Airport Revenues and User Charges

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Page 1

Airport Revenues and User

Charges

Amedeo R. Odoni

Massachusetts Institute of Technology

1.231J/16.781J/ESD.224J Airport Systems

1.231J/16.781J/ESD.224J Airport Systems ––Fall 2007Fall 2007

Page 2

Airport Revenues and Charges

Objective:

– Review airport revenues and international

practices in determining user charges

Topics:

– Ownership and management

– General principles in setting airport

charges

– Review of aeronautical and

non-aeronautical charges

– Comparing airport charges

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Page 3

Growing Tension

“There is something structurally wrong with our

partnership between airlines and airports. If one of

the partners is losing his shirt, while the other is

counting his money, it is no longer a partnership.”

Giovanni Bisignani, IATA Director General, 10/02

“Airports are not on the verge of bankruptcy and

that seems to bother those who are.”

David Plavin, President, ACI-NA, 9/04

ACI resolves to exclude IATA from future airport

airline negotiations on airport charges.

New Zealand, January 2006

Some Rough Comparisons

–

FY 2004/05 or

CY2004

2.6%

/

-1.3%

$9.6 billion

/

$-3.1 billion

$392

billion

Top 150

airlines (in

revenue)

20.9%

/

11.3%

$8.2 billion

/

$4.1 billion

$42

billion

Top 100

airports (in

revenue)

Operating

margin/

Net margin

Operating

result/ Net

result

Total

revenue

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Page 5

Results of Top Seven Airport Groups: 2004/05

28.4% 1,131 Schiphol Group 24.4% 1,598 Narita International Airport Group 19.7% 1,670

Port Authority of New York and New Jersey

33.1% 2,265 AdP 13.8% 2,542 Fraport 11.9% 2,616 Aena (Spain) 31.8% 3,901

BAA – British Airports Authority

Operating margin Revenue ($ million)

Source: Airline Business, December 2005

Page 6

Forms of Ownership and Management of Airports Forms of Ownership and Management of Airports A. Government-owned; operated by Department or Agency

of national government

B. Government-owned; operated by a municipal or regional Department or Agency

C. Government-owned; operated and managed by a private contractor

D. Operated by an independent Airport Authority, which is fully owned by municipal and/or regional and/or national government

E. As in ‘D’ but with minority private shareholders (some shares may be publicly traded)

F. Privately-owned (fully or in majority, possibly with some or all shares publicly traded); operated as independent airport authority

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Page 7 Privatization examples: Airports with some publicly Privatization examples: Airports with some publicly

traded shares traded shares

32.1% State of Hesse, 20.5% City of Frankfurt, 18.4% Federal Republic of Germany, 29.0% Free Float (Frankfurt Stock Exchange)

Frankfurt/Main (Fraport)

65% Beijing Capital Airport Group (Government Owned), 10% Aeroports de Paris (ADP Manag’t), 25% Free Float (Hong Kong Stock Exchange)

Beijing (BCIA)

20% Province of Lower Austria, 20% City of Vienna, 10% Employee Found’n, 50% Free Float (Austrian Stock Exch)

Vienna (VIE)

25.8% Auckland City Council, 9.6% Manukau City Council, 7.1% Singapore Changi Airport, 57.5% Free Float (New Zealand + Australian Exchanges)

Auckland (AIA)

33.8% Danish Government, 66.2% Free Float (Copenhagen Stock Exchange) [until 2005] Copenhagen (CPH)

15% Strategic Partner led by Copenhagen Airport, 85% Free Float (Mexican Stock Exchange)

Mexican Southeast Airport Group (ASUR)

100% Free Float TBI (UK)

100% Free Float (London Stock Exchange) [until 2006] BAA (British Airports

Auth’y)

Ownership and Management of Airports: Comments Ownership and Management of Airports: Comments

Tendency toward D - F as airports become busier

and more important to local and national

economies

Many possible variations within categories

“Build, operate and transfer” (BOT) agreements

often associated with E and F

E and F often involve a fixed time limit (e.g. 25-50

yrs): duration of “concession”

BOT arrangements may also be made for individual

facilities within an airport (e.g., terminals, car parks,

etc.)

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Page 9

Airport Privatization Trend

Growing private participation in airport ownership

Equally important, private-sector management

practices are replacing traditional government-style

management in an environment demanding

economic self-sufficiency

Trend toward “outsourcing” of airport activities, lean

airport organizations (“US model”)

Accompanied by improved understanding of need

for regulatory safeguards to protect public interest

and prevent monopolistic practices

Page 10 Commercialization and Away

Commercialization and Away--fromfrom-Home Ventures-Home Ventures

Fast-growing non-aeronautical revenues as a

result of emphasis on commercial activities and

other landside services (due to growing traffic and

to numbers and longer dwell times of connecting

and departing passengers)

Ventures away from home, sometimes in activities

not directly related to airports (e.g., real estate)

Evolving organizational structures reflecting these

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Page 11 Organizational Structure: The Amsterdam

Organizational Structure: The Amsterdam SchipholSchipholGroupGroup

Corporate Staff Domestic Airports International Project Consult Business Unit: Airlines Business Unit: Retail Business Unit: Passengers Schiphol Airport Real Estate Support Services Inform'n + Communic'n Technology Board of Management

Background on User Charges

Controversial issues, with varying practices around the world; little guidance available; occasional government intervention

Chicago Convention (1944), Article 15, Chapter 2:

– uniform conditions for aircraft of all Contracting States

– non-discriminatory charges for international air services

– publish charges and communicate them through ICAO

Bermuda 2 Agreement (UK/US, 1977):

– user charges may reflect, but shall not exceed, full costs, including fair return on assets after depreciation

ICAO Doc. 9082/4 (1992, 2001) Statements by Council on Charges for Airports and En Route Navigation

ICAO Doc. 7100 (annual) Manual of Airport and Air Navigation Charges

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Page 13

Statements by ICAO Council: Airport Charges

Cost Basis for Airport Charges

– Principle: International users must bear their full share (but not more) of the cost of the airport – Airports should maintain full financial records – Full cost includes operating cost of airport and

essential services, as well as interest, depreciation, repairs and management

– No charges for facilities not used

– Airports may produce revenues greater than costs – A user’s ability to pay should not be taken into

account until all costs are assessed

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Definitions

Aeronautical charges(revenues, costs): Charges for services or facilities directly related to the processing of aircraft and their passengers and cargo in connection with facilitating travel.

Non-aeronautical charges(revenues, costs): Charges related to the ancillary commercial services, facilities and amenities available at an airport.

Off-airport (or non-operating) revenues (costs):

Revenues derived from activities which are not related to the movement of aircraft, passengers and cargo through the subject airport. [Examples include revenues from real estate ventures, consulting, investments at other airports, etc.]

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Page 15

Types of User Charges: Aeronautical

Landing (and/or takeoff)

Terminal-area air navigation

Passenger service (terminals)

Cargo service

Aircraft parking and hangars

Security

Airport noise

Noxious emissions (air pollution)

Ground (ramp and traffic) handling

En route air navigation

Landing fee

ICAO Council Statements:

– Should be based on maximum permissible takeoff weight (MTOW), except under airport limitations

– Should be computed on basis of a rate per 1000 kg; rate may vary at certain weights

– May be just a fixed charge up to a weight threshold – Should include cost of lights and other landing aids

--these should not be optional

– Should not depend on stage length

Note: Ability-to-pay is the driving

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Page 17 Computation of Landing Fee at a Major US Airport Computation of Landing Fee at a Major US Airport

Item Amount

A. Capital cost of public part of airfield at beginning of FY $354,339,888 B. Depreciation of public aircraft facilities $14,173,596 C. Interest on public aircraft facilities $15,308,339 D. Depreciation of equipment $457,413 E. Interest on equipment $330,168 F. Snow removal services $2,540,000 G. Maintenance and operations $28,228,906 H. Administration $16,670,916 I. Allocated portion of estimated tax liability $3,578,719 J. Prior year adjustment to projection ($4,545,064) K. Annual cost of airfield facilities in FY (= B through J) $76,742,993 L. Projection of scheduled air carrier weight (000 lbs.) 21,200,000 M. Landing fee per 1,000 lbs for FY (= K / L) $ 3.62

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Other Aeronautical Charges

Terminal Air Navigation -- Sometimes charged

separately; allocated between airport operator and

ATM service provider

Passenger Service -- Charged on a per passenger

basis; usually paid directly by airline, but with

notable exceptions; “head taxes” (e.g., PFC in US)

are often a form of passenger service fee

Cargo Service -- Per ton or other unit measure

Parking and Hangar Charges -- Based on MTOW

and/or aircraft dimensions; often no charge for

occupancies of less than “normal threshold” (2-6

hours); rate may differ for contact vs. remote

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Page 19

Noise

Noise-

-Related Charges

Related Charges

Increasingly common; often part of landing fee Often depend on time of day and/or aircraft noise

characteristics

Stage 3 aircraft are increasingly being broken up into finer subdivisions, as Stages 1 and 2 disappear

Cover noise mitigation costs + instruments for demand management

ICAO Statements:

“should be imposed only where noise problems exist”; “should recover only costs of noise alleviation”;

“should not be prohibitively high for the operation of some aircraft”

Note: Some airports (Stockholm, Zurich, Geneva) have introduced noxious emissions charges

Security Charges

Varying practices

National police or other government security agency;

airport operator; third-party contractor

Supervision is state responsibility

Users requesting or requiring additional security may

be charged more

Often part of passenger service charge

ICAO Statements: authorities may recover costs but

no more

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Page 21

Provision of Ground

-

Handling Services

Alternative sources of services:

– Airport operator (Authority or State)

– Airline itself (“self-handling”)

– One airline to another (“third party service”)

– Independent, specialized server

Availability of at least two competitive sources is

typically required or encouraged

Extensive personnel requirements

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Aeronautical charges and taxes per departing Aeronautical charges and taxes per departing

passenger on a B737

passenger on a B737--400* (Athens, 2007)400* (Athens, 2007)

€ 38.46 / € 48.46 Total***

€ 12 / 22 Airport development fund (ADF) charge**

€ 0.20 Check-in desk charge

€ 0.32 CUTE system charge

€ 1.97 Baggage handling system charge

€ 0.33 Ground power charge (pro-rated per departing pax)

€ 1.44 Loading bridge charge (pro-rated per departing pax)

€ 4.11 Security charge

€ 11.86 Passenger terminal facilities charge

€ 1.28 Parking charge (pro-rated per departing pax)

€ 4.95 Landing charge (pro-rated per departing pax)

* Assumes 110 passengers (75% load factor), 60-minutes stay, contact gate at MTB

**ADF is 12 euros per EU departing passenger and 22 euros for non-EU *** First total applies to EU passengers and second to non-EU

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Page 23

Landing fees: ATH vs. LHR (2007)

€ 908 € 1,971 397 Boeing 747-400 € 908 € 1,874 365 Airbus 340-600 € 908 € 545 68 Boeing 737-400 Landing charge LHR* Landing charge ATH MTOW (tons) Aircraft type

* Peak Period, summer 2007

Cost per Departing Passenger, B737

-

400

11 Rome 13 Lisbon 17 Istanbul 21 Dusseldorf 23 Munich 26 Berlin Tegel 26 Brussels 28 Zurich 30 Vienna 33 Amsterdam 35 Athens 44 London Heathrow € Airport • Summer of 2007 • 75% Load Factor

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Air Navigation Charges: Statements by the

Council

Costs to be taken into account should include only those related to services and facilities under ICAO Regional Air Navigation Plan

Approach and Airport Control Charges

– should be associated with landing fee

– may take aircraft weight into account, but “less than in direct proportion”

Route Air Navigation Charges

– should take into account distance flown, and aircraft weight (in less than direct proportion)

Charges for Services Outside Provider’s Airspace

– a State may charge for services rendered anywhere

– collection of charges in such cases may be difficult

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EUROCONTROL: Air Navigation Facility

Charges

The EUROCONTROL Formula:

Charge = (service unit rate) x (# service units)

# service units = (distance factor) x (weight factor)

distance factor = Great-circle distance (in 100s of km)

(Great-circle distance is reduced by 20 km for each takeoff or landing within a concerned state)

N

t

r

=

⋅

P

d

N

=

⋅

50 weight takeoff e permissibl Max factor weight =

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Page 27

EUROCONTROL Example

300 km flown by 200 ton aircraft in a country with

a fee of $50 per “unit”:

Charge = 6 x $50 = $300

6

50

200

=

⋅

=

100

300

units

of

#

EUROCONTROL En Route Unit Rates* EUROCONTROL En Route Unit Rates*

Albania 48 Austria 65 Belgium/Luxembourg 84 Bosnia 47 Bulgaria 53 Croatia 41 Cyprus 35 Czech Republic 28 Denmark 57 Finland 38 France 61 Germany 71 Greece 37 Hungary 35 Ireland 31 Italy 70 Macedonia 67 Malta 32 Moldova 38 Netherlands 54 Norway 56 Portugal 49 Romania 41 Slovakia 41 Slovenia 59 Spain 72 Sweden 49 Switzerland 76 Turkey 29 UK 82 (Azores 15)

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Page 29

Non

-

Aeronautical Charges

Statements by the Council: “Should be developed to the maximum possible”

Concession fees for aviation fuel and oil – Concessionaire or airport itself

– Council: treat as non-discriminatory aeronautical charge

Concession fees from commercial activities

– Fixed amount or percentage of gross sales (10-60% with guaranteed minimum)

Revenues from car parking and car rentals

– Operator itself; third-party operator; BOT agreements – On-premises vs. off-premises car rental facilities – Fast growing!

Page 30

Non

-

Aeronautical Charges [2]

Rentals for airport land, space in buildings (including advertising space) and equipment

Fees charged for tours, admissions, etc.

Fees derived from provision of engineering services, utilities, etc., by airport operator

Off-airport revenues • Consulting services

• Education and training services

• Management contracts at other airports • Management contracts for other activities

• Equity investments in travel-related or other ventures • Equity investments in other airports

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Page 31

U.S. ticket taxes and fees (2007)

Notes:

Rates effective 2007

Only includes domestic taxes and fees added directly to the price of tickets PFC and FSSF collection limited to first 2 enplanements per one-way trip Rural airports exempt from some taxes

Special FST & FTT rules exist for Alaska and Hawaii

FSSF temporarily suspended from June 1 to September 30, 2003

TSA $2.50

per enpl. FSSF

Federal security service fee

Collecting airport $3 or $4.50

per enpl. PFC

Passenger facility charge

$3.30 per segment FST

Federal segment tax

Airport and Airway Trust Fund 7.5%

FTT Federal ticket tax

Recipient Rate Symbol Tax/Fee 4 702,513 Other 13 2,630,834 Parking 6 1,288,974 Rental cars 6 1,199,514 Terminal concessions 3 560,767

Land and non-terminal facilities

36 7,120,169 Aeronautical Revenues 3 671,539 Other 1 254,280 Fuel sales 2 429,513

Cargo and hangar rentals

13 2,641,439

Landing fees

17 3,123,399

Terminal rental charges

% of Total Revenues ($ 000)

Revenue Sources

All U.S. Airports with Commercial Service (2006)

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Page 33 100 19,920,372 Total 32 6,417,600 Non-Operating Revenues 2 442,605 Other 12 2,450,995

Passenger facility charges

13 2,574,666 Grant receipts 5 949,335 Interest income % of Total Revenues ($ 000) Revenue Sources

All U.S. Airports with Commercial Service (2006)

Note: 508 such airports in 2006

Source: FAA Form 5100-127 responses

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All U.S. Airports with Commercial Service (2006)

100 16,387,584 Overall total 45 7,298,358 Total 26 4,179,174 Depreciation 19 3,119,184

Interest payments and other Non-Operating Expenses 55 9,089,226 Total 5 794,422 Other 2 244,762 Insurance and settlements

14 2,375,588

Contractual services

4 706,622 Repairs and maintenance

4 631,276 Supplies and materials

5 900,300 Communications and utilities

21 3,436,256

Salaries and benefits

% $(000)

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Page 35

All U.S. Airports with Commercial Service (2006)

Total Debt: $64 billion

–

$60 billion in bond debt

–

$49 billion in debt of 32 busiest airports

Capital Project expenditures

–

Airfield

$2.9 billion

–

Terminals

$3.0 billion

–

Parking

$0.4 billion

–

Ground access (all modes) $0.5 billion

–

Other

$2.2 billion

–

Total

$9.0 billion

5 552,804 Other 12 1,552,794 Parking 6 712,149 Rental cars 7 922,634 Terminal concessions 2 294,835

Land and non-terminal facilities

40 5,016,447 Aeronautical Revenues 3 398,246 Other 1 105,240 Fuel sales 2 260,011

Cargo and hangar rentals

16 1,954,598

Landing fees

18 2,298,351

Terminal rental charges

% of Total Revenues ($ 000)

Revenue Sources

32 Busiest U.S. Commercial Airports (2006)

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Page 37 100 12,550,521 Total 28 3,498,859 Non-Operating Revenues 1 165,661 Other 14 1,747,435

Passenger facility charges

7 924,221 Grant receipts 5 661,542 Interest income % of Total Revenues ($ 000) Revenue Sources

32 Busiest U.S. Commercial Airports (2006)

Page 38 Aeronautical Revenue as % of Total Operating Aeronautical Revenue as % of Total Operating

Revenue (2002) Revenue (2002) 43% Average 49% Average 54% Zurich 51% Vienna 71% Milan MXP 32% Munich 40% Sydney 52% Manchester 39% Singapore 48% London LHR 41% Beijing 45% London LGW 67% Kuala Lumpur 46% Frankfurt 48% Osaka/Kansai 37% Rome FCO 28% Incheon 52% Copenhagen 45% Hong Kong 36% Paris CDG 44% Bangkok 62% Brussels 34% Auckland 48% Amsterdam

Airport Revenues and User Charges