Airport charges have always been like a red rag to a bull for airlines, which frequently complain that they are too high and need to come down. Airports have long countered that they are capital intensive businesses, often with costly long-term expansion projects on the go that need to be funded somehow. The debate between airlines and airports on this issue has been going round in circles for a long time, but there are signs that the current tough operating environment is leading to greater co-operation between the two sides.
"In these uncertain economic times, airports are working hard to keep charges stable and where possible to lower them to help our airline customers," says Andreas Schimm, director of economics at the Airports Council International. And airlines are finding that in some cases their bargaining power when it comes to negotiating charges is increasing, perhaps a little too much, according to Chris Smith, managing director and head of airports practice at Seabury. "Airlines that have a dominant position at airports are increasingly exerting their dominant position," he says. "Some airlines are exploiting their dominant positions in significant ways."
One example of an airport that has recently reversed a planned charges hike in response to pressure from its main hub carrier is Detroit Metro. The Wayne County Airport Authority, which operates Detroit Metro, said in its original budget for the coming fiscal year that it planned to increase airline charges by $40 million. The airport authority's chief financial officer, Tom Naughton, says the increase was needed because Detroit had found itself at the centre of a "perfect storm", with the opening of its new terminal coinciding with record high oil prices and the onset of the global credit crunch.
But Detroit's biggest carrier, Northwest/Delta, itself battling with tough market conditions, let its feelings on the planned charges hike be known and requested that the airport authority reduce the increase by $10 million. "The airlines, led by Delta, came in and asked us to go back to the drawing board and mitigate the impact," says Naughton. "So we spent four weeks working with the airlines, looking under every stone, and the board eventually approved a $7 million reduction. So instead of a $39 million increase, we're looking at a $32 million increase.
"Delta's goal was $10 million and we've agreed to come up with an additional $3 million. We're committed to getting to $10 million." However, shaving $7 million off the planned increase did not come easily to the airport. After scrutinising its entire operation, it found that it could just about rake back $7 million by raising parking charges and through other measures. "We saw opportunities to increase parking rates and save money on utilities, so we agreed to move forward with the $7 million adjustment," explains Naughton.
An additional reduction will be more difficult to achieve because "the low hanging fruit has already been picked", although the answer could lie in staff cuts. "We're at the end of a 20-year construction programme and we're not looking forward to a lot of new construction, so we have to reassess our requirements, such as staff and contractual services," adds Naughton. "We're naturally going down this road anyway so we see some opportunity to get some payroll costs out of the operation."
Naughton says Detroit has found itself "caught up in the credit crunch", and as major carriers cut capacity "we're looking at a 7% reduction in traffic next year". It is a similar story at Dallas/Fort Worth, where the financial implications of hub carrier American Airlines cutting capacity by 5% in 2009 are severe. As an airport which operates under a residual cost system, where the income from airline landing fees alone is used to balance the airport budget, it had two options to cope with the expected traffic fall, says Joe Lopano, DFW's executive vice-president marketing and terminal management.
"The pressure is on either the airlines to pick up the difference or the airport to make savings." DFW had been planning a landing fee increase in April 2009 to reflect rising costs, particularly for energy, of some $23 million in its 2008/09 financial year, which began in October. This may now be postponed. "We are trying to find ways to keep landing fees flat through a variety of measures including cost savings, re-financing and using some of our capital," says Lopano. "We're motivated. We understand how important American is to us and our community and how much pressure they're under."
Detroit and DFW are not the only airports that have found themselves squeezed by airlines to reduce or maintain their existing charges. Says Naughton: "Most large airports are under some pressure from airlines. There is the threat that if charges are not lowered they'll move flights to other cities." Across the pond in Europe, Lars Rekke, director general of Swedish airports operator LFV - which operates 16 airports including Stockholm Arlanda - agrees that "there is pressure from airlines, of course, and that did have an impact on our decision" to lower charges.
But, airline pressure aside, LFV's strategy for the last four years has been to give back any gains to the airlines that serve its airports in the belief that this helps stimulate volume. "Since 2004, we've said that if we exceed on our financial performance goals then we will use the additional resources to reduce our charges," says Rekke. "So since 2004, we have reduced our passenger charges by SKr325 million ($41.2 million) on a yearly basis. This represents 15% of our total charges."
Shifting the burden
LFV has been gradually moving the burden of airport charges away from the airline and on to the passenger, and this has also become a trend at other airports. "For a number of years we have shifted the balance between landing fees and passenger fees. Most of our charges are based on passenger volume. If we have SKr2.2 billion in fees, only SKr700 million are landing fees," says Rekke.
ACI's Schimm says airport charges have shifted towards the passenger to such an extent that airports now face the risk of reduced revenues as load factors start to decline. "The amount of user charges paid by carriers for landing and parking and other airside services is insufficient to even cover the real cost and is already substantially subsidised by passenger charges and non-aeronautical revenues," he says.
"If airlines were to pay the real cost of aircraft operations at an airport, charges per aircraft would have to go up. Increasingly, what airports elect to do instead is to recover their costs through passenger service charges. This approach increases the risk of the airport operator as its revenue depends on load factors, but it reduces the risk of airlines as they pay on a by-passenger basis."
Seabury's Smith agrees that airport charges are becoming more heavily weighted towards the passenger than the airline, and he puts this down to "the practice of airlines". "There has been a very significant shift of charges from airlines to passengers. Ten to 15 years ago, half came from landing charges and half came from the passenger, and it would all be incorporated into the fare," says Smith. "There has been a structural shift in airport charges themselves. The passenger-related element at some of the airports I've evaluated shows that the passenger charge is now at least three-quarters of the revenue."
However, he points out that "the overall trend for airport charges as airports run out of capacity is upwards, not downwards". This trend is clearly evident at Amsterdam Schiphol Airport, where easyJet has launched a vociferous campaign against a recent hike in fees which the low-cost carrier claims makes the Dutch airport Europe's most expensive. "At Amsterdam Schiphol there has been an increase in airport rates of more than 30% as of 1 November 2008 and the departing passenger is paying the bill," says easyJet operations director Cor Vrieswijk (see main picture).
"Departing passengers pay more than double what transfer passengers pay," says Vrieswijk. For a European flight operated by an Airbus A319, easyJet says the total fee for a direct passenger, including all taxes, security charges, passenger and landing charges, is €48.96 ($62), compared to €22.22 for a transfer passenger. The airline believes this is part of a strategy designed to drive low-cost carriers out of Schiphol and into surrounding regional airports. "Schiphol is full in terms of noise restrictions and it can grow only marginally. They want to move regional operations to Eindhoven and Rotterdam," says Vrieswijk, a claim that Schiphol denies. He adds that the airport has a "selectivity programme with a priority list of five", which he claims includes KLM at the top of the list "because it wants to maintain its hub status" and leisure carriers at the bottom. He says some are lumping low-cost carriers into the leisure category and calling for them to move to regional airports, something easyJet finds incompatible with its business model.
"This doesn't excite us because it puts easyJet's position at the airport in danger. About 70,000 movements have to move to regional airports and we're concerned that half of those will be low-cost carriers. Schiphol is a very important airport to easyJet and we want to keep it as part of our network, despite the cost increases," adds Vrieswijk. He says the Netherlands faces the prospect of losing airline traffic to nearby airports in Belgium and Germany, and that Schiphol is "in danger of becoming a second-tier airport". He adds: "Schiphol stands to lose connectivity with Europe. Focusing on just being a hub won't support the position of Schiphol."
EasyJet has filed a complaint with the Dutch competition authorities and is calling for Schiphol to reverse the fees and the 60% security charge increase, which it believes should be subsidised by the government. Vrieswijk says the airport has now become a "political debate", and that "the future for Schiphol is a matter for national policy".
The extent to which government regulators get involved in airport charges is another lightening rod issue. For instance, controversy reigned in the UK earlier this year when the country's Civil Aviation Authority allowed airports operator BAA to significantly increase charges at London's Heathrow and Gatwick airports. The CAA set the maximum charge for Heathrow at £12.80 ($19) per passenger for the year from April 2008 - an increase in real terms of 23.5% on the 2007/08 price cap. The increased cap for each of the following four years was set at a maximum of 7.5% plus the rate of inflation. At Gatwick, the maximum charge was increased by 21% for 2008/09 to £6.79 per passenger, with the maximum charge for the following four years increased by 2% plus the rate of inflation.
The CAA's decision prompted outrage from the airlines and led to a rare moment of unity between the chief executives of bmi, easyJet and Virgin Atlantic, and the deputy chief executive of Ryanair, who held a joint press conference to brand the UK's airport regulatory framework a "failure" and call for a top-to-bottom review of the entire process.
But the CAA continues to defend itself against the barrage of criticism from airlines. "We set maximum price caps at Heathrow, Gatwick and Stansted in a manner we think is best calculated to further the interests of users and encourage investment," says CAA head of economic regulation and competition policy Nick Fincham. He adds that the main driver behind the decision was "the need for investment" at Heathrow and Gatwick. "It was investment the airlines had agreed but they didn't like the bill that was attached."
Fincham points out that economic regulation "should be focused on addressing the risk of abuse of market power" and should be "a proportionate response to the risk of abuse". However, he admits that "the current approach to regulating airports in the UK could be improved", and suggests modernising the process in two ways. "Firstly, there should be greater clarity as to the CAA's objectives," he says, adding that the current objective is to further the interests of the user, which refers to both the passenger and the airline. "Our duty should be to the end user - the consumer."
Fincham's second suggestion is to afford the CAA greater flexibility. "Our principle function is to set maximum price caps, but we think we should have more flexibility to tailor regulation to the degree of market power," he says. "That way we could tailor or customise it to match the level of abuse." This would require the CAA to be "made properly accountable". The UK government has agreed that the airport regulation process should be modernised and is expected to put out some initial thoughts on how this could be achieved early next year.
ACI's Schimm believes the success of regulation hinges on its definition and purpose, but agrees with Fincham that it should be geared towards the end user rather than the airlines. "Contrary to what many believe, it's not the purpose of regulation to protect airlines from excessive user charges. The ultimate purpose of regulation is to protect the consumer from price or service discrimination," says Schimm. "There is a fundamental difference between the interest of airlines and passengers, and it is plain wrong to assume that airlines are taking care of passenger interests." He adds that regulation should be "the exception, not the rule, recognising the competitive pressure airports are operating in today".
The ongoing debate between airports and airlines on airport charges is moving forward, although that doesn't mean the two sides are not still locking horns, according to Seabury's Smith. "It's less of an emotional debate now and more of a rational debate," he says, adding that some airports and airlines "find it easier to see eye to eye than others". For instance, in the case of airports that are in the process of expanding, flexibility over reducing charges is not as easy to come by as it is at airports that have ample capacity going forward, as Smith points out: "For those airports in the middle of a capital expenditure programme, or those that urgently need to increase their capacity, there are not many options to reduce charges."
However, in the current environment airports could find themselves in a position where they have no choice but to postpone planned expansion projects. "Many airports are now looking to delay capital expenditure," says Smith. "Airports may be in for declining traffic and capital expenditure may be put on hold. It's less obvious but airports are certainly suffering too - there is pain going on."