
etc.) and the risk analysis of the business.

11. Cost to airport owner
vs stakeholders
It is also worth remembering that in an operational airport, there are
several financial business models operating simultaneously.
The airport owner needs to attract airlines,
concessionaires and passengers to use the airport
and there are many factors that can influence this,
depending on the availability of alternative local
airports this owner needs to offer value for money to
both it’s direct and indirect customers.

12. Cost to airport owner
vs stakeholders
As well as the OPEX & CAPEX costs borne by the airport owner, the
airlines, handling agents and concessionaires that operate at the
airport also have their own financial cost.
Often there is a direct, and possibly complex, interaction between these cost
models. For example, if the airport were to replace part of the baggage
system with a fully-automated system, then the operational costs will most
likely change. The new assets may require less frequent maintenance, but
may also require a higher skilled workforce to carry out this maintenance.
Automation may also mean that the handling agents require less staff to
operate the system and therefore a reduction in their staffing costs.

13. Cost to airport owner
vs stakeholders
As well as the OPEX & CAPEX costs borne by the airport owner, the
airlines, handling agents and concessionaires that operate at the
airport also have their own financial cost.
Often there is a direct, and possibly complex, interaction between these cost
models. For example, if the airport were to replace part of the baggage
system with a fully-automated system, then the operational costs will most
likely change. The new assets may require less frequent maintenance, but
may also require a higher skilled workforce to carry out this maintenance.
Automation may also mean that the handling agents require less staff to
operate the system and therefore a reduction in their staffing costs.

14. Financial models
It is also worth considering that the airport owner and the airlines /
handling may well have different financial models and this will influence
their decision to prioritise OPEX over CAPEX (or vice versa).
Many organisations are limited in the amount of capital
expenditure they are able to access and therefore may
prefer to direct their investment towards revenue-
generating activities. This is why some organisations
prefer to lease rather than purchase – they don’t want
to tie up precious capital.

15. Financial models
For most airport owners, the need to expand relies on large capital
infrastructure projects.
Such heavy capital investment usually requires a long-term payback period to
get a return on that investment.
However, operating in a more revenue-based business model makes an
organisation more agile to react to change, this is often a more appropriate
model for airlines. Initiatives that promise to reduce CAPEX and transform it
into OPEX would therefore be extremely attractive, as this often;
 Promotes short-term spending plans, which speed up the budgeting process;
 Spread the cash flow and reduce interest charges
 Creates a more agile business as funds are not tied up in large upfront expenditures
 Creates only the capacity that is currently needed, increasing if requirements change.

16. Increasing Efficiency
In order to increase baggage operation efficiency, some capital
expenditure is inevitable. Whether this is expansion, replacement of
obsolete equipment, new technology.
Investing in automated technology will increase
efficiency, by reducing manpower, however it should be
noted that the new technology is usually airport owned
and the lost manpower often handling agent staff. Also
to be considered is the probable increased maintenance
costs. This return on this investment needs to be
recovered from the airlines in the form of facility charges

17. Baggage Charges
Under ICAO policies for airport charges, airport users “shall
ultimately bear their full and fair share of the cost of providing the
airport”
However it should also be noted that “in general, aircraft operators and
other airport users should not be charged for facilities and services they do
not use”.
Whilst in the past it was therefore perfectly justifiable for an airport operator to have a
standard charging model that it applied to airlines based on a fee per passenger or on
aircraft size, under the current mixture of full-service and low-cost operators, not all
user fully utilise available facilities, this is particularly the case in relation to baggage
services. It has therefore become necessary for airport operators to review whether
their current business model for charging of baggage operations facilities and
services is still fit for purpose and/or compliant with ICAO policies.

18. Baggage Charges
Requirement for a more bespoke Baggage Charging policy.
With different airlines now requiring the potential of differing levels of service for different
routes, classes and seasons, now is the perfect time for airport operators to review how that
charge for their baggage operations.
Today’s technology means every bag can be tracked throughout the entire baggage handling
process and this offers the opportunity for a very bespoke charging structure, tailored to the
individual needs of each airline and charging only for the facilities or services used. The
possibility also exists for each and every bag to have its own charge for precisely what
services it has used.

19. Thank you for your
time and attention
Copyright © 2019 – Julian Malins