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1 1 Chapter 1 Introduction 1.1 Decade of Amazing Change and Disrup ons 1.2 Shi s in the Airport Opera ng Environment 1.3 Funding and Financing Airport Projects and Services 1.4 Evolving Airport Business Model 1.5 Purpose of the Airport Guide 1.6 Airport Guide Organiza on 1.7 Addi onal References Chapter 1 of this Airport Guide examines the contribu ng factors that have mo vated airport operators to seek addi onal sources of revenue to supplement opera ng revenues from aeronau cal ac vi es. Airline consolida on plus effec ve capacity control and price discipline has led to a more compact domes c airline system. To address structural changes within the airline industry, airport operators have deployed a variety of innova ve strategies to stabilize and grow revenues and to make use of new technologies. A vigorous pursuit of revenue opportuni es has forced an evolu on of the tradi onal airport business model from one that emphasizes provision of support for air transport to a management model that includes a diverse por olio of airport facili es and services. The chapter also describes the organiza on of this Airport Guide and provides addi onal references for changes and innova on in the avia on industry. 1.1 DECADE OF AMAZING CHANGE AND DISRUPTIONS In many respects, the adop on of changing technology over the last decade has drama cally influenced how airports operate and how passengers and airlines interact with the airport. Some examples of changes in airport and tenant opera ons affec ng the experience of passengers are: GPS use has become mainstream. Video streaming and digital media have transformed the delivery of news, music, books, film, and adver sing. Online retail shopping now competes heavily with built stores.
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE 1 2 Mass adop on of cell phones, digital cameras, and open mobile plaÂorms has changed how passengers check in, print boarding passes, process luggage, reserve or pay for parking, and order food in an airport terminal. Mobile plaÂorms con nue to replace paper and credit cards, and serve as point of sale (POS) devices. Handheld devices also deliver personalized informa on to airport customers, such as flight and gate informa on, adver sements, and receipts. Communica on has become less hierarchical. User generated content (e.g., Wikipedia, YouTube, crowd sourcing) and social networks allow individuals to express opinions and deliver digital informa on. Communica on used to be primarily from one person or organiza on to another; today, it is possible to communicate from one person or many people to many others. Opportuni es for sharing volumes of data have accelerated change, coupled with a need for accelerated response. Internet capability has enabled organiza ons to func on without walls. Global outsourcing has moved a large amount of technical and customer support offshore. Hybrid cars and compressed natural gas (CNG) buses have altered fuel consump on and the cost of opera ng these vehicles. Each of these technological changes has contributed to a transforma on of how airports and airlines conduct business and carry out economic transac ons across the United States and the world. Other exogenous events have also drama cally altered commercial avia on. Many of these changes stem from the tragic events of the September 11, 2001 (September 11) terrorist aÂacks and subsequent security concerns, but other changes are due to U.S. and interna onal economic condi ons, the economic health of the airline industry, and noteworthy weather events. For many years before 2001, airports considered the airlines their principal customers. Cri cal aircra requirements, the number of opera ons, peak hour demands, gate requirements, and aircra servicing needs determined the length and configura on of runways and taxiways. Signatory airlines had exclusive or preferen al use agreements for gates and hold areas in the terminals. Peak hour flows of air passengers determined space requirements for check in, baggage handling, and security. As the airline industry expanded its domes c and interna onal networks, the trajectory of demand for airport use and space also increased at many airports. Up through 2000, advances in aircra size and technology required airport sponsors to modernize facili es con nuously Original Pan Am Worldport (1980) Source: Port Authority of New York and New Jersey
CHAPTER 1 â INTRODUCTION 1 3 and to improve operaonal efficiencies. The need to re engineer passenger terminals was most visible at JFK Internaonal Airport, where iconic terminals, such as the original Pan Am Worldport and the TWA Flight Center, designed before widespread use of jet bridges and large capacity aircraÂ, had become funconally obsolete. Airport sponsors connue to keep up with changing aircra technologies and scale. With the startup of Airbus 380 aircra service in October 2007, many airports had to widen taxiways to accommodate the wingspan of the aircraÂ, increase the height of terminal gates, and expand gate areas to handle 525 to 853 passengers. Other catalysts have turned airport operator aÂenon toward expanding the scope of the airportâs businesses. Following September 11, both airlines and airport sponsors abruptly switched course from a growth oriented philosophy to a more risk averse approach that connued for the next decade. Figure 1 1 highlights a succession of disrupons: terrorism, bankruptcies, natural disasters, and the largest recession since the Great Depression. September 11 was followed by anthrax aÂacks, an outbreak of severe acute respiratory syndrome (SARS), invasions of both Iraq and Afghanistan, and the subprime mortgage crisis that led to the Great Recession at the end of 2007. During the first half of the decade, almost every network carrier, with the excepon of Alaska Airlines, went bankrupt. Perhaps because most of the airlines had restructured their networks, capacity, and fleet during this me, they went into the Great Recession at the end of 2007 with leaner operaons as well as pricing and capacity discipline. In 2007, the carriers responded immediately to the financial crisis. Almost every airport experienced a loss of flights and seats, especially medium hub and small hub airports. Many non hub airports lost all service. To gauge the extent of change, in 2007 there were 476 primary airports in the United States with more than 10,000 enplaned passengers. This group included 140 small hub airports and 269 non hub airports. By 2013, there were 392 primary airports, including 71 small hub airports and 258 non hub airports. Eighty four small hub and non hub airports lost status as a primary airport grid and more than half of these airports lost commercial air service enrely. The period from 2007 to 2012 involved substanal losses of seat capacity offered at U.S. airports: 4% percent for large hub airports 20% for medium hub airports 14% for small hub airports 13% for non hub airports The Great Recession and the subsequent slow recovery marked a definite shi in the airline and airport industries from a focus on growth to one of financial survival and avoidance of risk.
Figure 1 1: Decade of Disrup ons Source: KRAMER aerotek inc., 2014
CHAPTER 1 â INTRODUCTION 1 5 Table 1 1 compares changes in the number of enplaned passengers at airports serving as connecÂng hubs for U.S. airlines from 2000 to 2013 and clearly demonstrates how changes in airline connecÂng networks can severely affect levels of acÂvity at a parÂcular airport. Former connecÂng hubs Lambert St. Louis InternaÂonal, CincinnaÂ/Northern Kentucky InternaÂonal, PiÂsburgh InternaÂonal, Memphis InternaÂonal, San Jose InternaÂonal, and Cleveland Hopkins InternaÂonal are among the airports that have lost 30% to 75% of enplaned passengers and faced sudden vacancies in their terminals. AlternaÂvely, at airports where the airlines concentrated connecÂng acÂvity, such as CharloÂe Douglas InternaÂonal, John F. Kennedy (JFK) InternaÂonal, Denver InternaÂonal, and Hartsfield Jackson Atlanta InternaÂonal, the number of enplaned passengers has grown rapidly. Table 1 1: Changes in Enplaned Passengers at Hub Airports, 2000 versus 2013 Hub Airports CY 2000 CY 2013 Gain or Loss of Enplaned Passengers 00 13 Change Charlo e 11,469,282 21,346,601 9,877,319 86.1% New York (JFK) 16,155,437 25,036,358 8,880,921 55.0% Denver 18,382,940 25,496,885 7,113,945 38.7% Atlanta 39,277,901 45,308,407 6,030,506 15.4% Miami 16,489,341 19,420,089 2,930,748 17.8% Chicago Midway 7,059,520 9,915,646 2,856,126 40.5% Sea le 13,875,942 16,690,295 2,814,353 20.3% Houston (George Bush) Intercon nental 16,358,035 18,952,840 2,594,805 15.9% Las Vegas 17,424,214 19,946,179 2,521,965 14.5% Philadelphia 12,294,051 14,727,945 2,433,894 19.8% San Francisco 19,556,795 21,704,626 2,147,831 11.0% Bal more 9,675,681 11,132,731 1,457,050 15.1% Phoenix 18,094,251 19,525,109 1,430,858 7.9% Washington Dulles 9,643,275 10,570,993 927,718 9.6% Dallas/Fort Worth 28,274,512 29,038,128 763,616 2.7% Newark 17,212,226 17,546,506 334,280 1.9% Los Angeles 32,167,896 32,425,892 257,996 0.8% Salt Lake City 9,522,344 9,668,048 145,704 1.5% Columbus 3,441,286 3,063,822 (377,464) 11.0% Minneapolis St. Paul 16,959,014 16,280,835 (678,179) 4.0% Raleigh/Durham 5,191,077 4,482,016 (709,061) 13.7% Kansas City 5,903,296 4,836,221 (1,067,075) 18.1% Chicago O'Hare 33,845,895 32,317,835 (1,528,060) 4.5% Detroit 17,326,775 15,683,523 (1,643,252) 9.5% San Jose 6,170,384 4,315,839 (1,854,545) 30.1% Cleveland 6,269,516 4,375,448 (1,894,068) 30.2% Memphis 5,684,619 2,301,003 (3,383,616) 59.5% Pi sburgh 9,871,995 3,812,460 (6,059,535) 61.4% Cincinna 11,223,966 2,776,377 (8,447,589) 75.3% St. Louis 15,288,493 6,216,104 (9,072,389) 59.3% Total Primary Airports 708,638,875 738,365,312 29,726,437 4.2% Source: FAA Air Carrier Acvity Informaon System Database (ATADS)
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE 1 6 1.2 SHIFTS IN THE AIRPORT OPERATING ENVIRONMENT As the Great Recession changed the ways that both airlines and airports conduct business, airport sponsors have taken on new responsibili es and assumed addi onal risks to address: Shortened dura ons on airline/airport opera ng agreements Reduced seat capacity in the domes c system and more concentra on in the largest markets, usually at the largest airports Increased compe  on among airports for air service, passengers, and investment Fewer customer service representa ves of airport tenants on airport premises Reduced federal funding for Airport Improvement Program (AIP) grants in aid with passage of the FAA Moderniza on and Reform Act of 2012 A ceiling of $4.50 on passenger facility charges (PFCs) (set in 2000 and not increased) Challenges to fund capital projects because tradi onal long term revenue streams from airlines are more uncertain In addi on to these challenges, airport management must: (a) deliver safe and secure opera ons; (b) plan for future growth; (c) maintain a good credit ra ng and posi ve cash flow to fund opera ng expenses and maintenance and to fund debt service; and (d) posi on the airport compe  vely to retain/enhance air service and customers. To operate nimbly and effec vely in this environment, airport organiza ons are striving to be self sufficient, flexible, and agile. 1.3 FUNDING AND FINANCING AIRPORT PROJECTS AND SERVICES Airport operators depend on a variety of sources to fund capital projects and pay for opera ons and maintenance. 1.3.1 Funding Sources Funding refers to revenue streams that airport operators can use to pay for a project or a service. Examples of tradi onal airport funding sources include: Aeronau cal income from use of the airfield and terminal area by airlines, aircra owners, or fixed base operators (FBOs) Non aeronau cal income from concessions, parking, rent on land and non terminal facili es, and sale/resale of u li es PFCs collected by airlines for each enplaned passenger Grant receipts from the AIP administered by the FAA and funded through the Airport and Airway Trust Fund (AATF), established in 1970 to finance capital improvements at U.S. airports. The AATF is funded from excise taxes paid by air passengers The rela ve contribu on of airport funding sources varies by size of airport, as Figure 1 2 shows. For the smallest commercial airports, grant receipts are the largest funding source; for large hub airports,
CHAPTER 1 â INTRODUCTION 1-7 aeronaucal revenue contributed in 2013, 47% of funding sources. Non-aeronaucal and aeronaucal revenues are also important sources to all airports. Figure 1-2: Relave Contribuon of Funding Sources by Airport Hub Size, 2013 Source: FAA, AAS-400: CATS Report 127, 2013 1.3.2 Financing Most airports depend on various forms of debt, equity, and capital leases to provide for immediate cash requirements to pay for capital projects. Financing, unlike funding, creates an obligaon to the enty providing the financing. Bonds are the most common mechanism that airports use to finance long-term capital projects, including: General obligaon bonds (GOs) â backed by the overall tax base of the issuing enty General airport revenue bonds (GARBs) â repaid by airport general revenue PFCs â backed bonds secured by PFC revenue Special facility bonds â repaid by revenue from a facility [ACI-NA] At the end of 2013, U.S. airports reported $83.4 billion of indebtedness (see Figure 1-3). Ninety-seven percent of airport indebtedness was financed with long-term bonds. 5% 8% 22% 48% 47% 40% 29% 20% 35% 40% 40% 26% 13% 12% 10% 6% Large (29) Medium (35) Small (74) Non-Hub (329) AIRPORT HUB SIZE (NUMBER OF AIRPORTS) Passenger Facility Charges Non-Aeronaucal Revenue Aeronaucal Revenue Grant Receipts
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE 1-8 Figure 1-3: Airport Indebtedness by Airport Hub Size, 2013 Source: FAA, AAS-400: CATS Report 127, 2013 1.4 EVOLVING AIRPORT BUSINESS MODEL The economic and poliÂcal upheavals of the past decade helped to solidify a view held by many airport operators that (1) tradiÂonal methods to fund and finance capital projects, airport operaÂons, and maintenance may, on their own, be insufficient in the future, and (2) airports needed to reduce dependence on aeronauÂcal revenue and federal grants. The exploraÂon of new funding sources coincided with an already-changing business model. Figure 1-4 traces the evoluÂon of airports. In the 1970s, the airlines were the principal customers and the airport served as the ground-to-air connecÂon for passengers. By the 1990s, airport terminals had evolved into desÂnaÂon spots for originaÂng and connecÂng passengers as operators developed diversified concession programs and services. Today, the airport business model has expanded further to incorporate a wide range of commercial and industrial acÂvity, customer services, natural resource development, and public-private partnerships (P3s). The expanded airport model includes a diversified porÂolio of services and faciliÂes that generates revenue by providing to a captured customer base of airline personnel, tenants, and airline travelers: Retail, food, and beverages ExecuÂve and general aviaÂon Non-aeronauÂcal enterprises Large, $65,428,054,572; 78% Medium, $12,454,165,473; 15% Small, $4,094,873,795; 5% Non-Hub, $1,457,212,724; 2%
CHAPTER 1 â INTRODUCTION 1 9 Figure 1 4: Evolving Airport Enterprise Sources: Adapted by KRAMER aerotek inc. from Oliver Wyman Inc. 1.5 PURPOSE OF THE AIRPORT GUIDE The purpose of this Airport Guide is to discuss strategies that can increase net revenues to the airport sponsor and compe  vely posi on an airport in its region, as well as in domes c and interna onal markets. The objec ve of this research is to produce a guide to help airport professionals iden fy, evaluate, and implement innova ve strategies for genera ng revenues. This guide should iden fy innova ve revenue sources and techniques currently in use, or being considered for use by airports, but not widely known. Innova ve revenue sources should also include techniques in prac ce by other transporta on modes or other industries but not aÂempted at airports. In preparing this Guide, the research team should inves gate a range of revenue genera on opportuni es from a variety of sources including, but not limited to, airport users, the entrepreneurial use of airport assets, and the regional economy that benefits from airport ac vi es. [Original ACRP Problem Statement] This Airport Guide has both a broad mandate and a broad audience. It offers a framework to organize revenue development strategies for airports, focusing on some of the most effec ve and innova ve ideas. 1.6 AIRPORT GUIDE ORGANIZATION There are four components to the research presented in this Airport Guide (see Figure 1 5): 1. Summary and conclusions, introduc on, overview of the strategies that set the framework for the Airport Guide 2. A discussion of each innova ve revenue strategy
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE 1-10 3. Case studies that exemplify successful applicaÂon of parÂcular strategies 4. A bibliography, a set of definiÂons, and an index readers can use to locate specific revenue strategies and techniques Chapter 2 introduces each of the revenue strategies. Chapters 3-7 describe each of the strategies in more detail. Chapter 8 presents the case studies. Three appendices provide addiÂonal resources. Appendix A provides an annotated bibliography. Appendix B provides definiÂons of terms and abbreviaÂons. Appendix C is a quick index to the implementaÂon techniques used in this Guide. Figure 1-5: Organizaon of the Airport Guide *BCEC = Boston ConvenÂon & ExhibiÂon Center 1.7 ADDITIONAL REFERENCES ACRP Report 20: Strategic Planning in the Airport Industry (Ricondo & Associates, Inc., et al.), TransportaÂon Research Board of the NaÂonal Academies, Washington, DC, 2009, hÂp://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_020.pdf ACRP Report 74: Applicaon of Enterprise Risk Management at Airports (Marsh Risk ConsulÂng, HNTB CorporaÂon, and Direct Effect SoluÂons, Inc.), TransportaÂon Research Board of the NaÂonal Academies, Washington, DC, 2012, hÂp://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_074.pdf 1. Overview Summary and Conclusions Introduction Framework for Innovation 2. Key Strategies Customer Focus Airport-Provided & Shared Services Revenue Participation Value Capture Improvements to Existing Airport Businesses 3. Case Studies Concession Management at Indianapolis Ground Services at Springfield- Branson Participatory Leases at Pittsburgh & McCarren Value Capture at Dallas/Fort Worth and at BCEC* 4. Additional Resources Annotated Bibliography Definitions & Acronyms Index of Revenue Strategies
CHAPTER 1 â INTRODUCTION 1 11 ACRP Report 76: Addressing Uncertainty About Future Acvity Levels in Airport Decision Making (Kincaid, I. et al.), Transportaon Research Board of the Naonal Academies, Washington, DC, 2012, hÂp://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_076.pdf ACRP Report 77: Guidebook for Developing General Aviaon Airport Business Plans (Aviaon Management Consulng Group), Transportaon Research Board of the Naonal Academies, Washington, DC, 2012, hÂp://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_077.pdf Davidson, N. and S. Van Beek, âAirport Strategic Planning, Time to Take a Fresh Look,â Focus, LeighFisher, 2012 Economic Affairs and Research, Economic Bullen, 4th Edion, ACI NA, Washington, DC, March 2013 FAA, Airport and Airway Trust Fund (AATF), Factsheet, April 2014 NCRRP Project 07-01, âAlternative Financing Approaches for Passenger and Freight Rail Projectsâ (CPCS Transcom, Ltd.), Transportaon Research Board of the Naonal Academies, Washington DC, 2015. Office of Inspector General, Aviaon Industry Performance, A Review of the Aviaon Industry, 2008 2011, Number CC 2012 029, September 24, 2012, Washington, DC United States Government Accountability Office.GAO 13 261, GAO Report to Congressional Requesters: Naonal Airspace System Airport Centric Development, GAO 13 262, U.S. GAO, Washington, DC, 2013, hÂp://www.gao.gov/assets/660/653427.pdf
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE 1 12
