How to identify and optimize for the value and traps in airport privatization
Most European airports are privatized – none of the US ones are – the rest of the world is a mix with no clear pattern. Is it inevitable and a matter of time – or are there some situations that simply call for this and others that don’t?
Epinion Aviation’s Managing Director, Brian Kaasner Kristiansen, weighed in on this issue representing the airport passenger views in a debate in Global Airport Leaders Forum in Dubai last week together with executives representing airport operations, finance, suppliers and airlines – and exciting and very balanced stakeholder group.
First of all, airport profitability potential is largely driven by the same logic as in retail: location, location, location. Located either close to a main destination/origin or directly on the route between other major origin/destinations with limited competition, such airports have huge profit potential and require substantial investments, often beyond the political appetite. These are obvious candidates for privatization.
Secondly, it is critical to understand the key differences between government owned and a privatized version, where three main differences appear as a natural cause:
- You move from a long-term planning view to a short-term financial optimization view, which inevitable reduces costs and take advantage of fast revenue drivers but at the expense of what may be right for the long-term perspective. This requires a delicate handling of the privatization with smart ownership, minimum requirements and clear objectives.
- You move from political motivation to stakeholder management, where you need to pay attention to the political side as one perspective but equally to suppliers, airlines, passengers and community, which tend to drive more balanced view – and often also gains a management with more relevant experience.
- You move from a platform administration perspective to a customer orientation view over time or from an internal to external view, which tend to place a premium on the value generated for those who pay and reduce unnecessary cost, where none will pay – a blue ocean strategy if you will.
This last part – customer centricity – is key and it starts with efficiency first, because airports are born blind without any direct passenger data and changing towards customer centricity is a mindset change for the entire airport workforce, which can easily number in the 50,000. Therefore, most airports start by optimizing their route development (network planning for airlines), where they identify more and better data to build solid business cases to lure in new routes or airlines to build passenger numbers.
Once this is up and running the touch points along the passenger journey get the attention. What works, what does not work, what do different segments expect and what do they want in the future, how do you optimize it for a digital world with self-service, automatic bio scanning, interconnected services etc. 1% improvement in satisfaction will drive 1.5% improvement in non-aviation revenues.
But really, this only scratches the surface: Airports are so much more than transport hubs – shopping centers, media platforms, parking lots are all potential stand-alone business units. Parking alone can count for up to 40% of profits in an airport, owing to the huge income and relatively low investment needs.
So where in the old days no private business could manage an airport due to investments and limited income potential, today it is the other way around for the best located airports, who have huge investments to keep up with particularly transfer passengers and require special business knowledge in many areas.
Contact us if you are in the middle of an airport privatization to get the inside scoop on driving profits in all airport business units with our proprietary aviation insights and market research approach.