Introduction
The purpose of an airport is to facilitate aviation, which is also generally considered its primary source of revenue. However, due to pressure from competition and low-cost carriers, the profit margin on aeronautical income has been decreasing as airports tried to undercut each other’s prices. As a result, they have become increasingly reliant on non-aeronautical revenues such as rent from shops stationed in the facility. These cash streams are mostly dependent on the number and type of passengers that pass through the terminal. This essay will evaluate the reasons why airports increasingly focus on non-aeronautical revenues and their types. By doing so, it will demonstrate that the maximization of these types of income is necessary for airport survival but is not a viable survival strategy alone.
Discussion
The Rise of Non-Aeronautical Revenues
As mentioned in the introduction, LCCs are among the primary reasons for the decline of aeronautical revenues. Francis et al. (2004) discuss how, seeing their rapid growth, many airport managers started trying to attract them in hopes of capitalizing on the growing traffic. However, the new airlines proved to be unwilling to pay the same fees as traditional carriers and began negotiating for lower fees. Their market power, which emerged from numerous airports’ simultaneous competition for their presence, enabled them to secure excellent deals. As a result, airlines have begun trying to compensate by extracting revenue from the visitors directly (Francis et al., 2003). They began offering a wider and more comprehensive variety of services that evolved over time to incorporate new conveniences.
As a result of the various measures taken by airports to increase non-aeronautical revenues, their proportion in the overall income grew accordingly. Per Graham and Morrell (2016), among European airports, in 1984, the percentage was at 41%, but then it began growing steadily to become 50% in 1999. With that said, non-aeronautical revenue sources are still limited and contingent on the passengers that visit the location for flights. As such, there is a soft upper limit on their share in the airport’s overall earnings. Graham and Morrell (2016) confirm its existence, noting that airports have struggled to change the ratio since 2000, which averaged to 60-40 aeronautical versus non-aeronautical globally in 2013. Nevertheless, the airports have been successful in extracting additional income from their customers, doing so in a variety of ways.
Sources of Non-Aeronautical Revenues
Airports use a variety of non-aeronautical sources of revenue that work with customers both directly and indirectly. Dileep (2019) lists to rent, direct sales, catering, car parking, consultancy centers, visitors, and business services, but there are many other minor items that do not necessarily warrant a detailed mention. With that said, while they may not be significant when isolated, their massive variety can influence the overall figures substantially when they are combined. As shown in Fig. 1, direct retail, rents, and parking are the most significant categories, constituting approximately two-thirds of the entire figure. More than half of the remaining non-aeronautical revenues are miscellaneous and unnamed, presumably because each one produces less than 1% of the total income.
With that said, the three most important items still warrant a detailed discussion, starting with direct retail. The airport operator will typically operate some shops in the facility directly while also providing catering services. Consultancy centers and other services provided directly by the airports rather than a third party can also be considered part of direct sales. It should also be noted that people who work at the airport, such as employees and visiting airline workers, also have to use its services (Page, 2019). Sales made to them can also be considered a substantial part of direct retail income.
The spaces that are not occupied by airport facilities and services that are owned by it are generally rented out to third-party shops. These facilities will typically provide a fixed monthly or annual income to the airport. Vogel (2019) also describes a system where renters have to pay the airport a percentage of their turnover, which is likely designed so that the airport can further capitalize on the number of its customers. It should also be noted that the facilities within the airport use its electricity, water, and other utilities, which they then have to compensate. All of these items can be broadly classified under rent, as they deal with third parties rather than the airport directly.
Lastly, parking should be discussed, as it has an unusual relationship with airports. Many visitors (though not all of them) will arrive at the facility alone using a car and depart on an aerial trip, which can be lengthy. For that duration, they need to store their car safely, and many airports accommodate this need by providing large parking spaces of different types that suit diverse customer needs. The maintenance requirements of a parking lot are relatively minor unless it is being expanded, as Auckland International Airport’s 2005 parking earnings of $24.8 million and expenditures of $1.3 million show (Senguttuvan, 2016). As such, parking is highly profitable and may be considered one of the most effective sources of non-aeronautical revenue for an airport.
Conclusion
The increase in the importance of non-aeronautical revenues may be considered a self-imposed change, as airports lowered their aeronautical charges to attract LCCs but found that their overall revenue failed to grow. As a result, they had to resort to using the increased passenger traffic to increase their income. Airports worldwide have introduced a large number of measures, such as retail, car parking, and rent, which constitute approximately 40% of their total revenues globally. However, non-aeronautical revenues still depend on passenger traffic, which can only result from aeronautical operations. There are limits to how much a visitor is willing to spend, and, therefore, while non-aeronautical revenues supplement the loss of their counterparts, they cannot replace them.
References
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Francis, G., Humphreys, I., & Ison, S. (2004). Airports’ perspectives on the growth of low-cost airlines and the remodeling of the airport–airline relationship. Tourism Management, 25(4), 507-514. Web.
Graham, A. (2018). Managing airports: An international perspective (5th ed.). Taylor & Francis.
Graham, A., & Morrell, P. (2016). Airport finance and investment in the global economy. Taylor & Francis.
Page, S. J. (2019). Tourism management (6th ed.). United Kingdom: Taylor & Francis.
Senguttuvan, P. S. (2016). Principles of airport economics. Excel Books.
Vogel, H. (2019). Foundations of airport economics and finance. Elsevier Science.