While analysts pore over every minor twist and turn in airline alliance strategy, few have cared to ask whether airports too may have a strategic role to play in this game. Instead, they have largely been seen as sleepy utilities, run by bureaucrats not businessmen, and with little control over their own fate. But beware. These sleeping giants are rapidly awakening with potentially massive implications.
At present, the airport/airline relationship tends to be stacked heavily in favour of the carrier. Individual airports are usually no match for their airline customers and, as a result, are forced into defensive and deferential positions. If anything, deregulation has further weighted the balance, with airlines better able to divide and rule, while at the same time dramatically increasing their demands for improved facilities, branding and tariffs. Airlines are the key to bringing in the passengers and airports are left in no doubt of this fact.
The US market is a case in point. Ten majors and their franchise partners control something in the order of 90% of scheduled flying and can make or break local economies by their choice of hubs and routes. By contrast, the airport operators are, for the most part, local monopolies, living off traffic in a single city. So for example, The Port Authority of New York, which controls three of North America's largest hubs, accounts for less than 7% of the region's airport traffic.
The picture is similar elsewhere around the world. So the BAA Group, arguably the world's largest airport grouping, has sales around the $3 billion mark, accounts for a little over 10%of passenger traffic in its home European market and perhaps 3% worldwide. Compare that with the major airlines and their emerging alliances. Groupings such as Star or oneworld are on track to cover around 20-25% of the world's international passengers and with combined group sales of $50 billion or more.
Airports are reacting to this changing world, with a drive to turn themselves into commercial businesses, competing for traffic and developing other revenue streams in retail and property. Their demand for the freedom to compete has contributed to privatisations in Europe, South America, Africa, Australia and Asia.
Power shift
This drive for commercialism could also bring with it a shift in the balance of power, with airlines finding that they have helped to shape a new breed of airport group that is not be so easily manipulated in the future. The crucial point is that a major new industry has begun to stir. Like all new industries in their early days, it is highly fragmented. But consolidation must surely come.
At present there are something over 500 significant airports in the world - the Airports Council International lists a membership of 565. Assuming that consolidation mirrors that of the airline industry, then the leading groupings would each have to cover the equivalent of 100 average-sized airports.
But could such "airport giants" really emerge in practice? Many analysts will raise doubts, citing obstacles to acquisitions excessive selling prices. Perhaps, but the speed of privatisation is gaining; countries are now putting entire systems up for sale and they are being bought.
One unfamiliar feature of the sector is the virtual absence of leadership from the USA, where airports are still local utilities with strict rules on how their profits are spent. But outside North America, the market is taking hold and fragmentation will surely turn into consolidation. Aviation is no exception to the rules of the market. Indeed, its global nature and its insatiable need for capital makes consolidation almost inevitable.
As with the airlines themselves, the market will simply work its way around such industry barriers, and softer "alliances" will make it more palatable for nations to let go of their airports. There are groupings aiming for an interest in perhaps 20 airports. It would only take a few more deals from there to take the number up to 100.
Industry implications
If and when these groupings emerge, the industry implications are clear. Such groups would be less open to manipulation by airline customers. Indeed, they may be able to dictate terms to the airlines - another advantage that will drive consolidation. They will also be far more influential in a whole range of regulatory issues where the airlines, within their powerful trade associations, have traditionally dominated. For example, they may seek to take a greater control over their core product - slots.
There is at least one other possible outcome. Airports are often local monopolies, with the development of competing airports being blocked by a mixture of geographical, environmental and cost issues. Large cities usually have potential alternatives to their major hubs, including small airfields and former military bases. Some are being exploited by niche operators, but until now they have lacked the resources to overcome the obstacles to real expansion. This restraint on local competition is good news for the established airport and, more so, for its incumbent airline.
Consider the position of one of the proposed new airport giants pondering its lack of a strategic presence in a neighbouring state or city. An intolerable situation for an aspiring global company. Among the alternatives, the airport planner may consider teaming up with a friendly airline alliance which would also like to enter the market. Together they could develop an under-used airfield or even offer to purchase an established site and turn it into a rival hub. The point is that an airport giant might have the muscle to create competition in markets that are presently restricted.
Airports are often criticised for their obsession with retailing, but it is a model they could well pursue. Just as major retailers aim to see their brands present in every major market, so too airport groupings may begin to set their sights on global coverage.
| Leading city airport systems | |||
| City | Airports | Passengers (million) | World share % |
| London | LHR/LGW/STD | 96.7 | 3.4 |
| New York | EWR/JFK/LGA | 86.4 | 3.0 |
| Chicago | ORD/MDW | 83.9 | 2.9 |
| Paris | CDG/ORY | 63.6 | 2.2 |
| ACI Total | 565 members | 2,849 | 100.0 |
Source: Airline Business
