Like it or not, the airport industry has not escaped this trend. And as controversy continues over the level of airport landing and air traffic control charges - particularly in Europe where the EU Commission has drafted plans to regulate such fees - the interest in airport performance and efficiency is unlikely to decline.
A second reason for the newly emerging interest in airport performance indicators lies in the changing ownership structure of airports and an emerging sense of competitiveness in the airport world. Until recently, and with a number of exceptions in the US and the Far East, airports did not compete to any real extent. This situation, coupled with an ownership structure which invariably lay in the public sector, meant that there was no real pressure for airports to compare their performance with that of others. Traditional attitudes in this context are changing, as the level of private sector interest and participation in airports increases.
So what are performance indicators? Very simply, they are little more than a means of comparing performance in terms of production units, financial measures, such as return on capital employed, or efficiency of use of assets.
Industrial production can be measured in terms of widgets produced per man hour; for airports a simple equivalent is that of passengers per employee. This type of comparison of a business with that of its peer group is a very practical way of ensuring that a business is competitive or, better still, ahead of the rest of the field.
Despite the benchmarking trend, there is a fundamental question over the validity of performance comparisons.
Critics of the concept have pointed to the myriad of ways in which airports are organised, and have taken the view that like with like comparisons simply cannot and should not be made. The aphorism 'comparing apples and oranges' has often been applied to airport performance indicators. The main factors which make comparisons difficult are:
1 Different accounting policies which affect depreciation and asset valuation.
2 Different employment structures can mean that the same activities may be undertaken in one case by airport employees, and in another by employees of an organisation such as a government agency, an airline or a contractor.
3 Different levels of diversification. Apart from the core airport business, different airports may have interests in various additional activities such as hotel operations, consultancy, ground handling companies and car parks.The inclusion of results for these activities, it is argued, will distort comparisons with airports without such financial interests.
These differences certainly exist but there are ways in which their effects can be softened. Also airline performance indicators have been published for many years despite similar obstacles. Airline managers have long been accustomed to seeking a competitive edge through the use of any analytical tool available and have therefore been more inclined to shrug off the problematic side of performance indicators. In contrast, airports in the public sector have tended to lack the commercial pressure needed to overcome their reticence. Furthermore meaningful performance appraisal has not been widely practised in the public sector until relatively recently.
There is another use for performance indicators which is unaffected by differences between airports. Indicators can be used simply as a year-on-year means for an airport to assess its own performance, without necessarily relating this to external benchmarks.
Arguably, an airport which did no more than set itself targets for year-on-year improvements in performance levels - and achieved them - would quickly find that external comparisons would automatically improve, however they were measured.
In its Review of Airport Performance, published earlier this year, Symonds Travers Morgan found that the need to establish a valid basis for comparisons could be handled in a number of ways.
First, a common set of core airport activities was selected which tended to exclude commercial activities such as the operation of ground handling services, car parks, consultancy and air traffic control services. These effects then had to be smoothed out to allow comparability with airports where such activities do not take place.
Where the level of detail in an airport's report and accounts was high, it was possible simply to remove the revenues, costs and employee numbers associated with a particular non-core activity. In some cases, revenues, but not costs, were shown in which case a common sense assessment of costs was made.
Useful comparisons
In cases where activities such as ground handling were factored out, it was assumed that if the airport itself did not provide the service another party would do so in exchange for some form of concession paid to the airport. Such payments were then estimated by reference to the turnover of the particular sub-business.
The necessary adjustments were thus made to the raw data to allow useful comparisons to be made.
Symonds Travers Morgan's review contains a total of 22 different performance measures, either operational or financial, based on 1995/96 data from 28 airports or airport groups. Charts 1 to 5 detail five of the key measures used. Each chart shows the extremes from the review and therefore in the case of the absolute measures, differences of up to a multiple of 10 exist between the top and bottom ranking airport.
Given the rapid growth in the importance of airport retailing, the measure of commercial revenues per passenger is clearly a must (Chart 1). This shows a considerable variation in commercial revenues, with a strong performance by a number of airports in Europe where the concept of airport retailing is well developed. The list is headed by Vienna and London/Heathrow which are, significantly, both in the private sector. The three top airports are European while the two North American airports listed, San Francisco and Vancouver, are in the bottom half of the chart as are Oslo, Sydney and Johannesburg.
As is the case with all the financial measures used, this scale is shown in units of the Special Discount Rate (SDR), an international financial measure based on the trade-weighted values of seven major currencies.
Commercial revenues include both rental income and concession revenues, but tend to be dominated by the latter. While the level of spend per passenger is influenced by the retailer/concessionaire rather than by the airport itself, the airport can have an influence by providing a suitable facility to encourage retailers to set up shop in the airport. For the airport to achieve a good income from concessions it needs to enter into contracts which strike the right balance in terms of producing an adequate return both for the airport and the concessionaire.
Serious effect
The abolition of duty and tax-free sales within the internal EU market, expected to take place in 1999, is likely to have a serious effect on the concession revenues at many European airports with modest extra-EU traffic.
In these cases, unless action is taken to boost retailing without tax concessions, commercial revenues could drop to levels similar to those in the US and Australia, where the majority of passengers travel on domestic services.
Chart 2 shows an overall revenue figure for each commercial air transport movement (ATM). A number of factors determine the position of an airport in this chart, including its aeronautical charging policy; the degree of commercial development at the airport; the size, type and usage of the aircraft; and the average number of passengers per aircraft.
Aeronautical revenues consist of basic airport charges, such as landing charges and passenger service charges, and are the airport's return for running its core business. Such revenues will be higher at airports with relatively large numbers of passengers per aircraft, because charge structures relate to aircraft weight and passenger charges are on a per passenger basis. Long-haul aircraft are therefore subject to higher landing charges than smaller aircraft.
This holds true whether or not the airport has well developed commercial activities. Therefore Heathrow, a major international hub, has both the highest commercial revenues per passenger and the second highest revenue per air transport movement among the airports surveyed. This provides an instant picture of financial attractiveness to potential investors.
Adequate return
Chart 3 shows total operating profit as a percentage of total assets and illustrates the return on capital employed, which varies between zero and 35 per cent. Relatively few airports are achieving an adequate return on their assets in terms of delivering a return to investors, whether public or private, or their ability to finance future capital investment.
Some airports would achieve a better return by selling off their assets for property development - providing that they are correctly valued - and investing the proceeds, rather than continuing to operate them as an airport.
This raises the question of whether running an airport should be viewed as a commercial activity or the provision of a public service. Most non-privatised European airports seem to fall into the latter category with very low returns on investment. In contrast London/Heathrow, which is not included in this chart, achieved a 12 per cent return.
Alternatively some of the airports in the top half of this table may not have invested much in infrastructure and their high rates of return may reflect the depreciation of their assets to very low levels. In Hong Kong, for instance, the old airport has been heavily depreciated in the run up to its replacement. In contrast, Miami has invested heavily in a $4 billion expansion and development programme. As with a large number of the measures reviewed, a critical factor will be to assess how an airport's performance changes year-on-year.
Historically airports made virtually all of their income from aeronautical charges to airlines for the use of the basic airport facility. Chart 4 shows, however, that few airports now receive enough money from their core aeronautical activity to cover their costs. Other sources of revenue, such as concessions, are becoming an increasingly important part of the airports business. If duty and tax-free shopping for intra-EU flights ceases in 1999 as currently expected, airports with limited inter-continental traffic, such as Dublin, may have to increase their aeronautical charges significantly in order to remain profitable.
But airports appearing near the top of this scale cannot be assumed to have excessive aeronautical charges. Vancouver's charges are relatively modest on a world scale and its position simply reflects the fact that it has relatively low operating costs. Similarly, an appearance at the bottom of the chart does not mean that the airport's charges are low: charges at Orlando are actually higher than those at Vancouver. This situation is due to the charging system of residual costs which applies at many US airports, including Orlando. Under this system, aeronautical charges must be set so as to recover no more than the difference between operating costs and commercial revenues.
Range of factors
Chart 5 takes the assessment of investment potential a little further on from Chart 2. The level of operating profit per passenger depends on a range of factors which affect operating efficiency, but also on the nature of the traffic passing through the airport. Airports with a high proportion of international traffic, which generates high levels of spend, tend to be more profitable than those with a high proportion of domestic or charter traffic.
It is not therefore surprising that by this measure the majority of the higher ranking airports handle mainly international scheduled services. The bottom of the list is occupied by San Francisco, Orlando and Los Angeles, which have a high proportion of domestic traffic. Indeed these US airports are not expected to produce an operating surplus.
There are a number of valid ways in which airport performance indicators can be used both as a peer group comparison and an assessment tool by investment analysts. While many differences exist between airports for fairly intractable structural reasons, Chart 1 demonstrates what might be done at a number of airports if a different approach were taken to commercial development. In a lot of cases there is enormous potential.
Now that airports are increasingly seen as targets for private sector investment, either through outright privatisation or some form of joint venture, the use of measures of this kind seems inevitable. As long as the various factors involved are clearly understood, airport performance indicators can be a valuable source of infomation to a variety of users. This is certainly a tool for which the airport industry is now ready.
Source: Airline Business
