Airports - Dawn of a New Era

BCG
The Boston Consulting Group
Airports — Dawn of a New Era
April
2004
Preparing for one of the industry ’s
biggest shake -ups
The Boston Consulting Group is a general management consulting firm that is a global
l e a d e r i n b u s i n e s s s t r a t e g y. B C G h a s h e l p e d c o m p a n i e s i n e v e r y m a j o r i n d u s t r y a n d m a r ket achieve a competitive advantage by developing and implementing winning strategies.
Fo u n d e d i n 1 9 6 3 , t h e f i r m n o w o p e r a t e s 6 0 o f f i c e s i n 3 7 c o u n t r i e s . Fo r f u r t h e r i n f o r m a t i o n , p l e a s e v i s i t o u r We b s i t e a t w w w. b c g . c o m .
© 2 0 0 4 T h e B o s t o n C o n s u l t i n g G r o u p G m b H. A l l r i g h t s r e s e r v e d .
Fo r i n f o r m a t i o n a n d r e p r i n t a u t h o r i z a t i o n p l e a s e c o n t a c t B C G a t t h e f o l l o w i n g a d d r e s s :
The Boston Consulting Group
Marketing & Communications/Legal
Ludwigstraße 21
80539 Munich
Germany
Fa x :
+49 (0)89 2317-4718
E-Mail: [email protected]
TABLE OF CONTENTS
ACKNOWLEDGEMENTS
2
INTRODUCTION
3
EXECUTIVE SUMMARY
5
N E W PA T T E R N S O F PA S S E N G E R G R O W T H
9
PRESSURES TO ACT MORE LIKE BUSINESSES
21
STRATEGIES TO SUCCEED IN TOMORROW ’S ENVIRONMENT
25
IMPLICATIONS FOR AIRLINES, INVESTORS, AND GOVERNMENTS
31
BCG’S EXPERIENCE IN THE AVIATION INDUSTRY
33
KEY QUESTIONS
35
ACKNOWLEDGEMENTS
Dr. Daniel Stelter is vice president and director at The Boston Consulting Group in Berlin and Global
Practice Area Leader for Corporate Finance and Strategy.
Dr. Achim Fechtel is vice president and director at The Boston Consulting Group in Munich and a BCG
airport and aviation expert.
Premal Desai is manager at The Boston Consulting Group in Frankfurt.
Our co-authors include:
Mike Deimler is vice president and director in Atlanta and Global Head of BCG’s Travel and Tourism
Practice Area.
Martin Koehler is senior vice president and director in Munich, a member of the Travel and Tourism
Leadership Team and a BCG airline expert.
Greg Sutherland is vice president and director in Atlanta, a member of the Travel and Tourism
Leadership Team, and a BCG airline expert.
We wish to thank our interview partners and experts who unhesitatingly provided us with information.
We also wish to thank the BCG project team under the direction of Premal Desai: Markus Hepp,
Matthias Osthoff, Amadeus Petzke, Keith Conlon, Hendric Fiege, Ralf Ermisch, and Patrick Buchmann.
Contacts
Fo r f u r t h e r i n f o r m a t i o n o n t h i s s t u d y,
please contact your regional expert:
E u r o p e : D r . D a n i e l S t e l t e r : [email protected]
US:
M i k e D e i m l e r : [email protected]
Asia:
R o s s L o v e : [email protected]
INTRODUCTION
As passenger numbers pick up in the wake of recent international crises,
including 9/11 and SARS, many airports are anticipating a return to the
s t a b l e , l o n g - t e r m g r o w t h t h a t c h a r a c t e r i z e d t h e l a s t t w o d e c a d e s . H o w e v e r,
the reality is likely to be different, according to BCG research.
Although passenger volumes will rise, albeit more slowly than originally forecast, growth will be concentrated in a much smaller number of airports in the future, leaving many operators with far less
traffic than their already overly ambitious investment plans assume. True, low-cost carrier (LCC) traffic
has led to booming passenger numbers for some airports, but profitability of LCC airports remains a
major issue. To add to these challenges, operators will come under mounting pressure to act more like
businesses—not just infrastructure suppliers, with much lower costs and higher revenues.
In short, the rules of the game are about to change.
This report describes the forces driving these changes and their strategic implications for not only airports but airlines, investors, and governments as well. Based on in-depth research and interviews with
executives throughout the aviation industry, it also outlines the strategies and business models that airports will need to survive and thrive. Most airports can succeed, provided they start preparing now. We
hope this report facilitates this process and, at the very least, provides a much needed wake-up call.
3
This report distinguishes between four different types of airports: primary international hubs, secondary hubs, international “origin and destination” (O&D) airports, and regional airports. The table below
describes the key characteristics of each of these. (Exhibit 1)
EXHIBIT 1
Example
Atlanta
Key characteristics
Airline
High share of transfer traffic
Large catchment area
PAX in excess of 40M
Main hub of major international airline
Leadership role in alliance
Lower share of transfer traffic
Large catchment area
PAX in excess of 20M
Main hub of international long-distance
airline or secondary hub of major airline
Subordinate or niche player in alliance
Main hub of regional airline or secondary
hub of major airline
Subordinate role in alliance
PAX = 12M
Low share of transfer traffic
Sizeable catchment area but often
overlapping
PAX around 10M
Albany
International
Airport
No transfer traffic
Smaller or remote catchment areas
PAX below 10M
Regional airlines
LCC
International
hubs
No. of
airports
18
PAX = 79M
Sydney
International
O&Ds
32
PAX = 22M
Secondary
hubs and
O&Ds
Regionals
Vienna
PAX = 1.5M
Source: BCG analysis
FOUR TYPES OF AIRPORTS CAN BE DISTINGUISHED
4
~ 150
~ 2,400
EXECUTIVE SUMMARY
The drive for lower costs among the world's top airlines, coupled with the rise of low-cost
carriers, will substantially alter the distribution of passenger growth between airports.
The unprecedented string of international crises over the last three years—from 9/11 and SARS to the
Iraq war—has left many of the world's financially fragile airlines with unsustainable losses. To cut costs,
the members of the top three alliances will redirect the bulk of their long-haul transfer traffic into a
handful of mega-hubs, sidelining many of today’s secondary hubs. This trend will be accelerated by
“open-skies” deregulation, mergers, and the introduction of mega-planes, such as the A380, which only
the largest hubs with significant feeder capacity will be equipped to handle. In fact the share of total traffic at the top 50 airports claimed by nine potential mega-hubs has already risen from 30% to 34% in the
last two years.
The expansion of low-cost carriers represents a second trend. Attractive O&D locations as well as some
regional airports stand to benefit from an increase in convenient and financially attractive point-topoint travel in the short- to medium range. This decentralization of traffic patterns might be repeated
in the long-haul segment, once new and cost-efficient equipment like Boeing’s 7E7 becomes available.
Among the large airports, only the mega-hubs and attractive O&D locations that feature prominently in
the alliances' schedules will enjoy significant long-term growth. Just 40 or so of today's 180-plus hubs are
likely to be in this position. Mega-hubs will profit from the consolidation of long-haul traffic. While they
are largely bypassed by LCC traffic, they will not be negatively affected by the general rise in point-topoint travel with planes like the 7E7, since frequencies will increase as mega-hubs are too essential to be
bypassed by long-haul traffic.
Selected O&D locations as well as regional airports well positioned to attract LCC traffic will gain from
the rise in point-to-point traffic. The others, notably secondary hubs with weaker airlines, will experience much less growth than their overly ambitious investment plans assume. Long-haul traffic is consolidated away from them into mega-hubs, and point-to-point travel threatens to bypass many secondary
hubs. This will force them to explore new avenues to cover the cost of their capital and to grow
profitably.
5
With growing affluence in previously remote regions of the world and the further rise of LCCs, a significant number of regional airports and smaller international O&Ds will also experience substantial passenger growth. Still, overly ambitious plans speculating on this growth are in many cases risky, since the
winners in this group of airports are much harder to predict.
Faced with lower than anticipated growth, airports will have to act more like
businesses to thrive, not simply as infrastructure suppliers. Privatizations will
intensify this need.
As state-owned and protected monopolies, airports have historically been treated as means to regenerate regional economies, not as businesses. This has not only led to massive investments that often bear
little relation to airports’ growth potential. It has also created an oversupply of hubs—often with excess
capacity, and bred unnecessarily high operating costs, which could in general be reduced by 20% to
30%. These costs will have to come down—in order to not just keep tomorrow’s airports profitable but
to satisfy carriers' demands for lower, more flexible charges.
Governments’ growing reluctance to subsidize and protect airports, reflected in a rising number of privatizations and more widespread deregulation of the value chain will add to this pressure. Under the
glare of the world's capital markets, privatized airports will be expected to deliver more aggressive
improvements in revenues. Non-aviation revenues such as retail will be critical, particularly for destinations dependent on LCCs: in BCG’s experience, no LCC airport is likely to achieve profitability without
extraordinary focus on non-aviation revenues.
Different types of airports, such as mega-hubs and regional airports, will require
different investment and carrier strategies.
Only airports home to a leading and financially secure main carrier in one of the alliances will be eligible to become a mega-hub. They will also need to be in a central location with a large, affluent catchment area. Most of these airports still need to make sizeable block investments to accommodate future
growth. Their carrier focus will have to shift to the dominant member of their alliance. Providing outstanding service and innovative products will be vital.
All other airports should freeze block investment programs and only add capacity on an incremental
“needs-musts” basis. Destinations that are likely to remain secondary hubs should concentrate on alliance carriers, while international O&D airports must court intercontinental airlines and sweat existing
assets. Targeting LCCs in order to fill existing overcapacities can be a worthwhile consideration. Regional airports should target LCCs, underpinned by tight cost management.
In all cases, operators will have to work much more closely with the carriers to optimize joint interfaces
and to leverage cost and revenue synergies. Such opportunities have been underexploited due to the
historically adversarial relationship between the two players.
6
Selecting the right position in the value chain will be decisive.
Few operators have the breadth of expertise and resources to optimize every link in a value chain as
diverse as an airport's. Retail, ground handling, and other links in the chain all require different skills
and business models. Tomorrow's winners will position themselves in the section of the chain where they
can extract the maximum value based on their capabilities and the competitive outlook of their chosen
segment.
Some will specialize in particular links in the chain and leverage their expertise, especially in standardized, labor-intensive activities such as facilities management and ground handling. Others will handle
broader categories of services. A minority, meanwhile, will act as “orchestrators,” coordinating almost
entirely outsourced elements of the value chain in order to ensure the suppliers deliver a consistently
high, cost-effective level of service. Each option will require a different business model, including different skills, and different levers to lift revenues and reduce costs.
Planning for this new world must start now—the process will yield immediate
returns.
This new aviation landscape is likely to take shape within the next ten years. Already there is evidence of
airlines consolidating traffic into larger hubs and movement to introduce more competition into the
airport sector. To succeed in tomorrow’s environment, it’s essential that airport operators identify their
likely position in the new landscape, develop appropriate investment and carrier strategies, and position
themselves at the optimum point in the value chain.
The imminent trends will lead to a stronger segmentation among airports. They should proactively start
to enter this competition, not only by adding abundant capacity and thus adding cost, but by defining
their role in the future aviation arena and by differentiating accordingly.
Above all, they have to operate more like profit-driven businesses, reducing costs and pinpointing
opportunities to lift revenues per passenger. This can be done now and will generate rapid rewards.
7
NEW PATTERNS OF PASSENGER GROWTH
For decades, the world's top airports have enjoyed relatively stable growth under the
protective wing of governments, encouraging many to invest heavily in additional capacity
on the assumption that tomorrow will simply be a continuation of the past. But their ultimate paymasters—the airlines—live in a very different world. Their demands, not the least
of which will be for lower costs, will radically alter how future passenger growth is distributed amongst airports, thereby creating clear winners and losers.
A life cycle of air-traffic patterns
The pattern of air traffic has been following a particular life cycle. Point-to-point connections between
the world's largest cities dominated networks in the early post-war period. Only a few routes had sufficient
demand to serve air traffic. With growth in demand came development of a large number of small and
mid-sized regional hubs and international O&Ds, a second stage of the life cycle. Most recently, increasing cost pressures as well as airline and alliance consolidation is leading to a concentration of long-haul
traffic into a few mega-hubs, with an accompanying rise in continental point-to-point traffic. This puts
massive pressure on the "middle tier," a significant number of secondary hubs. While this development is
already evident in the US and Europe, Asian air traffic is still in an earlier phase of the life cycle.
Exhibit 2 describes the current trend. Until recently, there was a clear distribution of roles in the aviation
landscape, with steady growth for all players. The emergence of LCCs as well as technological advances in
the construction of new planes have substantially redistributed the shares in the matrix. Growth will be
far less homogenously spread in this time of change. LCCs have increased the area of point-to-point travel, which is being further expanded by a new generation of planes such as the 7E7. The pressure exacted on “established” airlines, signified by the shrinking size of the flag carriers’ pie, leads to an increasing
consolidation of transfer traffic into few mega-hubs. Let us look at these developments in more detail.
The problem: an oversupply of hubs
Airports are arguably the most comfortable members of the aviation industry. As natural monopolies,
protected by regulations and predominantly owned and subsidized by governments, most have enjoyed
stable, long-term growth. This is reflected in the fact that the rankings of the world’s top 50 airports as
measured by passenger numbers barely changed between 1991 and 2003; as Exhibit 3 illustrates: seven
airports dropped out of the top 50 over this period, but none of them was a member of the top 30. It can
9
also be seen in airports’ disproportionately high margins, relative to airlines’: on average, airports’ cash
and profit margins are roughly four times higher. In addition, their return on investment is more than
twice as high (see Exhibit 4).
The problem is that governments have not treated airports as profit-oriented businesses but as infrastructure suppliers whose primary aim is to boost regional economies. In interviews with BCG,
government entities responsible for regional and international airports all cited regional economic
considerations, such as employment and tourism, as the key drivers of investment decisions. Although
this strategy has often had the desired effect—large hubs like Atlanta typically employ 45,000-plus
people-—it has produced three major difficulties:
„ An oversupply of hubs: This can be seen in the dense clusters of hubs in Exhibits 5–7. Does US Airways, for example, really need three neighboring hubs on the eastern coast of the USA (Exhibit
5)? Or does the SkyTeam alliance require four hubs in Europe within an hour’s flying time of one
another (Exhibit 6)? Since Asia is still in an earlier stage of the air-travel life cycle, the situation
there is somewhat different, with many aiports still engaged in a battle for mega-hub status. Even
those airports not achieving this status will enjoy significant (though smaller) growth over the
next decade (Exhibit 7).
„ A capacity imbalance between hubs: The emphasis on regional economic development at the
expense of commercial considerations has led to massive block investments that bear little
relation to airports’ growth potential, creating excess capacity at some locations and an undersupply at others. In most cases, surplus capacity is the norm. As Exhibit 8 illustrates, based on a
group of North American airports that plan to invest $24.5 billion over the next two years, operators will have excess capacity of between 29 million and 352 million (3.9% to 46.9% of total
EXHIBIT 2
Previously:
Clear role allocation—growth in all sectors
High
Today:
Substantial change—uneven growth
High
(1)
Hubbing
(all hubs)
Hubbing
(all hubs)
Available RPK for city pair
Available RPK for city pair
P2P
(O&D airports)
3
FC P2P(2)
(O&D airports)
FC hubbing
(increasingly
mega-hubs)
1
2
LCC P2P(3)
FC hubbing
(increasingly
mega-hubs)
Hubbing
(primary hubs)
FC hubbing(4)
(increasingly mega-hubs)
Low
Low
Short-haul
Long-haul
Short-haul
Distance of city pair
(1) Point-to-point
Note: Schematic representation
Source: BCG analysis
(2) Flag carrier P2P
(3) Low-cost P2P
(4) Flag carrier hubbing
Long-haul
Distance of city pair
1
LCC steal of FC P2P
2
New P2P routes possible due to LCC's lower cost structure
3
Technological change (e.g., 7E7)
EMERGENCE OF LCC AND TECHNOLOGICAL CHANGE HAVE FUNDAMENTALLY CHANGED AIRLINE AND AIRPORT LANDSCAPE
10
EXHIBIT 3
Chicago
Toronto
Minneapolis
25
St. Louis (20) Seattle
33 69 33 Detroit
Newark
Denver
27
Boston (23)
Cincinnati (21)
Salt Lake (19)
25 Philadelphia
Atlanta 30
Las Vegas
New
York
JFK (32)
29 36
37
San Franciso
79
New York LGA (22)
Los Angeles 55
Baltimore (20)
53
27
Charlotte (23)
34
30
Phoenix 37
Orlando
Dallas
Honolulu (20)
Houston
Miami
Mexico City (22)
London STN (19)
Manchester (20)
Amsterdam
London LHR
63 40
London LGW 30
48 Frankfurt
48 24
Paris CDG
Munich
23 22
26 Rome
Barcelona
36
Madrid
Paris ORY
Palma de
Mallorca (19)
Fukuoka (19)
Seoul
26 Tokyo NRT
Beijing 24 20
63 Tokyo HND
Hong Kong 27
Osaka (19)
30 Bangkok
Singapore
25
Jakarta (20)
22 Sydney
M PAX, total PAX, about 3.4 billion
Private owned(1)
Public owned
Stockholm, Copenhagen, Sapporo, Düsseldorf, Pittsburgh, Washington, and Zurich no longer among the top 50
(1) Classification of airports as private owned from start of prioritization process
Source: Annual reports; ACI; authorities; press search; web pages; BCG analysis
RANKING OF TOP AIRPORT LOCATIONS HAS REMAINED FAIRLY STABLE OVER TIME
EXHIBIT 4
x 11.9
Cash margin
142,739
x 3.4
= 35.3% of
total
(1)
market
42%
12%
Profit margin
17,483
12%
11,988
ROI
x 2.9
= 18.7% of
total
(1)
market
3%
(3)
11%
5,070
4,160
5%
ROE
1,414
13%
Revenues
EBITDA
(2)
(1) Calculated with PAX multiple
(2) First ten having available data
(3) Airports: BAA, Fraport, Copenhagen, Vienna, Zurich; airlines: Austrian Airlines, British Airways, Lufthansa, SAS, Swiss
(4) Ranked by revenues 2000
Note: Airport companies with available data are most significant for analyses as data is published by companies that target profit maximization
Source: Airlines business; annual reports; BCG analysis
(3)
7%
Net result
Top 10 airport
(3)(4)
companies
(4)
Top 10 airlines
AIRPORTS HAD SIGNIFICANTLY BETTER MARGINS THAN AIRLINES EVEN BEFORE RECENT CRISIS
11
EXHIBIT 5
44%
Seattle (27)
Minneapolis (33)
Could Atlanta draw
traffic from Cincinatti?
82%
Chicago (69)
San Francisco (29)
51%
35%
Las Vegas (36)
49%
St. Louis (20)
61%
23%
New York JFK (32)
58%
77%
Salt Lake City (18)
72%
36%
Detroit (33)
Pittsburgh (14)
70% Philadelphia (25)
92%
72%
American Airlines started
to downsize St. Louis?
Denver (37)
87%
Delta
91% Charlotte (23)
Dallas (53)
American
Alaska Airlines
Cincinatti (21)
Phoenix (37)
45%
= 22M PAX
79% Atlanta (79)
Does US Airways need
three neighboring hubs?
Los Angeles (55)
Continental
United
Southwest
68%
U.S.
Houston (34)
Miami (30)
81%
54%
American West
Northwest
Non-hub
What will be the consequence for individual hubs if airlines consolidate their hub strategy?
Note: Airline shares based on 2002 data, total PAX is 2003 data
Source: ACI; CSSB Hub Fact Book 2003; BCG analysis
U.S. AIRPORT LANDSCAPE CHARACTERIZED BY DENSE HUB SYSTEM—MAIN AIRLINES WITH LARGE SHARES AT AIRPORTS
EXHIBIT 6
Copenhagen (18)
Manchester (20)
London LHR (63)
London LGW (30)
Amsterdam (40)
Brussels (15)
Paris CDG (48)
Paris ORY (22)
Swissair grounding led to
significant downsizing of
flag carrier. Entry to Oneworld
provides reorientation
Zurich (17)
(1)
Sabena grounding led to
downsizing of flag carrier
Frankfurt (48)
Munich (24)
Vienna (13)
Milan (17)
= 18M PAX
STAR
Madrid (36)
Barcelona (23)
Oneworld
Rome (26)
SkyTeam
Other
(1) Assumes successful Air France-KLM merger
Note: Alliance capacity share is measured in percent of scheduled seat capacity in 2002, total PAX numbers from 2003, MXP from 2002
Source: CSSB Hub Fact Book 2003; BCG analysis
EUROPEAN AIRPORT LANDSCAPE HAS OVERSUPPLY OF HUBS DOMINATED BY THREE MAJOR ALLIANCES
12
EXHIBIT 7
Seoul
Japanese airports
Costly megaproject
Claim for hub
Complex business site
Geographical capacity restraints
Unprofitable business
Separated of domestic/international traffic
1.5
100
7.1
19.9
ICN
10.6
PEK 24.4
Bangkok
Highly profitable
Limited capacity
Megaproject on the way
18.5
63.2
26.5
NRT
Central Japan Intl.
20
Airport Project
6.1
1.2
HND
18.9 ITM
87 18.8 FUK
Beijing
Tremendous domestic growth
Limited capacity
CTS
26.8 23.2
Ambitious expansion project
No long-haul traffic
BKK
Classic O&D
Recently privatized
Capacity restrictions (noise)
(1)
45
XX
7.3
17.5 24.7 19.3
SIN
KUL
M PAX
Singapore
Free capacity
Main South Asian hub
Highest service levels
Multitude of discounts
20–40% growth in last 10 years
60–80% growth in last 10 years
(1)
(1) No exact figures about expansion measures available
Source: Annual reports; authorities; press search; Web pages; ACI; BCG analysis
Megaproject "in water"
Partly hub status
Profitable business
Sydney
HKG
100
30.2
Kuala Lumpur
Hong Kong
Second airport
XX
5.3
possible solution
SYD 24.7
< 100% growth in last 10 years
Prospective capacity in 2015
ASIAN AIRPORT LANDSCAPE CHARACTERIZED BY BATTLE FOR MEGA-HUB POSITIONS
capacity) passengers by 2010, depending on the ratio between replacement investments and
investments into additional capacity and assuming passenger numbers grow in line with IATA’s
forecasts. And the situation is poised to get worse. By 2015, an additional $150 billion to $200 billion will be invested into airports globally. The core problem with these investment programs is
that they are based on two overly optimistic assumptions. First, that passenger growth will return
to its historical long-term average. This is by no means certain. As Exhibit 9 shows, forecasts have
already been revised downwards in the wake of 9/11, SARS, and the Iraq War. While these crises
are now largely behind us, the geopolitical instabilities that caused some of them have not been
resolved: similar events in the short to medium term cannot be ruled out. The second, more dangerous misconception is that any future growth will continue to be shared relatively equitably
between airports. However, as we discuss below, this is unlikely to be the case. There will almost
certainly be clear winners and losers, leaving many airports with even larger volumes of redundant
capacity.
„ Higher carrier charges: As monopolies, airports have been able to pass on the costs of excess
capacity to the carriers in the form of higher charges—costs that few of today’s financially unstable
airlines can afford (see below). San Francisco airport is a case in point: It recently expanded its
facilities on the ambitious assumption that passenger volumes would escalate by 7.9% a year
between 2001 and 2006, but traffic actually shrunk between 2000 and 2002 by 12.3% a year (and
still further in 2003), leading to a 23.8% rise in airlines’ landing and terminal charges to pay for
the costs of the expansion (Exhibit 10).
13
EXHIBIT 8
M PAX
CAGR
(1)
+1.65% 749
647
54
$24.5B
187
454
352
2001
2010
102
131
29
Required
additional
capacity
Min.
planned
(2)
capacity
(1) IATA forecast for worldwide growth with 25% discount due to saturated market
(2) Calculated as product of all available investments and average cost per new PAX worldwide of $187
(3) Calculated as product of all available investments and regional average of cost per new PAX in North America $54
Source: Annual reports; authorities; press search; Web pages; BCG analysis
Max.
planned
(3)
capacity
Total
investment
until 2006
Overcapacity
54 Cost per PAX in $
CURRENT EXPANSION PROJECTS WILL YIELD SIGNIFICANT OVERCAPACITIES (SCHEMATIC CALCULATION
FOR PLANNED EXPANSIONS IN NORTH AMERICA)
The future: traffic will increasingly be channeled into mega-hubs
EXHIBIT 9
Revenue passenger
kilometer in billion
AEA member airlines
Forecast post-recession
but pre September 11
The huge financial pressures on the major carriers will
leave them with little choice but to consolidate their traffic into mega-hubs, sidelining many of today’s primary
and secondary hubs.
Original forecast
Forecast post-recession/
September 11 but pre
Gulf War II/SARS
Recession
September 11
New forecast
SARS/Gulf War II
1998
1999
2000
2001
2002
2003
2004
2005
Note: Schematic representation
Source: AEA; BCG analysis
PASSENGER GROWTH FORECASTS HAD TO BE REPEATEDLY REVISED DOWNWARDS RECENTLY
14
Although the airline industry has always struggled
with profitability, averaging a net profit margin of just
0.3% since 1975, the recent severe downturn in passenger volumes, sparked by 9/11 and other international crises, has left many carriers with unsustainable losses. Between 2001 and 2002, IATA members’
losses amounted to $20.4 billion, borne predominantly by the flag carriers in the three alliances (SkyTeam,
Oneworld, Star Alliance), which account for 55% of
global passenger volumes. Over half of the alliances’
airlines are unprofitable and often unsustainably so.
EXHIBIT 10
19.99
$/PAX
16.28
14.25
PAX development
Showcase San Francisco:
developments after recent expansion program
(1)
Average airport cost per enplanement (CPE)
CAGR: -12.3%
41.0
2000
MIA
LAX
DFW
2.80
Aeronautical
revenues
3.48
DEN
31.5
2001
2002
CAGR: +23.8%
5.80
SFO
34.6
ATL
186
119
67
2001
159
89
70
2000
281
179
102
2002
Since 2000 enplanement growth has been revised downward twice to 20–30% of previous projections
Landing fees
Terminal charges
(1) Landing fees and user charges for air carriers calculated per PAX; estimate based on of 2001 numbers
Source: Salomon Smith Barney Hub Factbook 2002; SFO; FAA Airline annual reports; BCG analysis
COSTS FOR TODAY ’S AIRPORT INVESTMENTS WILL BE PASSED ON TO AIRLINES (EXAMPLE SAN FRANSISCO AIRPORT)
In the past, governments could usually be relied on to
come to the rescue but not in today’s more laissezfaire political climate as Sabena recently discovered.
Nor will airlines be able to rely on an upturn in passenger traffic to lift revenues to a sufficiently high
level to cover the shortfall. As Exhibit 11 shows, revenue has been increasing slower than passenger
growth over the last 20 years, a trend that will
continue as LCCs expand. Airlines will inevitably have
to cut costs.
To reduce costs, each of the three main airline
alliances is likely to concentrate future long-distance
passenger growth into one mega-hub in each continent. These airports will have three key characteristics: a central geographic location, a large and affluent catchment area, and a resident carrier that is
both, financially sound and a major player in its
respective alliance. In the U.S., Atlanta and Dallas are
examples of likely candidates; in Asia, Singapore and
Hong Kong are possibilities.
EXHIBIT 11
x 2.6
x 1.7
Margin
erosion
RPK growth(1) since 1980
Revenue growth since 1980
Average airline net profit margin 1980–2000: +/-0%
(1) Revenue passenger kilometers
Note: Numbers rounded
Source: British Airways; IATA WATS 86, 95–03; BCG analysis
PAX GROWTH ALONE WILL NOT BRING AIRLINES
BACK TO PROFITABILITY
15
EXHIBIT 12
North America
Europe
Share of main carrier (in %)
79
49
35
23
68
61
51
36
45
81
82
77
54
58
22
21
60
72
44
30
70
Atlanta (ATL)
Chicago (ORD)(1)
Chicago (ORD)(2)
Los Angeles (LAX)
Dallas (DFW)
Denver (DEN)
San Francisco (SFO)
Las Vegas (LAS)
Phoenix (PHX)
Houston (IAH)
Minneapolis (MSP)
Detroit (DTW)
Miami (MIA)
Newark (EWR)
New York (JFK)
Orlando (MCO)
Toronto (YYZ)
St. Louis (STL)
Seattle (SEA)
Boston (BOS)
Philadelphia (PHL)
Charlotte (CLT)
New York (LGA)
Mexico City (MEX)(3)
Pittsburgh (PIT)
50
59
53
41
Seoul (ICN)
59
Madrid (MAD)
London Gatwick (LGW)
51
Rome (FCO)
47
Munich (MUC)
49
60
Paris (ORY)
Bangkok (BKK)
51
Singapore (SIN)
46
Sydney (SYD)
44
53
Barcelona (BCN)
24
Brussels (BRU)
24
Tokyo (NRT)
66
Zurich (ZRH)
100
31
Hong Kong (HKG)
57
Paris (CDG)
Amsterdam (AMS)
86
87
48
Tokyo (HND)
Frankfurt (FRA)
91
Share of main carrier (in %)
41
London Heathrow (LHR)
24
0
Asia/Pacific
Share of main carrier (in %)
34
Beijing (PEK)
36
Manchester (MAN)
0
50
50
Fukuoka (FUK)
51
Milan (MXP)
100
0
50
100
Highest concentration at US hubs
(1) United Airlines
(2) American Airlines
(3) Mexicana and Aeromexico together
Note: Sorted by PAX
Source: Airport authorities; annual reports; press search; BCG analysis
AIRPORTS HIGHLY DEPENDENT ON MAIN CARRIERS
The introduction of a new generation of mega-planes, such as the A380, which will require large hubs
with substantial feeder capacity, will accelerate the shift to mega-hubs (as will any further international
crises).
There are already signs that traffic is starting to be consolidated into larger hubs. During the sharp
downturn in volumes between 2000 and 2002, , the smaller “bottom-quartile” hubs in the U.S. lost
12.8% of their traffic, while the larger top-quartile hubs suffered only a 6.3% fall. More recently, several
U.S. carriers have announced plans to rationalize their hub networks. US Airways, for example, is likely
to shed at least one of its hubs, while Delta and Northwest intend to focus traffic on select hubs. Similar
moves have been seen in Europe. British Airways, for instance, has moved services from Gatwick to its
larger neighbor, Heathrow, contributing to a 5.1% drop in passenger numbers at Gatwick and a 4.3%
rise at Heathrow.
None of this would be a major problem if hubs didn’t depend heavily on individual carriers, but the fact
of the matter is that the vast majority do: over three quarters of the world’s top 50 airports rely on a
single carrier for 40% or more of their traffic (Exhibit 12), rising to as high as 80% in several cases. Many
U.S. hubs are particularly dependent, raising questions about their long-term viability.
16
The growth of point-to-point travel will place secondary hubs
under greater pressure
While intercontinental traffic, with some qualifications, is likely to be consolidated into hubs, the pattern of continental traffic is somewhat more complex. The growth of point-to-point travel, which is more
cost-efficient, profitable, and convenient for both, carriers and passengers, will draw traffic away from
hubs, especially secondary hubs. This will be driven by two key developments:
„ The rise of LCCs: Regional, point-to-point LCCs, such as Southwest Airlines in the U.S. and
Ryanair in Europe are dramatically changing the way the aviation sector operates. These airlines
have already stolen up to 60% of passenger growth from the major flag carriers on selected routes
(Exhibit 13), predominantly in Europe, where they service 95% of primary airports, and increasingly in the U.S., where they are expected to reach 80% of passengers within the next three to five
years. Asia’s LCC market is still relatively immature, but it too is gathering pace, reflected in a flurry of recent LCC upstarts—among other Malaysia’s Air Asia, Singapore’s Tiger Airways as well as
Thai Air Asia. The continued growth of point-to-point LCCs will have a major impact on the
world’s hub network, as it will drain traffic from the hubs. Although all hubs will be affected,
including mega-hubs, secondary hubs that depend on relatively small regional airlines will be hit
the hardest. These airlines will not be able to compete with LCCs’ cost base and will switch to providing feeder services for their alliance’s respective mega-hub.
„ The arrival of the new Boeing 7E7: Designed mainly for intercontinental point-to-point travel
(although it also has regional potential, notably in long-haul continents, such as Asia), this jet and
others like it will be able to bypass hubs by providing direct point-to-point travel, thus offering
more cost-efficient and convenient routes. Only attractive destinations capable of servicing this
plane will be safe. Mega-hubs will feel little impact as frequencies are likely to increase. But small
and less attractive secondary hubs will suffer. The increased 7E7 traffic at preferred secondary
hubs, however, will struggle to offset the losses incurred by the growth of LCCs, leaving them still
with unexpected overcapacity.
Deregulation will accelerate this trend, especially in Europe
“Open-skies” deregulation will not only give carriers the freedom to operate from hubs of their choice
in Europe, it will spark a spate of mergers between the airlines, sucking traffic into the lead carriers’
home hubs. Although the longed-for regulatory approval is unlikely to happen any time soon, there are
signs it is moving closer: in October 2003 the EU started negotiations with the U.S. government to establish the parameters of a U.S.-European open-skies accord.
17
EXHIBIT 13
(1)
LCC influence on established airlines at selected location
126
New demand: 40%
100
LCC: 42
FC
(2)
Start
(3)
FC: 84
Year 3
(3)
"Stolen": 60%
Defense strategies of established airlines
Pricing: compete on marginal-cost basis
• Focus on 60 segment
• Provide introductory tickets
• Guarantee availability on all flights
Improve cost position
• Close gap to LCCs to maximum of 20–25%
Save on airport services
• Fees
• Ground traffic services
LCC topic hot in Europe, established in North America, emerging in Asia
(1) Low-cost carrier
Source: BCG analysis
(2) Flag carrier = established airline at location
(3) Indexed
LCC BOOM LEADS TO FURTHER PRESSURE ON ESTABLISHED AIRLINES
The result: new patterns of passenger growth, undermining
many airports’ investment plans
It’s difficult to say with any certainty how rapidly global passenger volumes will grow in the long run.
Some organizations—usually those with a vested interest in painting a rosy picture, expect a return to
the healthy rates of the last decade—when the compound annual growth rate was around 4%: Airbus
and Boeing, for example, forecast 4.7% and 4.9% respectively up until 2020. Others are less optimistic:
IATA predicts 2.2% over this period.
What is unquestionable is that the consolidation of the hub network will radically alter how this growth
is distributed between airports. In fact, there is already a mismatch between different airports’ growth
rates, as Exhibit 14 illustrates. Looking ten years ahead, there will be even starker differences. Mega-hubs
will enjoy the greatest growth. O&Ds and regional destinations that are favoured by point-to-point carriers will also experience a significant increase in traffic. Most airports, however, will experience much
lower growth and, in some cases, an absolute decline in passenger volumes.
„ Exhibit 15 shows that there has already been a significant consolidation of traffic into mega-hubs
and away from secondary hubs during the recent crises. The share of total top 50 airport traffic
passing through nine potential mega-hubs increased from 30% to 34% in just two years. Exhibit
15 also indicates what the distribution of passenger growth might look like in the next five years
up to 2008, owing to further hub consolidation. This is only intended as a rough indication of the
winners’ and losers’ shares, not a definitive outcome.
18
EXHIBIT 14
58%
15%
9%
7%
6%
Swissair grounding
October 2, 2001
5%
1%
0%
Sabena grounding
November 7, 2001
0%
Average
-2%
-2%
-3%
-6%
-11% -12%
-16%
-23%
-30%
STN
BCN
MAD
VIE
MAN
MUC
AMS
FCO
CDG
LHR
FRA
CPH
LGW
(1)
DUS
ORY
(2)
MXP
(3)
ZRH
BRU
(1) Transfer to BA traffic from LGW to LHR
(2) Transfer AF traffic from ORY to CDG
(3) No data for 2003, change 2000–2002
Source: Annual reports; company Web pages; press search; BCG analysis
BEGINNING AIRLINE CONSOLIDATION WILL BE DECISIVE IN SETTING FUTURE AIRPORT LANDSCAPE
IN EUROPE (PAX CHANGE 2000–2003)
EXHIBIT 15
Hub consolidation already under way
Share of top 50
traffic (%)
100
90
80
70
60
50
40
30
20
10
0
1,650
29.8
30.4
33.9
1,600
38.0
Total PAX at top 50
airports
1,550
1,500
1,450
70.2
69.6
66.1
62.0
1,400
Nine potential
mega-hubs
1,350
Other 41 of
top 50 airports
1,300
2001
2002
2003
2008
(1)
1,250
Total PAX at
top 50 airports
(1) Forecast for mega-hubs: Average of Airbus and Boeing forecast (4.8%) plus 10% assumed mega-hub bonus due to consolidation trend.
Forecast for remaining top 50 airports: IATA forecast for worldwide growth with 25% discount due to saturated market
Note: Nine potential mega-hubs: ATL, ORD, DFW, LHR, FRA, CDG, HND, HKG, SIN, others are the remaining top 50 airports
Source: Airbus; Boeing; IATA; ACI; BCG analysis
NINE POTENTIAL MEGA-HUBS HAVE INCREASED THEIR PAX SHARE AT THE EXPENSE OF
SECONDARY HUBS
19
„ Exhibit 16 illustrates where different airports are likely to be positioned in tomorrow’s consolidated hub network, based on the strength of both, their top carrier and their local environment—
the size and affluence of the catchment area, tourism potential, and geographic location. Airports
in the top-right corner, such as Frankfurt and Heathrow, will probably be mega-hubs for their
respective alliances, while Munich, Gatwick, and other players in the middle section will continue
to operate as secondary hubs. Interestingly, many of the airports in this segment of the matrix have
significant unused capacities already today. The hubs in the lower left corner will be relegated to
international O&Ds providing merely point-to-point traffic. Some of the players on the margins of
these areas, will probably engage in an “investment gamble”, trying to outbid rivals’ investments
in an attempt to secure their desired position as mega-hubs. Few airports will indeed be megahubs, but many more follow investment strategies as if they were destined to be among this elusive
group—a dangerous game for the losers, who will be burdened with high excess capacity.
EXHIBIT 16
Frankfurt
London LHR
Paris CDG
Paris
ORY
Munich
Airlines
London LGW
Amsterdam
Manchester
Madrid
Rome
Milan
Barcelona
Zurich
Palma de
Mallorca
PAX million
Brussels
Free capacity
Used capacity
Environment
Source: BCG analysis
STARTING POINT IS DECISIVE IN HUB CONSOLIDATION (EXAMPLE FOR EUROPEAN HUBS)
20
PRESSURES TO ACT MORE LIKE
BUSINESSES
The cozy world of the past has encouraged many airports to neglect operating costs, as well
as opportunities to lift revenues: most have functioned as infrastructure suppliers not businesses. In the future, carriers’ demands for lower charges, coupled with governments’ growing reluctance to support airports, will force operators to function more efficiently. Lower
than anticipated passenger growth at many airports will intensify this need.
Despite relatively high margins, the state-protected environment in which the vast majority of airports
has lived over the last eight decades has meant that most have not operated as competitive, profitdriven businesses. This is most obvious in the field of investments, where the basic principle that investment growth should only be pursued once profitability is above the cost of capital, has been widely
ignored, especially at regional airports. Most regional airports are unprofitable yet still have ambitious
expansion plans. Operating costs have also been overlooked, partly due to the fact that fixed assets dominate airports’ balance sheets. According to BCG’s analysis, airports could reduce their operating costs
by 20% to 30% on average, including 5% to 7% in the short run.
Three key developments will force airports to look much more closely at both, costs and revenues:
1. Lower than expected passenger growth
The drop in aviation and non-aviation revenues that will accompany lower than expected passenger
growth at airports will leave many struggling to service the debts of their existing investment programs.
To compound this problem, credit-rating agencies are likely to downgrade operators suffering steep
declines in passenger growth, increasing the cost of raising additional funds. Pittsburgh International
Airport provides a salutary warning of what the future might hold. Its General Airport Revenue Bond
(GARB) was recently downgraded from A to BBB by the Fitch Rating Agency after US Airways rejected
a lease agreement with the airport, suggesting the airline might abandon Pittsburgh as a hub.
2. Carriers’ demands for reduced charges
Airport charges, including aeronautical and ground-handling fees, account for a substantial proportion
of carriers’ costs, typically one quarter of the price of the average airline ticket (Exhibit 17). In the past
airlines have found it difficult to negotiate reductions due to airports’ monopoly positions and ignorance of the operators’ true costs. Today, however, carriers increasingly have access to more detailed cost
breakdowns, thanks to governments’ demands for greater accounting transparency, placing them in a
stronger negotiating position. More significantly, they are acutely aware that their survival—and the
future of the airports, most of which depend heavily on a single carrier—hinges on lower charges. The
drive to reduce these is further fuelled by the widespread sense of injustice within the aviation industry
over the large discrepancy between the two parties’ margins. As one executive said: “If one of the
21
EXHIBIT 17
In
euro
103%
2.9%
100%
17.2%
144
4
140
24
12.9%
11.5%
7.1%
7.1%
5.7%
5.7%
8.6%
24.2%
17.1%
34
24
7.1%
18
16
10
10
8
8
12
10
Total ticket
price
Profit
margin
Total cost
Ticketing
and sales
Crew
Profit
Aircraft
costs
Passenger Fuel and
service
oil(1)
Admin.
and other
En route
charges
MainteTotal Station and Aeronance airport-relat- ground
nautical
ed charges handling charges
Non-airport-related costs
Airport-related costs
(1) Fuel prices vary significantly over time; estimation based on 15-year average of 135 euro per ton
Source: AEA benchmark study; Shell; BCG analysis
AIRPORT-RELATED COSTS ARE SIGNIFICANT
partners is losing his shirt while the other is counting money, it is no longer a partnership.” LCCs, which
have shown themselves to be more than willing to pull out of destinations if the figures do not add up,
will add to the pressure, particularly if the European Commission puts a stop to regional airports offering LCCs sweeteners, as witnessed in the recent Charleroi ruling and Ryanair’s subsequent decision to
cut down on its Charleroi routes.
3. Government ’s growing reluctance to subsidize airports
Governments are both politically less willing and financially less able to support airports. Free-market
solutions are increasingly the preferred option in most public-service sectors, especially as the widening
gap between tax receipts and public expenditure makes continued state support unsustainable. This is
reflected in two trends within the airport sector:
„ More widespread privatization: Since 1987, there has been a steep and relatively steady increase
in the number of airport privatizations that is due to pick up again after being halted in the recent
crises as Exhibit 18 shows. To date, over 60 airports have gone down this road, spanning virtually
every continent, from Europe and South America to Australia and Asia. Europe has the highest
concentration of privatized airports (nine out of the top 20), with several more due to join their
ranks. In the U.S., only few small operators such as Buffalo and Albany, have been privatized, a
reflection of the fact that airports remain one of the few avenues open to influence regional economic development in this otherwise highly deregulated economy, as well as considerations of
national security. This situation, however, may be about to change, not the least of which is due to
severe budget problems, foremost the U.S. federal deficit, but also budgetary constraints faced by
many states and cities.
22
EXHIBIT 18
Athens
ASUR (Mexico)
AdP
Adelaide
Atlanta
Argentina
Bangalore
Birmingham
Auckland
Bangkok
Bolivia
Australian Regionals
Bombay
Brisbane
Canberra
Bratislava
Bristol
Costa Rica
Budapest
Düsseldorf
Eindhoven
Calcutta
Istanbul
Hanover
Chubu
Belfast
Kent
Hobart
OMA (Mexico)
Ecuador
Bournemouth
Melbourne
Luton
Fraport
Hong Kong
Liverpool
Cardiff
Naples
Malaysia
GAP (Mexico)
Lima
Kansai
Prestwick
Copenhagen
Perth
Skavska
Jakarta
Malta
Madras
Southampton
East Midlands
Rome
South Africa
Oman
Sydney
Narita
BAA
Vienna
London City
Sanford
Wellington
Stewart
Zurich
New Delhi
1987
… 1990–1992
1993–1996
1997
1998
1999
2000–2002
Planned
Privatization to yield more efficient operations and to secure airport financing of infrastructure
Source: BCG analysis; press search
NUMBER OF PRIVATIZATIONS ACCELERATING AGAIN
EXHIBIT 19
Infrastructure provision
Business-to-business services
Business-to-customer services
Management
Support functions
1
Property and
utilization rights
Transaction
management
• Inivitations to bid
• Contract
negotiation
• Takeovers
2
Real-estate and
infrastructure
development
Real-estate planning,
development
3
5
4a
6
7
Flight OPS
Facility
management
Facility management
Security
Construction
4b
Terminal OPS
(incl. security)
Flight operations
• Tower
• Runway traffic
• Gates
Ground
services
Ground services
Luggage services
Space allocation
(non-aviation)
Retailing
• Duty-free shops
• Catering
• Food and beverage
Cargo services
Safety (fire protection)
Conferencing
Parking
Other
In-flight services
Terminal operations
Other
services
Space utilization
• Outdoor space
• Indoor space
• Advertising space
Source: BCG analysis
AIRPORT VALUE CHAIN VERY DIVERSE
23
Further privatization will not only force airports to increase efficiency in order to keep shareholders on board, it will also provide access to additional funds via the world’s capital markets. It
will not necessarily guarantee success—both, Brussels and Zurich are privatized airports—but, on
balance, it will lead to a significant improvement in performance.
„ Deregulation of the value chain: Few airports have the specialist skills or scale to optimize each of
the links in their highly diverse value chain. As Exhibit 19 shows, these links can range from realestate and facility management to retail, terminal operations, and ground handling. At the
moment, responsibility for the different parts of the chain tends to be shared between the airports
and carriers, with the balance of roles varying between airports. At Atlanta, for example, Delta
handles most of the chain, including retail and facility management, leaving the airport authority
to manage a limited number of services, while the opposite is the case at Frankfurt (Exhibit 20).
Deregulation will deconstruct the chain further, enabling new players to enter different elements of the
chain, bringing all the efficiency gains that competition entails. Retail has already been deregulated at
many locations and has produced impressive results, often via outsourcing. Since BAA has managed Pittsburgh International’s retail operations, revenues have tripled. More recently, ground handling has been
deregulated in Europe, lowering costs especially in those EU member states with former handling
monopolies, such as Greece and Italy, according to an EC study. Further deregulation of other parts of
the chain is inevitable, especially as privatization becomes more deeply entrenched in the industry.
EXHIBIT 20
Frankfurt
Atlanta
Fraport
Airport Authority
Real estate/landlord
Facility management
Flight OPS
Terminal OPS
Ground handling
Cargo handling
Retail
13,000 employees
Real estate/landlord
Flight OPS
800 employees(1)
Ticketing and sales
In-flight passenger services
Fleet management
Technical issues/maintenance
31,000 employees
Facility management
Terminal OPS
Ground handling
Ticketing and sales
In-flight passenger services
Cargo handling
Fleet management
Technical issues/maintenance
Retail
36,000 employees(2)
Lufthansa
Delta
(1) Estimation ($40 million for salaries, average of $50,000)
(2) First estimate (approximately 80% Delta business at Atlanta airport)
Source: Lufthansa; Delta; Fraport
DEPENDING ON AIRPORT, OPERATORS AND AIRLINES TAKE ON DIFFERENT ROLES
24
STRATEGIES TO SUCCEED IN
TOMORROW’S ENVIRONMENT
Airports will have to rethink their strategies and business models to survive and thrive in
tomorrow’s environment. The first step is to soberly assess your role in the new hub network
and expected passenger growth. This will determine your investment and carrier strategy. It
will be equally critical to position yourself at the most competitively advantageous point in
the value chain, with a clearly defined role.
Developing appropriate strategies
The redistribution of passenger growth will redefine airports’ roles, requiring different investment and
carrier strategies for different types of airports:
Identify your role in the new network
Two key factors will determine airports’ roles in the new landscape and, consequently, their relative
growth and capacity requirements:
„ Geographic location, including size and affluence of catchment area: Only airports with central
locations and large, affluent catchment areas will be eligible to be mega-hubs. International O&Ds
will need a similar catchment area to succeed.
„ Carrier’s strategic and financial strength: In addition to the right geographic location, mega-hubs
will be the primary home of a leading alliance airline. Heathrow, which is dominated by the
Oneworld alliance airline BA, is one example. Secondary hubs will also require a strong relationship with a major carrier in an alliance. At all airports, from mega-hubs down to regional airports,
the financial health of the lead carrier will be paramount. This must be carefully analyzed, especially in relation to any investment plans. As Brussels Airport discovered, the impact of a financially ailing airline can be devastating: since Sabena went bankrupt, the airport’s passenger
volumes have plummeted by 30%.
25
Different strategies for different types of airports (Exhibit 21)
„ Mega-hubs: These must focus on the lead airline in their respective alliance, as well as regional
feeders. Providing the highest quality of service and innovative ways to spread capacity throughout the day will be vital. Intelligent differentiation between premium and basic products will also
be required. Only mega-hubs will be in a position to make large “batch” investments to expand
capacity, secure in the knowledge that there will be long-term passenger growth.
„ Secondary hubs: Many of today’s hubs will be downgraded, making their overly optimistic investment plans redundant. All investments should be revisited and switched to an incremental,
“needs-must” basis. Attention should be concentrated on alliance carriers.
„ International O&Ds: The emphasis must be on sweating existing assets to extract maximum value
out of historically high investments. Airlines with a sound strategy, alliance, and financial position
should be actively courted to ensure commitment to the airport. Those international O&Ds that
stand to profit from an enlarging catchment area and subsequent rise in point-to-point traffic
should base their expansion strategy on careful foundations and sound planning, which should
always favor incremental investment approaches over block investments. Attracting LCCs to fill
existing overcapacities should be considered, but no capacity extensions to cater for LCCs.
„ Regional airports: The focus should be on LCCs and exceptionally tight cost control, not just to
satisfy LCCs’ demands but to return to or maintain profitability. In view of the likelihood that
these airports will continue to be used by governments as tools for regional economic development, state funding for any (incremental) investments should be sought. Creating new regional
airports will, in most cases, be unwise.
EXHIBIT 21
Example
Atlanta
International
hubs
Airline focus
Leading airline within alliance
Quality leadership
Regional feeders
Privatization imperative
Capacity management
PAX = 79M
Sydney
International
O&Ds
Key issues
Intercontinental airlines
Sweat your assets over the limit
All other airlines
Maximize return
Member of airline alliance
Support your alliance airline
All other airlines
Stop investments
PAX = 22M
Secondary
hubs and
O&Ds
Vienna
Streamline business model
PAX = 12M
Regionals
Albany
International
Airport
PAX = 1.5M
Source: BCG analysis
WHAT TO DO: FOCUS ON BEST BET
26
LCC
Focus on LCC segment
Regional feeder
Thight cost management
Acquire public funding
Managing airports as businesses, not infrastructure suppliers
Select the right business model for your chosen point in the value chain
As mentioned earlier, few operators have the breadth and depth of resources and expertise to maximize
returns from each link in airports’ highly diverse value chain. Instead of acting as integrators of the
entire value chain, operators will have to identify a position within the chain where they can add maximum value, based on their capabilities and the competitive outlook of their chosen section of the chain.
Each part of the chain will require different skills and resources plus different levers to reduce costs and
boost revenues, as Exhibits 22 and 23 illustrate. Ground handling, for example, will depend on personnel allocation and process optimization to create value, while aviation-related services will hinge on cost
transparency, negotiation strategies, and investment control, among other demands. Some operators
will be best equipped to concentrate on individual links in the chain, others will benefit from taking
broader roles.
Generally, there will be four types of operators:
„ Specialists will focus on particular links in the value chain and leverage their scale and know-how
globally. Usually this will involve standardized, labor-intensive activities, such as ground handling
and facility management. As these are traditionally low-margin fields, scale will be critical. Already
several global specialists are emerging. In ground handling, ServisAir/GlobeGround
EXHIBIT 22
Management
1 Trans2 Realaction of prop- estate/infraerty and utistructure
lization rights development
Support functions
3
4a
5
Flight OPS
Facility
Ground
Terminal
4b
management
services
OPS (in. sec.)
6
Space
allocation
(non-aviation)
7
Other
services
Real estate
Characteristics
Levers
Facility management
Capital-intensive
Labor-intensive
Customer: airport operator and airport-related external companies
Majority of total lifetime property cost accrues during use
Market for special properties hardly existent
High competition in certain areas
Financing
Site analysis/knowledge of place
Specialization (technical FM)
Project management
Property development
Standardization (infrastructure and commercial FM)
Regulatory circumstances
Property usage
Source: BCG analysis
OPTIMIZATION LEVERS ALONG THE VALUE CHAIN (I)
27
EXHIBIT 23
Management
1 Trans2 Realaction of prop- estate/infraerty and utistructure
lization rights development
Support functions
3
4a
5
Flight OPS
Facility
Ground
management 4b Terminal
services
OPS (in. sec.)
Aviation
Characteristics
6
Space
allocation
(non-aviation)
7
Other
services
Non-aviation
Ground services
Capital-intensive
Capital-intensive
Labor-intensive
Specific flight and terminal operations knowledge
Opaque passenger behavior
Complex processes
Regulated environment
Complex demand structure (retailers)
Cyclical demand
Negotiation strategy
Space allocation
Personnel allocation
Investment control
Marketing
Process optimization
Levers
Cost transparency
Process efficiency
Airline affinity
Airport and terminal management
Source: BCG analysis
OPTIMIZATION LEVERS ALONG THE VALUE CHAIN (II)
operates at 39 locations, with a turnover of more than $800 million, while Swissport is present at
24 airports. Within the U.S., Delta Air Lines has also started to aggressively market its maintenance
services to other airlines, turning a $50 million side business in 2000 into a $160 million operation
by the end of 2003.
„ Layer-masters will handle categories of related services, for instance, business-to-consumer
services such as retail, conferencing, and parking. BAA’s retail managing contracts are an example of this development.
„ Orchestrators will coordinate outsourced services at individual airports, ensuring consistent quality standards and cost control, as well as act as the interface with airlines to deliver innovative,
value-added products and services. Pure orchestrators have yet to emerge, but Athens International Airport is a pioneer.
„ Integrators will continue to handle the whole value chain, as Frankfurt does now.
Drive down costs
Operational excellence has to be the new management imperative. Exhibits 22 and 23 highlight the
main levers for reducing costs (and increasing revenues) in different parts of the value chain. The
golden rule, which has so often been broken in the past, is that no investments should be made unless
expected profitability is above the cost of capital.
28
Exploit non-aviation revenues
Increasing revenues per passenger through non-aviation channels, such as retail and parking, will be a
key driver of growth and profitability for all airports, especially those that experience lower than
expected passenger growth or even an absolute drop in traffic. In fact, in BCG’s experience, airports
that depend on LCCs will usually only be able to sustain profitability via non-aviation revenues. Love
Field airport in the U.S. is a case in point: Its non-aviation revenues, which were three times higher than
aviation revenues, kept it in the black in 2001, with a modest $9.9 million profit (Exhibit 24). Its parking
revenues alone were five times larger than its landing fees and bigger than all its non-aviation revenues
put together.
Retail is likely to provide some of the richest pickings as BAA’s airports have shown. To maximize this revenue,
operators will have to persuade carriers to strike an intelligent balance between their demands for shorter
transfer times and the airports’ need to keep passengers shopping for as long as possible. This will ultimately
be in both parties’ interests: higher revenues will give operators more leeway to lower carrier charges.
Consider privatization
Many airports should consider at least partial privatization in order to raise funds, gain access to the
capital markets and trigger efficiency improvements. This can be done via an IPO—a route successfully
taken by Frankfurt and Vienna—or by offering stakes through a trade sale. Strict management of the
privatization process is essential for success and is controlled by an IPO task force: strategies must be
refined, resources mobilized, efficient controls put into place, and the organization aligned with the capital markets. Trade sales can provide an attractive alternative to IPOs, by recruiting strategic investors to
take significant stakes in the airport company. External know-how can thus be bundled to ensure greater
optimization of potential.
EXHIBIT 24
6.8
In
million
dollar
6.0
2.5
24.2
10.7
1.4
18.1
1.6
6.6
9.9
7.7
Aeronautic Non-aeronautic
Nonoperating
operating
operating
revenue
revenue
revenue(1)
Labor cost Communication Supplies
and utilities and materials
Other
operating
expenses
EBITDA
Interest
change
Depreciation
Net profit
(1) Excluding grant receipts of $2.5 million, only covers interest income and other non-operating revenues
Source: BCG analysis
LCC AIRPORTS CAN ONLY BE PROFITABLE WITH THE RIGHT REVENUE MIX—EXAMPLE LOVE FIELD, TEXAS
29
Tr e a t a i r l i n e s a s p a r t n e r s
The future of the airport sector lies in closer cooperation with the major airlines as business partners,
not just customers. As a first step, joint seminars and workshops could foster better understanding. In
many areas, there are considerable opportunities to leverage cost and revenue synergies, for example,
by pooling customer information to target high-margin passengers and by bundling together common
support services, such as IT, and by clearly defining interfaces. (Exhibit 25) Transparency and clearly
defined contracts provide the basis in all areas of cooperation. Service-level agreements should become
standards in strong relationships. Short-term aids in crises also work to improve the relationship, as
significant temporary reductions in landing fees at major Asian airports during the SARS crisis signified.
EXHIBIT 25
Transaction
of property
Real-estate and
infrastructure
development
Facility
management
Airport
authority
Airport
Airport
authority
authority
Airport authority,
airline and sublease
companies
Value chain
interfaces
Measures of
interface
improvements
Terminal OPS
Ground
services
Space
allocation
Other
services
Airline
Airport authority,
airline and sublease
companies
Airport
authority
Airport authority
Airline
Bundling
Jointly coordinate operations
Outsourcing
Share scheduling information
Jointly optimize IT and
disposition instruments
Joint cost
reduction
Results
Flight OPS
Quality assurance
Find trade-off
between minimum
connection time
and retailoptimized
terminal design
Additional
revenue sources
Risk reduction/planning reliability
Joint cost reduction
Win-win situation as result of open cooperation
Source: BCG analysis
PROCESS EFFICIENCY GAINS CAN BE YIELDED BY JOINT IMPROVEMENT OF INTERFACES
30
IMPLICATIONS FOR AIRLINES,
INVESTORS, AND GOVERNMENTS
Airlines: Bring airports into focus and tighten operational links
Airlines have long neglected the value potential of airports due to their focus on network development.
There are various levers to reduce airport-related costs and revenues:
„ By working closely with a particular operator, airlines can identify potential to improve process
efficiency. This will lead to reduced costs for airports and, via lower charges, for airlines. But the
more substantial contribution to higher airline margins will be through shorter turnaround times
and consequently higher aircraft utilization.
„ Airlines can support airport operators in increasing their retail revenues by helping them find partners who are best suited for optimal exploitation of the revenue lever. Moreover airlines can contribute by providing valuable information about their passengers, which allows retailers to
custom-tailor their offerings. Airports should then share the increased revenues with airlines,
creating a win-win situation that encourages all parties to move in the described direction.
Although severe frictions between airports and airlines characterize the current situation, both parties
should work towards easing the tensions since both will profit from a renewed partnership.
Investors: Pick the right investments and improve profitability
It has never been a better time to invest in airports. Many owners face difficulties in financing their airport shareholdings and are increasingly willing to sell off stakes in attractive locations. But investors have
to thoroughly analyze the options before entering the complex airport business:
„ Investors should screen all possible targets and analyze long-term growth options based on airline
prospects as well as geographic and environmental factors. Only airports exhibiting a stable
growth outlook and a realistic perception of themselves will lead to long-term returns on adequate
investments.
„ From along the diverse value chain, investors should decide which business to invest in. Depending on an individual investor’s risk profile, capability portfolio, and investment strategy this can be
31
either in real estate, airport management, or business-to-consumer services. If investors do not
take into account the ongoing deconstruction of the value chain, they risk an attack from betterpositioned competitors.
„ Investors must be aware of the various cost and revenue levers airports can pull to improve their
margins. The potential to increase efficiency and revenue per PAX is large at most airport locations and can significantly raise the returns on investment.
Well-advised investors with a clear strategy and a set of relevant investment criteria will emerge on top of
the current developments in the airport industry.
Public authorities: Secure infrastructure provision without
suffering negative returns
Infrastructure provision as a means of regional development has always been the focus for public authorities.
This will remain the case in the future. But in times of dwindling public budgets, authorities are looking for
opportunities to reduce their investments and increase returns on airport shareholdings without neglecting
its infrastructural importance for their particular region. Key steps to take and issues to consider include:
„ Authorities must soberly analyze the growth potential of each airport. Although every region
would like to profit from a nearby intercontinental hub, only a few will enjoy this privilege. It is
fairly obvious which cities will be the location of mega-hubs as this is determined by airline network strategies: authorities must understand and accept the reality of the growth prospects of
their airport portfolio.
„ To reduce requirements of public funding, governmental institutions should encourage airport managers to exploit the revenue potential offered by retailing. Increasing revenues per PAX is a comparatively
easy option since its implementation does not require unpopular decisions like workforce reductions.
„ Authorities should ensure that airport managers implement a tight cost control, focusing on
process efficiency and adequate real-net output ratios. Significant efficiency gains are a direct way
of saving taxpayer’s money.
„ Alternative sources for financing airport investments should be explored. Getting private
investors involved is an excellent opportunity to trigger changes in airport management and
reduce airports’ dependency on subsidies.
These recommendations will not endanger the provision of airport infrastructure; they will ensure the
long-term survival of individual airports. Structural changes force all airport owners to act in order to
avoid deterioration in their shareholdings.
32
BCG’S EXPERIENCE IN THE AVIATION
INDUSTRY
BCG has extensive experience in the airport and
aviation industry
BCG works closely with numerous clients within the aviation sector—airlines, airports, and other
service providers—always with the goal of developing our clients’ competitive advantage, successfully
implementing it, and increasing their sustained earning power. Projects we have been involved in have
ranged from privatizations and profit improvement measures to value management, strategic positioning, and internationalization. All have shown bottom-line impact and enabled our customers to achieve
a superior strategic positioning within a changing business environment.
In addition to the frameworks described in this report we have developed a set of tools specifically for
the aviation industry. This includes a standardized airport “health check” to identify the measures
needed to prepare our clients for the future.
If you would like to discuss this report’s findings in more detail or require assistance in any other field,
please contact one of our world experts.
33
KEY QUESTIONS
Questions for airlines
1. What is the overarching network logic of my alliance and how does this affect my airport
selection and strategy?
2. What are my main airports’ investment programs and how do they correspond to my
perspective capacity, service, and cost requirements?
3. How can I actively participate and influence airports crucial to my strategic positioning?
4. How can joint optimization of interfaces benefit my efficiency and service position?
Questions for airport operators
1. Which role is my airport realistically going to play in the medium term given its location
and key airline(s)?
2. Do my investment plans accurately reflect this role?
3. Am I actively cooperating with my main customers?
4. Can my cost position be optimized?
Questions for public authorities
1. What is a viable airport landscape for my region given expected growth rates and trends
and are funds distributed accordingly?
2. Are publicly owned airports sufficiently working to exploit non-aviation revenues and
control their cost position?
3. Should alternative ways of financing airport investments be explored and the expertise
of private investors tapped?
4. Are ways to better coordinate airport development on a supraregional and
supranational level being sufficiently explored?
Questions for investors
1. Does my investment portfolio account for individual growth prospects and a
sober assessment thereof by the respective airport?
2. Which steps of the airport value chain are most promising as investments?
3. How far has the airport’s efficiency potential been realized and is the
management and ownership committed to delivering returns?
35
GLOBAL CONTACTS
Amsterdam
Brussels
Hamburg
London
J. F. Kennedylaan 100
3741 EH Baarn
Netherlands
Tel +31 35 548 6800
Fax +31 35 548 6801
Boulevard de L’Imperatrice, 13
1000 Brussels
Belgium
Tel +32 2 289 02 02
Fax +32 2 289 03 03
Chilehaus A
Fischertwiete 2
20095 Hamburg
Germany
Tel +49 40 30 99 60
Fax +49 40 33 79 45
Devonshire House
Mayfair Place
London W1J 8AJ
England
Tel +44 207 753 5353
Fax +44 207 753 5750
Athens
Budapest
Helsinki
Los Angeles
60 Vassilissis Sophias Avenue,
11528 Athens
Greece
Tel +30 210 727 9213
Fax +30 210 727 9168
Váci u. 81
1056 Budapest
Hungary
Tel +36 1 235 90 00
Fax +36 1 235 90 10
Eteläesplandi 12, 3rd Floor
00130 Helsinki
Finland
Tel +358 9 228 661
Fax +358 9 228 66 911
355 S. Grand Avenue
33rd Floor
Los Angeles, CA 90071
USA
Tel +1 213 621 2772
Fax +1 213 621 1639
Atlanta
Buenos Aires
Hong Kong
Madrid
600 Peachtree Street N.E.
37th Floor
Atlanta, GA 30308
USA
Tel +1 404 877 5200
Fax +1 404 877 5201
Bouchard 647-10°
(C1106ABG) Buenos Aires
Argentina
Tel +54 11 4314 2228
Fax +54 11 4314 2229
34th Floor, Shell Tower
Times Square, Causeway Bay
Hong Kong
China
Tel +852 2506 2111
Fax +852 2506 9084
Alcala, 95
28009 Madrid
Spain
Tel +34 91 520 61 00
Fax +34 91 520 62 22
Auckland
200 South Wacker Drive
27th Floor
Chicago, Illinois 60606
USA
Tel +1 312 993 3300
Fax +1 312 876 0771
Houston
101 Collins Street,
Level 52
Melbourne VIC 3000
Australia
Tel +61 3 9656 2100
Fax +61 3 9656 2111
Chicago
23–29 Albert Street, Level 30
Auckland 1
New Zealand
Tel +64 9 377 2297
Fax +64 9 3070 958
Bangkok
Cologne
37th Floor, U Chu Liang Building
968 Rama IV Road, Silom
Bangkok 10500
Thailand
Tel +66 2 667 3000
Fax +66 2 655 3123
Im Mediapark 8
KölnTurm
50670 Cologne
Germany
Tel +49 221 5500 50
Fax +49 221 5500 5500
Barcelona
Copenhagen
Avda. Diagonal 640-6°E
08017 Barcelona
Spain
Tel +34 93 363 4700
Fax +34 93 363 4710
Amaliegade 15
1256 Copenhagen K
Denmark
Tel +45 77 32 34 00
Fax +45 77 32 34 99
Beijing
Dallas
Unit 902, The Exchange Beijing
No. 118 Jian Guo Lu Yi
Chau Yang District
Beijing, 100022
China
Tel +86 10 6567 5755
Fax +86 10 6567 5799
500 N. Akard Street, Suite
2600
Dallas, Texas 75201
USA
Tel +1 214 849 1500
Fax +1 214 849 1501
Berlin
Stadttor 1
40219 Düsseldorf
Germany
Tel +49 211 30 11 30
Fax +49 211 13 12 96
Düsseldorf
Dircksenstraße 41
10178 Berlin
Germany
Tel +49 30 28 87 10
Fax +49 30 28 09 83 05
Frankfurt
Boston
Exchange Place, 31st Floor
Boston, MA 02109
USA
Tel +1 617 973 1200
Fax +1 617 973 1339
An der Welle 3
60322 Frankfurt am Main
Germany
Tel +49 69 9 15 02 0
Fax +49 69 59 64 793
Melbourne
One Houston Center
1221 McKinney, Suite 3850
Houston, TX 77010
USA
Tel +1 713 286 7000
Fax +1 713 286 7001
Mexico City
Istanbul
Suleyman Seba Cad. No. 83
Akaretler, Besiktas 80680
Istanbul
Turkey
Tel +90 212 310 2600
Fax +90 212 310 2666
Tamarindos 400 piso 18 A
Colonia Bosques del las Lomas
México, D. F. C. P. 05120
Mexico
Tel +52 55 5258 99 99
Fax +52 55 5258 04 44
Miami
Jakarta
Level 22, Mashill Tower
Jl. Jenderal Sudirman Kav. 25
Jakarta 12929
Indonesia
Tel +62 21 526 7775
Fax +62 21 526 7776
703 Waterford Way
Suite 740
Miami, FL 33126
USA
Tel +1 305 728 6042
Fax +1 305 265 7840
Milan
Kuala Lumpur
Level 28, Menara IMC
No. 8 Jalan Sultan Ismail
50250 Kuala Lumpur
Malaysia
Tel +60 3 2078 5770
Fax +60 3 2078 5784
Lisbon
Rua das Chagas 7–15
1200–106 Lisbon
Portugal
Tel +351 21 321 4800
Fax +351 21 321 4801
Via della Moscova 18
20121 Milan
Italy
Tel +39 0 2 65 59 91
Fax +39 0 2 65 59 96 55
Monterrey
Vasconcelos 101 Ote – 5°
Col. Residencial San Agustín
Garza García, N. L. C. P.
66260
Mexico
Tel +52 81 8368 6200
Fax +52 81 8368 0808
Moscow
Prague
Stockholm
Warsaw
Usadba Center
Voznesensky pereulok, 22/13
125009 Moscow
Russia
Tel +7 095 258 34 34
Fax +7 095 258 34 33
Na Prikope 15
110 00 Prague 1
Czech Republic
Tel +420 2 22191444
Fax +420 2 22191330
Skeppsbron 38
SE-111 30 Stockholm
Sweden
Tel +46 8 402 44 00
Fax +46 8 402 46 00
Sienna Center
Ul. Sienna 73
00-833 Warsaw
Poland
Tel +48 22 820 36 00
Fax +48 22 820 36 36
Mumbai
Rome
Stuttgart
Washington DC
55/56 Free Press House
215 Free Press Journal Marg,
Nariman Point, Mumbai 400 021
India
Tel +91 22 2283 7451
Fax +91 22 2288 2716
Largo Tartini 3/4
00198 Roma
Italy
Tel +39 06 85203420
Fax +39 06 85203665
Kronprinzstr. 28
70173 Stuttgart
Germany
Tel +49 711 20 20 70
Fax +49 711 22 12 38
4800 Hampden Lane
Suit 500
Bethesda, MD 20814
USA
Tel +1 301 664 7400
Fax +1 301 664 7401
Munich
San Francisco
Sydney
Zurich
Ludwigstr. 21
80539 Munich
Germany
Tel +49 89 23 17 40
Fax +49 89 2 60 66 98
Two Embarcadero Center,
Suite 2800
San Francisco, CA 94111
USA
Tel +1 415 732 8000
Fax +1 415 732 8200
Level 61, Govenor Phillip Tower
1 Farrer Place,
Sydney NSW 2000
Australia
Tel +61 2 9323 5600
Fax +61 2 9323 5666
Zollikerstrasse 226
CH-8008 Zurich
Switzerland
Tel +41 1 388 86 66
Fax +41 1 388 86 86
Nagoya
Dai Nagoya Building 28–12
Meieki 3-chome, Nakamura-ku
Nagoya, Aichi 4500-0002
Japan
Tel +81 52 533 3466
Fax +81 52 533 3468
New Delhi
3rd Floor, DLF Centre
Sansad Marg
New Delhi 110 001
India
Tel +91 11 335 8912
Fax +91 11 335 8915
New York
430 Park Avenue, 18th Floor
New York, NY 10022
USA
Tel +1 212 446 2800
Fax +1 212 446 2801
Oslo
Karl Johans gate 45
0162 Oslo
Norway
Tel +47 23 10 20 00
Fax +47 23 10 20 99
Paris
4 rue d’Aguesseau
75008 Paris
France
Tel +33 1 40 17 10 10
Fax +33 1 40 17 10 15
Santiago
Taipei
Av. Isidora Goyenechea 3621
Suite 901
Las Condes
Santiago
Chile
Tel +56 2 338 9600
Fax +56 2 338 9602
Room 702, 23/F,
105 Tun-Hwa S.
Rd. Sec 2
Taipei 106
Taiwan
Tel +886 2 2755 0000 x722 &
702
Fax +886 2 2784 1632
Sao Paulo
Av. Brig. Faria Lima,
3064 – 5th Floor
Sao Paulo, SP 01451-000
Brazil
Tel +55 11 3046 3533
Fax +55 11 3842 9638
Seoul
Kwangwhamun Building,
20th Floor
64-8, Taepyong-ro 1-ka,
Choong-ku Seoul
Korea
Tel +822 399 2500
Fax +822 399 2525
Tokyo
The New Otani Garden Court
4-1, Kioi-cho
Chiyoda-ku, Tokyo 102-0094
Japan
Tel +81 3 5211 0300
Fax +81 3 5211 0333
Toronto
BCE Place, 181 Bay Street
Suite 2400, P O Box 783
Toronto, Ontario M5J 2T3
Canada
Tel +1 416 955 4200
Fax +1 416 955 4201
Shanghai
21/F, Central Plaza
227 Huangpi Bei Lu
Shanghai, 200003
China
Tel +86 21 6375 8618
Fax +86 21 6375 8628
Singapore
50 Raffles Place #44-02/03
Singapore Land Tower 048623
Singapore
Tel +65 6429 2500
Fax +65 6226 2610
Vienna
Am Hof 8
1010 Vienna
Austria
Tel +43 1 537 56 80
Fax +43 1 537 56 8110
BCG
Amsterdam
Athens
Atlanta
Auckland
Bangkok
Barcelona
Beijing
Berlin
Boston
Brussels
Budapest
Buenos Aires
Chicago
Cologne
Copenhagen
Dallas
Düsseldorf
Frankfurt
Hamburg
Helsinki
www.bcg.com
The Boston Consulting Group
Hong Kong
Houston
Istanbul
Jakarta
Kuala Lumpur
Lisbon
London
Los Angeles
Madrid
Melbourne
Mexico City
Miami
Milan
Monterrey
Moscow
Mumbai
Munich
Nagoya
New Delhi
New York
Oslo
Paris
Prague
Rome
San Francisco
Santiago
São Paulo
Seoul
Shanghai
Singapore
Stockholm
Stuttgart
Sydney
Taipei
Tokyo
Toronto
Vienna
Warsaw
Washington
Zurich