Thursday, November 1, 2012

The love-hate relationship between airport operator and hub carrier

There are mutual dependencies between an airport operator and a hub carrier. Both companies contribute to the overall product "Airport". In many subject areas, the interests of both parties are therefore identical. Different interests can occur in subject areas in which the airport operator represents the interests of all airport users and they do not meet the interests of the hub carrier, or where the airport is representing their own interests.


Different Roles

The airport operator is holding the concession to operate the airport and is therefore responsible that the infrastructure is used efficiently and suffices to accommodate future growth. The planning and the day-by-day management of infrastructural resources should therefore stay where the financial responsibility is located i.e. with the airport. Airports leaving the management of infrastructure to airlines will be faced with inefficiency and continuous demands for more and better infrastructure which produces higher costs (for example inefficient resource allocation and lack of control of slot adherence). A hub carrier is planning their network and schedule in order to satisfy the demand of passenger and cargo transportation and in doing so, to make as much profit as possible. For an airline, the planning of resources like aircraft and crews is their core competence and should not be handed over to an airport as the financial responsibility to shareholders lies exclusively with the airline.

Different Businesses

There is a big difference of the cost structure between airline and airport. An airline has 70-80% variable costs. In case of an economic downturn it will reduce costs by eliminating flights with a low profitability and can so reduce their main expenditures substantially and quickly. The planning horizon is usually 2 flight seasons except for fleet planning which is covering 2 to maximum 5 years. An airport has 70-80% fixed costs. The main cost factor, infrastructure, cannot be reduced quickly if revenues drop because airlines cut their flight schedule. Airports therefore tend to build functional infrastructure which is cheap to build and maintain. The planning horizon (master plan) covers often the best part of the concession period and can be as long as 30 to 50 years.

Conflict 

Though the relationship between hub carrier and the airport is a symbiotic one there are conflicts in the one between hub carrier and hub airport. From the airport’s view, the hub carrier presents with its big market share a cluster risk and a danger to its independence. To attract other airlines is the sensible thing to do in order to mitigate those risks, at least from an economical and entrepreneurial point of view. This is a balancing act though, because the airport has to be careful not to cause a too competitive environment in order to prevent an adverse effect on its main customer. The hub carrier in turn expects from the airport a better and more exclusive infrastructure than the other airlines to get a competitive advantage. All this of course offered at costs which should lie considerably below the prices paid by competitors for less suitable facilities. And there should be no competition, even to destinations presently not served by the hub carrier.

Conclusion

This conflict exists at most of the hubs of this world. It should be addressed by airport and hub carrier in order to find a cooperation model without intruding into the partners business or responsibility. It should not be lopsided but serving both partners even if it means compromising. It should allow both, airport and hub carrier to grow and to conduct its business within limits to be agreed on in a memorandum of understanding, without interference of the partner.

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