IATA – How will airport alliances and buyouts affect airlines?

Since the 1990s a continual shift towards airport privatization has seen more gateways forming alliances or being taken over by international multi-airport groups.

The benefits of airport consolidation are different from those of consolidation in the airline sector, however. They are driven by other factors, taking place in different ways and at different speeds.

“Airport alliances are not being driven by the same economic forces as airline alliances,” says Peter Forsyth, Professor of Economics at Monash University in Australia. “The key motivation for airline alliances or mergers is to obtain network benefits or economies of scale, and therefore an increased market power.”

Forsyth believes that the principal motivation for airport integration appears to be increased coordination and the transfer of expertise between partners.

Vertical integration

Replication of carrier tie-ups appears to offer the best prospects for airlines. In October 2008, Aéroports de Paris (ADP) and Schiphol Group entered a new strategic alliance, which included an 8% capital stake and equal board representation. The alliance is slated to last for 12 years and the stated goals are to improve competitiveness through a dual hub (notably for SkyTeam) and strive for best-in-class service levels. Improving retail, real estate, and telecommunications is also on the agenda.

“We expect the cooperation to strengthen our relationship and integration with our largest clients (KLM and Air France) through optimized connectivity between the two airports,” says Ad Rutten, Executive Vice President and COO, Schiphol Group.

The airport alliance hopes to create cost savings of $23.4 million (EUR18 million) a year from 2013, through shared resources and reduced capital expenditure. Whether any of this will filter through to reduce costs for the airlines remains to be seen.

Dr Hans-Martin Niemeier, lecturer at the University of Applied Science in Bremen, Germany, is not totally convinced about the alliance. “Joining hands will be useful for them in terms of exchanging ideas as they share the same main customer but, besides the transfer of management knowledge, I am not sure what the point is. My concern is that this alliance is mainly about market power,” he says.

Being neighboring hub airports, the combined catchment area will create a passenger market with 59 million inhabitants. If competition between airport hubs is increasing, this is a move in the opposite direction. “This alliance says to me that they do not want competition,” Niemeier opines. “It signals to me that they want to keep things as they are and build up one giant market.”

Munich and Singapore Changi Airports announced a strategic alliance last year, mirroring their home airline membership of Star Alliance. The aim of the cooperation is to learn from one another and continue improving processes for customers by exchanging experiences on a regular basis. Niemeier thinks there could be some sharing of technology, and knowledge relating to concessions and retail. “It could be useful, but I doubt there will be any significant effect,” he says.

The advantages of airport alliances

Other airport alliances and buyouts are equally difficult to judge. The experience and professionalism of large airport operators, which take stakes in airports in developing nations, could be a good thing. Best practice leading to more efficient operations is one possible benefit.

On the other hand, there is a concern that operators will impose ‘big airport’ thinking, resulting in excessive or unnecessarily high tech infrastructure. This will be reflected in higher user charges for airlines.

Forsyth says that the biggest danger could be a situation in which a large airport with relaxed standards in cost discipline ends up consulting on a project in a developing nation. “I would be concerned about airports that have high costs looking to consult as part of a consortium overseas,” he says.

He also wonders whether some companies in the business have wide enough experience to be consulting. “Some groups might simply be good at getting governments to sign up for a contract that is better for the airport group than it is for the country itself,” he says.

Quito case study

The new international airport under construction at Quito, Ecuador -which will be the most expensive airport in Latin America when it is completed- could be cited as a case in point.

But not everyone would agree. Jeff Scheferman is President and CEO of ADC&HAS Airports Worldwide, a joint venture between Houston Airport System Development Corp and Airport Development Corp (a Toronto-based firm that started in the airport privatization business in 1987). ADC&HAS Airports Worldwide is the consultant partner in the consortium that is developing the new Quito airport.

“This will be the first large Greenfield airport to be built in Latin America for many years,” says Scheferman. “The existing airport is right in the middle of the city, and there have been too many near catastrophes there. The Ecuadorean Government rightly feels that a new airport is the only way of meeting future air service demand.

“The airport will revert to the government of the country within a finite time period, so it would not be in our interests to over-build,” he adds. “That would mean investing more, without any scope for maximizing the return on that investment. Why would we want to put our good money upfront to over-build a facility that will be under-utilized? It is all a question of timing capital expenditure to meet demand in the future.”

He acknowledges that the user charges will be higher than those at the existing Mariscal Sucre International Airport. “The increased tariffs for Quito will simply reflect the construction cost of the project, and the significant risks that are associated with it,” he says. “I want to stress that the shareholders have not received a single penny back from this project since it started in 2002, despite the significant amounts of money that have already been spent on above the equity contributions, developing the project, environmental studies, and the construction itself.”

Scheferman believes the airlines will clearly recognize that the airport is not over-built when it opens later this year. “If we weren’t building this airport, the Quito market and related economic growth that Quito and Ecuador will enjoy would be seriously hampered,” he says.

Although airlines agree there is a need to improve the current infrastructure, they argue that this should not be through increased user charges when other means of financing are available.

“Airlines and passengers have seen increases of 79% while they still use the same outdated facilities” says Jeff Poole, IATA Director of Industry Charges, Fuel and Taxation. “Pre-financing of project investment through increased charges has been one of the key concerns in Quito. In its current form, the airlines and passengers basically became unwilling investors in the project with no control and return on their investment.

“We look forward to much better cooperation and common sense in the relationship with Quiport, and its CEO Philippe Baril is committed to working with IATA on this”.

Poor track record

The track record for airport alliances is mixed. In 2001, Amsterdam Schiphol and Frankfurt airports formed the Pantares Alliance, with the intention of bringing in Italian airports, but nothing much evolved and it eventually crumbled.

Barely more successful was Galaxy, a global alliance between specialist cargo-only airports. This had some effect in terms of creating a network of cargo airports that could more effectively market themselves to airlines, but Galaxy too has now died a quiet death.

There are also questions surrounding an airport’s reasons for an alliance or takeover. If an airport wants to know how to improve the performance of its concessions, it might do better to draw knowledge directly from the retail industry or from external consultants, rather than simply teaming up with another airport.

There are more positive examples of alliances, though. In the China Pearl River Delta, Hong Kong and Shenzhen airports constantly explore potential mutual benefits and have developed good transport links between the two locations. Travelers can take advantage of Hong Kong’s international connections, whereas Shenzhen offers an extensive domestic Chinese network.

Hong Kong is also a member of the East Asia Airports Alliance, which recently discussed harmonizing security measures and implementing a registered traveler scheme with the aim of improving customer service.

Airport tie-ups represent a mixed bag for airlines. There are potential improvements for carriers and their customers, but the risk of increased market power and higher costs is never far away.