2. FOR INTERNAL USE
Overview of the Lecture
• Introduction
• Airport ownership, regulation and stakeholders
• Airport costs and revenues
• Airport credit ratings
• Airport management models
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3. FOR INTERNAL USE
Introduction
• Airport finance is a key tool for ensuring the
longevity of an airport. The roles:
– Crucial to an airport’s long-term survival is a consistent
volume of traffic
– Airline determine the level of service to an airport
primarily based on the volume and characteristics of
demand and internal consideration
– Airline’s consideration
• Sufficient infrastructure, extra cost incurred
• Airport charge
– Effective management influenced airport finance
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4. FOR INTERNAL USE
Introduction
• Traditionally, all airports were owned by the public
sector
– Strategically important asset for regional and national
economic development
• The privately owned airports tended to be the very
small general aviation airports
• Commercial management practices were not given
top priority
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5. FOR INTERNAL USE
• Moves towards commercialization
– Effects of airline deregulation
– Establishment of more independent airport authorities
– Airports were given more commercial and operational
freedom
– An increasing number of airports started adopting more
commercial accounting practices in the 1970s and 1980s
– Greater reliance on commercial revenue
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Introduction
6. FOR INTERNAL USE
• Airports are effectively regional monopolies
– Requires high capital investment costs with sole purpose
of competition, highly inefficient
– Airports and airport systems become regional monopolies
– US model
• Airports are publicly owned (by cities, States)
• Receive AIP funding cannot make a profit for owners
– UK model
• Major airports are privately owned through Heathrow Airport
Holding Limited (formerly BAA)
• Airport user charges are regulated and reviewed every 5 years
(retail price index – x)%
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AIP – airport improvement program
Airport ownership, regulation and stakeholders
7. FOR INTERNAL USE
• Multitude of stakeholders, within and outside the physical
and organizational boundaries of the airport
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Airport ownership, regulation and stakeholders
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• Not all of them responsible of the airport organization
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Airport ownership, regulation and stakeholders
9. FOR INTERNAL USE
• Airports depend on capital and operating revenue to
pay for capital projects and operating expenses
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Airport cost and revenues
10. FOR INTERNAL USE
• Airports operate either on a single-till or dual-till
model
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Airport cost and revenues
11. FOR INTERNAL USE
• Airports operating cost cover many different
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Airport cost and revenues
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• Airports takes different approaches to determine
which work to handle in-house vs outsource
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Airport cost and revenues
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• Capital cost come through very large projects
and through small and medium-sized
equipment
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Airport cost and revenues
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Airport cost and revenues
Sources of Aeronautical Revenue
Runway usage fee A/C Take off & landing
Passenger fee Terminal service, airport security and ???
Aircraft parking fee Per hour or per session
Handling fee Ground handling service
Others ATC, navigation, lighting, air bridge, CO2 emission etc…..
Who set airport charges?
– Usually by government or by the airport
– The charges framework is very uniform but can be very different
among similar airports
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Airport cost and revenues
ICAO’s Policies on Charges for Airports and Air Navigation Services
Basic principles
▪ Non discrimination
▪ No abuse of dominant position
▪ Transparency
▪ Encourage efficiency and efficiency in the provision of services
▪ Monitor and encourage investments to meet future demand
▪ Ensure user’s views are taken into account
17. FOR INTERNAL USE
Terminal
• Duty & tax Free
• Other retail
• News & Gifts
• Car Hire
Property
• Offices
• Utilities
• Advertising
• Real estate
• Hotels
Car Parking
• Short Stay
• Medium Stay
• Long-Stay
• Staff
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Airport cost and revenues
• Sources of non-aeronautical revenue
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• Factors affect terminal sales
– Traffic
– Dwell Time
– Psychology
– Regulations
– Terminal design / unit location
– Retail / F&B mix
– Contracts
– Success of operator
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Airport cost and revenues
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Factors that Affect Terminal Sales
terminal design and unit location
Check-in Check-in
Security
Schematic diagram of passenger airside flow
Retail
Food & Beverage
Seating
Business Lounge
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Factors that Affect Terminal Sales
terminal design and unit location
Security
Retail
Food & Beverage
Seating
Business Lounge
FIDS
display
Schematic diagram of passenger airside flow
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21. FOR INTERNAL USE
• Property income generated from lease of:
– Offices
– Business lounges
– Industrial real estate (hangars, cargo facilities, business
parks)
– Hotels
• Airports are attractive development sites
• Importance of property depends on:
– Traffic volume and characteristics
– Scale of freight activity
– Airport land use planning agreements
– Distance from urban centre
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Airport cost and revenues
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• Airports can be attractive advertising sites –
(especially for premium brands)
– Depends on:
• Volume and characteristics of passengers
• Architecture of airport
• Quality of Media
• General economic conditions
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Airport cost and revenues
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Airport cost and revenues
0 10 20 30 40
Birmingham
Amsterdam
BAA
Los Angeles
Manchester
Zurich
Athens
ADP
Fraport
Beijing
Car Parking Revenue as % of
Total Commercial Revenue
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• Airport can benefit from both active approaches and
operational conditions for driving non-aeronautical
revenues.
– Strategies approach:
• Creating an attractive atmosphere in which passenger are more
likely to spend money
• Dwell times are an important metric; a facility which the
passenger simply pass through quickly may be convenient to
passenger but will not generate significant non-aeronautical
revenues
• Many airports have been laid out to ensure that passenger have to
pass through a variety of retail outlets on the way to the gate
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Airport cost and revenues
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– Operational conditions
• A certain level of delays may have a positive impact on the level of
non-aeronautical revenues since they increase passenger dwell
times
• Passengers that are stuck waiting for a delayed flight are more
likely to spend money on food and in retail
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Airport cost and revenues
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• Some airports also have unusual sources of revenue
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Airport cost and revenues
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0
1
0
20
30
40
50
60
70
80
90
1
00
Asia Pacific Europe Latin America /
Carribean
North America
Other
Advertising
Property
Car Rental
Car Parking
Retail
Breakdown of Non-aeronautical Revenues 2008 ACI airports by region in %
Source: 2008 ACI airport economics survey 27
Airport cost and revenues
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• Determined by a multitude of factors and are the key
drivers of the cost of borrowing for capital projects
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Airport credit ratings
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• The level of O&D traffic and expected growth are
an important credit rating determinant
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Airport credit ratings
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Source: Pagliari (2010)
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Airport management models
Current situation
Traditional airports managed all their commercial activities in-house.
At some airports, duty-free business was managed by the national airline.
In past 30 years, airports have increasingly relied on 3rd party operators (duty-free,
F&B, car parking and etc)
Airport retail / F&B is dominated by a few large specialist companies.
Different contractual agreements have been established between airports and 3rd
party operators.
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High level of airport
control
Low level of airport
control
Direct
management
Management
contract
Joint -venture
Concession
agreement
Source: Pagliari (2010) 31
Airport management models
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• Direct management
– Airport operator responsible for entire business (marketing,
pricing, procurement)
– Traditional model – today mainly used in very small airports
– Limited application to terminal retail because airports do not:
• Have competency to manage retail directly
• Have same bargaining leverage with suppliers as major retail
operators do
– Few examples of direct management of retail include Dubai,
Dublin, Malaysian Airports, Amsterdam
– Can work well in large airports with established airport
operators that have retailing experience
– Car parking at many major airports is managed directly
– Property managed directly by airport property departments
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Airport management models
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• Management contract
– Airport authority owns the business – pays all costs and
receives all revenue
– A third-party operator is contracted to manage the
business – paid a performance-based fee
– Contracts last for a fixed term (3 to 10 years)
– Airport not involved in staffing issues
– Greater financial risk to airport
– Not common in terminal retail – mostly used in car parking
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Airport management models
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• Joint-ventures
– Airport and operator establish JV company to develop business
– Airport able to develop long-term strategy with an experienced
operator (long-term contract agreement)
– High administration / bureaucracy costs associated with
contract-based models (e.g. concession) are removed
– Risks, profits, capital expenditure shared between airport &
operator
– JV will work well in large airports with high retail / F&B activity
• Aéroports de Paris with Aelia (travel retail operator)
• TAV with Gebr Heinemann in Istanbul
– Favoured model by retail / F&B operators (longer term security)
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Airport management models
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• Concession
– Most widely adopted model in retail / F&B.
– Most airports do not have expertise in retail / F&B
– The operator pays the airport company a % of the shop /
outlet turnover
– Contracts between the airport and the operator run for
periods of between 5 to 10 years
– Revenue sharing ensures cooperation
– Contracts with operators are secured through a competitive
tender
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Airport management models
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Airport management models
Concession
Master concession contract
(single contract)
▪ Works better in smaller airports
▪ Economic of scales
▪ Retail operators able to transfer knowledge of travel
retail experience
▪ Easier for the airport authority to manage
Separate contracts with
individual retailers
▪ Works better in larger airports
▪ More diversity / competition may improve quality of
retail offer
▪ More complicated for the airport authority to
manage
▪ Possible high turnover of retails
