Contributing writer Dimitri Coll, Director, ASQ, ACI World
The rise in the number of global travellers coupled with the increased use of mobile and digital technology, increased competition, and new e-commerce options has important implications for non-aeronautical revenue for airports and their bottom lines.
As air travel continues to extend its reach to the world’s populations through affordable choices, the demographic composition of the world is changing. Whereas many advanced economies continue to experience an ageing population, major emerging markets have observed an expansion in their working age populations, which has contributed to a burgeoning middle class. Moreover, the first generation of digital natives, millennials, have expectations that are in line with their distinctive lifestyles, which are helping shape new business models across aviation.
As aviation’s center of gravity shifts eastward, Millennials, the generation born between 1980 and 2000, will also redefine the marketplace during their peak earning years. With technology at their fingertips, they have a set of expectations that distinguish themselves from previous generations. Based on research from Goldman Sachs:
“Millennials have come of age during a time of technological change, globalization and economic disruption. That’s given them a different set of behaviors and experiences than their parents. They have been slower to marry and move out on their own and have shown different attitudes to ownership that have helped spawn what’s being called a “sharing economy.” They’re also the first generation of digital natives, and their affinity for technology helps shape how they shop. They are used to instant access to price comparisons, product information and peer reviews. Finally, they are dedicated to wellness, devoting time and money to exercising and eating right. Their active lifestyle influences trends in everything from food and drink to fashion.”
Creative destruction, a term first coined by Joseph Schumpeter in his famously acclaimed 1942 book, Capitalism, Socialism and Democracy, depicts the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Technological disruption is analogous to the concept of creative destruction as it applies to modern technological innovations. Like many other industries that are faced with technological disruption, airport operators must manage a capital-intensive business but also diversify their revenue streams especially on the commercial side during a period of significant change.
Airport managers are recognizing the importance of non-aeronautical revenue in diversifying their revenue streams beyond aeronautical sources, as they strive to provide more space or maximize existing space to cater to passenger preferences. Retail facilities and food and beverage outlets inside many airports’ terminals are attractive investments since they represent over one third of commercial revenues on average. However, in several mature markets, there is no doubt that, along with disruptive technologies such as pervasive access to online retail and e-commerce platforms, increased retail competition outside the purview of the airport has limited the growth prospects for airports’ non-aeronautical revenues. Similarly, there are also challenges for advertising due to the huge increase in online advertising. Car parking is another major source of revenue that is faced with increased competition. Airport car parks have always been subject to competition from off-site facilities, but increasingly they must compete with public transport services which remove the need to travel to and from airports by car. The rise of the “sharing economy” and transportation network providers like Uber and Lyft has also meant that airport managers must rethink their conventional non-aeronautical revenue streams.
This is not to say that non-aeronautical activities are not growing. They are continuing to grow globally especially in some emerging markets, but their growth is not enough to surpass aeronautical revenues on a proportional basis. Based on data from ACI’s Airport Economics Survey (see Chart 1), it is worth underlining that non-aeronautical revenues (net of non-operating items) share was estimated at 43.1% in 2005 but went down to 39.9% in 2017.
The modern airport operator, which has been propelled into a dynamic and competitive landscape, has moved away from being a mere infrastructure provider to a diversified and complex business that operates strategically within the air transport value chain. Consequently, an understanding of economic performance based on data-driven analytical tools provides valuable business intelligence to decision makers and other stakeholders. Airports must harness data from an array of sources. This requires data on the broader economic context and the drivers that affect the airport business. A firm grasp of market segments based on evolving tastes and preferences of passengers is a vital component in capitalizing on the return to customer experience. That is, a mastery of passenger survey data and customer information provides airport operators a valuable toolkit to leverage positive outcomes in allocating their scarce resources.
While this new era of online retail and services have disrupted the conventional business models on the non-aeronautical side of the airport business, they could also represent new unexploited “outside of the box” opportunities yet to be explored especially since revenues from retail concessions continue to make a large portion of non-aeronautical revenues. In 2017, this portion which also includes concession revenues from duty free activities, represents 30.2% of all revenues (see Chart 2).
**Car parking revenue includes revenue from airport-operated parking lots and car parking concessions revenue
***Other non-aeronautical revenue includes revenue from other unspecified concessions, revenue from other unspecified activities undertaken by an airport and other unspecified non-aeronautical activities
According to McKinsey & Company, 42% of millennials say they prefer the online retail experience and tend to avoid the conventional brick-and-mortar shops in the US context. Thus, the consultancy argues that the retail store of the future must offer an omnichannel experience to customers. This is achieved by capitalizing on the wealth of data collected by retailers and applying the latest machine learning and analytics tools which aim to customize individual customer experiences. In fact, as much as 83% of customers say they want their shopping experience to be personalized. Moreover, McKinsey’s research states that effective personalization can boost store revenues by 20% to 30%.
More specifically, in the context of airport cash flow and revenues, it is vital that airport operators attract the right blend of retailers as well as other concessions on their non-aeronautical side of the business. This means not only crafting a concession agreement to maximize net revenues from commercial activities but working closely with these concessions to jointly achieve the ultimate end goal of maximizing the overall customer experience.
Customer experience management is the practice of designing and reacting to customer interactions to meet or exceed customer expectations. Increasing customer satisfaction leads to brand loyalty and advocacy, which in turn enhances revenues. More specifically, “airport customer experience” can be defined as the sum of all the interactions that a passenger has with the airport community. It refers to how the customer perceives its interaction with an airport.
Customer experience execution is crucial, since the best way of increasing non-aeronautical revenues is to increase the customer satisfaction. Indeed, an increase of 1% in the global passenger satisfaction mean, as defined by the Airport Service Quality (ASQ) Survey, generates on average a 1.5% growth in non-aeronautical revenue.
ACI’s ASQ programme is the globally established benchmarking programme measuring passengers’ satisfaction while they are travelling through an airport and provides a detailed view of the passenger experience through the complete airport journey. The ASQ Awards celebrate the top airport performers who serve as role models for the industry.
In summary, customers consider that they have had a satisfying airport experience when:
An airport delivers a satisfying experience when:
In order to enhance the customer experience and raise the overall satisfaction, airport managers should prioritize their investments on the following:
The service environment is more that just the infrastructure and cleanliness of terminals. It includes an overall sense of comfort and the general airport ambience. This refers to such subtle things as lighting and temperature. The human factor is crucial in the delivery of an excellent customer experience and not only from airport employees or workers on the airport site, but from all the people involved along the entire passenger journey. In essence the discretionary time component is how airport services accommodate passengers by providing such amenities as WIFI Internet access in addition to facilitating time spent in retail outlets and restaurants. The discretionary time component literally has a two-pronged impact since it directly contributes to increases in customer satisfaction and non-aeronautical revenues. If airport managers could further harness customer data to cater to individual preferences and customize experiences, this will likely have a compound effect on revenues.