Research suggests there is huge untapped revenue potential for airlines and airports if they simply co-operate. But this is easier said than done
The airline-airport relationship is often characterised by their tendency to clash over airport charges. But as airlines expand non-ticket revenues and airports reduce their airline dependency by diversifying their non-aeronautical business, European research suggests the industry is missing a trick: €46 billion ($64 billion) in untapped revenue that both sides could reap through new methods of collaboration.
The study, by management consultancy AT Kearney, speculates that Europe's aviation sector could tap a bigger share of people's overall leisure budget by looking at the business as a whole. "Airlines, airports, retailers, baggage handlers and ground transportation providers should see themselves as an interrelated 'eco system', offering seamless transitions in the passenger's journey," says Dr Tanja Wielgoss, AT Kearney's head of aviation, Central Europe.
"If airports developed into genuine local site managers, they could further expand their non-aeronautical business to provide ground-based transportation services for passengers, employees and local residents at an extra cost. Or they could extend retail offers onto aircraft and facilitate deliveries at the gate or car park once the passenger has landed."
Even if both stakeholders expand their roles, there is a consensus that airlines and airports are not yet fully in tune with each other. Malaysia Airports managing director Bashir Ahmad says: "We need to align our business models, which may be easier said than done, but there is commonality between us. We are both dependent on the same customers and want to extract as much value as possible from the passenger experience."
Airports have found ways to boost their non-aviation revenues, with some turning to real estate and building golf courses on land earmarked for future airport development. But Craig Bradbrook, director, security and facilitation at Airports Council International, points out: "It doesn't signal a diversification into the sports and leisure industry. At the end of the day, their forte is managing airports." According to ACI statistics, 45% of global airport revenues come from non-aeronautical sources.
On the other hand, the flexible airline model has helped ancillary services to take off. Airlines are expected to accumulate €18.4 billion from ancillaries this year - less than 5% of their total operating revenues, but up considerably from €11 billion in 2009, reports the Amadeus Guide to Ancillary Revenue 2010 by US consultancy IdeaWorks. Amadeus predicts that worldwide ancillary revenues.
However, the latest Amadeus study in partnership with Oxford Economics, Gold Rush 2020, speculates whether ancillaries will be the "silver bullet" to future revenue growth for airlines to 2020. Either way, the study sees airlines aligning their activities more closely with the rest of the travel value chain.
In the Middle East's aviation sector, strong structural integration, where the airline and airport are part of the same group, has left Dubai International airport well positioned to harness new revenue opportunities. "We have already cracked this [structural] integration," says Paul Griffiths, Dubai Airports chief executive, referring to the integration between the Emirates Airline & Group, Dubai Airports and Dubai Civil Aviation Authority, which all share one chairman.
Griffiths is putting pressure on stakeholders, including airlines and airports, to tear down "silo walls" in the passenger journey. "We must stop looking at the aviation business in vertical channels, where airlines, airports, handling agents and IT providers each have a role. A lot of the time the customer spends at an airport is wasted in non-commercial processes, from queues at check-in to security," observes Griffiths. "Why not radically engineer passenger processing by taking these processes off site? It creates a huge increase in dwell time in retail areas and a more conducive environment in which passengers are more likely to spend."
Airports recognise the commercial importance of retail spend, but Griffiths argues they could even eliminate their dependence on aeronautical revenues by allowing airlines to share the incremental business of retailers.
"Airlines are running out of ideas to stop being part of the boom-and-bust cycle," he says. "Why not credit airlines based on in-terminal passenger spend, so they have financial incentives on the ground? Mindsets can be changed if there is a compelling [commercial] reason to do so."
Eugene Barry, vice-president, retail at the commercial unit of Dubai Airports, acknowledges it will take some time for this model to be accepted across the entire airport, airline and retailer supply chain, stressing: "The more successful commercial operators will recognise the [revenue] opportunities first."
The commercial pressures on airports to make high-cost, long-term capital investments over long periods still leaves most airport managers dependent on aeronautical revenues, including Ahmad from Malaysia Airports, who faces potential cost overruns in the construction of Kuala Lumpur's second low-cost terminal, KLIA 2, which is expected to replace a temporary facility in April 2012.
"Keeping aeronautical charges low by increasing our commercial revenues is helping us, but we have a long way to go before it can totally replace aeronautical revenues," he says. "Airports need a steady income stream and cannot vary their charges daily, unlike airlines, who must understand the way airport charges are applied."
In some cases, airlines have reduced the infrastructure burden on airports through part-ownerships. Notable examples in Europe include Lufthansa's minority stake in Fraport and its 60% stake in Munich airport's Terminal 2. Munich and Lufthansa jointly planned, constructed, financed and operate the facility, which is dedicated to Lufthansa and Star Alliance partners.
However, the idea of airlines and airports working together in passenger facilitation for commercial, rather than efficiency, gains is still relatively unexplored. But in the USA, airlines often operate entire terminals based on long-term, exclusive-use lease agreements.
JetBlue, which has owned and operated Terminal 5 at New York JFK International exclusively since October 2008, sets a good example of how closer collaboration can lead to mutual gains. The Port Authority of New York and New Jersey, which provided the $800 million funding for JetBlue's Terminal 5, is able to work closely with airlines because of its considerable non-airport activities - it also manages local roadway infrastructure.
In a unique commercial arrangement, JetBlue pays a per-enplanement fee to the Port Authority, which to help recover terminal infrastructure costs over a 30-year term. "It's a win-win situation as more customers mean more revenue for us and the Port Authority," says Rich Smyth, JetBlue's vice-president for corporate real estate.
JetBlue also acts as the landlord for retail areas, sub-leasing space to concessionaires and sharing a percentage of total sales with the Port Authority. This close partnership has also led JetBlue to expand its non-aviation income to in-terminal advertising revenues, which are also split between the airline and the Port Authority, as well as the advertising agency, says Smyth.
If airlines, airports and all suppliers in the chain are to share revenues, it is assumed they must also share data. Airports often accuse airlines of withholding passenger information that would help them better understand who their customers are. Phil Baker, chief executive of Australia's Adelaide airport, says: "We don't necessarily need to know every passenger detail from airlines, but the raw data is a good start - information on travelling habits or when they like to check-in. It should work in both our interests."
EasyJet head of product development Peter Gerstle says the common industry standpoint is a "chicken and egg" situation. "Airlines expect to see some payback if they share data beyond what is operationally required, while airports are reluctant to invest in the necessary IT and airport infrastructure without the commitment from airlines to work together to monetise enhanced services." Even if they agree to share data, conflicts remain about where the airline experience ends and the airport experience begins. "The relationship between airlines and airports in commercial areas is not well established," says Gerstle. "Airlines ultimately hold the customer relationship. From an airline perspective, we view the customer as ours and as our right to sell ancillaries, such as car parking or car hire, which clashes with the aims of airports."
But ACI International director general Angela Gittens is optimistic. "There will come a time when both parties will work in the interests of their ultimate customers and start sharing data to offer a seamless service," she says. "After all, passengers aren't interested in which entity provides the service."
Gittens points out that airlines have already shown a willingness to share data at European airports with capacity problems, through collaborative decision making. More than 20 airports in Europe have set up a full standard for CDM, a Eurocontrol initiative in which ground handlers, airports, airlines and air traffic controllers share information on a central database, such as flight departure times or delays, to optimise operational efficiencies on the runway, taxiway and apron.
However, changing the industry's "legacy mindset" will be key to both sides improving the customer experience and monetising it, says Nawal Taneja, professor and chairman, department of aviation, University of Ohio. Airports could sell reservations to ground transport systems by co-ordinating the schedules of air traffic controllers with airlines and buses or trains, says Taneja.
"If a flight cancellation causes a missed connection in a passenger's journey, the airport or airline could co-ordinate transfers with bus or taxi reservation systems to hotels or even a nearby airport, which improves their experience. It could also be an added ancillary revenue service." Airports must also start segmenting their dynamic airline customers, moving away from traditional thinking and separating "airlines within airlines", such as intercontinental carriers, as well as categorising passengers "based on need, not purpose of travel", Taneja argues.
EasyJet's Gerstle suggests airports should take a leaf out of the hospitality industry's book by differentiating services based on their customer profile mix. "Hotels are doing a great job of catering for different target markets," he says. "Some airports have a fast-track, shorter queue with more advanced screening technology for business travellers to speed up their journey at an extra cost, but very few seem to cater to the needs of other customer types, such as families or seniors."
Despite the challenges, it is widely understood that IT will be the future "enabler" for the industry to handle traffic growth, streamline processes and create new revenue streams. ACI's Gittens says: "Advancements in GPS technology will enable passengers to use mobile devices to navigate through the airport more easily. Technology is allowing the industry to think of new ideas they wouldn't have thought of before."
Airports are already using real-time technology to capture their own data by tracking passenger movement to better understand behaviour patterns and achieve smoother process flows. An undisclosed European airport is working with SITA's R&D division in this area by using Bluetooth tracking, says Kevin Peterson, SITA's senior product manager, airport solutions.
As the self-service trend continues, airports can also add value to airlines that are losing passenger information at the check-in kiosks, says Yannick Beunardeau, Amadeus's director of airport solutions. "As airlines only see passengers at the boarding stage, airports will need to fund the IT infrastructure to negotiate with airlines to share their data. We need to link the available data between the airport and airline, which is possible today."
Beunardeau believes the industry's next generation of revenues will stem from airports, airlines, or both players incentivising passengers in real time to increase their in-terminal spend through IT applications, such as sending retail promotions via SMS messages on mobile devices.
"I don't think it will be too long before airlines and airports work together effectively for the benefit of passengers, with added cost benefits," says Gittens. What lengths they will go to is another question. But developments in technology will offer new opportunities and solutions, empowering both airports and airlines to commonly focus on partnerships and commercial rewards.