Improving Terminal Design to Increase Revenue Generation Related to Customer Satisfaction (2014)

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98 Chapter 5 discusses a new approach airports are employing to generate additional revenue while improving customer (air traveler) satisfaction: developing land adjacent to or near their terminals into commercial complexes. Some of these terminal-area developments have taken on features of metropolitan downtowns becoming multimodal, multifunctional concentrations of office buildings, retail facilities, hotels, conference and exhibition centers, and leisure and recreation venues. 5.1 Ancillary Land Development In more than a few cases, this landside development has contributed a substantial portion of airport revenues. Depending on whether the airports follow single-till/residual or dual-till/ compensatory accounting policies, they have been able to use ancillary land use revenues for expansion and modernization of their aeronautical infrastructure and facilities and/or to cross- subsidize airline costs, keeping the airport competitive for air service. Equally important, ancillary land development has provided commercial facilities and services which enrich the passenger experience. A positive airport experience has been shown to play a role in helping hubs compete for transit passengers. This indirectly bolsters airport revenue through additional aeronautical fees and terminal commercial revenues generated by these incremental transit passengers. The following sections provide a summary of primary commercial developments on ancillary airport land, highlighting both airport revenue and customer satisfaction aspects. 5.1.1 Retail Facilities Some airports have been able to develop significant retail facilities near their terminals, and others have not. Good highway access and passenger rail service appear to be factors in foster- ing retail development beyond the terminal. Retail space for non-travelers depends critically on the market catchment area and the ease of airport access. In some cases, air travelers find such landside retail offerings a draw as well. For example, Minneapolis’s huge Mall of America (located three miles from the airport terminal, but connected by an APM) reportedly derives over 10 percent of its sales from airport-based visitors. The airport is also a major Delta hub for trans-Pacific flights, which attract a large number of passengers with long layover times. This mega-mall likewise draws “retail tourists” who fly in from Asia and across the United States to shop, dine, and even sleep in the mall’s hotels. Duty-free sales inside and outside the terminal depend largely on passenger demography and retail alternatives open to travelers. Dubai duty-free retail has more than U.S. $1.4 billion in sales C H A P T E R 5 Ancillary Land Development Considerations

Ancillary Land Development Considerations 99 annually since many of its transit passengers from Africa and Asia do not have good shopping facilities in their home cities. Factory outlets and big box retailers requiring large, flat land parcels with sufficient parking have operated successfully, serving mainly local non-travelers when the catchment area is sufficiently large and highway access favorable. Some airports such as Athens and Brisbane have been able to substantially boost their revenues through direct factory outlets and big box retail facilities located on their ancillary land, as shown in Figure 5.1. 5.1.2 Hotels Demand for airport and airport-area hotels is also largely determined by volume of passenger traffic, especially business travelers. Upscale terminal-linked hotels (four- and five-star) are becom- ing increasingly common and have generally been successful. Passengers value quick, pedestrian terminal access and the business services, fine dining, and meeting and leisure amenities such high-quality hotels provide. Some terminal-linked hotels serve as virtual corporate headquarters and meeting locations for executives and sales people who fly in for meetings with perhaps just one overnight stay. Corporations often fly their customers and clients to these larger airport hotels for meetings and seminars, as well. The above description characterizes the Grand Hyatt linked to Dallas/Fort Worth’s Terminal D, shown in Figure 5.2, where nearly as much airport revenue is derived from business meetings and ancillary business services as from overnight guest stays. Chicago O’Hare’s Hilton and the Weston at Detroit Metro report similar trends in terminal-linked hotel business revenues. Passengers’ satisfaction is further enhanced by quick and easy access from these hotels to the terminal concourses where they can visit a variety of shopping, food, and entertainment venues. Such venues are typically not offered by the clusters of three-star hotels found near highway off-ramps further from airport terminals. 5.1.3 Conference and Exhibition Complexes Conference and exhibition facilities tend to be most successful at and around large hub airports (e.g., Atlanta, Frankfurt, Hong Kong, Chicago O’Hare, and Amsterdam Schiphol). Some mid-size Figure 5.1. Retail facilities on ancillary Athens International Airport land. Source: Aerotropolis Business Concepts

100 Improving Terminal Design to Increase Revenue Generation Related to Customer Satisfaction airports such as Helsinki, Munich, Stockholm, and Oslo have developed profitable conference and exhibition venues, drawing on their centrality in a market region and air networks. In addition to sufficient air networks, multimodal surface transportation access (rail and highway) plays a key role in airport area conference and exhibition success. This is especially true in the conference and exhibition areas near Atlanta’s, Chicago’s O’Hare, and Hong Kong’s airports (such as the AsiaWorld Expo shown in Figure 5.3). Because they are often not on airport property, such facilities may not directly generate airport revenues. However, they do indirectly benefit the airport’s bottom lines by attracting substantial numbers of air travelers who boost airport aeronautical and terminal commercial revenues. Convenient access to airport area conference and exhibition facilities also contributes to cus- tomer satisfaction by reducing airport commuting time to the facilities. Conversely, airport area conference facilities that are stand-alone may not provide other forms of customer satisfaction that downtown facilities provide via nearby urban amenities. 5.1.4 Office Buildings The signature headquarter buildings of hub-based airlines sometimes grace major airports, but the offices of travel-intensive sectors such as producer services are often the most difficult segment of demand for most airports to capture. Office functions need to balance the costs of airport Figure 5.2. Dallas/Fort Worth Grand Hyatt Hotel. Source: Aerotropolis Business Concepts Figure 5.3. AsiaWorld Expo at Hong Kong International Airport. Source: Aerotropolis Business Concepts

Ancillary Land Development Considerations 101 access for travelers with the commuting costs of employees. In some cases, these considerations reinforce the attraction of airport areas, but in many cases they do not. With the exception of the World Trade Center (commonly known as the WTC) at the Amsterdam Airport Schiphol and The Squaire (formerly known as the AirRail Center) at the Frankfurt Airport, which are both centered on regional passenger rail and major highways with good commuter access, most airports have difficulty in attracting office functions beyond those that are directly connected to the pro- vision of air transportation. However, Schiphol’s (Figure 5.4), Frankfurt’s, and other hub airport office buildings have commanded premium rents and thus generate substantial airport revenues. 5.1.5 Cargo and Services The location determinants of services vary widely. Traveler services and some cargo-handling services are strongly attracted to airport locations and are among those types of businesses willing to pay a premium for an on-airport site. The greater the degree to which the services depend upon air transport, the higher their likelihood of locating on airport land, assuming it is available. Many other services are attracted to airport areas primarily by the value proposition of land availability for cost. Though not major revenue generators, educational and health facilities can be good anchor tenants that attract other tenants and add prestige to the airport. For example, the GMR Group, developer of the Hyderabad, India Aerotropolis, recruited an international business school and major health provider to its airport. It did this as much for stature and for attracting other facilities as for real estate revenue returns. 5.1.6 Recreational, Green, and Cultural Venues Recreational areas, such as nature preserves (without birds), as well as certain warehouse functions, can serve as good airport safety and noise buffer areas. The large parcels of land area sometimes available at and near airports have led to proposals for theme parks and green recreation; however, accessibility to the regional customer base remains an important determinant of revenue success. Airport solar farms are likewise increasingly found both airside and landside in open areas. Figure 5.4. Amsterdam Schiphol Airport offices. Source: Aerotropolis Business Concepts

102 Improving Terminal Design to Increase Revenue Generation Related to Customer Satisfaction Terminal area recreation and cultural facilities are often located in zones that are not yet sufficiently attractive to support higher-revenue-generating commercial facilities. Travelers appear to value the relaxation afforded by cultural offerings, which may reduce stress. Some airports offer community-oriented concerts and festivals. The aim appears to be air travelers’ enjoyment and generating community good will, rather than revenues. 5.1.7 Managing Ancillary Land Development Numerous airports (both public and private-sector operated) have established commercial and/or real estate divisions to develop their ancillary landside areas as well as foster develop- ment beyond airport boundaries. These airports include Aéroports de Paris; Dallas/Fort Worth International Airport; Frankfurt Airport; Amsterdam Schiphol; Singapore Changi; and Spain’s Ferrovial Group, which also owns United Kingdom airport operator, the British Airport Authority (now known as Heathrow Airport Holdings). To briefly note some management structures: • Aéroports de Paris established a real estate division in 2003 to act as the developer, general contractor, and construction project owner and manager of landside commercial properties at Paris Charles de Gaulle and Orly International Airports. • China Capital Airport Holdings, a corporatized state-owned enterprise that operates much like a private entity, is rapidly proceeding with its highly ambitious Beijing Capital Airport City. Working with partners such as Airport City Development Corporation, Ltd., and municipalities such as Shunyi, it is developing shopping, entertainment, education, exhibition, sports and leisure, logistics, light manufacturing, finance, trade, and housing facilities at and around Beijing Capital International Airport. Its Airport City Logistics Park, being led by Airport City Devel- opment Corporation, Ltd., covers over 2.5 million square meters. • Dallas/Fort Worth International Airport’s management is aggressively expanding its commercial and real estate divisions to lease airport land to a wide variety of commercial tenants. It is also forming public–private partnerships to develop over 5,000 acres of ancillary property for office, hospitality, retail, entertainment, and wellness facilities. • Hong Kong International Airport has likewise established both commercial and real estate divisions to boost its terminal retail and develop its adjacent SkyCity commercial complex. • Malaysia Airports Holdings Berhad is an entrepreneurial organization developing Kuala Lumpur International Airport’s airport city, commercially anchored by its large Gateway Park that, in addition to retail and office development, includes motor sports, an automotive hypermarket, and leisure venues drawing on the local as well as aviation-induced markets. • Incheon International Airport Corporation is forming a variety of joint ventures with the private sector to develop its expansive ancillary land encompassing hotels, office buildings, logistics zones, shopping, entertainment, and tourism districts, as well as housing and services (e.g., medical) for its “AirCity” workers. • Dubai Aviation City Corporation has been established to build and manage Dubai World Central, a US$33 billion airport-centered set of cities under development 25 miles south of downtown Dubai. Its cornerstone is the initial phase of the new Al Maktoum International Airport, which opened in 2011. Dubai World Central is planned to include logistics office towers, aviation-related industry, hotels, a mega-mall, golf course, and housing for 40,000 on-site workers. Slowed by Dubai’s real estate crises, Dubai Aviation City Corporation’s current focus is on developing its “Logistics City.” • Amsterdam Schiphol, through its Schiphol Real Estate, which operates on the basis of private- sector principles, has been a key revenue-generating arm of its airport operator, the Schiphol Group. Over 50 percent of the Schiphol Group’s profits come from aviation-linked commercial activities.

Ancillary Land Development Considerations 103 5.2 Conclusion Airports from Amsterdam to Zurich and from Athens to Seoul are pursuing ancillary land development as a pivotal means to financing airport operations while contributing to their profitability, cost competitiveness in attracting airlines, and passenger satisfaction. Other inter- national airports (not quite the scale of Amsterdam Schiphol or Seoul’s Incheon) have given land- side commercial development a high priority [e.g., Abu Dhabi, Athens, Belo Horizonte (Brazil), Brisbane, Calgary, Dublin, Helsinki-Vantaa, Munich, Stockholm-Arlanda, Taiwan-Taoyuan, Vancouver, and Vienna]. They all are incorporating a broadening range of traditionally urban commercial functions to diversify their land use and revenue streams. Such land use diversification is creating additional rewards for airport operators, their development partners, airport businesses, and air passengers. In the process, it is transforming many city airports into airport cities.