The battle between airlines and airports over charges shows little sign of calming down, but there are calls for a new approach
Relations between airlines and airports over charges seem destined to get worst before they get better. Although intimately linked in the business of air transport, their relationship is under more strain than ever.
Crisis-hit airlines, led in their campaign by IATA, are working harder to pinpoint airports they believe are charging too much. Airports, stung by criticism they feel can be unjustified, are fighting back. They too have suffered at the hands of the industry malaise, says Airports Council International (ACI), and it continually points out that airport fees, on average, still only represent 4% of total airline operating costs.
But, as the annual ranking of the top 50 airport groups shows, most were profitable last year, with only the systems in Chicago, Detroit and Hawaii dipping to operating losses. Overall, operating margins remained at a healthy 19.2% only marginally down on previous years.
For its part, IATA says it wants airports to be healthy and profitable partners. However, according to Andrew Sentance, chief economist at British Airways, airlines have borne a disproportionate share of the pain along the aviation value chain - which includes airports, air traffic service providers, global distribution systems and others - many of whom have remained highly profitable during the slump.
Evidence of the deteriorating relationship is nowhere more apparent than in Toronto. There a public row has broken out between IATA director general Giovanni Bisignani and Lou Turpen, president of Greater Toronto Airports Authority (GTAA).
The forthright Toronto chief took offence at comments made in September by Bisignani about the airport's charges. "Your remarks about Toronto-Pearson were misleading, unhelpful and evidence of your confrontational approach to the airlines/airports relationship," Turpen told the IATA head.
"Petulant" response
Turpen's response, effectively banning IATA from doing any business at Toronto, was described as "petulant" by Bisignani. He wants GTAA to reconsider a 27.7% increase in fees for 2003. IATA characterises Toronto's approach to airlines as one of "indifference". "The level of transparency is poor and consultation is meaningless," it complains.
IATA took the unusual step of holding a press conference to highlight its anger at Toronto's fees, and revealed a letter sent to Canada's transport minister David Collenette from Bisignani. In that he accused the government of turning Toronto into a "monopolist".
Although the war of words is at its fiercest at Toronto, it is by no means the exception. Airline executives across the globe are railing against airport charges. "The biggest problem is that airlines are accountable to market forces and unfortunately airports are not," says Federico Bloch, president of El Salvador's TACA.
Latin America is singled out as the region where some of the worst charging abuses are taking place following a succession of airport privatisations that Bloch describes as "horrible". Several countries privatised their airports only to turn them from government monopolies to private ones where there is either overcharging or underinvestment, or a combination of both, he says.
Even during the good times there were spats between airlines and airports over charges, but they usually received little attention. This has all changed. Charging concerns were "an important undercurrent brought to a head by the crisis", says BA's Sentance.
While fights over charges at Toronto, Tokyo Narita and Pittsburgh grab the headlines, there are initiatives to move past the rhetoric and navigate a way forward. But an industry-wide discussion is for now absent, with the atmosphere between IATA and ACI at a new low on the issue.
"The airport industry is more than annoyed by IATA's continued attack on airports as a single industry, when in fact IATA itself recognises there are good relations between airports and airlines at a local level,"says ACI director general Bob Aaronson. The airports association is itself gearing up for a "change of tone".
"Since the IATA annual general meeting in June, there has been very little of a positive nature happening in terms of constructive dialogue except for that which continues between IATA and ACI," says Aaronson. "What is really needed is serious dialogue between senior airline managers willing to take the time to talk to leaders in the airport industry - ACI and IATA need to be the facilitators of this."
Although IATA will continue to attack airports where it feels charges are too steep, its over-arching concern is over the issue of "inadequate economic regulation and accountability" of airports. As Bisignani said at the recent Arab Air Carriers Organisation annual meeting: "Airports are natural monopolies and as such they should be properly regulated, and measured on a range of performance criteria."
BA's Sentance argues that the problem centres on the "market power" held by airports, with carriers often facing limited choices over the hubs that they have to serve. "This brings up the question of regulation, and whether it needs to be more effective, to ensure power is not abused," he says.
Airports need the "rigours of regulation" adds Bloch. "It is the best way to discipline a natural monopoly," he says, adding that regulation over Latin America's privatised airports has been poor, while others have not observed basic ICAO policies on airport charges.
As many argue for regulation, it is widely recognised that more than one valid model should emerge. "There is no single model - it may be that an airport could be asked to accept one of four or five standard models," says Aaronson.
Regulatory model
IATA believes the UK's regulatory model is broadly a good one, although it recently blasted BAA's increase in fees - approved by the Civil Aviation Authority in April - as "outrageous". BAA will raise charges at Heathrow, for example, by 6.5% above the rate of inflation for the next five years.
The CAA's decision, seen by carriers as overly generous, included "a very strong focus on the need to encourage investment", says Dr Harry Bush, CAA group director economic regulation. With the new fifth terminal at Heathrow under construction, and with possible new runways on the horizon, BAA is spending heavily and needs to be able to raise money accordingly.
"It is important to have independent regulation, but the UK model shows it doesn't always work," says BA's Sentance. "There is a need for transparency and consultation alongside that to make it work properly."
The CAA is evaluating how well the latest charging review worked and how to position the regulator in future, says Bush, who joined the CAA six months ago when the review was nearing completion. "The perception that I bring is that there is a lot that airports and airlines should be doing in terms of talking to each other and working out their problems themselves," he adds.
In the past, the CAA has taken a "light touch" to regulating charges, and Bush believes this should continue: "Where the regulator can be helpful is in helping to set the terms of engagement between the airports and the airlines - it's about achieving genuine discussion."
Bush, who is careful not to criticise the approach either party has taken, believes this includes airports being transparent about their costs and investment strategies and airlines taking greater responsibility for owning this part of their supply chain by engaging more strategically. He does not want to move to more "intrusive" regulation, saying it hampers commercial agility. "It brings a lot of problems and costs because everyone adheres to regulatory timescales and not commercial timescales."
Overall, the UK model is a heavy-handed approach, argues Stuart Condie, BAA director economics and regulation, burdening the decision with a long-winded and complex process. BAA alone produced 800 papers relating to the last review, which itself took three years to complete. For Condie, alternatives are for "voluntary agreements with the threat of regulation or regulation without price control itself."
Aaronson at ACIwarns that excessive regulation of airports is the worst thing that could happen to airlines. This, he argues, would ultimately end up increasing costs to airlines. "My own view is that in most cases the form of regulation should be a mandate - at national level or from a regulatory structure - that requires airports and airlines to negotiate with each other as business partners, and that's as far as it should go," he says.
As the UK considers the evolution of its regulatory model, airlines remain convinced regulation should play a key role. They also want more consultation on airport capital spending - a key driver of charges. "Airlines increasingly feel there should be much better discussion of these plans and the cost-effectiveness of them ahead of major airport development," says Sentance. "Airports may be discussing plans that go beyond what airlines are prepared to pay." In Ireland, for example, Aer Lingus and Ryanair have consistently opposed Aer Rianta's spending plans at Dublin and other airports.
Ground-breaking rebate
Following the latest review, the UK charging regime now also includes a ground-breaking rebate element where BAA will pay airlines if certain standards are not met. This links a small percentage of charges to the quality of service the airlines receive. The scheme includes the availability and serviceability of aircraft stands, jetties and baggage handling systems, security queues and service elements such as cleanliness, measured through passenger surveys .
Allied to this, the CAA will introduce an airfield congestion element to the rebate scheme for both arrivals and departures by April 2005. The maximum level of rebate will reach 3% of charges revenue. Although modest in its first application, BA says the scheme helps plug an important gap in the charging regime.
IATA also praises the Australian model. "At first the Australian solution was privatisation with regulation," said Bisignani, talking to the country's National Aviation Press Club in August. Then price controls were deregulated in mid-2002, a move Sydney Airports Corporation described as a "lighter-handed approach". But since then, charges have also risen between 40% and 100%, says IATA, and there are now calls to scrap the current price monitoring system with more robust regulation.
New Zealand's competition watchdog, the Commerce Commission, also recommended regulating charges at the country's privatised airports - where Wellington for instance hiked fees by 78% in April. The government rejected this idea. Air New Zealand says: "In the absence of price controls, airports have been sent a clear message that they can charge what they like."
Such frustration over the regulatory environment is also evident in Africa. John Morrison, chief executive of the Airlines Association of Southern Africa (AASA) concedes that regulators have been introduced by some of the governments which have privatised or commercialised their airports. But they have all too often put the performance of the airport, and the corresponding return to the government, above the interests of carriers or passengers, he adds.
Privatising the region's airports has brought more efficient terminals for carriers, but "costs have gone from being modest to almost unaffordable" in some cases, says Morrison. AASA has appealed to governments and competition authorities for assistance, but this approach has fallen on deaf ears. "Our only success is in having a continual 'consultation' with the regulator to convince him that a lot of these airports are abusing their powers," he says.
However, Morrison is hoping that AASA's campaign to influence the regulator in South Africa will pay dividends as he considers a new five-year pricing regime for Airports Company of South Africa. "Hopefully we will see some relief," he says, stressing that at local level a great deal of co-operation exists with airports on many issues.
Latin American mandate
Bloch hopes that the mandate airline chiefs have given to Alex de Gunten, new head of the International Association of Latin American Airlines (AITAL), will make similar headway. With several airports already privatised, the game is one of catch-up in trying to persuade governments to change their approach. "It is critical for AITALto focus on each airport to see how to deal with it," says Bloch. This work will be in league with IATA.
To date, AITAL and individual carriers have managed to make governments aware of the seriousness of the issue, although concrete results have not been forthcoming so far, says Bloch. "The tide has been stopped in certain cases - everyone is a bit more cautious and at least is thinking: are we doing the right thing?"
According to Bloch, four to five years ago the solution for airports was privatisation. "Now it is not the automatic default option," he says. "I personally feel the best model is a non-profit, government-owned entity but privately managed. It would be an autonomous organisation run by the private sector to obtain management efficiencies giving the best service at the lowest cost."
Hong Kong initiative
As the Hong Kong Special Admini-strative Region (SAR) government deliberates which privatisation model it will choose for Chek Lap Kok, IATA is keen to put its message across for a strong and independent regulator early in the process to help ensure post-privatisation charges are not onerous. One initiative has been to hold, in partnership with the Hong Kong Chamber of Commerce, a seminar in November on the issue of regulation and privatisation.
With the Chek Lap Kok process in its embryonic stages, it is too early to judge what influence such efforts will have. Other privatisation moves, notably in the Netherlands and Germany, have caused airlines considerable angst.
Leo van Wijk, chief executive of KLM, has also outlined how his airline used its political influence to block Amsterdam Schiphol's privatisation after being frustrated for two years in its bid to obtain financial information from the airport. "This was the only way we were able to get their full figures - this is not a true partnership," he says.
German carriers have opposed two proposals to develop Berlin's Schonefeld airport privately. Both involved substantial pre-financing charges that carriers refused to accept, says Wolfgang Dreher, director operations services, Hapag-Lloyd.
Just as the gulf between airlines and airports is widening in some places, so it narrows in others. Multi-year pricing deals between airlines and airports at Frankfurt, Copenhagen and Melbourne are held up as epitomising the business relationships that many advocate.
Melbourne, for instance, received an IATA Eagle Award in June recognising its management practices and commitment to its airline partners. Its agreement commits to no price rises above the rate of inflation to cover expected capital works.
There does however remain a lot of work for both sides to do, moving from the current megaphone diplomacy towards new acceptable models of consulting, regulating and agreeing on airport charges.
Source: Airline Business
