The metamorphosis of airports
2
Chapter Outline 2.1 Introduction 17 2.2 The commercialization of airports
17
2.2.1 Awakening of airport owners 17 2.2.2 Airport business models 19
2.3 The changing surroundings of the airport business
25
2.3.1 Airport security 25 2.3.2 Airport information technology 26 Feature 2.1 The airport of the future 28
2.4 Summary 31 References 32
2.1
Introduction
Over the last 30 years, airports have evolved from being mere providers of infrastructure into business-oriented service providers. Nowadays, many have become complex commercial businesses, operating in unique and developing physical, financial, and regulatory environments. While customers and stakeholders demand efficient operations and competitive pricing, shareholders focus on profitability. To deliver on that, various airports have adjusted their own business model to their target customers’ model, leveraging their specific strengths. More recently, the constantly changing business environment requires airports to cope with a number of strenuous matters. In addition to changing customer demands and consumer behavior, these include i.a. the emerging competitive landscape resulting from that, security threats, and the implementation of innovative technologies suiting the digital age.
2.2
The commercialization of airports
2.2.1 Awakening of airport owners Against the background of the developments described in Chapter 1, The nature of airports, also the role of airports has changed from providers of transportation infrastructure to businesses in their own right. Airports have evolved from being publicsector infrastructure providers into sophisticated, business-oriented service providers which can be run efficiently and in many instances be self-sufficient (Gittens, 2015). Foundations of Airport Economics and Finance. DOI: https://doi.org/10.1016/B978-0-12-810528-3.00002-0 © 2019 Elsevier Inc. All rights reserved.
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Foundations of Airport Economics and Finance
Parallel to deregulation of the airline industry in the late 1970s and accelerated growth during the 1980s, a new view of airports developed. Historically, airports had been operated as government funded nonprofit public utilities, lacking commercial incentives. Around this time, however, many started to be considered more as commercial enterprises, resulting in the commercialization of the sector. Europe clearly paved the way in this direction, while other regions still followed the traditional approach (Freathy, 2004). Since aviation income is usually subject to some form of regulation, commercialization has generally stimulated the development of additional revenue sources. As introduced in Feature 1.1, airport revenue is classified into aeronautical or aviation and nonaeronautical or commercial revenue. The first category comprises those sources of income arising directly from the operation of aircraft and processing of passengers as well as freight. Nonaeronautical revenues, in contrast, are typically generated by all kinds of commercial activities and retailing within the terminal as well as rents for terminal space and airport land. Based on the growing awareness of the commercial potential, many airports reinvented their business concept. Capitalizing on the passenger growth, some have meanwhile grown into economic centers conducting a variety of activities and providing a wide range of services. Nowadays, airports are no longer only regarded as modal interfaces but also as leisure attractions and primary attractions in their own right. Several adopted the “airport city” approach, transforming into multifunctional enterprises acting as global gateways for tourism, commerce, and industry, and generating sizable commercial development within and beyond their site (Baker and Freestone, 2011; Kasarda, 2013). The antiquated break-even goal has long been replaced by clear profit orientation. And this commercialism also applies to regional and downtown airports, a number of which have emerged as a low-cost alternative to congested and more expensive hubs. Others, again, are supporting privatization tendencies as a means of funding their ambitions and retaining cost advantages. Generally, airports are now being realized as corporations or private sector companies as opposed to state authorities, as business enterprises in contrast to infrastructure providers, and possibly as an attractive investment opportunity. And even airports which are totally publicly owned in the meantime are increasingly being run as competitive businesses (Humphreys, 2003; Freathy, 2004). Corporatization is a first step in the process towards privatization. Although all shares are still with the public sector, the airport’s assets and management are incorporated to form a company run on commercial lines. The essential step, however, is commercialization, demonstrating the ability of delivering sustainable growth, improved efficiencies and profitability. Usually, it starts out by focusing on cost savings followed by enhancement of aviation and, of course, commercial revenue (Humphreys, 2003; Freathy, 2004). The importance of commercial revenue has been ever-increasing, since this is usually the area of greatest potential revenue increase due to the combined effects of underlying traffic growth and increased spend per passenger (Graham, 2009). In general, commercial activities generate additional nonregulated revenue which improve overall profitability. The balance between financial expectations from commercial activities, especially retail and aeronautical charges, is key to the
The metamorphosis of airports
19
business structure of airport privatization projects. During this phase, nonaeronautical revenue showed strong growth where more entrepreneurial business strategies were adopted, which typically involves maximizing primarily rental and concession revenue from retail sales, parking facilities, and property. More recent data indicates, however, that this type of airport revenue has come under heavy attack from e-commerce (Gittens, 2014; Beltran, 2018; Hirsh, 2018). Chapter 11, Specifics of airport economics, will go into more details of this aspect. Commercialization does not necessarily have to lead to privatization (elaborated on in Chapter 9: Ownership structure), particularly when better value for money is delivered to the public sector, releasing sufficient funds for future infrastructure development. Former Aer Rianta (now daa), Amsterdam Schiphol, as well as Fraport and Manchester before their partial privatization are examples of companies successfully run on commercial terms by public-sector shareholders. According to Airports Council International (ACI) (2017a), 614 airports which is equivalent to roughly 15% globally have been partially or even fully privatized in 2016, and some have become attractive investments. Only a few, however, are listed at a stock exchange, where their shares have performed reasonably well since the 2008/09 economic crisis, reflecting the general stability of returns and future growth potential. Moreover, they often have a strong real estate development potential. And yet major airports tend to also have utility-like qualities, with a unique selling proposition in their catchment areas (Barclays Bank, 2014; HSBC, 2014; Credit Suisse, 2017). For a number of airports progressing privatization is also providing a new source of revenue from equity participations elsewhere. A further diversification of the business and tapping new revenue streams is a common strategic approach, primarily affecting the commercial side of the airport. As regards the airside of the business, focusing on a main target customer group including their clientele is a complementary option for facing market dynamics and evolving competition.
2.2.2 Airport business models Whereas airports and airlines are intrinsically linked and rely on one another to operate efficiently, they are based on different business models. Airlines are able to move quickly to respond to changes in traffic flows, by leasing or retiring capacity. Airports, on the other hand, must make long-term planning decisions to safeguard capacity and meet the needs of a rapidly growing aviation industry and develop new business models. Vogel and Graham (2013) have summarized that current airport classifications established by the ACI, European Union (EU), Federal Aviation Authority (FAA), International Civil Aviation Organization (ICAO), and several consulting companies are broadly related to five factors, which have all been identified as being relevant in terms of economics and financial performance: G
G
G
G
G
airport location, volume of traffic, nature of traffic and role of airport, congestion, utilization and technical characteristics, and ownership, organization, and regulation.
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Foundations of Airport Economics and Finance
Another way of differentiating airports is according to their business model, which is closely related to the business/network model of their airline customers. This does not necessarily always allow for a clear separation though, as they are not mutually exclusive and some airports may fit into more than one group due to a partial overlap. In essence, a business model is the way in which the company operates, or the method of doing business by which it can generate revenue and sustain itself. The business model details how it makes money by specifying where it is positioned in the value chain. Each business is characterized by a unique set of processes for creating value for customers. This involves a number of key elements, such as the main (and possibly secondary) target customer group, products to be offered, promotion and distribution as well as allocation and management of resources (Osterwalder and Pigneur, 2010). First applications of the business model approach for analyzing airports have only been introduced more recently, including Frank (2011) and Kalakou and Maca´rio (2013). This is again many years after the successful adoption to the airlines’ world, similar to the time-lag in using performance measuring and benchmarking techniques. For airports, this basically means how they convert traffic predominantly derived from gross domestic product (GDP) into revenue and profits (eventually adding value) by the provision of demanded infrastructure and services, as illustrated by Fig. 2.1. Both, in turn, do incur capital and operating cost. Operational efficiency
GDP/traffic demand
Airport infrastructure and services
Regulation/ yield, profit
Capital structure
Return/ shareholder value
Asset utilization/ investment
Figure 2.1 Fundamentals of an airport business model. Source: Author.
This main value proposition is key to the business model concept. In contrast to the conventional classifications it has some merits by pursuing an analytical rather than descriptive and at the same time business-oriented approach. Moreover, it acknowledges that business models may require adjustments due to the changing industry environment. In this regard, Sharjah airport is an accurate illustration: 25 years ago, it used to be a major Middle East cargo airport, but in the meantime, it primarily hosts low-cost passenger traffic. Table 2.1 summarizes examples for six different models originally introduced by ACI Europe (2010). These are hub airports, destination airports, business airports, low-cost airports, cargo airports, and airport networks, though overlaps are common.
Table 2.1 Airport business models Business model
Africa
Asia-Pacific
Europe
Latin America
Middle East
North America
Primary/Mega Hub Airport
JNB Johannesburg, South Africa
ICN Incheon, South Korea
LHR London Heathrow, United Kingdom
GRU Sao Paulo, Brazil
DXB Dubai, UAE
ORD Chicago O’Hare, United States
Secondary Hub Airport
NBO Nairobi, Kenya
KIX Kansai Osaka, Japan
CPH Copenhagen, Denmark
EZE Buenos Aires, Argentina
AUH Abu Dhabi, UAE
SAN San Diego, United States
Destination Airport
SSH Sharm El Sheikh, Egypt
CGK Jakarta, Indonesia
ATH Athens, Greece
PUJ Punta Cana, Dominian Republic
HAS Ha’il, Saudi Arabia
LAS Las Vegas, United States
Business Airport
LAD Luanda, Angola
JHB Senai, Malaysia
LCY London City, United Kingdom
EIS Lettsome, BVI
AZI Al Bateen, (Abu Dhabi), UAE
VNY Van Nuys, United States
Low-Cost Airport
FEZ Fes-Saiss, ONDA, Morocco
OOL Gold Coast/Coolangatta, Australia
BTS Bratislava, Slovakia
TIJ Tijuana, Mexico
SHJ Sharjah, UAE
DAL Dallas Love Field, United States
Cargo Airport
ADD Addis Ababa, Ethiopia
MAA Chennai, India
LEJ Leipzig-Halle, Germany
GDL Guadalajara, Mexico
SHJ Sharjah, UAE
MEM Memphis, United States
Airport Network
ACSA, South Africa
AAI, India
AENA, Spain
ASA, Mexico
n/a
NAS, Canada
Source: Compiled by author from various sources.
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Foundations of Airport Economics and Finance
This is clearly a rather broad and overlapping typology, where airports frequently fall into more than one category. Also, the pursued business approach is usually not the result of a singular board decision but of a historical development of capitalizing on given and/or acquired strengths like geographical location or home base of a flag carrier and its alliance partners, etc. Nevertheless, traffic volume and structure is mostly different across business models, reflecting the majority of airline customers. Table 2.2 highlights major traffic characteristics for a subset of airports presented in Table 2.1. It compares the individual compound annual growth rate (CAGR) to the overall regional growth for the 10 year period 2007 16, measured in percentage points (ppts). In addition, the cargo share (freight and mail) of total traffic (measured in workload units, WLUs) and the share of transfer passengers complement the 2016 traffic actuals. While airports generally participate in the overall traffic development of the region they are located in, a comparison of the growth differential between average regional and airport specific growth rates reveals a more disparate picture. There are a number of successful examples for attracting additional passenger services like ADD, AUH, DXB, FEZ, GRU, LCY, and SHJ or cargo shippers/integrators like BTS, LEJ, and MEM. Notwithstanding, the uneven distribution of traffic growth does not show a consistent business model-specific pattern. Taking into consideration the statistical effect of sometimes high growth rates in relation to a small basis, the individual development appears to be confined to the overall regional scenario supported by individual strengths delivering a competitive edge, for example, location, and occasionally supplemented by extraordinary effects. The significant impact of geographical location, in combination with a wellmanaged home-based airline industry, on an airport’s ability to grow is also evidenced by Arthur D. Little (ADL) in their 2013 “World Airport Report”. In addition, the market entry of low-cost carriers (LCCs) has also exerted a positive impact on numerous ones (ADL, 2013). After all, it are the airlines’ decisions regarding their route network, code-sharing, and alliances, as well as mergers or cease of operations, which are significantly impacting on the traffic volume, structure and growth enjoyed by an airport. Airports are locally fixed and heavily invested in long-term assets which basically cannot be put to alternative use. Airlines, in contrast, are flexible enough to react to the market dynamics, including new ground infrastructure becoming available as well as (geo-)political developments. Feature 6.1 will discuss various examples for effects of airline strategies and other extraordinary events on the business development of airports in great detail. In conclusion, airports are fundamentally “derived” businesses, which is of overriding impact on their economics and financial performance. Their business model should accommodate the demand for facilities and services derived from the volume, mix and growth of traffic they are hosting. The airports’ business is fundamentally derived from the needs of their main customers, the airlines; their requirements, in turn, depend on their very own business model and resulting traffic structure and quality. Despite recent convergence of the models (or even hybridization), this is based on the respective segments served. Their main passenger target groups at the same time represent the airports’ consumers.
Table 2.2 Traffic development of selected airports 2006 16 Airport
Region
PAX (‘000) 2016
CAGR (%)
JNB, Johannesburg NBO, Nairobi FEZ, Morocco ADD, Addis Ababa
AFR AFR AFR AFR
20,804 7,113 893 8,731
1.8 4.8 14.6 14.3
ICN, Incheon CGK, Jakarta JHB, Malaysia OOL, Australia
ASP ASP ASP ASP
57,765 58,195 2,828 6,411
CPH, Copenhagen LCY, London City BTS, Bratislava LEJ, Leipzig
EUR EUR EUR EUR
GRU, Sao Paulo EZE, Buenos Aires PUJ, Punta Cana GDL, Guadalajara
Individual vs regional CAGR (ppts) (%)
Cargo (t) 2016
Cargo share WLU 2016 (%)
Cargo share WLU 2006 (%)
Share transfer PAX 2016 (%)
Business model
21.8 1.2 11.0 10.7
310,084 231,798 84 211,710
13 25 0 20
16 35 2 17
28 36 ,1 61
Primary Hub Secondary Hub Low Cost Cargo A/P
7.4 6.6 8.0 5.8
20.8 21.5 20.2 22.3
3,542,643 601,329 6,244 6,646
38 9 2 1
45 11 3 0
15 7 1 1
Primary Hub Destin. A/P Business A/P Low Cost
29,043 4,539 1,757 2,190
3.4 6.7 21.0 20.7
20.5 2.8 24.8 24.5
423,042 1,973 22,903 1,047,879
13 .1 12 83
15 .1 3 10
21 4 2 1
Secondary Hub Business A/P Low Cost Cargo A/P
LAC LAC LAC LAC
36,844 9,831 6,898 11,405
8.3 3.7 7.3 5.3
2.0 22.6 1.0 21.0
508,185 176,869 20,663 151,283
12 15 3 12
23 21 n/a 15
30 13 1 3
Primary Hub Secondary Hub Destin. A/P Cargo A/P
DXB, Dubai AUH, Abu Dhabi HAS, Saudi Arabia SHJ, Sharjah
MEA MEA MEA MEA
83,654 24,482 822 11,048
11.3 16.6 7.2 13.7
2.9 8.2 21.2 5.3
2,592,454 813,169 659 180,911
24 25 1 14
34 33 4 47
54 73 ,1 14
Primary Hub Secondary Hub Destin. A/P Low Cost
ORD, Chicago SAN, San Diego LAS, Las Vegas MEM, Memphis
NAM NAM NAM NAM
77,961 20,726 47,497 4,001
0.2 1.7 0.4 29.8
21.3 0.3 21.0 211.2
1,562,860 171,510 101,148 4,322,071
17 8 2 92
17 10 2 77
45 7 15 1
Primary Hub Secondary Hub Destin. A/P Cargo A/P
Note: Bold print 5 sample airports revisited throughout the book. WLUs, Workload units. Source: Compiled by author from Albatross Airports Database, 2018. Marketing Data for the Airport Industry. Momberger Airport-Information, Sainte Anastasie; German Aerospace Center (DLR), 2017. Sabre Market Intelligence Database. Institute for Air Transport and Airport Research, Cologne.
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Foundations of Airport Economics and Finance
Although the deregulation and liberalization of the aviation sector has led to considerable overall growth, the lion’s share resulted from LCCs. As reflected by Table 2.2, several smaller or regional “secondary” airports have benefited from the market penetration of the LCC airline business model and “accidental hubbing,” based on the developing self-connecting culture of passengers. Various others will probably continue doing so as this model is being rolled out to the long-haul by carriers such as Norwegian, Scoot, Eurowings, Icelandair, WestJet, Wow, etc. as well as recently announced Level (International Airline Group, IAG) and Boost (Air France). In order to compete successfully in the commercialized environment, airports have to adjust their business models. Ideally speaking, the design of infrastructure, layout of facilities, and operational processes should be aligned to each other and directly related to the needs of customers and users. Moreover, performance management techniques need to be adopted as a means of reducing costs, optimizing levels of service delivery and ultimately improving the bottom line. Based on these considerations, several airports operate dedicated facilities for LCCs, including Copenhagen (CPH, GO Facility), Kansai International (KIX, Terminal 2), Tokyo Narita (NRT, Terminal 3) and Melbourne (MEL, Terminal 4). Frankfurt airport operator Fraport has announced to accelerate construction work of the LCC pier at its new FRA Terminal 3, to provide cost-saving, no-frills handling (Willis, 2017; Vogel, B., 2017). Others like London’s Gatwick (LGW), Luton (LTN), and Stansted (STN) as well as Bergamo (BGY) and Budapest (BUD) or Bangkok’s Don Mueang (DMK) may be considered low-cost airports per se, due to their tremendously high share of airline customers operating this model. Particularly in Europe, the demands as well as the practices of the airline customers have changed notably, according to the studies of Copenhagen Economics (CE) (2012) and Oxera (2017). This has been found to be caused by adjusted or even new airline business models and technological changes. The development of the LCC model and the resulting point-to-point services created a more dynamic market with airlines both deploying additional aircraft and churning existing routes on a Europeanwide basis. Furthermore, they appear to be less demanding of facilities, ultimately reducing entry costs in the airports market (Hanaoka and Saraswati, 2011; Graham, 2013). The point-to-point traffic has enabled passengers to bypass hubs, putting pressure on secondary hubs (Beria et al., 2017). Hub-bypassing was also supported by modern aircraft technology, reducing the minimum efficient scale for operations. Furthermore, the consolidation of hub airlines and increasing multi-hub operations provide additional commercial options and stronger buying power. On the other hand, the rise of hubs in the Middle East has resulted in increased competition for European hubs. Finally, the development of high-speed rail has increased competition for shorthaul travel, which has contributed to larger airport catchment areas and the degree of competitive overlap. Evidence suggests that it is primarily in the European context that airports are being perceived to be businesses in their own right. This appears to be related to the sector’s development since the late 1980s, which has resulted in the situation that Europe is the most mature market in terms of airport commercialization and privatization. Target customer groups have been identified and developed further
The metamorphosis of airports
25
over time, capitalizing on the given strengths of the respective airports. Elsewhere, infrastructure models are very much dependent on how airports are embedded into the overall political setting of their home countries. After all, airports originally were government owned—and the majority still are, including North America and the Gulf region, where infrastructure models are distinctly different. European airports are characterized by commercialization and diverse ownership structure. This development, partially due to limited and further decreasing public financing, is likely to be fueled by the new European Commission (EC) “State Aid Guidelines” to be discussed in Feature 5.1. Forty-one percentage of the partially or fully privatized airports handle more than 73% of the passenger traffic, 78% of the publicly owned airports are corporatized and their modes of operations are business driven and elaborate. This involves creating sustainable value to the benefit of shareholders, employees, and the local region, by a very clear competitive approach (ACI Europe, 2016). The landscape is different in North America, where the semi-integrated & utility model prevails. Public ownership of semicorporatized airports by municipalities, states, and Federal Government is the standard. Investments and operating costs are financed by respective nonprofit organizations with a focus on wider externalities, such as safe and sustainable transportation. Nevertheless, terminal use and management is frequently organized and financed by private airlines (Jankovec, 2014). The integrated model in the Middle East is again markedly different. In the Gulf States, most notably Dubai, airports are under government ownership and at the same time integrated with the national airline and Civil Aviation Authority. Despite public financing of investment and operating cost no direct return on investment is expected, since they form part of the Emirates’ vision to change the course of aviation history to prepare for the post oil period (Jankovec, 2014). In addition to capitalizing on their local strengths in terms of pursuing a clear business model, a number of airports have expanded into international operations and built brands. As this is most frequently found amongst privatized operators, it will be discussed in Chapter 9, Ownership structure. What all business models have in common, however, are the basic underlying economics.
2.3
The changing surroundings of the airport business
While the environmental impact may severely affect the freedom of airports to do business, other issues like the security threat and technical developments, that is, airport IT, are of equal importance for secure and sustainable operations.
2.3.1 Airport security The entire aviation industry including airports is subjected to regulatory rulings in the area of safety and security and is known to be one of the most regulated industries in the world. While safety deals with upholding safety requirements of
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Foundations of Airport Economics and Finance
industry internal matters, usually of operational nature, security focuses on thwarting threats that are external to the industry, usually being people related. The rules and regulations in this field have shown the propensity to be tightened extremely over time, primarily being driven by external occurrences of terroristic character, like the Lockerbie bombing of 1988 and the terror attacks of September 11, 2001 (9/11). Regulatory bodies of the aviation industry regarding safety and security include ICAO at international level, the European Aviation Safety Agency (EASA) and the EC at EU level, and the national governments at national level, which intend to maintain the paramount importance of safety and security at airports. The resulting costs for the new procedures and equipment, however, are borne by the traveling passenger, as the costs are passed on to them (EC, 2016). In the aftermath of 9/11, the management of the airport security process is complicated. Competencies vary between government departments and countries, and coordination is needed between them to ensure the wrong people or goods do not “slip through the cracks.” Especially as air passenger and freight growth is expected, improvement is required to raise security standards without causing more burdens for airports, operators, passengers, and traders (Menzel and Hesterman, 2018). ACI has launched regional airport collaborative decision-making initiatives in this area, as there is recognition that greater industry collaboration is crucial to further improving the passenger journey and reducing cost to industry. This is demonstrated by the recent agreement between ACI and International Air Transport Association (IATA) to jointly develop “Smart Security”, which aims to reduce the inconvenience of security checkpoints for passengers, while optimizing security screening resources and asset utilization. The initiative will also include implementing new procedures to facilitate risk-based screening and decision-making (Gittens, 2018; Szabo´, 2015). Explosives detection will definitely remain a priority at checkpoints. In the EU, new requirements of the European Civil Aviation Conference (ECAC) on screening hold baggage according to “Baggage Screening Standard 3” will become effective. As regards nonexplosive threat detection, recent technological developments allow for accelerated automation and efficiency thanks to electronics screening research blending with machine learning for improved accuracy (Vogel, B. and Cross, 2018). A comparatively new issue is the field of cybersecurity and related data protection. In addition to the numerous opportunities of progressive digitalization and automation (discussed in the subsequent chapters), this trend is bearing risks at the same time. Cyberthreats make operations and data vulnerable (International Airport Review, 2017; Flight Airline Business, 2018).
2.3.2 Airport information technology The state of technology comprises aspects of advanced technical developments and innovations, affecting the business of airports and in a more general context that of the aviation industry on the whole. Automation and technical advancement, in this regard, play a major role for modernization and innovation of certain processes for
The metamorphosis of airports
27
airports, which speed up the business procedures and enhance the experience for passengers. Examples of passenger experience improvements include: G
G
G
G
G
providing passengers with free Wi-Fi access within the terminal, provision of mobile phone charging stations within the terminal, radio-frequency identification baggage identification, processing, and sorting systems, self-service solutions for passengers for check-in and baggage drop-off, and mobile apps for electronic boarding passes, airport wayfinding, frequent flier accounts or inflight entertainment.
Airports which are already using innovative technologies, like self-service possibilities, do not only satisfy the travelers more, but also increase the number of passengers given the existing airport infrastructure, as fewer lines build up and less time is needed for the activities of passenger and baggage check-in (Cherry, 2015; Unisys, 2015). Hence, the trend is going in the direction of increasingly involving the passengers in contributing to their own experience. London Gatwick Airport (LGW), for example, in partnership with its biggest airline customer EasyJet will run a trial of a new self-boarding technology based on end-to-end biometrics in summer 2018. Personal data collected at the self-service bag drops will be recognized by automated self-boarding gates and verify that each passenger’s passport, face and boarding card match—within less than 20 seconds (Pickering, 2018a). Such innovative solutions are expected to reduce queue times, enhance the passenger experience at every touchpoint, and speed up the overall process. Even more so, in combination with facial recognition/e-passports at immigration. Automatic passport controls are already being used at several airports, for example, London Heathrow (LHR) and Frankfurt (FRA). As new systems are constantly being developed and implementation takes some time, airports always need to look ahead and plan accordingly. Airports continually invest in IT, as the development of the industry has always been driven by technological enhancements in general. IT in particular has been the backbone of airport operations for decades already. This applies to both airside and landside, where applications are numerous and the system landscape is scattered. More recently, though, its significance has increased even more, due to changing demands of airport customers and developing consumer behavior. Given the practical relevance of social media for passenger processing and experience as well as the implications of Big Data for generating additional revenue thus improving the business performance, airport operators can support their long-term strategy in successfully leveraging technology (Dersy, 2015; Fabre, 2017; Phy, 2014). Investment in IT systems is essential for improving customer satisfaction levels by automation, reducing face-to-face services and hence staff cost at the same time. Similar to airlines, the airport industry constantly needs adapting to changes in the business environment. The challenges they have to cope with include passenger expectations and improvements in the passenger journey, optimization of the airport’s infrastructure, and accomplishment of commercial objectives. The “2017 Airline & Airport IT Trends Insights” (Sita, 2017) show which action airports have taken in this respect, with a focus on passenger processing, future automation, and cybersecurity. Total IT investment budgeted for 2017 amounted to USD 8.43bn airports planned
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Foundations of Airport Economics and Finance
spending on information technology, which is equivalent to 5.1% of total revenue. Of note, 15.6% of the airports planned to use IT for business transformation in comparison to 13.2% in 2016. Associated to the advancing digitization are cyber threats which 30% of the airports are preparing for and even 96% of the airports plan a combination of major projects and R&D programs focusing on cybersecurity initiatives over the next 3 years. Fifty-nine percentage of the airports make bag-tracking investments to support the implementation of IATA Resolution 753. Twenty-nine percentage of the airports plan to provide single token or “one identity” biometric ID management solution by 2020 and 58% of the airports invest in single biometric travel token trials. This is another substantial increase against 2016, when 36% of the airports expressed interest in this technology. Moreover, 45% of the airports will fund artificial intelligence (AI) trials over the next 3 years as compared to 24% in 2016. This is a clear indication that both passenger-facing and behind-the-scenes technologies are changing passenger processing and the principle way of how airports are being run, also confirmed by initial budget estimates for 2018 (Flight Airline Business, 2017; Fabre, 2017; Sita, 2018). Such changes are reflected in Feature 2.1. In combination with further innovations it provides an outlook on future airports. Feature 2.1 The airport of the future The aviation industry is characterized by intense market dynamics. During the last decade, passenger numbers have almost doubled and continue growing at comparable rates. Nevertheless, many airlines were—and still are—struggling for financial viability in a highly competitive marketplace. Budget airlines have successfully penetrated the Asia-Pacific region as well, and the low-cost model is now being rolled out to the long-haul. Over the same period, travelers have also changed in several respects—materially driven by the success story of the smartphone. They have developed into postmodern consumers who make extensive use of new information technologies, such as the Internet of Things (IoT) and social media (Sabre, 2014; ACI Europe, 2014). Many prefer to take advantage of self-service options to smoothen their airport experience and demand for airports with fewer hurdles. This requires adequate investment in equipment and IT (Sita, 2017; 2018) and to rethink service quality. According to IATA (2017a), its “Global Passenger Survey” has found that passengers are keen to maximize personal control over their airport experience even further: G
G
G
G
74%, for example, used an electronic boarding pass (in the 12 months before) and 72% had a preference for self-boarding, 68% want to self-tag their bags—preferably with electronic bag tags—and 48% wish to self-drop bags, 64% opted for biometric identification as their preferred token of traveling and 58% fancy automated immigration gates and kiosks, and 63% found real-time information crucial for improving their experience during travel disruption and 42% favor notifications via SMS.
The metamorphosis of airports
As evidenced by the latest edition (IATA, 2018), these new behaviors and needs of airport users have started off a far-reaching process of airport digitization. Progressive concepts like the one suggested by consultancy VisionBox (2017) foresee airports as an open-space place without obstacles, waiting lines and stop-and-go procedures, fashioned more like a mall or art gallery. They expect the future airport ecosystem to be coined by the digitization of the passenger experience and a frictionless journey, where processes are seamless, contactless and in motion. This would actually allow passengers to take full control of their journey as requested in IATA’s surveys mentioned above—using their biometrics features to clear checkpoints, book services, shop and receive personalized information. As referred to earlier, London Gatwick Airport (LGW) for instance will run a trial of a new self-boarding technology based on end-to-end biometrics in summer 2018 together with its most important customer EasyJet already. Personal data collected at the self-service bag drops will be recognized by automated self-boarding gates and verify that each passenger’s passport, face, and boarding card match—within less than 20 seconds (Pickering, 2018a). Such innovative solutions are expected to reduce queue times, enhance the passenger experience at every touchpoint, and speed up the overall process, even more so in combination with facial recognition/biometric fingerprints and e-passports at immigration. Fully fledged automated border control gates are already being used at various airports, including Amsterdam Schiphol (AMS), Frankfurt (FRA), London Heathrow (LHR) and Zurich (ZRH) or being trialed, for example, at Paris-Charles de Gaulle (CDG) and Paris-Orly (ORY) airports (International Airport Review, 2017; Jenner, 2018). Regarding security checkpoints, alternative screening procedures to today’s 2D X-ray technology scanning equipment may be an option for processing passengers more efficiently, including computed tomography (CT) technology. A demonstration at London Luton (LTN) revealed a promising 50% increase in throughput when maximized with automated screening lanes. CT technology is 3D, thus greatly enhancing the ability to visually inspect the contents of carry-on bags for prohibited items. It potentially offers the opportunity for passengers to leave liquids, gels, and aerosols, as well as laptops, in their carry-on bags in future. Such a system will be trialed at JFK in summer 2018. What’s more, such technological advancements and innovations will allow for improving operational flow and with it the passenger experience as well as for growing capacity and devoting resources and real estate to commercial activities (Laustra, 2018; Airports International, 2018a). The highly topical discussion of the blockchain concept, the latest step in the evolution of digital technologies, is even bearing the potential to elevate things to an entirely new level. It is expected to allow for compliance checks to be carried out in a more sophisticated and automated way (Willis, 2018). (Continued)
29
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Foundations of Airport Economics and Finance
Feature 2.1
(cont’d)
Creating the “smart airport” of the future may be more about implementing a mobile, one-identity ready, IoT-enabled line of seamless self-service interaction points using biometrics and mobileID for speedy on-the-move transactions (Vision-Box, 2017)—rather than a yoga room, butterfly garden, IMAX movie theater, or indoor skating rink, for instance; these amenities became recently available at San Francisco (SFO), Singapore Changi (SIN), Hong Kong (HKG), and Seoul Incheon (ICN). Still, some architects even envision community-style airports, acting like a town square. This would allow travelers to do everything they are used to do in their home neighborhood, making it a place they want to go rather than where they have to go—or in short: turn needs into pleasure. This community space will certainly include shopping, but the experience might be different from the established retail concepts. Advanced passengers don’t want to be manipulated into shopping, but giving the waiting time back as if they were still in their community may make them feel more comfortable, relaxed, and willing to buy more. This similarly applies to employees (Sumers, 2018). IATA and ACI have launched their own joint initiative New Experience in Travel and Technologies (NEXTT) by the end of 2017 only. It is supposed to synthesize a common vision of the future on-ground transport experience against the background of air travel demand doubling by 2036 approximately. With the intention of improving the passenger experience and optimizing operational efficiency, NEXTT will: G
G
G
explore the possibilities of transferring on-site processes, such as security processing and baggage check/drop, off-site, investigate how tracking and identification technology, automation and robotics can improve safety, security, the customer experience, and operational efficiency, and will promote the better use of data, predictive modeling, and AI to facilitate realtime decision-making.
Various airports are already involved in projects exploring NEXTT concepts, including Amsterdam (AMS), Bangalore (BLR), Dubai (DXB), Heathrow (LHR), and Shenzhen (SZX) (IATA, 2017b; Garcia, 2018). In conclusion, the digital transformation is fundamentally converting the airport business in a digital world, that is, leveraging the use of emerging technologies and associated processes to add value for customers (airlines) and consumers (passengers). This will require significant investment to enable the IT landscape, but managed thoroughly it will eventually strengthen the airport value proposition and contribute to achieve commercial objectives (ACI, 2017b; Frost and Sullivan, 2017). A current example is Incheon International Airport (ICN), which has given consideration to various of the above-discussed issues already, when combining technology and design to significantly transform the experience of passengers going through its new Terminal 2 opened in January 2018. It
The metamorphosis of airports
31
features a high amount of self-service equipment, amongst others Sita’s bagdrop technology. The latter streamlines the process for passengers and makes more efficient use of terminal capacity (King, 2018; Pickering, 2018b). Fig. 2.2 summarizes the ongoing digital evolution of airports.
Airport 1.0 Airport 2.0 Airport 3.0 Airport 4.0
Manual and analogic processes Subustantial time-lag between resource solicitation and airport reaction Initial automation of selected process steps Self-service facilities, e.g., check-in kiosks, baggage drop Optimization of several core processes, e.g., flow processing/monitoring Limited data sharing Overall stakeholder integration Real-time response to operational needs and customer requests
Figure 2.2 Stages of airport digitization. Source: Adapted from Arthur D. Little (ADL), 2015. Airports 4.0: impact of digital transformation on airport economics. ,http://www.adlittle.com/downloads/tx_adlreports/ 2015-05-Arthur_D_Little_T_T-Impact_of_Digital_on_Airport_Business_Model.pdf. (accessed 30.05.15.).
Alongside the progressing digitization and dependence on advanced technology goes the concern regarding cybersecurity. Adequate design and careful systems integration are essential for airports to become more resilient to international disruptions and cyber threats. Munich airport (MUC) unveiled a new center to fight cybercrime in early 2018. The Information Security Hub (ISH) is a competency center where in-house IT specialists work together with industry experts across Europe to develop strategies for fighting cyberattacks and new approaches to defend against cybercrime—not only for airports. Full prevention, however, seems hardly to be possible (Lauterbach, 2017; Airports International, 2018b). The impact of the featured customer-centric growth scenario on operational efficiency, infrastructure investment, and ultimately the finances of an airport will be discussed in more detail in Section 4.4, Operational efficiency, as well as Features 8.1 and 11.1 on Airport collaborative decision making and Towards breakeven and profitability, respectively.
2.4
Summary
Airports have meanwhile positioned themselves as an integral part of the travel value chain. Over the last 30 years, they have evolved from being mere infrastructure providers into sophisticated and business-oriented service providers. Nowadays, many have become complex businesses, operating in unique and evolving physical, financial and regulatory environments.
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Foundations of Airport Economics and Finance
Diversification and commercialization as well as focusing on a main target customer group are strategic options, helping to face these problems successfully, but have their limitations. Airport business models usually capitalize on given strengths, for example, location, or have developed over time—and are essentially predicated on the model of their main customers. Specific attention needs to be given to the rapidly changing environment. This includes long-standing security threats, while more recent concerns in terms of cybersecurity are adding a new dimension to this. Changing customer demands and consumer behavior pose additional problems in the digital age. Therefore, the chapter’s feature is on the airport of the future, presenting visions of industry experts. These are addressing the travelers’ demands to be in control of their journey using their smartphones and additional advanced technology at the airport.
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