The Airports Council International released a whitepaper on the above subject matter as part of its whitepaper on non-aeronautical revenue activities at airports. The Airports Council International (ACI) advances the collective interests and acts as the voice of the world’s airports and the communities they serve, and promotes professional excellence in airport management and operations. This whitepaper which yours truly was involved in producing, outlines the types of contractual relationships between airport operators and concessionaires. It is reviewed here and can be downloaded for free from the ACI store.
One common means of managing non-aeronautical revenue activities at airports is through concession agreements. This is regulated by a contract which defines various aspects of the relationship of the airport with the concessionaire. This relationship is grouped into operational and financial terms.
Concession agreements allow airports leverage on the specialisation of concessionaires to ensure the best customer service and customer experience for their passengers. Service Level Agreements embedded in them enable airports to influence the quality of service delivered to other passengers. It also leads the concessionaires towards excellent value propositions to their customers. The downside, however, is that the agreements may not be flexible enough to deal with changes in the business environment. In some cases the balance of risks and rewards may be tilted somewhat unfairly in favour of the airport.
The whitepaper outlines three different types of contracts based on the number of units or locations captured under the contract. These are: Single Unit Concession, Bundle Concession and Master Concession. Each of them have differing measures of flexibility and innovation, commercial agility and adaptation to evolving trends, states the whitepaper.
Risk appetite and sophistication define concession fee models. Five are listed, namely: Minimum Annual Guarantee (MAG)/Fixed Rent; Revenue Share/Rent as Share of Sales; Hybrid (combination of MAG/ Fixed Rent and Revenue Share/Rent As Share of Sales); Revenue Share With Tiered Rents; and Profit Share/Rent as Share of Operating Profits.
Non-aeronautical activities can be managed by joint ventures. Here, investments are shared between airports and concessionaires. Both parties are able to maximise returns on available space and create a highly innovative and attractive shopping experience for customers as a common goal. Efficient corporate governance is key to the successful operation of this business model. A close collaboration and sharing of expertise has the potential to better align the direct interest of the airports and concessionaires in increasing performance. However, aligning the vision, mission and policies between the business partners is a challenge with this business model.
Supply Contract is also another model for managing non-aeronautical activities. Here, the airport keeps full control on investments and manages operations. Suppliers just provide a variety of international products and brands of various categories. The responsibility for retailing is with the airport. The challenge with this business model is that it may take a long time and a lot of effort for the airport to be able to give customers excellent retail experience as retail will not be the only business of an airport. This model calls for significant investment by the airport, states the whitepaper.
A hybrid business model between supply contracts and concessions is Management Contract. Here, the airport bears all investments, keeps control over operations whilst the operator comes along with operational expertise which could be eventually transferred to the airport. Both parties have a joint interest in increasing sales and activities at the airport with this model.
The whitepaper advises airport operators and concessionaires to appreciate that the air transport industry is dynamic. They should seek to collaboratively adapt to the business environment with an eye on giving benefits to all parties and above all to the passengers who are the ultimate end-users of their services.
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