Airport Revenue Diversification (2010)

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As the airline industry consolidates and strives to achieve greater efficiencies and lower costs, airports are responding to an environment where demand for facilities and revenue streams have become less predictable. To address a higher level of risk, airports are striving to more fully utilize their land and facilities and diversify their revenue streams. This report presents an overview of the issues surrounding development of non-aeronautical business on airport property and the techniques and mechanisms airports are using today to diversify revenue activity. Information used for this synthesis was gathered through an intensive literature review and interviews with airports and industry experts. Panel members for this project requested a broad examination of innovative ideas that would be of interest to commercial and general aviation airports of all sizes and missions. Because what is innovative for one airport may be commonplace for another, a broad spectrum of ideas is presented. The synthesis is divided into three parts. Part 1 (chapters one and two) provides an overview of how the business model for airports has changed. Also discussed is the federal role in shaping what activities take place at an airport and how airlines, reluctant to enter into long-term use and lease agreements, have compelled airports to accept greater risk, to seek greater operational efficiencies and to diversify sources of revenue. Part 2 (chapters three and four) discusses how alternative revenue development fits within the airport planning process and reviews various strategies that airports employ to leverage their resources, form partnerships, and attract development. Part 3 (chapters five through seven) presents a number of examples of revenue diversification at airports that are fully implemented or in the initial stages of development. The examples are organized into three groups: (1) aviation services, such as ground handling; (2) non-aeronautical land development, including large-scale projects and stand-alone facilities; and (3) ancillary land uses, such as mineral extraction and renewable resources. The following is an overview of the findings of this synthesis report: • The business model for airports has changed. The regulatory framework for airport operations, planning, and capital projects was instituted when the airport’s principal mission was to provide basic infrastructure for airlines and other aeronautical users. Today airports support a wide array of businesses, more like an industrial or commercial center, or in some cases, a small city. • Air carrier airports, reliever airports, and general aviation airports have vastly different access to capital and the capacity to develop and maintain core facilities for aeronautical activity. That said, when it comes to revenue diversification, many reliever and general aviation airports have years of experience developing alternate sources of revenue that, out of necessity, are not passenger-dependent businesses. • The FAA regulatory framework is focused on maintaining the safety and integrity of air- ports for aeronautical use. Federal definitions of aeronautical and non-aeronautical activ- ity and financial reporting requirements on Forms 5100-126 and -127 can make it a challenge to discern the types and extent of non-aeronautical activity at an airport that is not passenger-dependent. SUMMARY AIRPORT REVENUE DIVERSIFICATION

• Airports that have lost their status as an airline hub are often challenged to reuse or redevelop terminals for aeronautical purposes. These facilities are typically sub- ject to FAA assurances and obligations. FAA district offices appear to handle reuse issues on a case-by-case basis. • Extensive competition exists among airports in the United States and Canada to become intermodal logistics and distribution centers. The most successful develop- ments take advantage of particular local market strengths, such as military base activity, cross-border commerce, and industry concentrations (e.g., aerospace man- ufacture, mail order, space center, research facilities, and technology). • Although airports initiate land development projects and many invest public funds in upfront site preparation and infrastructure, the private sector plays a critical role and ultimately provides the litmus test for market feasibility. Recently, shortages of available capital have delayed many projects or required developers to renegotiate master agreements with airports to accommodate more flexible financing arrange- ments and project schedules. • Airports are undertaking a number of diversification projects. Examples in this synthesis include: – Airport-owned and managed aviation services offered because (1) previous providers left the market, (2) the airport seeks to increase revenue, or (3) the air- port is lowering station costs for airlines. – Energy development in the form of (1) use of airport land for solar, wind, or geother- mal projects; (2) mineral extraction; or (3) research and development of biofuel feedstock and/or refining processes. – Non-aviation facilities that are low impact, such as golf courses, hiking trails, sports arenas, or other athletic facilities. – Additional passenger-dependent enterprises or services not in the terminal includ- ing valet parking, pet kennels, gas stations, convenience stores, retail outlets, and hotels. – Cross-utilized facilities such as health clinics that serve both employees and passengers. – Business and office parks, research facilities, and industrial developments. – Logistics centers and intermodal cargo facilities. – Joint development projects with military, other government entities, or private par- ties that involve nonmonetary exchanges to accomplish infrastructure development or to provide services such as fire fighting, utilities, and wastewater treatment. 2