Restricted retail: How airport security may reduce retail revenues

New security regulations threaten to reduce airport retail revenues. Can airports drum up new sources of non-aeronautical revenues and avoid increasing charges?

Airports may have to scramble to find new sources of revenues to make up for an expected reduction in duty free sales caused by a European Commission (EC) restriction on liquids in hand luggage.

The restriction, which came into effect in early November and is already affecting retail sales at airports worldwide, was the hot topic at last month's Airports Council International (ACI) annual general assembly in Cape Town. The restriction prevents passengers from carrying in their hand baggage containers with more than 100ml of liquid unless they are purchased at airport shops within the European Union (EU) that are using special tamper-proof bags. Duty free alcohol purchased outside the EU, Iceland, Norway and Switzerland is being confiscated by security when passengers transfer at any EU airport. Passengers with the point of entry in the EU as their final destination are not affected.

Airports are concerned the new EU regulation is just the tip of the iceberg and "is part of a trend of increasing restrictions", says ACI director general Bob Aaronson. "We are heading to a time we can only board an aircraft with Bermuda shorts and a bikini," says Gunnar Heinemann, who owns 135 duty-free airports shops through his company Gebr Heinemann. "This is nonsense."

"It is becoming more and more difficult for us to give our customers, the passengers, the welcome we'd like to give them in our airports," adds ACI chairman and Copenhagen Airports chief executive Niels Boserup.

As the first order of business at Cape Town, ACI members swiftly approved a resolution urging governments to work together to harmonise security restrictions. As a matter of urgency, airports and retailers attending the general assembly agreed they would try to persuade the EC to ease the new regulation or at least allow duty-free shops outside Europe an opportunity to meet the EC's tamper-proof bag requirement.

"A global solution needs to be found very quickly. I urge you to go back to your countries and lobby," Heinemann told the delegates. "Time is not on your side. As you stand here you are losing customer confidence."

Echoing Heinemann, Abdelhanine Benallou, director general of Moroccan airports operator ONDA says: "This is only the first step. It's important to contact our governments to get our voice listened to. I think none of us have been consulted in these measures."

Sydney Airport chief executive Max Moore-Wilton says ACI needs to make sure governments give airport security issues more attention. Australia's deputy prime minister has already promised to look at how the new EU regulation is unfairly affecting Australian airports, according to Moore-Wilton. "There needs to be an effective multilateral framework. We can't have governments unilaterally changing the rules. It's a very selfish approach."

He warns that if new security regulations continue to be introduced in a non-­harmonised fashion, passengers may get so fed up they will simply stop flying. "The industry is robust and flexible, and travellers are forgiving to a point. If travellers say 'this is enough' than we have a problem. Maybe we should put politicians in the [security] queue," Moore-Wilton says. "We can't continue to treat travellers in the global context as though all travellers are terrorists. If we do, we will destroy the confidence of travellers."

Most concerning is the impact the new EU regulation is having on airports that probably need the revenues the most. George Muhoho, president of ACI Africa and chief executive of Kenya Airports Authority, says the new regulation will particularly impact airports in developing countries banking on an increase in retail sales to become more efficient and pay for badly needed upgrades. "The last thing we needed is yet another challenge," he says.

Unfair discrimination

Muhoho, along with several other airport directors from inside and outside Europe, claims the EU regulation unfairly discriminates against non-European airports. "I'm sure it's not intended but you can possibly see it," he says.

"An airport in Africa, Asia or Australia can just as effectively screen goods as one in Europe," says Moore-Wilton.

"It's rendering us a secondary market," adds Monhla Hlahla, chief executive of Airports Company South Africa, host of this year's assembly. She says it is hard to make sure shops comply with the new EC regulation because it does not match regulations on liquids in handbags from outside Europe. If more region or country-specific regulations are introduced, it "will become costly for us to chase different standards because there is no uniformity".

Adds Muhoho: "If you don't have international standards it becomes very difficult because it is subjective. That is why we need ICAO to intervene."

Assad Kotaite, former president of the ICAO Council and the assembly's keynote speaker, says the UK security scare in August shows airports are vulnerable and need to focus on efforts to improve security. Kotaite urged ACI members to continue to improve security while upgrading their airports to accommodate more passengers and cargo. "It's a delicate balancing act," he says.

Boserup says the new EC regulation is also having a negative impact on European airports because "passengers are bewildered" by the regulations and therefore are not purchasing duty free in Europe either. "This is a bureaucratic decision. We are not at all happy about this," he says, adding that Copenhagen duty-free shops are trying to revive sales by guaranteeing passengers a full refund if their purchases are confiscated.

Airports are now trying to calculate the economic impact of the new EU regulation. "The impact will only be measurable in the next month or two," says Hlahla. But the concern is it could lead to a drop in non-aeronautical revenues at a critical time.

Airports around the world have been working to increase their non-aeronautical revenues to cover the cost of infrastructure improvements without increasing airport charges. Airports used the general assembly to trade ideas on how they can generate even more non-aeronautical revenues.

For example, ONDA is developing an aviation-related industrial zone outside the Casablanca airport and building low-cost hotels which will cost €5-10 ($6.40-12.80) for a few hours of rest. Non-aeronautical revenues now account for 60% of revenues in Morocco.

"We keep on implementing strategies to increase non-aeronautical revenues. We need to look at different uses of land around airports, new projects," Benallou says. "We have to go beyond retail space and car rentals."

Miami, in an attempt to drum up new revenues to pay for an upgrade project, has decommissioned one of its five general aviation airfields and is now looking for a company to extract rocks located underneath the airfield worth an estimated $1 billion.

"We're going into the rock-mining business," says Miami-Dade Aviation Department assistant director Miguel Southwell. "We're seeking permits now to begin mining the rocks. We need that money to help with debt service of the capital programme. The key driver is non-aeronautical revenues. People keep mentioning it."

Sharing ideas

Moore-Wilton says Sydney is opening a "park and bark" boarding kennel to house pets while their owners are on holiday. He also urges airports to learn from the shopping malls created by Dubai and Hong Kong, which now rely on retail shops to generate a majority of their revenues.

Non-aeronautical sources account for about 50% of revenues at Sydney. Copenhagen, Johannesburg, Paris and Vancouver also have a 50-50 split while some airports such as Nairobi are only able to rely on non-aeronautical sources for 30% or less of their revenue stream. But other airports such as Frankfurt are already up to two-thirds non-aeronautical.

"The world's best practice is 50% or better. We aim for that at Macquarie Group for all our airports and it is something we should keep in mind in future," says Moore-Wilton, who also serves as Macquarie's chairman.

"It's going to the world best practice, seeing what's being done by best retailers in the world and modifying our business so we get much better penetration."

There is a concern airports that already have well over half non-aeronautical revenues will run out of ideas and have no choice but to raise charges. But most of these airports think there is still more that can be squeezed from the non-aeronautical side. Jacksonville airport in Florida, for example, is already at 70% non-aeronautical and is confident it can achieve 75%.

"We want to do it because the airline business always seems to be volatile and in the USA there is always less opportunity to get federal capital dollars," says Jacksonville Aviation Authority chief executive John Clark. "The airlines love it because it keeps rates and charges competitive. Our push is to develop non-aeronautical revenues."

Source: Airline Business