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Businesses are Flying!

Airports are incredibly complex and challenging businesses but, in many cases, they are businesses that make money. Many airports are owned by the government but still, they are often operated as businesses – just businesses that are publicly owned. The majority of airports make their money through what they earn from passenger-carrying commercial flights using their facilities. Some airports are cargo focused and fund their operation through cargo flights but airports such as Paris’s Charles De Gaulle Airport and London’s Heathrow Airport rely almost entirely on passenger flights. While the amount of cargo going through these airports is significant, the number of dedicated cargo flights is low in proportion to the airport’s daily flights. The question is: how do they generate profits and what goes on behind the scenes that enable them to run their operations effectively and, at the same time, efficiently? For this study, I am going to be looking at the most famous airport in the world – the London Heathrow.

Heathrow makes its money off of the 78 million passengers flying through each year. Heathrow is the busiest airport in the world that is fully privately owned - the UK government owns no stake in it and so it is perhaps the best example of an airport built to turn a profit. It costs $1,485,650,000 per year to run Heathrow airport. This includes costs like $494,000,000, which Heathrow pays in salaries to its 6,500 employees. Almost 76,000 people actually work at Heathrow but only those 6,500 actually work for Heathrow. The company that runs Heathrow, Heathrow Airport Holdings, is only responsible for the oversight and administration of the airport, within Heathrow’s walls though, there are hundreds of other companies operating. Those 70,000 other people work for the airlines, the baggage handling companies, the air traffic control company, the restaurants, the rental car companies, the bus company, and all the other different employers at the airport. There are, of course, plenty of other costs involved in running the airport from the $232 million dollars per year in maintenance to the $113 million yearly utility bill for water, electricity, internet, gas, and more. But overall that number of $1.5 billion is what it costs to run the sixth busiest airport in the world. That’s more than it costs to run the entire 1.3 million people country of Swaziland.

On a per passenger basis, it costs approximately $19 to run the Heathrow. Essentially that means Heathrow needs to make $19 from each passenger that passes through its doors in order to break even. Obviously, some passengers are more profitable than others. Arriving passengers generally just get off the plane, go through customs, and leave immediately without making any purchases. Whereas, connecting and departing passengers generally have more time to shop at the airport. Retail is incredibly important to the profitability of any airport. This is part of the reason why it’s in the airport’s best interest to make the security and check-in procedure as quickly as possible so the passengers have more time to shop. Heathrow makes money through retail by taking a cut out of every sale made. On average, through restaurants the airport earns 95 cents per passenger, retail stores earn them $5.15 per passenger, the parking lots add to another $2.03, then all the other smaller sources of retail revenue such as rental car companies and VIP lounges account for another $3.04. Rather uniquely, Heathrow also operates the express train from the airport to Paddington Station which makes them another $2.15 per passenger. All in all, the airport makes $13.32 from passengers through purchases on top of their actual airplane ticket, and it’s worth pointing out that this doesn’t mean that passengers spend $13.32 - this means that Heathrow makes $13.32 per passenger. This is their cut, the actual spending at the airport per passenger is much higher.

Now, you may think that this amount of retail revenue per passenger is high and you would be right, it is. In fact, it’s one of the highest retail revenues per passenger of any airport worldwide. In comparison, Washington Dulles Airport makes $5.68 per passenger, Auckland Airport makes $7.71, and Paris’ Charles De Gaulle Airport makes $10.92 per passenger from retail. Heathrow is an expert in making passengers spend. They use all sorts of tricks and tactics to increase passenger spending. For example, in Terminal 3, to get from security and to all the gates, all passengers have to walk through duty-free which increases sales enormously. Heathrow also doesn’t display the gate for flights until 45-90 minutes before departure. Because of this, passengers wait in a central area where all the shops and restaurants are located. Being one of the very few airports with non-stop service to all six continents, Heathrow also has the advantage of being an airport focused on long-haul service. These flights tend to carry the wealthiest passengers and while, worldwide, passengers arrive at an average of 2 hours and 17 minutes before their flight, Heathrow passengers arrive 2 hours and 51 minutes before. This means they have more time to shop at the airport. As mentioned, though the airport needs to make $19 per passenger but retail only earns them just over $13.

The rest of it comes from flights. Each plane that lands at Heathrow pays the airport an average of $9,500. That goes to paying for things like gate space, a check-in area, and the runway time itself. On departure, airlines are charged again, this time per passenger. For each passenger flying to a destination outside of Europe, the airline is charged a base of $58 but this charge is reduced to $44 if a passenger connects through Heathrow rather than originating or to $39 if the aircraft is parked at a remote stand rather than a gate. It’s worth noting that these are the published prices. In reality, many airlines with a significant number of flights at Heathrow have an agreement with the airport that reduces their costs.

Breaking it down, what those numbers mean is that Heathrow gets, on average, $29 of the cost of every passenger’s ticket. As you can see that means that Heathrow makes a fair bit more than it costs to run the airport. The company mostly uses this operating profit to pay off debt from prior projects and to pay taxes so, in the end, they are only truly making about $8.20 off of each of their passengers, but what these numbers also mean is that, by design, Heathrow is incentivised to attract long-haul flights. The airport is currently at capacity. Their maximum number of flights per day is 657, and they currently have 650. They really have no more capacity which means one of the only ways for them to grow financially is to bring in larger planes. This is no doubt that part of the reason why Heathrow is so poorly connected to the country is that it is in the UK. The airport only has flights to eight airports in the UK which means the airport has exactly the same number of destinations in the UK as it has in China. The reality is that Heathrow is a commercial company while most UK residents would likely want to see domestic flights to their largest airport, it just doesn’t make commercial sense to operate short and cheap flights. It’s not only less lucrative for the airport, but it’s also more costly for the passenger than flying to other smaller airports.

Of course, not every airport is like Heathrow. Not every airport is a commercial company, and that’s just because, in many cases, running an airport the way the public wants it to be run is bad business. About two-thirds of all airports worldwide lose money. In many cases that’s because they are government-run and just not that focused on making money. However, the entire focus of the authorities should not be on making the airports profitable. Because of the fact that ultimately, it’s the passengers who would be paying more for their travel and this would cause less travel and mobility, thus, hindering opportunities for people and lesser growth opportunity for the airport itself.

manav.gupta

Manav Gupta

I am a person who loves to read about science and economics,all the new developments in the world or any ongoing chaos. I am a strong believer of "knowledge is the key to success".

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