ANALYSIS
12/01/2013 - 00:00

Sharing Risk and Reward

An improved airline-airport relationship could lead to benefits for both parties

Airports have undergone incredible changes in the past 100 years—a trend that looks set to continue. From the sheds and repurposed barns of yesteryear, airports have developed into some of the most inspiring feats of architecture in the world today. The main terminal at Beijing’s Capital International is the sixth largest building in the world by floor area, for example—but still isn’t the largest airport building today. That record belongs to Dubai’s Terminal 3 (by the floor area metric it is ranked second in the world behind the New Century Global Center in Chengdu).

Such significant construction takes time and money, of course. And though this just one element of the rollercoaster relationship between airline and airports is on an upswing, the question of investment—and the user charges that follow—is always a fractious one. 
The recent Memorandum of Understanding between IATA and Airports Council International (ACI) underlines that forward thinking is taking place. But for Paul Griffiths, CEO Dubai Airports, if the relationship is to develop into something more permanent than the ephemeral liaisons of the past, user charges must be tackled head on.

“Airports must be an intelligent member of the aviation supply and support its airline partners, which control the core business-to-consumer relationship,” he says. “Airports are being asked to have greater exposure to commercial risk, for example. This is a perfectly acceptable argument and could be beneficial for both parties if the structure of the arrangement is right.”

Griffiths points to duty free as an example of what could be achieved. Onboard duty free is an area ripe for airlines and airports to share the risk and the reward. Airlines struggle with the concept, says Griffiths, because of the difficulty in combining choice with the practical issues of weight and fuel burn. Consequently, the service rarely meets the expectations of the modern customer due to the limited choice and availability. “Wouldn’t it be better if airlines did sales in the sky and then the order was fulfilled once the passenger arrived?” asks Griffiths. “This would reduce airline operating costs and increase their commercial potential. And airports would obviously benefit from increased sales.”

Griffiths believes this scenario could be taken even further and the amount of sales could feed directly into how much an airline pays the airport. Airlines and airports would each have an incentive for increasing sales and forming a real partnership.

Market power

The airline-airport connection seen in the Middle East isn’t often replicated in other parts of the world.

Charges at London Heathrow have tripled in the past 10 years, for example, according to Joe Thompson, Director of Airports for Virgin Atlantic. “Obviously it is a concern to us that our passengers pay some of the highest charges in the world,” he says. “It deters inbound tourism and foreign investment. That will always provide challenges and where airports have market power, as the CAA has concluded they do at both Heathrow and Gatwick, the interests of airlines and our customers will come into conflict with the airports.”

A final, binding decision from the UK Civil Aviation Authority on Heathrow Airport Limited’s capital plans is expected in January 2014. One version meets all airline and, by proxy, passenger expectations. But a second plan that reduces investment by some $1.5 billion will not meet requirements and puts HAL in a difficult position. Operational resilience—a critical factor when the airport is 99% full—and the passenger experience will deteriorate to the extent that “Heathrow will never be Europe’s hub of choice as its owners hope it will be,” according to Gerry O’Connell, IATA’s representative at Heathrow.

Even here, however, the issue doesn’t preclude a close working relationship and the opportunity to share risk and reward in future. Thompson believes it is important that day-to-day operational relationships between airports and airlines remain good and productive, even when there are tough debates about price taking place in parallel. “We will continue to work closely with all of our airports to ensure that we are delivering the best and most efficient service possible,” he adds.

It is a sentiment that echoes globally despite some isolated resistance. In North America, most airports are managed by the local municipality and discussions usually focus more on the development than how that development is financed. Further south, a bout of privatization has been less forgiving. Quito, Lima, and Bogota boast new facilities while three major airports in Brazil have been privatized and more are scheduled to follow.
In Bogota, a new terminal hasn’t sufficiently satisfied the need for extra capacity. The situation is being exacerbated by an inefficient stand allocation system and restricted airspace. IATA has voiced its concern but is working with the airport to maximize efficiency.

Asia-Pacific leads the way

With Asia-Pacific leading the way in real and potential growth in traffic, many eyes will turn to the region to see how the airline-airport relationship develops. There is plenty of positive news and a greater balance in risk and reward at many airports. Vinoop Goel, IATA Head of Infrastructure and Government Relations in Asia-Pacific, says the airline-airport relationship in the region continues to evolve.

“A collaborative deal in the spirit of partnership is the best way forward,” he says of user charges. “We have seen some very good examples in Asia-Pacific. We now have long-term charges agreements with Narita Airport, for example, that have provided considerable relief to airlines. We are also working collaboratively with the airport on a number of fronts to improve the operations and efficiencies at the airport. All these efforts will help Narita improve its service proposition for airlines planning to fly to Tokyo.”

The potential fly in the ointment for Asia-Pacific comes in the form of low cost terminals, a phenomenon particular to the region. Building terminals for specific business models may not be the best use of scarce airport space and resources. Goel doesn’t have a problem with the idea of low cost terminals—since all terminals should be operated as efficiently as possible—but points out that their lack of flexibility is dangerous, “white elephant” territory. “That is what’s happening at Nagoya Airport now, which has had to review its plans for its low cost terminal due to AirAsia Japan ceasing operations,” he notes.

Goel believes that while some passengers are content to travel on low cost airlines they might have higher expectations of their airport experience, such as the use of air bridges and lounge access. “Look at what’s happening at KLIA and Singapore’s Changi,” he says. “Both airports were among the pioneers in low cost terminals in Asia. Both are now developing new facilities. The services at KLIA2 will be comparable if not better than KLIA, while Changi’s T4 will be ahead of its predecessor, the Budget Terminal.”

The best way forward, says Goel, is to maintain a focus on overall airport efficiency, passenger convenience, and airline operating requirements while allowing airlines to choose which facilities they want to use.

Data sharing

“Airports and airlines can work together to take costs out of the system,”  says Angela Gittens, ACI Director General. “We can collaborate on projects to build capacity for more effective security, higher safety performance levels, better environmental management, non-aeronautical revenue generation, and top notch customer service.”

As an example, Gittens points to Airport Community Recommended Information Services, which allows the sharing of data to accomplish tasks such as self-service baggage check-in. Spreading this enabling methodology could both take millions of dollars out of airline and airport processes directly as well as allow airports to meet increasing demand without additional bricks and mortar.

“Think of common use systems without airlines or other users having to retrofit their applications to meet whatever system the airport happens to have,” says Gittens. “Also think of spreading the use of Airport Collaborative Decision Making to all busy airports so that delays are minimized and irregular operations are recovered more quickly. How much is that worth to airports, airlines and passengers? Sharing data can make that possible; the technology exists, the protocols are agreed. What has to happen next is a collaborative mindset on the part of the airport, the airline, and the air traffic manager. The respective industry associations are poised to help.”

Design with a difference

Thanks to airline industry innovation in its booking processes, airport size hasn’t detracted from the passenger experience. To incorporate e-ticketing, mobile boarding passes and the like, airports are refashioning their footprint.

Dubai Airports CEO Paul Griffiths, says the priority there is to eliminate from the design those time-consuming processes that don’t add any value. Development can focus on the remainder of the footprint in a way that best serves the customer. Many of the travel processes that are common today have their origins in the early days of aviation. The bank of check-in desks in a central building is a case in point. “There is no longer a need to reconfirm a booking multiple times,” says Griffiths. “Once the passenger has made the transaction and the airline has all the relevant passenger information there is an electronic footprint that does not need to be verified time and again.”

Dubai Airports plans to accommodate these changes in process to deconstruct the airport environment. “It will allow us to give every passenger an experience unique to them while at the same time we can combine the different elements seamlessly to ensure efficient operations,” says Griffiths.

Pushing the essential travel processes behind the scenes allows the airport to concentrate on the services that make the difference to the customer. On arrival, passengers generally want to reach their vehicle or train as quickly as possible. On departure, choice is king and the variety of services and amenities will be a key differentiator between competing airports as will the connecting time. At major hubs, airlines and airports need to work together to reduce connecting times, says Griffiths. This would make the combination of airline and airport more attractive to the end user.

THOUGHT LEADERSHIP

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