Monday, January 2, 2012

Resource Manual for Airport In-Terminal Concessions

The evolution of airports from rudimentary airfields to today’s sophisticated centers of commercial transportation is paralleled by the development of in-terminal concession programs at airports. In the opinion of airport concession managers interviewed for this project, in-terminal concession programs have over the years gained a higher profile and become more important contributors to the financial and operational success of today’s airports. Developing and managing in-terminal concession programs requires the application of sound commercial practices adapted to the unique constraints of airport terminals, an understanding of the needs of passengers, and an understanding of the public procurement requirements under which individual airports operate.

The rapid growth in airline travel following World War II was characterized by a highly regulated airline industry and a growing need for new, modern terminals and airfield capacity. The introduction of jet aircraft in the late 1950s made airline travel faster and more convenient, and required further expansion of airfields and terminals. While the need for new investment was great, airports at that time were unproven credit risks. To support the required new investment, airport sponsors turned to long-term lease and use agreements with the airlines and long-term concession agreements, often exclusive, which provided guaranteed revenues over the life of the agreements.

Airline deregulation in the late 1970s resulted in new startup airlines, expanded airline service, cheaper airfares, and rapid growth in numbers of passengers, followed by a significant period of terminal expansion. Major new terminals at the airports serving Atlanta, Dallas/Fort Worth, Denver, Phoenix, and Pittsburgh, among others, were planned to accommodate the expansion of airline hub-and-spoke route systems. The terminals at airports in other cities were expanded to meet current and forecast demand.

Also, in the 1970s, a few forward-leaning airport sponsors, such as those overseeing Washington National and Miami International airports, introduced branded concessions to supplement the large contracts that characterized the airport industry at that time. Operators of other airports, including Portland International Airport, successfully brought local brands to the airport.

Federal mandates to expand opportunities for minority businesses were introduced in the 1980s, and airport sponsors restructured concession agreements to provide opportunities for Minority Business Enterprises (MBEs, later changed to Disadvantaged Business Enterprises, or DBEs), adding to the scope of existing concession programs.

Over time, airport sponsors became less reliant on revenue guarantees and more concerned with improving the food and beverage, retail, and service concessions offered to passengers. The reduced reliance on exclusive contracts and long-term guaranteed revenues—based on a realization that the local market, and not individual airlines, was the driver of passenger demand—brought an end to the belief that passengers were a “captive market” most efficiently and profitably exploited by a few long-term concession agreements. From a contracting perspective, the award of concession agreements evolved from straight bids based solely on guaranteed revenues toward more customer-focused processes emphasizing customer satisfaction and convenience as well as revenue. Passengers showed clear preferences for concessions that more closely resembled their choices outside the airport.

In 1992, the new Pittsburgh International Airport terminal opened with a concession program run by a developer, BAA USA, a subsidiary of the U.K. airport operator BAA plc, the privately owned successor to the former British Airports Authority. Allegheny County, operator of the airport, and the hub airline, US Airways, wanted a new, sophisticated concession program that would help attract connecting passengers and make the airport more competitive with other hub
airports. The Pittsburgh concession program featured international, national, and local brands and a major commitment to specialty retail. The program was a big success and marked a turning point in the evolution of in-terminal concessions. Soon, traditional concessionaires were embracing branding and offering portfolios of brands.

The increased competition and ease of market entry that led to the expansion of airline service and new airlines also put the older legacy carriers under financial pressure. Increased competition and excess capacity left these airlines vulnerable to economic downturns. Airlines pushed airport sponsors to reduce their rates and charges in the short term and to decrease their reliance on airline rates and charges by growing nonairline revenues. As a result, airport managers became even more focused on improving their concession programs.

Once considered ancillary services that offered basic passenger conveniences, in-terminal concessions have increased in importance as airport sponsors seek to increase nonairline revenues while meeting higher passenger expectations. Fortunately, there is a direct connection between the two.

The purpose of this resource manual is to provide airport concession managers and other stakeholders, such as airport senior management, board members, concessionaires, and airlines, with an easy-to-use reference for understanding, planning, evaluating, managing, and developing airport in-terminal concession programs.

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