Airport Economics Manual (Section Eight)

Chapter-1
ICAO Policy On  Airport Charges

This chapter focuses on ICAO’ s  policies on airport charges and provides the framework  for the guidance material contained in this manual.
Part-A—Addresses the basic policy  principles  expressed  in Article 15 of the convention on International Civil  Aviation (Doc-7300).

Part-B—Focuses the additional policy  guidance in ICAO’ s policies on charges for airports  and air navigation services (Doc-9082); explains how the policy was developed and highlights some principles that States have found of particular interest.
Part-C--- Presents the third element in the policy-making process related to airport charges.

Finally, Part-D--- summarizes ICAO’ s  current with regard to the use of charges for environmental.

In summary, Article 15 sets out the following three basic principles

    • Uniform conditions shall apply  to the use of airports  and air navigation services in a Contracting State  by aircraft of all other  Contracting State;
    • The charges imposed by a Contracting State for the use  of such airports or air navigation services shall not be higher for aircraft of other Contracting States than those paid  by its national aircraft engaged in similar international operations;
    • No charge shall be imposed by any Contracting  State solely for the right of transit over or entry into or exist from  its territory of any aircraft of a Contracting State or persons or property thereon.

    Chapter-2
    Organizational Structures Of Airports

    This chapter addresses various aspects of the organizational structure of airports.

    Part-A presents the forms of organization that can be used at the national level, be it under government ownership and control, or with private participation or involvement. This part also addresses the issue of airport networks and the steps and precautions that States should take in the transition towards a commercialized or privatized regime.

    Part-B addresses the mechanism for economic oversight that States may wish to establish for overseeing the practices of airport operators.

    Organizational Forms At  the National Level

    This part focuses on various organizational formats which airports operate. Considering the diverse circumstances involved, it is not the intent to recommend one organizational format over another but rather to provide guidance to States by describing relevant aspects of each format. The decisions made  by individual States as to the organizational format under which their airports should operate will depend on  the situation in the State concerned and will often be strongly influenced by government policy. Constitutional  and administrative arrangements as well as the experience of other States may also affect decisions on organizational format. Recent trends in airport ownership and control have shown that the various organizational formats used by States can be regrouped into two main types. The first type falls under government or public ownership and control, which  is still the predominant form of organizational, and the second
    Type is where private interests are involved, a format which is assuming an increasing importance.

    Government Ownership And Control In Airport Management And Operation

    Government or public ownership may take the form of direct control and management, for example through a Civil Aviation Administration, or through another ministerial department, or bodies regional or municipal levels of governments. Government control cal also be exerted through bodies benefiting from  a certain degree of autonomy, such as a government  body with financial and operational autonomy, an autonomous corporation established under the provisions of a special statute (a statutory body), or a company established under company law. Under this type of management, airports remain under the overall ownership and control of the government and the organizations operating them are expected to act with public interest in mind rather than primarily  governed  by profit considerations, although  this should not preclude the setting of clear objectives and adoption of best  commercial practices. This option  may  provide flexibility to States in ensuring that the development of airports will suit their national political, social and economic requirements. Finally, it has to be noted that in some cases the government may keep the ownership of airports (land/or facilities), while the operation (i. g . the control) is vested to other interests.

    Airports Within   A Government Department

    While a growing number of international airports are being operated under the format of an Autonomous airport entity, many airports are still operated by government entities.

    Where the operation of one or more airports represents  only one  of many functions performed by an administration, consideration  needs to be  given to a number  of organizational  and managerial features  that promote efficient airport operations.  Perhaps most important among  these  is to organize  each airport or group of airports  as a separate entity or department within the administration, with the department head reporting directly to the director of the administration.

    It would also be necessary to clearly describe the decision-making authority vested in the head
    of an airport department Such authority should normally extend to decisions pertaining to the daily operations  of the airport, including personnel management and the authority to make purchases of supplies and arrange for any services required for that purpose. The department head should also be given the authority to negotiate agreements concerning all but major concessions and rentals, the final decisions relating to which would normally be made at higher levels. Decisions involving, for example, major purchases  or investments in facilities and equipment, and approval of charges on air traffic would normally also be made at a higher level within the administration  (or even outside it), but this should be done in consultation with the head of the airport department concerned. A more general comment with regard to responsibility and authority is that if the head of an airport department is made responsible  for the revenue development and costs and efficiency of the airport, that person should also have considerable  authority in decisions affecting airport operations.

    If is necessary  to establish a separate set of accounts for each airport, since costs and revenues pertaining  to airport operations cannot otherwise be identified. It should, however, be noted that the administration’s accounts might not be kept in a format that is responsive to the requirements of airport management. Should  that be the case, the airport department could supplement the administration accounting format by establishing its own internal accounting system that would meet these requirements. The format of airport accounts and their possible itemization is addressed in Chapter-3.

    Autonomous Airport Entities

    An autonomous airport entity is essentially an independent body established for the purpose of operating and managing one or more airports, one objective of which is to permit local and user needs to be better met. In some instances, the scope of such autonomous airport entities has have also been established exclusively to operate and manage air navigation services, particularly with regard to the en-route (and approach) phase(s) of flights.

    the autonomous airport entities is growing in all regions. They are particularly common in Europe and the United States. For example, in a majority of the States  in Europe, the major international airports are operated by autonomous airport entities. While the establishment of an autonomous airport entity would not necessarily result in an unprofitable airport becoming profitable, experience gained worldwide from these  developments  indicates that where airports have operated by autonomous entities their overall financial situation has generally tended to improve. Consequently, it is recommended that, where this is the best interest of provides and user, States consider establishing autonomous entities to operate their airports.
    Since the main purpose of establishing autonomous airport entities has been to improve efficiency and financial results, the tendency in some States has been to limit the area of their responsibility to those major international airports with sufficient traffic volumes to warrant expectations of attaining financial self-sufficiency. But as noted below, the establishment of autonomous airport entities can frequently be beneficial even where these conditions do not exist and subsidies continue to be required. As a consequence, new entities created in some States encompass both profitable and unprofitable airports.

    The Autonomous Civil Aviation Authority

    Assigning the operation of one or more airports to an autonomous airport entity may not, in certain circumstances, be a good approach to improving airport operating efficiency. For example, in a small State with limited Aviation activity and where the operation of an international airport is the dominant function of the  Civil Aviation administration, little if anything may be gained by separating the airport operation from  the Civil Aviation Administration and assigning it to an autonomous airport entity established exclusively for that purpose. In fact, costly duplication could result if each of the two bodies carries out functions previously performed more efficiently and at a lower total cost by the Civil Aviation Administration.  This applies particularly to administrative costs and overheads.

    The reduced responsibilities of the Civil Aviation administration would normally include Aviation Safety and various Licensing, Monitoring, Policy, and regulatory functions. As a result of having been divested of airport operations, however, the administration would no longer have the financial benefit of the common use of premises and equipment, the costs of which were, at least in part, financed by airport revenues. With its revenue-generating capacity severely restricted, it could also be more difficult for the reduced Civil Aviation Administration to obtain from the government the funds it requires to perform its activities. Another factor to be considered in these circumstances is the potential for rivalry between the new autonomous airport entity and the Civil Aviation Administration, and its possible consequential detrimental effects on aviation development.

    Private Participation Or  Involvement In Airport Ownership And Operations

    Privatization is the word most commonly used in connection with the changes taking place in the ownership and management of airports. Often, the word privatization is loosely interpreted as any move away from government ownership and management of airport services. Privatization connotes either full ownership  or majority ownership by private interests  of airport facilities and services. Therefore, a management contract, a lease, as well as minority participation in the equity of airports  should not be described as privatization, but rather as private participation or private involvement since the ownership and control rests with government  Private participation/private involvement, which are synonyms, mean that the private sector has a role in the ownership and/or management in the provision  of airport services, and that majority or ultimate ownership remains with the government.

Private participation or involvement can take different forms. However, management of commercial concessions, in particular retail outlets, at an airport by a private entity is not considered as private participation or involvement. Although airports are owned, in a majority States, by the government (a State, provincial or municipal government or a combination of any of these), a growing number of airports are now under some form of private ownership  or involvement. IN some States, airport entities ( managing and operating either a single airport, or an airport system, or an airport network) have now been privatized; in others, plans are under way for private involvement in airports in a number of ways, including leasing, part ownership or the ownership  of parts of an airport such as terminal buildings. In the latter case, where a part of an airport ( such as a passenger terminal) is privately owned and operated , leaving the rest of the airport in public ownership, measures need to be taken  to ensure that the privatized element of the airport makes a proper contribution to the costs of operating the rest of the airport, for instance by payment of a significant concession or lease fee.

Described below are some of the  most  common  forms of private participation/involvement that are used for airport management and operation

    • Management Contract: Under this option, the management of an airport or a group of airports is transferred to a private entity for a limited period of time for a fee or predetermined payment terms. The Airport (s)  benefits from professional management, but development of the airport (s) is not included in the contract.
    • Lease or Concession: Leases/ concessions can be short-, medium-, or  long-term. Under this option, an airport or a group of airports is transferred for management and development to a private entity for fixed period. In almost all cases, the responsibility for expansion and development of airports rests with the lessee or concessionaire, under conditions that are either listed  in the contract  or depending on traffic growth. The payment terms leases or concessions vary widely. In almost cases, it is all down payment while  in other cases  it is partly annual payment  or only annual payment. One of the most  common forms is the BOT (Building-Operate-transfer) scheme, an ownership  and management system under  which a private entity obtains  the right  to finance, build and operate  a certain facility, including land and/or buildings , over a long period of time, and on expire of the right returns it the owner. Many variants of this scheme have come into existence (see definitions in the glossary of terms in circular 284- privatization in the provision of  Airports  and Air Navigation Services).
    • Transfer of minority ownership. Under this option, ownership of an airport or a group of airports is partially transferred to the private sector, through outright sale of shares to a strategic partner . or an IPO (Initial Public Officer) on the stock exchange market. The advantage of this system is that the transfer of ownership can be carried out in stages, depending upon local circumstances and needs.
    • Private sector ownership and control. Under this option, majority or full ownership of the airport is transferred to a private entity including non-profit corporations or trusts. In the event that a State would wish to regain ownership.  It  would have to buy back the shares, with the risk that their price may be higher than the original sale price.
    • Private sector ownership and/or operation of parts of the activities of an airport. This option refers to the ownership and operation of certain facilities or services  at an airport, for example a passenger terminal, or a cargo warehouse, or security services. The activities of the operator are regulated by a contract which, from a legal point of view, is similar to a commercial concession agreement.
    • Privatization as a source of revenue. Governments are realizing that where the traffic volumes are relatively high, it may be possible to pass the burden of financing airport development programs to the private sector. Moreover, private participation  and privatization in the provision of airport services has been seen as a source of revenue to cover or reduce budgetary  deficits. Profit-making airports can provide a regular source of tax revenue. Financial bids for private participation and privatization of airports have further encouraged states to move in this direction.
    • Major airports considered commercial entities. The current approach of governments is to move away from the ownership and management of non-core public utilities, and airports are turning into  cities in themselves with market places and meeting points for people and businesses. There is the perception that privatization or private involvement leads to improvement in the management  of airports.
    • Increased efficiency and productivity. The application of management methods based on best commercial practices promotes transparency, efficiency and cost effectiveness, and the development and application of performance parameters improves productivity and the quality of services provided.
    • Emergence of global airport management industry. The business and financial communities have realized that an airport can be a sound investment. Airport are essentially monopolies. Growth in traffic in somewhat regular and exceeds the growth  of gross domestic product over the longer term .Depending on the economic cycles, the credit ratings of many major airports are generally very high and they have strong cash flows. Investors are aware that airports are subject to government regulations, but commercial activities at airports, which produce significant revenues, are less regulated than aeronautical activities or not regulated at all. All these factors combined have resulted in major management companies investing and participating in the management of airports in other regions of the world, thus participating to the gradual emergence of a global airport management industry.
    • Change in ownership and management in the provision of airport services requires careful consideration of a number of factors. Fundamental among these is that an airport is in essence a monopoly on which the users — airport operators, passengers and shippers alike – are highly dependent. The objectives of change should be clearly defined. An in-depth analysis of the present stage of the aviation infrastructure in the country, including the preparation of a detailed profit and loss statement should be conducted. This analysis should also take into account future projections. Furthermore, simultaneously with a possible decision to place profitable airports in a different category, consideration should be given to how the remaining airports and other services are to be managed and financed.

    Institutional Arrangements: Checks and Balance

    Research and experience have shown that regulation of the economic behavior of monopoles can be achieved through the power of information, and also through countervailing economic power of well-informed customers who are epitomized by airlines at an airport. Information can be harnessed through the development of certain  institutional arrangements in shaping a commercial monopoly. Once in place, such arrangements can foster a routine of checks and balances between service providers and users that brings about fair, reasonable and efficient prices and levels of service. While nor ‘’automatic’’ in the manner of free markets, regulation through institutional checks and balances users the power of information to transmit the right signals and responses between  users and providers in lieu of the bureaucratic power of government agencies.

    Examples of institutional arrangements include

    1. Mandatory consultation in the establishment of user fees and investment plans in order to ensure adequate disclosure of costs and transparency in the economic and financial underpinnings of rate and service proposal;
    2. Stakeholder membership on the board of directors is a means of promoting the adequate flow of economic information between the provider and its users;
    3. Joint ownership, or mixed enterprise, represents an extension of board membership as a means of ensuring information flow, consultation and consensus in the establishment of rates and charges; however, there might be potential competition issues involved regarding airline competition and barriers to entry where joint ownership means airlines having a large say about investment plans and about the management of the airport;
    4. Debt financing of capital investments and improvements is also an effective means of creating discipline and efficiency in a commercial monopoly. When a commercial monopoly borrows or sells bonds to finance new investments, credit markets seek information indicative of strong assurances that system users view the facilities and equipment as necessary and desirable; that the organization’s management team  is sound and capable; and what operations generally are efficient so that sufficient operating revenues will be available to service interest and depreciation over the life of the investment programs.
    5. Not-profit financial status. The rationale behind this arrangement is that removing the profit incentive from an otherwise commercially-oriented organization relieves it of the stimulus to abuse its monopoly power. However, it can also be argued that a profit motive protects the public against the risk of a service provider failing to generate sufficient surplus revenues to sustain and modernize its facilities on a timely basis. In whatever case, the managers will have to trade off among multiple objectives, which are well-known problems of management incentives. Legislation in States that have selected this approach permits their commercialized entities to earn a rate of return,

     

    Organization Charts

    While various types of organizational structures can be used to ensure effective management and internal communications for different types of operating entities, examples of some generic airport organization charts are included in the following pages. Although each airport
    Is unique and will take on its own unique organizational and governance structure, certain basic factors need to be considered when an airport organization chart is to be prepared Figures 2-1,2-2 illustrate different organizational structures.

    The establishment of the most suitable organizational chart for an airport ( or group of airports) should take into account the following factors:

      • The functions and the objectives of the airports;
      • The relationship between the various functions performed at the airport;
      • The number of airports and their geographical distribution, if they are operated as a group;
      • Airport size, which determines whether each of the various functions should be entrusted to a distinct department, or whether some of them could be grouped together in the same organizational unit or department;
      • The types of traffic (international, domestic, civil, military);
      • The degree of financial autonomy of the airport or airports concerned.