In the fifth article in this six-part series, Gavin considers how airports and tourism boards can assist airlines with incentives to support air services development. For airports, that is very much related to discounts on charges and fees, whereas for DMOs it is all about how to work co-op marketing campaigns.
Gavin’s previous roles have included development in British Airways, as well as consultancy projects for United Airlines, American Airlines, Qantas, and supporting the development of low-cost airlines to touristic destinations. Gavin has held a Board Position (CCO) at Portuguese airline SATA International and has been the advisor to the Board of Visit Portugal on air connectivity.
As a professor, Gavin is responsible for programs spanning the commercial aspects of aviation and airports and works closely with Aeroclass on executive courses, bringing DMOs and airports together for tailored learning programs that support route development for destinations.
How should airports and tourism boards support the development of air services? This is a question that airport marketing personnel and national and regional government tourism agencies ask themselves every day. In essence, is there a ‘one size fits all’ level of support that can be offered to all airlines, wherever they are located in the world? The answer is no. Each market will have an approach that fits with the rules of their country and business accordingly.
So, what are we funding? In the eyes of an airline, the potential to fly from A to B should be based on the vision that the passengers (and/or cargo) carried, will allow for the carrier to be profitable. Therefore, is it appropriate that airports and tourism authorities need to offer something on the basis that the carrier should be serving the route due to potential demand and then charging the passengers accordingly.
In essence, it is not as easy as that. Putting yourself in the shoes of the carrier, the vision of a new route is based on the premise that we may not start seeing route success until Year Three of the operation. The first year is where the airline will lose money, based on the start-up costs of serving something that is not well-known. Year Two is when we can see break-even, leading to the profit in the third season. Thus, support is needed to help the airline take the risk, and work with its partners to share some of the risk in taking on the air service.
What are we incentivising?
The vision of support for an airline depends very much on which side of the table you are sitting. With airports, it is clear: we can provide reductions per se on our charges/tariffs for landing and passenger services. We can also negotiate a deal based on how many passengers you may bring us. For an airport, the commercial success is based on a good blend of aviation and non-aviation revenues. At its most basic, airports charge airlines to land and charge their passengers for navigating through the terminals. So, can we make money out of an airline relative to the passengers they bring us? And, if we can incentivise airlines to bring even more passengers and we have a successful non-aviation offer (food and beverage outlets, shopping and entertainment, etc.), increases in passenger numbers and footfall mean we can potentially earn even more revenue. Thus, what we offer on one side (discounts), an airport may get back on the other side of their business.
According to the Airports Council, the non-aviation revenue is larger as a percentage of total revenues for an airport today than the revenue they make from charging airlines fees and charges. So, airports can support both discounts and volume deals as ways to bring even more hardware (planes) and passengers accordingly.
For tourism boards, the vision is different. Here, government agencies need to balance the vision of how much they need to spend to support the route and work with airlines on promotion campaigns. The more tourists we bring, the more we can see the multiplier effect of tourism. In particular, those staying in a hotel or accommodation that is licensed and part of the fiscal system will contribute in two ways. They provide employment, which means such individuals contribute with social security and tax payments, and the employer will contribute to tax returns, too. Also, the tourist will also spend money in the service economy, so any extra tourist has a financial benefit to the destination.
What is an airport offering
To ensure that airports look at enhancing plane movements and therefore potential passenger numbers, the business can look to give a level of discount on the carrier’s operational costs, in the hope that such growth and monies spent in the terminals is greater than the discount given to the carrier. It is with this in mind that airports can offer airlines with a percentage discount on their published charges, in particular through reductions in the carrier’s landing fees, even to the extent of waiving all charges to zero for the first year of their operation. Such a measure may help to stimulate the carrier to add the service, and then airports may continue to offer further discounts in the following years (e.g., Years Two and Three respectively), where the discounts may be 75% and 50% of the fees for these consecutive years accordingly.
Overall, then, the airport is taking a hit on their up-front revenues but hoping that new business and passenger growth will off-set such discounts, as a means of enhancing total revenues for the airport.
The tourism board scenario
Supporting an airline through a government agency, which is predominantly the case when talking about support from DMO’s or national tourism agencies, can be both complex and challenging in its execution. The reason is that governments, particularly in the context of the European Union, are very much governed by laws relating to state aid and what constitutes help to a private or public business. Therefore, any such support as an incentive must be seen as a co-operative marketing campaign, whereby the agency contributes an amount to the airline’s promotion of the new route in question. For example, if a new route is to be developed between the UK and Portugal, and, the airline in question is British Airways, this carrier would develop a marketing campaign for a fixed amount and the tourism board of Portugal would support 50% of such. The campaign is to present the route back in the source market, and this way, monies from governments have been placed in the execution of developing the demand potential, rather than not cover operational costs.
Therefore, the way in which governments fund co-marketing campaigns can differ. One such mechanism is for a DMO to announce the routes they would like airlines to consider on their agency site and then place a tender document to all those who are interested. This way the carrier will then address the route, build the campaign and submit as their response to tender.
The alternative is for the DMOs to develop a matrix of investment for particular routes and seek to push such scenarios to carriers: ‘Would you be interested in developing this route? If so, this is the support for co-marketing that we can offer.’
The difference between the full tender, where all airlines can participate, versus being more selective and stating what we need and why you are being asked to develop, is based on how the funding is being drawn down from the financial departments of governments. Tenders are more akin to working with regional funding, and the specific targeted route campaigns happen mostly when central government departments are involved. Providing marketing support to an airline for a specific route is essentially the same as when a DMO runs its own campaign to attract travelers from a particular source market. The only difference being, now the tourism board is not paying for the campaign but rather supporting an airline’s marketing.
Knowing what to support and building a strategic matrix is key for the air services development success of a DMO. In essence, we should not be paying for ‘all-flights’. A tourism board must be more strategic in their vision and develop a strong understanding of what this route will do to benefit my destination. Thus, when building any such air services incentive matrix, the following need to be considered:
- Vision of the route – we only support routes of strategic inbound importance. It is not the job of the DMO to be worried about outbound passenger numbers, nor cargo.
- Prioritise our markets – can we provide more marketing support for routes from these countries that we really need to stimulate? Providing an amount of support for all markets is without vision, so we must rank, prioritise and then highlight that we can allocate more marketing monies to those that fit in with our strategic vision.
- How many frequencies – what is the vision with the service? If we are focusing on weekend breaks, then we need a minimum of two per week, and if short breaks, we should have three per week. Also, do we support more than a daily service? The key consideration must be how we see the development of the tourism offer. What is a ‘fair’ level of weekly services?
- Plane sizes: based on the premise that we want more tourists, should we incentivise more marketing monies for greater plane sizes, and can we have a minimum number of seats offered? Overall, a good incentive may offer support for planes from 100 to 180 seat; from 181 to 240 seats; and 241 seats and above. This allows for the different levels of narrow body and wide-body aircraft to be supported.
- Do we support competition? If a route is already being served. should we also support a second carrier that is also interested in opening up? The benefit for the destination being that the first carrier may not be growing or looking to increase services, and in the meantime that route has scope for more passenger/tourist development.
- Seasonality – finally, when do we need growth of potential tourists? Should we present more marketing funds to airlines to develop routes during the low season (winter as an example), or should the focus be on extending the tourism season—by encouraging routes to start earlier or continue later into the year?
In conclusion, monies offered to airlines for route development from airports and tourism boards are essentially seen as a way of forming a strong growth and development partnership and are not the reason we fly. The business case for an airline deciding to fly a certain route is made up of many different factors that were outlined earlier in this series of articles, and generally any incentive given is no more than 5% of the operating costs of the route. Thus, the network planning and the Chief Commercial Officer of an airline take a significant risk when deciding to fly a new service.
The benefit of these partnership is that they offer a way for airports and tourism boards to work together within an air services committee to raise the profile of the question ‘why fly?’ – proving a robust business case with defined marketing support as a means of bringing re-assurance to the carrier that airports and tourist boards are with them on this decision to serve, and that it is in the interest of their destination/region/country to have them onboard. For the carrier, it feels that they have a sense of place and a combined stakeholder agreement that their connection is bringing success for all. A win-win, in every direction.
Join us next month as Gavin looks at how destinations and airports measure the success of a route. In particular, understanding the value of our air services development programme, and what the new lift will bring to key stakeholders and private sector businesses, plus measuring the value of a passenger and the support we offer in marketing to secure the route, will all be discussed and critiqued.