Andre Medeiros and John Potter
February 17, 2015
Today’s airports are increasingly complex operations, requiring excellence across a broad and diverse set of capabilities and the management of many different stakeholders. Increasing service expectations (from both passengers and airlines); regulator-imposed constraints on aeronautical charges; and the need to fulfill a national, regional, or municipal development role mean that airports are continually challenged in a drive for efficiency, service quality, and passenger growth. Being able to focus operating expenses and investments on the capability areas that matter most is critical to meeting these challenges.
Only activities representing essential capabilities that differentiate an airport — that give it a unique and sustainable winning position in its market — deserve significant investment. These activities, after all, allow an airport to deliver its unique value proposition. By contrast, capabilities that are necessary to keep the airport running but that don’t make a big difference to airlines or passengers should be handled as efficiently as possible. Finally, activities and capabilities that don’t provide a significant operational benefit and that aren’t differentiating from an airline or passenger point of view should be cut back or eliminated.
Benchmarking operating cost performance across airports can be a valuable tool in the quest for efficiency. However, the analysis needs to account for the inherent differences in airports’ operating environments. For instance, local labor costs can vary across comparator airports, and a terminal infrastructure design can give some airports inherent operating cost advantages (or disadvantages) over the short and medium terms. The good news is that once these differences are accounted for, cost benchmarking can be very valuable, providing perspective and illuminating areas of the operations that are ripe for improvement.
One way that airports can get a sense of which costs are essential is by breaking them down into four groups using our ISSR framework: inherent, structural, systemic, and realized costs. Management can do something about all of these costs in the long run, though the near- and medium-term opportunities are generally found within systemic and realized costs.
The global trends toward airport privatization and the increased participation of private operators are gaining momentum as many governments tighten their belts and look for ways to run local airports more efficiently. In many parts of the world, private financial investors are now looking at airport infrastructure as a generator of a stable, long-term income stream. This is leading to a transformation in how airports pursue operations excellence.
If they are to maximize returns, airport operators will need to address several big challenges. First, they have to find a way to thrive in often tightly regulated environments. The second challenge for private airport operators is keeping up with constant changes in the provision of air travel itself. These changes include the needs of mobile Internet– enabled passengers, the increasing sophistication of on-site retail models, diverse airline business models, and the ever-changing security protocols for passenger and cargo screening. These are all changes that force airport operators to make investments, adjust established processes, and refine their management of passenger flows.
For airports to effectively manage their financial returns in the face of all this, it is essential that they develop a clear understanding of their operating costs, and how those costs align to their defined essential capabilities and to their larger strategic objectives. This, indeed, is the crux of the challenge. With this kind of clarity, airport operators can improve their chances of meeting regulatory and market requirements, achieving operational excellence, and delivering sustainable positive financial returns, year after year.
It is essential to understand how operating costs align to capabilities and strategic objectives.
Successfully meeting service expectations of regulators, airlines, passengers, and other stakeholders — while optimizing operating costs and delivering positive financial returns to increasingly demanding private shareholders — is no easy task. A critical input is being able to look at comparator and competitor airports in a way that provides a meaningful view of efficiency opportunities. Developing a clear understanding of an airport’s essential capabilities and of the costs that are within management’s control also provides a greater level of focus to efficiency initiatives. By doing both these things, airport operators are able to create more sustainable, competitive, and profitable operations that deliver on their strategic objectives.