The economics of ice cream parlours and small congested airports

Contributing author: Ilia Lioutov, Manager, Economics Policy, ACI World

Many major hubs as well as highly seasonal airports are faced with managing air transport demand in tandem with their existing infrastructure. Hence, the question of slot coordination—specific time periods allotted for an aircraft to land or take-off—becomes crucial to the issue of managing scarce airport infrastructure. The Worldwide Slot Guidelines (WSG) represents guidance material in allocating scarce airport infrastructure to airline users in a harmonized manner. Today just over half of the worlds’ air routes operate at slot-coordinated airports (IATA Level 3). Level 3 specifically refers to airports where the demand for infrastructure significantly exceeds an airport’s capacity during a relevant period or season.

As of May 2019, and with reference to IATA Summer Season 2019, there were 141 schedule-facilitated (Level 2) and 204 slot-coordinated (Level 3) airports, hence 345 Level 2 and Level 3 airports combined.

The capacity dilemma at small seasonal airports

What do ice cream parlours and small congested airports have in common? Except for the ice cream parlours located in the tropics, ice cream parlours, by and large, face significant seasonality to their business and the resultant sales. That is, there is pent up demand for ice cream and related products during the summer months. However, other seasons typically experience dwindling demand. Cash flow falls significantly in the off-season, but fixed costs such as rent and other financing may remain constant for these parlours.

Many smaller airport operators face a similar dilemma with respect to the seasonal component to their business, but they have significantly higher fixed cost on the infrastructure they must manage. Airports serving smaller markets in terms of annual passenger throughput tend to have higher overall costs on a per-passenger or per-workload unit basis. Average total costs tend to decline with an increase in market size. Fixed costs (or capital costs), are spread over an expanding airport’s throughput to achieve economies of scale. In addition to facing higher unit costs, passenger traffic is often distributed heterogeneously throughout the calendar year creating capacity constraints during peak periods. Contrary to the perception that only huge airport hubs handling significant volumes of passenger traffic face congestion problems, schedule facilitation and slot coordination also affect smaller airports. Major fluctuations experienced by airports throughout the year occur most commonly among airports serving tourist destinations. The dilemma or challenge faced by these airports is that they are congested for a few months and are often classified as Level 3 for only a summer season. The required infrastructure is insufficient to fully meet demand during these periods. However, these airports are relatively underutilized for the rest of the year. Moreover, revenues generated during the peak season may fall short of covering the full cost of the airport on an annualized basis.

Chart 1 shows the number of L2 and L3 airports combined and corresponding passenger traffic volumes for airports with fewer than 5 million passengers per annum. The vast majority of these airports are located in Europe. 96 of the 149 airports (64%) that are L3 or L2 and have fewer than 5 million passengers are located in Europe. These airports handle 60% of global traffic among the smaller slot coordinated and schedule facilitated airports.

Chart 1: Number of L2 and L3 airports combined (S19) as of 10 May 2019 and corresponding passenger traffic volumes for airports with <5mppa (2018)

The Mediterranean effect

In Europe, monthly passenger traffic variations reflect the mainstream holiday period from July to September and movements from north to south. A significant proportion of airports in the region are highly seasonal in that they are located in the Mediterranean region and serve as gateways to tourism-oriented destinations. Chart 2 shows 3 Mediterranean airports located in tourist destinations of Greece, Italy, and Spain – Mikonos (JMK), Olbia (OLB) and Menorca (MAH) respectively. Each of these airports is a L3 for a summer season only. Almost a quarter of annual passenger traffic is handled by MAH in the vacation period of August. Similar but less pronounced peaks could also be observed for JMK and OLB.

Chart 2: Monthly passenger traffic for selected Mediterranean L3 airports (2018) 

The economic sustainability of smaller airports

While there are a handful of smaller airports that achieve profitability, many smaller airports, especially those with fewer than one million passengers per annum, operate at a loss. The reason smaller airports remain in operation hinges on the idea that they contribute to the local, social, and economic development of the surrounding communities. Because these positive externalities are not fully internalized, government intervention in the form of subsidies or grants helps to cover the shortfall or deficits. With regards to major airport networks around the globe, airport operators that manage multiple airports of varying size, profitable airports tend to cross-subsidize or compensate for the net losses of smaller airports.

ACI’s recent Policy Brief: Airport networks and the sustainability of small airports presents business models and policy recommendations that facilitate the sustainability of smaller airports as part of a broader network of airports under the umbrella of a single airport operator.

Notes: The WSG states other criteria. A Level 3 airport is one where expansion of airport infrastructure to meet demand is not possible in the short term; Attempts to resolve the problem through voluntary schedule adjustments have failed or are ineffective; and as a result, a process of slot allocation is required whereby it is necessary for all airlines and other aircraft operators to have a slot allocated by a coordinator in order to arrive or depart at the airport during the periods when slot allocation occurs.

A Level 2 airport is one where there is potential for congestion during some periods of the day, week or season, which can be resolved by schedule adjustments mutually agreed between the airlines and facilitator.

The above article is an adapted excerpt from the 2019 edition of the World Airport Traffic Report. For more detailed analysis and insights on air transport demand, view ACI’s suite of products.

With comprehensive data coverage for over 2,400 airports in 175 countries worldwide, ACI’s World Airport Traffic Report remains the authoritative source and industry reference for the latest airport traffic trends, rankings, and data rankings on air transport demand.

ACI’s Annual World Airport Traffic Dataset is the industry’s most comprehensive airport statistics dataset featuring airport traffic for 2,500 airports in 175 countries. The excel database can be filtered by type of traffic (passenger traffic, cargo, aircrafts movements), geographical regions and more.