Session 2
Future of Business and Commercial Arrangements at Airports
Speakers
Mukesh (Mookie) Patel, Airport Chief Officer, Business and Finance, Austin–Bergstrom International Airport, Moderator
Candace McGraw, CEO, Cincinnati/Northern Kentucky International Airport
Dave Edwards, President/CEO, Greenville–Spartanburg International Airport
Eric Smith, Partner, Kaplan Kirsch & Rockwell LLP
Overview
Airports have seen a lot of changes in commercial relationships, particularly in the concessions realm in recent years. This panel explored other big shifts in the industry related to cargo and e-commerce, real estate and nonaeronautical development, counterparties, and unidentified risks.
Detailed Summary of the Panel Discussion
Mookie Patel introduced the panel.
Dave Edwards provided an overview of GSP from when he took over in 2011 through today. In 2009, GSP was traditional and focused on passenger traffic, but there were opportunities to get involved in other lines of business. Edwards explained that there is a BMW auto manufacturing plant adjacent to the airport. The plant was shipping all of its imports to Huntsville, AL, and trucking parts to South Carolina, so the airport worked for 6 years to stand up an international, long-haul cargo service to Europe to attract BMW to use GSP. He noted that the airport did not have any ground-handling resources to do the work, so it provided internal staff training. That group stood up in 2011, and then, when BMW had a logistics issue, it handled 13–14 wide-body aircraft for them over a few months. The airport saved the plant $1 million per hour, since BMW did not have to shut down its assembly line.
On the basis of that experience, GSP then attracted regular cargo service and set up a complete business model, known as Cerulean Aviation, for handling that international cargo. During the height of the pandemic, Edwards said, the airport was handling 28 flights per week; this rate is now back down to 14–15 flights per week. He noted that the number of international cargo flights is a great revenue stream for the airport. Edwards stated that not many airports are ground handling and warehousing. GSP also does all the commercial fueling at the airport with its own staff, which is also a great source of revenue that provides high margins. Edwards also noted that the airport also took over FBO operations.
Edwards reported that, during the pandemic, GSP delved into the concessions food and beverage (F&B) business. The airport had an operator that was struggling, so it worked on an exit strategy, taking over the concession and utilizing a management agreement. Edwards stated that, even though airports face risks and capital expenditures, it is still possible for an airport to implement solutions and make a profit. He said the airport’s F&B business is not yet where GSP wants it to be, but it is coming up as GSP continued to recover its passenger numbers. He said the margins on F&B are really slim. The airport has also delved into a land development project on 3,800 acres, 2,700 of which are available for nonaeronautical revenue. Edwards noted that the airport has grown revenue significantly.
Patel asked Edwards to discuss the economic impact and offer information on other metrics that airports use.
Edwards noted that when GSP was trying to recruit Southwest Airlines, it did an economic impact study before Southwest started operations at the airport and then redid the study after the airline came to GSP. The economic impact more than doubled. At that time, however, the airport had not entered the new businesses that Edwards discussed. After GSP did enter the new businesses, the new economic impact study went from $800 million annually to more than $2.2 billion. When the airport does the study again, Edwards said, the economic impact will likely be approximately $4 billion, which is significant for the state of South Carolina.
Candace McGraw asked Edwards how he assesses the risk and reward of nontraditional businesses.
Edwards answered that there is always a risk, and the airport was not an expert in any of these sectors. He said the key was a lot of analysis. In the case of the FBO operations, he said, the airport had outside consultants who helped with the concepts and helped explain the concepts to the airport board. Edwards continued that airports are going to have to take more risks in the future. AIP grants and PFCs have not gone up in 20 years. GSP is trying to get more funding from the State of South Carolina, but, ultimately, the airport is going to have to find new ways to get revenue because it is not going to obtain it from the federal government. Edwards stated that the airlines want control, which is why there is no increase in the PFC, and that he thinks Weisser is exactly on target regarding airports having to take control of the facilities and focus on quality. Edwards noted that the airports are capable of successfully running their business, and that is what they should do. He suggested that the airlines all have an ulterior motive, which is profit.
McGraw stated she has faced challenges during her experience at Cincinnati/Northern Kentucky International Airport (CVG). She said she arrived in 2009 as chief administrative officer and became CEO in 2011. In 2009, the airport was amid a 7-year passenger decline. The airport was a Delta Airlines hub, but Delta merged with Northwest Airlines and decided CVG was not needed as a hub anymore. As a result of this change, the airport lost 75 percent of its passengers. At the height of Delta’s service, CVG had 20–22 million passengers annually. However, when McGraw took
over in 2011, it had 3 million. She said they had to determine how to run the airport like a business and make it healthy again.
McGraw explained that at the time, the airport had one major carrier with around 40 gates and two other carriers with a combined total of six gates. On the passenger side, the airport recruited additional airlines but had no internal air service development activity at all. She continued that the dominant carrier had all the control and power, which was a disadvantage to the airport. However, the 7,700 acres of airport-owned land was advantageous for potential development. At the time, the airport only had the international cargo carrier DHL, which had just returned to the airport, as revenue.
McGraw stated that CVG also invested in innovation. She said that although the airport is not yet profitable, it has been entering into agreements with small businesses and start-ups by allowing them to test their technology within the airport. In exchange, the airport shares the revenue. She explained that the airport has a few partnerships that have resulted in the development of a few products, two with patents pending. She explained that it is a long-term process that includes a live test site, with millions of people coming through the airport facilities.
McGraw noted that an Amazon deal has changed her perspective. After frenetic conversations for around 3 months, the airport signed a contract with Amazon. Afterward, the airport asked Amazon why it chose to conduct business with CVG. Amazon responded that CVG had (1) great airfield infrastructure ready to go, (2) great highway infrastructure, (3) a great workforce with experience in aviation, and (4) the ability to move as quickly as the private sector.
Janet Harrah said she has worked on all three of CVG’s economic impact studies and stated that CVG wanted a meaningful study. The first study was published in 2014 and showed a $3.4 billion annual impact. In 2017, this had grown to $4.4 billion. In 2018, just as Amazon was starting, it was $6.8 billion. CVG is updating the study again, which will show what the pandemic did and where the airport is heading.
Patel suggested that airport practitioners can learn from failures as well. He said he joined the team at Austin–Bergstrom International Airport in 2020. Patel used to work with someone who did network planning at Alaska Air and then went to Amazon Air. Patel texted him about the airport land and availability, and they moved forward with negotiating a deal. As the deal was being finalized and they had broken ground, the market on the e-commerce business started falling. Patel stated that a lot of the Amazon Prime and Amazon Air staff were disbanding, and, eventually, Amazon walked away from the $27 million project. The airport had to pivot to its traditional cargo carriers, all three of which have large contracts with Tesla and Samsung (which has a chip manufacturing facility in Austin). Now, Patel said, the airport is looking at a cargo-sorting facility. He said he was hoping the building would be open in July 2023 with another tenant. Patel explained that owning and controlling the building provided the airport with more flexibility for dealing with this type of risk.
Eric Smith said he had worked with clients that saw massive de-hubbing, such as that at CVG, and looked at airport development from the standpoint of economic security. With regard to land use development, Smith said airports should not lose sight of the fact that they are public entities and should be doing this for the community and the state. However, Smith said it is also about the money, which gives airports flexibility, if the money is from diverse sources. He provided one example of a federal inspection station facility. He said most airports cannot afford to pass along all the costs to the airlines and passengers. He also stated that if airports have nonaeronautical revenue, they can pay for the federal inspection station and make the investment in trying to support international air service.
Smith quoted former President Dwight D. Eisenhower, saying, “Plans are useless, but the act of planning is indispensable.” Smith stated that airports need to be ready when opportunities arise and prepare by identifying and quantifying hurdles for development and that airports should have that information before they ask for money.
Smith continued that it is important to recognize that there is a balance between what airports can charge airlines and what something costs. He said airports need to figure out what is invisible in their rates and that they need to understand what it really costs to operate and run their facilities.
Edwards added to Smith’s point about planning, saying that in 2012, GSP completed a land use master plan and identified nine different parcels that it could develop for a range of things. Together, those parcels offered high profitability. The airport had done most of the development with third parties and put in all the infrastructure. However, it lost out on a big project with Boom, a manufacturer of supersonic aircraft. Edwards said Boom loved the GSP campus, but GSP lost the contract to another airport that had 1,000 acres of cleared, pad-ready land. Edwards stated that Greensboro received more than $100 million from the state to get it ready and to invest in roadway infrastructure.
