The Analyst

Competition and disruption comes to airports worldwide

Ivo Favotto, a Sydney-based executive and company owner who has worked for all three stakeholders in the Trinity chain, outlines the multiple challenges faced by airports and how they must respond to the disruption and competitive threats of the modern, digitally enabled world.

Airlines the world over like to paint airports as evil monopolists trying to steal their last penny of profitability while those same airlines have few pennies of profitability to give anyway, writes Ivo Favotto.

Notwithstanding some good years every now and then, airlines (as a collective group) have a long history as destroyers of shareholder value – mostly by unsustainably reducing prices to win market share. There are of course some notable airline exceptions to this tactic.

Airports and airlines seem to be locked in a perpetual argument over the level and structure of aeronautical charges. And competition regulators are forever trying to referee, seeking to determine what is a ‘fair’ rate of return for airports to make while airlines (and their industry associations) are forever grumbling about the ‘unfairness’ of the process, highlighting the proportion that airport charges contribute to airline costs.

And yet over in travel retail land, we wonder why airports and airlines don’t just play nice and share data to better extract more shopping dollars from consumers?

Quaternity – sounds good, more difficult in practice

How hard has it been for travel retail’s Trinity concept (where airports, retailer and brands supposedly cooperate to grow the market) to get traction amid perpetual debates about the appropriateness (or not) of Minimum Annual Guarantee Structures and levels? The Moodie Davitt Report’s Trinity Forum concept is now in its 17th year and while an undoubted success as a Forum, the level of cooperation between the Trinity often falls well short of the ideal – evidenced by the fact that we are still talking about it 17 years on.

Imagine how hard it will be for a Quaternity (Trinity + airlines) to succeed in the context of the often (but not always) challenging relationship between airports and airlines over aero charges. Earlier this month during The Moodie Davitt Report’s Virtual Travel Retail Expo, there was call after call from speakers and attendees alike for a Quaternity, for more cooperation and for more data sharing as the key to the salvation of travel retail.

While there are nascent signs of success – just like there was with the Trinity – the Quaternity still has a long, long way to go and an even tougher context to overcome. Which is not to say we should not try – I am just trying to contextualise the challenges.

At the recent Virtual Travel Retail Expo, speakers from across the industry called for airlines to play a deeper role in driving the commercial business

Notwithstanding the impact of the often-adversarial relationship between airports and airlines may have on the potential for more widespread Quaternity cooperation, airports are also under siege from disruptors attacking both aero and non-aero revenue streams.

COVID-19 ranks as the biggest disruptor of air traffic over the past 70 years – that much is self-evident. But less clear is the long-term impact of the rapid acceleration in the uptake – as well as quality and functionality – of video conferencing on business travel. Brands such as Zoom, Microsoft Teams, Skype, Google Meets and a plethora of others are now embedded into our consciousness and everyday habits.

Both IATA and ACI have forecast that it will take until at least 2024 for air travel to reach 2019 levels, but they also argue that it may never reach its previous trajectory due to a potential reduction in business travel now replaced by video conferencing. Airports and airlines now have tech giants as new competitors. They are big, well financed, strong and emboldened by their skyrocketing uptake due to COVID-19.

The value implications for airports from this disruption could be material – though the degree remains uncertain. Investment managers and analysts have been working overtime in recent months, strategising, and analysing multiple scenarios, trying to understand what it all means.

Internet transparency exposes commercial revenues

Not only are some elements of air travel under threat from new competition and disruption, but non-aero revenues are too. Services such as duty free, specialty retail, currency change, car rental, ground transport and car parking all find themselves in the firing line.

Let’s start with duty free. Long gone are the days when people bought things at the airport because they were cheap – with the possible exception of categories that are still duty/excise free, such as liquor and tobacco, as opposed to tax (GST/VAT) free. But even liquor and tobacco are under threat from a confluence of factors including online retailers, lower occupancy costs for off-airport retailers, and increasingly restrictive regulations.

The threat of competition for this critical airport revenue stream has become more real as consumers’ ability to price-check using mobile devices grows. The price transparency impacts of the internet are being felt in the softness of passenger spend rate growth experienced by many airports in multiple countries.

Price transparency is having an acute impact on perceptions of the airport offer

While we have witnessed an explosion of space dedicated to specialty retail at most airports over the past 10-15 years, it too faces the same competitive threat as duty free – online retail and greater price transparency. The challenge of online commerce to airport specialty retail has long been threatened but never really materialised (rather the opposite – airports seemed somewhat immune from the troubles of the domestic market) – until COVID-19 accelerated the growth of online shopping.

In terms of price transparency, there isn’t a week that goes by without a story in the media somewhere in the world appearing in my Google Alert email about rip-off prices in an airport somewhere in the world – it seems a standard go-to for editors on slow news days to get a sensational headline.

Airport specialty retail trades on its convenience factor – airports are places where large volumes of travellers pass through and dwell for a long time and hence represent a convenience place to do some shopping rather than trudging to a mall on your day off.

Currency exchange and car rental revenues challenged

Currency change is also under threat. In my Analyst article on currency change in The Moodie Davitt Report on 21 September, I highlighted that a shift to card and mobile payments, together with online retailers exposing a convenience pricing model at airports, has led to the rivers of cash airports traditionally received from currency change morphing into something more akin to a stream. Currency change outlets will still be located at airports, but it won’t ever be like the good old days.

Car rental revenues are under threat too – particularly at airports with a high proportion of leisure traffic. The share of passengers’ car rental needs being captured by off-airport providers is growing fast, driven by a plethora of value brands (often owned by the big car rental players trying to segment the market themselves).

Airports are turning to new and innovative ways to offer premium services and value to the on-airport providers who pay a big premium for being in such prime locations. Once again, the price transparency of the internet, driven by the emergence of car rental price comparison websites, is putting pressure on the on-airport car rental pricing model. In the face of this competition, it is getting harder and harder for car rental companies to pass-on Premium Location Fees (check your car rental invoice/receipt the next time you rent a car at an airport for this fee) to consumers.

Car rental facilities will of course continue to be offered and provided at airports and will grow strongly but internet-driven disruption is challenging future revenue streams.

It’s the same for ground transport revenues. First there was Uber (and now plenty of others) disrupting the taxi industry and at the same time disrupting the investments made by airports in supporting infrastructure and requiring new and additional supporting facilities. The emergence of lower-cost ride-sharing has also disrupted airport car parking revenues so that for some passengers it may be cheaper to ride-share to and from the airport than pay airport parking prices.

Disruption is coming to every aspect of the business, with currency exchange and car parking and rental under severe pressure

And the rise of the now ubiquitous mobile phone has made timing airport pick-up runs an exercise in just-in-time perfection, avoiding the need for parking. Airports are now providing often free (sometimes pay-per-use) waiting lots – called cell lots in the US.

Car parking revenues have long been disrupted by over-the-fence park-and-ride style providers although airports have – by and large – been able to overcome this threat through the utilisation of online booking tools which has given them access to more precise and fine-tuned market segmentation techniques.

Airports need to audit and assess their revenue resilience with some urgency and build up their management and advisory capabilities to react quickly to change

However, a new – and potentially much bigger – threat facing airport car parking revenues is automated vehicles. What seemed like fantasy when David Hasselhoff played Michael Knight remotely summoning his car KITT in the 1980s television series Knight Rider seems much closer to reality nearly 40 years later. If you listen to Tesla’s Elon Musk, the Autopilot functionality in their all-electric vehicles will be ready to be switched on in the not too distant future.

An automated vehicle may soon be able to find its way home to your own garage rather than parking in the airport’s much more expensive garage. Airports are thinking hard about whether to invest in car parking assets already.

Rising to the disruption and competitive challenges of the modern, digitally enabled world

Now, I am not asking you to cry me a river for airports – in normal times most of the larger passenger airports around the world are still making good money and finding new ways to deal with and respond to competition and disruption. They are big boys and girls that don’t need me to defend them and remain strong businesses and good investments.

But at the same time, the pace of change and disruption is speeding up in the airports sector. With huge and largely fixed capital assets, airports cannot always change course so quickly. Huge volumes of capital get invested in providing airport infrastructure. That capital investment is illiquid and immobile and needs to be serviced with interest payments or dividends, just like any other investment or business.

They are under assault from multiple disruptors across multiple revenue streams, just like other businesses. Airports need to audit and assess their revenue resilience with some urgency and build up their management and advisory capabilities to react quickly to change.

In this context, it should not be surprising when an airport reminds the travel retail industry that they are not a “lender of last resort” [Heathrow Airport Retail Director Fraser Brown -Ed] or that “airports are not the bad guys”. Airports are not the monopolistic businesses that they may have been decades ago. Rather, they are complex commercial organisations rising to the disruption and competitive challenges of the modern, digitally enabled world. They can and do work in close partnership with travel retailers and brands.

Lots of trinities across many industries wobble when they are under competitive assault and a crisis such as COVID-19 turns the discussion onto the distribution of the pie, rather than growing it. The travel retail Trinity is no different.

*Ivo Favotto owns and runs The Mercurius Group, a consultancy focused on industry research, consultancy and benchmarking studies, as well as operating his own destination merchandise supply business.

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The Moodie Davitt eZine Issue 286 | 16 November 2020

The Moodie Davitt eZine is published 15 times per year by The Moodie Davitt Report (Moodie International Ltd). © All material is copyright and cannot be reproduced without the permission of the Publisher. To find out more visit and to subscribe, please e-mail

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