"Pilots take no special joy in walking. Pilots like flying." - Neil Armstrong
What are Airport charges, and how are they formed and determined?
Written by: Dean Boljunčić.
Many times, with insufficiently informed sources, we can read that an individual airport is extremely and unrealistically expensive for airlines or that its services are more expensive than another and therefore not even attractive to airlines.
But is that really so?
Let’s start with some basic knowledge, what exactly are Airport Charges?
In general, each airport has, in principle, two large groups of revenue:
When we talk about Airport charges, it must be clarified that this is NOT about the Handling charges, but about the basic prices of using the airport infrastructure. We most often distinguish the following Aviation fees:
Passenger service charge
Security service charge
Landing and Take Off charge (LTO)
Aircraft parking fees
In addition, there are sometimes fees for the use of common infrastructure (Centralize infrastructure charge), the use of 400 Hz of electricity on the platform etc.
The first three charges are considered as the Passenger related charges group, and the other two as Airplane related charges.
Together, these fees constitute total Aviation revenue.
At larger airports, Handling is performed by external companies specializing in the provision of handling services or the airline itself, while at smaller airports, the airports perform themselves Handling services.
Namely, according to EU regulations, any airport with an annual traffic of more than 2 million passengers or 50,000 tons of Cargo, must open the possibility for an external specialized company to perform Handling services.
As mentioned above, there are two basic groups of airport revenues and accordingly, airports can harmonize their financial operations with the two most common financial regulations:
Single till - indicates only one joint financial account for both types of income and financial flows between Aviation and Non-Aviation income are allowed.
Dual till - indicates two separate financial accounts and financial flows between Aviation and Non-Aviation revenues are not allowed.
Both types of regulations have their advantages and disadvantages, but in principle smaller airports choose Single till regulation, which allows them to offer extremely low Aviation fees and which are themselves below cost-effectiveness, but they are therefore aware that can generate high revenues from other commercial activities (shops, cafes, restaurants, parking, advertisements, renting space, etc.) and thus cover the negative balance of low fees and make a profit overall. With this approach, smaller airports have great flexibility in negotiating with airlines.
One of the major disadvantages of Single till regulation is that airlines can be often asked for a percentage of Non-Aviation revenue under the argument that airlines insure passengers, and therefore are entitled to a certain percentage of Non-Aviation revenue as well. Small airports that depend on aggressive low-cost airlines, find it difficult to protect their Non-Aviation revenues and often agree to share their Non-Aviation revenues with airlines.
Dual till regulation has the great advantage of protecting their Non-Aviation revenues, but it does not have as much flexibility in defining pricing and fee strategies. One interesting thing about airports that have a large number of departing passengers is that about 70% of the profit is realized from the car parking fee, while the highest revenues from are coming from Aviation fees, but Aviation costs are extremely high, so Aviation profit is often measured in single-digit percentages (often up to 5%).
Regardless of the financial regulations chosen by individual airports, in both cases it is advisable to develop a strategic package of measures or incentives to reduce risk and encourage airlines to introduce new routes or add frequencies on existing one.
Such incentives are called Incentives and are usually formed over a period of 3 years, because it is generally believed that when introducing a new route, if after 3 years a particular route is not profitable, it will not become so (PSO routes are an exception).
Incentives can be based on a certain percentage of reduced passenger service fee, reduced or complete exemption of aircraft landing and take-off fee (LTO), as well as a combination thereof. Of course if the airport also provides handling services, flexibility and the possibility of fees becoming extremely attractive becomes even higher.
The development of the strategy, available tools and the process of developing new routes, I will try to explain in more detail in some future article.
In order to return to the topic and explain the course of formation of fees, it is first and foremost necessary to know your own costs of using the infrastructure, including the costs of key personnel. Without these detailed data, any definition of compensation makes no sense. For airports with more than 5 million passengers, this is almost impossible, because during the consultation with its users, detailed actual costs of the airport infrastructure, and thus the expected annual profit, must be shown and presented.
Namely, airports with more than 5 million passengers according to EC regulations must go through a consultation process for setting up their Airport charges.
When estimating your own Aviation costs, future investments need to be considered in order to improve or maintain the quality of infrastructure use. All of this together makes up the cost of using the airport infrastructure.
For instance, an airport that has "air bridges", for example, has higher costs than an airport that does not have air bridges, so it is realistic to expect higher fees also.
In Amsterdam, for example, airlines can choose whether they want "connected handling", which means using an air bridge or "disconnected handling", or without using an air bridge. In this case, the landing and taking off charge with connected handling is as much as 25% higher than disconnected handling.
In line with all of the above, airports with higher costs also have higher charges.
In the case of Single till regulation, it is necessary to know the actual costs of Non-Aviation revenues, and expected revenues and profits, in order to define the strategy for defining fees or determine the lowest possible level of Aviation fees, so that together with Non-Aviation revenues airports can generate profit . How big, it stays on the strategy of an individual airport, taking into account all the business risk.
The development and planning of the Airport Price List is an extremely complex task, which requires a thorough knowledge of own costs and projections of planned revenues.
For this reason, it is extremely important to develop a basic strategy for positioning your airport in the market, determine the desired strategy and direction of development, and according to these guidelines to plan future costs and expected revenues, and thus determine your future Airport charges and incentives.