The economics of the Internet, the new economy and opportunities for airports

Journal of Air Transport Management 8 (2002) 49–62

The economics of the Internet, the new economy and opportunities for airports David Gillena,b,*, Ashish Lallc b

a University of California, Berkeley, CA, USA School of Business and Economics, Wilfrid Laurier University, 75 University Avenue West, Waterloo, Ontario, Canada N2L 3C5 c Room S3-B1A-28, Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore

Abstract This paper provides an overview of how the new economy and the Internet have and are likely to change the conduct of business. The Internet creates value on both sidesFon the demand side by allowing firms to customize to suit specific consumer needs and on the supply side by reducing costs. Our particular interest is in identifying opportunities for airports, which are almost an afterthought in the travel industry. Our survey of online trends indicates that airports are essentially local brands and the value proposition lies in complementing the local economy. r 2002 Elsevier Science Ltd. All rights reserved. Keywords: Airports and e-business; Airports and the new economy; Online travel industry

1. Introduction Has the Internet redefined economics in the new economy? The Internet has emerged as a vital component of the new marketplace infrastructure. It has been aptly dubbed, as an airway, roadway, railway and seaway for 21st century business operations. As such, the Internet is capable of reducing distances thereby bringing people and businesses closer together, ideally making markets more efficient in both an allocative and productive sense. The terms e-commerce or e-business have been used to describe almost any activity associated with the Internet and the new economy. In many cases they have been used carelessly. The ranges of activities for which the Internet has and can be used are electronic data interchange (EDI), e-information, e-transactions, e-commerce and e-business.1 The first three are simply *Corresponding author. Tel: +1-519-884-0710 ext. 2469; fax: +1519-888-1015. E-mail addresses: [email protected] (D. Gillen), [email protected] (A. Lall). 1 EDI and other private networks continue to dominate corporate procurement. The Asian Wall Street Journal, May 21, 2001 reports on page T3 that in the year 2000, US$ 458 billion worth of transactions were conducted by US companies using EDI. In the same year, direct corporate purchases over the Internet were worth US$ 503 billion and those conducted using electronic B-to-B market places were worth $43 billion. Though, the latter two channels are expected to dominate transactions in the future, EDI is not expected to die anytime soon.

ways of producing more efficiently, of reducing transactions cost and of matching consumers with their preferred choice.2 They simply represent a new way of doing old things better but there is nothing new. They lower costs and the gains can be real or merely pecuniary. On the other hand true e-business and e-commerce reflect the enabling feature of the Internet; doing new things that in the absence of the Internet would not happen. An essential feature of these new e-businesses is rooted in their networks; one might argue they are rooted in networks and the economics of any business will obey the logic of networks. The new economy3 has three distinguishing characteristics; it is global, it favors intangible things (ideas, information, and relationships) and, it is intensely interlinked (rooted in networks). This does not mean that everything is new. A good example of ‘relationships’ occurs in the airline industry where aircraft are smarter from both external R&D and internal communication of the different parts. This results in increased productivity, safety and provides opportunity for new outcomes 2 In effect moving them closer to the point in characteristics space that matches all the characteristics they desire and in the desired proportions. 3 We are using the new economy to describe e-business and ecommerce; business that would not exist in the absence of the Internet and which are rooted in electronic networks.

0969-6997/02/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII: S 0 9 6 9 - 6 9 9 7 ( 0 1 ) 0 0 0 4 1 - 2

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D. Gillen, A. Lall / Journal of Air Transport Management 8 (2002) 49–62

(better maintenance programs). At the same time the planes talk to one another in real time so they can better utilize the airspace; this is called Free Flight Phase 1 in the US.4 A second principle difference between old and new economies is value came from scarcity and closed systems in the old economy and it comes from openness and plenty in the new economy. There is a downside to all of this euphoria regarding the new economy, however. It may be simply expressed as: ‘What the Internet giveth, logistics taketh away’. Providing consumers and businesses with more choice from multiple sources can reduce transacting time and costs but at the end of the day, tangible products still have to be delivered to market. Having B-to-B and B-toC are, in many if not most cases, e-information and etransactions with elimination of some middlemen and or warehousing steps. These types of transactions provide the first opportunity for airports. Increasing the turnover rates of goods (like the velocity of money) and linking customers with producers means many orders and more packaging to more destinations. In the old economy warehouses acted as buffers for incomplete demand information and we substituted the wholesale system for networked information. Are these opportunities or threats? The second set of opportunities for airports in the new economy, come from the information flows and network characteristics of the new economy. Steel produced in 1990 is better than steel produced in 1950 because the former contains more information (or embodied technological progress). This represented an evolution where information was transferred in a sequential way from the laboratory to the product. But the new economy provides an opportunity for continuous information flows in real time. A chip in a credit card contains information on customers. A chip in an automobile component stores information on the component itself and its performance and this information can be shared. New vehicles are ‘smarter’ than older ones because components communicate with a central computer or with each other, such as, anti-lock braking systems and all-wheel drive. As a result performance is better. There is no reason an airport cannot be networked in the same way where the various parts communicate with one another by having chips in different locations providing information on everything from wear and tear (scheduling maintenance), to locations of equipment, to identifying potential conflicts or problems. But this is a systems view. The airlines understand the concept, and value, of a network. It is not clear that airports 4

The new economy tools of trucking include bar codes, radios, dispatch algorithms, routing hubs and eventually even roads themselves through intelligent transport systems. These tools follow the logic of a network even though the truck still has to be driven the oldfashioned way.

appreciate this idea. They have traditionally viewed themselves as nodes and make decisions only in this context.5 In this paper we provide two streams of information. First, we examine the underlying economics of the Internet and the so-called new economy, expanding on the themes introduced above. In particular, we are interested in network effects, the role of information, declining marginal costs (increasing returns) and trying to understand the drivers, mass customization and apparent vertical disintegration. Do these features lead to fundamental differences in business strategy between the so-called ‘smokestack’ economy and the new economy? How do these features relate to the ‘airport business’? Second, we examine the activities of airports in their use of the Internet to enhance their business proposition. Here we concentrate on B-to-C applications. The insights gained in this discussion are then used to provide suggestions for future direction and opportunities for airports both to do new things and to do things better.

2. Features of the new economy The emerging literature describing the new economy states that it is based in networks and installed base and exhibits ‘increasing returns’. Furthermore, the newer part of the economy is knowledge based whereas the traditional economy is processing based. These particular features lead to quite different characterizations of how the economy works. In Fig. 1 the left pane (a) reflects the traditional market with an upward sloping supply curve and a downward sloping demand. These curves owe their shape to diminishing returns, diminishing marginal utility and diminishing marginal productivity. On the right side (b) is the characterization of the new economy. As demand grows it is valued even more and thus more demand leads to yet more demand due to higher value. The value of the network increases as some exponential function of the number of users; generally by the square. This idea is not new. As Liebenstein’s classic work, ‘‘Bandwagon, Snob and Veblen Effects’’ published in 1950, points out that demand curves are more inelastic when consumers derive positive value from increases in the size of the market. The inelasticity is a result of their shift outward reflecting higher value. Thus the demand curve is really a locus of observed demands that are points on traditional demand curves. Along with increasing returns, marginal costs are very low. Why? We believe it is a result of a number of factors and not entirely those that we traditional ascribe 5

This may not be surprising since they may not be able to appropriate the rents from the network the way airlines are able to do so.

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D. Gillen, A. Lall / Journal of Air Transport Management 8 (2002) 49–62

$

$

S

D

S

D 0

Output (a)

0

Output (b)

Fig. 1. (a) The old economy and (b) the new economy.

to causing increasing returns. The supply curve we observe in the new economy is a frontier, a locus of cost/ consumption combinations at different levels of output or size. The costs take their position due to four factors. Firstly, low marginal costs due to high up-front costs. Knowledge based products are difficult to design and bring to market. They are heavy on know-how but light on resources, hence the low marginal costs. Secondly, the cost curve is shifting down from learning curve effects. But these are not simply on the supply sideFwe learn to do it better as we make more. More importantly, on the demand side, customers need to invest time to learn the capabilities of a product (flying an Airbus or maintaining a Boeing) and on subsequent (or derivative) versions of this product they need only update these skills. As a result they will demand more of them.6 Products that gain market advantage will stand to gain further advantage. Thirdly, there are what some have termed network effects, but we would call complementors (based on Brandenburger and Nalebuff’s (1996) theories of Co-opetition and the ValueNet). Many knowledge-based products need to be compatible with a network of users. If a product becomes the standard the demand will be substantially increased (e.g. Java). Again note this is an output effect. The last source of cost savings is technological change. New technologies change the mix of inputs, the amount of inputs and even the required inputs. All can lead to lower costs. Among all the conditions listed above for low costs or increasing returns, two are related to larger outputs and two are related to shifting cost curves. This distinction is very important since in the past bigger has been cheaper and therefore the conclusion was drawn that bigger causes cheaper. But if the source of the cost savings arises from shifts in the cost function, the implied

causality is reversed, cheaper causes bigger. The implication of the difference between these two can be enormous since the role of market restrictions in achieving lower costs is to create monopoly rather than to promote openness and broad market appeal. Network effects are another concept that has been treated somewhat carelessly in the new economy literature. First, they are referred to as ‘network externalities’ and this label is appropriate only if the affects are not internalized. Consumers are unlikely to do so, though if the network is owned, the owner would (or should) internalize the ‘benefit’ of the broad base of users.7 Once internalized, they are no longer externalities. Airlines that offer broad geographic coverage themselves or in an alliance internalize some or all of the value of the network in their yield management practices, for example. A second point regarding externalities is they are not homogeneous (Katz and Shapiro, 1994). If business strategies in the new knowledge based economy are based in part on the network benefits, it is important to distinguish between direct and indirect effects. The direct externality affects real resources and is a real benefit whereas indirect effects are pecuniary; because of the large installed base of PCs, the price of floppy discs has fallen. This is a pure transfer and not an externality. The internalization of network effects is of particular importance to airports. The value of connectivity to other airports is always positive; the network externality is positive. But if airports fail to internalize this effect they will be too small and/or they will have too few destinations to serve. If airports can internalize these benefits the size of the network will be optimal. An interesting side aspect to the network size issue is that it does not depend on the technology or type of networks (which may be competing). What is the optimal size of

6 Note this is an effect that moves us along the marginal cost function.

7 If neither internalize the network externality, the network will be smaller than is socially optimal.

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an alliance? Clearly, if there are network externalities, and we believe there are, policy should not discourage broadly based alliances. Furthermore, since competing networks confer consumer benefits, one could argue that large network coverage by two or more competing networks is superior to one very large network. The issue of competing networks and our discussion earlier regarding increasing returns raises the issue of choice among network technologies. For example, is it better to have a number of international hubs in Europe (Schiphol, Frankfurt, Heathrow, and Charles de Gaulle) or should there be one hub with many spokes. These are two different network technologies. If there are positive network effects that raise the value to consumers as markets get larger, larger competitors have an everwidening advantage over smaller competitors. If production costs are constant or falling, network effects are a sufficient condition for natural monopoly. But if marginal costs do rise, there is a limit to the size of the network. Some have argued (Arthur, 1996) that traditional economy industries will exhibit diminishing returns while new economy (knowledge based) industries exhibit increasing returns. However, once we acknowledge that consumers have a variety of tastes and there are capacity constraints even in the new economy, multiple networks can co-exist.

3. Lessons for airports Airports might be thought of as mixing old and new economies. The traditional processing world is the one in which they move airplanes and people. The knowledge is in the aircraft, runways and terminals. The new economy services are the idea, knowledge, relationship services they can and do produce. The travel portal discussed below is a new economy product. A further distinction we see is one familiar in economics in distinguishing competition in the market from competition for the market. Traditional industries compete in markets and need to optimize; produce at lowest cost for the deemed quality desired in the market. Knowledge based firms complete for the product because of network effectsFwinner takes much of the market. The objective is not one of optimization as much as identification and adaptation. Viewed as a local producer, airports are old technology while viewed in the context of networks; airports are a new economy industry. Airport management will therefore be faced with a tension between trying to provide the least cost way of moving aircraft and people, and trying to strategically position the airport in the competing networks and offering new services that are a natural grouping with airports. This interdependence fits nicely into the notions of complementors alluded to earlier

which recognize positive feedback, and apply across markets as well as within markets. Arthur (1996) states at page 106, ‘‘In fact, if technological ecologies are now the basic units for strategy in the knowledge based world, players compete not by locking in a product of their own but by building websFloose alliances of companies organized around a mini-ecology.’’ Airports progress by building an alliance of services, some with other airports, that allows them to exploit increasing returns and network presence. While it is true that local market passengers would seem to place a limit on demand, having an international hub does not. Branding yourself to handle long-haul connecting passengers with services and connectivity will yield rents. How these rents are shared between dominant airlines at the hub and the airport is another issue. What are some of the key features that an airport should focus on in embedding the new economy into its current products and to develop new products? As we have emphasized earlier since network effects are so important, it is the value of the network not the firm (airport) that should be maximized. Secondly, the Internet provides more choice and the opportunity to move customers to their desired position in product space but this also increases costs. More information must be processed and sifted through prior to making the final choice. Therefore, keep the costs of attention and the costs of participation low.8 Automate as much as possible to increase information and create digitized service. Placing a chip in a door allowed hotels to change keys electronically, to monitor movements and improve security. Being able to deliver information to passengers, airlines, personnel and other users by having more information on the airport system will add value. And the passengers and shippers can provide the airport with more information as well. Until recently we had a warehousing system that was used as a buffer against incomplete demand information. With networked information this should change and the number of intermediaries reduced if not eliminated. The literature on the Internet and new economy emphasizes the notion of relationships. Because network effects are so important, community is said to precede commerce. This is founded on three basic ideas. First, networks cannot be installed but must grow and emphasizing relationships means the investment in the network will grow much faster. Second, it is possible to have customization. New technology can provide mass customization so being part of a network does not mean homogeneity. Third, the network economy restores the 8 Readers Digest became so popular because it allowed people to have a capsule summery of books that they would otherwise have time to read. The value proposition was based on the key idea that what was scarce was time.

D. Gillen, A. Lall / Journal of Air Transport Management 8 (2002) 49–62

symmetry of information or knowledge. There is less chance of incomplete information or asymmetric information, therefore we should have less adverse selection and the costs of writing and enforcing contracts should be reduced. Since the customer will, in many cases be part of the production process (e.g. self check-in makes each passenger a check in agent much the same way that using an ATM machine makes one a teller), this is a new relationship between customers and suppliers. It is then important that customers and suppliers be equally smart and all be connected (Napster is a good example of connecting customers to each other); lateral connectivity provides more information that vertical connections. The more interconnected is a technology the more use it will receive and hence the more value it will have. A clear strategy to emerge from this thinking is to maximize the opportunities for others to participate in your network. Airports should link with hotels and tours and the local economy. The connectivity of a network is not just about destinations it is also about origins.

4. E-business issues of practice The Internet reduces transactions and search costs. This increases efficiency. In addition, the medium also serves an enabling function in that it allows for implementation of new business models. This section provides a brief discussion of both these features. In particular, it examines the impact of reduced search costs on price competition. Or, has the Internet brought markets closer to the ideal of perfect competition? The enabling features discussed here include hypermediation and syndication. Lastly, it provides an overview of existing e-business models. 4.1. Price competition The Internet reduces costs both for buyers and sellers and facilitates price comparisons. It also allows for low cost provision of detailed information which can accessed anytime. Yet a few firms dominate many online markets and cyberspace has not eliminated price dispersion. The eventual impact on prices is product dependent. Thus we expect higher dispersion for products where non-pecuniary considerations such as after-sales support are important to the purchase decision. Given low startup costs, there are likely to be numerous sellers who are just a click or two away and consumers may have preferences regarding quality of service, trustworthiness of suppliers and security of transactions. Though the Internet allows consumers to find the best price, it also allows sellers to customize, bundle and price discriminate.

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According to Shapiro and Varian (1998) the Internet turns everything into a commodity. Reverse auction sites in particular, such as Priceline.com, facilitate this process by helping buyers to identify price floors and meta-search engines such as Copernic automate the process of making price comparisons. Sinha (2000) argues that the impact of the Internet is analogous to that of the impact of private labels or ‘‘no-name’’ bands at supermarkets on sales of name brand goods. Private labels provide consumers the information that a product of comparable or near equal quality can be purchased for much less than major brands. Thus, forcing major brands to cut prices. In this example, price competition erodes brand loyalty. For example, brokerage service has been turned into an undifferentiated product with the emergence of online services and margins have been driven down. Further, many ecommerce companies overly emphasize building a subscriber base and to do this they reduce prices. This is also happening in the B-to-B world where exchanges offer competitive bidding for products and allow procurement at the lowest cost. Using price discrimination, bundling products and producing better products are some strategies firms can use to counter this trend. Both online and traditional shopping are affected by non-price variables. For the purchase of specialized books (in Economics, for example) Amazon.com and Barnes & Noble differ in one significant respect. Though both firms may quote identical prices, it is highly likely that Amazon will require the consumer to place a special order which can take up to six weeks whereas Barnes & Noble will have the book in stock. This probably can be explained by differences in procurement methods and back-end relationships with wholesalers and publishers. If a consumer wishes to purchase more than one book, the availability of the specialized book essentially dictates the choice of vendor, regardless of any price differences. This is because transportation costs are non-linear in that they have a fixed and a per-book component, which makes it unattractive to unbundle the order and purchase from both vendors. Typically price differences are not significant enough to outweigh the saving in transportation costs. Clearly, in this case it is not loyalty or prices that drive the purchase decision but the procurement policies of vendors, which ultimately affect timely availability and therefore purchase. Another example is the Dell.com model or what Slywotzky (2000) refers to as the ‘‘choiceboard model’’ where the consumer puts together the product based on their needs. The consumer can make very general price comparisons for computer systems, but it is difficult to make component based price comparisons. In the case of Dell, good customer service and product reliability are key business driversFnot just prices. Thus customization benefits both consumers and producers.

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Consumers can buy a made-to-order system, but this allows Dell to price discriminate.

* * *

Horizontal PortalFYahoo.com Vertical Portal (Vortal)FWebMD Affinity PortalFWomen.com

4.2. Disintermediation and hypermediation The Internet creates disintermediation in the bricks and mortar world by connecting consumers directly with sellers, but it is creating hypermediation online (Carr, 2000). Hypermeditation refers to the process of conducting online transactions. The typical buyer goes through many intermediaries such as the phone company, the ISP, the search engine, the company that executes the search, the vendor, the credit card company and the post office or courier company that delivers the product. Volume and efficiency makes microtransactions possible and many of the intermediaries are literally getting paid in pennies. An intermediary such as Inktomi.com that executes searches, is probably making millionsFone penny at a time. This would be impossible in the bricks and mortar world. 4.3. Syndication Syndication works with information goods because the same information can be used by a large number of consumers. Thus information goods are about abundance and not scarcity. They cannot be destroyed and can be re-packaged. Syndication also requires what Werbach (2000) refers to as modularity. A syndicated good does not usually constitute an entire product, but is just part of whole. The traditional organizing model is linear, with originators creating content, syndicators sourcing from various originators and packaging it, and distributors delivering content to consumers. The Internet allows this linear chain to be replaced by a network. Originators on the Internet expand the scope of content that can be syndicated and facilitate global distribution. Often the same company plays all three roles as in the case of the Motley Fool. It originates content that it uses on its own website (Fool.com). It offers content through syndicators such as iSyndicate. com. It acts as a syndicator itself and provides commentary on financial markets to sites such as Yahoo!, to newspapers and to radio stations. It also distributes syndicated news stories from wire services such as Reuters. 4.4. E-business models There are various models of doing business on the Internet. They include: * * * *

Business-to-consumerFAmazon.com Consumer-to-consumerFEbay.com Consumer-to-businessFPriceline.com Business-to-BusinessFChemdex.com

Kaplan and Sawhney (2000) provide a good classification of B-to-B models. They provide a matrix that matches the type of product with the nature of the transaction. Businesses buy two types of inputs: those that are specialized in nature or industry specific (or ‘‘manufacturing’’ inputs) and those that are general in nature and can be used across industries (or ‘‘maintenance repair and operating’’ inputsF‘‘MRO’’). Specialized inputs such as aircraft parts are sourced vertically or from industry specific suppliers such as Boeing. General inputs such as stationary and computers are sourced from horizontal suppliers or suppliers that sell across industries such as Dell Computers. Firms use either ‘‘systemic’’ sourcing or spot sourcing to obtain inputs. The former involves long-term relationships between buyers and sellers and may require vendor qualification. Spot sourcing is more common for commodities and the identity of buyers and sellers is not important in such transactions. Different types of ‘‘B-to-B Hubs’’ have evolved to either reduce transactions costs or to eliminate price and/or demand volatility. MRO Hubs such as Ariba.com are horizontal markets that allow systemic sourcing. They deal in low value goods with high transactions costs and provide catalogues from many suppliers and use third party logistics for fulfillment. Yield managers are horizontal markets that allow spot sourcing of MRO inputs. They deal with businesses that have a high degree of price and demand volatility and where expansion and contraction of capacity is expensive. Examples include Onemedia. com which sells slots for all types of media; Capacityweb.com allows OEM and contract manufacturers to trade manufacturing capacity; in addition there are yield managers for capital equipment, labour (Employease. com) and electricity. Exchanges on the other hand, are vertical markets that allow for spot sourcing of manufacturing or specialized inputs. They are similar to traditional exchanges and help to smooth out demand and supply volatility. Examples include Paperexchange.com, which has members in 80 countries and content in 7 languages. It has a logistics partner for e-fulfillment. Catalog Hubs allow systemic sourcing of manufacturing inputs and like MRO hubs they reduce transactions costs and create value by aggregation and matching. Examples include Commerxplasticsnet.com for plastics, resins, compounds and polymers; and Sciquest.com for scientific and life sciences products such as antibodies. Ehubs can be either neutral or biased. Neutral E-hubs act as independent third parties and favour neither buyers nor sells. Forward aggregators are seller-biased E-hubs

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that aggregate supply and operate downstream in the supply chain. Reverse aggregators are buyer-biased Ehubs that aggregate demand and operate up the supply chain to bargain with sellers. In general terms the bias depends upon the side of the market that is fragmented and neutral markets are fragmented on both sides. An increase in the number of participants in a biased market creates value on only one side of the market. For example, in a seller-biased market, an additional buyer benefits sellers but not buyers. Neutral markets are better because they benefit both sidesFthe links are many to many since a seller can become a buyer or vice-versa.

Table 2 Internet penetrationFpercentage of population onlinea Region

1999 (%)

2005 (%)

North America Western Europe Asia Latin America Eastern Europe Australia/NZ

38 17 1 2 2 32

68 43 6 12 15 59

a

Jupiter Research, 2000

Table 3 Internet penetration forecastsFhouseholdsa Country/ region

5. Online trends The online population is expected to continue to increase, as is transacting online. However the opportunities are likely to differ across countries given differences in standards of living, access to technology, and the ability and willingness to adopt new ways of doing things. In this section we provide information on general trends relating to Internet penetration and usage. Later in the section we focus on the travel industry and current positioning of airlines, travel agents, hotels etc. In addition to providing an overview this will assist in determining what role if any airports might play in the online travel industry. 5.1. Internet penetration and demographics Jupiter Research reports that there were 255.8 million Internet users worldwide in 1999 (Table 1). North America had the largest share (45%) followed by Western Europe (25%) and Asia (20%). Internet penetration, measured as the percentage of a particular region’s population online was also the highest in North America (Table 2). 38% of North America’s population was online in 1999 followed by Australia and New Zealand (32%) and Western Europe (17%). Though this ranking of regions is expected to hold in 2005, Internet penetration in Western Europe Table 1 Number of Internet usersF1999a Region

Number of users in millions

Percentage share in world

North America Western Europe Asia Latin America Eastern Europe Australia/NZ Total

115.8 64.5 49.9 10.6 7.9 7.1 255.8

45 25 20 4 3 3 100

a

Jupiter Research, 2000

Germany Austria Switzerland UK Ireland Sweden Denmark Norway Finland Netherlands Belgium Luxembourg France Italy Spain Portugal Greece W. Europe USA a

Number of online households in millions

Percentage of households online

2000

2005

2000

2005

9.7 0.6 0.8 6.7 0.2 1.9 1.1 0.9 0.8 2.5 0.8 0.0 3.5 2.5 1.6 0.2 0.3 34.2 53.0

18.7 1.4 1.7 12.6 0.5 2.5 1.5 1.3 1.3 4.3 1.7 0.1 9.9 8.0 4.3 0.9 1.1 71.6 80.0

25 19 21 28 12 48 47 48 34 37 19 25 14 12 13 7 7 22 51

47 41 45 51 35 61 63 63 52 59 39 48 38 35 33 26 27 43 74

Jupiter Research, 2000.

is expected to increase by about two and a half times over the period 1999–2005. In the year 2000 there were 53.5 million online households in the United States and 34.2 million in Western Europe. Household penetration rates stood at 51% and 22%, respectively. In absolute terms, the spread between USA and Western Europe is expected to narrow considerably by 2005 (Table 3). Germany and the United Kingdom together accounted for a little less than half of online households in Western Europe and these numbers are expected to double by 2005. Penetration rates however are the highest in Scandinavian countries and stood at about 50% in 2000. By 2005 almost three-quarters of all American households and about two-thirds of all Scandinavian households will be online. Data at the individual level show similar patterns (Table 4). In absolute terms Germany has been leading in Western Europe, followed by the United Kingdom and this is also expected to be the case in 2005.

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Table 4 Internet penetration forecastsFindividualsa Country/ region

Germany Austria Switzerland UK Ireland Sweden Denmark Norway Finland Netherlands Belgium Luxembourg France Italy Spain Portugal Greece W. Europe USA a

5.2. Online activities

Number of online individuals in millions

Percentage of population online

2000

2005

2000

2005

18.9 1.7 2.0 18.8 0.7 4.6 2.6 2.3 1.9 5.1 2.2 0.1 10.7 6.6 5.4 0.8 0.7 85.0 122.0

39.2 3.4 3.3 31.0 1.4 5.6 3.5 2.9 2.8 9.6 4.1 0.2 24.2 20.4 13.4 2.7 2.9 170.6 194.0

23 20 28 32 18 51 48 51 37 32 21 30 18 11 14 8 6 22 44

47 41 46 52 36 62 63 63 53 58 40 49 39 35 34 27 27 43 68

Jupiter Research, 2000.

Table 5 Gender and age distribution of Internet users in 1999a Country

Users Gender (millions)

Age

Male Female Under 35 35–54 55 and over (%) (%) (%) (%) (%) Netherlands 3.9 Italy 4.0 Germany 14.0 France 7.8 Norway 2.0 UK 14.2 Denmark 2.3 Spain 3.9 Finland 1.7 Sweden 4.3 USA 104.0 a

65 64 61 59 58 57 55 55 54 52 50

35 36 39 41 42 43 45 45 46 48 50

50 63 53 67 48 47 46 64 47 46 55

42 32 39 27 40 42 39 31 46 41 35

8 5 8 6 12 11 15 5 7 13 10

Jupiter Research, 2000.

Table 5 shows the gender and age distribution of Internet users for the United States and selected Western European countries. In 1999 the gender split was even in the United States where as 52–65% of Internet users in Western Europe were males. In Italy, France and Spain, about two thirds of Internet users are under 35 years of age. In Scandinavian countries, there is more equity across age groups; 46–48% of Internet users in 1999 were under the age of 35 and 39–46% were between the ages of 35 and 54. Scandinavian countries also have a higher proportion of users aged 55 and above.

What do people use the Net for?9 In the United States, e-mail is the most popular activity, followed by using search engines. Researching products and services is a very close third.10 This ranking of activities holds for all age groups. The fourth most popular activity for those under 50 years of age is browsing local content and for those 50 and aboveFelectronic greetings and postcards. Travel research is the 12th most popular activity and its popularity increases with age. 48% of users 50 years and above use the Internet for travel research; they report this as their sixth most popular activity. In contrast, only 37% of those between the ages of 19 and 35 use the Net for travel research; this is their 14th most popular online activity. Internet users can be segmented into buyers or those who transact online; browsers who research online but shop off-line; and non-shoppers or those who conduct no shopping related activities. Approximately 40% of Internet users in the United States are buyers, another 40% are browsers and the remaining 20% are nonshoppers. Veterans of the Net, or those who have been online for two or more years comprise 78% of online buyers. Thus online tenure is the key predictor for online commerce. Other indicators include age and income group. Browsers tend to be younger and have lower income. Non-shoppers also have lower income and tend to be older. The top product categories researched by online buyers and browsers are books, CDs, tapes, albums and travel purchases. About a quarter of those who intend to make a purchase online visit two sites before making a purchase and about half visit between three to five sites. Online research also influences off-line purchases. In this regard most of the online activity is focused on identifying prices and selection of product brand and manufacturer. Table 6 shows the number of online buyers in Western European countries and in the United States and their expenditures. In the United Kingdom there were 5.8 million online buyers in the year 2000 and their numbers are expected to triple by 2005. Germany was second in Western Europe with 4.9 million buyers and their numbers are expected to quadruple by the year 2005. Together these two countries accounted for more than half the online buyers and 60% of the online spending in Western Europe in the year 2000. In the year 2000 online buyers in both Germany and the UK spent an equal amountFapproximately Euro 2 billion. Online 9

The data in this section pertain only to the United States and are based on a survey by Jupiter Research (2001b). The sample size is 2312. 10 Popularity is defined as monthly or more frequent use. The respective percentages are 93%, 79% and 78%.

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D. Gillen, A. Lall / Journal of Air Transport Management 8 (2002) 49–62 Table 6 Online buyers and spendinga Country/ region

Germany Austria Switzerland UK Ireland Sweden Denmark Norway Finland Netherlands Belgium Luxembourg France Italy Spain Portugal Greece W. Europe USA

Table 7 Top 5 categories for online spending in billions of euroa

Online buyers in millions

Online spending in billions euro

2000

2005

2000

2005

4.9 0.3 0.4 5.8 0.1 1.4 0.6 0.6 0.4 1.1 0.4 0.0 2.0 1.1 1.0 0.1 0.1 20.4 39.3

21.2 1.6 1.6 17.9 0.6 3.1 1.7 1.5 1.4 4.5 1.7 0.1 12.1 8.2 5.7 1.0 1.0 85.0 85.0

2.2 0.1 0.2 2.4 0.0 0.6 0.2 0.2 0.2 0.3 0.1 0.0 0.6 0.2 0.2 0.0 0.0 7.6 26.9

18.2 1.1 1.3 17.3 0.4 2.8 1.4 1.3 1.1 3.2 1.1 0.1 7.6 4.2 2.7 0.4 0.4 64.4 82.9

a

Jupiter Research, 2000. Note: US forecasts are for the year 2003. US Spending is converted using 1 euro=1.041$

spending in both countries is expected to be about 7–8 times higher in 2005. Table 7 shows the top 5 product categories based on online spending in the United States and Western Europe. In the year 2000, travel and tours was the top category with airline tickets being the largest sub-category in the United States. This dominance is expected to continue into 2003. It is important to note however that this is not the most popular product category with online shoppers, at least in the United States Jupiter, 2001b). The top 5 in terms of popularity are books, music, apparel & accessories, software and toys. Travel is the 7th most popular product category. 5.3. Online travel trends Compared to 1998, consumers in the United States tripled their online expenditure on travel to $6.5 billion in 1999. This dollar figure represented about 5% of the leisure and unmanaged business market. Airline tickets accounted for about 77% of all online travel expenditure. The share of online travel expenditure is expected to grow to 14% ($28 billion) by 2005.11 Leisure dominates online travel across all product categories. In 1999, 80% of all online travels bookings were for leisure and the remainder for unmanaged business (Jupiter, 2000d). In 1999 51% of online bookings were 11

The data in this section are for the United States.

Product categories

Travel and Tours Of which air tickets Computer hardware and software Books, music and videos Groceries Apparel Others Total a

W. Europe

USA

2000

2003

2000

2003

2.3 F 2.1 1.1 0.8 0.6 0.7 7.6

10.0 F 8.7 3.6 5.2 2.4 5.1 35.0

10.6 7.5 7.1 2.6 0.8 1.3 4.5 26.9

20.8 13.1 15.2 8.3 7.2 6.4 25.0 82.9

Jupiter Research, 2000. Note: US Spending converted using 1 euro=1.041$

done via agencies and the rest via suppliers. The share of suppliers is expected to expand to 55% in 2005.12 Jupiter (2000a, d) expects growth to slow down, but forecasts that the online travel market in the US will be worth $28.2 billion in 2005 and that in Europe will be worth $16.9 billion, compared with $2.2 billion in 2000.13 Online buyers use three sources to book travel. These include online agencies and or travel portals such as Traveloicty.com and Expedia.com; suppliers site such as those of airlines, hotels or car rental companies; and through referrals from one supplier’s site to another’s.14 Based on referral patterns in the United States, Jupiter (1998) expects airlines to become ‘‘online brokers’’ or the main beneficiaries of the disintermediation underway in the travel sector.15 Airlines provide a large number of referrals to other suppliers whereas they receive very few. A survey of Executives conducted by Jupiter Research revealed that: *

A high number of bookings are passed along from: * Airlines to hotels16 * Airlines to car rental companies17 12

Site registration acts as a deterrent for about 40% of online users, so many travel sites have relaxed this requirement. About 70% of the travel sites in the US do not require registration (Jupiter, 2000e) 13 Suppliers such as Buytravel.com (United’s alliance with Buy.com) and ‘‘T2’’Fa four airline consumer-direct alliance are expected to capture about 55% of the online travel business in 2005 (Jupiter, 2000b). 14 Tour operators and cruise operators do not have a large online presence partly because their products are more complex compared to airline tickets. The latter have become like commodities. Supplier sites typically lack product breadth and do not provide for comparisonshopping. Online travel agencies rather than suppliers dominate portal real estate. 15 Jupiter (1998) estimates a cumulative saving in commission costs for airlines of about $689 million over the period 1998–2002. 16 75% of hotel executives surveyed indicated that they received some referrals from other supplier sites but these represented only 4% of their total online bookings (Jupiter, 1998). 17 15% of online bookings of car rental companies were referrals from other supplier sites (Jupiter, 1998).

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Some number of bookings are passed along from: * Hotels to car rentals * Car rentals to hotels * Hotels to airlines * Cruise operators to airlines * Tour operators to airlines * Cruise operators to hotels A very low number of bookings are passed along from: * Cruise operators to car rental companies * Car rental companies to airlines * Airlines to cruise operators * Airlines to tour operators

The industry as a whole seems to have moved away from worrying about channel conflict to channel confluence and agencies are using Co-opetition, or working together with suppliers to help sell distress inventory, to develop new products and provide frequent traveler rewards for booking via their sites. Hotel rooms, cruises and tours are relatively more difficult to sell online compared to airline tickets and rental cars because they have more attributes or are more complex products. This is not surprising as air tickets and rental cars are search goods whereas accommodation and tour packages are experience goods. Search goods, are easier to sell using the Internet than experience goods.18 The quality of search goods can be assessed prior to purchase by visual inspection or by evaluating the objective characteristics of the product.19 The quality of experience goods can only be assessed after the consumer uses or consumes the product.20 Each of these goods has an associated form of advertising. Informational advertising is usually associated with search goods and sellers are informing buyers about the objective characteristics of the product. Such advertisements are usually found in print media. Persuasive advertising is associated with experience goods and sellers attempt to influence preferences and tastes of buyers. Television is the usual medium for persuasive advertising. A shampoo advertisement on the television rarely provides the exact chemical composition of the product; instead it provides visually pleasing images of how good one’s hair might look after using the product.

Clearly selling more travel products requires more content to support online sales. The current approach to content provision is brochure-like. Context specific content is where the value lies. Content is important as 61% of online consumers search for information about travel products online (Jupiter, 2000b). According to a recent Jupiter Consumer Survey, 49 percent of prospective travelers use the Internet to decide where to go on vacation.21 Local content is the untapped opportunity in the travel sector (Jupiter, 2000c). In the United States most Internet users rely on their local newspaper or its website to obtain local content and would consider accessing more local information online if it was more relevant and better targeted. Though content is desirable, it is not necessarily a very effective tool for customer acquisition. From a business viewpoint a content rich site has an additional cost to recoverFthe cost of creation and hosting of content. In addition there is horizontal free riding on content. For example, Amazon.com provides tables of contents for books where as Barnes & Noble does not. Consumers can obtain information from one source and buy from another. Content that is not product related is largely ignored and survey research indicates that most online shoppers are looking for two things:Flow price and choice.22 Online vendors should use content creatively to build relationships with consumers rather than to drive transactions. Reichheld and Schefter (2000, p. 106) suggest that the Internet is not about price but about building trust: ‘‘Contrary to the common view that Web customers are fickle by nature and will flock to the next new idea, the Web is actually a very sticky space in both business-to-consumer and business-to-business spheres.’’ Online customer acquisition is expensive and it takes a number of years to recoup the investment. In some sectors more than half of the customers defect before the break-even date.23 For the online apparel market, Reichheld and Schefter (2000) find that repeat customers spend twice as much after the second year of their relationship than in they do in the first six months. They estimate the typical customer acquisition cost in this product category to be about $53 with 1.1 years required to break even. 15% of the customers defect before the break-even point. The attrition rate prior to reaching

18 There are some exceptions, for example computer software is an experience good and also very easy to sell online. Many software vendors provide free trials prior to purchase to allow consumers to assess the products. 19 Objective characteristics are also sometimes referred to as thirdparty verifiable and serve an important role in dispute resolution, should they arise. 20 A third category is credence goods where the consumer relies on assurances of the provider that the job was well done. Medical care falls in this category and one of the roles of a Medical Association or similar certification body is to assure consumers that they can expect from their physician, a certain ‘acceptable’ level of competence.

21 Mapquest.com has been mentioned frequently in Jupiter research reports as ‘‘standing alone’’ in providing objective destination content. This site provides street maps for airports in the United States and also provides information on the general neighbourhood in terms of location of businesses, entertainment and sporting facilities. 22 74% of consumers in the US buy online because of price (Jupiter, 2001a) and an overwhelming number have a specific product in mind when they shop online. 23 Reichheld and Schefter (2000) estimate that less than 20% of online companies track customer retention even though the medium is ideal for this purpose.

*

*

D. Gillen, A. Lall / Journal of Air Transport Management 8 (2002) 49–62

breakeven is estimated to be about 40% for consumer electronics and more than 60% for online grocery sales. They cite the Vanguard Group a mutual fund company as an exemplary example of putting relationships before sales. Vanguard spent over $100 million to develop their award winning website with the intent of assisting customers in making informed and better decisions. Indeed contrary to popular Web strategy, they made it difficult for customers to use the Website for transactions by requiring them to upgrade to 128-bit encryption browsers and mailing their passwords to them rather than sending them by e-mail. The strategy paid off as Vanguard’s site accounts for 40% of the company’s interactions with customers. Vanguard’s advertising expenditures are one-tenth those of its competitors but it acquires new customers faster than most.

5.4. Travel related access venues Though an overwhelming number of Internet users use PCs located at home or at work, other locations are becoming more popular. As with online shopping, veteran users rather than novices, are more likely to seek out alternative access venues. There are variations across income groups as well. Less affluent consumers in the United States are more interested in community related venues such as public libraries, government offices or post offices and shopping malls or supermarkets. More affluent consumers in the United States are relatively more inclined to using travel-related locations (Jupiter, 2000e). Though the likelihood of use at a particular venue may vary across income groups, the relative attractiveness of venues does not. Hotels are most popular, followed by airports; cruise ships; and lastly airplanes.24 The same is true for tenure on the Internet. Though the importance placed on a venue varies based on tenure; regardless of tenure, those online prefer hotels to airports.25 Airports ranked poorly with households without an Internet connection. 49% of respondents indicated that they would access the Internet from a public library or a school; whereas only 3% would do so from a hotel or an airport.26 Jupiter Research predicts that there will be about 2000 Internet Kiosks in US airports by the year 2002 and these will be accessed by 4% of flyers. 24 A Jupiter Research (2000f) survey on ‘Nomadic Access’ indicates that 50% of higher income (>$75 k) respondents indicated an interest in access at airports. The numbers for middle ($50–75 k) income and low (o$50 k) income respondents are 38% and 38%, respectively. This survey was conducted in the United States and the sample size was 1401. 25 Jupiter (2000f) reports that 44% of veterans, 34% of intermediate users and 29% of novices perceive airports to be a valuable access venue. 26 Jupiter/NFO Survey, 1999. Sample sizeF636.

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6. AirportsFsources of demand and revenue The demand for the services of airports is driven by the demand for air travel. The two main drivers of air travel demand are wealth or per capita GDP and prices. Passenger traffic handled by airports primarily belongs to one of three categories: originating, transfer, and transit. Originating passengers are sourced from the local catchment area of the airport and though catchment areas may overlap in some locations, airports have a monopoly over originating passengers. Originating international passengers are more valuable to airports than originating domestic passengers because airports generally charge airlines more for departing international rather than departing domestic passengers. In addition, international passengers spend more time at airports and therefore more money.27 Transfer passengers disembark at an airport and depart on another flight without going through customs and immigration formalities at the transfer point. Transfer traffic depends on the range of connections available at an airport, the ticket price, and location, to the extent that passengers may be reluctant to transfer at airports that lie in a direction opposite to that of their final destination.28 Compared to the market for originating traffic, the market for transfer traffic is more competitive. However, airports can only influence the passenger flow-through times; location is fixed and ticket prices depend upon airlines. Some airports such as Frankfurt, Paris (CDG) and Copenhagen are more dependent on their respective hub carriers Lufthansa, Air France and SAS than London (Heathrow and Gatwick) and Zurich. In the case of the former, the size and competitiveness of hub carriers determine transfer traffic growth. Among major European airports, transfer traffic as a percentage of total traffic exceeds 40% at Copenhagen, Frankfurt Zurich and Amsterdam.29 Transit passengers stop at an airport but do not disembark. Since these passengers stay on the plane while it prepares for the next leg of its journey, they are of low value to an airport. The transit market is small in Europe but large in Asia. Singapore, Kuala Lumpur, Bangkok and Hong Kong have all developed transit businesses and competition is primarily based on price. Most airports have two primary sources of revenue. They are charges for use of infrastructure or aeronautical revenue and commercial revenue from retail operations and property. Aeronautical revenue is driven by traffic growth, as are revenues from retail operations. The latter also depend on spend per head. Property 27 Credit Suisse First Boston (2000) estimates that originating international passengers may be three times as valuable to airports as originating domestic passengers. 28 To passengers with a low value of time, there may be a trade-off between location of the transfer point and ticket price. 29 Fig. 17 in CSFB (2000).

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income is driven by traffic growth in so far as larger airports charge higher rents and by the rate of investment in property. At major European airports, aeronautical revenue is probably the largest component of revenues, but there are some exceptions. Vienna airport has a significant third revenue sourceFground handling.30 BAA has a high proportion of commercial revenue because it owns duty-free shops. Warburg Dillon Reed (1999) reports global duty and tax-free sales for the year 1997 to have been about $21 billion. Airport duty free retail was the most important segment valued at $9 billion and airport on-board sales, the smallest segment (14% in 1996).31 Europe has the largest share (about 45%) in global duty free sales, followed by Asia/Oceania (about 35%) and the Americas (about 25%).32

7. Conclusions: what can airports do? How airports use the Internet is likely to reflect how airports view themselves. A very minimalist view would be that an airport is an infrastructure supplier or a supplier of an intermediate input in the provision of air transportation services. What else do airports do? They provide some facilities, either themselves or through tenants, for the passengers they handle. The facilities vary considerably across airports however, most if not all airports have health facilities, currency exchange booths, duty-free shops and restaurants. Other tenants could include providers of travel-related services such as rental cars, hotel services, tour operators and the like. In addition airports provide parking facilities, ground transportation links through cars, taxicabs, buses and rail. Airports also provide a variety of services to airlines, including air-traffic control, baggage and cargo handling, catering, aircraft maintenance and land for cargo handling terminals and hangers. Lastly, they provide facilities to Government departments for immigration, customs and possibly health services. The description thus far is not exhaustive and perhaps from an Airport Manager’s viewpoint it may indeed be a rather poor description of what an airport does. Nonetheless, the above list is better than what one may be able to compile from websites of many ‘International’ airports. Airports are at the very early 30 CSFB (2000) reports that in 1999 34% of the revenue at Vienna airport was from ground handling. The airport has to introduce a third-party supplier in order to conform to an EU directive which came in effect on January 1, 1999. Regardless, the airport expects to maintain a dominant share. 31 Though airport prices are lower than those on the high street, WDR (1999) estimates that airport mark-ups are two to three times those on the high street. 32 Intra-EU duty free ceased as of June 30th, 1999. In 1996 intra-EU duty free sales were valued at around $2 billion.

stages of leveraging the power of the Web. The first initiative airports can take is to improve their websites.33 Three pieces of information most travelers require are the local weather, the local time and the exchange rate. Few Airport websites currently provide this information. The initial stages of using information technology involve attempting to replicate the physical world in cyberspace. Accordingly, Airports are trying to move merchandising to the Web but it is highly unlikely that the current variants are proving to be successful. Singapore’s Changi for example provides web-based pre-ordering of duty-free items and at the BAA website it is also possible to pre-order foreign currency. The devil however is in the details. The race between VHS and Betamax home video formats showed us that superior technology alone is not enough to get ahead. The continuing losses of Amazon.com tell us that selling commodities using the web can be quite a challenge even for companies that are global brands and models of ecommerce. Pre-ordering foreign currency and duty-free items is useful in that it saves the time one might spend browsing at duty free shops.34 However in its current form this service is unlikely to generate much excitement, let alone drive business-to-consumer e-commerce. Pre-ordering is similar to restaurant reservationsFpeople only make reservations at restaurants because seating capacity is limited. Regardless, those embarking on this venture may wish to consider some of the following issues even though none of them may prove to be a good value proposition. Firstly, registration requirements such as those at the Changi website are likely to act as a deterrent. Under the pre-order only system such as that at BAA, it is possible to pre-order items even if one enters false or fake information in every required field such as name, address, e-mail address, phone number, flight number and flight arrival/departure time.35 Back-end processes could be developed to ensure for example, that flight numbers entered by users are authentic.36 If BAA goes one step further and requires the customer to pay for the goods at the time of ordering there is no incentive to provide incorrect information. Clearly the value of the 33 Most airport websites are like digital brochures (see for example YVR). The importance of website design cannot be overstated. For example websites should use frames and left justified menusFthese are user friendly. The first page should be as light as possible to ensure fast loadingFthis is why Amazon.com hardly has any graphics on its front page. 34 Some passengers like to browse and others may do so because they have nothing better to do at an airport. 35 Shapiro and Varian (1998) p. 35, cite a survey which finds that 94% of web users have refused to provide information to a website and 40% have given false or fake information. 36 The Travelocity website does not process a request if the credit card number is not valid.

D. Gillen, A. Lall / Journal of Air Transport Management 8 (2002) 49–62

current service can be enhanced if the transactions can be completed at the website and the service includes distribution or delivery. The airport can take this model a step further and help integrate back-end operations of its tenants. Items ordered on the web for delivery to customers need not be stored and displayed in a showroom; they can be stored in a nondescript warehouse that can accommodate not just liquor and tobacco, but also books and electronic items. The front-end interface can be linked to a back-end inventory management system. The airport now becomes more than a landlord; it provides another marketing channel for its tenants and for smaller tenants it provides warehousing and inventory management solutions that they may not have implemented themselves. Airports that own duty free shops such as BAA could reduce procurement costs with business-to-business ventures with suppliers. Airports should seriously ask themselves if they expect to increase margins by selling duty free items such as tobacco and liquor online. The answer probably depends on the execution. Price competition is unlikely to boost profits particularly at high cost locations and a few low cost airports are likely to capture most of the business.37 Without online price information it is difficult to compare prices across locations and consumers are likely to be risk averse and purchase duty free items at point of departure rather than at the point of arrival.38 However online price information at just the destination or both the origin and destination airports allows consumers to compare prices and this may shift demand from one airport to another regardless of the pre-order service. If competition is on the basis of price alone (as it is likely to be for items such as tobacco and liquor) the cost leader will attract all the business and price competition between airports will drive down margins.39 Lastly, pre-ordering currency is a valuable service only if the currency one requires is expected to be in short supply.40 This is unlikely to be an attractive service for those embarking from countries with international currencies. Moreover it is unlikely that consumers will pay for currency using credit or charge cards due to the high interest rates associated with cash advances. An 37 A price comparison for a 1 L bottle of Chivas Regal using the websites of BAA and Singapore Changi Airport shows that one can save about SG$10 by buying at Changi Airport. 38 They are also likely to do this anyway because of longer dwell times at the airport from which they embark on their journey. Dwell times are determined by airlines rather than by airports. 39 Individual passengers need only compare prices at O-D pairs or triplets if there is a transfer, or stopover, but demand will shift in favour of the cost leader from all locations that it receives passengers from. 40 The BAA service offers lower commission rates on pre-ordered travelers cheques, but it is possible for other agencies (such as the AAA in the United States) do the same.

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online offering in itself does not generate new businessFmost book publishers have websites, yet it is more likely that consumers purchase from Amazon.com because it serves the role of an aggregator. How do others perceive airports? Most of the online travel survey research we have drawn from above does not even mention airports even though air travel is impossible without airports. Transport demand models classify the dwell times at airports as access and egress costs that are then added to the dollar costs of transportation. Passengers use airports not because they may necessarily want to but because they have to, and from their viewpoint a good airport is one where they have to spend the least amount of time. Airports are dependent upon airlines for passengers and airlines also determine dwell times. These perceptions however do not reflect the importance of airports and in order to assess their value to different stakeholders airports must ask themselves who would be hurt most if they ceased to exist. The answer would likely be the local community. All airports are essentially ‘‘local brands’’ despite the fact that some may be better known internationally than others; and they provide the most value to the local community. The review of online travel trends indicates that objective local content is missing from the travel market. Airports are ideally suited to filling this gap. This will also allow them to minimize the uncertainty that travelers face when they visit a new location. Local content is currently available from a variety of sources, however it is not provided in the right context. Airports can serve as infomediaries, syndicators and distributors of local content. Through closely monitoring and collecting information on their stakeholders, they can provide data on the local community to visitors and vice-versa. For example, it is possible for a first time visitor to a particular city to obtain a list of good restaurants from websites such as Fodors.com, but in order to be valuable that information has to be crossreferenced from other sources to determine if the best restaurants are also located within a convenient distance from the hotel that they are staying at. An airport website in collaboration with a company like Mapquest.com is perfectly suited to aggregating information from various sites. Commerce opportunities can also be tied to the local or national economy. If Frankfurt International Airport feels compelled to enter e-tailing they could collaborate with a company such as Activeresearch.com and sell German wine produced in the Rhine and Moselle valleys.41 Activeresearch.com has many useful tools including a product selector, which asks users to state which product characteristics are important to them. It then examines trade-offs between characteristics and finally recommends products that are 41 The wine growing regions at the confluence of the Rhine and Moselle are an hour’s train ride away from the Frankfurt Airport.

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best suited to the particular user. Frankfurt airport and indeed, all German airports could partner with Rosenthal to sell (and have delivered at the airport) fine china (or ‘‘table culture’’ products) to visitors to Germany. Sounds crazy? Maybe, but neither good German wine nor fine china are commoditiesFliquor and tobacco are. Consumers will be hard pressed to comparison shop to find the best deals and competition from other airports cannot drive prices down. Though we do not have data on German wine producers, the Rosenthal website shows that in 1999 approximately 52.9% of their income came from Germany, 31.1% from the rest of Europe, 11.3% from North America and 4.7% from the rest of the world. The ‘‘rest of the world’’ is quite large and some of its residents quite rich that Rosenthal may not scoff at such a proposal!

Acknowledgements The authors thank participants at the 4th Hamburg HWWA Workshop on Airports, The Internet and ECommerce, for their comments on an earlier version of this paper. Ashish Lall thanks Chadwick Teo and Danny Cham for assistance and Mr. Karamjit Singh, Chief Executive of SATS Airport Services Pte. Ltd., for an interesting discussion.

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