Europe's airports form a big business. They generate US$13 billion in revenues annually, and the largest are complex enterprises encompassing a broad spectrum of activities centred on passenger and freight transport. And they are thriving; based on conservative estimates, the number of passengers passing through them is expected to double by 2010. But within their current success lie the seeds of enormous financial and managerial challenges.
The single biggest challenge that airports face is how they will finance their continuing capacity growth. Over the past few years, US$4 billion annually has flowed into the sector in Europe, to fund such projects as the recently opened airport in Munich, the upgrading of Oslo's Gardermoen and new terminals in Frankfurt, Vienna and Paris. The pace of airport investment is expected to accelerate. It is estimated that $65-80 billion will be spent on European airports and related infrastructure over the next 10 to 15 years. Mega-projects such as the new Berlin/Brandenburg International Airport, London/Heathrow's Terminal Five, and the new Athens International Airport, are already in the works. However, in the current European economic climate, governments can no longer finance investments of this magnitude.
The prospect of raising the required capital would be daunting, if airports weren't emerging as an attractive investment opportunity for the private sector. Some of Europe's airports have already established a track record of successful privatisation. The privately owned UK airport company BAA, and the partial privatisation of Copenhagen and Vienna airports, as well as the new Athens International Airport, all provide examples of the successful role the private sector can play.
However, private sector involvement carries a price: a focus on commercialism and profits. The bureaucratic, lax management style that has plagued some of Europe's airports will not be tolerated in this new environment. Airports and their government owners are finding that if they are to thrive over the next decade, they need to change. They must adopt a far more commercial, more competitive and creative management approach than they have traditionally taken.
Airports can and do compete in many ways. For example, they fight to achieve the status of airline hub, for passengers, for cargo, for aircraft service contracts, and for retail shops and related services.
As a result, Europe's airport owners and managers are coming to realise that their airports are major commercial enterprises, and that they can no longer treat them as government agencies. They are learning to think about cost-effectiveness and customer satisfaction, about tapping new sources of revenue and assessing their financing options, and about alternative facility uses.
Six key success factors have emerged as winning strategies for Europe's most successful airports:
1 Redefining the customer
2 Competing for transfer passenger traffic
3 Retailing
4 Improving ground access
5 Promoting airports as destinations
6 Leveraging expertise in a global arena
Redefining the customer
Airports are becoming increasingly sophisticated in defining their customer base and targeting different market segments. Traditionally, they have treated airlines as their primary target customers, because airlines have generated the largest portion of airport revenue through landing and handling charges. Now they are expanding their efforts to develop specific strategies that target and satisfy not just local airline passengers, but also transfer passengers, airport employees, and even nearby residential and business communities. The evolution of facilities and services at European airports reflects a more sophisticated understanding of the distribution of customers and their requirements (Chart 1).
But not all airports have followed this evolutionary path. Most have a very narrow definition of their customer base. For example, the current Athens airport, under government control, focuses on the airlines operating there. Nearly 10 million passengers pass through the airport each year, yet it offers them minimal services. The airport could serve as an important connecting hub for the Greek islands, but it manages to handle very few transfer passengers. The logistics of changing terminals at Athens to fly to the Greek islands are so complicated that most island-bound passengers fly direct or transfer at large western European hubs.
By contrast, Frankfurt has developed a wide range of shopping, catering, leisure, business, and service facilities which are targeted at a broad range of potential customers. There is even a discotheque. Local residents also constitute an important element in the customer mix: Germany has restrictive laws on shopping hours, so local residents often find that the airport is the only place where they can shop in the late evenings and weekends. A recent study of the airport's commercial revenues (excluding landing fees, handling charges, and so on) showed that 76 per cent of revenues were generated by passengers, a surprising 13 per cent by airport employees, and 11 per cent by other visitors of various kinds, including local residents.
Transfer allegiance
Clearly, an airport has limited influence over the volume and character of the passengers for whom it provides a destination or departure point. A passenger travelling to any given city will generally use the local airport, whatever it is like. But transfer passengers are another matter. They represent approximately 45 per cent of passenger traffic at airports such as Frankfurt and Copenhagen, 40 per cent at Amsterdam, and 30 per cent at Heathrow (Chart 2). Each year, more passengers transfer between flights at Heathrow or Frankfurt than arrive at or depart from Zürich. Air France has developed a new corporate strategy that is focused on building Paris/Charles de Gaulle into a major hub, and this should stimulate a significant increase in transfer passengers there.
Airports cannot compete for transfer passengers through ticket pricing strategies, as prices are obviously controlled by the airlines. However, they can compete in other ways. Successful airports have demonstrated that they can influence passengers' choice of routes and carriers through the facilities they offer, scheduling, their control over the transfer time between flights, and other customer services. The following key factors are within an airport's control:
* Short, reliable stopovers between flights. Frankfurt manages to offer 45 minute minimum stopovers, regardless of the airline.
* Ease of transfer. Transfer passengers (and the airlines that cater to them) want to be able to use a single terminal, or at least have the transfer made simple and easy. At Schiphol, passengers catching connecting flights are not required to change terminals. At Heathrow, with its multi-terminals, BAA has spent $150 million easing the transfer process.
* Frequent and conveniently scheduled flights. Airports have to be able to provide a critical mass of flights to key destinations so that passengers who miss a connection don't have to wait too long for the next flight. They can influence the scheduling choices of airlines by managing such factors as service level and cost and reliability, and by offering lower airport charges, or even none at all, for transfer passengers.
* Superior shopping and other passenger services. At Schiphol, passengers transferring between flights can use an indoor driving range and even a casino without having to clear customs; Copenhagen provides a sauna for transfer passengers; and BAA offers quiet rooms where passengers can sleep if they have long waits.
Cash flows
Airport retailing, traditionally a neglected area, has taken on an increasingly important role in providing airports with private funding, and is proving to be a lucrative source of revenue.
As a result, airport owners and managers are seriously rethinking their entire retail strategies. They are evaluating, for example, the types of products and services they want to have sold in their facilities, which concessionaires they want, where they want the concessions located, and how to construct the best deal with the concessionaire. Developing new sources of airport retailing will take on greater importance after mid-1999, when intra-European Union duty free sales are scheduled to end.
There can be marked differences in airport retail strategies. Aéroports de Paris is similar to most European airports in assuming a relatively passive strategic role. The airports take their profit in rental rates, and also receive a small percentage of concessionaires' sales. By contrast, BAA enters into comprehensive partnerships with its concessionaires, and becomes very actively involved. BAA receives no fixed monthly rent from its retail partners, but it takes between 3 and 80 per cent of the revenue that concessionaires collect.
Commissions average between 40 and 60 per cent, with a higher revenue percentage on high-value luxury goods such as premium cognacs, scotches, perfumes, and leather goods, with lower percentages on products such as standard-brand cigarettes and liquors. Each concessionaire is responsible for the upfront capital investment in store furnishings and the continuing operation. BAA maintains down-side protection, because the concessionaire must guarantee that it will achieve at least 80 per cent of a jointly agreed sales forecast.
BAA is unique in that it employs 150 retail experts to work directly with concessionaires. Their job is to conduct extensive market research, customise the product list, and maximise sales (some similar sized airports employ fewer than five retail experts). Each BAA-operated airport, and even each terminal at a BAA airport, offers a highly customised product list based on passenger demographics.
For example, Heathrow Terminal 3 serves many North Americans and Japanese, who buy mostly high-end brands and speciality gifts. Gatwick South Terminal serves primarily British vacationers on charter flights, and they tend to buy duty-free liquors and cigarettes. BAA's retail strategy is resulting in increases in sales and sales per passenger (Chart 3).
Chart 4 shows that commercial revenues per passenger vary significantly from one airport to another, which suggests that many of Europe's leading airports continue to have considerable commercial revenue potential. BAA's performance at Heathrow is the strongest. Vienna, Frankfurt and Amsterdam also show high average revenue per passenger, but they derive a significant portion of their sales from local residents.
Making tracks
Enlightened airport managers are beginning to view Europe's well developed rail network as a prospective ally rather than as a competitor. As freight and passenger traffic at airports increases, and the range of activities expands, ground transport links - especially to high-speed, intercity rail - will become more important.
The new airport in Munich is already connected to the city's urban rail system, as are the airports in Frankfurt, Stockholm, Manchester, Zürich, Amsterdam, Düsseldorf, Paris/CDG, and London's Gatwick and Stansted (Chart 5). BAA is providing 70 per cent of the equity for the $500 million Heathrow Express, which will take passengers from Heathrow to London's Paddington station in 16 minutes. When it opens in 1998, the new Oslo airport at Gardermoen will be linked to the city by a fast train service; the 47km journey will take 19 minutes.
Increasingly, airports are also working on integrating with high-speed rail networks by building railway stations, as they have already done at Frankfurt, Schiphol, and Charles de Gaulle. These train stations can help build up passenger usage and extend the airports' catchment areas.
Improved intercity rail connections also help to alleviate traffic overload at some airports. Small aircraft will most likely be priced out of the market as runway capacity at key airports becomes more scarce. Rail is naturally suited to replace or complement such shorthaul services, freeing up capacity for higher-margin routes.
The concern that high-speed rail might replace some air traffic is not well founded. It is true that when the TGV was introduced on the busy 400km Paris-Lyon route, flights between the two cities dropped by 35 per cent and traffic dropped an estimated 60-70 per cent. But few other air routes in Europe could be replaced by rail. Nearly three-quarters of passenger seats offered within Europe are on flights covering distances greater than 400km. A further 24 per cent are on routes that offer fewer than 800 daily passenger seats (the estimated minimum to justify high-speed rail), or over water, or on routes where there is existing rail competition (high-speed or upgraded fast services). This leaves only 2-3 per cent of Europe's air traffic potentially vulnerable to competition from high-speed rail - minimal given annual growth rates of 4-5 per cent.
Airports as destinations
Over the long term, airports have the capacity to develop facilities both on site and in the surrounding area that will make them attractive to the local residential and business community, but also as a venue for international and other business events. The types of facilities they offer could include meeting, conference and convention facilities, shopping centres, hotels, distribution centres, office buildings, business parks, and entertainment and leisure activities such as movie theatres and night clubs. Airports with good road and rail links are particularly well placed.
Such developments will require significant investments in infrastructure, but they will help to ensure airports' longterm viability by making them more competitive, by attracting private capital investment, and by increasing profitability.
Leveraging expertise
Some of Europe's leading airports have already begun to see the potential for expanding globally as a way to earn profitable growth for their shareholders, finance further capital investments, and build a strong company. They are already expanding through acquisitions, alliances, and management contracts - building on their strong franchises, increasing the size and scope of their activities, creating partnerships, and marketing their managerial expertise (Chart 6). BAA is running Indianapolis Airport and the retailing activities at Pittsburgh. Schiphol has become a partner in the $1.1 billion renovation and operation of the international arrivals building at New York/JFK. Several European airports have expressed strong interest in the forthcoming privatisation of the Australian airports system. Some European airports are beginning to emerge as major world-class companies.
Lessons learned
The airports in Europe are growing fast to serve a constantly expanding number of passengers. But growth comes at great financial cost. To sustain it, these airports and their governments are being forced to develop creative strategies for involving the private sector and increasing profit potential.
European airports that have made the transition to highly successful business enterprises can provide valuable lessons for others, both in Europe and elsewhere. Each airport is unique, with its own customers and needs, and each requires a different path to success. However, the basic components of value that an airport can offer its customers, and from which it can provide value to its shareholders, are common to all.
Successful airport strategies focus on understanding and responding to the needs of various customer segments; growing their commercial revenue base; increasing their value as transfer and destination points; and extending the range within which they can attract and service passengers through convenient rail and other ground links. Most significantly, successful airports are learning to become global players in what is fast becoming a worldwide industry.
Source: Airline Business
