As airlines have consolidated and worked to cut their airport costs, facilities large and small across the country continue to chase after nonaeronautical revenue to fill the gap. Airport Business took a look at what three -- Dallas Fort Worth International, Jacksonville International and Boise -- are doing to keep their facilities in the black as the industry’s revenue model continues to evolve.
Rebecca Hupp has been Boise’s airport director since March 2012. Smaller airports like hers have really felt the impact as airlines have reduced the number of 50-seat jets and turboprops and the schedules that accompanied them.
“The challenge is always to diversify, because it wasn’t that long ago when Boise saw a significant decrease in airline operations during the recession that started in 2008,” Hupp recalled. “We saw flights decrease by 25 percent and our money also dropped.”
The challenge was how to keep costs low when a key revenue generator -- airlines -- dropped, said Hupp. “We didn’t want it to lead to a spiral of greater costs and less service, but we rebounded,” she said.
Boise currently derives 68 percent of its revenue from non-aeronautical sources, said Hupp. “We brought in just over $19 million in revenue in 2015,” she said. It also won two awards for its food and beverage programs in the 2016 ACI-NA Airport Concessions Awards.
The airport’s largest income generator is parking, which accounts for about a third, said Hupp. “Then there’s car rentals, concessions and hangar rentals,” she said.
One of Boise’s top nonaeronautical sources is property rentals on the facility’s more than 5,000 acres of land, said Hupp. “We rent our land for a variety of different nonaeronautical uses, everything from horse pastures and farm land to warehouses,” she said. “We also lease space to cell phone towers.”
Steve Grossman has been the executive director and CEO at the Jacksonville Aviation Authority (JAA), where he oversees four airports: two general aviation facilities, a former Navy air station and Jacksonville International.
Jacksonville International Airport’s split is 70 percent nonaeronautical revenue, which brought in $52 million in 2015, driven by parking, rental car and concessions, he said. “We’ve already maximized our concessions program, operated by Paradies, which is where it starts with most airports,” said Grossman. “We don’t overwhelm passengers with concessions, but we have a balanced program that generates close to the maximum from our customer base.”
And you build out a nonaeronautical program from there, said Grossman. “Next is parking, a common large revenue generator for airports. We’ve aggressively priced parking to gain the maximum revenue and market share from off-airport providers,” he said. “We’ve gained back 20 percent of our revenue in the past five years.”
When he took over JAA, Grossman found that his GA airports were in the red and the naval base was breaking even. “The first thing we did was have their staff do business plans so they could be break even or cash positive,” he said. And five years later, they are, he added.
One of JAA’s GA airports leases property to auto dealerships to store cars, said Grossman. “There’s also an RV lot on property that had zero revenue before. Our airports can take advantage of the city’s growth, and we’re ready to handle development for offices, commercial spaces or whatever is needed,” he said.
Jacksonville International Airport has two hotels on site, said Grossman. “We have lots of acreage that is not airside and we have plans for it. When you have property like that, you do compete for office space, warehouses and research and development,” he said. “We’ve already done the prep work, so when the market is ready, we’ll be ready. As the area around Jacksonville airport grows, we can take advantage of those market opportunities.”
Ken Buchanan is the executive vice president of revenue management for Dallas/Fort Worth International Airport, the fourth-busiest facility in the country in 2014. The airport’s nonaeronautical revenue falls between 65 to 69 percent of total revenues, bringing in a whopping $383 million in 2015. It was named winner of Richard A. Griesbach Award of Excellence in the 2016 ACI-NA Airport Concessions Awards.
“Look at how diverse our revenue streams are. We're getting almost $4 million from natural gas. We have more than a hundred operating natural gas wells on our airport. And I don't know of another airport in the country other than maybe Denver is maximizing on the natural resources of their land,” said Buchanan. “DFW sits on 18,000 acres, which is more than 50 miles of space.”
DFW has three hotels on the property, with more than a thousand rooms, said Buchanan. We have an 800-plus room Hyatt Regency that handles conferences, a luxury Grand Hyatt hotel with approximately 300 rooms and we have opened a Hyatt Place hotel next to the rental car center.”
The airport is surrounded by significant highway frontage roads, said Buchanan. “So last year we opened up our first car dealership at the airport. We have an Infiniti dealership, which I believe is the largest Infiniti dealership in the U.S.,” he said. “We have plans to open up three to four other dealerships on our airport. So there's a tremendous amount of opportunity to grow our nonaeronautical revenues, unlike other airports that are landlocked or that may not be centrally located in their metroplex.” In 2015, DFW did $135 million in parking and $74 million in concessions, he added.
All three airports have faced challenges and achieved victories with nonaeronautical revenue. Jacksonville’s Grossman said his big challenge is attracting aerospace businesses to the airport. “We’re not the only community going after them, because it depends on the incentive packages that a state can offer,” he said. “In the past years, Florida was not aggressive in that area and lost big deals because of it. But Gov. Rick Scott has been aggressive in going after businesses.”
Grossman said he doesn’t lose sleep at night over missed opportunities. “I focus on our biggest opportunities, because there is so much to focus on. We’re trying to develop a commercial spaceport, which is a brand new industry, and that will contribute to nonaeronautical revenue,” he said. “I do not waste time and work with a lot of local partners, including Visit Jacksonville and the economic development arm of the Chamber of Commerce, to respond to RFPs.”
Boise Airport’s biggest victory is its concessions program, said Hupp. “We did an RFP in 2014 when that contract expired. We selected two new companies, Delaware North and Paradies. We based our selection on revenue generated for the airport, investment in facilities, the ability to have it create sense of local presence and the ability to execute and manage the concessions,” she said. “Our program now has several marquee concessions that allow local restaurants to showcase their brands, and the response by the public has been tremendous.”
The airport’s challenge -- and success -- was its parking garage, said Hupp. “Before my time, the airport was going to build a parking expansion, but there were delays over local policies and the airport’s authority to issue bonds,” she said. “Then the recession happened. But after the recession, we were able to proceed and we got very favorable rates for our bonds and construction costs, which worked to our benefit. We’re now experiencing an unprecedented use of our parking lot and revenues have exceeded projections.”
DFW’s Buchanan said understanding the consumer needs, wants and desires is a big challenge. “We conducted a customer segmentation study three years ago and we really dug deep into what the customer expectations are,” he said. “And of our 64 million passengers at DFW airport, we dug deep into what is it that each segment expects in the airport. What drives and motivates them in an airport? And we've nailed our program around what they say they want.”
Revenues increased because the airport is giving passengers more of what they want, said Buchanan.
Technology obviously is a huge challenge, said Buchanan. “But it's one that we embrace. It's definitely changing how the consumer interacts at the airport. For example, when you look at our international passengers, over 70 percent of [them] use an electronic kiosk to enter into the United States. That's a huge,” he said. “So we have 70 kiosks that replaced 25 stations with an agent in those stations.”
DFW has introduced a mobile app that handles things like finding parking spaces and restaurants within five minutes of where they're located. “Our research shows that our average customer travels with more than two electronic devices. And they want to be connected. And so it gives us the opportunity, we're fortunate to be the home of AT&T world headquarters,” he said. “So we have a relationship with them and offer free Wi-Fi to all of our guests in DFW airport. We're able to leverage that technology company to provide a service to our passengers at the airport. So technology is changing so fast and staying ahead of that is a challenge. But it's one that we embrace.”
As a result of industry changes, airports have had to change the way they do business over the past 10 years. “I’ve been in Boise for four years, and airline consolidation has changed the industry. Bag fees have changed the way we handle luggage. Security screening has changed,” she said. “Back in 2000, we had 10 airlines. Now we have four that carry more than 90 percent of all domestic travel, so we’ve seen less of a need for things like ticket offices and other kinds of things.”
In the past 10 years, DFW has moved away from the typical landlord-tenant mentality to a more of a business relationship, said Buchanan. “Most airports have a Minimum Annual Guarantee (MAG) as base rent and they also get a percent of sales that concessionaires produce,” he said.
“What we've done at DFW is reduce the actual MAG and the amount of rent that our concessionaires pay us and increased the amount of percent that we get on sales, which changes the dynamic in our relationship,” said Buchanan. “I'm no longer that landlord saying, ‘give me my rent. The rent is due. Pay me the rent and I'm happy.’ Instead, we say we’ll work hard to create a business environment that is conducive for you to maximize your sales. Therefore, since I'm getting my revenue based on your sales, I will get more revenues.
“If our concessionaires aren't doing well in generating sales, then our revenue aren't going to come in strong,” he stated. “And so I've got to do everything I can to create an environment where they can maximize their sales, because that's where our revenues come from. In 2016, we view our concessionaires as business partners.”
Jacksonville’s Grossman said his airport has seen a similar philosophical shift in the past 10 years. “We evaluate everything on a business-like basis and don’t allow politics to get into it,” he noted. “We’re not here to make deals with friends or sign below-market deals. We’re more like a bank, evaluating revenue potential.”
Like DFW, Jacksonville looks at what it can do to make companies successful, said Grossman. “We will take less money on the front end to make more on the back end. For example, one of our airports had a golf course that was doing terribly,” he said. “We struck a deal with a new golf course management company, gave them the flexibility to run the course and good financial terms where they didn’t have to pay us a significant amount of rent right away. But the rent went up as they did better.”
Looking ahead to the next 10 years, all three agree that nonaeronautical revenue will continue to grow in importance for airports. “Airports learned a lesson during the recession as airlines cut capacity and flights, and passenger numbers decreased,” said Hupp. “We all now see the need to diversify our revenue sources so we’re not tied to one stream.”
In 2015, Boise Airport opened a 130,000 square-foot aircraft maintenance facility for SkyWest Airlines, said Hupp. “It’s been a huge success for us and the community, bringing in 100 jobs and leasing 12 acres of land that hadn’t been utilized,” she said. “It’s complementary to our revenues and it’s an investment that has paid off.”
Jacksonville will continue to grow in everything it’s already doing, along with growing the component of non-aviation land for commercial development, said Grossman. “In 10 years, I see that as upwards of 20 percent of nonaeronautical revenue. The city will continue to grow and 10 years from now, the airport will have a fair amount of that development. And the commercial spaceport will also generate a nice profit for us.”
Buchanan said the next 10 years will be incredible for DFW because the amount of commercial development that it can accommodate is very significant. “In the next 10 years, we could find ourselves in a situation where we're generating more non-aeronautical from the business relationships that we have with our land versus our terminals,” he said.
