Airport budgeting, finance and rates & charges development
In our approach to developing a comprehensive business strategy for an airport, an important first step is to have internal airport leadership consensus on the strategic direction and goals of the airport. This is accomplished through understanding the competitive position of the airport, not only from a rates and charges standpoint, but also from a comprehensive business approach. Since the airline use and lease agreement becomes the centerpiece for all contractual arrangements, it is important to understand the competitive position prior to making commitments to airlines. Commercial airports are economic engines for the community and the airport assets should be utilized to their maximum potential. We work with our clients to go through such an assessment prior to the commencement of lease negotiations.
Creating the best economic environment for commercial airlines to be successful at the airport becomes the overall driver to the airport’s bottom line. Airlines are more cost sensitive than ever and make decisions on air service based on the economics at airports. We encourage our clients to develop the most competitive agreements that provide strong operating principles for network carriers while reducing barriers to entry for low cost carriers.
We do not support the approach of taking a generic base agreement methodology provided by the consultant and using it as a “one size fits all” solution. In approaching any airline negotiation, we customize the approach based on the situation that is unique to that airport and one where airline trust in the process can be maximized. Those ‘recreating the wheel’ negotiations tend to increase suspicion and extend the process longer than is necessary because a consultant uses its template and may be less likely to modify provisions that are comfortable for them. Focusing on the business terms and operational requirements becomes the focus, as it should be, and unnecessary effort is not extended to negotiating what otherwise should be standard terms.
Trillion is committed to developing sound and transparent rates and charges models that are developed around the quantified needs of the particular client. We believe this approach allows the airport to determine the rate making methodology and business approach that best fits the objectives of the airport and allows the flexibility to create the most financially secure business environment for the airport and the incumbent airlines. Ultimately, airports that are most successful are financially solid and offer competitive rates and charges to their airline partners. Many non-hub and small hub sized airports are now expected to become financially self-sufficient and need time and a plan to make that conversion. Slowly and consistently applying a cost approach model developed for the particular airport’s situation provides for this self-sufficiency to increase over time. This is the approach that Trillion has successfully followed in airline negotiations for our small airport clients.
The goal of a successful negotiation is to develop an agreement that meets the goals of the airport and that both sides feel is a “win”. The win-win scenario is particularly important in today’s environment where small airports are struggling to keep service. This approach does not suggest an abdication to airline desires; rather it is an approach where the consultant can use other airport examples where similar conditions have been implemented and the airlines have agreed, and to then educate local representatives as to other airline practices. With the turnover and/or lack of participation of airline representatives in smaller airport lease negotiations, often the representatives may not even be aware of practices that are endorsed by their own company colleagues in other parts of the system. Therefore, those representatives may be taking particular positions based on their limited exposure. Trillion can bring that industry wide breath of experience.
Trillion successfully leads its airport clients through this process that seeks a balance between the needs of the airport and its key stakeholders.
One of the first tasks to be accomplished with that process would be to begin to develop a cost based approach to a rates and charges model. This would include identification of airline and non-airline cost centers; an allocation of direct costs based on how resources are used to the various cost centers; an allocation of indirect costs to the same; reconciliation of square footage by category; and the allocation of revenues to the various cost centers. This process will serve as the basis for calculation of cost recovery rates, and the identification of discretionary revenues. Typically for non-hub airports, the terminal rates follow some form of a modified compensatory model and the airfield follows some form of residual model. Finalizing the final nuances of the respective model would be determined after the model is developed.