For Immediate Release May 23, 2005

RAA Calls On Airports To Reduce Their Costs

Commuter/Regional Airline News, May 23, 2005

CINCINNATI, Ohio - Airports must do more to restructure their operations in order to reduce costs for their largest partners - the airlines - according to airport consultants. The Regional Airline Association (RAA) this year has placed a new emphasis
on airports. The message has been that their pass-along costs are too high and must come down. Last week at the RAA's annual meeting here, a good deal of time was spent trying to educate the airports on how to reduce their operating costs. But because few airports are members of RAA, the association's member airlines were deputized at the conference to be the messengers of the new initiative.

The message is critical because 40 percent of all airports are served by only one carrier, said Michael Allen, president of BACK Aviation Solutions. Furthermore, four out of 10 are served by turboprop service alone. As the network airlines restructure their operations, money-losing routes between expensive airports are continually being evaluated.

"You must look at the airport industry to help you," Deborah Meehan, president of SH&E, a Boston-based airport consulting firm, told the airlines at the conference. "We preach to the airports that they must generate more money from non-airline sources. In addition, private-sector practices must be absorbed."

In most airports, the airlines provide half of the airport's revenues. At the same time, terminal concessions provide only 6 percent and creative use of airport land and facilities only generates 3 percent of the revenue. In too many cases, airports tailor their operations to meet the expectations of the bond market and not the airlines, said Ken Stevens, director of airport affairs at Horizon Air. When planning capital projects, too much bond money - which is repaid with receipts from the airlines' rents and landing fees - is spent on "water features and architectural style elements," he said. Stevens suggested that airports use local funds to pay for elements that serve a source of civic pride rather than bolster basic operational functions.

A new mindset is needed, Meehan said. "It works one flight at a time. This mindset we would like airports to take is to think strategically, think pro-actively, understand your assets, your strengths and weaknesses. They need to maximize their assets. They need to be flexible, risk-taking and reward- sharing." Airports must stick with program because "it is not a short-term process."

When airports are considering capital projects, the airlines' airport affairs staff need to get involved early, Stevens said. It is a mistake to let the station manager be an airline's primary representative on a major project. The station manager's loyalties may be compromised by a desire to improve the local facilities rather than to watch the carrier's bottom line.

Earlier involvement of the carrier can reduce planning time and simplify the project, he said. In addition, the earlier an airline is "on board" with a project, the more effectively the airport can lobby for federal or local funding. While capital projects drive up the landing fees and terminal rent assessments, Stevens said airports need to do a better job of controlling
their operating costs.

Both Stevens and Meehan outlined numerous cost-saving concepts that some airports are using. The ideas include:

• Community generated revenue banks, mostly pledges to buy tickets.
• Airports need to work to create revenue guarantees, which will hold an airline in a market long enough for critical mass to develop. A variation on this idea is a per passenger credit the carrier earns for each passenger it carriers.
• An airport pays the airline to provide service. Stevens said a Western resort is considering this idea.
• The airport provides agents and ground equipment. The concept has been used in several airports to reduce operating costs by 30 percent and up-front capital costs by 66 percent. However, Stevens noted that the airline loses the ability to "brand" the ground crews as being part of the carrier.
• The airport and airlines agree to a facility's operating budget with a ceiling on expenses. The airlines are protected if the operation goes over budget and benefit if costs are held down. A variation on this theme has the airport benefitting by holding costs down and holding onto the excess revenue.
• Some airports do a better job of providing concessions that generate higher sales and thus higher commissions. Airports and their retailers have a much better chance of generating a sale if they are selling something that "you actually want to buy," Meehan said.
• Airports need to evaluate their business practices. Meehan said Palm Springs received recommendations for more than $1 million in annual cost savings that could be obtained by changing its business practices.
• Airports need to develop plans to reuse older parts of their facilities in ways to generate new revenue.

View a PDF of Deborah Meehan's Presentation to the RAA 2005 Annual Convention

Contact:

Lindsey Litton
Media and Public Relations Manager
ICF International
1.571.265.1472
llitton@icfi.com
 

© 1997-2008, SH&E, an ICF International Company