Airport Dawn of a New Era

8/8/2019 Airport Dawn of a New Era

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A p r i l

2 0 0 4

Prepar ing for one of the indust ry ’s

biggest shake-ups

Airports — Dawn of a New Era

BCG The Boston Consulting Group



The Boston Consu l t ing Group is a genera l management consu l t ing f i rm that i s a g loba l

leader in bus iness s t ra tegy. BCG has he lped compan ies in eve r y majo r indust ry and mar -

ke t ach ieve a compet i t ive advantage by deve lop ing and imp lement ing winn ing s t ra teg ies .

Founded in 1963, the f i rm now operates 60 o f f ices in 37 count r ies . For fu r the r in fo rma-

t ion , p lease v is i t ou r Web s i te a t www.bcg.com.

© 2004 The Boston Consu l t ing Group GmbH. A l l r ights rese rved.

For in fo rmat ion and rep r in t au thor iza t ion p lease con tac t BCG at the fo l lowing address :

The Boston Consu l t ing Group

Marke t ing & Communicat ions /Lega l

Ludwigst raße 2180539 Mun ich

Germany

Fax: +49 (0)89 2317-4718

E-Mai l :marke t ing [email protected]



A C K N O W L E D G E M E N T S 2

I N T R O D U C T I O N 3

E X E C U T I V E S U M M A R Y 5

N E W PAT T E R N S O F PA S S E N G E R G R O W T H 9

P R E S S U R E S T O A C T M O R E L I K E B U S I N E S S E S 2 1

S T R AT E G I E S T O S U C C E E D I N T O M O R R O W ’ S E N V I R O N M E N T 2 5

I M P L I C AT I O N S F O R A I R L I N E S , I N V E S T O R S , A N D G O V E R N M E N T S 3 1

B C G ’ S E X P E R I E N C E I N T H E A V I AT I O N I N D U S T R Y 3 3

K E Y Q U E S T I O N S 3 5

T A B L E O F C O N T E N T S



Dr. Daniel Stelter is vice president and director at The Boston Consulting Group in Berlin and Global

Practice Area Leader for Corporate Finance and Strategy.

Dr. Achim Fechtel is vice president and director at The Boston Consulting Group in Munich and a BCG

airport and aviation expert.

Premal Desai is manager at The Boston Consulting Group in Frankfurt.

Our co-authors include:

Mike Deimler is vice president and director in Atlanta and Global Head of BCG’s Travel and Tourism

Practice Area.

Martin Koehler is senior vice president and director in Munich, a member of the Travel and Tourism

Leadership Team and a BCG airline expert.

Greg Sutherland is vice president and director in Atlanta, a member of the Travel and Tourism

Leadership Team, and a BCG airline expert.

We wish to thank our interview partners and experts who unhesitatingly provided us with information.

We also wish to thank the BCG project team under the direction of Premal Desai: Markus Hepp,

Matthias Osthoff, Amadeus Petzke, Keith Conlon, Hendric Fiege, Ralf Ermisch, and Patrick Buch-

mann.

A C K N O W L E D G E M E N T S

Contacts

For further in format ion on this study,

p lease con tac t your reg iona l exper t :

Europe: Dr. Daniel Stelter: [email protected]: Mike Deimler: [email protected]

Asia: Ross Love: [email protected]



3

A s p a s s e n g e r n u m b e r s p i c k u p i n t h e w a k e o f r e c e n t i n t e r n a t i o n a l c r i s e s ,

i n c l u d i n g 9 / 1 1 a n d S A R S , m a n y a i r p o r t s a r e a n t i c i p a t i n g a r e t u r n t o t h e

s t a b l e , l o n g - t e r m g r o w t h t h a t c h a r a c t e r i z e d t h e l a s t t w o d e c a d e s . H o w e v e r ,

t h e r e a l i t y i s l i k e l y t o b e d i f f e r e n t , a c c o r d i n g t o B C G r e s e a r c h .

Although passenger volumes will rise, albeit more slowly than originally forecast, growth will be con-

centrated in a much smaller number of airports in the future, leaving many operators with far less

traffic than their already overly ambitious investment plans assume. True, low-cost carrier (LCC) traffic

has led to booming passenger numbers for some airports, but profitability of LCC airports remains a

major issue. To add to these challenges, operators will come under mounting pressure to act more like

businesses—not just infrastructure suppliers, with much lower costs and higher revenues.

In short, the rules of the game are about to change.

This report describes the forces driving these changes and their strategic implications for not only air-

ports but airlines, investors, and governments as well. Based on in-depth research and interviews with

executives throughout the aviation industry, it also outlines the strategies and business models that air-ports will need to survive and thrive. Most airports can succeed, provided they start preparing now. We

hope this report facilitates this process and, at the very least, provides a much needed wake-up call.

I N T R O D U C T I O N



4

International

hubs

InternationalO&Ds

Secondary

hubs and

O&Ds

Regionals

Atlanta

Vienna

Example

High share of transfer traffic

Large catchment area

PAX in excess of 40M

Lower share of transfer traffic

Large catchment area

PAX in excess of 20M

Low share of transfer traffic

Sizeable catchment area but often

overlapping

PAX around 10M

Key characteristics

Main hub of major international airline

Leadership role in alliance

Main hub of international long-distance

airline or secondary hub of major airlineSubordinate or niche player in alliance

Main hub of regional airline or secondary

hub of major airline

Subordinate role in alliance

Regional airlines

LCC

Airline

18

32

~ 150

~ 2,400

No. of

airports

PAX = 79M

PAX = 12M

No transfer traffic

Smaller or remote catchment areas

PAX below 10M

Albany

International

Airport

PAX = 1.5M

Sydney

PAX = 22M

Source: BCG analysis

F O U R T Y P E S O F A I R P O R T S C A N B E D I S T I N G U I S H E D

E X H I B I T 1

This report distinguishes between four different types of airports: primary international hubs, second-

ary hubs, international “origin and destination” (O&D) airports, and regional airports. The table below

describes the key characteristics of each of these. (Exhibit 1)



5

The drive for lower costs among the world's top airlines, coupled with the rise of low-cost

carriers, will substantiall y alter the distribution of passenger growth between airports.

The unprecedented string of international crises over the last three years—from 9/11 and SARS to the

Iraq war—has left many of the world's financially fragile airlines with unsustainable losses. To cut costs,

the members of the top three alliances will redirect the bulk of their long-haul transfer traffic into a

handful of mega-hubs, sidelining many of today’s secondary hubs. This trend will be accelerated by

“open-skies” deregulation, mergers, and the introduction of mega-planes, such as the A380, which only

the largest hubs with significant feeder capacity will be equipped to handle. In fact the share of total traf-

fic at the top 50 airports claimed by nine potential mega-hubs has already risen from 30% to 34% in the

last two years.

The expansion of low-cost carriers represents a second trend. Attractive O&D locations as well as some

regional airports stand to benefit from an increase in convenient and financially attractive point-to-point travel in the short- to medium range. This decentralization of traffic patterns might be repeated

in the long-haul segment, once new and cost-efficient equipment like Boeing’s 7E7 becomes available.

Among the large airports, only the mega-hubs and attractive O&D locations that feature prominently in

the alliances' schedules will enjoy significant long-term growth. Just 40 or so of today's 180-plus hubs are

likely to be in this position. Mega-hubs will profit from the consolidation of long-haul traffic. While they

are largely bypassed by LCC traffic, they will not be negatively affected by the general rise in point-to-

point travel with planes like the 7E7, since frequencies will increase as mega-hubs are too essential to be

bypassed by long-haul traffic.

Selected O&D locations as well as regional airports well positioned to attract LCC traffic will gain from

the rise in point-to-point traffic. The others, notably secondary hubs with weaker airlines, will experi-

ence much less growth than their overly ambitious investment plans assume. Long-haul traffic is conso-

lidated away from them into mega-hubs, and point-to-point travel threatens to bypass many secondary

hubs. This will force them to explore new avenues to cover the cost of their capital and to grow

profitably.

E X E C U T I V E S U M M A R Y



6

With growing affluence in previously remote regions of the world and the further rise of LCCs, a signi-

ficant number of regional airports and smaller international O&Ds will also experience substantial pas-

senger growth. Still, overly ambitious plans speculating on this growth are in many cases risky, since the

winners in this group of airports are much harder to predict.

F a c e d w i t h l o w e r t h a n a n t i c i p a t e d g r o w t h , a i r p o r t s w i l l h a v e t o a c t m o r e l i k e

b u s i n e s s e s t o t h r i v e , n o t s i m p l y a s i n f r a s t r u c t u r e s u p p l i e r s . P r i v a t i z a t i o n s w i l l

i n t e n s i f y t h i s n e e d .

As state-owned and protected monopolies, airports have historically been treated as means to regener-

ate regional economies, not as businesses. This has not only led to massive investments that often bear

little relation to airports’ growth potential. It has also created an oversupply of hubs—often with excess

capacity, and bred unnecessarily high operating costs, which could in general be reduced by 20% to

30%. These costs will have to come down—in order to not just keep tomorrow’s airports profitable but

to satisfy carriers' demands for lower, more flexible charges.

Governments’ growing reluctance to subsidize and protect airports, reflected in a rising number of pri-

vatizations and more widespread deregulation of the value chain will add to this pressure. Under the

glare of the world's capital markets, privatized airports will be expected to deliver more aggressive

improvements in revenues. Non-aviation revenues such as retail will be critical, particularly for destina-

tions dependent on LCCs: in BCG’s experience, no LCC airport is likely to achieve profitability without

extraordinary focus on non-aviation revenues.

D i f f e r e n t t y p e s o f a i r p o r t s , s u c h a s m e g a - h u b s a n d r e g i o n a l a i r p o r t s , w i l l r e q u i r e

d i f f e r e n t i n v e s t m e n t a n d c a r r i e r s t r a t e g i e s .

Only airports home to a leading and financially secure main carrier in one of the alliances will be eligi-

ble to become a mega-hub. They will also need to be in a central location with a large, affluent catch-

ment area. Most of these airports still need to make sizeable block investments to accommodate future

growth. Their carrier focus will have to shift to the dominant member of their alliance. Providing out-

standing service and innovative products will be vital.

All other airports should freeze block investment programs and only add capacity on an incremental

“needs-musts” basis. Destinations that are likely to remain secondary hubs should concentrate on alli-

ance carriers, while international O&D airports must court intercontinental airlines and sweat existing

assets. Targeting LCCs in order to fill existing overcapacities can be a worthwhile consideration. Re-

gional airports should target LCCs, underpinned by tight cost management.

In all cases, operators will have to work much more closely with the carriers to optimize joint interfaces

and to leverage cost and revenue synergies. Such opportunities have been underexploited due to the

historically adversarial relationship between the two players.



7

S e l e c t i n g t h e r i g h t p o s i t i o n i n t h e v a l u e c h a i n w i l l b e d e c i s i v e .

Few operators have the breadth of expertise and resources to optimize every link in a value chain as

diverse as an airport's. Retail, ground handling, and other links in the chain all require different skills

and business models. Tomorrow's winners will position themselves in the section of the chain where they can extract the maximum value based on their capabilities and the competitive outlook of their chosen

segment.

Some will specialize in particular links in the chain and leverage their expertise, especially in standard-

ized, labor-intensive activities such as facilities management and ground handling. Others will handle

broader categories of services. A minority, meanwhile, will act as “orchestrators,” coordinating almost

entirely outsourced elements of the value chain in order to ensure the suppliers deliver a consistently

high, cost-effective level of service. Each option will require a different business model, including differ-

ent skills, and different levers to lift revenues and reduce costs.

P l a n n i n g f o r t h i s n e w w o r l d m u s t s t a r t n o w — t h e p r o c e s s w i l l y i e l d i m m e d i a t e

r e t u r n s .

This new aviation landscape is likely to take shape within the next ten years. Already there is evidence of

airlines consolidating traffic into larger hubs and movement to introduce more competition into the

airport sector. To succeed in tomorrow’s environment, it’s essential that airport operators identify their

likely position in the new landscape, develop appropriate investment and carrier strategies, and position

themselves at the optimum point in the value chain.

The imminent trends will lead to a stronger segmentation among airports. They should proactively start

to enter this competition, not only by adding abundant capacity and thus adding cost, but by defining

their role in the future aviation arena and by differentiating accordingly.

Above all, they have to operate more like profit-driven businesses, reducing costs and pinpointing

opportunities to lift revenues per passenger. This can be done now and will generate rapid rewards.





9

N E W P A T T E R N S O F P A S S E N G E R G R O W T H

For decades, the world's top airports have enjoyed relatively stable growth under the

protective wing of governments, encouraging many to invest heavily in additional capacity

on the assumption that tomorrow will simply be a continuation of the past. But their ulti-

mate paymasters—the airlines—live in a very different world. Their demands, not the least

of which will be for lower costs, will radically alter how future passenger growth is distrib-

uted amongst airports, thereby creating clear winners and losers.

A l i f e c y c l e o f a i r - t r a f f i c p a t t e r n s

The pattern of air traffic has been following a particular life cycle. Point-to-point connections between

the world's largest cities dominated networks in the early post-war period. Only a few routes had sufficient

demand to serve air traffic. With growth in demand came development of a large number of small and

mid-sized regional hubs and international O&Ds, a second stage of the life cycle. Most recently, increa-sing cost pressures as well as airline and alliance consolidation is leading to a concentration of long-haul

traffic into a few mega-hubs, with an accompanying rise in continental point-to-point traffic. This puts

massive pressure on the "middle tier," a significant number of secondary hubs. While this development is

already evident in the US and Europe, Asian air traffic is still in an earlier phase of the life cycle.

Exhibit 2 describes the current trend. Until recently, there was a clear distribution of roles in the aviation

landscape, with steady growth for all players. The emergence of LCCs as well as technological advances in

the construction of new planes have substantially redistributed the shares in the matrix. Growth will be

far less homogenously spread in this time of change. LCCs have increased the area of point-to-point tra-

vel, which is being further expanded by a new generation of planes such as the 7E7. The pressure exac-

ted on “established” airlines, signified by the shrinking size of the flag carriers’ pie, leads to an increasing

consolidation of transfer traffic into few mega-hubs. Let us look at these developments in more detail.

T h e p r o b l e m : a n o v e r s u p p l y o f h u b s

Airports are arguably the most comfortable members of the aviation industry. As natural monopolies,

protected by regulations and predominantly owned and subsidized by governments, most have enjoyed

stable, long-term growth. This is reflected in the fact that the rankings of the world’s top 50 airports asmeasured by passenger numbers barely changed between 1991 and 2003; as Exhibit 3 illustrates: seven

airports dropped out of the top 50 over this period, but none of them was a member of the top 30. It can



also be seen in airports’ disproportionately high margins, relative to airlines’: on average, airports’ cash

and profit margins are roughly four times higher. In addition, their return on investment is more than

twice as high (see Exhibit 4).

The problem is that governments have not treated airports as profit-oriented businesses but as infra-

structure suppliers whose primary aim is to boost regional economies. In interviews with BCG,

government entities responsible for regional and international airports all cited regional economic

considerations, such as employment and tourism, as the key drivers of investment decisions. Although

this strategy has often had the desired effect—large hubs like Atlanta typically employ 45,000-plus

people-—it has produced three major difficulties:

An oversupply of hubs : This can be seen in the dense clusters of hubs inExhibits 5–7. Does US Air-

ways, for example, really need three neighboring hubs on the eastern coast of the USA (Exhibit

5)? Or does the SkyTeam alliance require four hubs in Europe within an hour’s flying time of one

another (Exhibit 6)? Since Asia is still in an earlier stage of the air-travel life cycle, the situation

there is somewhat different, with many aiports still engaged in a battle for mega-hub status. Even

those airports not achieving this status will enjoy significant (though smaller) growth over the

next decade (Exhibit 7).

A capacity imbalance between hubs: The emphasis on regional economic development at the

expense of commercial considerations has led to massive block investments that bear little

relation to airports’ growth potential, creating excess capacity at some locations and an under-

supply at others. In most cases, surplus capacity is the norm. As Exhibit 8 illustrates, based on a

group of North American airports that plan to invest $24.5 billion over the next two years, opera-

tors will have excess capacity of between 29 million and 352 million (3.9% to 46.9% of total

1 0

(1) Point-to-point

Note: Schematic representation


(2) Flag carrier P2P

(3) Low-cost P2P

(4) Flag carrier hubbing

Previously:

Clear role allocation—growth in all sectors

Today:

Substantial change—uneven growth

P2P(1)

High

(O&D airports)

Hubbing

(all hubs)

Hubbing

(all hubs)

Hubbing

(primary hubs)

Low

Short-haul Long-haul

Distance of city pair

A v a i l a b l e

R P K

f o r c i t y p a i r

FC P2P(2)

High

(O&D airports)FC hubbing

(increasingly

mega-hubs)

FC hubbing

(increasingly

mega-hubs)

Low

Short-haul Long-haul

Distance of city pair

LCC steal of FC P2P

A v a i l a b l e

R P K

f o r c i t y p a i r

FC hubbing(4)

(increasingly mega-hubs)

2

1

3

1 Technological change (e.g., 7E7)3

New P2P routes possible due to LCC's lower cost structure2

LCC P2P(3)

E M E R G E N C E O F L C C A N D T E C H N O L O G I C A L C H A N G E H A V E F U N D A M E N T A L L Y C H A N G E D A I R L I N E A N D A I R -

P O R T L A N D S C A P E

E X H I B I T 2



1 1

(1) Classification of airports as private owned from start of prioritization processSource: Annual reports; ACI; authorities; press search; web pages; BCG analysis

Private owned(1)Public ownedM PAX, total PAX, about 3.4 billion

2533

30

79

273034

37

27

29 36

55

3753

25

33 69

TorontoChicagoMinneapolis

SeattleSt. Louis (20)DenverSalt Lake (19)Las Vegas

San Franciso

Honolulu (20)

Phoenix

Los Angeles

Atlanta

NewarkCincinnati (21)

DetroitBoston (23)

New York JFK (32)

Manchester (20)London LHRLondon LGWParis CDGBarcelona

Madrid

Palma deMallorca (19)

Paris ORY

RomeMunich

Frankfurt

Amsterdam

London STN (19)

3063

48

362223

24

4048

26

New York LGA (22)Baltimore (20)

Charlotte (23)

Orlando

MiamiHoustonDallas

Mexico City (22)

Philadelphia

Osaka (19)

Tokyo HND

Tokyo NRTFukuoka (19)

BeijingSeoul

Hong Kong

Bangkok

Singapore

Jakarta (20)

Sydney

24

27

2026

63

22

30

25

Stockholm, Copenhagen, Sapporo, Düsseldorf, Pittsburgh, Washington, and Zurich no longer among the top 50

R A N K I N G O F T O P A I R P O R T L O C A T I O N S H A S R E M A I N E D F A I R L Y S T A B L E O V E R T I M E

E X H I B I T 3

(1) Calculated with PAX multiple(2) First ten having available data(3) Airports: BAA, Fraport, Copenhagen, Vienna, Zurich; airlines: Austrian Airlines, British Airways, Lufthansa, SAS, Swiss(4) Ranked by revenues 2000Note: Airport companies with available data are most significant for analyses as data is published by companies that target profit maximizationSource: Airlines business; annual reports; BCG analysis

Top 10 airportcompanies

(3)(4)

Top 10 airlines(4)

Revenues

11,988

142,739

x 11.9

EBITDA(2)

5,070

17,483

x 3.4

Net result

1,414

4,160

x 2.9

= 18.7% oftotal

market(1)

= 35.3% oftotal

market(1)

ROE(3)

13% 7%

ROI(3)

11% 5%

Profit margin

12% 3%

Cash margin

42% 12%

A I R P O R T S H A D S I G N I F I C A N T L Y B E T T E R M A R G I N S T H A N A I R L I N E S E V E N B E F O R E R E C E N T C R I S I S

E X H I B I T 4



1 2

STAR

= 18M PAX

Oneworld

SkyTeam

Other

(1) Assumes successful Air France-KLM mergerNote: Alliance capacity share is measured in percent of scheduled seat capacity in 2002, total PAX numbers from 2003, MXP from 2002Source: CSSB Hub Fact Book 2003; BCG analysis

Manchester (20)

Madrid (36) Barcelona (23)

Rome (26)

London LHR (63)

London LGW (30)

Vienna (13)

Milan (17)

Copenhagen (18)

Sabena grounding led todownsizing of flag carrier

Swissair grounding led tosignificant downsizing of

flag carrier. Entry to Oneworldprovides reorientation

Brussels (15)

Paris ORY (22)

Paris CDG (48)

Amsterdam (40)(1)

Zurich (17)

Frankfurt (48)Munich (24)

E U R O P E A N A I R P O R T L A N D S C A P E H A S O V E R S U P P L Y O F H U B S D O M I N A T E D B Y T H R E E M A J O R A L L I A N C E S

E X H I B I T 6

Note: Airline shares based on 2002 data, total PAX is 2003 dataSource: ACI; CSSB Hub Fact Book 2003; BCG analysis

What will be the consequence for individual hubs if airlines consolidate their hub strategy?

American

= 22M PAX

New York JFK (32)Detroit (33)Chicago (69)

Minneapolis (33)

Philadelphia (25)

Alaska Airlines

Delta

Continental

United

Southwest

U.S.

American West

Northwest

Non-hub

58%

51%

Dallas (53)

Houston (34)

St. Louis (20)

Denver (37)

Phoenix (37)

Las Vegas (36)

San Francisco (29)

44%

Seattle (27)

Los Angeles (55)

Salt Lake City (18) 77%

45%

82%

36%

23%

87%

Cincinatti (21)

Charlotte (23)

Atlanta (79)

Miami (30)

Does US Airways needthree neighboring hubs?

Could Atlanta drawtraffic from Cincinatti?

American Airlines startedto downsize St. Louis?

70%

91%

92%

79%

72%

49%35%

61%

72%

68%

81%

54%

Pittsburgh (14)

U . S . A I R P O R T L A N D S C A P E C H A R A C T E R I Z E D B Y D E N S E H U B S Y S T E M — M A I N A I R L I N E S W I T H L A R G E S H A -

R E S A T A I R P O R T S

E X H I B I T 5



capacity) passengers by 2010, depending on the ratio between replacement investments and

investments into additional capacity and assuming passenger numbers grow in line with IATA’s

forecasts. And the situation is poised to get worse. By 2015, an additional $150 billion to $200 bil-lion will be invested into airports globally. The core problem with these investment programs is

that they are based on two overly optimistic assumptions. First, that passenger growth will return

to its historical long-term average. This is by no means certain. AsExhibit 9 shows, forecasts have

already been revised downwards in the wake of 9/11, SARS, and the Iraq War. While these crises

are now largely behind us, the geopolitical instabilities that caused some of them have not been

resolved: similar events in the short to medium term cannot be ruled out. The second, more dan-

gerous misconception is that any future growth will continue to be shared relatively equitably

between airports. However, as we discuss below, this is unlikely to be the case. There will almost

certainly be clear winners and losers, leaving many airports with even larger volumes of redundant

capacity.

Higher carrier charges: As monopolies, airports have been able to pass on the costs of excess

capacity to the carriers in the form of higher charges—costs that few of today’s financially unstable

airlines can afford (see below). San Francisco airport is a case in point: It recently expanded its

facilities on the ambitious assumption that passenger volumes would escalate by 7.9% a year

between 2001 and 2006, but traffic actually shrunk between 2000 and 2002 by 12.3% a year (and

still further in 2003), leading to a 23.8% rise in airlines’ landing and terminal charges to pay for

the costs of the expansion (Exhibit 10).

1 3

Free capacity

M PAX

20–40% growth in last 10 years

60–80% growth in last 10 years

< 100% growth in last 10 years

Prospective capacity in 2015(1) No exact figures about expansion measures availableSource: Annual reports; authorities; press search; Web pages; ACI; BCG analysis

SeoulCostly megaproject

Claim for hubComplex business site

BeijingTremendous domestic growthLimited capacity

BangkokHighly profitableLimited capacityMegaproject on the way

Japanese airportsGeographical capacity restraints

Unprofitable businessSeparated of domestic/international traffic

Hong KongMegaproject "in water"Partly hub statusProfitable business

SydneyClassic O&DRecently privatizedCapacity restrictions (noise)

Kuala LumpurAmbitious expansion projectNo long-haul traffic

SingaporeMain South Asian hubHighest service levelsMultitude of discounts

18.526.5

63.220

6.1

18.9 ITMHND

Central Japan Intl.Airport Project

Second airportpossible solution

1.2

18.8

10.6PEK

100

BKK

KUL

SIN

FUK

45 XX(1)

XX(1)

5.3SYD

7.319.3

24.4

30.2

17.5 24.7

24.7

23.2 HKG26.8

87

7.1ICN

100

19.9

1.5

CTSNRT

A S I A N A I R P O R T L A N D S C A P E C H A R A C T E R I Z E D B Y B A T T L E F O R M E G A - H U B P O S I T I O N S

E X H I B I T 7



T h e f u t u r e : t r a f f i c w i l l i n c r e a s i n g -l y b e c h a n n e l e d i n t o m e g a - h u b s

The huge financial pressures on the major carriers will

leave them with little choice but to consolidate their traf-

fic into mega-hubs, sidelining many of today’s primary

and secondary hubs.

Although the airline industry has always struggled

with profitability, averaging a net profit margin of just

0.3% since 1975, the recent severe downturn in pas-

senger volumes, sparked by 9/11 and other inter-

national crises, has left many carriers with unsustain-

able losses. Between 2001 and 2002, IATA members’

losses amounted to $20.4 billion, borne predominant-

ly by the flag carriers in the three alliances (SkyTeam,

Oneworld, Star Alliance), which account for 55% of

global passenger volumes. Over half of the alliances’

airlines are unprofitable and often unsustainably so.

1 4

Note: Schematic representationSource: AEA; BCG analysis

1998

Revenue passengerkilometer in billionAEA member airlines

1999 2000 2001 2002 2003 2004 2005

SARS/Gulf War II

September 11

Recession

Forecast post-recession/ September 11 but preGulf War II/SARS

Original forecast

Forecast post-recessionbut pre September 11

New forecast

P A S S E N G E R G R O W T H F O R E C A S T S H A D T O B E R E P E A -

T E D L Y R E V I S E D D O W N W A R D S R E C E N T L Y

E X H I B I T 9

(1) IATA forecast for worldwide growth with 25% discount due to saturated market(2) Calculated as product of all available investments and average cost per new PAX worldwide of $187(3) Calculated as product of all available investments and regional average of cost per new PAX in North America $54Source: Annual reports; authorities; press search; Web pages; BCG analysis

2001 2010

647

M PAX

749

Requiredadditionalcapacity

Min.planned

capacity(2)

102

OvercapacityCost per PAX in $

131

Max.planned

capacity(3)

Totalinvestmentuntil 2006

454

$24.5B

29

352

54

54

187

CAGR

+1.65%(1)

C U R R E N T E X P A N S I O N P R O J E C T S W I L L Y I E L D S I G N I F I C A N T O V E R C A P A C I T I E S ( S C H E M A T I C C A L C U L A T I O N

F O R P L A N N E D E X P A N S I O N S I N N O R T H A M E R I C A )

E X H I B I T 8



In the past, governments could usually be relied on tocome to the rescue but not in today’s more laissez-

faire political climate as Sabena recently discovered.

Nor will airlines be able to rely on an upturn in pas-

senger traffic to lift revenues to a sufficiently high

level to cover the shortfall. As Exhibit 11 shows, rev-

enue has been increasing slower than passenger

growth over the last 20 years, a trend that will

continue as LCCs expand. Airlines will inevitably have

to cut costs.

To reduce costs, each of the three main airline

alliances is likely to concentrate future long-distance

passenger growth into one mega-hub in each conti-

nent. These airports will have three key characteris-

tics: a central geographic location, a large and afflu-

ent catchment area, and a resident carrier that is

both, financially sound and a major player in its

respective alliance. In the U.S., Atlanta and Dallas are

examples of likely candidates; in Asia, Singapore and

Hong Kong are possibilities.

1 5

Average airport cost per enplanement(1)

(CPE)

SFO

19.99

DEN

16.28

MIA

14.25

LAX

5.80

DFW

3.48

ATL

2.80

$/PAX

Showcase San Francisco:

developments after recent expansion program

2000

159

2001

186

2002

281

89 119

70 67 102

179

CAGR: +23.8%

A

e r o n a u t i c a l

r e v e n u e s

2000

41.0

2001

34.6

2002

31.5

CAGR: -12.3%

P A X d e v e l o p m e n t

(1) Landing fees and user charges for air carriers calculated per PAX; estimate based on of 2001 numbersSource: Salomon Smith Barney Hub Factbook 2002; SFO; FAA Airline annual reports; BCG analysis

Since 2000 enplanement growth has been revised downward twice to 20–30% of previous projections

Landing feesTerminal charges

C O S T S F O R T O D A Y ’ S A I R P O R T I N V E S T M E N T S W I L L B E P A S S E D O N T O A I R L I N E S ( E X A M P L E S A N F R A N S I S C O A I R P O R T )

E X H I B I T 1 0

(1) Revenue passenger kilometersNote: Numbers roundedSource: British Airways; IATA WATS 86, 95–03; BCG analysis

Average airline net profit margin 1980–2000: +/-0%

RPK growth(1) since 1980

x 2.6

Revenue growth since 1980

x 1.7

Marginerosion

P A X G R O W T H A L O N E W I L L N O T B R I N G A I R L I N E S

B A C K T O P R O F I T A B I L I T Y

E X H I B I T 1 1



The introduction of a new generation of mega-planes, such as the A380, which will require large hubs with substantial feeder capacity, will accelerate the shift to mega-hubs (as will any further international

crises).

There are already signs that traffic is starting to be consolidated into larger hubs. During the sharp

downturn in volumes between 2000 and 2002, , the smaller “bottom-quartile” hubs in the U.S. lost

12.8% of their traffic, while the larger top-quartile hubs suffered only a 6.3% fall. More recently, several

U.S. carriers have announced plans to rationalize their hub networks. US Airways, for example, is likely

to shed at least one of its hubs, while Delta and Northwest intend to focus traffic on select hubs. Similar

moves have been seen in Europe. British Airways, for instance, has moved services from Gatwick to its

larger neighbor, Heathrow, contributing to a 5.1% drop in passenger numbers at Gatwick and a 4.3%

rise at Heathrow.

None of this would be a major problem if hubs didn’t depend heavily on individual carriers, but the fact

of the matter is that the vast majority do: over three quarters of the world’s top 50 airports rely on a

single carrier for 40% or more of their traffic (Exhibit 12), rising to as high as 80% in several cases. Many

U.S. hubs are particularly dependent, raising questions about their long-term viability.

1 6

(1) United Air lines (2) American Airl ines (3) Mexicana and Aeromexico together

Note: Sorted by PAX

Source: Airport authorities; annual reports; press search; BCG analysis

Highest concentration at US hubs

North America Europe Asia/Pacific

Share of main carrier (in %)

Atlanta (ATL)Chicago (ORD)(1)

Chicago (ORD)(2)

Los Angeles (LAX)

Dallas (DFW)

Denver (DEN)

San Francisco (SFO)

Las Vegas (LAS)

Phoenix (PHX)

Houston (IAH)

Minneapolis (MSP)

Detroit (DTW)

Miami (MIA)

Newark (EWR)

New York (JFK)

Orlando (MCO)

Toronto (YYZ)

St. Louis (STL)

Seattle (SEA)

Boston (BOS)

Philadelphia (PHL)

Charlotte (CLT)

New York (LGA)

Mexico City (MEX)

(3)

Pittsburgh (PIT)

0 50 100


0 50 100


0 50 100

7949

35

23

68

61

51

36

45

81

82

77

54

58

22

21

60

72

44

30

70

91

24

8687

London Heathrow (LHR)

Frankfurt (FRA)

Paris (CDG)

Amsterdam (AMS)

Madrid (MAD)

London Gatwick (LGW)

Rome (FCO)

Munich (MUC)

Paris (ORY)

Barcelona (BCN)

Zurich (ZRH)

Brussels (BRU)

Manchester (MAN)

Milan (MXP)

41

59

57

53

59

51

47

49

60

53

66

24

36

51

Tokyo (HND)

Hong Kong (HKG)

Seoul (ICN)

Bangkok (BKK)

Singapore (SIN)

Sydney (SYD)

Tokyo (NRT)

Beijing (PEK)

Fukuoka (FUK)

48

31

41

51

46

44

24

34

50

A I R P O R T S H I G H L Y D E P E N D E N T O N M A I N C A R R I E R S

E X H I B I T 1 2



T h e g r o w t h o f p o i n t - t o - p o i n t t r a v e l w i l l p l a c e s e c o n d a r y h u b su n d e r g r e a t e r p r e s s u r e

While intercontinental traffic, with some qualifications, is likely to be consolidated into hubs, the pat-

tern of continental traffic is somewhat more complex. The growth of point-to-point travel, which is more

cost-efficient, profitable, and convenient for both, carriers and passengers, will draw traffic away from

hubs, especially secondary hubs. This will be driven by two key developments:

The rise of LCCs: Regional, point-to-point LCCs, such as Southwest Airlines in the U.S. and

Ryanair in Europe are dramatically changing the way the aviation sector operates. These airlines

have already stolen up to 60% of passenger growth from the major flag carriers on selected routes

(Exhibit 13), predominantly in Europe, where they service 95% of primary airports, and increas-

ingly in the U.S., where they are expected to reach 80% of passengers within the next three to five

years. Asia’s LCC market is still relatively immature, but it too is gathering pace, reflected in a flur-

ry of recent LCC upstarts—among other Malaysia’s Air Asia, Singapore’s Tiger Airways as well as

Thai Air Asia. The continued growth of point-to-point LCCs will have a major impact on the

world’s hub network, as it will drain traffic from the hubs. Although all hubs will be affected,

including mega-hubs, secondary hubs that depend on relatively small regional airlines will be hit

the hardest. These airlines will not be able to compete with LCCs’ cost base and will switch to pro-

viding feeder services for their alliance’s respective mega-hub.

The arrival of the new Boeing 7E7: Designed mainly for intercontinental point-to-point travel

(although it also has regional potential, notably in long-haul continents, such as Asia), this jet and

others like it will be able to bypass hubs by providing direct point-to-point travel, thus offeringmore cost-efficient and convenient routes. Only attractive destinations capable of servicing this

plane will be safe. Mega-hubs will feel little impact as frequencies are likely to increase. But small

and less attractive secondary hubs will suffer. The increased 7E7 traffic at preferred secondary

hubs, however, will struggle to offset the losses incurred by the growth of LCCs, leaving them still

with unexpected overcapacity.

D e r e g u l a t i o n w i l l a c c e l e r a t e t h i s t r e n d , e s p e c i a l l y i n E u r o p e

“Open-skies” deregulation will not only give carriers the freedom to operate from hubs of their choice

in Europe, it will spark a spate of mergers between the airlines, sucking traffic into the lead carriers’

home hubs. Although the longed-for regulatory approval is unlikely to happen any time soon, there are

signs it is moving closer: in October 2003 the EU started negotiations with the U.S. government to estab-

lish the parameters of a U.S.-European open-skies accord.

1 7



T h e r e s u l t : n e w p a t t e r n s o f p a s s e n g e r g r o w t h , u n d e r m i n i n gm a n y a i r p o r t s ’ i n v e s t m e n t p l a n s

It’s difficult to say with any certainty how rapidly global passenger volumes will grow in the long run.

Some organizations—usually those with a vested interest in painting a rosy picture, expect a return to

the healthy rates of the last decade—when the compound annual growth rate was around 4%: Airbus

and Boeing, for example, forecast 4.7% and 4.9% respectively up until 2020. Others are less optimistic:

IATA predicts 2.2% over this period.

What is unquestionable is that the consolidation of the hub network will radically alter how this growth

is distributed between airports. In fact, there is already a mismatch between different airports’ growth

rates, as Exhibit 14 illustrates. Looking ten years ahead, there will be even starker differences. Mega-hubs

will enjoy the greatest growth. O&Ds and regional destinations that are favoured by point-to-point car-

riers will also experience a significant increase in traffic. Most airports, however, will experience much

lower growth and, in some cases, an absolute decline in passenger volumes.

Exhibit 15 shows that there has already been a significant consolidation of traffic into mega-hubs

and away from secondary hubs during the recent crises. The share of total top 50 airport traffic

passing through nine potential mega-hubs increased from 30% to 34% in just two years. Exhibit

15 also indicates what the distribution of passenger growth might look like in the next five yearsup to 2008, owing to further hub consolidation. This is only intended as a rough indication of the

winners’ and losers’ shares, not a definitive outcome.

1 8

(1) Low-cost carrierSource: BCG analysis

(2) Flag carrier = established airline at location(3) Indexed

LCC topic hot in Europe, established in North America, emerging in Asia

Start(3)

100

Pricing: compete on marginal-cost basis• Focus on 60 segment• Provide introductory tickets• Guarantee availability on all flights

Improve cost position• Close gap to LCCs to maximum of 20–25%

Save on airport services• Fees

• Ground traffic services

Defense strategies of established airlinesLCC(1)

influence on established airlines at selected location

Year 3(3)

126

New demand: 40%

"Stolen": 60%

FC(2)

FC: 84

LCC: 42

L C C B O O M L E A D S T O F U R T H E R P R E S S U R E O N E S T A B L I S H E D A I R L I N E S

E X H I B I T 1 3



1 9

(1) Forecast for mega-hubs: Average of Airbus and Boeing forecast (4.8%) plus 10% assumed mega-hub bonus due to consolidation trend.Forecast for remaining top 50 airports: IATA forecast for worldwide growth with 25% discount due to saturated market

Note: Nine potential mega-hubs: ATL, ORD, DFW, LHR, FRA, CDG, HND, HKG, SIN, others are the remaining top 50 airportsSource: Airbus; Boeing; IATA; ACI; BCG analysis

Hub consolidation already under way

20010

10

20

30

40

5060

70

80

90

100Share of top 50traffic (%)

Total PAX at top 50airports

Nine potentialmega-hubs

2002 2003 2008(1)

1,250

1,300

1,350

1,400

1,4501,500

1,550

1,600

1,650

29.8 30.4 33.9 38.0

70.2 69.6 66.1 62.0 Other 41 oftop 50 airports

Total PAX attop 50 airports

N I N E P O T E N T I A L M E G A - H U B S H A V E I N C R E A S E D T H E I R P A X S H A R E A T T H E E X P E N S E O F

S E C O N D A R Y H U B S

E X H I B I T 1 5

(1) Transfer to BA traffic from LGW to LHR(2) Transfer AF traffic from ORY to CDG(3) No data for 2003, change 2000–2002Source: Annual reports; company Web pages; press search; BCG analysis

STN

Average

BCN MAD VIE MAN MUC AMS FCO CDG LHR FRA CPH LGW(1) DUS ORY(2) MXP(3) ZRH BRU

58%

15%

9%7% 6% 5%

1% 0% 0%

-2% -2% -3%-6%

-11% -12%-16%

-23%

-30%

Swissair groundingOctober 2, 2001

Sabena groundingNovember 7, 2001

B E G I N N I N G A I R L I N E C O N S O L I D A T I O N W I L L B E D E C I S I V E I N S E T T I N G F U T U R E A I R P O R T L A N D S C A P E

I N E U R O P E ( P A X C H A N G E 2 0 0 0 – 2 0 0 3 )

E X H I B I T 1 4



2 0

Exhibit 16 illustrates where different airports are likely to be positioned in tomorrow’s consoli-

dated hub network, based on the strength of both, their top carrier and their local environment—

the size and affluence of the catchment area, tourism potential, and geographic location. Airports

in the top-right corner, such as Frankfurt and Heathrow, will probably be mega-hubs for their

respective alliances, while Munich, Gatwick, and other players in the middle section will continue

to operate as secondary hubs. Interestingly, many of the airports in this segment of the matrix have

significant unused capacities already today. The hubs in the lower left corner will be relegated to

international O&Ds providing merely point-to-point traffic. Some of the players on the margins of

these areas, will probably engage in an “investment gamble”, trying to outbid rivals’ investments

in an attempt to secure their desired position as mega-hubs. Few airports will indeed be mega-

hubs, but many more follow investment strategies as if they were destined to be among this elusive

group—a dangerous game for the losers, who will be burdened with high excess capacity.


Environment

A i r l i n e

s

Frankfurt

Paris CDG

ParisORY

Munich

Madrid

Barcelona

Amsterdam

RomeManchester

Zurich

Milan

Brussels

Palma deMallorca

London LGW

London LHR

PAX million

Free capacity

Used capacity

S T A R T I N G P O I N T I S D E C I S I V E I N H U B C O N S O L I D A T I O N ( E X A M P L E F O R E U R O P E A N H U B S )

E X H I B I T 1 6



2 1

The cozy world of the past has encouraged many airports to neglect operating costs, as wel l

as opportunities to lift revenues: most have funct ioned as infrastructure suppliers not busi-

nesses. In the future, carriers’ demands for lower charges, coupled with governments’ grow-

ing reluctance to support airports, will force operators to function more efficiently. Lower

than anticipated passenger growth at many airports will intensify this need.

Despite relatively high margins, the state-protected environment in which the vast majority of airports

has lived over the last eight decades has meant that most have not operated as competitive, profit-

driven businesses. This is most obvious in the field of investments, where the basic principle that invest-

ment growth should only be pursued once profitability is above the cost of capital, has been widely

ignored, especially at regional airports. Most regional airports are unprofitable yet still have ambitious

expansion plans. Operating costs have also been overlooked, partly due to the fact that fixed assets dom-

inate airports’ balance sheets. According to BCG’s analysis, airports could reduce their operating costs

by 20% to 30% on average, including 5% to 7% in the short run.

Three key developments will force airports to look much more closely at both, costs and revenues:

1 . L o w e r t h a n e x p e c t e d p a s s e n g e r g r o w t hThe drop in aviation and non-aviation revenues that will accompany lower than expected passenger

growth at airports will leave many struggling to service the debts of their existing investment programs.

To compound this problem, credit-rating agencies are likely to downgrade operators suffering steep

declines in passenger growth, increasing the cost of raising additional funds. Pittsburgh International

Airport provides a salutary warning of what the future might hold. Its General Airport Revenue Bond

(GARB) was recently downgraded from A to BBB by the Fitch Rating Agency after US Airways rejected

a lease agreement with the airport, suggesting the airline might abandon Pittsburgh as a hub.

2 . C a r r i e r s ’ d e m a n d s f o r r e d u c e d c h a r g e s Airport charges, including aeronautical and ground-handling fees, account for a substantial proportion

of carriers’ costs, typically one quarter of the price of the average airline ticket (Exhibit 17). In the past

airlines have found it difficult to negotiate reductions due to airports’ monopoly positions and igno-

rance of the operators’ true costs. Today, however, carriers increasingly have access to more detailed cost

breakdowns, thanks to governments’ demands for greater accounting transparency, placing them in a

stronger negotiating position. More significantly, they are acutely aware that their survival—and the

future of the airports, most of which depend heavily on a single carrier—hinges on lower charges. Thedrive to reduce these is further fuelled by the widespread sense of injustice within the aviation industry

over the large discrepancy between the two parties’ margins. As one executive said: “If one of the

P R E S S U R E S T O A C T M O R E L I K E

B U S I N E S S E S



partners is losing his shirt while the other is counting money, it is no longer a partnership.” LCCs, which

have shown themselves to be more than willing to pull out of destinations if the figures do not add up, will add to the pressure, particularly if the European Commission puts a stop to regional airports offer-

ing LCCs sweeteners, as witnessed in the recent Charleroi ruling and Ryanair’s subsequent decision to

cut down on its Charleroi routes.

3 . G o v e r n m e n t ’ s g r o w i n g r e l u c t a n c e t o s u b s i d i z e a i r p o r t sGovernments are both politically less willing and financially less able to support airports. Free-market

solutions are increasingly the preferred option in most public-service sectors, especially as the widening

gap between tax receipts and public expenditure makes continued state support unsustainable. This is

reflected in two trends within the airport sector:

More widespread privatization: Since 1987, there has been a steep and relatively steady increase

in the number of airport privatizations that is due to pick up again after being halted in the recent

crises as Exhibit 18 shows. To date, over 60 airports have gone down this road, spanning virtually

every continent, from Europe and South America to Australia and Asia. Europe has the highest

concentration of privatized airports (nine out of the top 20), with several more due to join their

ranks. In the U.S., only few small operators such as Buffalo and Albany, have been privatized, a

reflection of the fact that airports remain one of the few avenues open to influence regional eco-

nomic development in this otherwise highly deregulated economy, as well as considerations of

national security. This situation, however, may be about to change, not the least of which is due to

severe budget problems, foremost the U.S. federal deficit, but also budgetary constraints faced by many states and cities.

2 2

(1) Fuel prices vary significantly over time; estimation based on 15-year average of 135 euro per tonSource: AEA benchmark study; Shell; BCG analysis

Total ticketprice

Ineuro

Profitmargin

Total cost Ticketingand sales

Crew Aircraftcosts

Passengerservice

Fuel andoil(1)

Admin.and other

En routecharges

Mainte-nance

Totalairport-relat-ed charges

Station andground

handling

Aero-nauticalcharges

144 4 140 24

18

16

10

10

88

12

34 24

10

2.9% 100% 17.2% 12.9% 11.5% 7.1% 7.1% 5.7% 5.7% 8.6% 24.2% 17.1% 7.1%103%

Profit Non-airport-related costs Airport-related costs

A I R P O R T - R E L A T E D C O S T S A R E S I G N I F I C A N T

E X H I B I T 1 7



2 3

Source: BCG analysis; press search

Privatization to yield more efficient operations and to secure airport financing of infrastructure

BAA Vienna

Southampton

Prestwick

Liverpool

Copenhagen

Cardiff

Bournemouth

Belfast

Athens

London City

East Midlands

Perth

Naples

Melbourne

Kent

Istanbul

Düsseldorf

Bristol

Brisbane

Bolivia

Birmingham

Sanford

Rome

Skavska

Malaysia

Luton

Hobart

Hanover

Eindhoven

Costa Rica

Canberra

Australian Regionals

Auckland

ArgentinaAdelaide

ASUR (Mexico)

Wellington

South Africa

Jakarta

GAP (Mexico)

Stewart

Oman

Malta

Lima

Fraport

OMA (Mexico)

Zurich

Sydney

Madras

Kansai

Hong Kong

Ecuador

Chubu

Calcutta

Budapest

Bratislava

Bombay

Bangkok

BangaloreAtlanta

AdP

New Delhi

1987 … 1990–1992 1993–1996 1997 1998 1999 2000–2002 Planned

Narita

N U M B E R O F P R I V A T I Z A T I O N S A C C E L E R A T I N G A G A I N

E X H I B I T 1 8


Business-to-business servicesInfrastructure provision Business-to-customer services

Management

Support functions

Property and

utilization rights

Transactionmanagement• Inivitations to bid• Contract

negotiation• Takeovers

Flight operations• Tower• Runway traffic• Gates

Terminal operations

Safety (fire protection)

Retailing• Duty-free shops• Catering• Food and beverage

Space utilization• Outdoor space• Indoor space• Advertising space

Conferencing

Parking

Other

Ground services

Luggage services

In-flight services

Cargo services

Facility management

Security

Real-estate planning,development

Construction

1 2

Real-estate andinfrastructuredevelopment

Flight OPS

Terminal OPS(incl. security)

4a

4b

Facility

management

3

Ground

services

5

Space allocation

(non-aviation)

Other

services

6 7

A I R P O R T V A L U E C H A I N V E R Y D I V E R S E

E X H I B I T 1 9





2 5

S T R A T E G I E S T O S U C C E E D I N

T O M O R R O W ’ S E N V I R O N M E N T

Airports will have to rethink their strategies and business models to survive and thrive in

tomorrow’s environment. The first s tep is to soberly assess your role in the new hub network

and expected passenger growth. This will determine your investment and carrie r strategy. It

will be equally critical to position yourself at the most competitively advantageous point in

the value chain, with a clearly defined role.

D e v e l o p i n g a p p r o p r i a t e s t r a t e g i e s

The redistribution of passenger growth will redefine airports’ roles, requiring different investment and

carrier strategies for different types of airports:

I d e n t i f y y o u r r o l e i n t h e n e w n e t w o r kTwo key factors will determine airports’ roles in the new landscape and, consequently, their relative

growth and capacity requirements:

Geographic location, including size and affluence of catchment area: Only airports with central

locations and large, affluent catchment areas will be eligible to be mega-hubs. International O&Ds

will need a similar catchment area to succeed.

Carrier’s strategic and financial strength: In addition to the right geographic location, mega-hubs

will be the primary home of a leading alliance airline. Heathrow, which is dominated by the

Oneworld alliance airline BA, is one example. Secondary hubs will also require a strong relation-

ship with a major carrier in an alliance. At all airports, from mega-hubs down to regional airports,

the financial health of the lead carrier will be paramount. This must be carefully analyzed, espe-

cially in relation to any investment plans. As Brussels Airport discovered, the impact of a finan-

cially ailing airline can be devastating: since Sabena went bankrupt, the airport’s passenger

volumes have plummeted by 30%.



D i f f e r e n t s t r a t e g i e s f o r d i f f e r e n t t y p e s o f a i r p o r t s ( E x h i b i t 2 1 )

Mega-hubs: These must focus on the lead airline in their respective alliance, as well as regional

feeders. Providing the highest quality of service and innovative ways to spread capacity through-

out the day will be vital. Intelligent differentiation between premium and basic products will also

be required. Only mega-hubs will be in a position to make large “batch” investments to expand

capacity, secure in the knowledge that there will be long-term passenger growth.

Secondary hubs: Many of today’s hubs will be downgraded, making their overly optimistic invest-

ment plans redundant. All investments should be revisited and switched to an incremental,

“needs-must” basis. Attention should be concentrated on alliance carriers.

International O&Ds: The emphasis must be on sweating existing assets to extract maximum value

out of historically high investments. Airlines with a sound strategy, alliance, and financial position

should be actively courted to ensure commitment to the airport. Those international O&Ds that

stand to profit from an enlarging catchment area and subsequent rise in point-to-point traffic

should base their expansion strategy on careful foundations and sound planning, which should

always favor incremental investment approaches over block investments. Attracting LCCs to fill

existing overcapacities should be considered, but no capacity extensions to cater for LCCs.

Regional airports: The focus should be on LCCs and exceptionally tight cost control, not just to

satisfy LCCs’ demands but to return to or maintain profitability. In view of the likelihood that

these airports will continue to be used by governments as tools for regional economic develop-

ment, state funding for any (incremental) investments should be sought. Creating new regional

airports will, in most cases, be unwise.

2 6

International

hubs

International

O&Ds

Secondary

hubs and

O&Ds

Regionals

Atlanta

Sydney

Vienna

Example

Leading airline within alliance

Regional feeders

Intercontinental airlines

All other airlines

Member of airline alliance

All other airlines

LCC

Regional feeder

Airline focus

Quality leadership

Privatization imperative

Capacity management

Sweat your assets over the limit

Maximize return

Support your alliance airline

Stop investments

Streamline business model

Focus on LCC segment

Thight cost management

Acquire public funding

Key issues

PAX = 79M

PAX = 22M

PAX = 12M

Albany

International

Airport

PAX = 1.5M


W H A T T O D O : F O C U S O N B E S T B E T

E X H I B I T 2 1



M a n a g i n g a i r p o r t s a s b u s i n e s s e s , n o t i n f r a s t r u c t u r e s u p p l i e r s

S e l e c t t h e r i g h t b u s i n e s s m o d e l f o r y o u r c h o s e n p o i n t i n t h e v a l u e c h a i n As mentioned earlier, few operators have the breadth and depth of resources and expertise to maximize

returns from each link in airports’ highly diverse value chain. Instead of acting as integrators of the

entire value chain, operators will have to identify a position within the chain where they can add maxi-

mum value, based on their capabilities and the competitive outlook of their chosen section of the chain.

Each part of the chain will require different skills and resources plus different levers to reduce costs and

boost revenues, as Exhibits 22 and 23 illustrate. Ground handling, for example, will depend on person-

nel allocation and process optimization to create value, while aviation-related services will hinge on cost

transparency, negotiation strategies, and investment control, among other demands. Some operators

will be best equipped to concentrate on individual links in the chain, others will benefit from taking

broader roles.

Generally, there will be four types of operators:

Specialists will focus on particular links in the value chain and leverage their scale and know-how

globally. Usually this will involve standardized, labor-intensive activities, such as ground handling

and facility management. As these are traditionally low-margin fields, scale will be critical. Already

several global specialists are emerging. In ground handling, ServisAir/GlobeGround

2 7


Management

Support functions

Trans-action of prop-erty and uti-lization rights

Real-estate/infra-

structuredevelopment

Facilitymanagement

Groundservices

Otherservices

Spaceallocation

(non-aviation)

Flight OPS

TerminalOPS (in. sec.)

1 2 3 4a

4b

5 6 7

Characteristics

Levers

Real estate Facility management

Capital-intensive

Customer: airport operator and airport-related external companies

Market for special properties hardly existent

Labor-intensive

Majority of total lifetime property cost acc rues during use

High competition in certain areas

Financing

Project management

Regulatory circumstances

Site analysis/knowledge of place

Property development

Specialization (technical FM)

Standardization (infrastructure and commercial FM)

Property usage

O P T I M I Z A T I O N L E V E R S A L O N G T H E V A L U E C H A I N ( I )

E X H I B I T 2 2



operates at 39 locations, with a turnover of more than $800 million, while Swissport is present at

24 airports. Within the U.S., Delta Air Lines has also started to aggressively market its maintenance

services to other airlines, turning a $50 million side business in 2000 into a $160 million operation

by the end of 2003.

Layer-masters will handle categories of related services, for instance, business-to-consumer

services such as retail, conferencing, and parking. BAA’s retail managing contracts are an exam-

ple of this development.

Orchestrators will coordinate outsourced services at individual airports, ensuring consistent qual-

ity standards and cost control, as well as act as the interface with airlines to deliver innovative,

value-added products and services. Pure orchestrators have yet to emerge, but Athens Interna-

tional Airport is a pioneer.

Integrators will continue to handle the whole value chain, as Frankfurt does now.

D r i v e d o w n c o s t s

Operational excellence has to be the new management imperative. Exhibits 22 and 23 highlight the

main levers for reducing costs (and increasing revenues) in different parts of the value chain. The

golden rule, which has so often been broken in the past, is that no investments should be made unlessexpected profitability is above the cost of capital.

2 8


Management

Support functions

Trans-action of prop-

erty and uti-

lization rights

Real-estate/infra-

structure

development

Facility

management

Ground

services

Other

services

Spaceallocation

(non-aviation)

Flight OPS

Terminal

OPS (in. sec.)

1 2 3 4a

4b

5 6 7

Characteristics

Levers

Aviation Non-aviation Ground services

Capital-intensive

Specific flight and terminal operations knowledge

Regulated environment

Capital-intensive

Opaque passenger behavior

Complex demand structure (retailers)

Labor-intensive

Complex processes

Cyclical demand

Negotiation strategy

Investment control

Cost transparency

Process efficiency

Space allocation

Marketing

Personnel allocation

Process optimization

Airline affinity

Airport and terminal management

O P T I M I Z A T I O N L E V E R S A L O N G T H E V A L U E C H A I N ( I I )

E X H I B I T 2 3



E x p l o i t n o n - a v i a t i o n r e v e n u e sIncreasing revenues per passenger through non-aviation channels, such as retail and parking, will be a

key driver of growth and profitability for all airports, especially those that experience lower than

expected passenger growth or even an absolute drop in traffic. In fact, in BCG’s experience, airports

that depend on LCCs will usually only be able to sustain profitability via non-aviation revenues. LoveField airport in the U.S. is a case in point: Its non-aviation revenues, which were three times higher than

aviation revenues, kept it in the black in 2001, with a modest $9.9 million profit (Exhibit 24). Its parking

revenues alone were five times larger than its landing fees and bigger than all its non-aviation revenues

put together.

Retail is likely to provide some of the richest pickings as BAA’s airports have shown. To maximize this revenue,

operators will have to persuade carriers to strike an intelligent balance between their demands for shorter

transfer times and the airports’ need to keep passengers shopping for as long as possible. This will ultimately

be in both parties’ interests: higher revenues will give operators more leeway to lower carrier charges.

C o n s i d e r p r i v a t i z a t i o nMany airports should consider at least partial privatization in order to raise funds, gain access to the

capital markets and trigger efficiency improvements. This can be done via an IPO—a route successfully

taken by Frankfurt and Vienna—or by offering stakes through a trade sale. Strict management of the

privatization process is essential for success and is controlled by an IPO task force: strategies must be

refined, resources mobilized, efficient controls put into place, and the organization aligned with the cap-

ital markets. Trade sales can provide an attractive alternative to IPOs, by recruiting strategic investors to

take significant stakes in the airport company. External know-how can thus be bundled to ensure greater

optimization of potential.

2 9

(1) Excluding grant receipts of $2.5 million, only c overs interest income and other non-operating revenuesSource: BCG analysis

Aeronauticoperatingrevenue

Non-aeronauticoperatingrevenue

Non-operatingrevenue(1)

Labor cost Communicationand utilities

Suppliesand materials

Otheroperatingexpenses

EBITDA Interestchange

Depreciat ion Net profit

7.7

24.2

6.8 6.0

2.5

10.7

1.4 18.1 1.66.6

9.9

Inmilliondollar

L C C A I R P O R T S C A N O N L Y B E P R O F I T A B L E W I T H T H E R I G H T R E V E N U E M I X — E X A M P L E L O V E F I E L D , T E X A S

E X H I B I T 2 4



3 0

Tr e a t a i r l i n e s a s p a r t n e r sThe future of the airport sector lies in closer cooperation with the major airlines as business partners,

not just customers. As a first step, joint seminars and workshops could foster better understanding. In

many areas, there are considerable opportunities to leverage cost and revenue synergies, for example,

by pooling customer information to target high-margin passengers and by bundling together common

support services, such as IT, and by clearly defining interfaces. (Exhibit 25) Transparency and clearly

defined contracts provide the basis in all areas of cooperation. Service-level agreements should become

standards in strong relationships. Short-term aids in crises also work to improve the relationship, as

significant temporary reductions in landing fees at major Asian airports during the SARS crisis signified.


Win-win situation as result of open cooperation

Value chaininterfaces

Real-estate andinfrastructuredevelopment

Facilitymanagement

Groundservices

Spaceallocation

Otherservices

Terminal OPS

Flight OPS

Airportauthority

Airport authority,airline and sublease

companiesAirline

Airport authority,airline and sublease

companies

Airportauthority

Airline

Airport authority

Measures ofinterface

improvements

Bundling

Outsourcing

Jointly coordinate operations

Share scheduling information

Jointly optimize IT anddisposition instruments

Find trade-offbetween minimumconnection timeand retail-optimizedterminal design

Joint costreduction

Quality assurance

Risk reduction/planning reliability

Joint cost reduction

Additionalrevenue sources

Results

Transactionof property

Airportauthority

Airportauthority

P R O C E S S E F F I C I E N C Y G A I N S C A N B E Y I E L D E D B Y J O I N T I M P R O V E M E N T O F I N T E R F A C E S

E X H I B I T 2 5



3 1

A i r l i n e s : B r i n g a i r p o r t s i n t o f o c u s a n d t i g h t e n o p e r a t i o n a l l i n k s

Airlines have long neglected the value potential of airports due to their focus on network development.

There are various levers to reduce airport-related costs and revenues:

By working closely with a particular operator, airlines can identify potential to improve process

efficiency. This will lead to reduced costs for airports and, via lower charges, for airlines. But the

more substantial contribution to higher airline margins will be through shorter turnaround times

and consequently higher aircraft utilization.

Airlines can support airport operators in increasing their retail revenues by helping them find part-

ners who are best suited for optimal exploitation of the revenue lever. Moreover airlines can con-

tribute by providing valuable information about their passengers, which allows retailers tocustom-tailor their offerings. Airports should then share the increased revenues with airlines,

creating a win-win situation that encourages all parties to move in the described direction.

Although severe frictions between airports and airlines characterize the current situation, both parties

should work towards easing the tensions since both will profit from a renewed partnership.

I n v e s t o r s : P i c k t h e r i g h t i n v e s t m e n t s a n d i m p r o v e p r o f i t a b i l i t y

It has never been a better time to invest in airports. Many owners face difficulties in financing their air-

port shareholdings and are increasingly willing to sell off stakes in attractive locations. But investors have

to thoroughly analyze the options before entering the complex airport business:

Investors should screen all possible targets and analyze long-term growth options based on airline

prospects as well as geographic and environmental factors. Only airports exhibiting a stable

growth outlook and a realistic perception of themselves will lead to long-term returns on adequate

investments.

From along the diverse value chain, investors should decide which business to invest in. Depend-

ing on an individual investor’s risk profile, capability portfolio, and investment strategy this can be

I M P L I C A T I O N S F O R A I R L I N E S ,

I N V E S T O R S , A N D G O V E R N M E N T S



either in real estate, airport management, or business-to-consumer services. If investors do not take into account the ongoing deconstruction of the value chain, they risk an attack from better-

positioned competitors.

Investors must be aware of the various cost and revenue levers airports can pull to improve their

margins. The potential to increase efficiency and revenue per PAX is large at most airport loca-

tions and can significantly raise the returns on investment.

Well-advised investors with a clear strategy and a set of relevant investment criteria will emerge on top of

the current developments in the airport industry.

P u b l i c a u t h o r i t i e s : S e c u r e i n f r a s t r u c t u r e p r o v i s i o n w i t h o u ts u f f e r i n g n e g a t i v e r e t u r n s

Infrastructure provision as a means of regional development has always been the focus for public authorities.

This will remain the case in the future. But in times of dwindling public budgets, authorities are looking for

opportunities to reduce their investments and increase returns on airport shareholdings without neglecting

its infrastructural importance for their particular region. Key steps to take and issues to consider include:

Authorities must soberly analyze the growth potential of each airport. Although every region

would like to profit from a nearby intercontinental hub, only a few will enjoy this privilege. It is

fairly obvious which cities will be the location of mega-hubs as this is determined by airline net-

work strategies: authorities must understand and accept the reality of the growth prospects of

their airport portfolio.

To reduce requirements of public funding, governmental institutions should encourage airport man-

agers to exploit the revenue potential offered by retailing. Increasing revenues per PAX is a comparatively

easy option since its implementation does not require unpopular decisions like workforce reductions.

Authorities should ensure that airport managers implement a tight cost control, focusing on

process efficiency and adequate real-net output ratios. Significant efficiency gains are a direct way

of saving taxpayer’s money.

Alternative sources for financing airport investments should be explored. Getting private

investors involved is an excellent opportunity to trigger changes in airport management and

reduce airports’ dependency on subsidies.

These recommendations will not endanger the provision of airport infrastructure; they will ensure thelong-term survival of individual airports. Structural changes force all airport owners to act in order to

avoid deterioration in their shareholdings.

3 2



3 3

B C G ’ S E X P E R I E N C E I N T H E A V I A T I O N

I N D U S T R Y

B C G h a s e x t e n s i v e e x p e r i e n c e i n t h e a i r p o r t a n da v i a t i o n i n d u s t r y

BCG works closely with numerous clients within the aviation sector—airlines, airports, and other

service providers—always with the goal of developing our clients’ competitive advantage, successfully

implementing it, and increasing their sustained earning power. Projects we have been involved in have

ranged from privatizations and profit improvement measures to value management, strategic position-

ing, and internationalization. All have shown bottom-line impact and enabled our customers to achieve

a superior strategic positioning within a changing business environment.

In addition to the frameworks described in this report we have developed a set of tools specifically for

the aviation industry. This includes a standardized airport “health check” to identify the measuresneeded to prepare our clients for the future.

If you would like to discuss this report’s findings in more detail or require assistance in any other field,

please contact one of our world experts.





3 5

K E Y Q U E S T I O N S

Q u e s t i o n s f o r a i r l i n e s

1. What is the overarching network logic of my alliance and how does this affect my airport selection and strategy?

2. What are my main airports’ investment programs and how do they correspond to my

perspective capacity, service, and cost requirements?

3. How can I actively participate and influence airports crucial to my strategic positioning?

4. How can joint optimization of interfaces benefit my efficiency and service position?

Q u e s t i o n s f o r i n v e s t o r s

1. Does my investment portfolio account for individual growth prospects and asober assessment thereof by the respective airport?

2. Which steps of the airport value chain are most promising as investments?

3. How far has the airport’s efficiency potential been realized and is themanagement and ownership committed to delivering returns?

Q u e s t i o n s f o r p u b l i c a u t h o r i t i e s

1. What is a viable airport landscape for my region given expected growth rates and trendsand are funds distributed accordingly?

2. Are publicly owned airports sufficiently working to exploit non-aviation revenues andcontrol their cost position?

3. Should alternative ways of financing airport investments be explored and the expertiseof private investors tapped?

4. Are ways to better coordinate airport development on a supraregional andsupranational level being sufficiently explored?

Q u e s t i o n s f o r a i r p o r t o p e r a t o r s

1. Which role is my airport realistically going to play in the medium term given its locationand key airline(s)?

2. Do my investment plans accurately reflect this role?

3. Am I actively cooperating with my main customers?

4. Can my cost position be optimized?



Amsterdam J. F. Kennedylaan 100

3741 EH BaarnNetherlands

Tel +31 35 548 6800

Fax +31 35 548 6801

Athens60 Vassilissis Sophias Avenue,

11528 Athens

Greece

Tel +30 210 727 9213

Fax +30 210 727 9168

At lanta600 Peachtree Street N.E.

37th Floor

Atlanta, GA 30308

USA

Tel +1 404 877 5200

Fax +1 404 877 5201

Auck land23–29 Albert Street, Level 30

Auckland 1

New Zealand

Tel +64 9 377 2297

Fax +64 9 3070 958

Bangkok37th Floor, U Chu Liang Building

968 Rama IV Road, Silom

Bangkok 10500

Thailand

Tel +66 2 667 3000

Fax +66 2 655 3123

Barce lonaAvda. Diagonal 640-6°E

08017 Barcelona

Spain

Tel +34 93 363 4700

Fax +34 93 363 4710

Bei j ingUnit 902, The Exchange Beijing

No. 118 Jian Guo Lu Yi

Chau Yang District

Beijing, 100022

China

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Fax +86 10 6567 5799

Ber l inDircksenstraße 41

10178 Berlin

Germany

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Fax +49 30 28 09 83 05

BostonExchange Place, 31st Floor

Boston, MA 02109

USA

Tel +1 617 973 1200

Fax +1 617 973 1339

Brusse lsBoulevard de L’Imperatrice, 13

1000 BrusselsBelgium

Tel +32 2 289 02 02

Fax +32 2 289 03 03

Budapes tVáci u. 81

1056 Budapest

Hungary

Tel +36 1 235 90 00

Fax +36 1 235 90 10

Buenos A i resBouchard 647-10°

(C1106ABG) Buenos Aires

Argentina

Tel +54 11 4314 2228

Fax +54 11 4314 2229

Chicago200 South Wacker Drive

27th Floor

Chicago, Illinois 60606

USA

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CologneIm Mediapark 8

KölnTurm

50670 Cologne

Germany

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CopenhagenAmaliegade 15

1256 Copenhagen K

Denmark

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Dal las500 N. Akard Street, Suite

2600

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USA

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Düsse ldor fStadttor 1

40219 Düsseldorf

Germany

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Frank fur tAn der Welle 3

60322 Frankfurt am Main

Germany

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HamburgChilehaus A

Fischertwiete 220095 Hamburg

Germany

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Hels ink iEteläesplandi 12, 3rd Floor

00130 Helsinki

Finland

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Hong Kong34th Floor, Shell Tower

Times Square, Causeway Bay

Hong Kong

China

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HoustonOne Houston Center

1221 McKinney, Suite 3850

Houston, TX 77010

USA

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I s tanbulSuleyman Seba Cad. No. 83

Akaretler, Besiktas 80680

Istanbul

Turkey

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JakartaLevel 22, Mashill Tower

Jl. Jenderal Sudirman Kav. 25

Jakarta 12929

Indonesia

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Kua la LumpurLevel 28, Menara IMC

No. 8 Jalan Sultan Ismail

50250 Kuala Lumpur

Malaysia

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LisbonRua das Chagas 7–15

1200–106 Lisbon

Portugal

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LondonDevonshire House

Mayfair PlaceLondon W1J 8AJ

England

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Los Ange les355 S. Grand Avenue

33rd Floor

Los Angeles, CA 90071

USA

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Madr idAlcala, 95

28009 Madrid

Spain

Tel +34 91 520 61 00

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Melbourne101 Collins Street,

Level 52

Melbourne VIC 3000

Australia

Tel +61 3 9656 2100

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Mexico C i tyTamarindos 400 piso 18 A

Colonia Bosques del las Lomas

México, D. F. C. P. 05120

Mexico

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Miami703 Waterford Way

Suite 740

Miami, FL 33126

USA

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MilanVia della Moscova 18

20121 Milan

Italy

Tel +39 0 2 65 59 91

Fax +39 0 2 65 59 96 55

Monter reyVasconcelos 101 Ote – 5°

Col. Residencial San Agustín

Garza García, N. L. C. P.

66260

Mexico

Tel +52 81 8368 6200

Fax +52 81 8368 0808

G L O B A L C O N T A C T S



MoscowUsadba Center

Voznesensky pereulok, 22/13125009 Moscow

Russia

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Fax +7 095 258 34 33

Mumbai55/56 Free Press House

215 Free Press Journal Marg,

Nariman Point, Mumbai 400 021

India

Tel +91 22 2283 7451

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MunichLudwigstr. 21

80539 Munich

Germany

Tel +49 89 23 17 40

Fax +49 89 2 60 66 98

NagoyaDai Nagoya Building 28–12

Meieki 3-chome, Nakamura-ku

Nagoya, Aichi 4500-0002

Japan

Tel +81 52 533 3466

Fax +81 52 533 3468

New Delhi3rd Floor, DLF Centre

Sansad Marg

New Delhi 110 001

India

Tel +91 11 335 8912

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New York430 Park Avenue, 18th Floor

New York, NY 10022

USA

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OsloKarl Johans gate 45

0162 Oslo

Norway

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Par is4 rue d’Aguesseau

75008 Paris

France

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PragueNa Prikope 15

110 00 Prague 1Czech Republic

Tel +420 2 22191444

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RomeLargo Tartini 3/4

00198 Roma

Italy

Tel +39 06 85203420

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San Franc iscoTwo Embarcadero Center,

Suite 2800

San Francisco, CA 94111

USA

Tel +1 415 732 8000

Fax +1 415 732 8200

Sant iagoAv. Isidora Goyenechea 3621

Suite 901

Las Condes

Santiago

Chile

Tel +56 2 338 9600

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Sao Pau loAv. Brig. Faria Lima,

3064 – 5th Floor

Sao Paulo, SP 01451-000

Brazil

Tel +55 11 3046 3533

Fax +55 11 3842 9638

SeoulKwangwhamun Building,

20th Floor

64-8, Taepyong-ro 1-ka,

Choong-ku Seoul

KoreaTel +822 399 2500

Fax +822 399 2525

Shanghai21/F, Central Plaza

227 Huangpi Bei Lu

Shanghai, 200003

China

Tel +86 21 6375 8618

Fax +86 21 6375 8628

Singapore50 Raffles Place #44-02/03

Singapore Land Tower 048623

Singapore

Tel +65 6429 2500

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Stockho lmSkeppsbron 38

SE-111 30 StockholmSweden

Tel +46 8 402 44 00

Fax +46 8 402 46 00

Stu t tgar tKronprinzstr. 28

70173 Stuttgart

Germany

Tel +49 711 20 20 70

Fax +49 711 22 12 38

SydneyLevel 61, Govenor Phillip Tower

1 Farrer Place,

Sydney NSW 2000

Australia

Tel +61 2 9323 5600

Fax +61 2 9323 5666

TaipeiRoom 702, 23/F,

105 Tun-Hwa S.

Rd. Sec 2

Taipei 106

Taiwan

Tel +886 2 2755 0000 x722 &

702Fax +886 2 2784 1632

TokyoThe New Otani Garden Court

4-1, Kioi-cho

Chiyoda-ku, Tokyo 102-0094

Japan

Tel +81 3 5211 0300

Fax +81 3 5211 0333

TorontoBCE Place, 181 Bay Street

Suite 2400, P O Box 783

Toronto, Ontario M5J 2T3Canada

Tel +1 416 955 4200

Fax +1 416 955 4201

ViennaAm Hof 8

1010 Vienna

Austria

Tel +43 1 537 56 80

Fax +43 1 537 56 8110

WarsawSienna Center

Ul. Sienna 7300-833 Warsaw

Poland

Tel +48 22 820 36 00

Fax +48 22 820 36 36

Washington DC4800 Hampden Lane

Suit 500

Bethesda, MD 20814

USA

Tel +1 301 664 7400

Fax +1 301 664 7401

ZurichZollikerstrasse 226

CH-8008 Zurich

Switzerland

Tel +41 1 388 86 66

Fax +41 1 388 86 86



Amsterdam

Athens

Atlanta

Auckland

Bangkok

Barcelona

Beijing

Berlin

BostonBrussels

Budapest

Buenos Aires

Chicago

Cologne

Copenhagen

Dallas

Düsseldorf

Frankfurt

Hamburg

Helsinki

Hong Kong

Houston

Istanbul

Jakarta

Kuala Lumpur

Lisbon

London

Los Angeles

MadridMelbourne

Mexico City

Miami

Milan

Monterrey

Moscow

Mumbai

Munich

Nagoya

New Delhi

New York

Oslo

Paris

Prague

Rome

San Francisco

Santiago

São Paulo

Seoul

ShanghaiSingapore

Stockholm

Stuttgart

Sydney

Taipei

Tokyo

Toronto

Vienna

Warsaw

Washington

Zurich

BCG The Boston Consulting Group

Documents

Airport Dawn of a New Era