Impact of globalisation, deregulation, and privatisation on airlines and airports

Airports

Globalization has impacted the airport industry in two key ways. The first is that airports are now in global competition with one another, and this has spurred significant expansion of the industry. Airports compete on a regional basis -- the different airports along the Persian Gulf compete with each other for Europe-Asia transit passengers for example. As a result, demand for airport capacity has increased, setting off a round of expansion. This has put pressure on local land use and on governments to help their airports meet this demand (Cidell, 2004).

Ownership of airports has also become globalized as the result of deregulation. Private airport operators have emerged in a number of countries. Many of these operators have now diversified their holdings to include airports around the world. The Vancouver Airport Services, for example, has stakes in around twenty other airports worldwide, in Britain, Cyprus and the Dominican Republic in particular. This has brought with it challenges relating to government regulation of airports, in particular those owned and operated by foreign entities. In addition, these entities operate with a profit motive, which calls into question their ability to meet safety and security protocols effectively.

The globalized business world has also dramatically increased demand for air cargo. The air cargo system is becoming increasingly integrated, as trade liberalization encourages the flow of goods around the world. Airlines now compete for cargo the same as they compete for passengers. Cargo revenue increased 40% in the past year, including a surge of 26% in the first quarter of 2010. This increased volume, up to load factors of 56%, is a direct function of rapid increase in trade as the result of liberalization and globalization (Barnard, 2010).

One of the impacts of these changes is an increased focus on regional hubs, and hub-and-spoke models. The hub and spoke model has been used by airlines in the U.S. For years, and has become popular in other parts of the world as well. Some of the fastest-growing airlines in the world utilize this model -- Air Asia with Kuala Lumpur; Etihad with Abu Dhabi and Emirates with Dubai. Many European discount airlines, however, continue to focus on point-to-point flights, often to vacation destinations.

Hub airports now engage in competition with one another to fill their capacity. A good example can be found with Abu Dhabi, Dubai and Qatar. Each of these airports is government-owned and is supported by a government-owned airline. They compete against one another for lucrative trade that links Asia and the subcontinent with Europe and the Middle East. The airports thus have become proxies for broader competition between nations.

Private airports, however, have taken to operating differently. They compete on the basis of landing fees primarily, in particular with respect to who receives landing fees and how much those fees are. For these airports, increasing traffic is a primary strategic objective, whereas in the era of publicly-held airports, this may not have been as important. This shift in the mandate of airports has resulted from privatization, but ties back into globalization because these private companies are now able to invest in airports all around the world.

Airlines and airports have built more symbiotic relationships as a result of these changes. Some airports become dependent on specific airlines that use that airport as a hub, for example. Low cost airlines utilize secondary airports for their lower landing fees. Access to airports is sometimes strategic as well, for example when Canada blocked Emirates and Etihad from gaining more access to Canadian airports, which would have hurt the business of Air Canada, the major customer for all major Canadian airports (Parkinson, 2010).

2. There are a number of ways in which airports generate income. The first is through landing fees that are charged to the airlines. These fees are applied for the right to land a certain number of flights at certain times, and are paid by the airline for the use of a specific airport. Typically, landing fees are referred to as "aviation income." This class of income also includes passenger income, such as departure taxes that are levied to the consumer directly or are built into the cost of a ticket.

The second class of airport revenues is non-aviation revenues. These revenues include retail concessions, parking, rental car concessions, rent, and a variety of other types of revenue (Gittens, 2010). This revenue is generated from both consumers and from the companies that operate at the airport. In recent years, non-aviation revenue has increased as a percentage of total revenue. Largely, this is due to the increased attention that privatized airports pay to these streams.

Both streams of revenue are correlated with passenger traffic. Thus, the main driver by which airports increase their revenue is by increasing passenger traffic. Airports utilize whatever competitive advantages they can offer in order to facilitate this, be in prime location, size, capacity, landing fees or other enticements. Airports also work to keep passengers in the airport longer, and entice them to spend more. To accomplish this, airport managers alter the retail mix, design better public spaces, and generally seek to find ways to convince passengers to spend rather than simply to wait.

Airports typically benchmark their economic performance in terms of each type of revenue stream, including the percentage of non-aviation income that is generated (Pentol, 2010). In addition, airports will usually benchmark against past performance and other airports with which they are competing. Different segments (concession, duty-free) are also measured by airports when analyzing their financial performance. It should be noted that the changing dynamics of the airport industry are leading to a set of measures that is rapidly evolving as private airports hone their business practices (Humphreys & Francis, 2002).

3. There are a number of security threats facing airports at present. A threat which has emerged of late is related to terrorist devices in cargo shipments. Cargo often flies on passenger planes, which is why these devices represent such a threat. Cargo often undergoes a lower level of screening than does freight that originates with passengers. Another class of threat is internal. This represents a human resources challenge, in keeping suspect individuals out of the airport staff, or away from sensitive areas. For example, an employee in Orlando participated in the smuggling of firearms (Meserve & Ahlers, 2007).

In addition to terrorism, airports are threatened by disease and human smuggling (Frost & Sullivan, 2010). Both of these represent safety issues for the airport and the nation as a whole. Procedures need to be in place to manage these different risks. Airports must be able quarantine dangerous diseases should they arrive. In addition, airports need to be able to meet the security needs of the nation with respect to smuggling of humans, weapons and drugs. Organized crime needs to be denied access to airports.

Airports deal with these threats in a number of ways. They actively screen baggage and passengers. While there are some privacy issues with respect to these inspections, the inspections provide the main front line against security threats. New techniques including biometrics and full body scanning have also been introduced as a means of improving screening practices (Babu, Batta & Lin, 2004). In addition to technological solutions, airport authorities are focusing on the human resources function for improvements, including new training programs and better employee background screening measures.

Airports are also seeking more comprehensive means of addressing security issues. Much of the current security network is a patchwork set of rules that may or may not deliver effectiveness. New threats are met with procedures and rules to deal with the threats. The European Union is now seeking a comprehensive solution to airport security and is working with Israel to bring that country's techniques to European airports (Gedalyahu, 2010).

4. Airports today face a multitude of challenges. They compete with each other for business, seek to build both aviation and non-aviation revenue streams and they must also deal with enhanced security requirements. This places significant pressure on the airport sector. The response within the sector has been twofold. Some airports have become privatized, which allows major airport operators to utilize their expertise across a range of markets. The other solution is the development of public airports that serve as branches of their governments, attracting passengers and investment to the region. Both types of airports have strong, multifaceted strategic mandates and are among the vanguard of modern air transportation.