Airlines and airports are united when it comes to airport capacity: they both want more of it. But when the question of who pays for this capacity comes up, it is then that their paths begin to diverge.
The increasing success of airports in generating commercial revenues - those arising from shopping, car parks, and similar activities - has been well charted. The proportion of a typical airport's total income from non-aeronautical revenues has grown from less than 30% in the late 1980s to about 52% today, outstripping income from the traditional source of landing fees and other aeronautical charges, says Paul Behnke, economics director at trade group Airports Council International (ACI).
Airports want to use their commercial revenues to help pay for the huge investment in infrastructure they will need to make in coming years. To do this, ACI has to persuade ICAO's member states and national airport regulators to move away from the widely used "single till" approach to calculating airport charges.
In this approach, the two main sources of airport revenue - the traditional charges to airlines and passengers for using aeronautical facilities, and proceeds accruing from retail activities - are both taken into account when setting charges. ACI believes that this effectively creates a cross-subsidy, whereby the profits from commercial activities are used to offset aeronautical costs, with the result of reduced airline charges.
This, ACI holds, was fine when commercial revenues were relatively small. But as they have grown in importance, airports are right to question the validity of this system.
"The perversity of the single till is that it takes commercial revenues, which could be used to finance capital investment, and instead rebates those funds to the airlines," says Behnke. "It reduces short-term costs at the expense of long-term investment."
As ACI embarks on its mission to amend the single till approach, it has locked horns with its airline equivalent IATA, which describes the move as "a real threat to the airline industry".
"If you don't take into account the 50% of non-aeronautical income (that airports make from commercial sources), you could see very big increases in charges," says Julian de la Camara, an IATA director dealing with infrastructure charges. "Airlines can't afford this."
The issue came to a head earlier this year at ANSConf 2000, a conference ICAO organised for its 185 member states to revise and update them on its guidance on management and charging for airport and air navigation services.
The last time a conference like this was held was in 1991. According to Behnke, the single till issue was not as pressing at that time for airports, and they were left with rigid guidance that left them little room to manoeuvre. This year was markedly different. Position papers on the single till flooded in from ACI, IATA and many states. According to ACI: "In a normal competitive private sector market, these activities would be priced separately, and each would cover its own costs. In the airports business, this is not the case."
ACI wants a more flexible "dual till" approach where aeronautical and non-aeronautical revenues would be treated as individual profit centres.
It is an approach that has already been adopted by some airports. Seven of the ten largest US airports, for example, have stopped operating the kind of cross-subsidy given by the single till, and Australia and South Africa also intend to move away from that approach.
"If we give all commercial revenues straight back to airlines through the single till, it is money lost to investment," says Mike Toms, director of strategic planning at BAA, the UK airports group. Toms further believes that airports need the scope to retain some of this money to help finance infrastructure and to reward them for their initiatives in boosting commercial revenues.
Louise Congdon, general manager for strategy at Manchester Airport, argues that airports need this reward, otherwise they will lose the incentive to invest further in commercial activities. She says: "We cannot make a normal commercial return on our non-airport investment. If you can only get a set rate of return it stifles risk-taking, and stifles creativity."
According to ACI, another factor also comes into play - as airport traffic increases, the operation of the single till forces down charges, contributing to additional congestion and environmental pressure, while denying the airport the resources to counter these problems.
For example, an already congested airport like London Heathrow has fairly low airline charges compared to its main European competitors. Ironically, as it operates under the single till, the busier it gets, the cheaper it gets.
Higher charges
Although the airline industry generally favours the commercialisation of both airports and air navigation services, it is concerned that these practices often lead to higher user charges. IATA, for instance, believes that non-core activities within the airport perimeter, which can be developed due to the aviation activities, should benefit the airlines by lowering aeronautical charges.
The IATA argument runs thus: "Airports are specifically built for aviation purposes, and non-aeronautical revenues are largely derived from the passengers that airlines bring to the airports." This is an important point as far as airlines are concerned, for if they did not attract passengers to travel via airports, the airports would be unable to develop commercial revenues as they have.
ACI is unimpressed: "IATA justifies the single till on the basis that since airlines bring passengers to airports, they should receive the commercial revenue generated by these passengers. This is described as a partnership with airports, but in practice the only beneficiaries would be airlines. Passengers do not generate commercial revenues automatically; these are created by the skills of airports in developing and operating appropriate commercial facilities and services. Airports are entitled to some reward for their entrepreneurial efforts to diversify income streams."
In addition to ICAO revisiting the subject of airport charges, the UK's Civil Aviation Authority is undertaking a major consultation on the economic regulation of airports. It is looking at the issues surrounding the replacement of the single till with a dual till approach.
As the regulator of BAA, the way the UK CAA has regulated the world's first major privatised airport group is often seen as a model for others around the globe. In their submissions to the CAA, most UK airlines, and the Air Transport Association that represents the major US carriers, prefer to stick with the single till approach.
British Airways will concede some ground, however. "The operation of the single till might be reviewed, but we would not support a simple question of abolition - single vs dual till - unless this was part of a new deal giving new rights to airlines," it says.
Virgin Atlantic worries about possible "trade-offs" that airports might be tempted to make under a dual till approach which would be to the "detriment of airlines, and ultimately passengers". For example, a removal of regulation over commercial activities might encourage airports to reduce the space available to airlines for offices or crew check-in, in favour of more shops.
Middle road
The Swiss Government is proposing a compromise between the two schools of thought. The Swiss say that a certain share of commercial revenues should be counted towards the aeronautical side of the till, says Pascal Erni, a board member for Zurich Airport. This would mean that some commercial revenues go towards reducing airport charges, but not all of them. Nobody has said what this proportion should be yet, and it will almost certainly depend on local circumstances.
For example, if you compare an airport retail area with a shopping centre, the airport does not need to market itself to attract customers as the shops do, says Erni. The airport's customers are being brought in by the airlines.
"The aeronautical till allows airports to have reduced marketing and advertising costs, so the airlines should be compensated," he says.
The debate looks likely to move on to what should be "credited" from the commercial side to the aeronautical side. "Our argument is that it is inappropriate to have activities in the single till where the airport is in direct competition with others, such as in consultancy, long-stay car parking or ground handling (in Manchester's case)," says Congdon.
Nobody doubts that this is becoming an extremely complex area. For example, the regulators will have to consider how to divide common costs, like the terminal building itself, between the aeronautical and the commercial tills.
Airports say they are not advocating a move away from the single till simply to squeeze more money out of airlines and keep it for themselves.
"There must be a partnership between the two," says Zurich's Erni. "Our view is that airlines are not users of airports but customers. And you must allow your customer to participate in your success. The dual till on its own will not lead to higher charges. In the long-run, charges will be comparable (whether through a single or dual till approach)."
Manchester's Congdon understands airline fears, but says they must see the bigger picture. "We are in competition with other airports so we cannot be out of step (in terms of charges). Our big fear is that the year-on-year pressure to reduce charges will lead to a situation where they will not cover the cost of running the aviation side of the business - and we are not far off this today," she says.
If a new charging regime is brought in, it will be important that the appropriate regulatory safeguards are in place, so that users can complain to the regulator if they believe their monopoly supplier has acted unfairly.
IATA is somewhat nervous in this area. It has seen sharp increases in charges, most dramatically, says de la Camara, in Latin America, where regulation has either failed or not been applied.
He argues that if higher charges are to be levied, they should be brought in gradually, that airlines should be fully consulted on new charging structures and effective regulation must be in place.
"This regulation will primarily look at establishing a reasonable rate of return for the airport. If it is combined with the single till it will be quite easy to set up a target for the airport on how to behave and give it a really good incentive[to exceed it], while giving us reasonable charges," says Anders Svidén, SAS director government charges and chairman of IATA's User Charges Panel. "If there is not proper airport regulation, we fear airports will abuse their monopoly position," he adds.
As the airports and airlines swap punches on this issue, there is undoubtedly change in the air. "At ANSConf 2000 there was a sentiment that it was a subject that needed further study, with a view towards giving more flexibility," says BAA's Toms.
Although ACI and IATA are at loggerheads over this issue, ICAO is working with them to devise new guidance that both can endorse. With ICAO effectively acting as a referee between the two sides, it wants to reach a consensus soon so that it can be approved by year-end, says Bernard Peguillan, a member of its airport & route facilities management group.
The alternative is a major study into the whole issue, which could take up to two years to complete. This would leave the issue in limbo, and while the airlines are not too unhappy about the prospect of a delay, the airports want immediate action.
Green light for pricing
Whenever the dispute is resolved, the resulting ICAO guidance will not be binding. It will, however, give the green light for airports to begin applying new forms of airport pricing.
If, as seems inevitable, the days of a pure single till approach are numbered, the debate will then move to how the new dual till is managed. ACI and IATA are also working on some form of agreement that sets out how the new ICAO guidance will be interpreted in practice.
"States will do what they feel is appropriate to their own situation," says Toms. Some have already gone to a form of dual till, while others are examining a change to their regulatory regime to follow suit.
For Toms, the shift to a more flexible charging structure is crucial. It will attract more capital and offer sufficiently high rates of return to shareholders. "At stake is the future capacity of the industry," he says. "Airlines have got to ask themselves what is ultimately important - capacity and service quality, or small variations in price in the short-term?"
If all airports could be expected to act fairly, and were properly regulated, the airlines could probably live with this. But, as Svidén of SAS notes: "Some European airports say they want to go away from the single-till and put prices up by 30%. We know that if we open the door, even slightly, the flood gates will open."
Source: Airline Business
