Business models for airports in a competitive environment. One sky, different stories

Research in Transportation Business & Management 1 (2011) 25–35

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Research in Transportation Business & Management

Business models for airports in a competitive environment. One sky, different stories Laurence Frank ⁎ Ecole de Management Strasbourg, University of Strasbourg, BETA (CNRS UMR 7522), 61 Avenue de la Forêt Noire, F-67085 Strasbourg Cedex, France

a r t i c l e

i n f o

Article history: Received 7 January 2011 Received in revised form 10 June 2011 Accepted 14 June 2011 Available online 12 July 2011 Keywords: Airport strategies Airport management Airport business models Airport case-studies

a b s t r a c t Airport reforms have promoted the principle of self-sufficiency which has paved the way for the commercialization of airports. The research has investigated the contemporary business practices in airport management in order to devise a business model for an airport operating in a competitive environment. A business model consists of interlocking elements that when taken together create and deliver value and with which practitioners and academics depict and analyze “the way the firm operates.” The first contribution of this paper is to deliver a matrix of reference reflecting the core dimensions of airport operations which organizes the broad array of business practices into an inclusive structure. The second objective of this paper is to discover if the industry operates with a standard business model or if different sets of practices can be observed in various airports. The business structure of three airports respectively located in Asia, North America and the Middle East has been examined to test the idea of multiple airport business models. © 2011 Elsevier Ltd. All rights reserved.

1. Introduction In the 1980s policy-makers began to turn their attention to reforming airport governance and in many industrialized countries governments started to gradually withdraw from airport management to maintain only their regulatory duties pertaining to security and safety. Public financing of airport infrastructure became increasingly difficult because of the necessity to finance other priority services such as social services. Pressured by an increasing air transport demand and the need for additional capacity along with new airlines' strategies, governments had to find solutions to finance costly airport developments. To meet these demands, many countries commercialized their airports and adopted business-type approaches integrating different degrees of private-sector involvement. The mismatch between locally-rooted airports and the international outreach of the airline industry forced governments to devise new policies oriented towards competitiveness, profitability and performance to get their airports “on the market.” In the aviation sector, airport business models were introduced in 2003 by de Neufville with the notion of “airport systems” combining physical configuration and operational aspects. Following his observations airports evolved from inefficient monadic activities to systems of

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airports which developed into networks serving global markets. Gillen (2009) relates the contemporary airport business model to the changes in the air transport industry such as airline productivity demands and greater infrastructure productivity. This new view constitutes a change in the traditional management of public utility as it introduced a performance culture into ownership and governance practices. In management science, the concept of business models stems from the New Economy born from the Start-Up generation before it extended to the larger business community. One of the pioneering articles on the subject was put forward in 2000 by Linder and Cantrell (2000) who defined the business model as “an organization's core logic for creating value.” Although there is still no generally accepted definition of a business model, practitioners and scholars use it to describe and explain “the way the firm operates.” The originality of this paper resides in its exploratory nature as it investigates airport business models as holistic business systems which have received little attention until today. Airport performance and productivity have been extensively researched and typically compare revenue with traffic structure (Oum, Yu, and Xiaowen, 2003), technical efficiency (Pestana Barros and Dieke, 2007), capacity planning (Solak, Clarke, and Johnson, 2009), slot management and congestion (Basso and Zhang, 2010; Condorelli, 2007) and the relation between governance and efficiency (Oum, Adler, and Yu, 2006). Francis, Humphreys, and Fry (2002) took managerial dimensions such as ownership structure, quality management and business excellence into account to study

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the benchmarking of airport performance. As few studies have examined the business structure in its entirety to assess an airport's global output, the business model concept was deemed appropriate in order to capture what matters in the airport business today. Two central themes are developed in this paper. First, the airport business model builds on a matrix of reference gathering the core dimensions of airport operations in a competitive environment. Second, airports worldwide are endowed with the same mission but vary in terms of scale, function and outreach, and the heterogeneity of these structures is likely to produce multiple business models. Thus, this research is aimed at discussing if the industry operates with a standard model or if the sets of practices observed in various airports shape different business models. Before the three case-studies and their salient features are outlined, the methodology supporting this exploratory field research is presented. The next section then reviews the business model theory and the distinctive attributes of airport operations in order to see if the specifics of the airport industry lead to a sectorized business model. The elements supplied by the case-studies are subsequently analyzed with this theoretical airport business model matrix in order to distinguish similar from diverging business practices. These results will be discussed in the final section to establish whether a standard business model prevails in the airport industry or if several models co-exist as a result of a heterogeneous business environment. 2. Methodology The aim is to delve into three airport reform experiences to investigate business practices implemented to make airports profitable. It is not intended to generalize the results produced by a sample of three airports or seek theory-building, as the state-of-the-art of airport business models research is in its early days. The exploratory nature of this study required an empirical approach and case-studies were deemed relevant for the information that was sought. To collect the greatest variety of practices, the sampling of airports was based on diversification by location and institutional set-up (governance-mix). Once permission was obtained from all airport authorities and Civil Aviation officials, two-week visits were scheduled in each airport. In 2008 and 2009, several rounds of semi-structured interviews with employees from different functions and levels were conducted and a standard questionnaire designed to cover the widest array of business practices and areas of concern was used. Interview time was used to inventory practices and discuss with the interviewees specific issues or aspects the questionnaire did not include but which were critical for the airport business. The content of interviews was supplemented with corporate documents, press clippings and governmental publications to obtain a complete picture of the business system. An analysis of the interview data and company documents enabled the development of a more focused understanding of each airport's accomplishments and challenges. The questionnaire included for instance questions on the airport's status quo ante stage, guiding strategy, details on stakeholders identity and ex post achievements so as to cover a before to after period. The data collection revealed that profitability and financial information were sensitive topics in the airport industry as well as details pertaining to the strategic alliances established to operate in joint ventures. All names of actors and places are fictitious at the request of contributors who felt that disclosing information could be prejudicial to the relations between the various business partners.

money in this business? How can we deliver value to customers at an appropriate cost? (Magretta, 2002) 2. How to create value out of the bundle of resources possessed by the company? Ness and Brechin (1988) refer to the concept of “organizational technology” which is broadly defined and includes not only the machines and other hardware organizations use to achieve their ends, but also the skills, knowledge, training of employees; the approaches, strategies, and procedures utilized; and even the characteristics of the objects (inputs and outputs) on which work is performed (p.256). Miller (1998) added “configuration” to technology as a distinctive feature to explain the firm's performance through “the degree to which an organization's elements are orchestrated and connected by a single theme.” Chesbrough (2003) observed that the utility of the business model lies in its capacity to convert technical decisions into financial returns. The literature offers several representations of business models including various components from which were extracted the following seven consensual axes: 1. Customer value proposition defines the job to be done to solve a problem, fulfills an important need for the target consumer or capitalizes on market power. Lindgart, Reeves, Stalk, and Deimler (2009) looked at this proposition from another standpoint: “what compromises does our business model force customers to make? Why are nonusers or defectors dissatisfied with our offering?” 2. Key profit formula estimates the returns of the revenue model, the cost structure, the margin model and the resource velocity. Linder and Cantrell (2000) observed that today's customers are more educated and more demanding, experimenting new ways to do business, not all of which have a positive impact on margins. 3. Stakeholder rewards predict compensation of all actors involved and more specifically money-suppliers. 4. Key resources encompass valuable assets possessed by the firm such as people, technology, products equipment, information, partnerships and brand. The value of the firm's tangible and intangible assets was put forward by Edith Penrose in 1956 in her seminal work giving birth to the Resource-Based Theory. This theory established the relationship between resources and a competitive advantage. 5. Key processes explain the value created out of the organization of activities including processes, traditions, norms, routines and metrics. 6. Network value refers to the output of working with other players to influence a new industry and can be decisive in building up a competitive advantage (Linder and Cantrell, 2000). According to Morris, Schindehutte, and Allen (2005), positioning within a value network can be a critical factor in value creation. 7. Innovation/breakthrough: Johnson et al. (2008) stated that innovation is a major constituent of the business model and recommend capitalizing on a game-changing opportunity to increase profitability. Several representations and constituents of business models can be found in the literature but it was observed that the above seven building blocks tend to reflect a consensus among scholars. Nevertheless, the specifics of air transport operations suggest that there is more to the airport business model than these seven building blocks. Airport operations are subject to other considerations such as the power of regulators, governance-mix, risk management and externalities. As a result, it was decided to include them in the airport business model to reflect the core dimensions of airport management.

3. Business model theory 4. Airport industry's peculiarities A business model can be best understood as interlocking elements that when taken together create and deliver value (Johnson, Christensen, and Kagermann, 2008; Linder and Cantrell, 2000; Verstraete and Jouison-Laffitte, 2009). This concept underpins two major preoccupations: 1. Who is the customer? How do we make

Traditionally, airports used to view airlines as their primary customer because airlines have historically been their main source of income. Airport revenue stems from two types of income: 1. aeronautical revenue arising directly from the operation of the aircraft, the

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processing of passengers and freight; 1 2. non-aeronautical revenue generated by collateral activities such as income from commercial activities within the terminal and rents from space and land (Graham, 2003). In today's commercialized environment, airports emphasize non-aeronautical revenues from retail and concessions. A paradox can be observed in the industry: efficiency requires minimizing waiting time prior to boarding the aircraft so that parking charges decrease for airlines. Conversely, passengers spending more time in an airport fill their waiting time by shopping and eating at food courts. Graham (2003) observed that attention should be paid to other types of customers because they are likely to generate a significant volume of additional activity and income: meeters-and-greeters, visitors, employees, local residents and companies, all of them having different purchasing patterns and thus requiring market segmentation. In general, the greatest challenge awaiting airport's business developers is to model customers' behavior because there are no two identical individuals in terms of preferences and sensitivities when it comes to travelers' expectations (Hess, 2010) and the multicultural dimension of the air transport business makes this exercise even more complex. Morell (2010) recommends taking ground transportation into account when assessing the quality of a complete door-to-door package offered to passengers. Some airports redoubled their efforts to set up alliances with other business sectors such as Vancouver airport which coordinates with the cruising industry to accommodate US passengers en route to an Alaska cruise vacation. Other promising avenues are to be found in partnerships with international convention planners to exploit the potential arising from on-site convention centers and all-inclusive convention packages (Tretheway and Kincaid, 2010). 4.1. Ownership and governance The effects of the governance scheme on productivity levels are discussed by Oum et al. (2006) in a study comparing the efficiency of publicly owned and privatized airports. Considering that the key profit formula in the business model determines how compensation and returns will be distributed among stakeholders, it is expected that ownership and governance play a significant role in the business structure. Moreover, the governance scheme may or not offer guarantees from the State on the operator's investments which can determine how risk is shared by the actors. 4.2. Regulators International organizations such as the International Civil Aviation Organization (ICAO), the Federal Aviation Administration (FAA) or the European Union regulate operations of civil aviation throughout the world to various extents. On the national level, other regulators have the capacity to set rules and restrictions for the airport industry. In some countries, capital expenditure (CAPEX) policies are implemented to control investments (Starkie, 2006) while other States control landing fees or pay subsidies which distort competition (Morell, 2010). Regulation impacts on the organization of operational processes and routines as well as the use and the potential of the infrastructure and the nature of the traffic. For all these reasons, regulation should be included in the business model. 4.3. Externalities On the one hand, airports are widely recognized as important engines of economic growth, both supporting local economic activity and stimulating new investment in an area (Robertson, 1995) as well as fostering employment and new business opportunities. Growing 1 Most airports have a weight related landing charge based on maximum takeoff weight (MTOW) or maximum authorized weight (MAW) based on a simple method with a fixed unit rate per ton.

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attention is paid to business models pursuing simultaneously profits and societal wealth especially in developing countries. According to Thompson and Mac Millan (2009), firms should conceive business models creating societal wealth in order to alleviate poverty, and create new markets and offerings that can improve human conditions in precarious economies. On the other hand, airports are criticized for the quantity of negative externalities they produce (pollution, noise and environmental destruction). The airport business model should help balance these effects so that positive impacts are not offset by the inconvenience caused by intensive traffic developments. 4.4. Risk management Risk management throughout the world is a constant preoccupation for all airport and airline managers. The industry is highly sensitive to market fluctuations, political events, epidemic outbreaks (Doganis, 1992) and natural disasters, as the volcano in Iceland has recently demonstrated. Risk can also arise from overrated investments in projects located in developing countries undertaken on the assumption that emerging economies bring outstanding returns (Théry, 2002). 4.5. Reform opportunity cost Several reform vehicles can be used to change the governance scheme of airports and modernize their administration. Frank (2010) observed that States have at their disposition twenty-two different combinations of ownership and governance to reform the management of their airports. The reform opportunity cost is defined as the cost of adopting the wrong reform vehicle (one-way solutions with an early point of no return) even though a more efficient option may have been available. Equally, the opportunity cost may include a less than ideal solution due to affordability constraints. 5. Structure of the airport business model The addition of these extra dimensions enabled the completion of the structure of a standard airport business model reflecting the specifics of the airport industry (Fig. 1). Every successful company operates according to an effective business model. By systematically identifying all of its constituent parts, executives can understand how the model fulfills a potential value proposition in a profitable way using certain key resources and processes (Johnson et al., 2008). If the right business model enables an organization to achieve superior performance, it was deemed necessary to explain what performance encompasses in the airport industry. 6. Performance in the airport industry Efficiency in the airport industry refers to various operational aspects such as airport outputs in terms of aircraft movements and passenger handling (Graham, 2003; Oum et al., 2006), strategic airport planning (Wells and Young, 2003), productivity (Gillen and Lall, 1997; Humphreys and Francis, 2002), capacity management (Gomes De Barros and Wirasinghe, 1997) and efficient slot allocation (Condorelli, 2007; Stoica, Faye, Mora-Camino, and De Coligny, 2006). Airport operations are also shaped by airlines demands and nontraditional strategies of low-cost airlines (Francis, Humphreys, and Ison, 2004). Airport resources typically comprise of design and capacity of infrastructure (Gomes De Barros and Wirasinghe, 1997), size, outreach, catchment area (Strobach, 2010), land availability, opening hours, hub status, technologies, certifications, quality programs and technical and operational knowledge. Growing attention is now paid to market positioning, marketing driven practices and the ability to serve various and evolving customer demands (Jarrach, 2001).

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Fig. 1. Matrix of reference for the airport business model.

Consistent with an empirical approach, the three airport rehabilitation experiences were investigated and the business practices implemented to modernize these airports in an effort to make them profitable were examined. The following section presents the three case-studies and the corresponding findings that have been organized according to the standard matrix of the airport business model. This allowed an investigation of whether the practices are similar or different depending on the operational context.

had not yet materialized. The initial duration of the concession of 25 years was extended to 40 years to cover supplementary investments related to the addition of two airports into the concession contract. Despite delays in the return on investment, VAC's CEO considers the project to have been a success because it allowed the development of a new competence within the KEELY Group enabling the company to conquer new markets in the airport industry in the future, especially in developing countries.

7. Case-studies: taking the commercial path with three distinct vehicles

7.2. Decentralization and privatization in North America

7.1. Public–private partnership in Valisia In 1994, the Government of Valisia undertook a first wave of public reforms aimed at modernizing the State's administration which included airport rehabilitation. In 1995, the newly created Airport Development Authority of Valisia launched a tender to receive applications from foreign airport operators. Several foreign companies coveted the market and the concession contract was finally granted to a private consortium formed by the European RIAL (acquired in the meantime by KEELY) and TIX, an Asian holding company specialized in engineering work which together created the Valisia Airports Company (VAC). The contract signed between VAC and the Valisian government consisted of a “B.O.T” (Build–Operate–Transfer) followed by a 25-year exclusive operating license (concession). In 1995, the traffic of Talip International Airport (TIA), the capital city airport, hardly reached 900 000 passengers annually in an aging infrastructure no longer in compliance with international security standards. Although Valisia had traffic potential, all four national airlines had successively closed down over the years. In 1996, VAC began the construction work for the new terminal, but 2 years into the project, a political crisis broke out followed by a coup d'etat. Political and diplomatic restrictions were implemented to control the access to the country. All the construction work suddenly ceased, banks suspended the loans and traffic dropped to 600 000 passengers annually. As a consequence, the concessionaire was first tempted to abandon the project and to leave the country but it finally decided to persist with the project on KEELY's and TIX' own finances. In 1999, the situation improved and construction went on and was completed in 2002. In 2004, TIA welcomed more than a million passengers and its income increased from 5 million to 33 million USD between 1995 and 2004. In 2008, TIA was handling 2 million passengers and continues to grow. The airport is designed to handle 8 million passengers and host intercontinental and long haul flights. Initially, the concession's payback was expected around the 7th year but in 2008 it

From 1960 to 1980, airports in Rolin had been the responsibility of the federal Ministry of Transport. In 1992, the federal government decided to hand over its major airports to local communities who became responsible for their management and commercial development. Until then, investments made on runways, terminals and buildings originated from the immobilization fund administered by the Treasury Board. Aeronautical charges and collected taxes were repaid to the Treasury Board and airports were not expected to be profitable or even self-sufficient. Rolin airports were considered obsolete and in a deteriorated state and in the early 90s, modernization and profitability became urgent as the State realized that airports had become engines for economic growth and that competition was sharply increasing in the Americas. Instructions were given to create private entities responsible for elaborating strategies and master plans for the main airports. In 1997, Mills International Airport (MIL) was handed over to a local private but not-for-profit Airport Authority created for this purpose. As soon as the master plan was approved by the government, a sixty-year lease was signed between the airport authority and the Ministry of Transport. Expansion and modernization required three successive waves of investments amounting to 500 million USD in 2008 raised by public borrowing, bank loans and airport improvement fees. The airport is now considered “high tech” and welcomed 4 million passengers in 2009 which represents a 100% increase in traffic in 12 years. MIL implemented several simplified and speedy check-in procedures for passengers and offers a free translation service in sixty languages as a result of a partnership with a local association and its voluntary staff. MIL airport authority reported that profitability was achieved 4 years into the reform. 7.3. Modernization with an airport management firm in the Middle East In 2001, Bilanian regional airports were in a dilapidated state and produced chronic deficits. The Government of Bilania launched in the

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same year a national airport modernization program at the President's personal request. In 2002, Bilania applied for loans at the World Bank to finance the rehabilitation program of its airports. Reforms were also financially supported by governmental subsidies such as the Civil Aviation Fund funded by 25% of profits made by self-sufficient airports and loans from national private banks. Bilania's capital city airport, Sibah International Airport, was contracted out to a foreign airport operator and the 19 regional airports were handed over to the Bilanian Airports Company (BAC), a public holding of the Ministry of Civil Aviation. The network comprises six airports which are comanaged in partnership with DEM, a European airport management company hired in 2005 under a service contract for 5 years. The expectation was that DEM transfers knowledge and know-how to the Bilanian staff, implements efficient management practices, improves airport operations, increase traffic and aeronautical activities and enhances overall profitability. Substantial resources were invested in high potential airports such as Malik Airport (MAK) which experienced an outstanding increase in traffic between 2002 and 2007 due to massive tourism related developments in the location. MAK's traffic continues to grow and the financial results showed profits of 39% at the end of 2007. However, BAC and DEM had to overcome difficulties due to cultural misunderstandings, an ambiguous hybrid executive structure impacting decision making and disagreements concerning the transfer of assets to the contractual operator. The table below synthesizes the three reform experiences. As Table 1 indicates, the reforms generally coincide with changes in the ownership and governance structure and compliance with international norms and standards. The process by which these operators managed to curb losses with the implementation of new business practices belongs to a broader strategy. The following analysis details the actions undertaken by the three operators in order to make the airport more competitive and profitable. 8. Three airports, three business structures Talip International Airport (TIA) traffic is dominated by international carriers as the country has had no national airline since the four domestic carriers successively closed down. TIA is city-paired with Bangkok, Singapore, Tai Pei and Ho Chi Minh City and this leads to hub-sourced traffic causing peak hours in the morning and late afternoon and troughs during the day. 75% of all passengers are business travelers with a majority originating from Asian countries.

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The commercial facilities were designed to meet these passenger's habits and lifestyle. Fig. 2 illustrates the business practices observed at TIA. The TIA business strategy was conceived by the concessionaire (SAV) and sought to increase both aeronautical and non-aeronautical income. As a category 4B airport, TIA can accommodate large aircraft (B-747) but not the new large aircraft (A-380). Modernizing mostly consisted of complying with international standards and regulation and the operator acknowledged that no revolutionary practices or innovations were expected except for the upgrade of information systems and technologies. Traffic is supervised by a Slot Committee composed of Civil Aviation, airlines and airport representatives. SAV works in partnership with the Ministry of Tourism to devise coordinated tourism related programs and the airport is reported to play an important role in the country's economic development. The operator also created hundreds of jobs and provides on-going training to all staff in a country where unemployment is high and education is not affordable to all the population. SAV invested 80 million USD in the rehabilitation of TIA and repays 13.5% of its profits to the State as well as all profits exceeding the initial financial projection. This arrangement has the ability to cap the concessionaire's rents. Moreover, the concessionaire bears all risks pertaining to investments as the government of Valisia did not provide any guarantees on the loans contracted with the World Bank and private banks. The TIA rehabilitation project nearly failed after the coup d'etat in 1996 stopped all operations and bank payments for months only 2 years into the project and forced the concessionaire to invest his own funds to maintain the project. In 2007, SAV still struggled with profitability after 13 years of operations although the income per passenger is high (43.50 USD/pax). This could be related either to the length of the concession contract which has to be of sufficient duration to recover investments (Roma, 2001) or to over-priced rents paid to the government. Whether Valisia had other options instead of a public private partnership to modernize and exploit the potential of TIA airport was discussed with SAV's management. They believed that the Valisian State possessed neither the skills nor the financial resources to conduct this project domestically. Technical expertise could have been acquired abroad through contractual arrangements but the reconstruction of the airport was capital intensive and not affordable for the State. The next case outlines the practices adopted by Mills Airport (MIL) located in North-America. MIL is managed by a private airport

Table 1 Details of the reforms at the three airports.

Location Year of reform Number of passengers Ownership Governance and management Reform vehicle Year of study (y/s) Number of passengers Main funding sources

Investments (in MUSD) Self-financing stage Traffic growth since y/s Traffic structure in y/s Origin of traffic in y/s Increase in revenue Major changes

Talip Airport (TIA)

Mills Airport (MIL)

Malik Airport (MAK)

Asia 1995 600 000 State Private airport management company BOT + 25-year concession 2008 2 000 000 World Bank Private Int'l banks loans Capital 120 8 years + 120% Business 75% Asia (75%) + 600% Reconstruction, international norms and standards, staff trainings, commercial strategy, IT upgrades

America 1997 2 000 000 State Private airport authority not for profit 60-year lease 2009 4 000 000 Public borrowing Bank loans Capital 500 4 years + 100% Business 60% North America (65%) + 100% Expansion, new terminal, commercial strategy, land management Environmental program

Middle East 2005 2 500 000 State Private holding owned by the State 5-year management contract 2009 7 500 000 Government subsidies World Bank Local banks loans 75 2 years + 200% Charter/leisure (90%) Eastern Europe (60%) + 300% New terminal, international norms and standards New managerial practices, IT upgrades, commercial strategy

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Fig. 2. Talip International Airport—business model.

authority with a not-for-profit status and is allowed as such to raise funds through public borrowing (bonds guaranteed by the State). MIL is highly dependent on the national carrier for 65% of all flights and welcomes international IATA carriers, charter flights and a small number of private aircraft. Fig. 3 illustrates the business structure implemented at MIL airport. MIL's expansion potential is restrained by the low attractiveness in tourism terms of the location. Most visitors reach this so-called “administrative city” by road or bus. MIL's future is shadowed by a high speed train project revival supposed to network three major cities located within a 500 km radius, all of them equipped with a hub airport. The majority of MIL's passengers are North Americans traveling for professional reasons (60%). MIL's operator reported that business travelers expressed a desire for additional convenience products such as coffee shops and a steak-house restaurant rather than luxury products. The income per passenger at MIL was of 20.55 USD in 2007. MIL financed its expansion and modernization with public borrowing, bank loans, capital and airport improvement fees. MIL revenue consists of 65% of aeronautical income (free of State regulation) and 35% of commercial proceeds stemming from conces-

sion contracts. MIL pays an annual rent to the State of Rolin based on an increasing scale: 0% if revenue is less than 3.5 million USD to 12% if gross revenue exceeds 200 million USD. In 2007, the government agreed to reduce the rent which MIL translated into a 5% rebate on landing fees. The operator considers this rebate a strategic decision as several carriers added a fair number of flights to their schedules. MIL is a category 1 airport designed to welcome large aircraft on two runways; recent adaptations enabled the airport to accommodate the Airbus A380 which was necessary because several officials from the Middle East who regularly visit Mills recently acquired these aircraft. The VIP service follows the “protocole” guidelines and security procedures that are managed in coordination with the Foreign Affairs office. Along with political risk, MIL deals with extreme winter conditions which burden the cost structures depending on the length of the cold season. MIL capitalized on its real estate potential and significant efforts were deployed to exploit all unused lands surrounding the airport. Commercial developments comprise a shopping mall, a hotel, headquarters for new companies and hangars for technical maintenance. The uniqueness of the MIL business model lies in its genuine sensitivity to environmental concerns and in its

Fig. 3. Mills Airport—business model.

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involvement in the community. As a non-profit organization, MIL reinvests all profits in the development of the airport and donates more than 250 000 USD to community projects every year. In return, the airport benefits from a free translation service for passengers in 60 languages and volunteer on-site security surveillance. No external actors are involved in the management of MIL airport with the exception of airlines and concessionaires of leased commercial spaces. Given that the expansion potential is constrained by the location's low attractiveness for tourism, the MIL business model appears to be oriented towards self-sufficiency and community well-being. The third case describes an airport rehabilitation project in Bilania implemented with a business model aimed at taking up the underdeveloped potential of Malik International Airport (MAK) located in the region of Bilania. MAK is the second busiest airport in the country with the highest financial potential. Malik's attractiveness has been growing over the years as a result of the “500 USD all inclusive” holiday packages sold by Tour Operators. The Bilanian Airports Company (BAC) was assisted in this project by DEM experts who conceived a new strategy for this airport. DEM is paid for that service with a combination of fees and a percentage of the EBITDA produced by the six airports the service provider is managing in Bilania. MAK traffic consists of 90% charter flight passengers mainly originating from Eastern Europe. The traffic increased from 2.5 million to 7.5 million passengers in 5 years. The capital city airport located 500 km away feeds 10% of the traffic and business passengers represents 2% of all passengers. Significant efforts were deployed by the Bilanian Airports Company to attract more tourists from Western Europe with mitigated success. The commercial facilities at MAK can be considered basic and consist of a souvenir shop, a food court, a duty-free store and coffee shop (Fig. 4). Reportedly, MAK's Eastern Europe passengers are fond of alcoholic products and perfumes although they complain about their high prices. In 2007, the MAK revenue structure was divided between 62% of aeronautical revenue and 38% of commercial income, which translated into a low income of 11.25 USD per passenger. The construction of the second terminal and all on-site developments were financed by the World Bank, private Bilanian banks and the Civil Aviation Fund. The city of Malik is located in an area that was targeted in the past with car bombings which killed dozens of people and deterred tourists for some time. MAK management works in close collaboration with the Ministry of Tourism and hotel managers to bridge airport developments with accommodation capacity and to ensure coordinated developments. The city of Malik has a convention

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center used by the Bilanian Government for all official meetings and hosts several exhibitions and fairs during low season. The growth of MAK occurred with a set of challenges and limitations. Malik City is located in a desert region deprived of water. Desalinization of sea water was considered a suitable solution to increase water supply. Electricity demand was another concern and the local electricity supply plant was expanded. To cope with growing traffic, fuel storage had to be increased and now the airport has one week autonomy. A performance program was implemented to raise the quality of service in the terminal but it fostered some resistance among the airport staff reluctant to adhere to the principle of efficiency in public utility. Modernizing MAK consisted of complying with international standards and norms, integrating new information technologies and providing trainings to controllers and managers. Meteorological reading training was considered a priority to improve traffic management and it allowed the operator to charge penalties for delayed flights. DEM provided guidance for commercial developments as MAK airport managers had been transferred from the military forces to civil aviation and had no prior business education or experience. National airport developments have lead to the creation of 500 jobs in Bilania but BAC has struggled to find skilled people as the private sector offers higher salaries and better conditions. In general, MAK's business model is oriented towards financial growth. A third terminal is already on the drawing board and expansion plans show that the airport has not yet reached its full potential. The expected final capacity of this infrastructure is 20 million passengers per year in 2020. The revenue model seems enviable as it shows a continuous evolution. Managers are eager to find ideas to increase the income per passenger which they consider low, hence the recent initiatives to diversify travelers' profiles and the incentives to attract regular airlines from Western Europe. In comparing the three experiences, it appears that reform and modernization occur in different sets of business practices. Based on these observations, the following discussion further examines whether the airport business model is standard with minor variations, or if practices vary sufficiently to create unique business models in order to adapt to local requirements. 9. Discussion The findings confirm that the primary function of an airport is still to manage logistical flows of airlines and passengers. The dominating

Fig. 4. Malik International Airport—business model.

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aeronautical share of revenue in each airport suggests that this mission remains the airport's core competency within this sample. Although examining the three case-studies does not allow generalization of findings to a population, it can however be inferred from a selection of three airports similar in size but diversified on location, outreach and governance that variations can be observed in the set of practices. In general, an overarching philosophy could be identified in each business model and these supra-organizational identities are likely to produce an array of decisions and actions effecting business practices. The objective for TIA was to deliver a standard modern airport to support the economic development of the country, hence the decision of the operator to focus on business travel. As a result, an important commercial space within the international terminal is devoted to refined local artifacts. TIA shows the highest income per passenger and this is consistent with Graham's (2003) observation that business travelers are the highest spenders, especially Asian passengers accustomed to bringing gifts back home when traveling abroad. Business passengers represent 75% of TIA traffic. The high priced international food court located outside the airport indicates that the target customer is wealthy and used to international products and brands (Dairy Queen, Café Viennois). The MIL business model illustrates different motivations such as a community-based spirit and a corporate strategy that does not consider outstanding profits as the ultimate goal. The revenue model releases a significant income to the State and supplies enough funds to keep developing the airport. The MIL business model can be viewed as “philanthropist” and registers in Thompson and Mac Millan (2009) support for responsible and social wealth-creating business strategies. MIL business travelers preferred convenience products over luxury brands which is rather an extension of the high street offer than a “shopping experience.” MAK is a profitable infrastructure which has not yet reached its maximum lucrative potential and 25% of its profits feed the Civil Aviation Fund. The MAK business model is driven by a philosophy of solidarity and its contribution matters to the functioning of the national airport network. It enables the State to collect millions of dollars every year to modernize and operate smaller platforms deprived of any capacity to become self-sufficient which ensure public transportation and allow mobility within the country. Airports obviously play an important role in the local and national economy and support greater national strategies at various levels. However, the overview of the three business models also indicates that business models are endowed with a specific mission depending on the operational context. To see if different philosophies lead to different business practices and an extension to different business models, more attention was paid to specific dimensions: • Governance: VAC's executive director explained that besides a BOTconcession arrangement the Valisian government had no alternative than a public–private partnership as he possessed neither the skills nor the financial means to launch a modernization program. Rolin considered privatization an option but mitigated results of previous European experiences convinced decision-makers to retain the ownership of airports and to opt for long-term leases. Airport authorities operating under lease contracts such as in Rolin are subject to public auditing of financial results, use of infrastructure and quality of service. Bilania did not consider privatization a suitable option and compensated for the knowledge gap by hiring an international airport management service provider. As far as governance is concerned, the findings reflect diverging aspirations and capacities to reform airport management. • Customer value proposition: The findings indicate that the passenger traffic structure is related to a decisive factor namely location, as it produces dominant segments of travelers. The traffic structure also shapes the commercial facilities inside and outside terminals and data show that culture is another influential element as

business travelers of TIA have very different behavior compared to those of MIL. The airports with predominantly tourist traffic, such as MAK, may rely on charter flights and have to deal with seasonal traffic peaks. Charter traffic and cheap holiday packages seem to constrain the income per passenger. In general, an airport's customer value proposition is two-folded: offering attractive landing conditions to airlines and acceptable waiting time to passengers and visitors. According to the results, location plays an important role in the design of the commercial strategy. • Key profit formula: The revenue structure is dominated by aeronautical income in the three airports although the revenue model varies in each situation. The dominance of aeronautical income in the financial structure is consistent with prior studies. Graham (2003) observed that in general many secondary airports struggle to increase non-aviation revenues. For TIA, the potential income could be higher if the country had a national carrier. A national airline anchored in an airport can be a cornerstone in the business model as it supplies a basis of revenue (Graham, 2003). Surprisingly, with a low income per passenger of 11.25 USD, MAK managed to raise profits by 39% in 2007. With regard to investment schemes, the three situations indicate that borrowers, lenders and investors designate different actors depending on contractual arrangements, all of them leading to different risk management scenarios. Findings also indicate that developing countries can be advantaged with the access to World Bank loans which make them rely less on private bank loans. Locality evolved into a critical factor in this research as it induced natural growth caps in some cases. The attractiveness of the city seems decisive and MIL's expansion is constrained by the city of Mills' limited tourism potential while Malik City's attractiveness keeps growing every year and translates into a continuous traffic increase. However, a high volume of passengers does not necessarily lead to a high income per passenger as Table 2 illustrates. Doganis (1992) observed that profitability can arise in some countries from cheaper labor costs. All three airports can continue to grow their aeronautical operations as they have available capacity. Müller-Rostin et al. (2010) stressed that excess capacity can be a rational strategy to deter new entrants in the airport market. The TIA operator benefited from full freedom to set landing fees while MIL preferred consulting airlines regarding pricing. MAK was assisted by the service provider when setting prices but no actual cap was agreed. All three airports were severely impacted by the September 11, 2001 events, the threats of successive epidemics and the global financial crisis which caused a general drop of traffic and which translated into stagnating revenue at TIA and MIL. Valisia exerted its right to restrict hospitality to certain airlines for diplomatic reasons during the civil war and this had a significant impact on the commercial negotiations undertaken by the concessionaire with foreign airlines. • Stakeholder rewards: according to the results, the airport outputs benefit a large number of stakeholders as the table below indicates (Table 3). However, depending on the actors involved and the contractual arrangements, the compensation of stakeholders greatly varies. The case studies revealed that the concessionaire at TIA could not collect

Table 2 Airports' revenue in 2007. Airport

Revenue (in USDa)

Number of pax

Revenue per pax (in USD)

Aeronautical

Non-aeronautical

TIA MIL MAK

70000 000 82180 000 84400 000

1 600 000 4 000 000 7 500 000

43.75 20.55 11.25

55% 65% 62%

45% 35% 38%

a

Exchange rate 14 August 2008 from www.xe.com.

L. Frank / Research in Transportation Business & Management 1 (2011) 25–35 Table 3 Stakeholders rewards. Stakeholders

Compensation and created value

Owner (State)

Long-term rents, access to private capital and investments. New infrastructure (increased asset value). Enhanced international competiveness. Taxes and fiscal revenue. Operating profits (ROI), public and international loans, subsidies. Revenues from airport improvement fees and retailing/ parking concessions Interests and fees Employment, local development, economic growth, capacity building More destinations and connections, improved services and commercial offer. Convenient infrastructure, acceptable waiting time Transfer of expertise and skills, trainings, improved salaries Sales revenues, concession contracts, business partnerships

Operator

Money-lenders Community Customers

Employees Suppliers/partners

the profits that exceeded forecasts, hence the pressure to elaborate the best financial scenario at the signing stage and the capacity to bear all liabilities pertaining to high loans with no guarantee from the State. In this arrangement, the performance of the concessionaire is clearly in favor of the State. • Key resources: Developing countries may be disadvantaged to undertake reforms as the results show and the capacity of the management in place at the time of the reform to succeed in a commercialization project varies. TIA and MAK resorted to foreign airport operators to acquire know how, technical expertise and managerial best practices, conscious that competitive airport management is a venture. TIA was also pressured by the need to obtain capital investment. MIL managers recalled a seamless modernization process in collaboration with the technical staff of the Ministry of Transport who used to manage the airport prior to the reform. • Key processes: None of the three airports had a hub function in 2009. TIA traffic is supervised by a Slot Committee comprised of the operator, civil aviation and an international carrier. MIL manages its slots in cooperation with airlines without government control. According to DEM the service provider, MAK practices ad hoc slot management, mostly because the appointed management (military forces) did not possess the skills to set up a slot strategy. It was observed that the three airports resorted to outsourcing for groundhandling, concessions and several external services such as maintenance and cleaning. MIL offers an unprecedented service of free translation in sixty languages upon arrival, as a result of a partnership established with a local cultural not-for-profit center. The airport can also count on volunteering for security surveillance. The main terminal was designed to bathe in natural lighting to reduce energy consumption. MAK implemented creative solutions to avoid shortages of water and electricity in the city. The above analysis indicates that a significant number of practices are founded on contextual needs, opportunities and demands. Looking at each dimension, it is evident that most actions derive from local requirements and realities. In addition, the combination of all these practices suggests dependency effects and a possible hierarchy within the business model. 10. Interlocked components It was noted that the governance scheme succeeding a reform influences financing scenarios, distribution of returns, risk management, freedom to operate and relations between parties. In addition, it was observed that the reform vehicle itself deserves particular attention as the three experiences suggest that the modernization

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process induces a point of no-return at an early stage due to the size of investments and the complexity of the master plan. At MAK, the difficulty to implement a performance program due to the resistance of the staff is referred to in public management as path-dependency (Pierson, 2000; Mahoney, 2000) and designates a lock-in effect created by previous choices which are perpetuated even if better solutions become available at a later stage. At TIA, the airport staff was eager to access “modernity” but notions of future and planning were challenging for employees because the Valisian culture is present oriented. Academic and empirical studies do not make it possible to identify the ideal airport “governance-mix” and the three case-studies do not allow us to establish who from a government or a private entity is more likely to turn an airport into a profitable and sustainable business. However, Oum et al. (2006) observed that airports owned and managed by mixed enterprises with a government-owned majority are significantly less efficient than 100% publicly owned and operated airports and also that 100% public airports are more efficient than the public–private partnership airports. Furthermore, it is believed that a rehabilitation project comes along with an opportunity cost due to the fact that the “best” reform option can be out of reach or not affordable for reasons related to the possession of the required resources or to constitutional considerations. Valisia illustrates how a State becomes dependent on foreign partnerships and interests to obtain expertise and capital investments. The key profit formula appears to be the most interlocked component of the business model due to multi-directional effects in the revenue model. Combined with other dimensions, the interdependency of this component becomes obvious: – The governance scheme which determines how income is distributed among stakeholders. In all three cases, the State seems to be the advantaged party but the responsibility and compensations of operators vary in significant proportions depending on the contractual arrangement; – The investment scheme which varies depending on the countries and the actors involved. TIA proved to be a risky business as the concessionaire supplied capital and guarantees in return for an asset transfer and the freedom to operate the airport. At MIL and MAK, investments were backed by the State. – Location which constrains expansion capacity and the income per passenger as reflected in the findings. Surprisingly, the most crowded airport had the lowest income per passenger. With regard to the capacity to cope with growth, TIA is designed to handle a maximum of 8 million passengers which would represent an increase in traffic of 100%. MIL does not foresee any major increase in traffic in the near future and is confined to limited growth. Development plans are oriented towards airpark space optimization and real estate management in order to increase non aeronautical income. MAK has an ambitious development plan based on a volume strategy given that traffic forecasts are promising and income per passenger is low due to charter segmentation; – The category of the airport which determines the type of aircraft which can be accommodated. At MIL, A-380 adaptation was demand-driven rather than a strategic decision. It is quite unusual that a secondary airport handling smaller loads of passengers deem it necessary to prepare for new large aircraft unless a political decision says otherwise. TIA accommodated on only one occasion a B-747 because the traffic sourced by neighboring hubs arrives in smaller aircraft. MAK can accommodate B-747 but not A380 and does not see the adaptation necessary at this stage due to the dominant charter traffic. Looking at each component and how it interacts with others in the matrix is of high importance to understand the articulation of the business model. Influential local factors induce heterogeneous business

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structures mainly because disparate situations call for flexible practices. Industry specifics also mean that airport and airline strategies are tied together, forcing a single airport business model to adapt to several airline business models. All three airports operators acknowledged that good relations with airlines are a cornerstone of a sound and solid expansion plan—not to mention that the airport customer is primarily an airline customer. Ishii, Sunyoung, and Van Dender (2009) observed that passengers located in a multi-airports market make choices based on tradeoffs between frequent flyer programs and rewards, frequency of flights, numbers of destinations, airport access time and prices of fares depending on the purpose of the trip, criteria over which airport operators have little influence. By contrast, airport characteristics seem to play an important role in the choice of an airport as passengers rank quality and services of visited airports on specialized websites such as Skytrax. The survey performed by Bergadaa (2009) reflected passengers' sensitivity to the design, architecture and practical aspects of the airport, and findings indicate that some airports leave unforgettable impressions and diverse degrees of satisfaction. The next section seeks to provide preliminary conclusions to the concern whether the airport business model is standard in the industry or customized to meet the demands of different situations.

11. Standard or customized airport business models? Conclusions The quality of a business model depends on its capacity to supply a holistic view on the way the airport operates. Whether a standard business matrix leads to a universal airport business model is debated in this paper and the findings reflect a great variety of practices suggesting that most decisions are based on local considerations rather than on pre-established procedures. The case studies show that there are no two identical airport business models within a sample of three. This can be partly explained by the number of possible combinations associated to a single component. Moreover, the overarching philosophy observed in each model materializes in a set of practices deriving from a supra-organizational mindset. With regards to the components themselves, i.e. governance-mix, a great variety of practices and aspirations can be observed in each situation. The industry applies a traditional financial structure splitting income in two categories: aeronautical and non aeronautical income, but the analysis shows that the revenue model varies in each airport due to the range of factors taken into account to design the key profit formula. The findings also indicate that a financial structure depends on a complex arrangement of tangible and intangible dimensions considered on a case-by-case basis by the actors involved. Modernization entailed in all three experiences aligning airports to norms and complying with international standards and regulation. Process organization is similar in all airports especially when it comes to ground-handling, service to aircraft and runway management due to international certifications and regulation. From the three experiences, it was observed that additional resources can arise from the creativity, the imagination of the operators but also from locally available resources. MIL improved the customer value proposition with free translation in 60 languages inside the terminal. MAK avoided potential shortages of drinking water in the city with sea water desalinization. TIA made its food court available to all visitors and employees and provided a leisure area outside the airport. All three airports offer standard facilities such as duty-free stores, souvenir booths and coffee shops. It can therefore be inferred from the sample of airports that all business model components are influenced if not dominated by contextual circumstances. As a result, the possibility that a standard airport business model prevails in the industry is dismissed. The concessionaire of TIA confirmed that modernizing an airport to make it a profitable business involves multiple dimensions pertaining to geographical location, political regimes and economic factors. The

findings tend to support this opinion and even suggest that each business model is a “unique object.” The first objective of this paper was to conceptualize a business model reflecting the specifics of the airport industry in order to later compare business practices of different airports with a tool of reference. Accordingly, the first ambition of this exploratory research was to provide a matrix of reference collecting the core dimensions of the airport business leading to a theoretical architecture capturing the “DNA” of the airport business model. The application of the model to practical situations enabled a realization that business model components cannot just be piled up like bricks to reflect the “way the airport operates.” A business model is a dynamic structure subject to interdependencies and hierarchical effects. If the design of the business model matrix can be considered standard, the variety of choices and combinations of practices inventoried in different locations indicates that several combinations of business practices prevail in the airport sector which produce multiple if not unique business schemes. These findings have meant that it can be initially concluded that airport business models are in essence heterogeneous. Although the reduced sample of airports has prevented any possibility to generalize, it can be inferred that business models vary for contextual reasons and that the influential if not determinant nature of local factors requires customized airport business models. Further research on a larger sample of airports would allow these conclusions to be tested on a larger scale and to pay more attention to the structure of the business model itself in order to investigate how business models can enable airports to build a competitive advantage and not just become profitable.

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