More About the Money

By Debby McElroy
At the Tuesday morning breakfast, it was all about the money. Kitty Freidheim asked the airport directors (Howard Eng, President and CEO, Greater Toronto Airports Authority; Tan Sri Bashir Ahmad Abdul Majid; Managing Director, Malaysia Airports Holdings Berhad; Thella Bowens, President/CEO, San Diego International Airport; and Yiannis Paraschis, CEO, Athens International Airport) a number of questions about how managing their airport, offering an interesting contrast given the very different structures under which they operate.  Two of the more interesting questions were about privatization and the setting of rates and charges.

Privatization

Eng – in Canada all of the major airports, were in effect, privatized from federal government ownership into “not for profit” organizations governed by local boards. This allows airport management to obtain the necessary capital from the private sector and manage their bottom line.

Tan Sri Bashir – in Malaysia they have an operating agreement with the government, which results in compensation being paid to them for the use of the government’s assets. Of the profits from airport operation, 50 percent are paid to shareholders as dividends, 10 percent is paid to the government, 5 to 6 percent is paid as incentives to airlines serving the airport and the remainder is distributed as employee bonuses. “Our focus remains on increasing commercial revenue to remain profitable.”

Bowens – San Diego focuses on keeping staffing leans and using the private sector where appropriate to provide services at the airport. For example, terminal janitorial services were privatized to the airlines who ultimately contracted out this function.

Paraschis – Athens was the first “greenfield” airport to be built as a public-private partnership and there is a 30-year concession agreement in place.  The state receives funds from the airport’s commercial revenues, as well as from passenger fees and from dividends.  A privatized structure allows the airport to bring in expertise to run the business and obtain the necessary capital for success, avoiding the risks associated with being dependent on the public sector, especially in times of financial difficulty. However, given that the private sector is interested in opportunities to grow revenues, there may less interest in privatization in “the old world” airports, given their slower rates of growth.

Rates and Charges

Eng – In Canada airports have the freedom to set charges as required.  While airport charges are a very small part of an airline’s operating costs, airlines always oppose such increases and they have powerful lobbying groups. It is important to understand that you cannot add infrastructure and runways without increasing charges and if you don’t have the right infrastructure, airlines can’t make money.  “As good business partners, we have to work with the airlines- they need us and we need them”.  But the user-pay principle has to apply.

Tan Sri Bashir – Airlines and airports work hand-in-hand; we need the airlines to be successful in order for both parties to make money.  Under the old system of government-owned airports, profit was not a motive so the airlines were able to convince the government not to raise charges, even when necessary.  In today’s more balanced agreement, every five years the airport has the opportunity to present the justification for an increase in airline charges to the government for approval.  If the is sufficient justification and the government still says no, they have to pay the airport for the increase. This has happened in the past.

Bowens – in 2003 the airlines were only paying for 50 percent of the infrastructure they were using; today that is 100 percent. That said, San Diego remains focused on keeping airline costs low and growing non-aeronautical revenues, which makes the airlines happy.

Paraschis – Athens has a dual till system and “light handed” regulation.  Given that Athens was built as a “greenfield” airport, there is significant debt ($2 billion euros), translating into about 120 million euros annually for debt service.  Based on an audited statement and justification, airline rates can be increased.

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