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28 Sep Is airline investment good for airports?

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Thailand’s biggest low-cost carrier, Thai AirAsia, recently offered to invest in a new terminal at low-cost carrier hub Don Mueang International Airport. With an expansion plan already in place, the airport’s operator, Airports of Thailand Public Company Limited (AOT), declined the offer. But the move sparked discussions about whether airline investment would benefit the airport.

Exclusive terminals have their advantages but the relationship can be contentious.

EXCLUSIVE TERMINALS

Airlines often agree long-term leases and invest their own funds for exclusive use of airport terminals. British Airways operates a terminal (with IAG sister-airline Iberia since 2012) at London’s Heathrow, and Virgin and Qantas have exclusive terminals in the larger airports in Australia, for example. These airlines operate the facilities themselves, processing their own passengers and planning stands for their own planes.

For airlines, that increased control over airport operations while promoting the brand is exactly the attraction. In the U.S., airlines are currently investing in renovating their terminals in the face of fierce competition. Delta spent $1.4 billion upgrading its JFK terminal and has planned another $650 million at LAX.

POTENTIAL PITFALLS

For an airport operator, handing over facility management headaches to a successful brand for a fee could be a win-win-win proposition. And both parties understand the advantage of a seamless passenger experience.

So what are the potential pitfalls for an airport operator?

Giving up control over the terminal’s stand planning can present a real disadvantage by making coordination and efficiency for the airport as a whole more complicated. An airline’s primary interest is, naturally, creating advantages and efficiencies for its own operations.

Exclusive terminals have their advantages but the relationship can be contentious. In 2007, Heathrow’s operator and British Airways (BA) worked closely during building of Terminal 5 (pdf). With operations split across three separate terminals, BA looked forward to a “single campus” with capacity for 30 million passengers. Savings from operational efficiencies were expected to return BA’s £330 million investment within 10 years.

Not quite 10 years later, BA has complaints about limited capacity and has threatened to leave if exorbitant costs for Heathrow’s third runway plans are passed on in charges.

ECONOMIC LOGIC

Obviously, there is no one-size-fits-all answer. Each situation requires its own critical analysis of market conditions and profitability. Would effectively outsourcing exploitation by allowing airline investment be more profitable than operating the terminal?

And does that economic benefit outweigh the loss of control over total airport efficiency? Operators and airlines sometimes have entirely different ideas about airport development.

Another significant risk is tight profit margins in the airline industry. Many airlines have opted to not renew long-term leases or to sell them back, preferring the flexibility of handling fees per aircraft and renting terminal space. Looking for more stable (and silent) investors might be the safer bet.

About To70. To70 is one of the world’s leading aviation consultancies, founded in the Netherlands with offices in Europe, Australia, Asia, and Latin America. To70 believes that society’s growing demand for transport and mobility can be met in a safe, efficient, environmentally friendly and economically viable manner. For more information, please refer to www.to70.com

Narisra Limtanakool
Narisra Limtanakool
I joined To70 in the Netherlands in 2008, and returned to establish To70 Thailand in 2009. Over the years, the Thai office has expanded its young and energetic aviation consultant team. The network of To70 offices around the world allows us to combine international expertise with local knowledge to ensure that we can deliver what is in the best interest of our clients.
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