There is a puzzling phenomenon in the airport world. Airports that traditionally should be big winners struggle to maintain a leading position. Despite their apparent advantages, many have been battling in the middle of the pack in terms of profit and value growth. Others have been left behind.
The world has moved on and familiar business models - serving traditional customers (both airlines and passengers) in traditional ways - may no longer apply. For airport managers that means reinventing their business in a way that will generate sustainable growth. For their airline customers, this migration also means new ways of working with airports to create value for both parties.
Airport success has always been defined by a few basic measures. More traffic means more revenue, while costs are easily passed on to customers with little fear of competition. Some recent airport annual reports suggest the equation is straightforward: a high-growth market, plus superior products, plus high relative market share, equals success.
Unfortunately, the rules of success are changing. The airport business is fragmenting and boundaries are blurring. Profit distribution patterns are changing and a complex array of new market opportunities are emerging, together with many new types of competitors. In this new environment, growth alone will not ensure success. An analysis of 31 airports and groups around the world shows no correlation between growth and operating profits (see diagram above) Nor is there any real relationship between size (passenger numbers) and cashflow margin (operating profit, plus reported depreciation).
A new and fundamentally different set of assumptions about what is important has come into play. Airport managers now need to be concerned with not only who will come, but also how much value they bring with them, and most importantly, what must be done to capture that value.
Value migration
Value is flowing away from traditional customers and activities into new opportunity spaces or profit zones. This value migration, to use Mercer's concept, means that activities, skills and business designs that were once highly rewarded, such as ground handling, engineering and architecture, are fading into economic irrelevance. In addition, the internet revolution is likely to radically change how these services are provided.
The process can be dramatic, as good business designs can quickly propel companies towards industry leadership. For example, in the two years after its second round of equity offering the market value of Copenhagen Airport increased as a multiple of annual sales from 3.8 to 5.8. During the same two years the market value of Vienna Airport decreased from a multiple of 2.8 to 1.8.
On the other hand, unexpected changes in the marketplace have left some airports with business models tailored for markets that no longer exist. For example, some US hubs, such as Dayton, Baltimore and Raleigh/Durham, were high flyers in the 1980s, but found themselves left with oversized, underused facilities when the local hub airline pulled out. The new Denver airport was planned and developed to be a two-airline hub, but then Continental Airlines pulled out.
In Europe, Geneva Airport was similarly affected when Swissair cut back services, losing the bulk of its intercontinental operations to Zürich. Airports such as London Luton Airport, have experienced a boom in growth due to low-cost airlines. While it is true that low-cost airlines can rapidly expand an airport's traffic base, there are risks. Deregulation in the USA and Europe has demonstrated that almost 80% of these types of carriers go out of business.
Similarly, failing to match the product to future value creates value outflow, regardless of the product's quality. This has been the case with many airports that invested heavily in expensive airport baggage handling technology, only to find that it did not match the needs of airlines or passengers. Many of the major airport projects of the past decade, while seeming the best solution in the planning phase, have proven to be wrong in reality. For example, London Stansted Airport was designed to serve long-haul, full-service international airlines. Instead, it has become a departure point for short-haul, low-cost airlines, which obviously have radically different requirements. Conversely, the same holds true for airports such as Paris Charles de Gaulle (Terminal 2) or Munich Airport, which were built to serve local markets but are ill-equipped to function as the hub airports that they have become. However, their hub airlines are stuck with the facilities.
Value migration usually places industry incumbents in an intensely uncomfortable position. Maintaining leadership depends on the ability to identify competing business designs, assess their use to the customer and respond effectively. To stay ahead of value migration, established players must constantly evaluate competing new business designs and decide which ones really matter.
The problem is that when trying to take a critical look at one's own industry, vision can be distorted by past patterns of success and by industry norms that have traditionally defined the competitive playing field. In the airport business, as with the airline industry itself, established competitors tend to focus their efforts on incremental improvements: players aim to do the same things as always, only better. This outlook can lead to tunnel vision: an intense focus on an immediately relevant - but necessarily incomplete - set of competitors.
Succeeding in the airport industry of the future, however, will require managers to replace tunnel vision with a radar screen that defines competitors not as those that do the same thing, but as those that allow customers to choose business designs that satisfy their priorities. For example, some of the new and innovative designs that are emerging on the airport radar screen include:
* Investors looking for new private equity opportunities, who are layering new business ventures on to traditional airport development opportunities. An example here is for the airport business park, entertainment centre, or "shopping mall with runway";
* Service providers from outside the industry, such as the UK's National Express coach company, are expanding up or down their own value chain to provide a seamless service;
* Traditional airports that have started transforming themselves to become, for example, passenger charter/freight consolidation points, such as East Midlands airport in the UK, or intermodal integrators like Amsterdam, Paris CDG, Frankfurt, and Hong Kong;
* Niche operators or providers of outsourced services, such as ground handling or facility maintenance companies, that are looking to grab only one or two links of the traditional value chain;
* The Internet and airports, whether focused on customers (airlines, passengers and others) or on suppliers, which have the potential for significant value creation, although this design has yet to fully materialise.
Tomorrow's business design
Addressing the competitive business designs of tomorrow will require a more holistic approach - one that takes into consideration the need to deliver utility to customers while capturing value and generating sustained shareholder value growth. Most strategic analyses of airports start with an inside-out approach that assesses the airport's assets and core competencies and then looks for an efficient way to turn those into something customers will buy.
On the other hand, the Value-Driven Business Design framework, developed by Mercer Management Consulting, starts with customers - an understanding of their priorities and the trajectory along which those priorities are likely to evolve - and works inward. Market-driven issues of customer selection, profit model choice, and the identification of strategic control points serve as the basis for determining required capabilities (scope) and organisational structure.
To generate superior returns, an airport needs a breakthrough value proposition. This, in turn, depends on knowing the airport's best customers - those that create value - and matching resources to their needs.
Existing and potential airport customer groups are in some ways highly fragmented, comprising different airlines and different passenger segments with different characteristics - visitors, employees and tenants. Each customer group has different needs and spending patterns, similar to those exploited by sophisticated marketers in the financial services, telecommunications and retailing industries (see illustration, left). Successful marketing at airports capitalises on their unique infrastructures and information-intensive qualities and matches new uses and services to high-value customer needs.
To generate superior returns, breakthrough value propositions and new business designs will have to be developed. The airport industry is just beginning to realise the potential of its various customer segments, including employees and neighbouring businesses. The next winning player will have to do for airports what Nike did for athletic footwear, what IKEA did for furniture, and what FedEx did for overnight package distribution.
Once value spaces are identified, a company must develop an appropriate model to capture that value. Successful airport business designs are relying less on traditional approaches. Instead, airport managers are realising that there are many options for value creation, capture and protection - and that as the marketplace evolves, so must their value capture models.
The UK's BAA Group is an example of an airport operator that has developed a successful value capture model and consistently evolved it over time to achieve superior returns. BAA's stock performance has consistently outperformed the market average since it was formed in 1987 out of the privatisation of the British Airports Authority. Its business design was focused on running a better airport and unloading activities that were not essential to this.
As value migrated away from operations, BAA had to change its value capture model to focus on concessions management and, in particular on duty-free retailing, in which BAA developed market leadership. Finally, with competitors improving their retail offer and the impending discontinuance of duty-free sales within the European union, value again migrated and BAA adapted its model to participate in airport management projects elsewhere around the world.
Strategic control is a critical element of a company's ability to make sure its value capture model will continue to be effective over time. The higher the level of strategic control, the less likely it is that competitors can hope to duplicate a company's strategy.
Compared with many other industries, airports enjoy unique opportunities for gaining strategic control of their businesses. For example, in the case of major international hubs, it is unlikely, at least for the foreseeable future, that Air France would abandon its Paris Charles de Gaulle hub, that Singapore Airlines would walk away from its Changi hub, or that Delta Air Lines would give up on investments in infrastructure and customer franchises in Atlanta.
Strategic control
Whether most airlines like it or not, airports do have a high degree of strategic control in the form of "customer ownership". These airports will continue to build strategic advantages as they gain in scale and productivity.
Other airports may be putting their strategic control at risk. For example, Luton Airport which has battled long and hard with neighbouring Stansted for a share of London's growing low-cost scheduled market, is raising pricing to the extent that one of its key tenants, easyJet, is threatening to leave.
Just as matching the business design to customer priorities enables value capture, so must available resources be matched to the business design to make it work. Some leading airport operators in Europe, such as BAA or those at Copenhagen and Hamburg, have abandoned their historical "full service" approach, jettisoned businesses that are "no-profit zones" and emerged as radically different organisations. Other airports too are now outsourcing activities such as ground handling, facilities engineering, or financial planning, which can best be handled by companies that specialise in these fields.
Airport operators such as BAA, or those at Schiphol, Copenhagen, and Vancouver are also becoming involved in the emerging industry-within-an-industry of global airport management, which requires mastering a whole new set of core competencies.
Value migration is inevitable, regardless of the industry. Many of today's airport business designs could potentially become the 21st century's no-profit zones, particularly as more governments transfer airport ownership to the private sector and these new shareholders demand more of a value-driven approach to the business. In the long run, new competitors will continue to show up on the industry radar. If airports - and their airline customers - are to thrive, managers will have to focus on capturing this value, not on traditional measures.
Source: Airline Business
