Airport Business Basics 101: How do airports make money?
How do airports turn a profit? What determines their success? Finavia’s CEO Kari Savolainen walks us through the basics of the airport business.
The airport business is a complex puzzle that’s affected by many factors: airline route planning, passenger flows, local and international regulation as well as trends in the global economy. So how exactly do airports make money?
Finavia CEO Kari Savolainen talked to us about the basic principles.
1. Finavia's airport revenue comes from paying customers, not public funding
“Airports differ from other forms of mass transport, such as railways, in that they aren’t supported through public funding. At the end of the day, all of the money comes from passengers, even though they don’t directly pay for most of the airport services,” Savolainen says.
A large chunk of airports’ revenue is “aeuronautical,” meaning airlines pay for the use of an airport. However, other commercial services including rents and retail concessions from the terminals’ restaurants and shops, as well as airport parking, have become increasingly important in recent years.
2. Airlines pay according to aircraft weight and passenger count
Airport fees paid by airlines are, most often, based on the weight of the aircraft and the number of passengers onboard.
“Terminal and runway charges depend on the weight of the plane: A larger aircraft wears out the runway more, requires more parking space, and therefore pays higher fees. Airlines are also charged for each passenger and the services entailed in handling them at the airport,” Savolainen explains.
International airport fees also vary greatly between airports, and the competition is often tough. To attract airlines, many airports try to keep the charges as low as possible. Helsinki Airport, for instance, is among the least expensive hub airports in Europe.
“Though airport fees and charges count for a large chunk of our total revenue, they don’t necessarily increase the bottom line as much,” Savolainen says.
3. Commercial services are increasingly important
As the net income from airport fees has shrunk, other commercial services have become more important for the airport business. Busy terminals are good commercial locations for shops and restaurants, offering steady flows of customers, so partners pay top dollar to operate at an airport.
”Usually the airport doesn’t charge actual rent, but the partner company pays so-called retail concessions, i.e. shares a part of its income with the terminal operator,” Savolainen says. “The offering is designed together, and the airport supports the shops and restaurants through marketing. The risk is shared.”
Some airports also operate their own shops. Finavia, for instance, handled Helsinki Airport’s tax free shops until 2015, when the shop operations were sold to an international partner, the World Duty Free Group.
4. Parking and other services bring extra revenue
Car parking is another revenue stream for airports. Finavia, for instance, operates the parking lots at its own airports, including the 13 000 parking spots at Helsinki Airport.
”We also have smaller services, like the luggage handling and ground services offered by our subsidiary Airpro,” Savolainen adds.
5. Tough competition, but growing markets
Though passengers rarely pay directly for the use of an airport, they still determine the success of failure of the business. Passengers decide where they fly, through which airport, and how much money they spend on the way.
”The airport can affect the quality of its services and how smooth travel is, which, in turn, affect passengers’ choices. Research shows that along with price, the stopover airport is a deciding factor in ticket purchases. In addition, passengers have more time to spend in shops and restaurants, if they aren’t queuing the whole time,” Savolainen says.
Though, since the 1990s, deregulation and increased competition in aviation has meant shrinking net incomes from airport fees, the industry’s future still looks positive, says Savolainen.
”On a global scale, people’s standards of living are rising and the middle classes are growing, which means increased demand for air travel. I’d say we’re in a sunrise, rather than a sunset industry. Helsinki Airport, for instance is expected to serve 800 000 more passengers each year. That’s a positive challenge for us as an airport operator.”