Roundtable



Skyways: A Review of the Aviation Market and the Aerotropolis Concept

Roundtable features senior practitioners engaging in open discussion on the most pertinent issues facing the infrastructure industry both today and tomorrow. This edition features Roddy Boggus, John (Jack) Kasarda, and John Porcari discussing the future landscape of the aviation industry and the aerotropolis concept.

Amine Stambouli (AS): Since 2000, the United States commercial aviation industry has suffered several shocks that have led to reduced demand for air travel and increasing air carrier financial losses. These shocks have included the terror attacks of September11, unstable fuel prices, and a global recession. In response to this period of volatility, many American carriers have fine-tuned their business models with the aim of reducing operating costs and increasing operating revenues. In 2011 and 2012, demand for air travel and carrier operating profits improved as the commercial aviation industry experienced a return to stability.

As global economic activity and demand for air travel slowly picks up, what is your outlook on the US commercial aviation market going forward? What will the future commercial aviation market look like?

John Porari (JP): I think the first thing that served the industry well is some discipline on the capacity side and, among the US carriers in particular, with the consolidations. I expect that to continue so that air carriers will keep their load factors, if not their yields, high. If they couple that with fleet renewal, I think the carriers will have at least some insulation against future fuel price shocks.

Roddy Boggus (RB): I think we may see fewer commercial airports in the future. Many of the airports that we have today date back to World War II when over a thousand airfields were commissioned. Following World War II, many of these airfields were put back into service as commercial airports.

If we were designing an aviation system today on a blank sheet of paper, I don’t know that we would develop as many airports. With funding being less dependable these days, we may see a reduction in commercial service airports in the future.

Jack Kasarda (JK): I believe that over the long term we will continue to see short-term dips not only from economic downturns but also from unanticipated disruptions. It is important to keep in mind that passenger and cargo volumes have always bounced back, and bounced back stronger after dips. Aviation growth will thus be the long-term trend in the US and internationally.

The US domestic market will begin to mature, however. We will not likely have as high an average annual percentage growth over the next 30 years as we’ve had the last 30 or 40, but in absolute numbers we will see substantial expansion of the aviation market.

There’s little doubt that the mix of passengers will shift going forward. One can observe already with our aging population the increase in the number of wheelchair boardings. As the huge baby boomer cohort enters their 70s and 80s, they will continue to travel, creating delays and other challenges at the boarding gates. Foreign passengers on US domestic routes will mushroom as well. For example, the World Tourism Organization forecasts that there will be more than 110 million Chinese mainlanders traveling internationally by 2020. Foreign visitors, while boosting passenger volumes, will demand more multi-lingual airport and airline employees.

JP: There may well be too many commercial service airports in our national system. Not every town and city needs one and that’s an economic development reality in the US. Regions are the basic economic units these days and many regions have more than one airport as they’ve grown. It’s not clear that all regions can sustain the origin and destination service that they currently have.

RB: I also think that given the business model that regional businesses currently feed into global businesses, we’ve seen a trend to employ more efficient aircraft that allow some airports to serve routes they previously could not serve.

JK: While late 20th century intercontinental service was dominated by the four-engine aircraft, 21st century long-haul service will be dominated by the two-engine aircraft. Fuel prices contribute to 25 percent or more of the cost of airline operations now, so four-engine jumbo aircraft such as the A380 and the B747-8 will be overwhelmed in numbers by extended range two-engine aircraft such as the A-350, B787, and B777.

RB: I also think that airport owners or operators will understand that major employers drive air service and demand. It really argues for them to pay much closer attention to their region’s major employers that are actually filling the premium seats and to make sure that air carrier service development is tied very closely to the larger economic development strategy for the region.

JP: In terms of air carrier business models, Norwegian Air Shuttle is an interesting example as it is incorporated in Ireland and contracting crews from Thailand. Its fleet includes 787s that can serve some really interesting long and thin routes. Understandably, there’s a lot of concern and opposition from unions and others, but whether it’s Norwegian Air, or it’s somebody that follows them, we’re going to see more and more of this business model in the commercial aviation industry. 

I’m not sure how the Norwegian Air example will work out, but it really gets to the possibility, and maybe even the necessity, for airport owners or operators to buy service in the future or to actually directly or indirectly subsidize some of the air service. This also certainly puts pressure on existing US carriers because airlines like Norwegian Air could be seen as a low-cost carrier for international travel.

AS: What short- and long-term pressures has the changing commercial aviation landscape created for airport owners and operators?

JK: Airport owners or operators will need to increase their non-aeronautical, revenue from concession rents and sales, advertising, real estate, and parking. The US is behind in the percentage of revenues that our airports receive from non-aeronautical sources, but the pressure to increase a revenue alternative to landing fees, gate leases, and passenger facility charges is growing.

   

These alternative revenues can also have returns beyond the bottom line as concessions and other commercial offerings can enhance the passenger experience. Non-aeronautical revenue can also subsidize traditional aeronautical revenue to keep the cost to the airlines down, helping the airport maintain and grow air service. Airlines are going to continue to pressure airport owners or operators to keep their aeronautical charges in check, so non-aeronautical revenue growth will be the primary way forward.

JP: Because of this pressure, we’re seeing airport owners or operators trying to simply maintain their existing air service, let alone trying to bring new air service. Airport owners or operators now need to demonstrate significant traveler demand, as well as high load and yield factors to the air carriers in order to bring in new service.

JK: Let me illustrate the importance of airport costs as well as load and yield factors to the airlines in their decisions to serve an airport. During pitches by the airport owners or operators to air carriers, the airport managers will typically build a case for air service using the assets in the region and the facilities available to the carriers. The airline almost inevitably responds with three questions. The first is “Will we make a profit?” The second is “Will we make a profit?” And the third is “Will we make a profit?”

RB: Yes, it comes down to profit at the end for the airlines and I think all this works hand-inhand with multimodalism and how airports can connect to other parts of the region. The main idea here is to explore generating profit using air service coupled with a different modal piece.

JP: For travelers, the actual flight can be the smallest part of the journey. It’s getting to the airport and the rest of the travel experience that can be off-putting to travelers. Institutional and organizational barriers have prevented airport owners or operators from embracing multimodalism.

Very few airport owners or operators have the institutional arrangements or working relationships with other transportation agencies to plan for multimodalism. There are many examples where different transportation agencies have built to each other’s fence line without exploring connectivity.

JK: It’s not only about having multiple transport modes; it’s also about how they interface. The airport is the physical interface where the national, global, and local networks come together. Competitive advantage is derived by minimizing the time and cost of going from the passenger’s origin to the airport, through the terminals, and from the airport to the destination. It’s the total transport time and cost that’s important to travelers (and for cargo), not just the time in flight. This is where efficient multimodalism can play a pivotal role.

RB: I think the pressure is on airport owners and operators to change their business model. They need to think about how it functions within its region and understand how revenues flow to and from the airport.

JK: It also drives us to examine the types of executives and managers hired to run the airport. As airport functions have evolved, the mix of skills that are required of their senior personnel has changed too. Airport owners or operators now need executives and managers who understand real estate development, concessions negotiation, marketing, and other management tools that are involved in developing commercial components.

Planning silos also must be broken down. Airport owners or operators need a new model that integrates airport planning, urban planning, intermodal transportation planning, and business site planning to optimize both its aeronautical and non-aeronautical functions. Ideally, these two functions will be synergized.

RB: So let me ask a question before we move on: When we talk about the pressures put on the airport owners or operators, where are we in the US with public-private partnerships (P3s)? Are the pressures that are being put on airport owners or operators and the need for different talents also pushing towards P3s, beyond attracting private funding? Would P3s allow for better business planning and integrated planning?

JP: I think these pressures are one more argument for P3s because P3 would shift the allocation of risk. In a P3 model, the private sector has to put some skin in the game, which means they would need to understand the risk and rewards of the real estate and development aspects of the airport that could potentially build towards a larger airport city or aerotropolis concept.

JK: I have interacted with airports attempting to build an airport city via their commercial development plans. Many times they would like to transition property originally proposed for a possible future runway or other airport infrastructure. Gaining permission from the FAA to utilize that land for a ground lease for commercial purposes using a P3 model has been a struggle for some airports. Enabling airports to partner with communities and the private sector on property development within and adjacent to the airport could generate more passengers, more cargo, and more revenue for the airport, of course, respecting future aeronautical infrastructure expansion needs.

 

RB: Absolutely, there are many reasons for bringing in private enterprise through airports, and it’s not solely about alternative revenue or using private financing.

JP: There are examples around the country today where we have worked on both sides of the fence line with the airport owners or operators, the transportation agencies, and the private sector to create synergies for the travelers and all parties involved. Parsons Brinckerhoff is working with these groups to bridge the gaps and ensure that the airports can face these pressures and establish a more entrepreneurial organization with the proper governance and organizational models in place to better serve the region in the future.

AS: Programs administered by the Federal Aviation Administration (FAA), such as the Airport Improvement Program (AIP) and the Passenger Facility Charge (PFC) Program, have historically provided a reliable revenue stream to fund airport capital projects. The FAA Modernization and Reform Act of 2012 rolled back AIP funding for airports and did not increase the PFC ceiling of $4.50 set in 2000. This reauthorization, coupled with the industry outlook that the federal government will be unable to continuously fund airports at the levels required to meet ongoing infrastructure needs, have challenged airport owners or operators to explore new options for financial support.

What options exist to ensure that these programs continue to support investments into our national airport network? How can airport owners or operators better partner with their communities to develop stronger hubs of economic activity?

JK: The federal, state, and some local governments fund surface transportation infrastructure and in many cases ports. Our highways and rail lines, particularly in the Northeast Corridor, receive substantial federal government subsidies. They are viewed as public goods.

If you look at aviation and airports, you will see a similar type of public good and infrastructure. They provide the nation with highways in the sky. Shouldn’t we treat these highways in the sky the same way we treat highways on the ground, as public goods that are instrumental to the economic prosperity of regions and the nation?

I think a different funding paradigm is called for when looking at aviation and airports as essential regional and national public goods. I also think that on the federal government side, there is a need for a longer authorization period that can bring some predictability on federal funding levels.

JP: I think the definition of infrastructure and what constitutes a public good is shrinking and not expanding. For example, what would have been clearly considered a highway public good is now more likely to be funded through a toll arrangement or a P3. The political winds are pushing very hard in the other direction.

RB: Airports have been receiving funding from the federal government for over 70 years, so I think the possibility of airlines working with airport owners or operators and the regions in some sort of integrated business model in the way that we imagine it would be challenging.

Regarding P3 models, we have not seen a promising opportunity to illustrate how that might really work at a large hub airport. As a result, we have modified P3s, such as the program that the Port Authority of New York & New Jersey is trying to implement at La Guardia Airport.

Demand for midsized airports or smaller, many of which are the hardest hit in the system, have created significant challenges in planning for and developing demand risk P3 projects. We currently see that new delivery methods, such as availability payment P3s, are not options being considered due to the uncertainty surrounding funding.

JK: The whole issue is one of effective system integration and this goes back to the basics of engineering systems. Subsystem optimization may not be system optimization; what we currently have are different groups making every effort to optimize their subsystem, so the aviation system as a whole is not optimized.

JP: One opportunity that may actually help with integration at the subsystem level surrounds freight policy issues and how they relate to air cargo at airports. If you look at the larger trends on surface transportation, clearly there’s a lot of interest in freight and goods movement. There’s a recognition post the Great Recession that it’s the lifeblood of the economy. It’s also quite explicitly an opportunity to weave together the surface transportation silos. How freight policy interrelates with air freight will affect the development of state freight plans to support multimodality on a regional basis. From the airport owners’ or operators’ perspective, relatively low tonnage but high value air freight will need to play a key role in these new freight plans. This will start to logistically and institutionally sew together some of those silos that operate so completely separately right now.


JP:
Going back to our point about the importance of considering a region’s major employers in airport planning, regions need to recognize that airports are enterprise functions. Thinking of them in economic development terms will feed a successful long-term strategy for any airport where major employers and anchor institutions are understood.JK: One thing learned early on in my analysis of the air cargo industry is that the battle for air cargo is not won in the air; it’s won on the ground. Key factors are speed of customs clearance and efficient surface connectivity between the airport and manufacturers, distributors, and other customers.

RB: Most people think of an airport as the place to go to catch a flight, or worse, as a nuisance or an environmental threat. They look at it as the commonality of airplanes taking off and landing, people going and coming, but they don’t go any deeper than that. What people don’t know is that in the past five years, airports have made-up roughly 8 to 10 percent of GDP when lumped together. They’re the second-largest employer in the US behind Walmart.

JK: The challenge is airport owners or operators conveying that message simply so government leaders and citizens can grasp it. Once they do, we may see changes in the way investments are made by governments in airports and that the airlines are supported rather than treated as nuisances by the public and ATM machines for government.

AS: The aerotropolis concept has emerged to explain the planned and organic development of fully integrated cities around airports. Can you share your vision for the future of aerotropolei in the US? What benefits can this concept create for municipalities and airport owners?

JK: The aerotropolis brings value to firms and to regions. The aerotropolis simply put is an urban subregion whose infrastructure, land use, and economy are centered on an airport. Its value proposition is that it offers businesses rapid connectivity to their distant suppliers, customers, and enterprise partners. This enables them to reduce costs, increase productivity, and expand market reach, thereby becoming more competitive. Additionally, the region becomes more competitive as its trade in high-value goods and services is accelerated and it becomes more attractive for investment.

JP: In my opinion, the aerotropolis concept has organically been happening for a long time. What we’re talking about now is creating an aerotropolis that can work on the global level. For that to work, all the pieces need to be near the supply chain.

In the US, we have a mature market but I don’t think it keeps us from rethinking the way our regions are connected to the world. The development path to date for our regions has been traced by our ability to move products and people. The only way this continues to happen in the global economy and using just-in-time delivery is through air travel.

JK: The aerotropolis is comprised of three elements. One is the spatial element, the physically observable development of aviation-linked businesses near the airport.

The second element is functional. This includes the spatial element as well as businesses and business people who may be widely dispersed throughout a metropolitan region but are nonetheless dependent on the airport.

The third element is surface connections that exist between the airport and industry, businesses, and air travelers’ origins and destinations. Business and industry are the muscle of the aerotropolis, and the roadways, rail lines, and links to the airports are its multimodal skeleton.

In the US, most aerotropolis development to date has been organic. There has been limited formal planning of the aerotropolis. As a result, much development around airports has been spontaneous, haphazard, economically inefficient, and often unsightly.

In the future, organized aerotropolis development will occur through coordinated transportation and commercial land-use planning, bringing about more economically efficient, attractive, and sustainable airport area development. These positive outcomes will require synergizing airport, urban, and business site planning with coordinated surface transportation and landuse planning.

 

AS: Going beyond the concept, what needs to happen to implement the aerotropolis vision? What strategies can airport owners and municipalities utilize?

JP: You have to start with the fundamental recognition of the importance of the airport and the aerotropolis to the regional stakeholders. There’s work to be done in most regions on that, to gain a fundamental understanding of what an economic driver it can be. The challenge is sewing together some of the institutions that don’t interact and don’t even have a common objective related to airport development.

JK: Yes, aligning stakeholders is very important to aerotropolis development success. These stakeholders include government from the federal to the local, airport owners or operators, airlines, planners, real estate developers, and the financial community.

All of those parties have to be brought together and that’s what makes aerotropolis planning and development so challenging. The difficulty lies in how you can align these various stakeholders to work in concert to create the mutual benefits of the aerotropolis.

RB: I think the two of the biggest issues for aerotropolis implementation is multimodal development and governance. First, funding objectives need to be determined in consideration of all modes and they should complement each other. Second, the airport governance usually changes every four years and if this group fails to understand how the airport can drive additional development to benefit the region, then the likelihood of effective governance is low.

Regarding the development around airports, there is a need for education on behalf of the developers so that they can bring vision to the development needed around the airport that will work in synergy with the region.

JK: From a world cities standpoint, London and New York are still the premier global cities but they remain primarily so because of a 200-year history of transportation connectivity not related to aviation, which really arrived in the ’60s and ’70s with the growth of long-haul jets. If you go back to the early 1970s, the New York metropolitan region had around 120 of the Fortune 500 headquarters. They’re now down to under 50, while cities such as Atlanta, Charlotte, and Dallas are attracting or growing more Fortune 500 headquarters.

What London’s and New York’s governments don’t seem to buy into is the critical importance of aviation connectivity. While these cities continue to remain at the forefront of finance, media, and a range of other functions, they fail to recognize that other cities are gaining on them quickly by growing their airports and aviation networks. Many of these new competitors are in Asia and the Middle East.

Cities such as Dubai and Singapore can be basically described as global aviation hubs with citystates attached. They have grown their aviation hub status through their national flag carriers to become magnets for global enterprise and catalysts for regional economic development. We, too, need to view aviation and airports less as environmental threats to be controlled and more as essential infrastructure assets to compete in the globally-networked, speed-driven economy of the 21st century. This is the basis of the aerotropolis model.

AS: There seem to be vast opportunities on an international basis to implement the aerotropolis concept. As a worldwide infrastructure consultancy, Parsons Brinckerhoff is in the unique position of having expertise in a great number of domestic and international markets. How can we best leverage that expertise to help municipalities implement their aerotropolis vision?

JP: I think one thing that’s true both domestically and internationally is that regions and local governments in particular may believe that their problems or challenges are unique. What Parsons Brinckerhoff can do is to actually show, through the work we’ve done in other jurisdictions with best practices and thought leadership, that these problems are, in fact, solvable.

And one consistent theme you’ve heard today is the consensus that airports are vital economic engines for a region. How we maximize the utility of that engine is the conversation going forward. Parsons Brinckerhoff brings strengths to that conversation that no one else can.

Projects crossing multiple complex infrastructure, government, and commercial domains frequently fail due to a lack of comprehensive program management and this is what Parsons Brinckerhoff has a record of doing very well around the world. Integrated project and program management skills are Parsons Brinckerhoff’s strengths, which are fully applicable to aerotropolis development and megaprojects in general.JK: What Parsons Brinckerhoff can do is take the visions and ambitions of regions and airport owners or operators and make them real through the firm’s consulting, design, engineering, construction, and program management skills and experience.

RB: I think with industry thought leaders like Mort Downey, John Porcari, and Jack Kasarda, as well as the different skill sets within Parsons Brinckerhoff, we have the talent and the technical expertise to create synergies between the elements that make up an aerotropolis, and effectively implement and achieve our clients’ visions.

Image Header Source: Benson Kua (Creative Commons)