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NEWS Last modified on February 19, 2015

BLOG: Focus on your key capabilities or risk being left behind

New report highlights increasing pressure on airports to deliver profits in spite of the growing complexities of the business.

Today’s airports, whether they are managed by public or private entities,are increasingly complex operations that labour under an extraordinary range of demands.

Increasing service expectations (from both passengers and airlines), regulator-imposed constraints, and the need to fulfill a public development role mean airports are continually challenged in a drive for efficiency, service quality, and passenger growth. Operators increasingly have to do all this while meeting the financial return expectations of investors.

Benchmarking operating cost performance across airports can be a valuable tool in the quest for efficiency. However, the analysis needs to account for the inherent differences in airports’ operating environments. 

This adjustment can be done by breaking cost driver into four groups using our ISSR framework: inherent, structural, systemic, and realised costs.

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Inherent costs, which are determined by the nature and design of the airport and the industry itself, are strategically critical issues that have a significant impact on costs but are often outside the near and medium-term control of management.

Structural costs are determined by the type of business the airport engages in and how it provides its services and products – for instance, the mix of airlines served by the airport, and the extent to which it maintains its own staff versus outsourcing different activities and operations.

Systemic costs involve the organisation, processes, policies, and infrastructure the airport uses to manage its product and service delivery— i.e. people management processes, overhead, and the technologies that support the business.

Finally, realised costs are a function of how well the airport handles its operation and work practices. Management can do something about all of these costs in the long run, though the near and medium-term opportunities are generally found through a focus on systemic and realised costs.

We recently conducted a study across a number of European airports, using readily available public data (see exhibit 4 below).

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When adjusted for circumstantial factors (inherent and structural costs), airport efficiency (as measured by operating expenses per passenger) varies considerably from a low of £5.6  pounds per passenger (EDI) to a high of an operating cost of £17.8 per passenger at (VIE).

Despite these differences in cost performance, we’ve found there is a clear path for airports towards efficiency improvement.

Operators need to invest in a small number of vital capabilities that are critical to their market success, and reduce or eliminate their spending in areas that aren’t differentiating from the perspective of passengers and airlines.

An airport looking for ways to lower its operating cost must start with an understanding of its essential capabilities that allow it to perform certain activities better than others.

These capabilities may range from value-added passenger services to shorter minimum connection times, from deep passenger insights to retail services, or from the digitisation of the passenger experience to regulatory engagement.

Few airports have the need or the ability to do all these well. In fact, successful organizations of all types typically concentrate their investments on three to six capabilities that allow them to meet their strategic objectives.

With this strategic focus, it becomes much easier for airport operators to see which costs are justified — and if there are any activities that can be cut so that investment funds can be redirected into more important areas.

To gain insight into their capabilities, we generally encourage management to organise costs into three groups.

'Lights on' costs include activities and expenditures associated with the basic requirements of an airport’s operation and business – all activities that generally do not differentiate the airport. Here, the focus should be on ensuring they deliver the necessary level of service expected of the industry as efficiently as possible.

'Limited value' costs include activities and expenditures that are neither important to differentiating the airport nor required to operate and function in the industry. Efficiency initiatives should look to challenge the need for these activities — minimising their level or eliminating them altogether.  

'Essential capabilities' costs include activities and expenditures the business willingly takes on in order to differentiate itself — those three to six things the airport does better than any competitor to ensure the uniqueness of its market position. This is the area where investment will produce the greatest return.

In summary, successfully meeting service expectations of regulators, airlines, passengers, and other stakeholders — while optimising operating costs and delivering positive financial returns to increasingly demanding private shareholders — is no easy task.

A critical input is being able to look at comparator and competitor airports in a way that provides a meaningful view of efficiency opportunities. Developing a clear understanding of an airport’s essential capabilities and of the costs that are within management’s control also provides a greater level of focus to efficiency initiatives.

By doing both these things, airport operators are able to create more sustainable, competitive, and profitable operations that deliver on their strategic objectives.

 

About the authors

John Potter, a partner with Strategy& based in London, heads up the firm’s operations practice in Europe.

Andre Medeiros, a principal with Strategy& based in London, focuses on operational improvement and cost transformation issues for frontline service-oriented industries such as airport operators and retail.

This article is drawn from the larger study, Airport Operators’ Quest for Effiency: How airports can focus operational improvement efforts on their addressable drivers of cost, which can be seen here.

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