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OTHER ARTICLES Last modified on November 15, 2009

Thinking outside the box

Diversification, differentiation and innovation offer airports strategies for success in today’s world, writes David Feldman.

The airports business used to be simple. Only a few things really seemed to matter: grow traffic, capture market share, and keep the politicians happy. It was the combination of these three things that kept the industry going – and kept airport CEOs in their jobs.

But these old rules no longer apply in the airport world. Competition between airports has become stiffer, and market share can no longer be taken for granted. Neither can traffic growth, especially in challenging economic times when both business and leisure travel are taking heavy hits.

In the future, the impacts of growing competition and declining traffic are likely to challenge airports in different regions around the globe, from fast-growing hubs in the Gulf to retrenching hubs and regional airports in Europe and North America.

In order to be among the winners, airport CEOs will need to define new strategies, develop new business models and adopt new value propositions for their airports. They will need to put the right teams in place who buy into the new strategies and execute them flawlessly.

Most importantly, they must keep in view a strategy for long-term, sustainable success and not simply react to today’s or tomorrow’s crisis. In my company’s (Exambela) experience, working closely with different airports around the world, we have observed that the most successful strategies go beyond simply reflecting the needs of customers and delivering a sufficient return to investors or other stakeholders.

To adapt and thrive in this new world, airports will need to embrace three crucial tenets: diversify, differentiate and innovate.

New business models
The combination of thriving competition between airports and hard economic times means that many of the business models that have been the bedrock of airport growth over the past 20 years no longer apply and cannot be counted on for success.

The airport industry is likely to see even more casualties in the years ahead, especially if airports continue to cling to outdated business models as they struggle to keep pace with industry and economic changes.

However, a handful of business models have proved to be especially well adapted to today’s competitive and economic environment, and several others are emerging as promising, as shown in Figure 1. 

Some of these business models, such as alliance anchor hubs and ‘airport city’ development, have been successful for some airports for several years. But not every airport can attract 50 million passengers per year, and so an airport company must carefully construct and adopt the business model that plays to its airport’s own unique strengths and markets.

New business models have been developed to reflect changing market dynamics. For example, the business model successfully built upon airport retailing developed by BAA in the 1990s at Heathrow is no longer the cash cow it was, due to increased competition along with security regulations restricting liquids on board aircraft.

BAA’s focus now appears to be the profitable management of multiple, long-term construction sites at its airports. In effect, BAA has become less and less an airport operator, but more of a construction manager at Heathrow.

‘Do what others cannot’ is another viable business model adopted by some airports to fill gaps in the competition’s service offerings. For instance, Cologne/Bonn provides 24-hour operations, allowing it to be one of Europe’s few night hubs for express cargo operators.

In the London area, both Farnborough Airport and Biggin Hill have turned a traditional liability – their remote locations – into a competitive advantage. They have been successful with London’s strong business jet market, providing the quality, flexible service demanded by this segment that extreme congestion makes impossible at London’s larger, closer-in airports.

Helsinki-Vantaa provides another example of this strategy. Whilst it has neither a large local population to draw on nor the tourist appeal of some other European capitals, it does have astrategic geographic advantage. Flight times between Europe and Asia are faster via Helsinki than via Europe’s more central hubs or the Gulf airports. Combining its strategic location with shorter transit times due to its medium-sized, efficient terminal, Helsinki has created a genuine competitive advantage as a medium-sized connecting hub.

London City Airport has pursued a different strategy and developed into a one-of-a-kind niche airport. Offering its target market the fastest passenger processing times of any airport in London, its competition is not so much those other airports, but rather conference calls or high-speed trains. Its business model is not based on stealing share from other airports as much as it is on making air travel convenient enough to entice the businessperson who has other alternatives.

Finally, airports are becoming more and more ‘virtual’, as activities such as check-in, shopping, pre-ordering and purchasing of customised services (parking, lounge access, for example) take place outside of the physical airport itself.

Low-cost carrier Volaris Airlines in Mexico City has pushed this concept even further, developing a city terminal located in a shopping mall in which passengers complete check-in formalities. They are then bussed to Toluca Airport 60 kilometres away to actually enplane.

Abu Dhabi-based Etihad Airways has a similar service, with luxury coaches allowing it to expand its catchment area into Dubai.

Whilst these examples have been developed by airlines, these ‘virtual’ services could also be developed by airports themselves in the form of revamped ‘city terminals’ that had been popular in the air transport industry some years ago.

Some of the smaller, out-of-the-way European airports that are LCC bases provide profitable shuttle services into larger cities to counter the operating losses at the airport.

The keys to success
Each airport is unique, and there is no single template for success. However, in developing strategies for airports around the world, Exambela, has observed that many of the most successful new business models follow a three-pronged mandate to diversify, differentiate and innovate.

Diversification is a key element for any airport’s strategy, and an over-reliance on a single revenue source without a sense of underlying customer needs has been responsible for some of the industry’s recent casualties. For example, Brussels Airport saw the majority of its traffic disappear in 2001 when the hub airline Sabena went bust. Dead centre between Europe’s busiest airports – Heathrow, Frankfurt, Paris CDG and Amsterdam – Brussels had little chance of competing with the giants outside of its narrow geographic scope.

However, under new ownership and new management that joined the airport in 2005, the airport developed a strategy that was no longer based on imitating the ‘big guys’. Instead it was based on transforming Brussels into a highly efficient, mid-sized European gateway. A key element of this strategy included diversifying its carrier base beyond the national airline SN Brussels, to include international flag carriers and a mix of low-cost carriers, for which the airport is building a dedicated facility.

Nice Côte d’Azur Airport, along with its subsidiary Cannes-Mandelieu Airport, provides another example. These airports’ combined flights are divided roughly evenly – a third each – among Air France and other network carriers, low-cost carriers and business jets. Each segment has very different market dynamics from the others, allowing the airport company to be better able to weather bad times.

Athens also has successfully diversified its revenue sources as a core part of its strategy, not only in the form of actively marketing to new airlines for aeronautical revenues but also inthe form of ‘magnet store’ retailing on the airport site for non-aeronautical revenues.

By bringing in giant warehouse-size retail centres in a location that provides easy access and easy parking – nearly impossible in downtown Athens – Athens International Airport has become a destination of choice for Athenians to buy washing machines and living room furniture, providing a unique and valuable source of profits for the airport.

In Asia, Singapore Changi, whose primary business model is to be an ‘alliance anchor hub’ for Singapore Airlines and Star Alliance, has also pursued an international strategy to make it less dependent on traffic at its home airport. Through subsidiary Changi Airports International (CAI), the airport owns or manages airport activities around the world.

Differentiation is a frequently overlooked element in most airports’ long-term strategic plans. Sadly, too many airports, whether a hub airport in Europe or a regional airport in Asia, look and feel the same. However, in an age of increasing customer centricity, creating a unique value proposition has become more important than ever.

The airport value proposition now must go far beyond simply impressive architecture, to address how customers experience the airport asset and so create the ‘airport as a destination’. Customers, whether they are airlines, passengers, concessionaires or other businesses operating from the airport, must be given a reason to choose one airport over another, perhaps even over an airport closer by.

Successful examples of this strategy include the hotel doorman at London City Airport, a Turkish bazaar in the centre of Istanbul Atatürk Airport and a butterfly garden in Terminal 3 at Singapore Changi.

Creating a differentiated sense of uniqueness that reflects the local culture is also a key part of Vancouver Airports Services’ strategy when it bids for airports around the world, and it is a key driver of Vancouver Airport’s consistently high customer service ratings.

An emerging area of potential differentiation is environmental strategy. For instance, LFV, the operator of 16 airports in Sweden, was one of the first to recognise the importance of the environmental sensitivities at airports and is believed to be the first airport company in the world – as well as the first major Swedish company – to become climate-neutral in terms of greenhouse gases.

Innovation is the final element essential for newly successful airport business models. A culture of innovation allows an airport to stay ahead of the curve and anticipate future trends. As today’s markets and customer needs evolve, an inflexible adherence to what worked in the past can be a death sentence.

Successful innovation requires ‘out of the box’ thinking. In truth, the basics of the airport business have not changed much over the past 30 years. An airport is essentially a big box (sometimes a fancy new box, and sometimes an outdated old box) that people enter through one end, engage in various activities inside (check-in, seat assignment, security, for example), and then exit at the other end to board the plane.

Improvements in the speed and efficiency of these standard procedures and processes often have been offset by the need for new or more complicated processes (for example, security). Most of the examples of innovation at airports have been invisible to customer (such as improved air traffic control systems) or havebeen initiated by the airlines rather than by the airport (such as web-based check-in).

The airport world does offer a few examples, however, of genuine innovative thinking. For example, Swedish airport operator LFV has been particularly bold in developing new revenue sources, such as advertising billboards on control towers and ‘check-in shops’ where passenger complete check-in at a retail setting, as shown in Figure 2.

In terms of innovation and customer interface, Nice Côte d’Azur Airport has introduced a Club Airport Premier for frequent flyers at the airport. This loyalty programme offers a range of value-added services, including biometric technology to speed passengers through the airport.

Exambela recently asked the leaders of 22 European airports to identify which other European airports they thought were ‘best in class’ in terms of innovation. The results are surprising (see Figure 3 above).

Interestingly, none of Europe’s largest airport companies – AENA, BAA, Aéroports de Paris or Fraport – are perceived as ‘innovation leaders’. In the eyes of European airport management, the industry’s clear innovation leaders are mid-sized European hubs, in particular Amsterdam and Munich.

Munich Airport is a successful major European airport that has sought to make innovation part of its core culture. Indeed, it has a dedicated innovation team with an innovation budget. This team has been responsible for the various value-creating projects at the airport, including customer-facing products such as the MUC Card, the Winter Market and ‘Shop in the Box’. It also has been responsible for back-office innovation by using biofuels for ground service equipment and ramp process improvements.

Implications for airport leaders
The airport world continues to evolve, and airports – and their management teams – must also evolve to survive and thrive. All types of airports in all regions around the world will be affected, whether they are hubs, regional airports or low-cost airline bases.

In order to ensure its place among the winners, an airport must be able to define a unique, compelling business model that reflects the requirements of customers and other stakeholders at the gateway. However, especially in times of distress, it is all too easy to get caught up in the immediate crisis and lose sight of the long-term vision and goals that must be the basis for any long-term, viable strategy. Those airports that can diversify, differentiate and innovate in their service offerings and value propositions will emerge from the current turmoil in stronger positions to succeed. In order to do so, airport CEOs must first make sure they have the right team in place, with the right objectives so that they can define and ultimately implement a sustainable and successful strategy. An innovative strategy is no good if it doesn’t have the people behind it who can make it work.

In this new era, being an airport CEO isn’t what it used to be.

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