Analysis • North American airports
Consumers, concession planning and KPIs: The North American airport market in focus
Dan Cappell is among the most experienced senior executives and respected voices in the world of airport concessions and commercial revenues. His career includes time in senior roles across the industry Trinity – airport, retailer and brand – and now sees him working in the Commercial Advisory practice at aviation and infrastructure consultancy Leigh Fisher in North America. In this feature, Cappell candidly assesses the evolving landscape in the US airports business, and identifies where the big commercial opportunities lie.
The Moodie Davitt Report: Dan, you come to your role with Leigh Fisher with a wealth of international experience in the world of airports. What are the most significant differences you have noticed when dealing with the North American market?
Dan Cappell: Many of the operating practices, procurement practices and industry participants are similar. However North American airport concession operations have several differences when compared with those elsewhere in the world.
I have experience working for an international brand (Nestlé SA), international duty free retailers (Abu Dhabi Duty Free and Aer Rianta International), and international airport authorities (Melbourne Airport and Abu Dhabi Airports), which collectively comprise the ‘Trinity’. In all of these organisations, EBITDA and the next quarter’s results were the most critical core business performance measurements and, in my experience, this is also the case for other international airports.
North American airports, by contrast, do not all calculate EBITDA or focus as much on the next quarter results, and that fact has taken some adjustment to relate to and understand.
In short, the priorities and commercial focus are totally different when the airport is privatised, as is the case with many airports outside of North America, as opposed to the North American model of government, where airports are owned and operated by states, cities, counties or airport authorities. This difference in governance means that at airports in North America, the political stakeholder involvement is a key differential in how the airports are managed, and this stakeholder engagement factors into many of the business decisions and operating models.
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At North American airports, Gross Domestic Product contribution, and/or employment within the City and State often is given a higher priority than the EBITDA returns. Another major difference for North American airports is the focus on reducing costs for the airlines. In many cases, this is the priority whereas elsewhere in the world recovering all costs and maximising the revenues from all airport users, including the airlines, is much more the norm.
(Note the recent announcement that Heathrow has reached agreement with the airlines on a strategy to at least maintain airline costs, but with the goal of reducing costs. This is the first major move of an airport outside of North America to follow suit).
Dan Cappell: “The opportunities for growth are significant, if the design and expansion of airport infrastructure places commercial revenue returns as a much higher priority than today.”
In addition to the perspectives related to the revenue goals for North American airports, there are differences in the types of service offerings at North American airports. While airports are data-rich, few have or use detailed specific consumer research related to the concession offerings and guest experience that would drive decisions related to service.
Food and beverage dominates the concession offerings, with news and gift representing the largest share of retail sales. But speciality retail and duty free is relatively small by comparison and very few airports (only the larger international gateway airports) have the width and breadth of the duty free offering typically seen across the rest of the world.
It appears to me that the differences related to revenue goals, Key Performance Indicator (KPI) priorities, and service offerings between the North American concession business and the international concession business reflect a very different commercial environment and focus within the business.
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How do you assess the current US airport aviation sector?
The US market is data-rich as mentioned. The latest Airports Council International (ACI) outlook report for North America reports on several key elements that give an excellent overview.
Passenger traffic reached 5.3 billion globally in the first nine months of 2018 (up 6.2% year-over-year). While Europe led the way in growth for total passenger traffic, followed by Asia Pacific, North American airport passenger traffic is reported to have increased to 1.4 billion passengers (up 5.4%), which is well above the typical growth rate for a mature air travel market.
US domestic passengers increased from 555.6 million to just over 584 million (an increase of 5.2%), while international passengers increased from 84.5 million to over 87 million (an increase of 3%).
The report also indicated that capacity increases at US airports are being led by American, United, Southwest, and Spirit. American will add the most capacity from Dallas/Fort Worth and Charlotte, both domestically and internationally.
Most of the international capacity growth is from US airports to the Caribbean and Europe. United continues to add capacity at its mid-continent hubs, Chicago O’Hare, Denver and Houston Intercontinental. Denver will have double-digit percentage growth in flights and seats, focused domestically.
Internationally, United will increase capacity the most from its San Francisco hub, adding new destinations such as Toronto and Amsterdam, and flights to cities like Singapore and Frankfurt. Southwest will add the most capacity from Orlando International, with new international services to Central and South America.
The report concludes that base air fares in the US remain low as legacy carriers continue to unbundle fares to compete with low-cost and ultra-low-cost carriers. At US$349, the average unadjusted US air fare in Q2 2018 was 0.85% less than in Q2 2017 and was down 13.2% from the most recent Q2 high of US$492 in 2014. It was the lowest second quarter fare since BTS began collecting air fare records in 1995, and the second lowest of any quarter.
In addition to the ACI outlook report on traffic, it is important to understand the US aviation sector performance. IATA (International Air Transport Association) has reported that, following record airline profits of US$37.7 billion in 2017 and an expected US$32 billion in 2018, the industry is forecast to perform strongly again in 2019, in spite of rising fuel and labour costs.
IATA has forecast airline profits of US$34-35 billion in 2019. North American airlines are expected to continue leading the industry in profitability, generating the highest margins, returns on capital and profit. The average profit per passenger is expected to be US$16-17 for North American airlines.
Denver (above) and Dallas/Fort Worth (below): Airports with an appetite for investment and progressive commercial thinking.
So, against this background of continued passenger growth, new routes and capacity being added by the airlines, and IATA’s forecast of strong airline profitability in 2019, it is not unreasonable to state that the outlook for the North American concessions business is extremely positive.
Add to this multiple major infrastructure projects from Los Angeles to San Francisco, the New York Port Authority to Pittsburgh, Denver to Phoenix, Chicago to Washington Dulles, and once again the outlook on the surface is extremely positive.
While I am new to the US market and believe that there are many positives associated with the market, my experience in this business causes me to be a bit conservative as to the direct application of the forecasted airline growth relative to commercial concession programme growth opportunities at US airports.
The 2018 ACI North America outlook report highlighted that US airports are falling behind their international counterparts. US airports need new infrastructure investments to modernise for 21st century air travel demands.
The report indicates that over US$100 billion is needed in annual infrastructure needs, and current funding only scratches the surface of airport funding requirements. ACI has estimated that approximately US$38 billion is needed for terminal buildings, US$19 billion for airfield capacity and standards, US$15 billion for reconstruction, and US$13 billion for surface access, to name but a few.
From a commercial perspective, the reality in my view is that much of the airport infrastructure in the United States is old legacy infrastructure—terminals that were not built to optimise either commercial concession returns or the customer experience.
Even in the larger hubs, where investment and expansion has taken place or is currently in progress (e.g. Los Angeles’ US$14 billion programme or JFK’s US$115 billion programme), a large amount of legacy facilities remain in place.
That fact severely curtails commercial concession programmes’ ability to expand to the right amount of space, in the right location on the passenger’s journey through the airport. The commercial offering locations are typically in concourses that are akin to a railway carriage in design, and they do not provide required square footage per passenger benchmarks or space that is retail friendly.
Combine that with an overreliance on food and beverage and minimal focus on speciality retail and duty free, and the opportunities for growth and optimisation are significant, if the design and expansion of airport infrastructure places commercial revenue returns as a much higher priority than it appears to be today.
What are the big challenges facing airport concession planners?
From my perspective, there is insufficient commercial space, and, in many instances, the actual space provided for or designated as commercial space is not an ideal fit for purpose or in the optimal location.
The 2018 ACI North America concessions benchmarking study highlighted that US airport total operating revenues were approximately US$18.4 billion, split 54% aeronautical revenues (US$9.94 billion), and 46% non-aeronautical revenues (US$8.46 billion). Parking, ground transportation, and car rental accounted for a massive 60% of the non-aeronautical revenue, with food and beverage accounting for 7%, and duty free and retail 8%. The median spend on F&B is US$6.29 and duty free, news, gift and speciality retail is US$3.48.
While F&B performs well with respect to passenger spending, retail passenger spend is well below the rest of the world and once again highlights the significant opportunity, if the design, allocation of space, and the variety and specifics of the commercial offering is properly aligned to passenger demographics.
I also believe there is a significant opportunity for US airports to gain a more detailed understanding of their customers’ feedback regarding their existing commercial programme, what is missing and what they would like to see added in the future, with dedicated consumer research programmes designed specifically for the concessions business being more widely introduced.
The potential upside for US airports that optimise the concession locations, size and evolve the offering guided by specific consumer research is significant. Integrating these elements as one of the core pillars in any infrastructure development project and/or refurbishment of existing facilities will ensure that concessions programmes are at the forefront of mind, rather than an afterthought.
Tampa Airport: A US$154 million expansion and upgrade has just been completed, adding 69 new concession spaces.
Are there changes required to the prevailing concession model in the region?
The North American market has four core types of concession models, namely:
- Direct Leasing
- Prime Operator
- Master Concessionaire
- Developer / Manager
Of airports participating in the 2018 ACI North America concession benchmarking study, the type of concession model in place for food and beverage was broken down as follows:
- 45% Direct Leasing
- 48% Prime Operator
- 46% Master Concessionaire
- 24% Developer / Manager
For retail the following applied:
- 51% Direct Leasing
- 50% Prime Operator
- 41% Master Concessionaire
- 23% Developer / Manager
Effectively, the structure of the concession models is not significantly different from those applied on a global basis and, based on my experience, I do not believe that a major review of the business models is required.
I would propose that the concession agreements can be improved by including more specific KPIs in relation to budget accountability, average spends, reporting systems, business review meetings, and the evolution of ecommerce and online shopping.
On a more controversial note, depending on which side of the business ‘Trinity’ one is operating on, the structure of the terms and conditions applied in the North American market should be more aligned to global concession fee returns.
There are two key areas that I believe would benefit from being reviewed:
- Concession Fees
- Pricing Policies
In relation to financial returns from non-aeronautical food and beverage and retail concession agreements, the published data and my experience suggest that US airports lag behind the rest of the world.
Based on data from the 2018 ACI North American concession benchmarking study, the percentage rent of gross sales overall was reported to be 11.1% from food and beverage and 15.1% from duty free, news, gift and speciality retail. This survey is taken across large, medium, and small hubs, and certain participating Canadian airports.
The large hubs generate the highest returns, ranging from 13.8% for food and beverage to 16.2% for retail. I believe that anyone working in the global airport commercial concessions business will know just how low these concession fee returns are.
Many of the speciality retail stores are managed by the domestic market divisions of the major brands, with airport retail partners or direct with the airport.
The brand exposure and interface with the consumer is recognised the world over by brands who bid for speciality retail stores at many of the top 150+ airports worldwide in passenger traffic.
I do not see the same focus from the brands given to US airports where domestic passengers accounted for an estimated 87% of all traffic (584.4 million in the first 9 months of 2018). Therefore, the key question is how one can increase the percentages, whilst ensuring that everyone benefits.
If US airports focus on increasing commercial square footage in prime airport locations with substantial passenger flows and broadening the scope and diversity of commercial programmes based on specific consumer research to become more aligned with the rest of the world, not only will average passenger spending increase, ACI passenger satisfaction scores should also increase.
As importantly, global brands will be able to have the exposure and sales they require to justify the investment and the operators will have higher gross sales on which higher concession fees can be justified and accommodated. The other element is pricing policies. North American airports typically have one of two core pricing policies:
- Street Pricing
- Street Pricing plus 10%
Based on my experience, I believe that if this aspect would be more closely monitored or proactively managed by airport commercial management teams, passenger spending and revenue would increase. Obviously, the customer will make the final decision whether to buy or not. But, based on my research, the “gap” is significantly higher than 10% policy.
The operator’s argument that airports are more expensive than the high street is no different to Geneva, London Heathrow, Changi, Seoul, Melbourne, Abu Dhabi, or Hong Kong International Airport, to name but a few, which generate significantly higher returns from their retail and food and beverage concessions, in addition to having stricter pricing policies and benchmarks.
Note: The general disparity in concession fees between US and international airports is no different than the percentage margin at retail debate in the Middle East versus Asia. In both cases, it is hard to understand that there is a logical or rational argument that supports a 10% to 20% differential in concession fees, or 10% to 15% margin differential at retail for the operators due to global location.
F&B is today’s star in the world of US airport concessions, but retail presents a big opportunity, says Dan Cappell (Los Angeles T1 pictured).
Will the pace of airport privatisation quicken in North America?
Costs to maintain and operate airports have increased substantially in recent years. In addition, the estimated US$100+ billion immediate investment required in North American airports (as reported in the ACI outlook report) is also expected to increase operating and maintenance costs significantly in the coming years.
Total airport debt today exceeds US$90 billion (Fitch Ratings report, Q1 2019) with a growth rate of approximately 4% per annum compared to the forecasted 2.2% growth rate for passenger traffic. Nearly two-thirds of that figure comes from large hub airports with the balance allocated across medium and small hub airports.
Investors are clearly warming to the use of Public Private Partnership models (P3s) for key airport developments. Current US airport P3 projects include the automated people mover at Los Angeles, the Great Hall at Denver and the New York LaGuardia Central Terminal rebuild.
However, there does not yet appear to be a paradigm shift toward privatisation of US airports in their entirety. My view is that this subject will become more critical as US airports require major funding to renovate existing infrastructure and expand capacity to meet the growing numbers of passengers forecast over the next ten years.
In summary, privatisation is still relatively new with regard to US airports today. However, one can see the potential and I would not be surprised to see privatisation becoming a key factor in US airports’ future growth over the next 10-15 years.
What do airports need to do better to lift customer service standards and customer experience?
Perception is reality for the customer, relative to customer service and experience. This is a key challenge for airports both in the United States and worldwide.
US airports take the ACI ASQ quarterly survey results very seriously, and these results are a key driver of goals and operational protocols related to standards. The results that I have viewed in my work at US airports generally identify two areas, Customs and Immigration and TSA (homeland security) that consistently score unsatisfactorily.
Overall, US airports score well in other categories, such as check-in, baggage reclaim, walking distances and friendliness of staff, and many airports have volunteer programmes to assist passengers at every stage of their journey through the airport.
Car rental and car parking consistently deliver high scores, a reflection of their importance to airport business. For example, the relatively new consolidated rental car facility (ConRAC) at Tampa International Airport was designed to facilitate a passenger’s ability to obtain a vehicle and depart the ConRAC within 15 minutes of deplaning their aircraft, provided they have no checked luggage. This facility design and operational protocol provides not only excellent service, but a great customer experience.
This level of operational efficiency is uncommon at international airports. In my experience to date, the food and beverage operators also provide excellent levels of service, and one of the key contributors to this is gratuities.
Associates can earn up to 20% per transaction which can be a powerful motivator. (It would be an interesting project to analyse the difference, if the gratuities were removed).
On the other hand, it appears to me that US airports have a long way to go to meet the standards set by Changi, Incheon, and Hong Kong International airports with respect to providing exceptional customer experience.
As noted earlier, it appears to me that there can be improvement in the customer experience if US airports can address the design, the location of space, and the lack of space for commercial activity, and consider these elements when planning new infrastructure and/or refurbishing existing terminals.
Is food and beverage the future star? What will retail’s role be?
Based on the numbers, it appears that food and beverage is the star today, as it accounts for more than 60% of commercial activity as measured by space, and it delivers an estimated median spend of US$6.29.
Sit down, casual dining and bars account for over 46% of the business with the fast food quick service category accounting for more than 38%. In multiple US airport locations, F&B spend levels could be further increased, by having more seating capacity, particularly at peak hours, more efficient queue management SOPs, and a broader representation of the speciality coffee category.
In my opinion, the speciality coffee category at US airports is undersized relative to the rest of the world. Retail has only one way to go. The limited availability of speciality retail, the saturation of news and gifts outlets selling the same ranges of goods, and minimal duty free offerings compared to the rest of the world, all suggest that retail could be the star going forward. Link this to the evolution of ecommerce and online retail, and the opportunities for retail are unlimited.
US airports are making great progress. The international terminal at Dallas/Fort Worth, the new commercial concessions programme at Tampa, and the international departure hall at Los Angeles have all implemented commercial concession programmes that are aligned to improving the customer experience and spending and revenue returns.
It will take time to ensure that there is consistent application of the concession planning approach, but the opportunity is huge and will allow all parties to benefit. On a personal note, I could not be in a better place to help deliver the increased opportunities for passenger spending, revenue returns, and improved customer satisfaction.
Dan Cappell has over 28 years’ experience in executive management positions with international brands, global duty free retailers and two airport authorities. He is a Director at Leigh Fisher, a wholly owned subsidiary of Jacobs, working in the firm’s Commercial Advisory practice, specialising in concessions, development of business models and strategic plans.
He is currently providing executive level advisory support to Baltimore Washington International Airport and Ontario International Airport.
Previously Cappell was acting Chief Commercial Officer for Abu Dhabi Airports, where he led the concessions strategy for the new 720,000sq m Midfield Terminal and its 23,000sq m of commercial space. He also had responsibility for managing all aeronautical and non-aeronautical businesses at Abu Dhabi International Airport.
The Moodie Davitt Report • The Online Magazine • March 2019