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Innovative Revenue Strategies – An Airport Guide (2015)

Chapter: Chapter 2 - Overview of Revenue Strategies

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Suggested Citation:"Chapter 2 - Overview of Revenue Strategies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 2 - Overview of Revenue Strategies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 2 - Overview of Revenue Strategies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 2 - Overview of Revenue Strategies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 2 - Overview of Revenue Strategies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
×
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Suggested Citation:"Chapter 2 - Overview of Revenue Strategies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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Suggested Citation:"Chapter 2 - Overview of Revenue Strategies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
×
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Suggested Citation:"Chapter 2 - Overview of Revenue Strategies." National Academies of Sciences, Engineering, and Medicine. 2015. Innovative Revenue Strategies – An Airport Guide. Washington, DC: The National Academies Press. doi: 10.17226/22132.
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2 1 Chapter 2 Overview of Revenue Strategies 2.1 Agility in Changing Times 2.2 What Is Innovave for Airports? 2.3 Strategies Selected 2.4 Strategy Evaluaons 2.5 Key Funconal Areas Involved with Strategies 2.6 Wrap up 2.7 Addional References Chapter 2 presents the factors that went into selecon of the strategies, an overview of the strategies themselves, and a discussion of how implementaon of the strategies relates to different funconal areas of the airport. 2.1 AGILITY IN CHANGING TIMES Given the turmoil and structural changes of the last decade, airport operators have focused on ways to enhance the financial strength and resilience of the airport enterprise. From a planning perspecve, this focus involves clarity of strategic vision and concentraon in several key areas: Increased airport revenues and funding sources Improved performance in all funconal areas of the airport Opmized use of airport assets Compeve differenaon from other airports An airport organizaon that is responsive at all levels Figure 2 1 summarizes the key aributes of a diversified airport enterprise.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 2-2 Figure 2-1: Key Aributes of a Diversified Airport Enterprise Source: KRAMER aerotek inc., 2014 2.2 WHAT IS INNOVATIVE FOR AIRPORTS? Innovaon involves finding new ways to deliver a service or produce an outcome through adopon of new technology and systems, improvements to processes, or changes in organizaonal structure [Schumpeter]. For private companies, innovaon is adopted if there is an opportunity to reduce costs and/or increase profits. For publicly owned airports, innovaon can also include strategies to change the culture of the airport organizaon and its business partners or to use airport assets as catalysts for economic development. Innovaon for airport organizaons is muldimensional and involves the following parameters:1 New service concepts New customer interacons New business products New net revenues to the airport sponsor New delivery systems (personnel, organizaon, culture, technology) 1 Adapted from Den Hertog et al. 2010 Strategic: Se–ng priories based on vision, mission, goals, core businesses, and beliefs Results-oriented: Tracking performance; measuring key outcomes; adjusng and improving Resilient: Opmizing use of airport assets; cost compeve Customer-friendly: Meeng the expectaons of customers Market Compeˆˆve: Differenang airport brand and services Employees Engaged: Creang an environment for excellence

CHAPTER 2 – OVERVIEW OF REVENUE STRATEGIES 2-3 2.3 STRATEGIES SELECTED The innovave strategies described in this Airport Guide result directly or indirectly in cost savings or net revenue increases to the airport sponsor. There are three basic ways to increase net revenues to the airport sponsor: 1. Develop new sources of revenue 2. Increase airport sponsor parcipaon in tenant revenues 3. Improve the planning, administrave process, and management of exisng airport businesses Figure 2-2 shows these approaches. Figure 2-2: Ways to Improve Net Revenues Source: KRAMER aerotek inc., 2014 The five strategies described in this Airport Guide are summarized briefly in this secon. A separate chapter is devoted to each strategy. 1. Customer Focus – This strategy presents a number of new ideas to increase focus on customer needs and wants, achieving more sales of in-terminal concessions, adversing, parking, and added customer services. Innovative Strategies Develop New Sources of Revenue Increase Airport Sponsor Revenue Participation Improve Planning, Process, and Management of Existing Airport Businesses Results in Improvements to Net Revenues for the Airport Sponsor

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE SOURCE NOT FOUND. 2 4 2. Airport Entrepreneurial Acvity—Part I (Airport Provided Services and Shared Services, Facilies, and Equipment) – This strategy examines how greater efficiencies and cost savings can be achieved through shared use of equipment and facili‚es among tenants or through cross u‚liza‚on of airport staff. Major elements of the strategy include (a) shared services (e.g., passenger processing, aircra‹ processing, terminal services) and (b) common use facili‚es, equipment, and so‹ware (e.g., cargo facili‚es, display systems, check in areas, gate management, deicing, ground services, and parking aprons). Where feasible, the airport sponsor can provide services to tenants and passengers at private sector mark up and generate addi‚onal opera‚ng revenue. 3. Airport Entrepreneurial Acvity—Part II (Revenue Parcipaon in Real Estate and Natural Resource Development) – This strategy examines an expanded role for airports in real estate development. The tradi‚onal model involves a ground lease for a specified term based on the real estate’s appraised value. The strategy explores equity par‚cipa‚on in projects; par‚cipa‚ng leases; direct ownership, development, and management of a project; public private partnerships (P3s); and joint development. 4. Value Capture & Other Innovave Financing – Value capture strategies allow an airport to capture all or part of the added value in cases where property values and economic development “outside the fence” are clearly a˜ributable to airport ac‚vity. Value capture techniques have been used extensively in public transit developments. Privilege fees charged to off airport parking and rental car companies are a variant of value capture already in use by airports. This strategy inves‚gates more tradi‚onal value capture methods, such as special districts, development fees, and property tax sharing, and their applicability to airports. 5. Improvements to Exisng Airport Businesses – This strategy focuses on ways that airports can manage exis‚ng passenger concessions and services to achieve new revenue. It is most relevant for commercial service airports at which passenger dependent ac‚vi‚es are a significant contributor to opera‚ng revenues.

CHAPTER 2 – OVERVIEW OF REVENUE STRATEGIES 2 5 Goal Increase Net Revenues to the Airport Sponsor Strategy 1 Technique 1.1 Technique 1.2 2.4 STRATEGY EVALUATIONS Each strategy is evaluated and described in subsequent chapters according to a common framework, as follows: Scope of the Strategy o General descripˆon o Objecˆves o Applicability to different types of airports (all, commercial, general aviaˆon, cargo) o Prevalence (used regularly, used rarely, not tried at airports, used for other modes) o Special requirements, if any, to accomplish (e.g., land, passengers, natural resources, etc.) o Funcˆonal areas and key departments impacted Key Elements of the Strategy o Descripˆon o Examples Applicaˆon of the Strategy to Airport Acˆviˆes o Descripˆon of the technique(s) that lead(s) to execuˆon of the strategy o Why the technique(s) is (are) useful to the parˆcular airport acˆvity o Descripˆon of how techniques improve net revenue to the airport sponsor Summary Assessment (high, moderate, low) o Potenˆal for improved net revenues o Airport sponsor capital required o Degree of airport sponsor assumpˆon of risk o Complexity to implement o Poliˆcal/insˆtuˆonal challenges Implementaˆon Issues (if any) Conclusions References for Addiˆonal Informaˆon 2.5 KEY FUNCTIONAL AREAS INVOLVED WITH STRATEGIES In pracˆce, implementaˆon of revenue strategies will engage personnel from different departments or funcˆonal areas of an airport. This is also true of day to day operaˆons at an airport. However, adopˆon of the goal to increase the airport sponsor‘s net revenues would typically be integrated into an airport’s strategic plan. Its implementaˆon would engage all levels of the airport organizaˆon while including performance measures to track progress. For this reason, it is important to connect the strategies to key funcˆonal areas of the airport. Table 2 1 idenˆfies the key funcˆonal areas important to implementaˆon of the strategies discussed in this Airport Guide. Depending on which revenue generaˆon technique is selected and how an airport is organized, other departments or funcˆonal areas might also be involved. Airport organizaˆons vary widely. For example, at the largest airports, finance and property management o˜en take place in separate departments. At smaller airports, these funcˆons may reside in the same department.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 2 6 Table 2 1: Examples of Revenue Techniques by Key Funconal Area Key Funconal Areas Examples of Revenue Generaon Techniques Aircra and Passenger Services Airport provides ground handling service, deicing, catering, aircra parking, passenger processing (ckeng, check in, baggage, gate services), shared clubrooms Business Development Airport develops and improves traveler and tenant services, joint markeng and adversing campaigns, foreign trade zones, and pursues commercial or industrial development adjacent to the airport Cargo Airport parcipates in development of shared cargo warehouses, dedicated equipment, logiscs centers, and value capture techniques for just in me manufacturing and logiscs centers off the airport Concessions Airport engages directly in concept innovaon, mobile applicaons to support concessions, conversion of non revenue space to food & beverage, retail, and services, seasonal and niche markets, internet commerce Energy Management & Alternaves Airport operates ulies for tenants and parcipates in renewable energy and alternave fuel projects Environmental Airport offers opportunies for waste management and recycling, and agriculture for land stabilizaon Finance & Property Management Airport works with other public and private enes to iniate and obtain alternave sources of funding and financing for capital projects, operaons, and maintenance Airport strives to maximize use of airport property and may parcipate as developer, manager, partner, or joint venture in new ventures Ground Transportaon Airport pursues management alternaves, smart technology, alternave fee structures, beer curbside management for revenues, operaon of intermodal transfers Informaon Technology Airport pursues strategies for Wi Fi, shared backbone services, digital displays, customer segmentaon Legal and Contracts Legal department is involved with innovave lease and concession agreements, third party contracts, revenue sharing, profit sharing, equity parcipaon, privilege fees, royales, intellectual property rights, exclusive product selling rights Parking Airport introduces targeted product mix, concierge services, online reservaons, privilege fees, cost recovery for employee parking Planning, Design, & Administrave Process Procurement and administraon improves plans and specificaons for concessions, customer service offerings, document preparaon, solicitaon, offer & award, revenue development incubators Service Quality Airport pursues a pracce of exceponal customer service, quality assurance, and performance measurement (happy customers spend more money) Terminal Operaons Airport improves passenger processing, janitorial, and way finding to enhance the customer experience; airport also offers logiscs support to tenants at market rates Source: KRAMER aerotek inc., 2013 Table 2 2 relates the key funconal areas to the strategies themselves. In the table, a diamond indicates that this funconal area is important to the implementaon of the strategy.

CHAPTER 2 – OVERVIEW OF REVENUE STRATEGIES 2 7 Table 2 2: Key Funconal Areas Involved with Strategies Funconal Areas Code Customer Focus Shared Services & Facilies Revenue Parcipaon Off Airport Value Capture Improvements to Exisng Businesses Aircra & Passenger Services AS Business Development BD Cargo CA Concessions CN Energy Management & Alternaves EN Environmental EV Finance & Property Management FN Ground Transportaon GT Informaon Technology IT Legal & Contracts LC Parking PK Planning, Design, & Administrave Process PL Service Quality SQ Terminal Operaons TO Sources: Funconal areas adapted from ACRP Report 19A: Resource Guide to Airport Performance Indicators; chart prepared by KRAMER aerotek inc. 2.6 WRAP UP Chapter 2 presented an overview of revenue strategies that could be used by airports to increase net revenues to the airport sponsor and outlined the framework for evaluang each strategy. Implementaon of these strategies was also linked to key departments or funconal areas at an airport. The next chapters delve more deeply into each strategy and provide examples of techniques used to implement the strategy. Highlights from the case studies completed for this research are also included where relevant. 2.7 ADDITIONAL REFERENCES ACRP Report 20: Strategic Planning in the Airport Industry (Ricondo & Associates, Inc., et al.), Transportaon Research Board of the Naonal Academies, Washington, DC, 2009, h’p://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_020.pdf ACRP Report 28: Markeng Guidebook for Small Airports (Kramer et al.), Transportaon Research Board of the Naonal Academies, Washington, DC, 2010, h’p://onlinepubs.trb.org/onlinepubs/acrp/ acrp_rpt_028.pdf

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 2 8 ACRP Report 77: Guidebook for Developing General Aviaon Airport Business Plans (Avia on Management Consul ng Group), Transporta on Research Board of the Na onal Academies, Washington, DC., 2009, h‡p://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_077.pdf Davidson, N. and S. Van Beek, “Airport Strategic Planning, Time to Take a Fresh Look,” Focus, LeighFisher, 2012 Dallas/Fort Worth Interna onal Airport, Building a Future Together: DFW Interna onal Airport Strategic Plan 2012, Dallas/Fort Worth, Texas, 2012 Osborne, D. and T. Gaebler, Reinvenng Government: How the Entrepreneurial Spirit is Transforming the Public Sector, Penguin Books USA, New York, NY, 1993 Den Hertog, P., W. Der Aa, and M. De Jong, “Capabili es for Managing Service Innova on: Toward a Conceptual Framework,” Journal of Service Management, Vol. 21, No. 4, 2010, pp. 490 514. Schumpeter, J. A., The Theory of Economic Development, Harvard University Press, Cambridge, MA, 1934

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TRB’s Airport Cooperative Research Program (ACRP) Report 121: Innovative Revenue Strategies – An Airport Guide describes a broad range of tools and techniques to improve airport revenue streams, recover costs, and achieve operational efficiencies. The report identifies customer needs; airport-provided services and shared services, facilities, and equipment; revenue participation in real estate and natural resource development; value capture and other financing opportunities; and improvements to existing airport businesses.

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