Charges challenge

Airline complaints that airports are making excessive profits while they bleed has sparked a debate over the need for a new relationship between the two, with firmer ground rules for setting user charges and delivering services.

It is hard not to sympathise with airline complaints about the unfairness of a world in which they are condemned to make punishing losses, but where their suppliers continue to thrive. Nowhere is the gap more glaring than in the continued financial health of the world's airport groups though. Airlines would dearly love to see all of their suppliers share their pain and airports are high among them.

But the root problem goes much deeper than the need for an act of charity on the part of airports in reducing their user charges, though some have thankfully taken pity. At its heart lies a fundamental clash between two very different worlds. While the airlines are now largely at the prey of market forces, airports are, for the most part, state-owned and effectively monopolies. The real question is how to align the two.

It is a matter of record that airport landlords have consistently out-performed their airline tenants by a healthy multiple. Witness the returns in the latest Airline Business ranking of the top 50 airport groups. They collectively turned in an operating margin of close to 23% and net of better than 10%. At the same time, profits for the major airline groups sank without trace. And this gap is not simply a product of the downturn. Even in the heady boom years airlines have rarely looked like limping towards double digit operating margins let alone at net level. The gap is thrown into stark relief by the fact that airport stock is now regarded as a safe defensive play in bad times, while airline shares are the most risky of fair weather gambles.

But the profitability gap, while difficult to ignore, is not in itself an argument for airports to cut their user charges. The real issue is whether those profits have been fairly earned. Most businesses, airlines now included, have the discipline of the market to keep them honest. Or, if they are monopoly providers, there is the watchful eye of a government regulator. Airports typically have neither.

While airport groups may look increasingly like modern commercial businesses, with strong brands and international investments, the core aeronautical part of their business is still much the same as ever it was. It is true that airports and the cities they serve have become much more marketing savvy in attracting new service. However, on their core routes and at their home hubs, airlines have little choice about which airports that they must realistically use. And if there is no choice, then there is little customer power over the levels of service or charges on offer.

Not so long ago, airlines themselves inhabited a regulated world, protected by national boundaries. They have long since had to adapt to the new realities of the open market where customers and competitors set the prices and costs must be trimmed to match. It is this discipline that they want to see reflected in their suppliers, whether airports, air traffic service providers or computer reservation systems. In short, the charges that they pay should be directly related to the service that they receive. At present there are few or no formal mechanisms to ensure that connection is made.

For its part IATA, now in the midst of a highly vocal campaign, has called for a "strong, independent and neutral economic regulator" to bring some much-needed consistency to user charges around the world. That could be a workable idea. The UK's BAA, since its pioneering privatisation, has operated its home hubs under a charging regime which is capped by the regulator.

However, regulation can be a blunt tool, which may not ultimately be to the benefit of either side. US airports already complain of having too much regulation and too little commercial freedom. But if airports are to win greater financial freedom then it must come with some conditions attached. To start, airport finances must be put on a clear and transparent footing, where users can see exactly where their money goes. They also need to know how efficiently their money is being used. At present there are virtually no internationally agreed measures against which performance can be judged for good or ill. Airlines complain and airports refute, but there is little firm ground over which to conduct a constructive debate. IATA has pledged to create such a benchmark, but it will be more useful to all if airports can engage in the process too. Both sides could do better still if they can produce some clear guidelines for what a good service level agreement should look like.

Airlines are in no mood simply to let the issue drift and have been prepared to use their political muscle as demonstrated by IATA's outspoken intervention on user charges at Tokyo Narita. In the words of one senior airline executive, carriers can live with regulation if they have to or with free markets, but they cannot live with a murky mix of both.

Source: Airline Business