The impact of airline business models on Croatian airportsrevenues.doc

heri bezi, ph.d.university of rijeka, faculty of economicsivana filipovia 4, 51 000 rijeka, croatia+385 51 355 148bezicefri.hrkatija vojvodi, ph.d.university of dubrovnik, department of economicslapadska obala 7, 20 000 dubrovnik, croatia+385 20 445 933katija.vojvodicunidu.hrthe impact of airline business models on croatian airports revenues this article is the result of the scientific project innovation, technology transfer and competitiveness of croatian export no.1414 financed by croatian ministry of science, education and sportsabstractleisure market has numerous segments and can be suitable for various business models. looking at the airline industry, business models are converging. low-cost carriers increasingly serve holiday destinations. some scheduled and charter airlines are adopting successful low-cost carriers elements and participating in the low cost market. the boundaries between these models are increasingly diminishing. consequently, due to the rapid changes in the airline industry and ever-increasing competition between carriers, only the most adaptable ones will survive and evolve further. the main objective of this paper is to examine how different airline business models affect both aeronautical and commercial revenues of croatian airports. moreover, it measures and compares the impact of three main airline business models traditional scheduled, charter and low-cost on airports commercial revenues. two empirical models are used to estimate the rate of growth with regard to flight and passenger numbers. the explanatory variables in the first model include low-cost, charter and full service carrier flights, while the second model consists of passengers from low-cost, charter and full service airlines. the time period considered is from 2004 to 2008. the results indicate that the flights of all three airline business models contribute significantly to airports aeronautical revenues. however, charter airlines have the largest impact on airports aeronautical revenues. on the other hand, the figures show that charter and full service passengers have a significant impact on airports commercial revenues. by contrast, the contribution of low-cost passengers to airports commercial revenues is still insignificant. the findings have important implications for airport managers. in particular these include complementing airline business models and generating more commercial revenues. key words: airline business models, competitiveness, international business, croatian airports, commercial revenues, aeronautical revenues1. introductionairports represent some of the most dynamic and complex facilities and their activities are not related only to receiving aircrafts or the processing of passengers and freight. in order to compete successfully in a highly competitive market, airport authorities have to be focused on the developments and challenges facing the air transport industry and the airport sector in particular. the traditional role of airports was associated with airlines and generated most of its revenues from its core business or aeronautical revenues. however, the role of airports has been evolving. apart from its traditional air-side business, the increasing focus is on commercial activities. in this regard, the airport becomes a more sophisticated market entity that may be described as a multipoint service-provider firm (jarach, 2001, 123). the reason for this is partly due to the increasing pressure from the airline industry for airports to control the level of their other key revenue source aeronautical charges (graham, 2009, 106). in that sense, the role of airport managers is now often seen as that of running business with a focus on a better commercial orientation of the airports operations and of their facilities (torres et al., 2005, 363). different types of airline business models lead to a difference in the traffic carried and in the nature of the visitor stream (bieger and wittmer, 2006, 45).business designs of three main airline models could seem quite ambiguous. in fact, meaningful definitions of and distinctions between airline business models are not easily formulated, particularly when one considers the extremely dynamic nature of the industry (mason and morrison, 2008, 75). charters offered a way of serving tourism demands while not impacting too strongly on the scheduled airlines (dwyer and forsyth, 2006, 232). traditional and charter airline business models are under increasing pressure due to the strong growth of low-cost carriers (lcc) and use different strategies in order to respond to the market entry of low-cost airlines. sometimes it also means adopting some advantages of the low-cost airline business model or participation in low-cost market (e.g. lufthansagermanwings, condorfliegenpreise). this latter strategy is also known as carriers-within-carriers strategy (graham and vowles, 2006, 105) or airlines within airlines (morrell, 2005, 305; gillen and gados, 2008, 29). consequently, the boundaries between models are blurring (papatheodorou and lei, 2005, 6) and business models are overlapping (teckentrup, 2007, 123). comparing airline business models and measuring their impact on airports financial performance seem to be of paramount importance to airport managers. the ability of an airport to pursue different revenue strategies will depend on the level of integration between airports and airlines and the nature of competition in each market (gillen and morrison, 2003, 19). consequently, it is an important issue for airport managers to understand the changing nature of airport-airline relationship, dynamic aviation environment and to bear in mind the features of an individual airport. the problem for the airports manager is compounded by the different management styles and philosophies that operate within the carriers themselves, meaning that the requirements of each airline may be subtly, or even fundamentally, different from one which might be expected to be placed in the same category (pitt and brown, 2001, 52). this is crucial in assessing the benefits from both aeronautical and commercial activities before negotiating with airlines or offering them any incentives. the main objective of this paper is to examine how different airline business models affect both aeronautical and commercial revenues of croatian airports. moreover, it measures and compares the impact of three main airline business models traditional scheduled, charter and low-cost on airports commercial revenues. two empirical models are used to estimate the rate of growth with regard to flight and passenger numbers.the paper is divided in five main parts. first, the literature on assessing the impact of different airline business models on airport financial performance is reviewed. this is followed by the description of the dataset and the methodology used in the analysis. the results obtained are presented and discussed in section 4. the last section comprises managerial implications and conclusions emerging from the previous sections. it also indicates some proposals for the improvement of future research.2. literature reviewso far, there has been little exploration of the impact of different airline business models on airport financial performance. a review of the literature on this subject shows the lack of studies as well as limited quantitative analysis. the main reason for this is the availability of detailed financial data. papatheodorou and lei (2006, 51) study the impact of the three main airline business models (traditional scheduled, charter and low-cost) on airports aeronautical and non-aeronautical revenues. as a case study they use twenty-one regional uk airports over the period ranging from 1995-1996 to 2003-2004. given the airports exhibit considerable differences in size, the dataset is further subdivided into two groups, large and small airports, using three million passengers per year as the cutting benchmark. for the whole sample and for the large airports group, charter flights have the largest impact on airport aeronautical revenue, followed by low-cost and full-service flights. however, low-cost flights seem to be the largest contributor in the small airports group. on the other hand, the results show that the lcc passengers contribution to non-aeronautical airport revenue is highly significant across all three samples, although smaller for the large airports group than for the small one. the contribution of charter and full-service passengers is insignificant for the whole sample and the large airport group, but highly significant in the small one.using case studies approach, francis et al. (2003, 267) examine the impact of low-cost airlines on two airport-airline relationship at two european airports with less than one million passengers annually. it is found that airport managers perceive that future development at their secondary and regional airports can depend on the incentives they can offer to low-cost airlines. they argue that low-cost model motivates airlines to negotiate contracts that significantly reduce aeronautical revenues, leaving airports to compensate by seeking commercial revenues from the increase in passengers. in that context, francis et al. (2004, 507) explore the way in which airports have responded to the apparent opportunities afforded them by the growth of low-cost airlines and identify important issues for airport managers to consider when negotiating with low-cost airlines. graham and dennis (2007, 161) conduct the analysis based on descriptive statistics to examine the impact of low-cost airlines on 14 medium/small sized uk and three irish airports financial performance since 1998. the traffic analysis shows that low-cost carriers have been largely responsible for strong passenger growth and increased passenger load and a greater offer of european services at a number of regional airports. nonetheless, they deny overall obvious link between airport profitability and low cost operations and argue that these airports tend to have lower unit revenues, particularly as regards airport charges, but also lower unit costs.using hamburg airport as a case study, gillen and hinsch (2001, 25) estimate the impact of changes to the international aviation bilateral agreements on airport revenues and the income, employment and tourism effects for the local economy. impacts examined include changes to the frequency of flights, the gauge of aircraft flows and the number of passengers carried. they find that change in passenger and operations leads to a 6 percent increase in overall airport revenues, as well as increases in local output, investment and employment.the primary focus of the analysis by graham and dennis (2010, 127) was on the impact that low cost airline operations are likely to have on the volume and profile of passengers visiting malta. the evidence shows that traffic to malta increased significantly in 2007 but these additional travellers do not take shorter trips or travel more in off-peak times. in other words, the flexibility provided by low cost services has not been fully utilised. the authors underline that this is unlike the situation at a number of other european destinations where the introduction of regular low cost services has provided the flexibility for short break cultural tourism to develop.another descriptive analysis uses salzburg airport as a case study (schano, 2008, 54). it reviews the impact of low-cost airlines on both tourism in the region and the airport itself. a number of strengths and threats to airports core strategy of moderate growth, enhanced productivity and expansion of existing revenue potentials are identified. the paper concludes that a balanced marketing approach including both low-cost carriers and network carriers to provide connectivity via europes hubs will be the key to continued success for both the airport and the region it serves.papatheodorou and arvanitis (2009, 402) explore the evolution of airport passenger traffic in greece and argue that greece is still short of traffic generated by low-cost carriers especially outside the main metropolitan airports. they conclude that further dispersion of traffic could be possible in the mainland if low-cost carriers decide to enter the greek market. donzelli (2010, 125) shows that the advent of low-cost air services in southern italy coincided with more balanced flows of traffic across the year and an increase in international tourisms. additionally, in quantifying the wider impacts on a local economy from low-cost services, a single route can generate economic welfare gains of about 14.6 million per year. lei and papatheodorou (2010, 37) measure the effect of low-cost carriers on british regional airports commercial revenue using panel data analysis. the evidence shows that although low-cost carriers have a significant impact on airports commercial revenue, their contribution is smaller compared to other carriers. their empirical results indicate that holding other variables constant, on average, each additional lcc passenger boosts airport commercial revenue by 2.87, while each additional other carrier passenger raises commercial revenue by 5.59. as it can be seen from the aforementioned studies and analyses, only a few studies related to the influence of three airline business models to airports financial performance have been found. other studies are mainly descriptive and mostly focus on the relationship between low-cost airlines and their impact on airports, without taking into consideration the impact of other airline business models. to the best of our knowledge, no analyses on the subject including croatian airports have been found. 3. data and methodologythe analysis focuses on all croatian airports handling international air traffic over the five-year period ranging from 2004 to 2008. there are seven airports handling international air traffic in the republic of croatia zagreb, split, dubrovnik, zadar, rijeka, pula and osijek. the aforementioned airports are included in the analysis. a 55% stake in each is owned by the state, with the remaining 45% divided between different levels of regional and local authorities. in terms of total passenger volume, croatian airports recorded approximately 4.9 million passengers in 2009. it is worth pointing out that the airports of zagreb, split and dubrovnik amount to approximately 85% of the total passenger traffic in croatia. it is important to outline that sample period for the analysis starts from 2004, when low-cost carriers started their operations in croatia. all data were taken from the annual reports of the airports, which provide information on the physical and financial parameters of the airports. another source of information includes statistical data on passengers processed, obtained from croatian central bureau of statistics. similar to papatheodorou and lei (2006, 49), two empirical models measuring the impact of all three airline business models on croatian airports revenues are specified below. in the first ar model, the dependent variable is aeronautical revenue (ar), which refers to airports core activities, i.e. airline operations. aeronautical revenues include aircraft landing fees, aircraft parking and hangar fees, passenger terminal fees and air traffic control charges, with landing and passenger terminal charges being most important (zhang and zhang, 2003, 54). the structure of aeronautical charges at croatian airports is in line with many airports worldwide. the greatest part of aeronautical revenue consists of landing charges based on maximum takeoff weight (mtow). the second main source is related to passenger charges levied per departing passenger. due to the unavailability of data on aircraft size, the number of flights is used as a proxy for aircraft size. the explanatory variables in the ar model include the number of flights by three types of airlines low-cost (lcflight), charter (chflight) and full-service (fsflight) carriers.the value of regression coefficients (1, 2, 3) in ar model shows how much aeronautical revenues are expected to increase when the independent variable increases by 1%, holding all the other independent variables constant. these coefficients give a measure of the contribution of each variable to the model. a large value of regression coefficient indicates that a unit change in an independent variable has a large effect on the aeronautical revenues.in the second cr model, the dependent variable is commercial revenue (cr), associated with non-aviation-related activities. generally, commercial (or non-aeronautical) revenues are those generated by activities that are not directly related to the operation of aircraft, notably income from commercial activities within the terminal and rents for terminal space and airport land (graham, 2007, 56). although doganis (1992, 114) distinguishes eight groups of airports potential customers, passengers are emphasized as by far the most important group in terms of spending power. the cr model is defined as follows. in this context, commercial revenue primarily refers to the number of passengers. consequently, the explanatory variables in the cr model consist of the number of passengers carried by three types of airlines low-cost (lcpax), charter (chpax) and full-service (fspax). the value of regression coefficients (1, 2, 3) shows how much commercial revenues are expected to increase when the independent variable increases by 1%, holding all the other independent