Comment: Tapping into the non-aeronautical revenue opportunity

Jan Laufs: Firm views on how airports can better exploit non-aeronautical activities

INTERNATIONAL. How will non-aeronautical activities evolve in the future, and how should the industry tap into these great untapped opportunities in a fast-changing world? writes Jan Laufs*

Despite the importance of non-aeronautical revenues to airports, this segment actually lost share to aeronautical in the period 2000 to 2010 (according to figures from Indian management consultancy Technopak). That’s a feature of the prevailing external environment, with aviation hit by a series of crises that also affected traditional non aeronautical revenues (F&B, retail, concessions, advertising, car parking, car rental and duty free).

Does this mean we have reached a “˜natural’ proportion in the revenue split between aeronautical (53-54% of the business worldwide) and non-aeronautical? Are we at the end of the journey?

Not at all – but we are at an intriguing point in time. Let’s look at the business from a number of angles.

First, the airports are under extreme pressure to evolve. Changes in the airline industry have huge implications for airports planning their investments. The impact of airline bankruptcies and airline mergers and acquisitions (M&A) does not pass without collateral damage. Such developments can also be ruinous for airports that are wholly dependent on a single carrier.

Airports need to adapt faster to the dynamics of the market around them. Non-aeronautical revenues are key and airports must be inventive, tapping into fresh revenue sources by developing new services inside the terminals or further commercial activities outside the terminals.

Airports need to understand their customers and users better – collecting, sharing and analysing data well is more crucial than ever. A strong understanding of priorities, market dynamics and customer needs is essential to calibrate the services and products required to boost retail revenue. This cannot be done in isolation either: collaboration with concessionaires is essential.

Global megatrends-economic uncertainty, environmental crises, new technology, ethics commotions and a war for the best talent-are forcing organisations to rethink the way they do business. Whether in the context of M&A, restructuring, downsizing, offshoring or outsourcing, corporations are focused on driving down costs dramatically while increasing competitive advantage.

To provide this lever for improved work and business performance, organisations are increasingly driving workplace change. The desired outcomes vary by sector. Financial services companies focus on reducing real estate costs, stripping millions of square feet out of portfolios and on their agility to respond to uncertainty in the economic environment. The travel industry can achieve major cost reductions and enhance service quality by redefining the use of space and by using that space more efficiently.

How might that translate into the airport environment? One bold but economically (and service-wise) vital move is the strategy employed by some airports to eliminate dedicated airline lounges and to provide third party operated lounges that are available to all carriers and to more passengers.

Third-party lounge concessions
Traditionally, these lounges have been run by airlines as part of their VIP services and loyalty programmes aimed at their own passengers. As a result, VIP lounges often do not represent a profitable business to the airport, while the products and services offered to passengers are similar to those offered onboard. Passengers are only exposed to the brands, products and services of a single airline, which restricts their opportunity to purchase at other stores or to use other services.

With third-party management, lounge facilities can exhibit a variety of products and brands without restriction, and at the same time promote the airport’s own retail brands. This has the effect of stimulating purchasing among passengers,

Airport VIP lounges can be just as profitable as any retail store at the airport – perhaps even more so – if they are treated as commercial showcases that generate passenger flow to the shops and as promotional environments for brands and services.

There are benefits for the airlines too. They can reduce fixed costs and offer comfort to their clients at variable and optimized expenditure location by location. Only at the major hubs would the volumes justify individual, fully branded lounges.

The third party operator can operate with a wider, more stable base of prime passengers, allowing it to provide higher service levels and pay more rent to the airport. This consolidation frees up space that could be used for alternative commercial activities such as a landside hotel or retail activities.

And what about the passenger? To be blunt, they don’t care whether or not the lounge is branded by an airline: it’s the service and amenities that matter. And often the third party operator can deliver this because it’s their core business.

The real estate opportunity
So there is plenty of room to improve the potential of non-aeronautical within the terminal building. But there is an even bigger opportunity beyond the terminal, by leveraging airport real estate and disengaging non-aeronautical operations from the highs and lows of passenger traffic.

Real estate, which after all is about is all about “˜location, location and location’ is a driver of success for cities and for airports.

There is a clear opportunity for real estate development at the airport.
Jan Laufs

Because airports serve as infrastructure hubs combining air, road and often rail traffic, the airport is an ideal location in which to situate offices and hotels that cater to the modern working patterns of global enterprises and mobile workforces. An internationally favourable location with options for international and regional travel helps attract and retain young top talent. And rapid urbanisation is impacting global real estate markets too, creating new opportunities for investors, developers and corporate occupiers.

When comparing the most dynamic cities in the world, there is a close correlation between real estate investment and air traffic connectivity. Among the top ten air connectivity cities – measured by passenger numbers among leading city airports – many (including London, New York, Tokyo, Los Angeles, Chicago) are also in the top ten for direct commercial real estate investment (measured by all direct real estate investment over the past three years).

So there is a clear opportunity for real estate development at the airport. Schiphol Airport for example is home to the global headquarters of companies such as ING, SkyTeam and ABN Amro. Frankfurt Airport has attracted global players such as KPMG and DB Schenker in their latest real estate developments around the airport.

Airports can also often command higher premium rents, as in Zürich, London and Amsterdam, and present a strong income stream. This is why “˜airport city’ developments with a calibrated asset class mix of office, retail, hospitality and industrial are currently under the focus at many airports. The right mix of activities can act as a growth engine for both passenger and cargo traffic.

Some airports are becoming even more creative in their efforts to attract business and consumers. Munich Airport for example has hosted the European surfing championships and beach volleyball competitions, as well as its annual Christmas market. Hong Kong Airport features an IMAX theatre a 4D extreme screen. Incheon international Airport offers an ice skating rink and a golf course and is developing a 250 acre fashion island. In addition, cargo and manufacturing facilities also drive cargo volumes and rent for airports; Dubai’s Flower Center is one example.

These examples underline the untapped potential, yet not all players are up for the game. Why are only a few airports driving these new activities?

The real estate opportunity is not the same everywhere: its attractiveness for business and real estate investment depends partly on the city in which you operate. But this determines the market size – not the principal question about how to achieve a more commercial mindset. The key elements to success here are creativity, the willingness to change and the boldness to try new business models.

The good news is that this willingness will soon harden into an imperative for many airports as the need for change becomes compelling. Alongside that, the necessary creativity can be fostered by leveraging outside expertise. Airport operators have increasingly hired senior executives from industrial operations as well as from customer related industries such as retail and hospitality to strengthen their operational and management performance.

On their side, the larger travel retailers and F&B operators need to expand their skills with airport expertise and become even more competent business partners. That ranges from early stage commercial terminal planning to optimising operational space conversion and reacting fast to new trends, for example by opening pop-up stores to tap into fresh opportunities.

So, are we at the end of a journey for non-aeronautical revenues? Not at all. The journey has just begun.

*Author profile
Jan C. Laufs is an executive leader with a track record for growing revenues and optimizing profitability across diverse industries. He is experienced in the field of maximizing non-aeronautical revenues, brand building, and commercial/corporate real estate optimization. Jan has held executive positions in the real estate industry and airport sector. He was Managing Director of the Middle East’s second largest airport in Jeddah, Chief Commercial Officer at Lima Airport and held other key roles within the Fraport Group.
He started his career in the consumer goods industry, promoting brands including Davidoff and Peter Stuyvesant in the tobacco business, as well as working on other sectors.
He can be contacted through The Moodie Report.

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