In the near future, the global airport non-aeronautical revenues business will continue to face at least five major challenges ranging from pressure on passenger-driven non-aeronautical revenues to a possible oversupply of airport retail space.
For stakeholders in the industry’s ecosystem, such as equity shareholders, lenders, airport operators, sub-concessionaires, suppliers, brands, as well as passengers, the key to success to overcoming these challenges will lie in their level of innovation as well as mutual cooperation.
1. Pressure on passenger-driven non-aeronautical revenues.
The initial idea for developing a non-aeronautical revenues business in airports over the past two decades had been driven by a need to lower dependence on aeronautical revenues, especially in the era of low-cost carriers. Apart from that, there was a need to obtain an additional source of revenues with the ownership of airports passing from private to public hands.
However, fluctuations in passenger traffic movements still continue to affect the passenger-driven non-aeronautical revenues dependant businesses such as duty free, food & beverage as well as car parking.
While duty free, food & beverage and car parking remain crucial to the airports’ non-aeronautical business, wider thinking must be applied by the airport so that they can target new customers so as to reduce reliance on passenger-driven non-aeronautical revenues.
One possible solution to this challenge includes a rethinking of the purpose of an running an airport business. If the airport is to viewed as a business, must it only be only be an airport business targeting aircraft and passengers, or can be it part of a wider business where it can target other customers?
Existing and future concepts of landside and off-airport commercial developments point towards a shift in mindset and a recognition of revenues sources beyond aircraft and passengers.
2. The impact of airport privatization on retail prices
Much has been said in the industry about airports, retailers and brands/suppliers working together to create the ultimate airport experience that would benefit the various stakeholders.
While in most airports, various quality controls are in place to ensure a satisfactory of level of service, the increasing privatization of airports also implies that financial returns to the private shareholders of airport operators continue to be paramount and this is reflected in high non-aeronautical charges (e.g. shop rentals).
In many cases, financial stakeholders seek to obtain the maximum margin from their concessionaires without consideration of the long-term business relationship with the concessionaires. As an example, in some airports, high commission rates at 45% of total duty free sales to the airport operator add pressure on the operating margins of duty free retailers. This pressure ultimately translates into higher retail prices for passengers.
It therefore appears there has to be greater communication and dialogue between the financial stakeholders (e.g. lenders and investors) and the airport concessionaires, even when there are multiple layers of communication in-between. There should be a shift in mindset towards long-term sustainability of the airport business.
3. The dominance of airport security
With the world feeling an increasing threat from terrorist activities in recent times, it would not be a surprise to see airport security processes take a greater priority in the passenger journey and continue to be the key driver of the passenger experience. Apart from expectations of shorter airside dwell time due to more stringent security checks, issues like LAG restrictions will continue to play a challenge to the airport retail business.
The planning and operation of airport commercial space has to continue to keep up with the needs of airport security. This cooperation does not have to be one-way, as airport security should also continue to play its part in maintaining an overall airport experience for passengers. A visible example of such cooperation would be that in Amsterdam Airport Schiphol, where the design of the security space has been able to contribute to a positive passenger experience.
4.The challenge from digital activity and off-airport retail opportunities
The increasing digitalization of passenger retail activities as well the presence of off-airport duty free stores has to some extent impacted on the dynamics of shopping at some airports, especially for those passengers who make planned purchases.
This will have implications on physical airport shop space requirements, as well as rent to airport operators, which would not be able to collect a commission from the retail sales of concessionaires which are made outside the airport shop.
Nevertheless, a silver lining can be seen in impulse-shopping passengers, many of whom are first-time travellers. This target group of passenger should continue to be a key target of the airport retailers.
5. The airport retail infrastructure race
The airport retail footprint race parallels the current race in mega-airport building and terminal hub capacity expansion by various airports in various regions, such as in the Turkey-Middle East region (DXB, DWC, DOH, AUD as well as the New Istanbul Airport) and in Asia-Pacific region (SIN, KUL, BKK, HKG).
As examples, the new Istanbul airport will have more than 50,000 sqm of airside retail space while the upcoming Midfield terminal complex development of Abu Dhabi International Airport will have 28,000 sqm of retail and food & beverage space. The newly opened KLIA2 of Kuala Lumpur International Airport has about 35,000 sqm of retail and food & beverage space.
This airport construction and expansion trend is an expression of aspirations by various airports to become global or regional aviation hubs. Competition in the race is intense and there will be winners and losers for airport operators as well as the concessionaires which will operate the airport retail spaces.