Non-aeronautical revenues: Diversify and grow
ACI World’s vice president of economics, Patrick Lucas, considers the importance of non-aeronautical revenue to airports and how diversifying activities can boost the bottom line.
From a bare-bones perspective, aeronautical and non-aeronautical activity provide airports with their two main sources of revenue, with the latter significantly growing in importance over the past few decades as airports have become more commercially aware and developed the non-aviation related side of their businesses.
Aeronautical activity has historically accounted for the bulk of airport revenue across the globe.
Indeed, during pre-pandemic times (2019), aeronautical income typically accounted for 54% of all revenues and non-aeronautical activities for 40%.
However, many larger Asian and Middle Eastern airports with high levels of international passenger traffic have more than 50% of their revenues attributed to non-aero revenues prior to the pandemic.
As we all know, aeronautical revenue is based on charges levied on passengers, aircraft, security and for terminal rentals, and non-aeronautical income is essentially revenue generated from retail concessions, duty free, car parking, real estate income, and food and beverage, among others.
Since airports are businesses in their-own-right, diversifying their portfolio of activities – beyond the provision of infrastructure to airlines – by offering passengers, customers and local business communities a wide range of services, is a key axiom in this endeavour.
Consequently, revenue sources on the commercial side of the airport business (i.e., non-aeronautical revenues) tend to be more diverse than traditional aeronautical revenue streams.
In normal times, these non-aeronautical revenues constitute a vital component of an airport’s income statement and of its resulting bottom line. Such sources of revenue also tend to generate higher net profit margins than aeronautical revenues.
Not only do non-aeronautical sources of revenue provide diversification of airport income streams but they also serve as an additional cushion during economic downturns. This is true for most shocks, but the scale of the COVID-19 pandemic and resulting travel restrictions made the COVID-19 outbreak a crisis like no other.
Non-aeronautical revenue may be derived from rents charged to concessionaires offering a wide range of services to passengers, including car parks within the airport boundary, retail, banking, advertising, and car rental facilities on the airport site.
It also includes revenue from office and building accommodations on airport land in the form of leases. Other minor sources of non-aeronautical revenue may include various charges, such as those for third-party employee security passes, pass-through charges for utilities consumption or access charges for public transport operators.
All sources of non-aeronautical revenues understandably decreased in 2020 compared with 2019. Sources directly affected by passenger volumes suffered the most. Retail concessions (-65.2%), aviation catering services (-64.1%), food and beverage (-53.1%), and car parking (-48.9%) saw the most severe declines in revenues in 2020. Property and real estate revenues (-12.0%) were the most resilient with the lowest decline (see Chart 1).
Chart 1: Year over year % change in selected non-aeronautical revenues (2020/2019)
Chart 2 provides the global distributional breakdown of non-aeronautical revenue by source. Though retail concessions revenue was the largest source of non-aeronautical revenue for airports in 2019 (26.4%), the significant drop in passenger traffic brought down its share by almost 10 percentage points in 2020 to 16.8% of the total non-aeronautical revenue, only the third largest source.
Meanwhile, with greater immunity from the traffic decline – property revenue/rent – recorded the biggest share in non-aeronautical revenue in 2020, up 9.7 percentage points, reaching 24.9%. The second largest source of non-aeronautical revenue was car parking with a 19.1% share in 2020.
Minimising the impact of traffic risk through revenue diversification
A long-standing principle of financial portfolio management always aims to minimise downside risk through diversification. This rings true especially in light of the lessons learned from the pandemic.
With many revenue sources directly linked to passenger throughput, airport operators are looking at ways to diversify their revenue streams. One area is related to the existing real estate and property assets that airports occupy that are unrelated to the travelling public.
While airports are an integral part of the aviation ecosystem, they are also strategic partners in the local communities and cities they serve. Airport real estate is very much linked to the Airport Cities concept. Thus, real estate can be commercially developed in various forms – offices, hotels, entertainment and conference centres, shopping outlets and cargo/logistics facilities are just a few among an array of applications.
The development of commercial uses aimed at enhancing urban mobility and achieving sustainability targets – Electric Vertical Take-off and Landing (eVTOL) – is also growing in importance, especially in jurisdictions where ground access to airports is limited by congestion.
Chart 2: Distribution of non-aeronautical revenue by source (2020 vs. 2019)
** Car parking revenue includes revenue from airport-operated parking lots and car parking concessions revenue
*** Other non-aeronautical revenue includes revenue from other unspecified concessions, revenue from other unspecified activities undertaken by an airport and other unspecified non-aeronautical activities.
N.B. The distribution excludes ground handling concession revenue
Source: ACI 2022 Airport Key Performance Indicators.
Depending on the circumstance, airports may run such facilities and activities themselves or they may have a fixed lease with different service providers. A fixed lease may also be independent of the number of customers that are attracted to those respective businesses.
The main thinking is that the structure of these revenue sources tend to be shielded from the traditional aeronautical businesses linked to airport passenger traffic.
Enhancing customer experience to boost revenues
Many airport operators are moving towards the experiential philosophy to develop authentic customer experiences. This could be linked to a brand or service at the airport or the cultural happenings where the airport is located.
With non-aeronautical revenues being linked primarily to passenger traffic historically, previous research has shown that an increase of 1% in the global passenger satisfaction mean, as defined by the Airport Service Quality (ASQ) Survey, generates on average a 1.5% growth in non-aeronautical revenue in the broadest terms.
In other words, creating a seamless and memorable experience for passengers is also linked to a more than proportional increase in revenues and propensity to spend.
Wider use and deployment of digital technologies and e-commerce platforms that allow passengers to customise their journey are fundamental in developing non-aeronautical revenue streams by making it easy to make transactions before even entering an airport.
The use of advanced processing has definitely sped up amidst the pandemic permitting smoother processes.
Leveraging biometrics, big data, customs controls, baggage handling, and tracking has allowed airports and their partners to create a seamless journey for passengers and to minimise bottlenecks at various checkpoints. Thus, interactive and collaborative decision making allows all partners, including airport operators, to benefit from potential revenue gains by focusing on passenger needs.
Policy levers that broaden consumer choice – on-arrival duty and tax-free sales at airports
Enhancing customer experience also means expanding customer choice. Fostering the development of on-arrival duty and tax-free sales at airports is an opportunity to continue solidifying retail concession revenues, to diversify activities, and to broaden the scope of activities that duty and tax-free operators can undertake at airports.
Airport duty and tax-free shopping on arrival is now an established practice on most continents across the globe and is especially prevalent in the Asia-Pacific, Latin America-Caribbean and Middle East regions, as well as in many European countries that are not part of the European Union (EU).
More than 45 countries have already instituted the concept of on-arrival duty and tax-free shopping, including some of the largest aviation markets in the world – Australia, Brazil, China, Japan, India, Indonesia, Thailand, Turkey, and the United Arab Emirates. However, European and North American jurisdictions have been slow in embracing the concept.
Duty and tax-free shopping on arrival will require legislative elements to be amended to bring airports in these regions in line with global industry practice. For instance, in the context of the EU, changes to EU legislation should be considered to facilitate this form of commerce — namely, the Excise Duty and VAT Directives.
Purchases at arrivals duty and tax-free have minimal impact on domestic sales of products, as they merely substitute for products that would have been bought at the airport of departure. Subsequently, there is minimal impact on government tax revenue, and no increase in the number of products entering the market as travellers’ duty-free allowances remain the same for on-arrival duty and tax-free at airports in a given jurisdiction.
Duty-free on arrival will not in any way impact passengers’ right to purchase on departure, as they will simply have the choice to either buy on departure or arrival. That said, the spend propensity increases. Experience from across the globe has shown that duty-free on arrival can improve spend per passenger by 20-30% on average. In summary, there are number of opportunities that airport operators and their partners could seize to make their businesses more resilient to a downturn. This frequently translates into revenue diversification in areas beyond the traditional aeronautical sources.
There are also important benefits that governments need to consider in the context of reforming certain tax legislation – facilitating on-arrival duty and tax-free is a means to not only support airports and airport retailers in the recovery period, but it also ensures a multiplier effect through wealth and job creation across local communities from such expanded operations.
For more information:
The 2022 edition of the ACI Airport Economics Report presents the first in-depth global analysis of how the pandemic has affected airport industry revenues (aeronautical and non-aeronautical) by source, costs (operating and capital), and related trends across the globe and over time. The 2022 Airport Key Performance Indicators provide insight into how the pandemic has affected areas such as financial and employee performance, fixed-asset productivity, and airport operations.