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2 1 Chapter 2 Overview of Revenue Strategies 2.1 Agility in Changing Times 2.2 What Is Innova ve for Airports? 2.3 Strategies Selected 2.4 Strategy Evalua ons 2.5 Key Func onal Areas Involved with Strategies 2.6 Wrap up 2.7 Addi onal References Chapter 2 presents the factors that went into selec on of the strategies, an overview of the strategies themselves, and a discussion of how implementa on of the strategies relates to different func onal areas of the airport. 2.1 AGILITY IN CHANGING TIMES Given the turmoil and structural changes of the last decade, airport operators have focused on ways to enhance the financial strength and resilience of the airport enterprise. From a planning perspec ve, this focus involves clarity of strategic vision and concentra on in several key areas: Increased airport revenues and funding sources Improved performance in all func onal areas of the airport Op mized use of airport assets Compe ve differen a on from other airports An airport organiza on that is responsive at all levels Figure 2 1 summarizes the key a ributes of a diversified airport enterprise.
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE 2-2 Figure 2-1: Key Aributes of a Diversified Airport Enterprise Source: KRAMER aerotek inc., 2014 2.2 WHAT IS INNOVATIVE FOR AIRPORTS? InnovaÂon involves finding new ways to deliver a service or produce an outcome through adopÂon of new technology and systems, improvements to processes, or changes in organizaÂonal structure [Schumpeter]. For private companies, innovaÂon is adopted if there is an opportunity to reduce costs and/or increase profits. For publicly owned airports, innovaÂon can also include strategies to change the culture of the airport organizaÂon and its business partners or to use airport assets as catalysts for economic development. InnovaÂon for airport organizaÂons is mulÂdimensional and involves the following parameters:1 New service concepts New customer interacÂons New business products New net revenues to the airport sponsor New delivery systems (personnel, organizaÂon, culture, technology) 1 Adapted from Den Hertog et al. 2010 Strategic: SeÂng prioriÂes based on vision, mission, goals, core businesses, and beliefs Results-oriented: Tracking performance; measuring key outcomes; adjusÂng and improving Resilient: OpÂmizing use of airport assets; cost compeÂÂve Customer-friendly: MeeÂng the expectaÂons of customers Market CompeÂÂve: DifferenÂaÂng airport brand and services Employees Engaged: CreaÂng an environment for excellence
CHAPTER 2 â OVERVIEW OF REVENUE STRATEGIES 2-3 2.3 STRATEGIES SELECTED The innovave strategies described in this Airport Guide result directly or indirectly in cost savings or net revenue increases to the airport sponsor. There are three basic ways to increase net revenues to the airport sponsor: 1. Develop new sources of revenue 2. Increase airport sponsor parcipaon in tenant revenues 3. Improve the planning, administrave process, and management of exisng airport businesses Figure 2-2 shows these approaches. Figure 2-2: Ways to Improve Net Revenues Source: KRAMER aerotek inc., 2014 The five strategies described in this Airport Guide are summarized briefly in this secon. A separate chapter is devoted to each strategy. 1. Customer Focus â This strategy presents a number of new ideas to increase focus on customer needs and wants, achieving more sales of in-terminal concessions, adversing, parking, and added customer services. Innovative Strategies Develop New Sources of Revenue Increase Airport Sponsor Revenue Participation Improve Planning, Process, and Management of Existing Airport Businesses Results in Improvements to Net Revenues for the Airport Sponsor
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE SOURCE NOT FOUND. 2 4 2. Airport Entrepreneurial Ac vityâPart I (Airport Provided Services and Shared Services, Facili es, and Equipment) â This strategy examines how greater efficiencies and cost savings can be achieved through shared use of equipment and faciliÂes among tenants or through cross uÂlizaÂon of airport staff. Major elements of the strategy include (a) shared services (e.g., passenger processing, aircra processing, terminal services) and (b) common use faciliÂes, equipment, and soÂware (e.g., cargo faciliÂes, display systems, check in areas, gate management, deicing, ground services, and parking aprons). Where feasible, the airport sponsor can provide services to tenants and passengers at private sector mark up and generate addiÂonal operaÂng revenue. 3. Airport Entrepreneurial Ac vityâPart II (Revenue Par cipa on in Real Estate and Natural Resource Development) â This strategy examines an expanded role for airports in real estate development. The tradiÂonal model involves a ground lease for a specified term based on the real estateâs appraised value. The strategy explores equity parÂcipaÂon in projects; parÂcipaÂng leases; direct ownership, development, and management of a project; public private partnerships (P3s); and joint development. 4. Value Capture & Other Innova ve Financing â Value capture strategies allow an airport to capture all or part of the added value in cases where property values and economic development âoutside the fenceâ are clearly aÂributable to airport acÂvity. Value capture techniques have been used extensively in public transit developments. Privilege fees charged to off airport parking and rental car companies are a variant of value capture already in use by airports. This strategy invesÂgates more tradiÂonal value capture methods, such as special districts, development fees, and property tax sharing, and their applicability to airports. 5. Improvements to Exis ng Airport Businesses â This strategy focuses on ways that airports can manage exisÂng passenger concessions and services to achieve new revenue. It is most relevant for commercial service airports at which passenger dependent acÂviÂes are a significant contributor to operaÂng revenues.
CHAPTER 2 â OVERVIEW OF REVENUE STRATEGIES 2 5 Goal Increase Net Revenues to the Airport Sponsor Strategy 1 Technique 1.1 Technique 1.2 2.4 STRATEGY EVALUATIONS Each strategy is evaluated and described in subsequent chapters according to a common framework, as follows: Scope of the Strategy o General descripÂon o ObjecÂves o Applicability to different types of airports (all, commercial, general aviaÂon, cargo) o Prevalence (used regularly, used rarely, not tried at airports, used for other modes) o Special requirements, if any, to accomplish (e.g., land, passengers, natural resources, etc.) o FuncÂonal areas and key departments impacted Key Elements of the Strategy o DescripÂon o Examples ApplicaÂon of the Strategy to Airport AcÂviÂes o DescripÂon of the technique(s) that lead(s) to execuÂon of the strategy o Why the technique(s) is (are) useful to the parÂcular airport acÂvity o DescripÂon of how techniques improve net revenue to the airport sponsor Summary Assessment (high, moderate, low) o PotenÂal for improved net revenues o Airport sponsor capital required o Degree of airport sponsor assumpÂon of risk o Complexity to implement o PoliÂcal/insÂtuÂonal challenges ImplementaÂon Issues (if any) Conclusions References for AddiÂonal InformaÂon 2.5 KEY FUNCTIONAL AREAS INVOLVED WITH STRATEGIES In pracÂce, implementaÂon of revenue strategies will engage personnel from different departments or funcÂonal areas of an airport. This is also true of day to day operaÂons at an airport. However, adopÂon of the goal to increase the airport sponsorâs net revenues would typically be integrated into an airportâs strategic plan. Its implementaÂon would engage all levels of the airport organizaÂon while including performance measures to track progress. For this reason, it is important to connect the strategies to key funcÂonal areas of the airport. Table 2 1 idenÂfies the key funcÂonal areas important to implementaÂon of the strategies discussed in this Airport Guide. Depending on which revenue generaÂon technique is selected and how an airport is organized, other departments or funcÂonal areas might also be involved. Airport organizaÂons vary widely. For example, at the largest airports, finance and property management oÂen take place in separate departments. At smaller airports, these funcÂons may reside in the same department.
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE 2 6 Table 2 1: Examples of Revenue Techniques by Key Func onal Area Key Func onal Areas Examples of Revenue Genera on Techniques Aircra and Passenger Services Airport provides ground handling service, deicing, catering, aircra parking, passenger processing (ÂckeÂng, check in, baggage, gate services), shared clubrooms Business Development Airport develops and improves traveler and tenant services, joint markeÂng and adverÂsing campaigns, foreign trade zones, and pursues commercial or industrial development adjacent to the airport Cargo Airport parÂcipates in development of shared cargo warehouses, dedicated equipment, logisÂcs centers, and value capture techniques for just in Âme manufacturing and logisÂcs centers off the airport Concessions Airport engages directly in concept innovaÂon, mobile applicaÂons to support concessions, conversion of non revenue space to food & beverage, retail, and services, seasonal and niche markets, internet commerce Energy Management & Alterna ves Airport operates ulies for tenants and parcipates in renewable energy and alternave fuel projects Environmental Airport offers opportunies for waste management and recycling, and agriculture for land stabilizaon Finance & Property Management Airport works with other public and private enes to iniate and obtain alternave sources of funding and financing for capital projects, operaons, and maintenance Airport strives to maximize use of airport property and may parcipate as developer, manager, partner, or joint venture in new ventures Ground Transporta on Airport pursues management alternaves, smart technology, alternave fee structures, beer curbside management for revenues, operaon of intermodal transfers Informa on Technology Airport pursues strategies for Wi Fi, shared backbone services, digital displays, customer segmentaon Legal and Contracts Legal department is involved with innovave lease and concession agreements, third party contracts, revenue sharing, profit sharing, equity parcipaon, privilege fees, royales, intellectual property rights, exclusive product selling rights Parking Airport introduces targeted product mix, concierge services, online reservaons, privilege fees, cost recovery for employee parking Planning, Design, & Administra ve Process Procurement and administraon improves plans and specificaons for concessions, customer service offerings, document preparaon, solicitaon, offer & award, revenue development incubators Service Quality Airport pursues a pracce of exceponal customer service, quality assurance, and performance measurement (happy customers spend more money) Terminal Opera ons Airport improves passenger processing, janitorial, and way finding to enhance the customer experience; airport also offers logiscs support to tenants at market rates Source: KRAMER aerotek inc., 2013 Table 2 2 relates the key funconal areas to the strategies themselves. In the table, a diamond indicates that this funconal area is important to the implementaon of the strategy.
CHAPTER 2 â OVERVIEW OF REVENUE STRATEGIES 2 7 Table 2 2: Key Func onal Areas Involved with Strategies Func onal Areas Code Customer Focus Shared Services & Facili es Revenue Par cipa on Off Airport Value Capture Improvements to Exis ng Businesses Aircra & Passenger Services AS Business Development BD Cargo CA Concessions CN Energy Management & Alterna ves EN Environmental EV Finance & Property Management FN Ground Transporta on GT Informa on Technology IT Legal & Contracts LC Parking PK Planning, Design, & Administra ve Process PL Service Quality SQ Terminal Opera ons TO Sources: Funconal areas adapted from ACRP Report 19A: Resource Guide to Airport Performance Indicators; chart prepared by KRAMER aerotek inc. 2.6 WRAP UP Chapter 2 presented an overview of revenue strategies that could be used by airports to increase net revenues to the airport sponsor and outlined the framework for evaluang each strategy. Implementaon of these strategies was also linked to key departments or funconal areas at an airport. The next chapters delve more deeply into each strategy and provide examples of techniques used to implement the strategy. Highlights from the case studies completed for this research are also included where relevant. 2.7 ADDITIONAL REFERENCES ACRP Report 20: Strategic Planning in the Airport Industry (Ricondo & Associates, Inc., et al.), Transportaon Research Board of the Naonal Academies, Washington, DC, 2009, hÂp://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_020.pdf ACRP Report 28: Marke ng Guidebook for Small Airports (Kramer et al.), Transportaon Research Board of the Naonal Academies, Washington, DC, 2010, hÂp://onlinepubs.trb.org/onlinepubs/acrp/ acrp_rpt_028.pdf
INNOVATIVE REVENUE STRATEGIES â AN AIRPORT GUIDE 2 8 ACRP Report 77: Guidebook for Developing General Aviaon Airport Business Plans (Avia on Management Consul ng Group), Transporta on Research Board of the Na onal Academies, Washington, DC., 2009, 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 Dallas/Fort Worth Interna onal Airport, Building a Future Together: DFW Interna onal Airport Strategic Plan 2012, Dallas/Fort Worth, Texas, 2012 Osborne, D. and T. Gaebler, Reinvenng Government: How the Entrepreneurial Spirit is Transforming the Public Sector, Penguin Books USA, New York, NY, 1993 Den Hertog, P., W. Der Aa, and M. De Jong, âCapabili es for Managing Service Innova on: Toward a Conceptual Framework,â Journal of Service Management, Vol. 21, No. 4, 2010, pp. 490 514. Schumpeter, J. A., The Theory of Economic Development, Harvard University Press, Cambridge, MA, 1934
