Lecture 7: Airport Financial Management By: Zuliana Ismail

Learning Outcome Student able to: Explain how do airport generates revenues Compare the aeronautical and non-aeronautical revenues Explain how airport services and facilities are priced Airport revenues are classified as ‘aeronautical’ and ‘non-aeronautical’: Aeronautical revenue is that derived from aviation activities: charges to private and commercial aircraft operators, fuel sales, hangarage and airfreight facilities. Non-aeronautical revenue is all other income: from parking, shops, rents from offices and other buildings on the airport and other tenants. In all commercial airports, the major costs are fixed and relate to aeronautical operations and regulatory compliance (air traffic, fire & rescue, safety, security and environmental impacts). These airports therefore typically incur losses on their aeronautical activities and balance these with healthy surpluses on the non-aeronautical, to achieve profitability.

Airport Financial Airport financial management is important to manage the balance of operating revenues & expenses. In general, revenues from the operation of airport are used to cover airport's operating expenses. What means by airport expenses??? What means by airport revenue???

What is Airport Expenses Expenses means the cost or money that must be spent for something. In airport, there are two types of expenses which are: Capital improvement expenses Capital improvement expenses include costs of major construction projects such as airfield & terminal expansion. Operation & Maintenance (O&M) costs. O&M costs consist expenses for regular basis & are required to maintain the current operations at the airport. For example: salary of airport employees, costs of utilities such as power(electricity), water & telecommunications noun 1 the cost incurred in or required for something. Ø(expenses) costs incurred in the performance of a job or task. 2 something on which money must be spent. n verb offset (an item of expenditure) as an expense against taxable income. Øinformal charge to an expense account.

What is Airport Revenue? Airport revenue is income that an airport receives from its business activities. **In business, revenue or revenues is income that a company receives from its normal business activities, Usually from the sale of goods and services to customers. Some companies also receive revenue from interest, dividends or royalties paid to them by other companies. Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of $32 million.“ Airports revenue supports airports expenses & provides for the operations, maintenance, and capital improvements. Airport revenues are classified as ‘aeronautical’ and ‘non-aeronautical’: Aeronautical revenue is that derived from aviation activities: charges to private and commercial aircraft operators, fuel sales, hangarage and airfreight facilities. Non-aeronautical revenue is all other income: from parking, shops, rents from offices and other buildings on the airport and other tenants.

How do Airport generate Revenues?

How do Airport generate Revenues? Airports generate revenue from its business activities that can be classified into two categories, which are ‘aeronautical revenue’ and ‘non-aeronautical revenue’. Aeronautical revenue is that from aviation activities which is dealing with aircraft operations. For example, landing fees and aircraft parking fees, lighting and aerobridge charges (paid by airlines) Non-aeronautical revenue is generated from non-aircraft related commercial activities in the terminal building. For example , concessions, parking, rental car facilities, and advertising). Airport revenues are classified as ‘aeronautical’ and ‘non-aeronautical’. Aeronautical revenue is that derived from aviation activities which is dealing with aircraft operations. Non-aeronautical revenue is generated from non-aircraft related commercial activities in the terminal building. Sale of fuel and oil,

aeronautical vs non-aeronautical revenues Landing fees Passenger fees Aircraft parking fees Aerobridges Hangar Navigation Rental of land & space in terminal buildings (ex: office space ,hotels & airline cargo space) Concessions (ex: Retail shops & restaurants, bookstores ,ATM space, game rooms, flight insurance booths, rental car counters, gyms, salons, spas) Car Parking & Car Rental Airport income is generated from aeronautical and commercial activities. Aeronautical revenue includes aircraft landing fees, aircraft parking and hangar fees, passenger service charges and air traffic control charges (if the service is provided by the airport authority), with landing and parking charges probably being most important. Concession revenues are those generated from non-aircraft related commercial activities in the terminals and on airport land. Concession operations include running or leasing out shopping concessions of various kinds, car parking and rental, banking and catering, with terminal concessions and car parking and rental being most important. Revenue Base The company's revenue base is divided into 2 main categories - aeronautical and non-aeronautical revenue. Aeronautical revenue is mainly derived from landing fees, aerobridge charges, check-in-counter charges, parking fees and the passenger service charges. Non-aeronautical revenue comprises revenue generated from commercial activities, including duty free operations, hotel operations, free commercial zone operations, management of parking facilities and the lease of commercial space. Non-aeronautical activities include Concession fees (e.g., rentals and profit-sharing arrangements with concessionaires such as restaurants and retail shops) Revenue derived from rental of land, premises and equipment (e.g., hotels, and airline cargo space, kitchens and office space rent), Income derived from the airport's shops and services (e.g., baggage handling, and parking), and various fees charged to the public. Normally more than 50% of the total revenue of the airport generate by Non-aeronautical charges .

Concessions Concession is the payment that the owner of commercial activities in the airport have to pay to the airport authority. Airport concessionaires (such as restaurants, banking) typically pay rent for the space they occupy.

How do Airport generate Revenues? According to survey, 54% of airport revenue worldwide comes from aeronautical sources. 46% is derived from non-aeronautical sources Airport – Operating Revenues vs. Operating Expenses Summary Airport revenue provides for the operations, maintenance, and capital improvements of the Pierce County Airport – Thun Field. The three-year goal is for airport operations to be self-supporting through user fees and tenant charges. The operating expenses: associated with the airport include maintenance of airport systems and facilities, power and other utilities, and supplies and administration. The operating revenues come from leases and rental charges for land, hangers, tie-downs, and other facilities at the airport and a share of concessions. Performance Goal The Airport Operating Revenues will cover all Operating Expenses (excluding depreciation). Capital costs consist of the component costs (e.g., labor, materials and equipment) of construction of the airport and its component parts. An airport seeking to expand its facilities must raise sufficient capital to finance such infrastructure development from public or private sources. Sources of capital for airport development include: Governmental or international organization loans and grants, Commercial loans from financial institutions Debt (typically, bonds) from commercial capital markets, including private investors, banks investment houses, or fund pools, and the Extension of credit from contractors and suppliers. Operating Costs Such operating costs include expense items as interest and reduction on debt, taxes, and maintenance and administrative costs, including salaries, power, and repairs. Cash Flow Air side revenue streams include landing fees, fuel taxes, and maintenance and cargo facility leases. Land side revenue streams include terminal rents and gate leases, concessions, parking fees, and various taxes, such as, in the United States, Passenger Facility Charges. In addition to government grants and subsidies, the airport turns to its tenants -- the airlines, concessionaires, parking -- and the passengers they serve to finance its maintenance and operating costs, and debt service. Airports derive revenue streams from rents, charges and fees imposed upon airlines, various concessionaires, such as car rental companies, restaurants, newsstands, taxi and van services, catering and baggage services, fuel providers, and parking.

Airport Revenues 16 What can airport managers do to diversify revenue? Temporary Carts & Kiosks – Outposting – Licensing Agreements Sponsorships – Naming Rights – Branding Vending – Smart Carts – Business Products – Entertainment (e.g. Ipod music) Access and Exclusivity Fees Special Event Revenue Opportunities – Super Bowl – Conventions Passenger Related – Car Parking and Car Rental – Hotel and Conference Centers Aviation Related – Air Cargo – Aircraft Maintenance – Component Manufacture Transportation Related – Logistics – Distribution Centers – FTZ’s Business Related – Industrial Parks – Retail and – Commercial Uses Inside the Terminal Outside the Terminal

The taxes/fees on my ticket helps to support airports . How?

Ticket Taxes The portion of a ticket that is composed of taxes and fees depends upon the airfare and the passenger's journey distance Normally, airports charge a Passenger Facility Charges (PFCs) & Security Charge (SC). PFC is a service charge for using the airport facilities & SC is a service charge for using security facility. The portion of a ticket that is composed of taxes and fees depends upon the airfare and the passenger's itinerary. Airports receive a portion of the federal excise tax and segment tax included in the price of a ticket from the Airport Improvement Program (discussed in the next section). As referenced previously, airports may also charge a PFC. An excise or excise tax (sometimes called an excise duty or special tax) is a type of tax charged on goods produced within the country (as opposed to customs duties, charged on goods from outside the country). It is a tax on the production or sale of a good.[1] Typical examples of excise duties are taxes on gasoline, tobacco and alcohol (sometimes referred to as sin taxes).

PFC & SC PFC also referred as Passenger Service Charge (PSC) For example, airport in Malaysia, passengers are required to pay a Passenger Service Charge (PSC) as well as a Security Charge (SC). For Example:

Airport Revenues Shareholders Airport Operator Service Providers Property Rents, unregulated charges etc. Aeronautical Charges Property Rents, unregulated charges etc. Service Providers Retail, car parking, hotels etc. Fundamentally, in order to deliver an attractive return on investment, airports must increase their revenues; & where these revenues are subject to price regulation, airport operators will seek to: find ways to realise revenues outside the scope of regulation; & find ways to realise increased regulated revenues, where the regulatory system allows this; & ‘outside the scope of regulation’ might mean: through commercial activities; & through vertical integration; & through common interest; & regulatory systems may reward ‘efficiency’ & so airports may over-forecast expenditure in order to benefit from this. Airlines Fees Passengers Fares

How are Airport Facilities & Services priced ? Question How are Airport Facilities & Services priced ?

Aeronautical charges Landing Fees Passengers charges Aircraft parking charges Aerobridges – per embarkation or disembarkation. Hangar charges – rental monthly Navigation charges – per mile per aircraft within control zone. Sources of Revenues Landing Fees •Fee imposed based on each landing of an aircraft •Usually the largest source of income at an airport •Normally charged to jet and turbo prop aircraft only •Same rate for both International vs Domestic arrival •Based on Gross Takeoff Weight of Aircraft: Terminal Fees Imposed on scheduled and charter passenger carrying aircraft that use the Terminal Building Normally one of the largest sources of revenue for an airport Separate rate for International versus Domestic Arrival Based on Maximum Seating Capacity of the Aircraft Aircraft Parking Fees •Normally charged to aircraft that are parked for periods greater than one day. •Based on the Gross Take Off Weight of the aircraft •Rates are normally by the day, month or year Other Operating Fees Examples of other fees are listed below. Airports may or may not choose to levy these fees: •Loading Bridge Fee – Flat Rate (Calgary is $51 per connection) •Customs Pre-clearance Fee – Rate per passenger (Calgary is $2.14 per originating passenger) •Aircraft Plug in Fee: Flat Rate •Flight Information Display Fee: Flat Rate per line •Police and Security Fee: Based on maximum seating capacity of aircraft (Ottawa is $0.95 per landed seat) Fuel Flowage (normally AVGAS) Piston aircraft (smaller single engine and twin) do not pay landing fees Airport derives revenue from piston aircraft via Fuel Concession Fee charged to fuel companies Airport will charge fuel companies 4 cents to 8 cents (normal range) per litre for AVGAS sales 19

Aeronautical charges Landing Fees Fee imposed based on each landing of an aircraft Usually the largest source of income at an airport Normally charged to jet and turbo prop aircraft only Same rate for both International vs Domestic arrival Based on Gross Takeoff Weight of Aircraft:

Aeronautical charges Airlines pay rental charges for the space they occupy at ticket counters, gates, baggage handling, maintenance, and catering facilities, and also pay takeoff and landing fees, parking fees, and fuel fees. Two methodologies dominate computation of airline fees and charges under airport use agreements – the residual method, and the compensatory method

Aeronautical charges Passengers charges / Terminal Fees Imposed on scheduled and charter passenger carrying aircraft that use the Terminal Building Normally one of the largest sources of revenue for an airport Separate rate for International versus Domestic Arrival Based on Maximum Seating Capacity of the Aircraft

Aeronautical charges Aircraft Parking Fees Normally charged to aircraft that are parked for periods greater than one day. Based on the Gross Take Off Weight of the aircraft & size –wing span x fuselage dimension. Rates are normally by the day, month or year

Non-Aeronautical charges Hotel – building rental Offices – to airlines and businesses monthly rental sq ft Rental of check in counters per counter per flight Car parking – per car per hour Bus rental Retail shop outlets rentals monthly based sq feet size of the retail outlet (the biggest non-aeronautical revenue) Collect royalties from retail outlets 24

Quick Test The airport revenues are derived from ____________ and __________________`. Aeronautical revenues are come from______________ while non-aeronautical revenues come from___________ Aircraft parking are charged per hour and calculated based on aircraft sizes which are _________ X ________. The format to calculate the landing charge of an aircraft is based on the aircraft’s weight or GTOW. GTOW is stand for ____________________________-.