Factors that influence performance of an airport

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The financial performance of an airport is dependent upon factors such as traffic growth, capacity, competition, financial health, revenue streams, employment, ownership, regulatory environment, relationship with the airlines and co-operation within the airline industry.

Key issues answered through this analysis:

1. What are the different factors that impact the performance of an airport?

Factors influencing performance of an airport

The financial performance of an airport is impacted by factors such as:

Location - Traffic growth is directly correlated to the revenue generation potential of an airport, as increased traffic growth leads to higher aeronautical as well as non-aeronautical revenues. Traffic growth depends on increasing business activity and the development of tourism in regions around an airport. The location of an airport in the city is also a key determinant of transit passengers and cargo traffic.

Congestion - The overall air traffic globally is expected to grow rapidly over the next few years. According to the Airports Council International (ACI), a shortfall in capacity of nearly one billion passengers is expected as of 2020. The surge in air traffic affects the time taken at check-in counters, baggage screening and delivery, entry/exit from the aircraft to the terminal building, immigration counters, customs services, and car parking. Traffic growth is a key determinant of the quality of service at an airport. Airports witnessing rapid growth in traffic need to invest considerably in infrastructure so as to maintain customer satisfaction levels.

Capacity expansion - As passenger traffic increases, airports need to invest in new infrastructure to maintain the quality of services. As per global estimates, airports will have to invest about $30 billion over the next 15 years globally to effectively handle passenger traffic. In India, the government plans to invest about $15 billion for expanding airport infrastructure at existing airports and building new ones.

In many countries, it is difficult to expand the existing infrastructure or build greenfield airports on account of political, regulatory and environmental oppositions. At the planning stage, airports need to be planned effectively for the long term to ensure modular expansion capabilities at lower costs.

Competition - Airports compete with each other for increased passenger and cargo traffic, especially with the emergence of low-cost carriers and increased cargo movement. Airports with a higher percentage of transit passengers can lure more airlines or passengers. Moreover, there can also be competition between airports in the same city or close to each other. Rising competition will force airports to lower their charges in order to increase passenger traffic, leading to an erosion in their profit margins. In certain situations, an increase in traffic may not be able to offset lower ticket charges, especially for airports which operate at close to full capacity and need to invest more to expand infrastructure. Airports also face competition from alternative modes like railways and road transport.

Relations with airline companies - Since airline companies are significant, not just as customers, but also influencers in the aviation industry, airports need to maintain a healthy relationship with them. Also, airports cater to all categories of airlines - low cost carriers (LCCs) and full-service carriers (FSCs). This helps airports to provide acceptable solutions through negotiations with airline companies. Airports need to be flexible with the airline companies in terms of charges and fees, as the fragile financial position of the latter can affect customer services. In addition, consolidation in the airlines industry can impact flight capacities. Besides, there can also be situations where existing airlines seek to restrict expansion plans to grab market share, through code-sharing agreements.

Increase in urbanisation - The rapid increase in urbanisation in recent years has put airport infrastructure and services under severe strain globally. The objective of the US Airport Improvement Programme (AIP) is to ensure accessible, safe, affordable, quick, comfortable, reliable and sustainable travel for all passengers. Further, a rapid growth in the country's economy and population will result in higher passenger traffic, which will exert additional pressure on existing airport infrastructure facilities.

Regulatory Environment - The Airports Economic Regulatory Authority (AERA), the new regulator for airports in India, is responsible for creating a level-playing field and fostering healthy competition among all major airports, encouraging investment for building new airport infrastructure, regulating tariffs of aeronautical services, protecting the interest of fliers and operating efficient and economically viable airports. Airports Authority of India (AAI) ensures the creation, upgradation, maintenance and management of civil aviation infrastructure both on the ground and air space.

Financial availability and investments - Development of airport infrastructure is capital intensive and is characterised by long gestation periods. With the civil aviation industry growing rapidly, the requirement for airports and funds for building the same have increased. If investments do not keep pace with airport development plans, it may delay execution, escalate costs and lead to congestion at existing airports. Private players have contributed to the development of few major metro airports and their participation will be important going forward. Once the necessary funds are linked to airport infrastructure needs, long-term concerns with regards to investments can also be addressed.

Others - The government's Infrastructure Development Fund (RIDF) upgrades regional infrastructure to enhance operations at airports via land and connect road infrastructure to airports. This, along with liberal government regulations, will encourage development of airports, provision of quality services and will increasingly attract passenger and freight traffic. Thus, well-developed infrastructure and higher passenger traffic will lead to higher revenues for airport infrastructure players.

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