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The future challenges for airports
René Steinhaus, Aviation Expert at A.T. Kearney Berlin outlines the challenges airports will have in the future, including those brought forth by such factors as new capacity demands, the need to develop passenger service and provide for environmental safety.
Airports are the pacemaker of today´s life. We are used to fly in and out on a daily basis to cities for business meetings and holiday trips. The number of passengers traveling thru one of the Top-50 airports of the world on one day is bigger than the number of the population of many smaller cities. And airports are cities of their own. They deliver any services you can imagine like in a city. It happens not only in movies that people live at airports, many airports are developing business and residential areas very close by. Aviation is a very quick developing system. Airports as part of this system are facing some challenges in the future mainly from changing airline networks and required capacity supply, securing revenues and environmental issues.
Part 1: Networks, hub-competition and airport capacity
Being the platforms and home bases for the airline business, significant changes since the last two decades happened to the airline networks. In the past it was very common that national carrier linked their country to the world. At their home bases they only met home carriers from other countries flying on bilateral agreements. No carrier where allowed to transport passengers between other countries. Domestic routes faced very few competitions. And if it happened, these small newcomers where very fast eliminated with dumping prices. After the liberation of the European market the airline world went thru the same stages like in the US before. Many new airlines where founded. New business models like Low Cost Carrier established at the market. High competition led to mergers and to an airline concentration. Now after two decades the European market is concentrated to three major legacy groups and their referring alliances (Lufthansa, Air France/KLM and IAG) and four Low Cost Carriers (EasyJet, Ryanair, Wizzair and Norwegian). Smaller airlines suffer from being squeezed between these two business models or disappeared (e.g. Malev, Spanair, Olympic). Others found strong investors from outside of Europe to survive (e.g. Air Berlin, CSA, Alitalia).
But also the remaining legacy carriers get squeezed between Low Cost Carriers on the one site eating heavily into their loss-generating short haul business (intra-European and feeder flights). On the other side they are facing strong price and capacity pressure on their profitable long haul routes from Middle East carriers.
This development will change the airline world and therewith the networks significantly. On intra-European routes the large network carriers react to the LCC competition and to own cost disadvantages by outsourcing the production to the low cost carriers in the group. Lufthansa is currently transferring all decentralized traffic not touching their hubs to Germanwings and has further plans to develop the “Wings-Product” accross Europe analogue to the traditional LCC Model. Air France plans to transfer this task to Transavia and Hop. And IAG (British Airways and Iberia) will develop the 100% owned Vueling to its intra-European carrier. To not lose their loyal clients and frequent flyers, these network-LCC´s cannot just copy the “no-frill”-concept. Their customers are used to premium services like lounge access, pre-boarding, fast lanes and collecting points in frequent flyer programs. The traditional LCC carriers require new markets to maintain their growth rates. Creating new routes on secondary airports beside the large airports is getting more and more difficult. Therefor they discover the business travel market and are moving direct towards the traditional airports of the network carriers. To compete in these markets they are implementing more and more enhanced service packages like reserved seats and even frequent flyer programs. Network- and LCC- carriers are getting more and more similar. For airports it will become a challenge to serve the requirements of cost reduction and growing productivity. The typical turn-around time (time between arrival, handling, and departure) of an A320 or Boeing 737 for a network carrier is round 50 minutes, for LCC carriers it´s down to 25 minutes to gain a higher productivity. Aircraft only generate revenue when they are flying. Many airports should start thinking about how to provide the required procedures like walk boarding via two doors (in the front and in the back of the plane) or self-maneuvering-positions in their current infrastructure. The design of new terminals will require to build this in from the beginning and also to build less expensive terminal infrastructures than today to reduce cost.
To make it more complex, network airlines require to link the short haul flights with long haul flights at their hubs. Only in some markets like London or Paris you can fill a huge widebody aircraft from the local market to long distances every day. In Frankfurt sometimes up to 150 so called feeder flights are filling one Jumbo to go on a long range flight. And at the other side of the flight, feeder flights bring the passengers to their final destination. Imagine the big puzzle to coordinate this in case of delays and connections. Today not only airlines compete with each other, today airline-airport-systems are in competition. Only if the complex processes of a hub operation are synchronized like a perfect clockwork this network is competitive. Passengers missing their connection flights and staying in a hotel instead of arriving home to their families will next time think twice to take the same connection. If it happens again you lose them forever even with competitive ticket prices. A strong cooperation between the airport and its hub-airline is essential for the success in the strong growing hub market. The number of transferring passengers at the Top-20 hubs in Europe has quadrupled since 1990 to 180 million transfer passengers with an average growth rate of 6% - which is higher than the average growth rate of the global passenger traffic with 4%. Twenty years ago, the options to fly from A to B where very limited. Today passengers have many options to get from A to B via C, even in the same airline group. For example to fly from Berlin to Sao Paulo, in the Lufthansa System you can choose between a transfer in Frankfurt, Munich or Zurich. In the AF/KLM-system you can choose between Amsterdam and Paris. The same is valid for thousands of intra-European connections. Internally these hubs compete in the same group, with their own network planning and allocated fleets. This approach keeps the competitiveness of the full system very high.
A new business model emerging in the future years is the implementation of Low-Cost-Long range flights. The first examples for these operations are Air Asia X, Scoot and Norwegian. While it is very difficult to operate on a lower cost base at long range operations one of the main success factors for lower prices is a maximum utilization (Seat load factor) of the flights. The airlines have to ways to generate this: Flying from very large local markets or feed the flights by linking it to the short haul LCC networks. This is a chance for European LCC hubs like London-Gatwick, Barcelona or Berlin to establish a completely new kind of hubs. As one example Norwegian choose London Gatwick as one of the first bases for its long range operation exactly for both reasons.
The task of the airport in any kind of hub partnership is to provide always enough capacity for the airlines to grow and to guaranty reliable and cost effective processes tailored to the requirements of its hub. Especially the first task, providing enough capacity, is getting more and more difficult for airports in Europe. The European ATC Organization Eurocontrol forecasts demand to exceed future airport capacity by more than 10% in 2030, even if all current capacity enhancement projects can be delivered. The airport congestion will accelerate rapidly in 2025-2030, as unaccommodated demand almost doubles. How urgent this is shows two examples how long it takes to realize new capacities in Europe. The last runway addition in Frankfurt took 13 years from the first discussions to the opening. The last runway in Amsterdam took 18 years. This is not competitive with the strong growing Middle East hubs where the decision, approval and construction of complete new airports take half of the time.
In the times of capacity shortfall on European airports an very important competitive factor will be the intermodal traffic. If the air traffic is congested in some areas in Europe it will be an advantage for other airports to redirect traffic demand towards them by rail. High speed rail changed the picture in Europe on traffic flows between 1 to 4 hours of travel time. On many routes where the travel time by train is below 2 hours the air traffic was canceled or only sustained for hub feeding reasons. In the time frame between 2 to 4 hours travel time the competition between rail and air is strong. Airports that are linked to rail will have a huge advantage by participating at a huge intermodal network. The German railway for examples is cooperating with many airlines linking their flights with the “Rail&Fly” service to more than 5.600 stations in Germany. This gives airlines the possibility to feed their flights without using the feeder network of the competing home based carrier. To give you an example of the impact: the long distance railway station at Frankfurt Airport has 23.000 passengers per day and round 5,6 million passengers per year. This is more than many airports.
Also for airports not linked to rail new opportunities will open up with new aircraft types coming to the market in the next years. Lower seat mile cost with these aircrafts will make also the operation of so called thin routes competitive. Airlines will link smaller markets direct to each other. For example the new Bombardier C Series will enable airlines to fly with smaller 100seater aircraft direct from Europe to North America.
Winning airports in the future will be the ones that identify their future market and cooperate with the airlines operating at its location to provide unique products in their specific markets.
Part 2: The Revenue Challenges
Operational challenges for airports today are reducing the EBIT margin of the core businesses, which are aviation and ground handling. Therefor it is essential for airports to grow the non-aviation business. On large airports it has a revenue share of round 40% but is generating round 80% of the EBIT. Optimizing the non-aviation business has huge potential for most of the airports I have seen. The main non-aviation drivers are the travel retail (mainly duty free), car parking, food & beverage, advertising, real estate and services. If we look at the retail, many of the business travelers do not have time for shopping in the city they visit. The only chance for them to buy small presents for home or to get informed about new products is at the airport. A few minutes between security, lounge and boarding are the chance to buy. For leisure traveler shopping and eating at the airport is the first part of the holidays. They want to be entertained. This is the chance for airports to generate revenues. Optimizing the passenger process combined with a passenger friendly layout of the terminal like walk true areas and good information to the passengers about their flights and the required distance to the gate are important factors to reduce the stress level and to give passengers extra time for shopping. Globally acting retailers are specialized to operate shops at airports and to optimize revenues. Most of the airports are acting as a mall provider, renting out the spaces to retailers and restaurants. Here it is important to differentiate from other airports with local brands, offers and special promotions, because the travelers have the choice to buy at your airport ore at the other side of the flight. Airports more and more develop themselves to a service platform. They cooperate as the infrastructure provider with e.g. airlines, retailers, online-service-providers for integrated and seamless services. New technologies and data availability are opening ways for new services and passenger experiences. Tracking, navigation and identification via mobile phones are opening the way to individual tailored services. To give one example: In a flagship store of an online retailer at the airside of the airport you found a new electronic device. After buying it, you will find it directly delivered to the trunk of your car parked at the airport when you return. The car is off course cleaned and serviced, like always when you park it at the airport in your automatically pre-reserved parking zone. The payment is booked from your bank account at the end of the month. Choosing the right technologies and developing partnerships are the challenging tasks for airports in this business.
Part 3: The Environmental impact of airports
Air travel is an important driver of our modern live, nobody wants to miss it. Everybody wants to have access to air travel. But airports are facing dramatic challenges in their surrounding neighborhood limiting the competitiveness of airports in Europe. As an example while 24 hour operation is a usual business at hub airports worldwide, Frankfurt had to accept an outstanding very strict night curfew in exchange to the opening of the new runway. After 11pm nothing is moving anymore at one of the biggest hubs in the world. The aviation industry is doing huge steps in the reduction of pollution and noise emissions. Every new aircraft generation is reducing the fuel consumption by 15% to 20%. Very important for airports is the noise reduction. The currently starting change in the generation of regional and single aisle aircraft slashes aircraft noise footprints by up to 75% according to the manufacturer. But a next very big step for airports in noise and pollution reduction is being developed very quietly. Currently tests are undergoing to taxi aircraft to the runway with electric power. This can be done on two ways, with electric engines in the gear or with remote controlled tow trucks. The engines are started not until a position close to the runway. The results will be significant. Airports also have ideal distances and parking/charging conditions for electric ground handling cars. Many versions of these cars already exist up to huge passenger busses. They could be charged with own solar power. Some airports already installed solar devices at their green areas. A huge part of the energy consumption is used for the acclimatization of the Terminals and for the lighting of the aprons and runways. New Terminals are developed as energy passive house using underground heat ore solar energy. The glass windows have special materials to let the light in but the heating from the sun out if required. Like at home LED lights are dramatically changing the quality but most of all the consumption of the lighting. Another huge challenge for airports will be the implementation of green fuel. New logistics and standards needs to be tested and established.
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