airports - dawn of a new era
TRANSCRIPT
A p r i l2 0 0 4
Prepar ing for one of the industry ’sb iggest shake-ups
Airports — Dawn of a New Era
BCG The Boston Consulting Group
The Bos ton Consu l t ing Group i s a genera l management consu l t ing f i rm tha t i s a g loba ll eader in bus iness s t ra tegy. BCG has he lped compan ies in eve r y majo r indus t r y and mar -ke t ach ieve a compet i t i ve advantage by deve lop ing and implement ing winn ing s t ra teg ies .Founded in 1963, the f i rm now opera tes 60 o f f i ces in 37 count r i es . For fu r the r in fo rma-t ion, p lease v i s i t our Web s i te a t www.bcg .com.
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A C K N O W L E D G E M E N T S 2
I N T R O D U C T I O N 3
E X E C U T I V E S U M M A R Y 5
N E W PAT T E R N S O F PA S S E N G E R G R O W T H 9
P R E S S U R E S T O A C T M O R E L I K E B U S I N E S S E S 2 1
S T R AT E G I E S T O S U C C E E D I N T O M O R R O W ’ S E N V I R O N M E N T 2 5
I M P L I C AT I O N S F O R A I R L I N E S , I N V E S T O R S , A N D G O V E R N M E N T S 3 1
B C G ’ S E X P E R I E N C E I N T H E A V I AT I O N I N D U S T R Y 3 3
K E Y Q U E S T I O N S 3 5
T A B L E O F C O N T E N T S
Dr. Daniel Stelter is vice president and director at The Boston Consulting Group in Berlin and GlobalPractice Area Leader for Corporate Finance and Strategy.
Dr. Achim Fechtel is vice president and director at The Boston Consulting Group in Munich and a BCGairport and aviation expert.
Premal Desai is manager at The Boston Consulting Group in Frankfurt.
Our co-authors include:
Mike Deimler is vice president and director in Atlanta and Global Head of BCG’s Travel and TourismPractice Area.
Martin Koehler is senior vice president and director in Munich, a member of the Travel and TourismLeadership Team and a BCG airline expert.
Greg Sutherland is vice president and director in Atlanta, a member of the Travel and Tourism Leadership Team, and a BCG airline expert.
We wish to thank our interview partners and experts who unhesitatingly provided us with information.We also wish to thank the BCG project team under the direction of Premal Desai: Markus Hepp,Matthias Osthoff, Amadeus Petzke, Keith Conlon, Hendric Fiege, Ralf Ermisch, and Patrick Buch-mann.
A C K N O W L E D G E M E N T S
CCoonnttaaccttss
For fu r the r in fo rmat ion on th i s s tudy,p lease contac t your reg iona l exper t :
Europe: DDrr.. DDaanniieell SStteelltteerr: [email protected]
US: MMiikkee DDeeiimmlleerr: [email protected]
Asia: RRoossss LLoovvee: [email protected]
3
A s p a s s e n g e r n u m b e r s p i c k u p i n t h e w a k e o f r e c e n t i n t e r n a t i o n a l c r i s e s ,i n c l u d i n g 9 / 1 1 a n d S A R S , m a n y a i r p o r t s a r e a n t i c i p a t i n g a r e t u r n t o t h es t a b l e , l o n g - t e r m g r o w t h t h a t c h a r a c t e r i z e d t h e l a s t t w o d e c a d e s . H o w e v e r ,t h e r e a l i t y i s l i k e l y t o b e d i f f e r e n t , a c c o r d i n g t o B C G r e s e a r c h .
Although passenger volumes will rise, albeit more slowly than originally forecast, growth will be con-centrated in a much smaller number of airports in the future, leaving many operators with far less traffic than their already overly ambitious investment plans assume. True, low-cost carrier (LCC) traffichas led to booming passenger numbers for some airports, but profitability of LCC airports remains amajor issue. To add to these challenges, operators will come under mounting pressure to act more likebusinesses—not just infrastructure suppliers, with much lower costs and higher revenues.
In short, the rules of the game are about to change.
This report describes the forces driving these changes and their strategic implications for not only air-ports but airlines, investors, and governments as well. Based on in-depth research and interviews withexecutives throughout the aviation industry, it also outlines the strategies and business models that air-ports will need to survive and thrive. Most airports can succeed, provided they start preparing now. Wehope this report facilitates this process and, at the very least, provides a much needed wake-up call.
I N T R O D U C T I O N
4
Internationalhubs
InternationalO&Ds
Secondaryhubs and
O&Ds
Regionals
Atlanta
Vienna
Example
High share of transfer trafficLarge catchment areaPAX in excess of 40M
Lower share of transfer trafficLarge catchment areaPAX in excess of 20M
Low share of transfer trafficSizeable catchment area but often overlappingPAX around 10M
Key characteristics
Main hub of major international airlineLeadership role in alliance
Main hub of international long-distance airline or secondary hub of major airlineSubordinate or niche player in alliance
Main hub of regional airline or secondary hub of major airlineSubordinate role in alliance
Regional airlinesLCC
Airline
18
32
~ 150
~ 2,400
No. ofairports
PAX = 79M
PAX = 12M
No transfer trafficSmaller or remote catchment areasPAX below 10M
AlbanyInternationalAirport
PAX = 1.5M
Sydney
PAX = 22M
Source: BCG analysis
F O U R T Y P E S O F A I R P O R T S C A N B E D I S T I N G U I S H E D
E X H I B I T 1
This report distinguishes between four different types of airports: primary international hubs, second-ary hubs, international “origin and destination” (O&D) airports, and regional airports. The table belowdescribes the key characteristics of each of these. (Exhibit 1)
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The drive for lower costs among the world's top airlines, coupled with the rise of low-costcarriers, will substantially alter the distribution of passenger growth between airports.
The unprecedented string of international crises over the last three years—from 9/11 and SARS to theIraq war—has left many of the world's financially fragile airlines with unsustainable losses. To cut costs,the members of the top three alliances will redirect the bulk of their long-haul transfer traffic into ahandful of mega-hubs, sidelining many of today’s secondary hubs. This trend will be accelerated by“open-skies” deregulation, mergers, and the introduction of mega-planes, such as the A380, which onlythe largest hubs with significant feeder capacity will be equipped to handle. In fact the share of total traf-fic at the top 50 airports claimed by nine potential mega-hubs has already risen from 30% to 34% in thelast two years.
The expansion of low-cost carriers represents a second trend. Attractive O&D locations as well as someregional airports stand to benefit from an increase in convenient and financially attractive point-to-point travel in the short- to medium range. This decentralization of traffic patterns might be repeatedin the long-haul segment, once new and cost-efficient equipment like Boeing’s 7E7 becomes available.
Among the large airports, only the mega-hubs and attractive O&D locations that feature prominently inthe alliances' schedules will enjoy significant long-term growth. Just 40 or so of today's 180-plus hubs arelikely to be in this position. Mega-hubs will profit from the consolidation of long-haul traffic. While theyare largely bypassed by LCC traffic, they will not be negatively affected by the general rise in point-to-point travel with planes like the 7E7, since frequencies will increase as mega-hubs are too essential to bebypassed by long-haul traffic.
Selected O&D locations as well as regional airports well positioned to attract LCC traffic will gain fromthe rise in point-to-point traffic. The others, notably secondary hubs with weaker airlines, will experi-ence much less growth than their overly ambitious investment plans assume. Long-haul traffic is conso-lidated away from them into mega-hubs, and point-to-point travel threatens to bypass many secondaryhubs. This will force them to explore new avenues to cover the cost of their capital and to grow profitably.
E X E C U T I V E S U M M A R Y
6
With growing affluence in previously remote regions of the world and the further rise of LCCs, a signi-ficant number of regional airports and smaller international O&Ds will also experience substantial pas-senger growth. Still, overly ambitious plans speculating on this growth are in many cases risky, since thewinners in this group of airports are much harder to predict.
F a c e d w i t h l o w e r t h a n a n t i c i p a t e d g r o w t h , a i r p o r t s w i l l h a v e t o a c t m o r e l i k eb u s i n e s s e s t o t h r i v e , n o t s i m p l y a s i n f r a s t r u c t u r e s u p p l i e r s . P r i v a t i z a t i o n s w i l li n t e n s i f y t h i s n e e d .
As state-owned and protected monopolies, airports have historically been treated as means to regener-ate regional economies, not as businesses. This has not only led to massive investments that often bearlittle relation to airports’ growth potential. It has also created an oversupply of hubs—often with excesscapacity, and bred unnecessarily high operating costs, which could in general be reduced by 20% to30%. These costs will have to come down—in order to not just keep tomorrow’s airports profitable butto satisfy carriers' demands for lower, more flexible charges.
Governments’ growing reluctance to subsidize and protect airports, reflected in a rising number of pri-vatizations and more widespread deregulation of the value chain will add to this pressure. Under theglare of the world's capital markets, privatized airports will be expected to deliver more aggressiveimprovements in revenues. Non-aviation revenues such as retail will be critical, particularly for destina-tions dependent on LCCs: in BCG’s experience, no LCC airport is likely to achieve profitability withoutextraordinary focus on non-aviation revenues.
D i f f e r e n t t y p e s o f a i r p o r t s , s u c h a s m e g a - h u b s a n d r e g i o n a l a i r p o r t s , w i l l r e q u i r ed i f f e r e n t i n v e s t m e n t a n d c a r r i e r s t r a t e g i e s .
Only airports home to a leading and financially secure main carrier in one of the alliances will be eligi-ble to become a mega-hub. They will also need to be in a central location with a large, affluent catch-ment area. Most of these airports still need to make sizeable block investments to accommodate futuregrowth. Their carrier focus will have to shift to the dominant member of their alliance. Providing out-standing service and innovative products will be vital.
All other airports should freeze block investment programs and only add capacity on an incremental“needs-musts” basis. Destinations that are likely to remain secondary hubs should concentrate on alli-ance carriers, while international O&D airports must court intercontinental airlines and sweat existingassets. Targeting LCCs in order to fill existing overcapacities can be a worthwhile consideration. Re-gional airports should target LCCs, underpinned by tight cost management.
In all cases, operators will have to work much more closely with the carriers to optimize joint interfacesand to leverage cost and revenue synergies. Such opportunities have been underexploited due to thehistorically adversarial relationship between the two players.
7
S e l e c t i n g t h e r i g h t p o s i t i o n i n t h e v a l u e c h a i n w i l l b e d e c i s i v e .
Few operators have the breadth of expertise and resources to optimize every link in a value chain asdiverse as an airport's. Retail, ground handling, and other links in the chain all require different skillsand business models. Tomorrow's winners will position themselves in the section of the chain where theycan extract the maximum value based on their capabilities and the competitive outlook of their chosensegment.
Some will specialize in particular links in the chain and leverage their expertise, especially in standard-ized, labor-intensive activities such as facilities management and ground handling. Others will handlebroader categories of services. A minority, meanwhile, will act as “orchestrators,” coordinating almostentirely outsourced elements of the value chain in order to ensure the suppliers deliver a consistentlyhigh, cost-effective level of service. Each option will require a different business model, including differ-ent skills, and different levers to lift revenues and reduce costs.
P l a n n i n g f o r t h i s n e w w o r l d m u s t s t a r t n o w — t h e p r o c e s s w i l l y i e l d i m m e d i a t er e t u r n s .
This new aviation landscape is likely to take shape within the next ten years. Already there is evidence ofairlines consolidating traffic into larger hubs and movement to introduce more competition into theairport sector. To succeed in tomorrow’s environment, it’s essential that airport operators identify theirlikely position in the new landscape, develop appropriate investment and carrier strategies, and positionthemselves at the optimum point in the value chain.
The imminent trends will lead to a stronger segmentation among airports. They should proactively startto enter this competition, not only by adding abundant capacity and thus adding cost, but by definingtheir role in the future aviation arena and by differentiating accordingly.
Above all, they have to operate more like profit-driven businesses, reducing costs and pinpointingopportunities to lift revenues per passenger. This can be done now and will generate rapid rewards.
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N E W P A T T E R N S O F P A S S E N G E R G R O W T H
For decades, the world's top airports have enjoyed relatively stable growth under the protective wing of governments, encouraging many to invest heavily in additional capacityon the assumption that tomorrow will simply be a continuation of the past. But their ulti-mate paymasters—the airlines—live in a very different world. Their demands, not the leastof which will be for lower costs, will radically alter how future passenger growth is distrib-uted amongst airports, thereby creating clear winners and losers.
A l i f e c y c l e o f a i r - t r a f f i c p a t t e r n s
The pattern of air traffic has been following a particular life cycle. Point-to-point connections betweenthe world's largest cities dominated networks in the early post-war period. Only a few routes had sufficientdemand to serve air traffic. With growth in demand came development of a large number of small andmid-sized regional hubs and international O&Ds, a second stage of the life cycle. Most recently, increa-sing cost pressures as well as airline and alliance consolidation is leading to a concentration of long-haultraffic into a few mega-hubs, with an accompanying rise in continental point-to-point traffic. This putsmassive pressure on the "middle tier," a significant number of secondary hubs. While this development isalready evident in the US and Europe, Asian air traffic is still in an earlier phase of the life cycle.
Exhibit 2 describes the current trend. Until recently, there was a clear distribution of roles in the aviationlandscape, with steady growth for all players. The emergence of LCCs as well as technological advances inthe construction of new planes have substantially redistributed the shares in the matrix. Growth will befar less homogenously spread in this time of change. LCCs have increased the area of point-to-point tra-vel, which is being further expanded by a new generation of planes such as the 7E7. The pressure exac-ted on “established” airlines, signified by the shrinking size of the flag carriers’ pie, leads to an increasingconsolidation of transfer traffic into few mega-hubs. Let us look at these developments in more detail.
T h e p r o b l e m : a n o v e r s u p p l y o f h u b s
Airports are arguably the most comfortable members of the aviation industry. As natural monopolies,protected by regulations and predominantly owned and subsidized by governments, most have enjoyedstable, long-term growth. This is reflected in the fact that the rankings of the world’s top 50 airports asmeasured by passenger numbers barely changed between 1991 and 2003; as Exhibit 3 illustrates: sevenairports dropped out of the top 50 over this period, but none of them was a member of the top 30. It can
also be seen in airports’ disproportionately high margins, relative to airlines’: on average, airports’ cashand profit margins are roughly four times higher. In addition, their return on investment is more thantwice as high (see Exhibit 4).
The problem is that governments have not treated airports as profit-oriented businesses but as infra-structure suppliers whose primary aim is to boost regional economies. In interviews with BCG, government entities responsible for regional and international airports all cited regional economic considerations, such as employment and tourism, as the key drivers of investment decisions. Althoughthis strategy has often had the desired effect—large hubs like Atlanta typically employ 45,000-plus people-—it has produced three major difficulties:
An oversupply of hubs: This can be seen in the dense clusters of hubs in Exhibits 5–7. Does US Air-ways, for example, really need three neighboring hubs on the eastern coast of the USA (Exhibit5)? Or does the SkyTeam alliance require four hubs in Europe within an hour’s flying time of oneanother (Exhibit 6)? Since Asia is still in an earlier stage of the air-travel life cycle, the situationthere is somewhat different, with many aiports still engaged in a battle for mega-hub status. Eventhose airports not achieving this status will enjoy significant (though smaller) growth over thenext decade (Exhibit 7).A capacity imbalance between hubs: The emphasis on regional economic development at theexpense of commercial considerations has led to massive block investments that bear little relation to airports’ growth potential, creating excess capacity at some locations and an under-supply at others. In most cases, surplus capacity is the norm. As Exhibit 8 illustrates, based on agroup of North American airports that plan to invest $24.5 billion over the next two years, opera-tors will have excess capacity of between 29 million and 352 million (3.9% to 46.9% of total
1 0
(1) Point-to-pointNote: Schematic representationSource: BCG analysis
(2) Flag carrier P2P(3) Low-cost P2P(4) Flag carrier hubbing
Previously:Clear role allocation—growth in all sectors
Today:Substantial change—uneven growth
P2P(1)
High
(O&D airports)
Hubbing(all hubs)
Hubbing(all hubs)
Hubbing(primary hubs)
LowShort-haul Long-haul
Distance of city pair
Avail
able
RPK
for c
ity p
air
FC P2P(2)
High
(O&D airports) FC hubbing(increasinglymega-hubs)
FC hubbing(increasinglymega-hubs)
LowShort-haul Long-haul
Distance of city pair
LCC steal of FC P2P
Avail
able
RPK
for c
ity p
air
FC hubbing(4)
(increasingly mega-hubs)
2
1
3
1 Technological change (e.g., 7E7)3
New P2P routes possible due to LCC's lower cost structure2
LCC P2P(3)
E M E R G E N C E O F L C C A N D T E C H N O L O G I C A L C H A N G E H A V E F U N D A M E N T A L L Y C H A N G E D A I R L I N E A N D A I R -P O R T L A N D S C A P E
E X H I B I T 2
1 1
(1) Classification of airports as private owned from start of prioritization processSource: Annual reports; ACI; authorities; press search; web pages; BCG analysis
Private owned(1)Public ownedM PAX, total PAX, about 3.4 billion
2533
30
79
273034
37
27
29 36
5537
53
25
33 69
TorontoChicagoMinneapolisSeattleSt. Louis (20)
DenverSalt Lake (19)Las VegasSan Franciso
Honolulu (20)Phoenix
Los Angeles
Atlanta
NewarkCincinnati (21)
Detroit Boston (23)
New York JFK (32)
Manchester (20)London LHRLondon LGWParis CDGBarcelona
Madrid
Palma de Mallorca (19)
Paris ORY
RomeMunichFrankfurt
AmsterdamLondon STN (19)
3063
48
362223
24
4048
26
New York LGA (22)Baltimore (20)
Charlotte (23)Orlando
MiamiHoustonDallasMexico City (22)
Philadelphia
Osaka (19)
Tokyo HND
Tokyo NRTFukuoka (19)
BeijingSeoul
Hong Kong
Bangkok
Singapore
Jakarta (20)
Sydney
24
27
202663
22
30
25
Stockholm, Copenhagen, Sapporo, Düsseldorf, Pittsburgh, Washington, and Zurich no longer among the top 50
R A N K I N G O F T O P A I R P O R T L O C A T I O N S H A S R E M A I N E D F A I R L Y S T A B L E O V E R T I M E
E X H I B I T 3
(1) Calculated with PAX multiple (2) First ten having available data(3) Airports: BAA, Fraport, Copenhagen, Vienna, Zurich; airlines: Austrian Airlines, British Airways, Lufthansa, SAS, Swiss(4) Ranked by revenues 2000Note: Airport companies with available data are most significant for analyses as data is published by companies that target profit maximizationSource: Airlines business; annual reports; BCG analysis
Top 10 airport companies(3)(4)
Top 10 airlines(4)
Revenues
11,988
142,739
x 11.9
EBITDA(2)
5,070
17,483
x 3.4
Net result
1,4144,160
x 2.9
= 18.7% oftotal
market(1)
= 35.3% oftotal
market(1)
ROE(3)
13% 7%
ROI(3)
11% 5%
Profit margin
12% 3%
Cash margin
42% 12%
A I R P O R T S H A D S I G N I F I C A N T L Y B E T T E R M A R G I N S T H A N A I R L I N E S E V E N B E F O R E R E C E N T C R I S I S
E X H I B I T 4
1 2
STAR
= 18M PAX
Oneworld
SkyTeam
Other
(1) Assumes successful Air France-KLM mergerNote: Alliance capacity share is measured in percent of scheduled seat capacity in 2002, total PAX numbers from 2003, MXP from 2002Source: CSSB Hub Fact Book 2003; BCG analysis
Manchester (20)
Madrid (36) Barcelona (23)
Rome (26)
London LHR (63)London LGW (30)
Vienna (13)Milan (17)
Copenhagen (18)
Sabena grounding led todownsizing of flag carrier
Swissair grounding led tosignificant downsizing offlag carrier. Entry to Oneworldprovides reorientation
Brussels (15)
Paris ORY (22)Paris CDG (48)
Amsterdam (40)(1)
Zurich (17)
Frankfurt (48)Munich (24)
E U R O P E A N A I R P O R T L A N D S C A P E H A S O V E R S U P P L Y O F H U B S D O M I N A T E D B Y T H R E E M A J O R A L L I A N C E S
E X H I B I T 6
Note: Airline shares based on 2002 data, total PAX is 2003 dataSource: ACI; CSSB Hub Fact Book 2003; BCG analysis
What will be the consequence for individual hubs if airlines consolidate their hub strategy?
American
= 22M PAX
New York JFK (32)Detroit (33)Chicago (69)
Minneapolis (33)
Philadelphia (25)
Alaska Airlines
Delta
Continental
United
Southwest
U.S.
American West
Northwest
Non-hub
58%
51%
Dallas (53)
Houston (34)
St. Louis (20)
Denver (37)
Phoenix (37)
Las Vegas (36)
San Francisco (29)
44%
Seattle (27)
Los Angeles (55)
Salt Lake City (18) 77%
45%
82%
36%
23%
87%
Cincinatti (21)
Charlotte (23)
Atlanta (79)
Miami (30)
Does US Airways needthree neighboring hubs?
Could Atlanta draw traffic from Cincinatti?
American Airlines startedto downsize St. Louis?
70%
91%
92%
79%
72%
49%35%
61%
72%
68%
81%
54%
Pittsburgh (14)
U . S . A I R P O R T L A N D S C A P E C H A R A C T E R I Z E D B Y D E N S E H U B S Y S T E M — M A I N A I R L I N E S W I T H L A R G E S H A -R E S A T A I R P O R T S
E X H I B I T 5
capacity) passengers by 2010, depending on the ratio between replacement investments andinvestments into additional capacity and assuming passenger numbers grow in line with IATA’sforecasts. And the situation is poised to get worse. By 2015, an additional $150 billion to $200 bil-lion will be invested into airports globally. The core problem with these investment programs isthat they are based on two overly optimistic assumptions. First, that passenger growth will returnto its historical long-term average. This is by no means certain. As Exhibit 9 shows, forecasts havealready been revised downwards in the wake of 9/11, SARS, and the Iraq War. While these crisesare now largely behind us, the geopolitical instabilities that caused some of them have not beenresolved: similar events in the short to medium term cannot be ruled out. The second, more dan-gerous misconception is that any future growth will continue to be shared relatively equitablybetween airports. However, as we discuss below, this is unlikely to be the case. There will almostcertainly be clear winners and losers, leaving many airports with even larger volumes of redundantcapacity.
Higher carrier charges: As monopolies, airports have been able to pass on the costs of excesscapacity to the carriers in the form of higher charges—costs that few of today’s financially unstableairlines can afford (see below). San Francisco airport is a case in point: It recently expanded itsfacilities on the ambitious assumption that passenger volumes would escalate by 7.9% a yearbetween 2001 and 2006, but traffic actually shrunk between 2000 and 2002 by 12.3% a year (andstill further in 2003), leading to a 23.8% rise in airlines’ landing and terminal charges to pay forthe costs of the expansion (Exhibit 10).
1 3
Free capacity
M PAX
20–40% growth in last 10 years
60–80% growth in last 10 years
< 100% growth in last 10 years
Prospective capacity in 2015(1) No exact figures about expansion measures availableSource: Annual reports; authorities; press search; Web pages; ACI; BCG analysis
SeoulCostly megaprojectClaim for hubComplex business site
BeijingTremendous domestic growthLimited capacity
BangkokHighly profitableLimited capacityMegaproject on the way
Japanese airportsGeographical capacity restraintsUnprofitable businessSeparated of domestic/international traffic
Hong KongMegaproject "in water"Partly hub statusProfitable business
SydneyClassic O&DRecently privatizedCapacity restrictions (noise)
Kuala LumpurAmbitious expansion projectNo long-haul traffic
SingaporeMain South Asian hubHighest service levelsMultitude of discounts
18.526.5
63.220
6.118.9 ITM
HND
Central Japan Intl.Airport Project
Second airportpossible solution
1.2
18.8
10.6PEK
100
BKK
KUL
SIN
FUK
45 XX(1)
XX(1)
5.3SYD
7.319.3
24.4
30.2
17.5 24.7
24.7
23.2 HKG26.8
87
7.1ICN100
19.9
1.5CTS
NRT
A S I A N A I R P O R T L A N D S C A P E C H A R A C T E R I Z E D B Y B A T T L E F O R M E G A - H U B P O S I T I O N S
E X H I B I T 7
T h e f u t u r e : t r a f f i c w i l l i n c r e a s i n g -l y b e c h a n n e l e d i n t o m e g a - h u b s
The huge financial pressures on the major carriers willleave them with little choice but to consolidate their traf-fic into mega-hubs, sidelining many of today’s primaryand secondary hubs.
Although the airline industry has always struggledwith profitability, averaging a net profit margin of just0.3% since 1975, the recent severe downturn in pas-senger volumes, sparked by 9/11 and other inter-national crises, has left many carriers with unsustain-able losses. Between 2001 and 2002, IATA members’losses amounted to $20.4 billion, borne predominant-ly by the flag carriers in the three alliances (SkyTeam,Oneworld, Star Alliance), which account for 55% ofglobal passenger volumes. Over half of the alliances’airlines are unprofitable and often unsustainably so.
1 4
Note: Schematic representationSource: AEA; BCG analysis
1998
Revenue passengerkilometer in billionAEA member airlines
1999 2000 2001 2002 2003 2004 2005
SARS/Gulf War II
September 11
Recession
Forecast post-recession/September 11 but pre Gulf War II/SARS
Original forecast
Forecast post-recessionbut pre September 11
New forecast
P A S S E N G E R G R O W T H F O R E C A S T S H A D T O B E R E P E A -T E D L Y R E V I S E D D O W N W A R D S R E C E N T L Y
E X H I B I T 9
(1) IATA forecast for worldwide growth with 25% discount due to saturated market(2) Calculated as product of all available investments and average cost per new PAX worldwide of $187(3) Calculated as product of all available investments and regional average of cost per new PAX in North America $54Source: Annual reports; authorities; press search; Web pages; BCG analysis
2001 2010
647
M PAX
749
Requiredadditionalcapacity
Min.planned
capacity(2)
102
OvercapacityCost per PAX in $
131
Max.planned
capacity(3)
Totalinvestmentuntil 2006
454
$24.5B
29
352
54
54
187
CAGR+1.65%(1)
C U R R E N T E X P A N S I O N P R O J E C T S W I L L Y I E L D S I G N I F I C A N T O V E R C A P A C I T I E S ( S C H E M A T I C C A L C U L A T I O NF O R P L A N N E D E X P A N S I O N S I N N O R T H A M E R I C A )
E X H I B I T 8
In the past, governments could usually be relied on tocome to the rescue but not in today’s more laissez-faire political climate as Sabena recently discovered.Nor will airlines be able to rely on an upturn in pas-senger traffic to lift revenues to a sufficiently highlevel to cover the shortfall. As Exhibit 11 shows, rev-enue has been increasing slower than passengergrowth over the last 20 years, a trend that will continue as LCCs expand. Airlines will inevitably haveto cut costs.
To reduce costs, each of the three main airlinealliances is likely to concentrate future long-distance passenger growth into one mega-hub in each conti-nent. These airports will have three key characteris-tics: a central geographic location, a large and afflu-ent catchment area, and a resident carrier that isboth, financially sound and a major player in itsrespective alliance. In the U.S., Atlanta and Dallas areexamples of likely candidates; in Asia, Singapore andHong Kong are possibilities.
1 5
Average airport cost per enplanement(1) (CPE)
SFO
19.99
DEN
16.28
MIA
14.25
LAX
5.80
DFW
3.48
ATL
2.80
$/PAX
Showcase San Francisco:developments after recent expansion program
2000
159
2001
186
2002
281
89 11970 67 102
179
CAGR: +23.8%
Aero
naut
ical
reve
nues
2000
41.0
2001
34.6
2002
31.5
CAGR: -12.3%
PAX d
evelo
pmen
t
(1) Landing fees and user charges for air carriers calculated per PAX; estimate based on of 2001 numbersSource: Salomon Smith Barney Hub Factbook 2002; SFO; FAA Airline annual reports; BCG analysis
Since 2000 enplanement growth has been revised downward twice to 20–30% of previous projections
Landing feesTerminal charges
C O S T S F O R T O D A Y ’ S A I R P O R T I N V E S T M E N T S W I L L B E P A S S E D O N T O A I R L I N E S ( E X A M P L E S A N F R A N S I S C O A I R P O R T )
E X H I B I T 1 0
(1) Revenue passenger kilometersNote: Numbers roundedSource: British Airways; IATA WATS 86, 95–03; BCG analysis
Average airline net profit margin 1980–2000: +/-0%
RPK growth(1) since 1980
x 2.6
Revenue growth since 1980
x 1.7
Marginerosion
P A X G R O W T H A L O N E W I L L N O T B R I N G A I R L I N E SB A C K T O P R O F I T A B I L I T Y
E X H I B I T 1 1
The introduction of a new generation of mega-planes, such as the A380, which will require large hubswith substantial feeder capacity, will accelerate the shift to mega-hubs (as will any further internationalcrises).
There are already signs that traffic is starting to be consolidated into larger hubs. During the sharpdownturn in volumes between 2000 and 2002, , the smaller “bottom-quartile” hubs in the U.S. lost12.8% of their traffic, while the larger top-quartile hubs suffered only a 6.3% fall. More recently, severalU.S. carriers have announced plans to rationalize their hub networks. US Airways, for example, is likelyto shed at least one of its hubs, while Delta and Northwest intend to focus traffic on select hubs. Similarmoves have been seen in Europe. British Airways, for instance, has moved services from Gatwick to itslarger neighbor, Heathrow, contributing to a 5.1% drop in passenger numbers at Gatwick and a 4.3%rise at Heathrow.
None of this would be a major problem if hubs didn’t depend heavily on individual carriers, but the factof the matter is that the vast majority do: over three quarters of the world’s top 50 airports rely on a single carrier for 40% or more of their traffic (Exhibit 12), rising to as high as 80% in several cases. ManyU.S. hubs are particularly dependent, raising questions about their long-term viability.
1 6
(1) United Airlines (2) American Airlines (3) Mexicana and Aeromexico togetherNote: Sorted by PAXSource: Airport authorities; annual reports; press search; BCG analysis
Highest concentration at US hubs
North America Europe Asia/PacificShare of main carrier (in %)
Atlanta (ATL)Chicago (ORD)(1)
Chicago (ORD)(2)
Los Angeles (LAX)Dallas (DFW)Denver (DEN)
San Francisco (SFO)Las Vegas (LAS)
Phoenix (PHX)Houston (IAH)
Minneapolis (MSP)Detroit (DTW)Miami (MIA)
Newark (EWR)New York (JFK)Orlando (MCO)
Toronto (YYZ)St. Louis (STL)
Seattle (SEA)Boston (BOS)
Philadelphia (PHL)Charlotte (CLT)New York (LGA)
Mexico City (MEX)(3)
Pittsburgh (PIT)
0 50 100
Share of main carrier (in %)
0 50 100
Share of main carrier (in %)
0 50 100
7949
3523
6861
5136
458182
7754
582221
6072
4430
7091
248687
London Heathrow (LHR)
Frankfurt (FRA)
Paris (CDG)
Amsterdam (AMS)
Madrid (MAD)
London Gatwick (LGW)
Rome (FCO)
Munich (MUC)
Paris (ORY)
Barcelona (BCN)
Zurich (ZRH)
Brussels (BRU)
Manchester (MAN)
Milan (MXP)
41
59
57
53
59
51
47
49
60
53
66
24
36
51
Tokyo (HND)
Hong Kong (HKG)
Seoul (ICN)
Bangkok (BKK)
Singapore (SIN)
Sydney (SYD)
Tokyo (NRT)
Beijing (PEK)
Fukuoka (FUK)
48
31
41
51
46
44
24
34
50
A I R P O R T S H I G H L Y D E P E N D E N T O N M A I N C A R R I E R S
E X H I B I T 1 2
T h e g r o w t h o f p o i n t - t o - p o i n t t r a v e l w i l l p l a c e s e c o n d a r y h u b su n d e r g r e a t e r p r e s s u r e
While intercontinental traffic, with some qualifications, is likely to be consolidated into hubs, the pat-tern of continental traffic is somewhat more complex. The growth of point-to-point travel, which is morecost-efficient, profitable, and convenient for both, carriers and passengers, will draw traffic away fromhubs, especially secondary hubs. This will be driven by two key developments:
The rise of LCCs: Regional, point-to-point LCCs, such as Southwest Airlines in the U.S. andRyanair in Europe are dramatically changing the way the aviation sector operates. These airlineshave already stolen up to 60% of passenger growth from the major flag carriers on selected routes(Exhibit 13), predominantly in Europe, where they service 95% of primary airports, and increas-ingly in the U.S., where they are expected to reach 80% of passengers within the next three to fiveyears. Asia’s LCC market is still relatively immature, but it too is gathering pace, reflected in a flur-ry of recent LCC upstarts—among other Malaysia’s Air Asia, Singapore’s Tiger Airways as well asThai Air Asia. The continued growth of point-to-point LCCs will have a major impact on theworld’s hub network, as it will drain traffic from the hubs. Although all hubs will be affected,including mega-hubs, secondary hubs that depend on relatively small regional airlines will be hitthe hardest. These airlines will not be able to compete with LCCs’ cost base and will switch to pro-viding feeder services for their alliance’s respective mega-hub.
The arrival of the new Boeing 7E7: Designed mainly for intercontinental point-to-point travel(although it also has regional potential, notably in long-haul continents, such as Asia), this jet andothers like it will be able to bypass hubs by providing direct point-to-point travel, thus offeringmore cost-efficient and convenient routes. Only attractive destinations capable of servicing thisplane will be safe. Mega-hubs will feel little impact as frequencies are likely to increase. But smalland less attractive secondary hubs will suffer. The increased 7E7 traffic at preferred secondaryhubs, however, will struggle to offset the losses incurred by the growth of LCCs, leaving them stillwith unexpected overcapacity.
D e r e g u l a t i o n w i l l a c c e l e r a t e t h i s t r e n d , e s p e c i a l l y i n E u r o p e
“Open-skies” deregulation will not only give carriers the freedom to operate from hubs of their choicein Europe, it will spark a spate of mergers between the airlines, sucking traffic into the lead carriers’home hubs. Although the longed-for regulatory approval is unlikely to happen any time soon, there aresigns it is moving closer: in October 2003 the EU started negotiations with the U.S. government to estab-lish the parameters of a U.S.-European open-skies accord.
1 7
T h e r e s u l t : n e w p a t t e r n s o f p a s s e n g e r g r o w t h , u n d e r m i n i n gm a n y a i r p o r t s ’ i n v e s t m e n t p l a n s
It’s difficult to say with any certainty how rapidly global passenger volumes will grow in the long run.Some organizations—usually those with a vested interest in painting a rosy picture, expect a return tothe healthy rates of the last decade—when the compound annual growth rate was around 4%: Airbusand Boeing, for example, forecast 4.7% and 4.9% respectively up until 2020. Others are less optimistic:IATA predicts 2.2% over this period.
What is unquestionable is that the consolidation of the hub network will radically alter how this growthis distributed between airports. In fact, there is already a mismatch between different airports’ growthrates, as Exhibit 14 illustrates. Looking ten years ahead, there will be even starker differences. Mega-hubswill enjoy the greatest growth. O&Ds and regional destinations that are favoured by point-to-point car-riers will also experience a significant increase in traffic. Most airports, however, will experience muchlower growth and, in some cases, an absolute decline in passenger volumes.
Exhibit 15 shows that there has already been a significant consolidation of traffic into mega-hubsand away from secondary hubs during the recent crises. The share of total top 50 airport trafficpassing through nine potential mega-hubs increased from 30% to 34% in just two years. Exhibit15 also indicates what the distribution of passenger growth might look like in the next five yearsup to 2008, owing to further hub consolidation. This is only intended as a rough indication of the winners’ and losers’ shares, not a definitive outcome.
1 8
(1) Low-cost carrierSource: BCG analysis
(2) Flag carrier = established airline at location(3) Indexed
LCC topic hot in Europe, established in North America, emerging in Asia
Start(3)
100
Pricing: compete on marginal-cost basis• Focus on 60 segment• Provide introductory tickets• Guarantee availability on all flights
Improve cost position• Close gap to LCCs to maximum of 20–25%
Save on airport services• Fees• Ground traffic services
Defense strategies of established airlinesLCC(1) influence on established airlines at selected location
Year 3(3)
126
New demand: 40%
"Stolen": 60%
FC(2) FC: 84
LCC: 42
L C C B O O M L E A D S T O F U R T H E R P R E S S U R E O N E S T A B L I S H E D A I R L I N E S
E X H I B I T 1 3
1 9
(1) Forecast for mega-hubs: Average of Airbus and Boeing forecast (4.8%) plus 10% assumed mega-hub bonus due to consolidation trend. Forecast for remaining top 50 airports: IATA forecast for worldwide growth with 25% discount due to saturated marketNote: Nine potential mega-hubs: ATL, ORD, DFW, LHR, FRA, CDG, HND, HKG, SIN, others are the remaining top 50 airportsSource: Airbus; Boeing; IATA; ACI; BCG analysis
Hub consolidation already under way
20010
102030405060708090
100Share of top 50traffic (%)
Total PAX at top 50airports
Nine potentialmega-hubs
2002 2003 2008(1)1,250
1,300
1,350
1,400
1,450
1,500
1,550
1,600
1,650
29.8 30.4 33.9 38.0
70.2 69.6 66.1 62.0 Other 41 of top 50 airportsTotal PAX attop 50 airports
N I N E P O T E N T I A L M E G A - H U B S H A V E I N C R E A S E D T H E I R P A X S H A R E A T T H E E X P E N S E O F S E C O N D A R Y H U B S
E X H I B I T 1 5
(1) Transfer to BA traffic from LGW to LHR(2) Transfer AF traffic from ORY to CDG(3) No data for 2003, change 2000–2002Source: Annual reports; company Web pages; press search; BCG analysis
STN
Average
BCN MAD VIE MAN MUC AMS FCO CDG LHR FRA CPH LGW(1) DUS ORY(2) MXP(3) ZRH BRU
58%
15%9% 7% 6% 5%
1% 0% 0%
-2% -2% -3%-6%
-11% -12%-16%
-23%
-30%
Swissair groundingOctober 2, 2001
Sabena groundingNovember 7, 2001
B E G I N N I N G A I R L I N E C O N S O L I D A T I O N W I L L B E D E C I S I V E I N S E T T I N G F U T U R E A I R P O R T L A N D S C A P EI N E U R O P E ( P A X C H A N G E 2 0 0 0 – 2 0 0 3 )
E X H I B I T 1 4
2 0
Exhibit 16 illustrates where different airports are likely to be positioned in tomorrow’s consoli-dated hub network, based on the strength of both, their top carrier and their local environment—the size and affluence of the catchment area, tourism potential, and geographic location. Airportsin the top-right corner, such as Frankfurt and Heathrow, will probably be mega-hubs for theirrespective alliances, while Munich, Gatwick, and other players in the middle section will continueto operate as secondary hubs. Interestingly, many of the airports in this segment of the matrix havesignificant unused capacities already today. The hubs in the lower left corner will be relegated tointernational O&Ds providing merely point-to-point traffic. Some of the players on the margins ofthese areas, will probably engage in an “investment gamble”, trying to outbid rivals’ investmentsin an attempt to secure their desired position as mega-hubs. Few airports will indeed be mega-hubs, but many more follow investment strategies as if they were destined to be among this elusivegroup—a dangerous game for the losers, who will be burdened with high excess capacity.
Source: BCG analysis
Environment
Airli
nes
Frankfurt
Paris CDG
ParisORYMunich
Madrid
Barcelona
Amsterdam
RomeManchester
Zurich
Milan
Brussels
Palma deMallorca
London LGW
London LHR
PAX million
Free capacity
Used capacity
S T A R T I N G P O I N T I S D E C I S I V E I N H U B C O N S O L I D A T I O N ( E X A M P L E F O R E U R O P E A N H U B S )
E X H I B I T 1 6
2 1
The cozy world of the past has encouraged many airports to neglect operating costs, as wellas opportunities to lift revenues: most have functioned as infrastructure suppliers not busi-nesses. In the future, carriers’ demands for lower charges, coupled with governments’ grow-ing reluctance to support airports, will force operators to function more efficiently. Lowerthan anticipated passenger growth at many airports will intensify this need.
Despite relatively high margins, the state-protected environment in which the vast majority of airportshas lived over the last eight decades has meant that most have not operated as competitive, profit-driven businesses. This is most obvious in the field of investments, where the basic principle that invest-ment growth should only be pursued once profitability is above the cost of capital, has been widelyignored, especially at regional airports. Most regional airports are unprofitable yet still have ambitiousexpansion plans. Operating costs have also been overlooked, partly due to the fact that fixed assets dom-inate airports’ balance sheets. According to BCG’s analysis, airports could reduce their operating costsby 20% to 30% on average, including 5% to 7% in the short run.
Three key developments will force airports to look much more closely at both, costs and revenues:
1 . L o w e r t h a n e x p e c t e d p a s s e n g e r g r o w t hThe drop in aviation and non-aviation revenues that will accompany lower than expected passengergrowth at airports will leave many struggling to service the debts of their existing investment programs.To compound this problem, credit-rating agencies are likely to downgrade operators suffering steepdeclines in passenger growth, increasing the cost of raising additional funds. Pittsburgh InternationalAirport provides a salutary warning of what the future might hold. Its General Airport Revenue Bond(GARB) was recently downgraded from A to BBB by the Fitch Rating Agency after US Airways rejecteda lease agreement with the airport, suggesting the airline might abandon Pittsburgh as a hub.
2 . C a r r i e r s ’ d e m a n d s f o r r e d u c e d c h a r g e sAirport charges, including aeronautical and ground-handling fees, account for a substantial proportionof carriers’ costs, typically one quarter of the price of the average airline ticket (Exhibit 17). In the pastairlines have found it difficult to negotiate reductions due to airports’ monopoly positions and igno-rance of the operators’ true costs. Today, however, carriers increasingly have access to more detailed costbreakdowns, thanks to governments’ demands for greater accounting transparency, placing them in astronger negotiating position. More significantly, they are acutely aware that their survival—and thefuture of the airports, most of which depend heavily on a single carrier—hinges on lower charges. Thedrive to reduce these is further fuelled by the widespread sense of injustice within the aviation industryover the large discrepancy between the two parties’ margins. As one executive said: “If one of the
P R E S S U R E S T O A C T M O R E L I K E
B U S I N E S S E S
partners is losing his shirt while the other is counting money, it is no longer a partnership.” LCCs, whichhave shown themselves to be more than willing to pull out of destinations if the figures do not add up,will add to the pressure, particularly if the European Commission puts a stop to regional airports offer-ing LCCs sweeteners, as witnessed in the recent Charleroi ruling and Ryanair’s subsequent decision tocut down on its Charleroi routes.
3 . G o v e r n m e n t ’ s g r o w i n g r e l u c t a n c e t o s u b s i d i z e a i r p o r t sGovernments are both politically less willing and financially less able to support airports. Free-marketsolutions are increasingly the preferred option in most public-service sectors, especially as the wideninggap between tax receipts and public expenditure makes continued state support unsustainable. This isreflected in two trends within the airport sector:
More widespread privatization: Since 1987, there has been a steep and relatively steady increasein the number of airport privatizations that is due to pick up again after being halted in the recentcrises as Exhibit 18 shows. To date, over 60 airports have gone down this road, spanning virtuallyevery continent, from Europe and South America to Australia and Asia. Europe has the highestconcentration of privatized airports (nine out of the top 20), with several more due to join theirranks. In the U.S., only few small operators such as Buffalo and Albany, have been privatized, areflection of the fact that airports remain one of the few avenues open to influence regional eco-nomic development in this otherwise highly deregulated economy, as well as considerations ofnational security. This situation, however, may be about to change, not the least of which is due tosevere budget problems, foremost the U.S. federal deficit, but also budgetary constraints faced bymany states and cities.
2 2
(1) Fuel prices vary significantly over time; estimation based on 15-year average of 135 euro per tonSource: AEA benchmark study; Shell; BCG analysis
Total ticketprice
In euro
Profitmargin
Total cost Ticketingand sales
Crew Aircraftcosts
Passengerservice
Fuel andoil(1)
Admin.and other
En routecharges
Mainte-nance
Total airport-relat-ed charges
Station andground
handling
Aero-nauticalcharges
144 4 140 24
18
16
1010
88
12
34 24
10
2.9% 100% 17.2% 12.9% 11.5% 7.1% 7.1% 5.7% 5.7% 8.6% 24.2% 17.1% 7.1%103%
Profit Non-airport-related costs Airport-related costs
A I R P O R T - R E L A T E D C O S T S A R E S I G N I F I C A N T
E X H I B I T 1 7
2 3
Source: BCG analysis; press search
Privatization to yield more efficient operations and to secure airport financing of infrastructure
BAA Vienna
Southampton
Prestwick
Liverpool
Copenhagen
Cardiff
Bournemouth
Belfast
Athens
London City
East Midlands
Perth
Naples
Melbourne
Kent
Istanbul
Düsseldorf
Bristol
Brisbane
Bolivia
Birmingham
Sanford
Rome
Skavska
Malaysia
Luton
Hobart
Hanover
Eindhoven
Costa Rica
Canberra
Australian Regionals
Auckland
Argentina
Adelaide
ASUR (Mexico)
Wellington
South Africa
Jakarta
GAP (Mexico)
Stewart
Oman
Malta
Lima
Fraport
OMA (Mexico)
Zurich
Sydney
Madras
Kansai
Hong Kong
Ecuador
Chubu
Calcutta
Budapest
Bratislava
Bombay
Bangkok
Bangalore
Atlanta
AdP
New Delhi
1987 … 1990–1992 1993–1996 1997 1998 1999 2000–2002 Planned
Narita
N U M B E R O F P R I V A T I Z A T I O N S A C C E L E R A T I N G A G A I N
E X H I B I T 1 8
Source: BCG analysis
Business-to-business servicesInfrastructure provision Business-to-customer services
Management
Support functions
Property and utilization rights
Transaction management• Inivitations to bid• Contract
negotiation• Takeovers
Flight operations• Tower• Runway traffic• Gates
Terminal operations
Safety (fire protection)
Retailing• Duty-free shops• Catering • Food and beverage
Space utilization• Outdoor space• Indoor space• Advertising space
Conferencing
Parking
Other
Ground services
Luggage services
In-flight services
Cargo services
Facility management
Security
Real-estate planning,development
Construction
1 2
Real-estate andinfrastructuredevelopment
Flight OPS
Terminal OPS(incl. security)
4a
4bFacility
management
3
Ground services
5
Space allocation(non-aviation)
Other services
6 7
A I R P O R T V A L U E C H A I N V E R Y D I V E R S E
E X H I B I T 1 9
2 4
(1) Estimation ($40 million for salaries, average of $50,000)(2) First estimate (approximately 80% Delta business at Atlanta airport)Source: Lufthansa; Delta; Fraport
Frankfurt Atlanta
Real estate/landlordFacility management
Flight OPSTerminal OPS
Ground handlingCargo handling
Retail13,000 employees
Ticketing and salesIn-flight passenger services
Fleet managementTechnical issues/maintenance
31,000 employees
Real estate/landlordFlight OPS
800 employees(1)
Facility managementTerminal OPS
Ground handlingTicketing and sales
In-flight passenger servicesCargo handling
Fleet managementTechnical issues/maintenance
Retail36,000 employees(2)
Airport AuthorityFraport
Lufthansa Delta
D E P E N D I N G O N A I R P O R T , O P E R A T O R S A N D A I R L I N E S T A K E O N D I F F E R E N T R O L E S
Further privatization will not only force airports to increase efficiency in order to keep share-holders on board, it will also provide access to additional funds via the world’s capital markets. Itwill not necessarily guarantee success—both, Brussels and Zurich are privatized airports—but, on balance, it will lead to a significant improvement in performance.
Deregulation of the value chain: Few airports have the specialist skills or scale to optimize each ofthe links in their highly diverse value chain. As Exhibit 19 shows, these links can range from real-estate and facility management to retail, terminal operations, and ground handling. At themoment, responsibility for the different parts of the chain tends to be shared between the airportsand carriers, with the balance of roles varying between airports. At Atlanta, for example, Deltahandles most of the chain, including retail and facility management, leaving the airport authorityto manage a limited number of services, while the opposite is the case at Frankfurt (Exhibit 20).
Deregulation will deconstruct the chain further, enabling new players to enter different elements of thechain, bringing all the efficiency gains that competition entails. Retail has already been deregulated atmany locations and has produced impressive results, often via outsourcing. Since BAA has managed Pitts-burgh International’s retail operations, revenues have tripled. More recently, ground handling has beenderegulated in Europe, lowering costs especially in those EU member states with former handlingmonopolies, such as Greece and Italy, according to an EC study. Further deregulation of other parts ofthe chain is inevitable, especially as privatization becomes more deeply entrenched in the industry.
E X H I B I T 2 0
2 5
S T R A T E G I E S T O S U C C E E D I N
T O M O R R O W ’ S E N V I R O N M E N T
Airports will have to rethink their strategies and business models to survive and thrive intomorrow’s environment. The first step is to soberly assess your role in the new hub networkand expected passenger growth. This will determine your investment and carrier strategy. Itwill be equally critical to position yourself at the most competitively advantageous point inthe value chain, with a clearly defined role.
D e v e l o p i n g a p p r o p r i a t e s t r a t e g i e s
The redistribution of passenger growth will redefine airports’ roles, requiring different investment andcarrier strategies for different types of airports:
I d e n t i f y y o u r r o l e i n t h e n e w n e t w o r kTwo key factors will determine airports’ roles in the new landscape and, consequently, their relativegrowth and capacity requirements:
Geographic location, including size and affluence of catchment area: Only airports with centrallocations and large, affluent catchment areas will be eligible to be mega-hubs. International O&Dswill need a similar catchment area to succeed.
Carrier’s strategic and financial strength: In addition to the right geographic location, mega-hubswill be the primary home of a leading alliance airline. Heathrow, which is dominated by theOneworld alliance airline BA, is one example. Secondary hubs will also require a strong relation-ship with a major carrier in an alliance. At all airports, from mega-hubs down to regional airports,the financial health of the lead carrier will be paramount. This must be carefully analyzed, espe-cially in relation to any investment plans. As Brussels Airport discovered, the impact of a finan-cially ailing airline can be devastating: since Sabena went bankrupt, the airport’s passenger volumes have plummeted by 30%.
D i f f e r e n t s t r a t e g i e s f o r d i f f e r e n t t y p e s o f a i r p o r t s ( E x h i b i t 2 1 )Mega-hubs: These must focus on the lead airline in their respective alliance, as well as regionalfeeders. Providing the highest quality of service and innovative ways to spread capacity through-out the day will be vital. Intelligent differentiation between premium and basic products will alsobe required. Only mega-hubs will be in a position to make large “batch” investments to expandcapacity, secure in the knowledge that there will be long-term passenger growth.
Secondary hubs: Many of today’s hubs will be downgraded, making their overly optimistic invest-ment plans redundant. All investments should be revisited and switched to an incremental,“needs-must” basis. Attention should be concentrated on alliance carriers.
International O&Ds: The emphasis must be on sweating existing assets to extract maximum valueout of historically high investments. Airlines with a sound strategy, alliance, and financial positionshould be actively courted to ensure commitment to the airport. Those international O&Ds thatstand to profit from an enlarging catchment area and subsequent rise in point-to-point trafficshould base their expansion strategy on careful foundations and sound planning, which shouldalways favor incremental investment approaches over block investments. Attracting LCCs to fillexisting overcapacities should be considered, but no capacity extensions to cater for LCCs.
Regional airports: The focus should be on LCCs and exceptionally tight cost control, not just tosatisfy LCCs’ demands but to return to or maintain profitability. In view of the likelihood thatthese airports will continue to be used by governments as tools for regional economic develop-ment, state funding for any (incremental) investments should be sought. Creating new regionalairports will, in most cases, be unwise.
2 6
Internationalhubs
InternationalO&Ds
Secondaryhubs and
O&Ds
Regionals
Atlanta
Sydney
Vienna
Example
Leading airline within alliance
Regional feeders
Intercontinental airlines
All other airlines
Member of airline alliance
All other airlines
LCC
Regional feeder
Airline focus
Quality leadership
Privatization imperative
Capacity management
Sweat your assets over the limit
Maximize return
Support your alliance airline
Stop investments
Streamline business model
Focus on LCC segment
Thight cost management
Acquire public funding
Key issues
PAX = 79M
PAX = 22M
PAX = 12M
AlbanyInternationalAirport
PAX = 1.5MSource: BCG analysis
W H A T T O D O : F O C U S O N B E S T B E T
E X H I B I T 2 1
M a n a g i n g a i r p o r t s a s b u s i n e s s e s , n o t i n f r a s t r u c t u r e s u p p l i e r s
S e l e c t t h e r i g h t b u s i n e s s m o d e l f o r y o u r c h o s e n p o i n t i n t h e v a l u e c h a i nAs mentioned earlier, few operators have the breadth and depth of resources and expertise to maximizereturns from each link in airports’ highly diverse value chain. Instead of acting as integrators of theentire value chain, operators will have to identify a position within the chain where they can add maxi-mum value, based on their capabilities and the competitive outlook of their chosen section of the chain.
Each part of the chain will require different skills and resources plus different levers to reduce costs andboost revenues, as Exhibits 22 and 23 illustrate. Ground handling, for example, will depend on person-nel allocation and process optimization to create value, while aviation-related services will hinge on costtransparency, negotiation strategies, and investment control, among other demands. Some operatorswill be best equipped to concentrate on individual links in the chain, others will benefit from takingbroader roles.
Generally, there will be four types of operators:
Specialists will focus on particular links in the value chain and leverage their scale and know-howglobally. Usually this will involve standardized, labor-intensive activities, such as ground handlingand facility management. As these are traditionally low-margin fields, scale will be critical. Alreadyseveral global specialists are emerging. In ground handling, ServisAir/GlobeGround
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Source: BCG analysis
Management
Support functions
Trans-action of prop-erty and uti-lization rights
Real-estate/infra-
structuredevelopment
Facilitymanagement
Groundservices
Otherservices
Spaceallocation
(non-aviation)
Flight OPSTerminal
OPS (in. sec.)
1 2 3 4a
4b
5 6 7
Characteristics
Levers
Real estate Facility management
Capital-intensive
Customer: airport operator and airport-related external companies
Market for special properties hardly existent
Labor-intensive
Majority of total lifetime property cost accrues during use
High competition in certain areas
Financing
Project management
Regulatory circumstances
Site analysis/knowledge of place
Property development
Specialization (technical FM)
Standardization (infrastructure and commercial FM)
Property usage
O P T I M I Z A T I O N L E V E R S A L O N G T H E V A L U E C H A I N ( I )
E X H I B I T 2 2
operates at 39 locations, with a turnover of more than $800 million, while Swissport is present at24 airports. Within the U.S., Delta Air Lines has also started to aggressively market its maintenanceservices to other airlines, turning a $50 million side business in 2000 into a $160 million operationby the end of 2003.
Layer-masters will handle categories of related services, for instance, business-to-consumer services such as retail, conferencing, and parking. BAA’s retail managing contracts are an exam-ple of this development.
Orchestrators will coordinate outsourced services at individual airports, ensuring consistent qual-ity standards and cost control, as well as act as the interface with airlines to deliver innovative,value-added products and services. Pure orchestrators have yet to emerge, but Athens Interna-tional Airport is a pioneer.
Integrators will continue to handle the whole value chain, as Frankfurt does now.
D r i v e d o w n c o s t sOperational excellence has to be the new management imperative. Exhibits 22 and 23 highlight themain levers for reducing costs (and increasing revenues) in different parts of the value chain. The golden rule, which has so often been broken in the past, is that no investments should be made unlessexpected profitability is above the cost of capital.
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Source: BCG analysis
Management
Support functions
Trans-action of prop-erty and uti-lization rights
Real-estate/infra-
structuredevelopment
Facilitymanagement
Groundservices
Otherservices
Spaceallocation
(non-aviation)
Flight OPSTerminal
OPS (in. sec.)
1 2 3 4a
4b
5 6 7
Characteristics
Levers
Aviation Non-aviation Ground services
Capital-intensive
Specific flight and terminal operations knowledge
Regulated environment
Capital-intensive
Opaque passenger behavior
Complex demand structure (retailers)
Labor-intensive
Complex processes
Cyclical demand
Negotiation strategy
Investment control
Cost transparency
Process efficiency
Space allocation
Marketing
Personnel allocation
Process optimization
Airline affinity
Airport and terminal management
O P T I M I Z A T I O N L E V E R S A L O N G T H E V A L U E C H A I N ( I I )
E X H I B I T 2 3
E x p l o i t n o n - a v i a t i o n r e v e n u e sIncreasing revenues per passenger through non-aviation channels, such as retail and parking, will be akey driver of growth and profitability for all airports, especially those that experience lower than expected passenger growth or even an absolute drop in traffic. In fact, in BCG’s experience, airportsthat depend on LCCs will usually only be able to sustain profitability via non-aviation revenues. LoveField airport in the U.S. is a case in point: Its non-aviation revenues, which were three times higher thanaviation revenues, kept it in the black in 2001, with a modest $9.9 million profit (Exhibit 24). Its parking revenues alone were five times larger than its landing fees and bigger than all its non-aviation revenuesput together.
Retail is likely to provide some of the richest pickings as BAA’s airports have shown. To maximize this revenue,operators will have to persuade carriers to strike an intelligent balance between their demands for shortertransfer times and the airports’ need to keep passengers shopping for as long as possible. This will ultimatelybe in both parties’ interests: higher revenues will give operators more leeway to lower carrier charges.
C o n s i d e r p r i v a t i z a t i o nMany airports should consider at least partial privatization in order to raise funds, gain access to the capital markets and trigger efficiency improvements. This can be done via an IPO—a route successfullytaken by Frankfurt and Vienna—or by offering stakes through a trade sale. Strict management of theprivatization process is essential for success and is controlled by an IPO task force: strategies must berefined, resources mobilized, efficient controls put into place, and the organization aligned with the cap-ital markets. Trade sales can provide an attractive alternative to IPOs, by recruiting strategic investors totake significant stakes in the airport company. External know-how can thus be bundled to ensure greateroptimization of potential.
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(1) Excluding grant receipts of $2.5 million, only covers interest income and other non-operating revenuesSource: BCG analysis
Aeronauticoperatingrevenue
Non-aeronauticoperatingrevenue
Non-operatingrevenue(1)
Labor cost Communicationand utilities
Suppliesand materials
Otheroperatingexpenses
EBITDA Interestchange
Depreciation Net profit
7.7
24.2
6.8 6.0
2.510.7
1.418.1 1.6
6.6
9.9
In milliondollar
L C C A I R P O R T S C A N O N L Y B E P R O F I T A B L E W I T H T H E R I G H T R E V E N U E M I X — E X A M P L E L O V E F I E L D , T E X A S
E X H I B I T 2 4
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Tr e a t a i r l i n e s a s p a r t n e r sThe future of the airport sector lies in closer cooperation with the major airlines as business partners,not just customers. As a first step, joint seminars and workshops could foster better understanding. Inmany areas, there are considerable opportunities to leverage cost and revenue synergies, for example,by pooling customer information to target high-margin passengers and by bundling together commonsupport services, such as IT, and by clearly defining interfaces. (Exhibit 25) Transparency and clearlydefined contracts provide the basis in all areas of cooperation. Service-level agreements should becomestandards in strong relationships. Short-term aids in crises also work to improve the relationship, assignificant temporary reductions in landing fees at major Asian airports during the SARS crisis signified.
Source: BCG analysis
Win-win situation as result of open cooperation
Value chain interfaces
Real-estate andinfrastructuredevelopment
Facility management
Ground services
Spaceallocation
OtherservicesTerminal OPS
Flight OPS
Airportauthority
Airport authority,airline and sublease
companiesAirline
Airport authority,airline and sublease
companies
AirportauthorityAirline
Airport authority
Measures of interface
improvements
Bundling
Outsourcing
Jointly coordinate operations
Share scheduling information
Jointly optimize IT and disposition instruments
Find trade-offbetween minimumconnection timeand retail-optimizedterminal design
Joint cost reduction
Quality assurance
Risk reduction/planning reliability
Joint cost reduction
Additional revenue sources
Results
Transaction of property
Airportauthority
Airportauthority
P R O C E S S E F F I C I E N C Y G A I N S C A N B E Y I E L D E D B Y J O I N T I M P R O V E M E N T O F I N T E R F A C E S
E X H I B I T 2 5
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A i r l i n e s : B r i n g a i r p o r t s i n t o f o c u s a n d t i g h t e n o p e r a t i o n a l l i n k s
Airlines have long neglected the value potential of airports due to their focus on network development.There are various levers to reduce airport-related costs and revenues:
By working closely with a particular operator, airlines can identify potential to improve processefficiency. This will lead to reduced costs for airports and, via lower charges, for airlines. But themore substantial contribution to higher airline margins will be through shorter turnaround timesand consequently higher aircraft utilization.
Airlines can support airport operators in increasing their retail revenues by helping them find part-ners who are best suited for optimal exploitation of the revenue lever. Moreover airlines can con-tribute by providing valuable information about their passengers, which allows retailers to custom-tailor their offerings. Airports should then share the increased revenues with airlines, creating a win-win situation that encourages all parties to move in the described direction.
Although severe frictions between airports and airlines characterize the current situation, both partiesshould work towards easing the tensions since both will profit from a renewed partnership.
I n v e s t o r s : P i c k t h e r i g h t i n v e s t m e n t s a n d i m p r o v e p r o f i t a b i l i t y
It has never been a better time to invest in airports. Many owners face difficulties in financing their air-port shareholdings and are increasingly willing to sell off stakes in attractive locations. But investors haveto thoroughly analyze the options before entering the complex airport business:
Investors should screen all possible targets and analyze long-term growth options based on airlineprospects as well as geographic and environmental factors. Only airports exhibiting a stablegrowth outlook and a realistic perception of themselves will lead to long-term returns on adequateinvestments.
From along the diverse value chain, investors should decide which business to invest in. Depend-ing on an individual investor’s risk profile, capability portfolio, and investment strategy this can be
I M P L I C A T I O N S F O R A I R L I N E S ,
I N V E S T O R S , A N D G O V E R N M E N T S
either in real estate, airport management, or business-to-consumer services. If investors do nottake into account the ongoing deconstruction of the value chain, they risk an attack from better-positioned competitors.
Investors must be aware of the various cost and revenue levers airports can pull to improve theirmargins. The potential to increase efficiency and revenue per PAX is large at most airport loca-tions and can significantly raise the returns on investment.
Well-advised investors with a clear strategy and a set of relevant investment criteria will emerge on top ofthe current developments in the airport industry.
P u b l i c a u t h o r i t i e s : S e c u r e i n f r a s t r u c t u r e p r o v i s i o n w i t h o u t s u f f e r i n g n e g a t i v e r e t u r n s
Infrastructure provision as a means of regional development has always been the focus for public authorities.This will remain the case in the future. But in times of dwindling public budgets, authorities are looking foropportunities to reduce their investments and increase returns on airport shareholdings without neglectingits infrastructural importance for their particular region. Key steps to take and issues to consider include:
Authorities must soberly analyze the growth potential of each airport. Although every regionwould like to profit from a nearby intercontinental hub, only a few will enjoy this privilege. It isfairly obvious which cities will be the location of mega-hubs as this is determined by airline net-work strategies: authorities must understand and accept the reality of the growth prospects oftheir airport portfolio.
To reduce requirements of public funding, governmental institutions should encourage airport man-agers to exploit the revenue potential offered by retailing. Increasing revenues per PAX is a comparativelyeasy option since its implementation does not require unpopular decisions like workforce reductions.
Authorities should ensure that airport managers implement a tight cost control, focusing onprocess efficiency and adequate real-net output ratios. Significant efficiency gains are a direct wayof saving taxpayer’s money.
Alternative sources for financing airport investments should be explored. Getting privateinvestors involved is an excellent opportunity to trigger changes in airport management andreduce airports’ dependency on subsidies.
These recommendations will not endanger the provision of airport infrastructure; they will ensure thelong-term survival of individual airports. Structural changes force all airport owners to act in order toavoid deterioration in their shareholdings.
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B C G ’ S E X P E R I E N C E I N T H E A V I A T I O N
I N D U S T R Y
B C G h a s e x t e n s i v e e x p e r i e n c e i n t h e a i r p o r t a n d a v i a t i o n i n d u s t r y
BCG works closely with numerous clients within the aviation sector—airlines, airports, and other service providers—always with the goal of developing our clients’ competitive advantage, successfullyimplementing it, and increasing their sustained earning power. Projects we have been involved in haveranged from privatizations and profit improvement measures to value management, strategic position-ing, and internationalization. All have shown bottom-line impact and enabled our customers to achievea superior strategic positioning within a changing business environment.
In addition to the frameworks described in this report we have developed a set of tools specifically forthe aviation industry. This includes a standardized airport “health check” to identify the measuresneeded to prepare our clients for the future.
If you would like to discuss this report’s findings in more detail or require assistance in any other field,please contact one of our world experts.
3 5
K E Y Q U E S T I O N S
Q u e s t i o n s f o r a i r l i n e s
1. What is the overarching network logic of my alliance and how does this affect my airport selection and strategy?
2. What are my main airports’ investment programs and how do they correspond to myperspective capacity, service, and cost requirements?
3. How can I actively participate and influence airports crucial to my strategic positioning?
4. How can joint optimization of interfaces benefit my efficiency and service position?
Q u e s t i o n s f o r i n v e s t o r s
1. Does my investment portfolio account for individual growth prospects and a sober assessment thereof by the respective airport?
2. Which steps of the airport value chain are most promising as investments?
3. How far has the airport’s efficiency potential been realized and is themanagement and ownership committed to delivering returns?
Q u e s t i o n s f o r p u b l i c a u t h o r i t i e s
1. What is a viable airport landscape for my region given expected growth rates and trendsand are funds distributed accordingly?
2. Are publicly owned airports sufficiently working to exploit non-aviation revenues and control their cost position?
3. Should alternative ways of financing airport investments be explored and the expertiseof private investors tapped?
4. Are ways to better coordinate airport development on a supraregional andsupranational level being sufficiently explored?
Q u e s t i o n s f o r a i r p o r t o p e r a t o r s
1. Which role is my airport realistically going to play in the medium term given its locationand key airline(s)?
2. Do my investment plans accurately reflect this role?
3. Am I actively cooperating with my main customers?
4. Can my cost position be optimized?
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