An industry grappling with borders closing and reopening like faulty carpark boom gates. Airlines struggling with grounded planes, ever changing flight schedules and disappointed passengers. Airports diligently maintaining their assets, having to keep the lights (runway and other) on for when things “return to normal”. But for an airport’s aviation revenue, will there ever be a normal again?
Aviation revenue includes landing fees, terminal access charges, fees for security screening and other services, allocated to airlines and other operators. These revenues require an assessment of various operational and financial information, to determine appropriate charges for users of an airport’s facilities and assets. It requires careful consideration and balancing of the interests of multiple parties, especially when proposing price increases - a heated topic at the best of times, let alone with airlines operating under their current trying conditions.
Many large airports employ a "building blocks" methodology, incorporating both capital and operating costs, depreciation and inflation. Here, a rate of return is applied to a calculated asset base. As a result, there is both a "return on assets" and over time a "return of assets". This total return is allocated across the various revenue sources and drivers, i.e. passengers or movements, to arrive at unit charges. The downside here is the complexity of the calculations and the information required may not always be available, such as a weighted average cost of capital (i.e. a rate of return) for a council owned regional airport.
For smaller airport owners or operators, the historical asset base may be less of a concern – owners may have a goal of simply recovering an appropriate amount of their annual operating costs. Here, detailed annual cost budgets might be used, preferably alongside actuals, as well as passenger or movement forecasts for the different revenue sources – aeronautical charges, government mandated security costs etc. This approach has potential downsides including non-recovery of capital costs, and the calculated charges can fluctuate significantly over time with varying operating costs – when airlines and aircraft operators would prefer steady and predictable price paths.
Since the onset of the COVID-19 pandemic, the Australian Government has implemented a range of measures to support the Aviation industry. The current Domestic Airports Security Costs Support (DASCS) program provides financial assistance to Australia’s eligible domestic airports to assist with costs associated with mandated security screening requirements that must be met regardless aviation activity volumes. This is to assist airports in meeting their regulated screening obligations, and to avoid associated costs being passed on to airlines and subsequently passengers. Whilst participation in this specific program was via Government invite, it demonstrates why an airport needs to be always be across its operational cost base.
An airport is a large, complicated asset, with high fixed costs and many moving parts. In seeking to develop its aeronautical pricing strategy, an airport owner should consider the following:
Inclusion of all appropriate costs – this could encompass a full operational review or walkthrough, or at least a detailed analysis of all reported costs in the P&L, including prior periods to determine whether appropriate costs had been recovered;
Building supporting data and explanations for such costs, to assist with negotiations with airline partners, including scenarios and options;
Optimising their operations as part of, or preferably prior to, opening these negotiations
Building resilience and flexibility into their operations and structures, to assist with the next industry shock, whatever that may be; and
Achieving sufficient transparency in the cost base that airline support options can be considered while fully cognisant of total operational cost; and
Have an overall goal of obtaining a fair return on their assets and operations, providing fair growth opportunities for their airport and airline partners.
Airport owners and operators can also benefit from having their fees benchmarked against comparable airports, who more than likely are wrangling with similar pricing decisions, budget balancing issues, and shortages of accurate and timely information. A note of caution here: these comparable airports may similarly not be recovering all their costs, so benchmarking should not be the only approach employed.
Now is the ideal time to optimise aeronautical fees and airport business performance. Many airports will be considering reconciliation of security fees, and it is important that this work is completed accurately and fairly.
AVISTRA provides commercial advice and strategy development to airports and government. Our team has experience in assisting clients with aeronautical pricing strategy development, optimisation, audit, benchmarking and negotiation. For more information, contact Daniel Mellish on email@example.com.