Airline & Airport Collaboration – A Success Story

Background:

Our aim was to address several problems that were impacting seriously on the regional airline industry following the negative impact of several events – namely the financial collapse of Ansett and its family of regional airlines serving most states of Australia and the events of September 11th 2001.

• Traffic levels on regional routes were down by more than 30% on past levels;
• Overall seat load factors were down to about 55% for our client;
• On most routes, traffic was continuing to decline and on others the recovery from 2001-02 was very slow in coming;
• Some routes could not be sustained unless traffic could be quickly restored to viable levels.

We undertook to renegotiate all airport charges (predominantly weight-based landing charges and passenger head taxes) as either:

a. Savings that could be enjoyed by the airline to improve overall profitability and the economic sustainability of the air service, or

b. Savings that could be passed on to passengers to in the form of lower air fares in order to stimulate renewed demand for air travel.

There were twenty-four (24) regional airports in the network across four states of Australia, namely New South Wales, Victoria, Tasmania and South Australia.

Investigation:

Our research revealed that the major inhibitor to the recovery of air travel was ‘price’. Whilst taxes and charges had been growing insidiously for some years, the plethora of new taxes, levies and charges introduced after September 2001 was acting as an enormous disincentive for people to return to regional skies.

The first phase of the project ran over an initial period of about six-months. In that time, we researched all of the regional routes, assembled a detailed and comprehensive Powerpoint presentation for each airport owner and in the majority of cases we negotiated new pricing arrangements that would enable traffic to be restored.

We calculated what each regional economy was losing from the diminishing influx of passengers and what they might hope to gain from our proposed strategy. In some cases the difference between the lost economic benefit and the potential gain was staggering – up to $40 million per annum.

Solution:

We were successful in reaching agreements with eighteen of the twenty-four airports. Each arrangement was different and in each case the strategy was designed for the dynamics of the particular route.

In most circumstances all airport tax savings were passed-on directly to passengers and the airline’s contribution was to introduce a very low, yield-managed, entry-level fare substantially below any previous fare seen on the route. In other circumstances where the losses on a route were most severe, with the balanced approach taken by Aspirion, the airport owner and the airline operator forged collaborative arrangements to sustain the viability of the air service in the near-term allowing the market more time to rebuild and achieve sustained growth over the long term.

The first of the initiatives was introduced in July, with others coming on stream right through to October. Using a 7 day rolling average, the increase in passengers for the participating ports was almost three-fold that of the non-participating ports, measured from 7 Jul 03 to 22 Oct 03. But the most pleasing aspect of the project from the airline’s point of view has been the substantial revenue growth for the airline.

In addition, each of the regional communities benefited from the sizeable boost to the local economies and the restored viability of their air service. Each of the participating communities has therefore underpinned the viability of their air service. They have also seen the renewed influx to the economy with a substantial growth in visitations and the circulation of ‘foreign capital’ in the community. But most importantly, the airport owners have increased and broadened their tax base. This has reversed the need to increase taxes. Instead the basis has now been set to reintroduce their head taxes on a multi-tiered system.

The benefits to airlines are obvious, in the form of increased passengers, increased seat load factors, increased revenue and overall improved profitability. But one of the other huge benefits for both parties has been the opportunity to work collaboratively on solving a problem. This has dissolved the old relationship that bordered on adversarial. The local Council has also been seen by the community to be directly involved in bringing lower fares to its people and this has greatly enhanced their credibility.