Author: Aydin Maharramov
The BRB Bottomline
Airports are a vital, yet often overlooked, part of the economy. Their business models are often complex, and the structure of their ownership is evolving. In Europe, many airports have been fully or partially privatized, while in the US, almost all of them are under governmental control. In the coming years, it may be the need for capital investment, rather than the need for better efficiency, that drives many airports across the world and the US to implement some form of partial privatization.
For many long journeys, a key component of traveling is the airport. Many of us have gone through the lobbies, gates, and security checkpoints of an airport; many have likewise experienced airports in different countries around the world. Some are terrible, some are better than others, and some are simply indistinguishable. But what are the economic drivers of this difference in airport amenity quality?
There are many different operating models for airports that shape how airports make money and the services they provide. On top of this, there are differences across countries in ownership of airports–specifically, whether airports are government owned or privately owned, or a hybrid. While Europe has mainly embraced the transition to private and hybrid ownership of airports, the US has so far stuck to traditional government ownership. The business operations of airports are, no doubt, complex. But the business models of almost all commercial airports, private or public, can be simplified into several key areas in sources of revenue.
The Airport Business Model
Throughout your time at the airport, you as a passenger are not likely to pay much money to the airport directly. However, you’re much more likely to pay for parking, food, gifts, and, obviously, the plane ticket itself. It is by taking a share of these payments that airports make money and fund their operations.
From the Airlines & Retail
A significant chunk of airport revenue comes from airlines. Airlines are usually charged three main fees for the use of an airport: landing, terminal, and parking fees. The landing fee, as you might have guessed, is a charge made to land an airplane at the airport; this is usually dependent on the weight of the aircraft. A parking fee is a charge based on how long an aircraft is parked at a gate. The terminal fee is a charge dependent on the number of passengers a flight has and usually covers the cost of check-in desks, seating areas, and other facilities provided by an airport terminal. Constituting the majority of their revenue, airlines and their customers are paramount to airports – specifically, how much those airlines can afford to pay in fees.
The airport also takes a cut from all those shops and restaurants that line your long walk from security to the boarding gate. It is, understandably, in an airport’s best interest to try to get you to spend as much as possible, for as long as possible, on retail locations like bars and gift stores. A second major aspect of retail revenue comes from passenger parking, either by charging passengers directly or taking a cut of earnings from third-party parking space providers.
We can look at the revenue of Heathrow International Airport in London, one of the busiest airports in the world, to better understand the breakdown. At Heathrow, airlines are charged an average of $9000 for each landing and $55 per passenger for each departure. By charging third-party businesses, it also brings in around $0.95 per passenger on restaurants, $5.15 per passenger on retail shops, and $2.03 per passenger on parking. What’s interesting here is the relationship between airport ownership and the fees charged. For one, airports that are owned by the government, and therefore have access to government funding, might have less pressure to turn profits and therefore be less inclined to increase fees and charge airliners or retailers more. Second, with private ownership, the interest of shareholders comes into play. Private investors seeking maximum profitability will likely not hesitate to increase fees if needed, putting them at odds with the sometimes hundreds of businesses and airlines operating within the airport.
From the Government (Sometimes)
For airports that are public, which includes almost all airports in the US, government funding is an important component of airport finances. They usually find themselves under the jurisdiction of a state or municipality. Just like highways and schools, airports can be seen as just another area requiring cash from the government. However, unlike schools and highways, government funding is just one component of the many different sources of revenue for airports. And for US airports specifically, government funding seems to be negligible in their balance sheets.
For most governments, adequate funding of airports should not be overlooked. On top of their intrinsic value in providing economic activity, jobs, and a public service, they also are key to the functioning of other sectors of an economy, like tourism and trade. In fact, in the US, airports are estimated to generate $1.4 trillion in economic activity per year and provide around 11.5 million jobs. However, despite being government owned, many US airports, especially large ones, receive little taxpayer support and are required to essentially fund their own operations. The direct source of taxpayer funding, the federal Airport Improvement Program, has provided annually around $3 billion split between several hundred airports (to compare, just one main airport serving a large city will often cost hundreds of millions to operate). With little available funding, many US airports have been unable to modernize their infrastructure.
Different Airports for Different Customers
To further complicate the airport business model, there are different structures and key operations standards for airports depending on what kind of customers (airlines) they are serving. Specifically, there are differences between the high-cost airports that serve mainly international airlines and low-cost airports mainly focusing on low-cost, domestic airlines, like Southwest in the US or EasyJet in Europe.
We can look at the City of Houston as an example of different airport operations. The main, larger airport serving international flights from various national airlines is George Bush Intercontinental Airport. The smaller airport serving mainly domestic flights from low-cost airlines is William P. Hobby Airport. The difference in customers is reflected in the fees the airports charge: Bush Intercontinental has landing fees of $2.704 per thousand pounds and Hobby airport has landing fees of $1.857 per thousand pounds. It makes sense, then, why and how these ultra-low-cost airlines like Southwest, which aim to minimize costs in any way possible, choose smaller auxiliary airports to carry out their operations. This model transcends to the UK where low-cost carriers like Ryanair and EasyJet operate out of smaller, auxiliary airports far away from London, like Luton and Stansted, rather than the main airport which lies close to the city, Heathrow International.
With lower revenue, airports like William P. Hobby and London Luton are limited in their scope. With smaller passenger numbers and cheaper prices, they have less upgraded and luxurious facilities, often foregoing some of the VIP lounges and clubs seen at global hubs like JFK or Dubai International.
This once again intersects with the idea of government versus private ownership of airports. Privately owned airports will seek to maximize profits, and to do this will often forgo short, domestic flights for long-haul international flights. International flights, in general, have airlines that pay higher fees and have passengers that spend more on retail at the airport. This is often at odds with the interests of domestic residents serviced by that airport and is one of the main arguments against airport privatization. While international flights might do wonders for the balance sheet of the airport, it will do very little for the people who live within the range of the airport, who will often want to travel within their country.
Ownership of Airports
The question of who should own airports–the government, private companies, or a mix between the two–has been debated and discussed for decades. In the US, almost all airports are government owned. In Europe, however, many airports are owned and operated by private companies. This begs the question: does airport ownership really matter, and does it affect the quality of airports?
The history of airport privatization goes back to Margaret Thatcher’s UK in 1987 and the sweeping privatization of the British economy. Since then, many more airports across the world have introduced either full or partial privatization. The US is a notable exception, with only one fully privately-owned commercial airport in the entire country. It is important to note, however, that airport ownership is not binary but rather a spectrum. Apart from full sales of ownership, privatization is often introduced through issuance of service and management contracts where private companies are tasked with carrying out airport operations–this sort of privatization is common in the US. There is, also, privatization through the transfer of airport financing and development to private businesses.
Differences in Quality and Efficiency?
The main argument for the privatization of almost any industry or company is operating efficiency. Generally, private companies are seen as running operations more efficiently. Does this same thinking hold up for airports? To examine this argument, we can look at a comprehensive study done that compared a collection of British airports owned by BAA (a private, British company) with a collection of similarly-sized, public U.S. airports in operating and financial efficiency. Through data analysis, the study found that these private UK airports had higher revenue per passenger and lower revenue-cost ratios but also higher cost per passenger and cost per landing. Yet, the study concludes that the higher efficiency observed in private airports may be first due to labor productivity growth at UK airports and second due to monopoly power that allows private airports to increase revenues and profits.
On the flip side, a 2020 research article in the Journal of Air Transport Management found, after analyzing the variety of ownership structures around the world, no “conclusive evidence for the superiority of private management over public management” in terms of operations efficiency. However, the research showed the efficiency outcomes depended heavily on the extent of privatization, the types of private companies that would operate the airport, and the general economic environment. Instead, it seemed that the largest driver of privatization was not for the sake of efficiency, but for the much-needed funding and investment that came with private companies.
Differences in quality are also often hard to determine. Looking at rankings of the best airports in the world, one finds a mix of both privately-owned and government-owned airports that are ranked highest. There is no clear pattern. With the highest quality airports in the world being a mix of ownership, and with evidence for better operating and financial efficiency with private ownership being scant, it is difficult to put one system as superior.
Drivers of Privatization
There is, of course, the view that airports are a public good and should therefore be controlled by the government. This makes privatization a question of ethics. Many people think it would be unethical to privatize and make profits off of airports–the same way as it would be unethical to privatize public parks, roads and bridges, or canals. There is also no guarantee that private companies will act in the public’s interest and reinvest their profits back into the airport and community. As mentioned above, many airports would have no incentive to provide useful, short-haul flights to the residents of the local communities when long-haul international flights can bring in so much more money. Yet, many successful airports have been efficiently privatized around the world.
It seems that the main driver and cause of privatization is the need for investment, more than the need for efficiency. This is an area in which private companies can excel. Going back to Thatcher’s privatization of airports in 1987, the British private sector was able to inject capital investments into the floundering airport industry. The private sector can bring in capital that otherwise would not have been there to fund infrastructure and other improvement projects. It can often provide funding that the government cannot. Unsurprisingly then, a lack of funding is a major problem with US airports today: many don’t have enough funding from the government and therefore suffer from decaying infrastructure and poor services. In light of this, many airports have turned to private money. For example, New York’s JFK is planning a $12 billion privately-funded development project that will include the construction of new terminal buildings and modernization of its facilities.
Perhaps the ideal form of ownership that has been gaining popularity within the industry is the Public Private Partnership (PPP): a hybrid between private and public ownership of the airport. This model, which is employed in many different airports around the world, seems to incorporate the benefits of both sides. It ensures public goods provisioning while bringing in much-needed capital investment to improve airport infrastructure. Many airports across the world and across the US have implemented this structure–the JFK development project mentioned above would be an example of a PPP. In fact, large-scale PPP schemes have been implemented at many key airports in the country, from Los Angeles to Dallas to Denver.
Airports around the world are complex pieces of infrastructure and present even more complex economic and business problems. Different countries around the world have taken different approaches to the idea of airport ownership. No one form of ownership, whether that be full privatization or full government ownership, seems to be superior to the other. In the coming years, it will be imperative to watch the development of airport business models, especially in a post-Covid world, and the evolution of airport ownership.
- Airports present us with complex business models – they have multiple sources of revenue, various operating structures and several forms of ownership across geographies
- There has long been debate over quality, efficiency and overall superiority between the two competing forms of airport ownership – private and public
- It seems like the main driver of airport privatization is a need for funding and investment that only the private sector can provide
- US airports have historically been poorly-funded and because of this many have introduced forms of privatization by allowing private investors to fund airport development
Aydin is a freshman at UC Berkeley intending to major in Economics and minor in Data Science. He is interested in international economics and public policy and exploring the performance of different developing economies. He is excited to explore and develop his knowledge of these fields through his writing. In his free time, he enjoys reading nonfiction, watching soccer and touring the variety of kebab shops around the world.