Research Projects

Changes in Airline Cost and Passenger Growth: What Drives Airline Decisions to Grow or Reduce Service at Airports?

Examine the degree to which airline cost at airports influence airline decisions.

Background (Describe the current situation or problem in the industry, and how your idea would address it.)

Airline Cost per Enplaned Passenger (CPE) is a commonly used metric in the airport industry. Simply put, CPE represents the fees paid by airlines to airports primarily for landing fees and terminal rentals divided by the number of enplaned passengers (called "airline cost" in this problem statement). Since the airlines view airports as a cost center, CPE is an important metric to them because it is a cost the airlines feel they can control, unlike the cost of fuel or labor per block hour. From an airport perspective however, enplaned passengers do not drive cost; facilities and infrastructure drive cost.

Several rating agencies include CPE as a ratings factor (implied or expressly stated). Their assumption - as airport costs rise, it becomes less competitive, which may result in a loss of service and passengers. Airport CFOs question this assumption because the cost of airport facilities and landing fees represent only 3-6% of the total airline operating cost.

To determine if there is any correlation between the change in airline cost and the change in passengers at large hub airports, DFW Airport prepared an analysis using ACI-NA financial benchmarking data from FY 2010 through FY 2017. The detailed results follow. In summary, there is a medium correlation between airline cost and passenger growth, but in the opposite direction one would expect. In fact, as airline costs increased, enplaned passengers increased. A similar analysis of medium hubs is included in Attachment 1.

 

[See PDF of problem statement in Full Idea Details to view attachments.]

Why do we see the results shown above? Maybe it's because as passenger levels grow, the need for more facilities (terminals and runways) also grows. As the capital cost associated with this investment gets repaid, airline costs increase in the form of debt service and operating expenses.

Objective (What is the desired product or result that will help the airport industry?)

"The primary focus of this research is to draw conclusions on three areas:

o Examine how airline cost at airports influences airline decisions, and if so, to what extent. Research should attempt to differentiate: (1) the effect of airline cost on passengers/service; and (2) the inverse, the effect of passenger/air service on airport infrastructure/airline cost.

o Identify what causes airlines to add or reduce service at airports and the associated metrics to measure it. What is the relationship between airline revenues, yields, costs and profitability at various airports and how this affects airline growth?

o Are there new metrics that could be introduced to measure this?

More specifically, the research consultant should address the following questions:

o Validate the DFW work over a twenty-year period-of-time to determine if there is a correlation between changes in airline cost at airports and changes in airline service/passengers. The research should address large, medium and small hub airports.

o Does increased airline cost result in an airport being less competitive (i.e., loss of service or losing traffic to competing airports)?

o Could depreciation/net book value of assets be considered when comparing airline cost at different airports. In other words, where is the airport in the redevelopment cycle and what impact might this have on costs and growth?

o To what extent do airports compete within the same geographic area, or for connecting passengers between large hubs? Does airline cost make a difference, or are there other factors?

o How much does route profitability impact the addition or reduction of service at airports? (e.g., an airline will move a fight to a different route or hub if it is not generating enough yield relative to its own flights, not the flights of a competitor).

oThe industry looks at costs on a per enplanement basis, however, airline metrics are per mile/km (RASM, CASM), etc. An airline's route decision does not really look at the CPE, rather it looks at the input of the airport cost on CASM. International carriers and routes support higher CPEs today. Aircraft type and stage length support different cost structures. Should the industry evaluate airline costs in a different manner (e.g., stage length adjusted or on a CASM basis) and if so what new metrics should be used?

o Identify the impact of the local, regional and national economy on airline service. Is there a way to correlate this statistically over the twenty-year period?

o Is there a way to calculate airline profitability at airports with existing publicly available data? If so, identify the methodology and data sources.

o How does the timing of large capital projects at airports (expansion or major renovation of terminals) impact airline revenues, yields, cost, and changes in service and passengers?

o Do these answers change when comparing connecting-hub airports with originating and destination airports?"

Cost Estimate and Backup (Provide a cost estimate and support for how you arrived at the estimate.)

The estimated cost for this research is $400,000 based on ACRP research with similar levels of effort.

Related Research - List related ACRP and other industry research; describe gaps (see link to Research Roadmaps above), and describe how your idea would address these gaps. This is a critical element of a synthesis topic submission.

ACRP 03-08 Passenger Air Service Development Techniques (ACRP Report 18 – published October 2009).

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