Airports

Dubai’s exclusive A380 terminal, and the travails of airlines/industry @ mega airports

 

In early January 2013, perhaps the world’s first ever airport terminal created to cater exclusively to one aircraft type, was rolled into service: Dubai’s dedicated A380 facility named ‘Concourse 3′ opened to commercial operations.

t3-dubai

The new facility has as many as 20 parking positions directly at the terminal, and  another 13 at remote stands on the tarmac. In addition the terminal features separate boarding air-bridges for first class and business, together with jumbo waiting areas to accommodate up to 800-odd passengers, at each gate.

This terminal, built at a cost of $4.5 billion, boasts of a built-up area equivalent to 94 football fields, can handle 43 million passengers and takes the capacity of Dubai International Airport (DXB) to over 60 million annually [see ‘fact sheets from Dubai Airport].

When combined with the other concourses that are under construction, the DXB total capacity jumps to over 90 million. Bear in mind the current traffic is closer to half this number: some 50 million passengers traveled through this airport in 2011 [see ACI data]

dubai airport terminalThis is a historic moment in the checkered history of global aviation; but it is also opportune to pause here and reflect on what this means to the industry today and in future.

Undoubtedly, the rise of hubs in the Middle East provide a much-needed alternative to the traditional – tired and tiring – transit gateways in Europe viz. London Heathrow, Paris Charles de Gaulle, and other similarly crowded routes through Frankfurt or Amsterdam.  (Incidentally these Big 4 together accounted for more than 25% of all traffic in the world’s 30 busiest airports in 2011.) And yes, it is likely that service quality at the Middle Eastern airports will be better than that seen in Europe.

However will this redress the deeper, more perplexing issues ailing global aviation in the longer term?

Who pays for this?

Airline business is characterized by its near-zero operating returns, much in contrast with airports where the range is 11-20%. Forgettably, airports depend almost entirely on airlines to bring in the traffic and retail footfalls. Adding a shining new mega airport to the lot is not likely to change this fundamental reality. Airlines will continue – as far into the future that we can see – to reel under competitive, governmental, environmental, and a host of other pressures; and struggle to keep their business viable.

Over-sized / under-utilized airport capacity invariably adds to the operational costs of the airline – through higher landing fees and other user charges, thus further aggravating  the industry’s value equation.

Agreed, this may not be entirely true in the case of Terminal 3 or the entire Dubai Airport: both the airport and its main airline operator – Emirates, are entirely owned by the Government of Dubai. And it would not matter much for now, how the costs get  apportioned between two agencies of the same owner. Also since the Dubai Government views aviation as one of its strategic investment areas for helping the emirate to bounce back into economic resurgence after the financial crisis in recent years, it might not be in a terrible hurry for returns.

Moreover, since Terminal 3 is exclusively for use by Emirates (with Qantas as the only other airline sharing the A380 concourse, starting April 2013) – it is rather unlikely that airlines will soon get to bear the burden of financing DXB Terminal 3.

However the point to note here is, large opulent airports do not necessarily translate into the industry’s well-being; they might just showcase the deep pockets or regional ambitions of their promoters, and little else. And when the promoters look for returns – as they surely will, sooner or later – the noose tightens around the airlines’ neck.

So does this mean, only state-owned airports backed by governments with fiscal expansion policies should build billion-dollar terminals ?

I think this is where the issue gets a lot more nuanced.

To start with, let us examine the pricing model adopted at most airports. Aeronautical revenues – earned by the airport for services or facilities related to the processing of aircraft, passengers and cargo – consists among others, of the landing fee: while ICAO mandates that the landing fee at airport should be based on the maximum permissible takeoff weight (MTOW) and computed as a rate per 1000 kg, the actual landing fees vary widely from one airport to another, and pricing process vary from competitive bidding to rather arbitrary government diktats.

And here the airport promoters’ business outlook plays a crucial role. If the promoters are keen on recouping investments in infrastructure quickly – as with corporate financiers driven by market expectations and quarterly earnings pressure, they would depreciate their assets faster and pass them on to airlines through higher landing fees. Airports with a longer term view of their infrastructure investments are therefore more aligned to airlines’ interests.

Perhaps the key here is to separate mega infrastructure expansions with huge capital outlay, from running the operations at the airport. Airport operations is a very different business and has several similarities with the hospitality and retail industries. By issuing operating licenses through competitive bidding airports can be efficiently managed and run as a successful business, while the multiple-year infrastructure projects can be owned and managed with a longer term outlook.

Another issue that has been bitterly disputed between airlines and airports, is the treatment of non-aeronautical revenues (charges for ancillary services at the airport, including rentals from retail concessionaires, land-side parking facilities etc). While some airports maintain this is not a subject to discuss with airlines and keep a separate account of it (this is referred to as dual till), airlines argue that these revenue streams exist only because of the passengers they bring to the airport and therefore airports should account for all revenues while determining charges (aka single till).

By de-linking infrastructure expansions from routine airport operations, governments and airport authorities would not only find the single till approach more acceptable, but also develop a wider variety of investors to fund their capital-intensive long-gestation projects and thus reduce dependence on aero revenues.

Finally, to the rather unpopular question: do we need our opulent airport terminals?

Dubai Airport Terminal III 27

In this age when “greed is good”, and big is beautiful, this question is almost out of place. But lest we forget, an airport terminal exists to serve a very limited function: process passengers and cargo, in compliance with local customs laws; and provide a safe and secure passage between the air-side and land-side.

Technology today provides very efficient and effective solutions to handling crowd flows and cargo movements so that several million passengers can be processed annually within a modest-sized building.  Instead we choose to have sprawling terminals bigger than several dozen football fields, and then expect the airlines to pay for their air-conditioning and upkeep. Fair proposition?

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Global SME-aviation operations, Travel & Transportation Centre of Competence

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