Airlines have for many months been warning of the need for structural changes to their model as the severity of the economic crisis alters the operating landscape. But airports have not been unscathed either and face an equally dynamic period ahead in responding to bothshort-and medium-term challenges.
This new thinking is already evident as low-cost terminal projects become increasingly widespread, both in number and the type of airports at which they are found. And new thinking is likely to spread further across airports' strategy as they seek to diversifytheir revenues and reduce their dependence on the airlines themselves.
But the immediate pressure is how to respond to airlines' calls for support given the unprecedented drops in trafficand, perhaps more crucially to the airlines, yields.
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| "The things that divide airlines and airports are far fewer than the things that unite us" Angela Gittens, Director General, ACI World |
So it is against the backdrop of these difficulties that the age-old arguments between airports and airlines over fees has intensified. "I think the economic crisis has put more stress and tension on the airport-airline relationship," says ACI World director general Angela Gittens. Amid these difficult conditions, she says, frustrated airlines lash out and airports are "an easy target".
Airlines are concerned airports will try to offset falling revenues from reduced traffic numbers by increasing levels of airport charges to airlines, at a time when they can ill-afford an increase in their costs. While they acknowledge the efforts of some airports and governments, they are angered at cases where airport fees continue to rise.
In Europe, where recovery signs-particularly among network carriers-remainlimited, airline bodies continue to call for more respite in charges. In the summer the Association of European Airlines attacked airports for "flying in the face of reality" and of completely unacceptable price rises, slamming planned price hikes at Frankfurt and Munich.
Leisure airline grouping, the International Air Carrier Association, is also continuing its long-running criticism of charges in Cyprus, where the new Larnaca Airport opened in November. It argues the cost of the airport is being passed on to airlines, whichcan ill-afford it. "While the Cypriot Government has helped airlines with areduction in landing charges, we need these to be extended for at least one more year," says IACA manager, operations, Luc Greens, adding it endangers the tourism interests of Cyprus.
Koen Vermier, IACAdirector for aeropolitical and industry affairs, complains of a lack of competition and too many airport monopolies, be them state- or privately-held. He is decidedly unimpressed by the response from airports to the crisis, seeing few examples of airports that have dropped their prices. "I think they [airports] should start questioning the issue of cost-recovery," he says.
But airports argue they have to balance current traffic issues against long-term requirements to develop and fund new infrastructure, the bulk of investments in which are continuing as planned. "The economic crisis has put back the growth, by about three, maybe five years. But you are still looking at a doubling in traffic by around 2027-2030. And for an airport that is probably a couple of months away," says Gittens. "You always have to be thinking for the next peak; airports are still committing to airport infrastructure. Airports have to act counter-cyclically.
"I think most airports have tried," she adds. "But it depends where they are in their own cycle.Not every airport is in position to reduce charges. But airports are in a competitive market. I think most dig deep and tried to moderate the charges."
Airports also point to their relative lack of flexibility to adjust their own costs in the short-term. "Airlines are affected more immediately by sudden spikes and drops in the economy than airports. But they can also react more quickly by cutting flights, changing routes and cancelling aircraft orders, for example," says James Cherry, ACI World chairman. "We cannot simply cancel construction projects in mid-stream."
But he adds: "In today's economic climate, airlines and airports need to co-operate more than ever to weather the turbulence.In fact, I believe that we are entering a new era of co-operation in aviation, to the mutual benefit of all parties involved." Gittens saysthere has been strong co-operation between airlines and airports at a local level during the crisis and she isheartened by the way airports and airlines, alongside other industry stakeholders, recently joined forcesto establish a common position addressing environmental issues. "I don't know if this has ever happened before," says Gittens, adding: "The things that divide us are far fewerthan the things that unite us."
Changing Landscape
What the economic crisis had done is create further flux in an already fluid market. Airports were already having to think more creatively in positioning themselves in the market, often driven by the rapid growth of the low-cost sector. Now the capacity cuts by network carriers, which are continuing apace this winter in Europe, have allowedbudget carriers tomakefurther in-roads in traditionally mainstream airports and the line between the two models is increasingly blurred. This means competition could be tougher than ever when the traffic comes back.
"Everything is up for grabs, it is all very dynamic," John Grant, managing director of route specialists ASM, says of the current environment. "You have got to identify what the market is, then find the appropriate fees and charges.There is no doubt now that airports are reviewing exactly what their product proposition is," he adds. "There is a need to differentiate. The days are gone when airlines would pay whatever fees or charges in exchange for a product including things they don't necessarily need."
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Copenhagen Airport is among those building new terminal facilities dedicated to low-cost carriers |
"We have been quite busy in redefining our strategy and becoming more customer orientated than airports usually have been in the past," says Carsten Noerland, Copenhagen Airport's vice-president, aviation. "Different airlines are targeting different types of consumer and they are demanding very different things. You can't just say one size fits all."
Consequently it has embarked on a dual approach strategy, catering for its network carriers to help drive long-haul expansion and to build on the already significant low-fare presence at Copenhagen. "That you would as a business only target one type of customer or have only one product on the shelf would be unthinkable in other businesses," he notes.
ACI Europe director general Olivier Jankovec believes market pressures will continue to drive innovation at airports within Europe. "Clearly we are going to see the fact that airlines putting a lot of pressure on airports, cost-wise, is not going to go away," he says. "For European airports it is about adjusting the business model to the market and protecting their competitive position."
As a result he believes there is more focus on cost savings and more flexible models. "I think at the moment there is a strong drive to improve efficiency and cut costs, and also to prepare for the long-term. I think we are really seeing major efforts by airports to become leaner." He describes as unprecedented, for example, the levelof staff cuts being seen at European airports this year.
And while he believes the air transport sector will grow strongly when the recovery happens, he saysthe cost pressure will simply be replaced by a strengthening of the airline hand in the airline-airport relationship through the consolidation moves already being played out among airlines. This will create fewer, but stronger, airlines in Europe, improving the airline negotiating position.
"The balance of the airline-airport relationship will shift," he says, with fewer airlinesincreasing competition among airports. "That will continue to drive the need for people and efficiencyimprovements in ground services."
Diversifying Revenues
If the market crisis demonstrates anything, it provides further reason for airports to try to reduce their dependency on airline revenues, to develop more robust models to help ride out economic storms."Revenue diversification has already been happening in Western Europe, but it has really spread through the world," says Gittens.
Jankovec still sees more scope for growth of non-aeronautical revenues at European airports, in particular in retail, advertising and real estate. He also expects a shift in the structure of airports charges. "Something we are going to see is more weight put on the passenger charges," he says. "Airport revenues will be more dependent on passenger numbers than aircraftmovements."
Noerland says Copenhagen Airport's recently announced long-term charges structure is intended to share more of the risk with airlines. "Based on requests we changed the structure, putting slightly more on passenger numbers and less on the take-off weight, which is also a reflection that in difficult times you might have lower load factors," he says.
But, citing the proportion airport fees contribute to an airline's overall costs, he says there is a limit to the impact it has on route decisions. Gittens and Jankovec also highlight scope for reductions other thanfees to help airlinescut their costs at airport. "There is more to the relationship than charges," says Jankovec. "It is important to get as efficient ground services [as possible]. Here I see a lot of activity going on, led by airports, airlines and their partners."
Gittens sees technology as key to future savings in airport costs. "You are going to see airports using more sophisticated technology as an enabler to take cost out of the system. Airports are trying in this downturn to see what they can do with technology. It has so much potential and I don't think airports yet have seen all this potential."
Some also see more potential for airports to expand their own role."Airports have got to become sharper, but with the recession the spend per passenger is going to be less. You have to find new ways to interact with the consumer," says ASM's Grant. "Airports need to work on their relationship with their airport customer and now is the time to work on the relationship with their actual customer and build the loyalty."
Jankovec, similarly, sees airports addressing their end-usersmore directly. He explains:"In Europe I see that starting to emerge, together with more aggressive branding of the airport itself. Airports are reducing their dependency on one airline, playing a more active role in network development. Airports are becoming more involved in airline hub management and getting involved with the distribution side." This includes using an airport's website to show possible connections to the passenger and Jankovec suggests this could one day involve even selling tickets. "We are still a very traditional model where what you do as an airport and as an airlineis segmented," he says. But Jankovecbelieves this segmentation will ultimately change.
For more on the challenges facing the airport sector check out our earlier feature here
Source: Airline Business
