Against a backdrop of record fuel prices and the global economic uncertainties, airport charges are as sensitive a subject for airlines as ever in 2012.
"When fuel is at unpredictable prices, airlines are seeking every last efficiency they can get," says Laurie Price, director of aviation strategy for consultants Mott MacDonald.
Yet airports have been suffering too, with passenger and freight volumes under pressure, hitting their aeronautical revenue. Of 376 individual airports that provided financial data to Airports Council International (ACI) for 2011, which includes all the world's largest airports, 54% of those recorded losses.
Despite the interdependence between airlines and airports, the difference in their business models means tensions can often flare. In a recent high-profile example, New Delhi's Indira Gandhi International airport proposed a 340% increase in charges during the next two years. The airport justified the rise by pointing to high development costs of a new terminal and third runway and large sums owed to it by troubled carrier Air India and Kingfisher Airlines.
After vociferous complaints by operators flying into the Indian hub as well as IATA, which says the increases would have made the airport the most expensive in the world, it agreed to a smaller rise in charges.
Price feels there is a fundamental misunderstanding on both sides of the industry. "There is a complete lack of appreciation of airline economics from airports and sometimes the other way round." He says the relationship between the two businesses often appears to be "about confrontation not collaboration". It is complicated further by a move from airports during the past 20 years to become more entrepreneurial. ACI describes the evolution of the airport business model as a change from being "simply public-sector infrastructure providers into sophisticated, business-oriented service providers".
Rafael Echevarne, ACI director of economics and programme development, says this change to commercial operations "occurred mainly as a result of the realisation by governments around the world that airports are major engines of socioeconomic growth for the territories they serve". He says they can be self-sufficient through a variety of ownership and governance models.
"We have gone from a situation where airports were a branch of local or regional government and have been asked to stand on their own. They have to generate revenue to cover their operating costs," he explains.
Ulrich Schulte-Strathaus, the Association of European Airlines' secretary general, says this behavioural shift means airports often now think they are the ones managing the network. "You have some airports which have hired network managers because they think that airlines are just spokes of an airport." He says airports have learnt not to have their capacity growth linked to one network airline after what he describes as "a great shock to the airport sector when Swissair and Sabena went down".
However, Schulte-Strathaus does not believe the airports' recently acquired business acumen is harmful to airlines. Speaking on how airports fund infrastructure improvements, he says: "They will often do their utmost to not actually increase airport charges, but increase their revenue through non-aviation related revenues." ACI says airports' aeronautical revenues "frequently represent a zero sum or produce a deficit".
ACI's 2011 Airports Economics survey shows that during the financial downturn, airports turned to non-aeronautical revenues to cushion the impact of lower volumes of passengers and freight. These include retail and car rental concessions, car parking, food and drink, property and advertising.
It also says the financial crisis accelerated the trend of airports charging airlines on a per passenger basis rather than on an aircraft-related basis as airlines seek lower fixed operating costs. In 2011, passenger-based aeronautical revenues exceeded airports' aircraft-based revenue in every global region apart from North America, and accounted for 60.1% of their aeronautical revenue worldwide.
Echevarne feels a commercial approach does not damage the relationship between airlines and airports. He feels it is a natural step after airlines underwent the same change from being publicly owned to being corporatised, and sometimes privatised.
When problems do arise, Echevarne says it is because airlines perceive that airports are exploiting their positions. "In some cases airports have not been transparent enough in how they deal with their investments," he says. To avoid such scenarios he says that when corporatised, airports must demonstrate greater accountability in every aspect of their business.
Private airports, subject to commercial consideration and responsible to shareholders, are concerned about the distortion caused to airport charges by state-sponsored entities. Explaining the competition it faces from state-run airports, Kam Jandu, director of aviation at privately owned Budapest Airport, says: "They can be more receptive to airline requests to keep their charges down or reduce them, whereas private airports are driven by shareholders and it's very difficult to keep our own costs in check." For an airport run as a professional business, it is hard to compete with state-run airports for which "turning a profit every year is not in their DNA".
ACI Europe describes competition among the continent's airports as intense, all the more so given the tepid traffic growth in the European Union. With so many airports vying for a slice of the traffic growth, it says airlines can gleefully go airport shopping, set up a route for a year and, if it doesn't work, leave. That mix of low EU growth and network volatility, coupled with what it says is an alarming rise in capital costs representing 31% of total airport costs in 2010, are some of the reasons it says 48% of the Europe's airports are loss-making.
Budapest experienced this competition fiercely after the collapse of Hungarian flag carrier Malev in February, which provided 36% of its passengers in 2011. Facing a "huge vacuum", it temporarily closed one of its two terminals and postponed construction of its cargo base as well as launching an incentive programme to attract airlines to use the Hungarian capital as a base.
Jandu explains that after Malev's collapse, other airlines approached Budapest offering to generate passenger numbers that would replace those of Malev, but for doing so the airport was asked to reduce its charges by 70-80% in exchange. While offering some incentives, he says the airport was resolute in its refusal to accept such terms. "In our tariff manual there's no provision to give such a discount, regardless of the volume," he says, adding that airports are bound to offer deals that are non-discriminatory and transparent.
He says regional airports often make deals with low-cost carriers that agree to set up routes or bases in exchange for huge discounts on charges, since they guarantee large volumes of passengers. Yet he warns: "Recent history has shown us that is not sustainable, with very few exceptions. That only works in a low fuel cost environment."
In the poker game played between airports and airlines over fees, carriers are holding more cards than in the past. Airlines, particularly of the low-cost variety, respond quickly to situations, while airports must make long-term decisions to safeguard capacity years into the future. Jandu says Ryanair, which grounded aircraft over the winter, "mobilised within two weeks of Malev collapsing. They entered the market with two aircraft, ramping that up to five within the space of five weeks."
Yet the airport/airline relationship is not all fractious. Many are finding advantages in what Schulte-Strathaus calls "system partnerships". He says: "Particularly with large airports and hub carriers, there is an increasing understanding that it's a combination of experience on the ground and in the air that makes the system more competitive than others. You will find those airports which have that trust relationship and are the most transparent will walk through the investment they require in the airport user council." He cites Geneva as an example of "an airport that is totally transparent with its investment and what it does" and "always has the users involved with any major investment decision, which is reflected in the cost which the users can accept because they are involved in the process".
Calling for two businesses that are often "in two different worlds that really have difficulty understanding each other" to communicate, he says: "The better we understand each other the better we will be able to offer better competitive products as an aviation sector and jointly tackle excessively burdensome regulations, taxes and ETS."
ACI's Echevarne feels better harmony will be achieved if governments clearly outline what the playing field is an the rules of the game. He says: "We believe it is important to set out what the framework is before you go through with any corporatisation and privatisation process." He adds that in the row at New Delhi airport, economic regulation had been introduced after the airport was privatised. "Had the framework been in place prior to that, then there would have been no surprises to the operators or users."