National Academies Press: OpenBook

Airport Revenue Diversification (2010)

Chapter: Chapter Eight - Conclusions

« Previous: Chapter Seven - Ancillary Land Use
Page 46
Suggested Citation:"Chapter Eight - Conclusions." National Academies of Sciences, Engineering, and Medicine. 2010. Airport Revenue Diversification. Washington, DC: The National Academies Press. doi: 10.17226/14386.
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Page 46
Page 47
Suggested Citation:"Chapter Eight - Conclusions." National Academies of Sciences, Engineering, and Medicine. 2010. Airport Revenue Diversification. Washington, DC: The National Academies Press. doi: 10.17226/14386.
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Page 47

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46 This synthesis examined the issues surrounding revenue diver- sification at airports and the different ways that airports are generating alternate sources of operating revenue. The business model for airports is clearly changing, partly in response to an environment where airline cost control, bankruptcies, and mergers have increased the risk at airports for unplanned vacancies, reductions in level of service, and renegotiated use agreements. Airport capital projects are typically planned around a 20- to 30-year horizon; far longer than long-term plans made by the airlines. To address the maintenance and capital needs of an airport, such facilities have adopted new cost-cutting measures, performance benchmark systems, and new initiatives to redevelop stranded facilities, attract new business, and create additional operating revenue. The pathway to developing non-aeronautical activity at an airport is guided by (1) airport leadership, (2) market opportunities, (3) land use and zoning regulations at the local and state level, and (4) FAA grant obligations and assurances that protect the federal investment in airports and guide the type of activities allowed. There is also variation in state and local regulations concerning whether or how public entities can participate in private development. The legal framework for revenue diversification at airports can be complex and in many instances has been addressed by the FAA on a case-by-case basis. Even at the airport sponsor level, governing groups vary as to how much latitude airport directors are given with respect to initiation of capital projects, joint ventures, and lease negotiations. The FAA, through its financial reporting system, requires commercial service airports to report aeronautical and non- aeronautical operating revenue. The accounting categories for operating revenues make it difficult to discern how airports are diversifying beyond airline and passenger-dependent activity; however, it appears that for large and medium hub airports, non-aeronautical operating revenue derived from activities other than terminal concessions, rental cars, and parking represents a small percentage of the total operating revenue. For small and non-hub airports, and for general aviation air- ports, alternate sources of operating revenue are much more significant. Many examples of revenue diversification activity at air- ports are presented in this synthesis. They occur for a variety of reasons: (1) to fill a gap of service at an airport, (2) to function as a cost saving incentive to an airline, or (3) to provide a new source of operating revenue for the airport that takes advantage of unmet demand or a particular market niche. Airports are also engaged in activities that benefit the community more directly than the airport. This is often the case when National Guard or military facilities operate at an airport. Because of differences in an airport’s objectives for revenue diversification, the cost-benefit evaluation must also be situation dependent. Further research could include the future and systematic evaluation of ways that airports are engaged in revenue diver- sification. ACRP Project 01-15, Assessing and Implementing Innovative Research Strategies—A Guide for Airports, presents the opportunity to investigate alternative revenue strategies for airports and ways to measure their effectiveness. This synthesis scratched the surface of a very large topic. In the process, several issues emerged that would benefit from further investigation. • Rate of Return when Airports Provide Ground Services Some airlines routinely contract with airports for ground handling services. Other airlines also may contract for third- party ground handling when the number of daily departures is small. Several airports around the country provide these services on a “per-turn” basis. Airport-provided services are gaining traction with small hub and non-hub airports. Propo- nents argue that airport ground handling is good because it (1) generates revenue for the airport, (2) lowers airline costs, and (3) retains air service for carriers that might otherwise quit the market. Ground handling services cut across many functional areas of the airport including fueling, maintenance, terminal, and ramp services. Some workers are employed full time for ground handling; however, there are also typically many employees that either work part-time or are working on-demand when ground handling services are required. Airports differ on their philosophy about whether ground services should be offered as a break-even enterprise or for revenue generation. Ground handling has been added to the list of incentives offered to airlines: however, it is not evident whether these services retain airlines or whether certain airlines now expect an airport to offer such services. Per-turn pricing for ground handling has transformed this aspect of aviation services into a competitively CHAPTER EIGHT CONCLUSIONS

47 priced commodity. Rate of return issues and economic benefits remain unexplored for many airport-operated ground services. • Tracking Airport Diversification FAA compliance reporting is focused primarily on aero- nautical activity and passenger-dependent non-aeronautical activities (e.g., parking, concessions, and car rentals). Ground lease and other revenue and expenses for non-aviation activity are reported at an aggregate level. Advocates for activity diver- sification are inclined to emphasize the revenue side rather than the cost side and rate of return. It is difficult to draw con- clusions about which airport diversification activities result in the greatest economic benefits (i.e., net revenue, jobs, taxes, or indirect impacts) without further case studies and development of metrics that would facilitate comparisons across airports. • Regulatory Issues When U.S. airports experienced steady growth of aeronautical activity, the issues of revenue diversification did not figure as prominently in development discussions. However, as air- lines cut capacity or re-structure, many airports have experi- enced airline preferences for shorter leases and reduced airline investment in airport facilities. Revenue diversification into non-aeronautical activity has raised some regulatory issues that were discussed at the ACI–NA Legal Issues Conference (San Francisco, May 2009) and are addressed in the new FAA Airport Compliance Manual, published in September 2009: • In what circumstances can an airport use revenues derived from obligated airport property for non-aeronautical uses that will achieve greater airport self-sufficiency? • Considering that airport revenues come from many sources, when can an airport use revenues from “non- obligated” land and activities to subsidize, guarantee, or otherwise provide incentives for additional aviation activity? • For airports that experienced “de-hubbing” or substan- tial downsizing, what are permissible uses of property obligated for aeronautical purposes but in excess of current demand? The new norm for airports surviving in this economy is one where the airline industry remains risk averse with respect to long-term commitments for facilities and use of airports. In this environment, reconsideration and clarity on the use of aeronautical and non-aeronautical property and revenues makes sense and is worthy of further investigation. • Do Incentives Work? The efficacy of incentives is a much debated subject among airports and economic development groups. • Do incentives actually cause airports or localities to grow more rapidly than they would otherwise? • How much of an incentive is needed to serve as a “tipping point” in favor of a particular airport or are the incentives expected from all candidate locations? • How costly are incentives for an airport compared with the direct and indirect service, jobs, and revenue derived from the development? Incentives offered at airports have become both standard practice and a matter of careful process because, with few exceptions, incentives must comply with FAA Grant Assur- ances concerning revenue diversion, unjust discrimination, exclusive rights, and requirements for an airport to be self- sustaining. At this time, FAA guidance on air service incentives has a more established set of policy standards than the use of incentives for non-aeronautical development. The FY2010 ACRP Project 01-15, Assessing and Imple- menting Innovative Research Strategies—A Guide for Airports offers the opportunity to address many of the questions raised by this synthesis.

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TRB’s Airport Cooperative Research Program (ACRP) Synthesis 19: Airport Revenue Diversification explores the different sources of revenue for airports, separating core aeronautical revenue from ancillary revenues. The report also examines ways that airports have diversified activities and highlights the challenges that arise when non-aeronautical activity is proposed on land that is subject to Federal Aviation Administration grants obligations and assurances.

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