IATA is calling for a fresh look at the partnership between airlines and airports as it redoubles its efforts to achieve lower user charges
The numbers would appear to speak for themselves. Despite one of the worst year's on record, the world's top 50 airport groups ended 2001 showing a comfortable net margin of 11%. In stark contrast, losses among the world's top 50 airline groups left a negative margin of worse than -4%. Such numbers have only served to fuel long-running airline complaints that airport user charges are simply too high. As the losses continue, the grumble has turned into roar.
IATA has been spurred into action. When he took up the reins in June, new director general Giovanni Bisignani pledged to act over user charges and has been as good as his word. "Running an airport is not a licence to print money. Airline partners are not happy to pay the cheque at the end of each month without any chance of questioning the cost," he says.
Bisignani has launched into his campaign with a blunt attack on the inequality within an industry where one sector "is losing his shirt while the other is counting his money". While not questioning the need for airports to make a reasonable return, he does ask whether they are doing enough to follow the airline lead in tackling their costs.
"Our partners need to understand the industry's problems and the need to make deep sacrifices," he says. "The time for diplomacy is over. We need financially healthy partners but we will challenge them to provide the best service in the most effective way. We're not in a position any more to pay for service which is not efficient."
A obvious target for IATA has been Tokyo Narita, an airport whose charges are the second highest in the world after Osaka Kansai. Conveniently, Tokyo was host to the annual gathering of airport managers at the Airports Council International (ACI) World Assembly in October and Bisignani used the event to kick off IATA's renewed campaign on charges. Throwing protocol out of the window, he launched a vigorous attack on the privatisation proposals for Japan's largest airports.
His challenge to the ACI audience drew an equally forthright response. ACI chairman Ghanem Al-Hajri said: "Airports are not the problem and should not be expected to also make financial basket cases of themselves." The airports association believes that since most airports are owned and operated by government bodies, IATA's attack is a tactic in its campaign to obtain further government subsidies for failing airlines.
ACI director general Bob Aaronson says that while airports intend to be constructive on responding to airline concerns, IATA's criticisms are too general as local airport circumstances are so different. "The only way to make progress is on a case-by-case basis," he says.
Both parties - which co-operate on most aspects of air transport - are using unusually strong language. But behind the rhetoric and mud-slinging lie serious issues, and the arrival of Bisignani's direct approach, coupled with the dire state of the airline industry, has brought a new urgency to the debate.
Global effort
IATA's lobbying in Japan centred on the familiar calls for lower landing charges at Narita and for transparency in the government's privatisation plans for the country's three main international airports of Narita, Osaka Kansai and still-being-built Nagoya. But it is just the start of a global effort to bring airline concerns out in the open. Generally, user charges are discussed between airline and airport officials at the local level. IATA is elevating the issue to the boardroom and beyond. For instance, in Japan Bisignani wrote to the country's Prime Minister Junichiro Koizumi describing his association's concerns.
IATA argues, as it has before in complaints over South American privatisation programmes, that airport charges must be directly and transparently related to service, and that cross-subsidisation between airports is specifically ruled out under ICAO guidelines. The original Japanese proposals were criticised for potentially allowing Narita to subsidise the other two.
What is different about the current dispute is the force with which Bisignani has put the case. Then there is the result, with the government bowing to pressure from various quarters to modify its ideas with each airport likely now to be privatised separately. While IATA had no authority to stop the privatisation, Bisignani points out that strong and vocal opposition from the world's airlines would be made clear to any potential investors. Japan, for its part, is aware that it needs to show the world that it is changing the way it does business.
"Narita was our first approach because it was quite unique, but we will tackle every example where there is lack of transparency and efficiency, whether in ATC or airports," says Bisignani, adding that airline chiefs around the world sent their support about the success in Japan, telling him to keep it up.
While IATA appears to have had some success in influencing the privatisation process in Japan, the issue of Narita's landing charges, which stand at ´2,400 ($20) per tonne of aircraft take-off weight, is unresolved.
According to Tsune-aki Iki, executive adviser to the president of the Narita Airport Authority (NAA): "Narita Airport landing charges, which were established by agreement between IATA and NAA, have not been increased in the past 18 years in spite of steady increases in costs."
IATA says that despite traffic increases since 1984, the airport has not passed on any cost savings to its customers. Iki notes that Narita did temporarily reduce airline rents at airport facilities in the wake of 11 September, and that it absorbs some other costs rather than passing them on to airlines. He also says that the cost of operating Narita in the metropolitan Tokyo area is "essentially high", and that the land-locked airport surrounded by several towns and villages has to spend a great deal on environmental mitigation measures.
With a heavy investment in its second runway and terminal reconstruction, and with the pending privatisation - the largest since that of UK airports group BAA - Narita is in no position to reduce landing charges, he explains. "To achieve the utmost efficiency through privatisation of this size, it is very important that the best possible privatisation scheme will be decided and carried out effectively," he says.
"The landing charge level is an essential factor that will affect the financial health of the privatised company. NAA is, therefore, not in a position to reduce that level at this crucial time when it is going through the process," says Iki. The best that Narita says it can offer to IATA is to maintain the current charges for the next few years.
Fundamental questions
While specific cases such as Narita grab the headlines, IATA is asking for a more fundamental examination of airport charging practices, their financial transparency and for a reasonable relation between charges, the cost of facilities and services, and airport profit targets.
Figures for the top 50 airport groups show that operating margins were slightly down but still came in at nearly 23% last year, while ACI's own broader annual economics survey puts the level even higher at 30%. By contrast, airline group operating margins were negative last year and over the past decade have stayed firmly in single figures even at their height.
ACI's Aaronson counters that "operating profit is a very misleading figure for airports", preferring to look at net figures which take into account the interest charges and related costs of investing in long-term airport assets. However, the net figures too reveal a gulf.
In general, airports have always made profits of this order, says Peter Mackenzie-Williams, head of aviation at the UK's Transport Research Laboratory, which tracks airport performance and charges on an annual basis.
But Bisignani wants change. "I don't accept the pricing policies of our suppliers who basically operate as monopolies." In the case of airports, this monopoly status is partially true, says Mackenzie-Williams, but that there are competitive environments such as between Europe's main capital city hubs, the large North America hubs, and regional capitals such as Singapore and Kuala Lumpur.
"The real point is that pricing at a number of airports was originally set a long time ago, and probably not with a particularly scientific relation to cost," says Mackenzie-Williams. "Since then changes have been made at the rate of inflation, assuming no regulation."
IATA is insisting on better transparency on costs from airports so that it can understand how charges are set. "There is a transparency issue virtually everywhere - it is missing," says Mackenzie-Williams. "For an airline trying to get a handle on whether it is getting good value for money or not, it can only look at the aggregate figures. There it only sees the operating profit, and that sounds like rather more than a reasonable rate of return."
Airlines are also anxious to see airports taking every possible measure to cut costs and become more efficient. "The airlines of IATA have proved to the world that they have done the hard work; firing 200,000 people, outsourcing services and more," says Bisignani. "They have gone through a lot of pain and our partners need to act in the same way because we're in the same business."
Cost cutting
As a rule, airlines have gone to their supplier base and asked for cost cuts for services and goods of 10% across the board, says Anders Svidén, director for government charges at SAS. Many, including SAS, have broadly achieved this goal, except on the infrastructure charges side.
Many airports have taken action, a fact that IATA has recognised with its Eagle Awards that have been given to airports that are providing value for money. According to Svidén: "Some airports have done a tremendous job to cut costs, but there are hundreds of examples of them just ignoring the situation and increasing charges."
Airports argue that, unlike airlines, they have less flexibility to make cuts. Dominic Pannier, group strategy director at Aéroports de Paris, says: "Airports are by nature very tangible and fixed assets which cannot be moved or closed when traffic goes down. At Paris we have discovered that closing part of a terminal does not create significant savings."
This is a major difference between the two groups. "Airports have to protect their asset base, and therefore remaining profitable is a cushion for our on-going operation - it is the price for our inflexibility in terms of the use of assets," explains Pannier.
He also believes that at many airports, airlines do have a say in the charge-setting process, and on a local basis understand and agree with the resulting fee structure. At Paris there are three rounds of consultation, and a recent ACI Europe survey showed there are a variety of consultation processes at most countries in the region. Such behaviour enables airlines to become stakeholders in the process, says Pannier.
IATA wants to go a step further, with a "strong, independent and neutral economic regulator who reviews proposed user charges, not just in a few isolated countries, but everywhere". One example is privatised UK airport group BAA, which operates under a strictly regulated charging regime.
Another option can be seen in Australia, where from July the government deregulated aeronautical charges at the country's airports for a probationary five-year period. Instead of being regulated, charges are constantly monitored. "This decision recognised that the high administrative costs and potential costs of regulatory error arising from airport price regulation were no longer warranted, as airports would be subject to sufficient incentives and commercial pressures not to misuse market power," says Dominic Schuster, manager economics of recently privatised Sydney Kingsford Smith Airport.
"Price monitoring will provide continued transparency regarding aeronautical charges," he says. "The assessment of airport performance under deregulation will include considerations of whether aerocharges allow airports to earn above a fair return, having regard to the value of their assets, operating costs and an appropriate rate of return based on the riskiness of the business."
Germany's Fraport, which operates Frankfurt Airport, offers a middle road. Prior to its partial privatisation earlier this year, Fraport signed a new five-year contract with the Board of Airline Representatives at the airport, which consists of all airlines that operate there. The deal introduces a voluntary fee cap system, says Fraport executive vice-president Bernd Struck. "This limits the increase in charges and relates them to traffic development," he says. Basically, the more traffic the airport handles, the lower any increase in charges will be, and vice versa. The contract includes a commitment from Fraport not to reduce service standards in efforts to cut costs and to its investment plan, says Struck.
Over the past five years, the airport has also developed a charging philosophy that sees 55% of its fees related to passenger numbers and 45% to a fixed element related to aircraft weight. Struck believes the approach of increasing the variable part of the fee means Fraport takes more risk along with the carriers by being more reliant on traffic levels. "Our income is very much dependent on aircraft loads," he says.
While the method of setting and consulting on charges appears highly variable across the globe, ACI points out that they still only represent 4-5% of average global airline operating expenses anyway. In Europe, they are more, says Sviden of SAS, at some 7-8% of operating expenses, with air navigation services representing 5%. And airlines only see them going in one direction. "They are the fastest growing operating cost in the business," says Gerry O'Shaughnessy, manager for user charges at IATA. Then there is the issue of new charges for airlines being levied outside the scope of the traditional user fee, he says.
Renewed determination
Many of the arguments from each camp have been well rehearsed down the years as the issue of user charges comes once again to the boil. The difference today is the stress being felt by the airlines, and their renewed determination to cut costs and improve business efficiencies at every turn.
ACI's Aaronson accuses carriers of arrogance in their approach. "Airlines have not been interested in listening or understanding the financial perspective of airports. I suggest very strongly that if airlines really want to make progress they need to take the time to understand the finances of each individual airport."
Today a rift has opened in the usually close relationship between airlines and airports. For some, the realisation that both sides have to join forces for their common good cannot return soon enough. "Airports and airlines have one thing in common - they can only win together," says Struck of Fraport. "This is something maybe more airport managers have to get into their heads. Only our joint success is good success."
REPORT BY MARK PILLING AND KEVIN O'TOOLE IN LONDON
Source: Airline Business
