"Non-aviation" activities and the introduction of new thinking and ideas in the airport business: empirical evidence from an Italian case study

JAIRM, 2012 – 2(1), 34-50 Online ISSN: 2014-4806 - Print ISSN: 2014-4865 http://dx.doi.org/10.3926/jairm.3 34 “Non-Aviation” activities and the introduction of new thinking and ideas in the airport business: Empirical evidence from an Italian case study Vincenzo Fasone, Pasquale Maggiore Kore University Enna (Italy) [email protected], [email protected] Received February, 2012 Accepted May, 2012 Abstract Purpose: This paper aims to describe the main changes occurring in the airport industry with particular attention to the increasing relevance of the non-aviation activities. In fact, during the most recent decades, the airport business has evolved into a dynamic and competitive industry. In order to reduce their deficits airport management policies have progressively favoured the commercial aspects in order to produce greater profit margins. In many countries, greater management elasticity in business administration has occurred, and important modifications have been introduced in the national and international regulations according to a market oriented perspective. Design/methodology/approach: The method used is the case study approach and the analysis utilizes empirical data originating from the airport in Olbia. Findings: Findings show how the choice to invest in the non-aviation sector can be ascribed to the strategic orientation adopted by airport managers. Originality/value: Empirical evidence can highlight certain trends in the industry, whose values can lead to a core definition of the new paths of development for the airport Journal of Airline and Airport Management 2(1), 34-50 35 business to follow in the non-aviation dimension, and identifying at the same time innovative business ideas for opening up new market scenarios. Keywords: airports, non aviation activities, business ideas, case study 1. Introduction Airport-related business during the last decades has been substantially transformed into the reality of a dynamic and competitive industry. In effect, the industry has faced a number of changes that have produced a substantial redefinition of how and what the business sector – seen as a whole – is attempting to achieve in its goals. In this sense, many attempts have been made to reach an appropriate model for the airport business to support growth and development of infrastructures which have suffered significant deficits in the past (Gillen, 2011; Graham, 2008; Asheesh & Sandford, 2001; Jarach, 2001). In many countries, greater elasticity in managing business operations has been legislated and important modifications have been introduced in national and international regulations according to a market oriented perspective (Gillen, 2011; Graham, 2008; Doganis, 1992). Undoubtedly, one of the main innovations refers to the growing attention given towards the development of the “non-aviation” dimension in the context of general airport business activities. Since 1978, with entry into law of the Airline Deregulation Act, with jurisdiction over the aviation industry in the USA, great changes were generated with regard to business operations and significant innovations were introduced regarding management of airport systems. In the European region, another question addressed by airport companies has been the policy of integration finalized in the creation of a common market. The removal of political and commercial boundaries, indeed, caused many problems for operators regarding their operational scenarios. Journal of Airline and Airport Management 2(1), 34-50 36 In addition, catastrophic terroristic events, such as the attack on the “Twin Towers”, together with other global phenomena, such as SARS, have imposed special attention on one hand to security systems and on the other to encouraging and promoting a sense of trust among travellers. Airport-related activities also, face the challenge of coordinating the number of commercial ventures that exist around the core business and that can enable it to develop a systemic relationship with various stakeholders. Graham (2008) summarizes in three key points the changes that have occurred recently in airport management:  Expansion of commercial activities  Privatization processes  Diversification of ownership In Italy, these effects have had a significant impact on the deregulation and privatization of the industry (Sebastiani, 2004). The paper proceeds as follows: Section 2 provides a short overview on non-aviation activities in the airport industry; Section 3 briefly describes the Italian airport system; Section 4 discusses aims, methods and a hypothesis originating from research; Section 5 shows the resulting empirical evidence from a case study analysis; Section 6 includes some preliminary conclusions. 2. “Non-Aviation” activities in the airport business: A brief overview In literature Doganis (1992) defines the airport as a complex of assets (runway, buildings, plant and equipment) enabling the development of air transport for passengers, cargo and mail. According to Jarach (2001), “In recent times, industry’s best-in-class practices have tended to move away from the classical mono-modal approach, where airports struggle between each other and other modes of transportation to increase the weight of their secondary demand, in favour of a new strategic model of management”. The relevance of the non-aviation component regarding airport revenues and their regulation (Kratzsch & Sieg, 2011) is a well-established issue in literature. Zhang Journal of Airline and Airport Management 2(1), 34-50 37 and Zhang (1997) point out how the percentage of total airport revenues represented by non-aeronautical or commercial components is continuing to grow. Presently, among the wide range of airport activities, the most important services are operational, traffic-handling and commercial (Kramer, 2010; Morrison, 2009; Reiss, 2007; Bork, 2006). More specifically, in fact, airport management has faced a radical transformation in the sense of a redefinition of the business operational limits in order to focus their efforts on the activities outside the core business, i.e. on the “nonaviation” activities. Starting from these considerations, the element of interest, therefore, is the dynamic aspect of management, relating to the exercise of infrastructure development and the various activities that have become connatural to the demand growing in differing market segments. Some descriptive data offer a quick snapshot of the relevance of this aspect. According to the 2010 ACI report, the worldwide total airport income in 2009 reached USD 95 billion, whereas aeronautical revenues accounted for 53.5%, and non-aeronautical revenues made up 46.5%. Non-aviation revenues (NAR) rose by 3% in 2009, driven by the retail sector (+2%), real estate (+10%), car rental concessions (+9%) and food and beverage (+7%). In Europe, ACI-Europe (2010) shows that the revenues of European airports, in the last decades, have shown a gradual increase in the non-aviation category, reaching 12.1 billion euros (47% of total revenues) in 2009. Such figures show how NAR represents a vital component in airport management and can determine their financial viability especially in a downturn period, since they generate higher profit margins than aeronautical activities. This transformation cannot be approached exclusively to achieve higher profits, but also to rationalize the whole system that needs to find a balance between economic and public interests. Graham (2009) states that “within each global region and each country, commercial revenues will vary according to a multitude of factors […] These factors will directly depend on whether the airport adopts a ‘single till’ approach, encompassing all revenues when aeronautical charges are set or whether it uses a ‘dual till’ when aeronautical and commercial activities are treated as separate financial entities”. Journal of Airline and Airport Management 2(1), 34-50 38 “Airports are keen on using their commercial revenues – says Abeyratne (2001) – to help cover the costs of huge investments being made on infrastructures improvement. However, the ‘single till’ approach, which is widely used and takes into account both charges imposed on airlines and passengers for using aeronautical services and income derived from non-aeronautical activities as a single income source when setting charges, has been criticized as creating a cross subsidy whereby profits from commercial activities are used to offset aeronautical costs”. The transport sector is indeed affected by profound changes and is gradually losing its traditional image of a protected and monopolist business, because of modifications caused by European legislation that impose the principle of the “open market” in which different legal entities are forced to compete in terms of effectiveness, efficiency and profitability, addressing in a more flexible and timely manner the new required demands originating from the aviation sector. The importance of change in these forms does not concern the legal framework, but rather the evolution of productive capacity and dynamic management in a context that is free from cumbersome procedures of public administration and in which, using the know-how of private entrepreneurship, one can create a virtuous circuit also for creating employment opportunities. It is increasingly clear that a redefinition of the air transport business must necessarily deal with a new “business idea”, designed to facilitate the structural integration of the airport company in their product and market system in order to reach more effective levels of competitiveness and efficiency. Paraphrasing Richard Normann, the emerging “climate of operative tension” in a business context which removes or exploits eventual “disfunctions” occurring in a company’s daily functioning may result to be, in effect, an important “driver” from which a climate for new business ideas is formed. Truitt and Esler (1996) observe that increasingly, non-aviation activities at airports are being autonomously managed by separate companies under management contracts, often as an alternative to privatization through divestiture. In this paper, after a short presentation describing the Italian airport industry, we will discuss - in the light of empirical evidence - possible solutions to be implemented in the relevant business context in which the existence of Journal of Airline and Airport Management 2(1), 34-50 39 “spontaneous driving forces” can lead to a redefinition of corporate strategies, focusing particularly on the growth of the “non-aviation” dimension. 3. The airport business in Italy: Different modes of business administration A brief overview of the normative characteristics of the Italian airport managing systems is important to better understand its particular features that led to the reform of airport business procedures traced back to the Legislative Law Decree 537/93. This act defines the principles of an airport management system in which the private sector represents specific interests and asserts its relevance to ensure the further development and modernization of determinate infrastructures. The economic and legal models created to boost the privatization process also aim at standardizing different modes of governance within the various existing forms of management. Until the introduction of this reform act came into effect, the previously differing forms of management were:  Partial concession (the airport company is responsible for the non-flight airport infrastructures. The company provides services for aircrafts, passengers and freight while the Government administrates the flight infrastructure)  “Precarious” partial concession (in which the company of interest, during the time dedicated to the completion of the convention and the subsequent pending ministerial decree, receives in advance the possession of various properties from the airport entity in order to continue functioning under a partial concessionary set-up)  Total concession ‘by special-law’ (the airport company is responsible for the development of the complete infrastructure)  Direct management (the ENAC, the Civil Aviation Authority directly ensures the organizational and maintenance needs of airport assets). In contrast, the reform act itself states that the mode of total concession is the version that must replace the various types of existing management (i.e. partial or precarious). Therefore, the need to delegate management to a single operator in accordance with private rules oriented to flexibility is imperative. Journal of Airline and Airport Management 2(1), 34-50 40 According to this view, the concession of total management to limited companies is consistent with a new concept of the airport entity, seen now as a modern enterprise that interfaces with a variety of activities and develops its considerable economic potential at the same time giving more attention to passenger needs, a characteristic which has come to play a “central role” in the air transportation system. In essence, under this model the concessionaire plays the role of the investor to whom is delegated the reinforcement of the entrepreneurial capacity of the infrastructure. Actually, in some circumstances, the extreme delay in the implementation of this reform has frustrated expectations from the public sector. During the implementation of the privatization process, it is still the government’s responsibility to intervene and ensure, through a normative provision, the resources needed for successive phases developing airport facility improvements. Therefore, we can say that the design of the reform plan resulting from the previous system is still functioning. In the light of the framework discussed so far, management of Italian airports as outlined in their various organizational characteristics is as follows:  Partial concession (Albenga, Ancona, Asiago, Bolzano, Brescia, Crotone, Cuneo, Forlì, Grosseto, Lucca, Oristano, Padova, Parma, Perugia, Reggio Calabria, Reggio Emilia, Rimini, Salerno, Siena, Trapani, Treviso, Venezia “Lido”, Vicenza)  Total concession “by special law” (Roma “Fiumicino e Ciampino”, Milano “Linate e Malpensa”, Venezia “Tessera”, Torino “Caselle”, Genova and Bergamo)  Total concession ex D.M. 521/97 (Bari, Brindisi, Foggia, Bari, Napoli, Firenze, Olbia, Bologna, Pisa, Cagliari, Catania, Palermo, Trieste “Ronchi dei Legionari”, Alghero, Pescara, Verona “Villafranca” and Lamezia Terme)  Direct management (Lampedusa, Pantelleria, Roma Urbe and other small airports). Journal of Airline and Airport Management 2(1), 34-50 41 Regarding the debate on varying airport management infrastructures Asheesh and Sandford (2001) and Carney and Mew (2003) have offered an important contribution. The ownership of the airport companies has assumed various configurations in differing countries and in relation to appropriate normatives and regulations. It can be argued that the different ownership structures have been developed within a continuum transformed from public to private ownership. In the following way it is possible to identify structures:  Owned totally by public sector (with direct control by the State or by the Authority)  Mixed owned by public and private sector  Owned totally by private operators. In the case of Italian airports, the various companies’ ownership characteristics outline how the share capital is mostly the property of local authorities for instance, municipalities, Chambers of Commerce and in only a relatively few cases by private shareholders (ENAC, 2010). 4. Aims, hypothesis and method Through this study we are attempting to understand if and under which conditions the non-aviation dimension can be considered as a strategic business unit in order to support the long-lasting competitiveness of the airport system as a unified entity. Accordingly, this paper aims to address this issue through an explorative approach analyzing one particular Italian case study. This analysis is of particular interest when the country under study – in this case Italy – is characterized by a heterogeneous situation in reference to inherent airport characteristics (for instance, for passengers traffic volume, mix of low cost and traditional carriers operations, etc.) and lower non-aviation revenues than existing worldwide. However, in this context, relatively few studies exist. Abrate and Erbetta (2010) show how economic concerns can have a strong connection with changes in airport organization, involving in particular outsourcing of handling operations and Journal of Airline and Airport Management 2(1), 34-50 42 development of commercial activities. Curi, Gitto and Mancuso (2008, 2011) in their first study investigate airport efficiency and in the second, they separate the factors of efficiency related to the ability in managing airside activities (operational) in contrast to factors relating to the management of a complete range of financially-related business activities. The analysis utilizes empirical data originating from the airport in Olbia. These analyses represent interesting “laboratories” for data information implemented through the adaption of a market-oriented approach to business development. The study’s hypothesis is that a well-organized non-aviation sector can contribute significantly to boosting growth of overall airport business. In this sense, the related hypothesis is that the development of an efficient non-aviation dimension can be useful in dealing with economic and financial issues related to general air traffic business. The methodological approach utilized here is the case study analysis (Yin, 1994). In the selection of case studies for this research project, we have used a nonprobabilistic (judgmental), sampling technique. We also utilized so-called “purposive sampling”, often used to obtain illustrative outlines of specific realities through the use of particularly representative cases (Saunders, Lewis & Thornhill, 2003). The study was carried out and the relevant analysis performed with data directly gathered from the Olbia airport website, and through analysis both of financial reports and semi-structured interviews. The utilization of interviews enabled us to confirm the analysis of the collected data. Thus, in order to test the assumptions of this study, we carried out research based on secondary data analysis. Which in particular refers to “documentary secondary data” that include consolidated and single balance sheets of the selected company, airports’ traffic data and annual statistics. 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