Vertical integration of airport businesses

Airports all around the world are considering ways to diversify their revenue streams and build resilience in their business. As passenger numbers have fallen, airports have had to consider new ways of doing business, driving more revenue from what aviation business they do have, as well as finding more options to grow non-aviation revenue.

This article explores the option of integrating the airport and various on-site service providers.

Several entities exist across the airport supply chain, most of which provide various services to the airlines which operate at the airport, and others providing services to the airport's passengers and other customers. A typical airport business model involves various types of leasing arrangements between the airport and the providers of various goods and services on airport as well as aeronautical revenues charged to airlines.

So, what are the options for an airport to diversify into the operation of some of these business units? What are the potential advantages and disadvantages of doing this and what are some of the risks which may need to be overcome?

In the current aviation business environment, stepping into some of these activities may become necessary, particularly for some regional airports, to ensure continuity of service if other service providers cease business operations.

The good news is that this is do-able and if carefully managed, can create opportunities for the generation of positive cash flow and more efficient use of airport resources and capabilities.

On-airport services which airports can consider operating for themselves include; security screening, ground handling, airline catering, cargo terminal operations, aircraft refuelling, retail food and beverage services, parking, electricity, gas and telecommunications services.

Airports which operate carefully selected parts of this overall value chain can unlock various benefits for the airport business:

  1. The cross training of staff across multiple parts of the operation can improve workforce flexibility, and in particular the ability to backfill roles in small teams during periods of annual leave, or in the event of staff turnover.

  2. Greater opportunities for staff training, development and career growth can lead to the retention of great people who enjoy the variety of working in different roles across the business and having a change of scenery on a regular basis.

  3. Teams that work across the value chain have a better understanding of how each part of the value chain works and delivers value for customers. Reduction in operating silos can unlock innovation and improve efficiencies.

  4. There are some opportunities to re-task staff to non-peak tasks in order to achieve the best value from a shift. For example, staff brought in to handle an aircraft turn as a ground handling team may be re-tasked to other airport tasks (such as airfield mowing or cleaning the passenger terminal) to fill a minimum shift, or to make use of idle time between flights.

  5. Airports which provide services on airport have a greater degree of control over customer service outcomes, both for passengers, and for airlines.

  6. Opportunities exist to achieve synergies with respect to overhead costs such as management and administration costs by sharing them across several business units.

  7. Organisational culture, safety and compliance can be developed on a site-wide basis, and learnings can be shared across business units, fostering a culture of openness and team work.

However, some unique challenges can be anticipated and must be mitigated to make this work well for an airport:

  1. Amalgamating an airport business with on-site services requires a skilled management team that has the technical knowledge and leadership skills to manage a broad set of sometimes competing business, compliance and operational needs.

  2. Amalgamating an airport business results in the airport management having to lead a much larger team, manage a larger balance sheet and P&L and greater and more diverse risks. They need the skills to do this.

  3. Peak operational periods are still peak operational periods. During aircraft operating periods, peak numbers of staff across all disciplines are still required to safely and efficiently deliver the various operational and compliance requirements of each function.

  4. Smaller aviation business units can have difficulty in achieving economies of scale, particularly around training and compliance costs, when not supported by a corporate team of subject matter experts.

  5. If individual staff members are trained in too many roles, it can be difficult to maintain competency in all activities as they may not spend enough time working in each role. There is a sweet spot.

  6. Rostering can become complex and requires understanding the signed off capabilities of each staff member compared to the operational requirements for each shift, across all disciplines.

  7. It is important to ensure efforts are supported by the airport Enterprise Agreement or similar agreements and that personnel are appropriately remunerated, without unnecessarily increasing the airport's labour cost.

  8. Some consideration of corporate structure, and potentially, using separate corporate structures for various business units may result in a stronger negotiating stance with airline customers, particularly as applies to charges covered by various ICAO and IATA policy.

  9. Airport services such as ground handling, security screening, retail operations etc are similarly impacted by major market disruptions such as COVID-19 and may increase the business exposure to such events.

Vertical integration of airport businesses is particularly relevant for smaller airports and a number of airports in Australia and overseas use the approach. Toowoomba Wellcamp Airport, and Avalon Airport come to mind.

While vertical integration of the airport business may create some unique challenges and place some new demands upon the leadership team, it can also offer the airport and its team, a number of benefits.

Avistra provides commercial and strategic advice to airports, their owners and to government, with respect the development of sustainable aviation infrastructure and air services. If you’d like to explore how vertical integration could work for your airport, get in touch - we’d be happy to share some further thoughts and outline a path forwards.