Innovation

Optimizing airport aero revenues with dynamic pricing

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Fuelled by the growth in air travel, airports have transitioned from public infrastructures to dynamic arenas where private operators and innovative ownership models have gained prominence. Demand for new airports and the rise of privately operated facilities have led to a decline in government-operated airports, which requires continuous recalibration of the aviation industry's dynamics.

However, regulatory frameworks remain indispensable given airports' strategic role in economies. While respecting the rules of basic market economics, governments recognize that private ownership requires some oversight to prevent the imposition of excessive charges that would translate into escalated airfares, making air travel less accessible to the masses. This balance between operational freedom and regulatory supervision ensures that airports remain accountable and passenger-centric. 

Two pillars of airport revenue

Airports rely on two primary revenue streams — aero and non-aero revenue. The former encompasses charges levied on airlines for utilizing airport facilities, including essential services. Meanwhile, non-aero revenue is derived from rentals, concessions, and parking fees. 

Aero revenue hinges on various components, encompassing passenger fees, like security and facility charges, and airline landing and parking fees. Additional services, such as aerobridge usage and ground handling, entail further charges. Aero revenue sources are subject to regulatory oversight in most countries.

Fixed pricing vs. dynamic incentives for aero revenue

Flat pricing is the prevalent practice for aero revenue structures as it's straightforward to calculate and enforce, resulting in stable cost projections. However, adopting a dynamic pricing approach opens new opportunities for airports to improve revenues while nudging airlines towards higher service quality levels in their airport operations.

Currently, airports can impose differential charges on airlines based on supplementary services. Passenger service charges are typically fixed per passenger, landing fees hinge on metric tonnage, and aircraft parking charges correlate with duration. Yet, these fixed components constitute only a fraction of the intricate cost dynamics inherent in airport operations. Extended gate occupancy times can unleash cascading operational disruptions, underscoring the importance of managing aircraft turnaround times efficiently.

Moreover, escalating demand on IT infrastructures to streamline operations during peak periods must go hand in hand with a new pricing approach. While practical, the existing practice leaves airports and passengers seeking a more comprehensive model. 

Navigating toward dynamic aero charges

A paradigm shift toward dynamic and variable aero charges is imperative to foster a symbiotic relationship between airports, airlines, and passengers. While regulatory oversight remains vital, embracing a more nuanced framework that accounts for modern challenges is essential. A novel approach could involve allowing airports to implement dynamically calculated pricing structures governed by a capped upper limit. Incorporating non-discriminatory clauses would ensure equitable treatment.

This transition holds the potential to yield transformative outcomes:

  • Efficiency incentives: Charges for extended gate or stand occupancy can be calculated dynamically, reflecting the ripple effects of disruptions caused by delays.
  • Time-of-day dynamics: Dynamic adjustments to charges can be applied as airport traffic fluctuates throughout the day, mirroring airline ticket pricing flexibility.
  • Performance-based pricing: Flights adhering to promised timelines could benefit from reduced charges, fostering a culture of punctuality.
  • Flexible arrival windows: Dynamic pricing could encompass flights arriving outside designated windows, aligning charges with real-time demand.

Role of technology

In this era of unprecedented data capture, airports amass a wealth of information that can optimize revenues through dynamic pricing when harnessed alongside cutting-edge technologies, like machine learning. Innovation in this space promotes healthy competition among airlines and strengthens airport aero revenue while elevating the quality of services for passengers.

The metamorphosis of airports from slow-growing public entities to fast-evolving private ones has prompted a re-evaluation of pricing strategies across the globe. The convergence of dynamic pricing, regulatory oversight, and technology opens new opportunities for airport operations management.

By embracing flexibility and incentivizing excellence, airports can align their interests with those of airlines and passengers, ensuring a rewarding experience for all stakeholders. The future of the airport industry holds a case for implementing regulatory frameworks that recognize this need, and technologies like machine learning will help airports achieve dynamic pricing of aero revenue components based on market demand models.

Author Info

Priyod Chandran is a Principal Consultant in IBS Software's Digital Innovation & Consulting team with 14 years´ experience. 

He specializes in the application of emerging technologies in the airline industry and works with airlines around the world to bring transformational changes to their operations through innovation. Priyod holds a Master's degree from the Indian Institute of Management and is based out of Kochi.

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