Airports make money through several ways, People often wonder how any airport generates income. In this article we will tell you how the airports around the world make money and how do they function.
Aviation is big business, with global airport revenues hitting $131 billion in 2013, a 5.5% increase over the previous year, Airports Council International (ACI) reported in 2015. That income can be divided into two components: aeronautical and non-aeronautical.
Aeronautical revenue comprises the majority of airport income, and includes airline terminal space rentals, airline landing fees, and usage fees for terminals, gates, services and passenger counts.
U.S. airports generated about $10 billion in aeronautical revenue in 2013, or about 55% of total operating revenue, according to Federal Aviation Administration (FAA) data.
Airlines act as airport tenants, paying rent for counter and gate space, training facilities, storage facilities, hangars, offices and maintenance facilities. They additionally pay for landing and parking fees, and to hold a lease on ticket counter and gate space to occupy an exclusive area.
“Most airports create a contract with airlines wishing to use its facilities, typically known as a Use and Lease agreement,” the ACI noted.
In 2013, terminal fees, rents and utilities accounted for 45% of aeronautical revenue, with landing fees accounting for 30%. The ACI report found that airports generated $11.88 in aeronautical revenue per passenger.
In aeronautical revenue, passenger-based charges are trending upward, according to Airport World.
Non-Aeronautical Revenue on the Rise
Airports are increasingly focusing on non-aeronautical revenue to deal with the unpredictability of the airline business cycle.
According to the Airports Council International-North American Concessions Bench-marking Survey, non-aeronautical revenue reached almost $8.2 billion in 2013, or 45% of total operating income.
For each passenger, airports generated $8.14 in non-aeronautical revenue, which includes a variety of income sources. Let’s take a closer look at some of these revenue streams.
3 Ways Airports Make Money
Parking, Ground Transportation and Rental Cars
Parking and ground transportation fees comprised 41% of total non-aeronautical revenue in 2013, or $3.4 billion, the Concessions Bench-marking Survey found. Ground transportation includes taxis, limousines, shuttles and buses that transport airline passengers.
At 19.8%, rental car-related fees represented the next largest segment of non-aeronautical revenue for U.S. airports, totaling $1.6 billion.
Concessions and Retail
Two major factors work in airports’ favor when it comes to generating income from retail and concessions sales.
First, airline passengers typically have more spending power, according to the ACI survey. As of 2013, passengers had a median household income of $75,000 to $90,000, compared to a national median of a little more than $52,000.
Second, the heightened security measures mandated after the terrorist attacks of Sept. 11, 2001, mean passengers are spending more time in airport terminals, arriving early to ensure they clear security in time to make their flights.
Increasingly, airports are featuring more food and beverage options, expanding their offerings beyond national franchisers to include local restaurants and vendors.
In 2013, U.S. airports generated $587 million from food and beverage sales, or about 7.2% of non-aeronautical revenue.
Airport retail, meanwhile, is evolving from chocolate bars and magazines to designer clothing and locally produced goods, transforming the terminal into what has been described as a “travel megastore.”
The prevalence of smartphones, apps and other mobile technology means that retailers and concessionaires can customize their offerings with geo-specific targeting.
Worldwide, airport retail sales will see continuing growth through at least 2020, supported by rising passenger traffic and an improving economy, according to a 2015 report by Verdict, a research and analysis company.
The beauty products and fashion sectors are expected to enjoy the strongest growth, with more clothing retailers opening airport locations, the Global Airport Retailing report found.
Automated retail units also are a growing trend, with a presence in 53% of North American airports, according to the ACI’s Concessions Bench-marking Survey. Those units, which averaged gross sales of about $107,000 in 2013, provide travelers with 24/7 access to personal electronics, cosmetics and other consumer items.
These “upscale vending machines” allow airports to produce income in locations that would be too small for regular stores.
Commercial Development, Advertising and More
Office buildings, business and industrial parks, rail and transport infrastructure, retail centers, hotels and logistics hubs are all potential commercial projects on airport property that can boost non-aeronautical revenue streams.
Airports also generate revenue by selling advertising space inside and outside terminals. Additionally, sponsored spaces, special events and branded areas can generate operating income while improving airport ambiance and the passenger experience.
As Airports Council International noted in a 2013 report: “Airports worldwide have evolved from infrastructure providers into sophisticated, business-oriented service providers. … The revenue generated from non-aeronautical revenue often determines the financial viability of airports.”
How Airports Make Money in India?
The understanding of sustained financial health in the Indian aviation sector, especially at airports, still remains a challenge in India. With non-aeronautical revenue such as retail or advertising coming to rescue over the years, it is quite intriguing to appreciate how the Indian airports are surviving in a time of susceptible economic conditions.
India is currently the third largest domestic civil aviation market in the world, having recorded a total of 100 million domestic flyers in 2016 according to the Center for Asia Pacific Aviation (CAPA). The International Air Transport Association (IATA) predicts that the country will be the overall third largest aviation sector by 2026. According to IATA, India has become the world’s fastest-growing domestic travel market for the 22nd time in a row, recording a 26.6 pc year-on-year growth in January 2017. However, In 2016, the Airports Authority of India (AAI) that registered a net profit of more than INR 25 billion, only 13 of the 125 airports managed by the AAI were cost-effective. The dissection of the future forecast and the precedent records led us to an interesting study deciphering the strengths and limitations of Indian airports as independent commercially viable units. Optimizing the potential of India’s growing civil aviation market, the airports in India pose a formidable chance to become profit centers in the near future, but the job is easier said than done.
Procuring funds for modernization of the old aerodromes is another impending challenge for AAI. Entering into a joint venture with players in different fields, creating new facilities on a turnkey basis through global bids, offering airlines and operators same incentive to increase traffic flow at airports to make more viable commercial exploitation of existing facilities and introducing cost-cutting measures are some of the strategies, Suresh mentioned.
The Airport Marketing division of AAI has been instrumental in taking initiatives of engaging stakeholders such as airlines, ground handlers, freight forwarders, tourism agencies, industry associations, local authorities, etc. at various airport cities such as Chennai, Kolkata, Guwahati, Allahabad, Jaipur, Kullu, Shimla, etc. to identify challenges, exchange and share ideas and market dynamics for the growth of industry.
Airport Business – changing landscape
The competition in the aviation sector is gathering pace in India. With the liberalization of business rampant in a global market; the consumer preference while choosing a product has become not only price sensitive but also service sensitive. Airports around the world are going through a mass transformation in terms of how they generate revenue. Tariq Hussain Butt, the Head of Airport Marketing, AAI shared a piece of his thought with AIBM, “The privatization of airports started in 1987 when UK Government sold its eleven major airports including three airports (Heathrow, Gatwick and Stansted) in London area to BAA Plc (Formerly as British Airport Authority) a 100 pc private sector firm. After the evolution of airport privatization, the concept of Airport Marketing started in the early nineties in developed economies. In India too, after the privatization of airports, operators started developing and implementing marketing strategies to increase airline customer base, enhance passenger footfall and generate revenues.”
Describing the role of airport marketing in a time when vulnerability in the economy has to be balanced with the changing demands of the consumers, Butt said, “Airport Marketing can be described as the function by which airports interact with their target groups and identify and address each group’s needs in order to stimulate and accelerate their growth, resulting in more aviation and non-aviation revenues.”
Responding to the huge disparity in profits made by the 13 out of 125 airports handled by the AAI, Butt added, “Only few airports especially metro airports are earning significant revenues whereas airports in medium and small towns are making losses due to various reasons such as industrial & economic growth of the city, tourism potential, population with spending capacity, economic viability of airline operations, lack of marketing initiatives, etc. During preparation of Strategy Document 2010-2015 by the Ministry of Civil Aviation (MoCA), it was clearly emphasized to strengthen the marketing capabilities of AAI. Therefore, Airport Marketing Directorate was created in 2015.”
S Suresh reflecting on the present scenario of the Indian aviation business also added, “The Government of India has already launched the regional connectivity scheme (RCS) and the flow of passengers at remote locations will enable AAI to further enhance the revenue from commercial exploitation of these locations. Airports which are strategically located but have less traffic probability of sharing facilities for neighboring states will be explored.”
Tariq Hussain Butt explained how airports in India have to commit to innovative marketing as a priority in order to attract more passengers, additional concessions, or new carriers. Speaking about the opportunity in cargo marketing, Butt said, “There is also a huge potential of export cargo (General and Perishable Cargo) especially from the cities like Ahmadabad, Kolkata, Goa, Amritsar and Chennai. Guwahati and its catchment area in North East Region have an abundant scope of export of perishable cargo, however, due to lack of infrastructure such as pack houses, refrigerator vans, cold storage, etc. lack of international connectivity, perishable cargo cannot be fully exploited.”
Airport retailing gaining momentum
As a number of chic new airports are springing up across tier 2 and tier 3 Indian cities, conventional malls are presumed to witness a stiff competition. One of the prime aspects of airport revenue system, terminal retailing in India has clearly gained momentum. In the last couple of years as the expansion and modernization of more airports gathered pace, airports in India can now easily qualify as retailing destinations for international as well as domestic travelers – a unique hub where Indian brands can tap the global market without setting up a shop abroad.
Commenting on how the retail therapy in airports can add value to the attraction quotient of airports as well as surge the revenue, Butt said, “There are several opportunities for improvement in the financial performance of smaller airports. For instance, there can be improved development and use of retail opportunities at the airports – as witnessed in several of India’s newer airports. This could act as an attraction for the airport and add another revenue stream.”
The duty-free shopping experience that Indira Gandhi International Airport’s Terminal 3 (T3) has to offer is comparable to the best of shopping malls in New Delhi. Offering global brands such as Hugo Boss, Swarovski, WHSmith or Versace in a 24×7 shopping environment to the 35 million passengers commuting through IGI T3 is definitely a huge opportunity. A 30,000 sqm retail area with close to 250 retail outlets under one roof products ranging from liquor, tobacco to food & beverages, personal care, apparel and accessories the Delhi Duty-Free is nothing less than a mega shopping mall.
Addressing the demand, the Delhi Duty-Free recently rolled out airport retailing training academy. The CEO Luke Gorringe said, “The travel-retail sector in India is undergoing a rapid transformation and the next phase of growth will require well-trained professionals capable of understanding global best retail practices to meet the unique characteristics of the Indian consumer.”
Pratwish Kumar, the Station Head at WHSmith store in Kolkata’s Netaji Subhas Chandra Bose International Airport said, “India’s high street business continues to perform in line with expectations, at least we feel that every day. Over 1.6 billion global travelers are exposed to WHSmith brands in airports every year and the Indian airline industry is really adding value to airport retailing.”
Talking about the most preferred products in their store in Kolkata Kumar said, “We are continuously updating our stocks in international news, books and travel products. We are expecting a very travel business to boost and add value to the recent trend of airport shopping in the eastern region.”
However, a global study conducted by a Swiss research and consulting agency mindset revealed that 56 pc of the travelers around the world prefer visiting bars and restaurants over duty-free shops. Keeping the study mostly on millennial, women and leisure travelers, the survey finds that a third of the travelers say they would feel more encouraged to shop at duty-free stores only if they find comparable prices and attractive promotions. Although the equation in Indian airports as well as the retail therapy in India that is so predominant, revenue from retail outlets have become a crucial aspect for newer airports.
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