1. Lecture 6: Airport Financial Management
By: Zuliana Ismail

2. Learning Outcome Student able to:
Explain how do airport generates revenues
Compare the aeronautical and non-aeronautical revenues
Explain how airport services and facilities are priced
Airport revenues are classified as ‘aeronautical’ and
‘non-aeronautical’:
Aeronautical revenue is that derived from aviation activities: charges to private and commercial aircraft operators, fuel sales, hangarage and airfreight facilities.
Non-aeronautical revenue is all other income: from parking, shops, rents from offices and other buildings on the airport and other tenants.
In all commercial airports, the major costs are fixed and relate to aeronautical operations and regulatory compliance (air traffic, fire & rescue, safety, security and environmental impacts). These airports therefore typically incur losses on their aeronautical activities and balance these with healthy surpluses on the non-aeronautical, to achieve profitability.

3. Airport Financial
Airport financial management is important to manage the balance of operating revenues & expenses.
In general, revenues from the operation of airport are used to cover airport's operating expenses.
What means by airport expenses???
What means by airport revenue???

4. What is Airport Expenses
Expenses means the cost or money that must be spent for something.
Expenses for airports include
Capital improvements
Operating expenses
Airport Expenses
Expenses for airports include capital improvements, operating expenses, and non-operational expenses.

5. Airport Expenses Capital improvement expenses Operating expenses
Capital improvement expenses include costs of major construction projects such as airside & terminal expansion.
Operating expenses
Some sources of operating expenses are:
Labor (salaries),
Supplies,
Utilities (water / power supply),
And maintenance costs

6. Airport Expenses

7. What is Airport Revenue?
Airport revenue is income that an airport receives from its business activities.
Airport revenues are classified as ‘aeronautical’ and ‘non-aeronautical’:
Aeronautical revenue is that derived from aviation activities: charges to private and commercial aircraft operators, fuel sales, hangarage and airfreight facilities.
Non-aeronautical revenue is all other income: from parking, shops, rents from offices and other buildings on the airport and other tenants.

8. Revenue
In business, revenue is income that a company receives from its normal business activities.
Usually from the sale of goods and services to customers.
Some companies also receive revenue from interest, dividends or royalties paid to them by other companies.
Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of $32 million.“
Airports revenue supports airports expenses & provides for the operations, maintenance, and capital improvements.

9. How do Airport generate Revenues?

10. How do Airport generate Revenues?
Airports generate revenue from its business activities that can be classified into two categories, which are: 1.
Aeronautical Revenue 2.
Non- Aeronautical Revenue
Airport revenues are classified as ‘aeronautical’ and ‘non-aeronautical’.
Aeronautical revenue is that derived from aviation activities which is dealing with aircraft operations.
Non-aeronautical revenue is generated from non-aircraft related commercial activities.
Aeronautical = Related to aircraft operation
Non-Aeronautical = Non related aircraft operation

11. aeronautical vs non-aeronautical revenues
Landing Fees
Air Navigation Fee
Aircraft Parking & Hangar Charges
Airport Noise Charge
Passenger Service Charge(PSC)
Security Charge (SC)
Ground Handling Charges
Night flight fees
NON-AERONAUTICAL REVENUES
Concession fees for Commercial Activities
Car Parking & Car Rentals
Rental of Airport Land, Space in Buildings & Assorted Equipment
Fees charged for Airport Tours, Admissions etc.
Aeronautical revenue is that from aviation activities which is dealing with aircraft operations. For example, landing fees and aircraft parking fees, lighting and aerobridge charges (paid by airlines)

12. Aeronautical Revenues
Aeronautical revenue is generated from aircraft related activities in the airside area or airport land.
Aeronautical revenue is mainly derived from landing fees and aircraft parking fees, lighting and aerobridge charges (paid by airlines).
Landing fee is a charge paid by an airline for using the runway.
Parking fee is for using the tarmac and taxiway.
Revenue Base
The company's revenue base is divided into 2 main categories - aeronautical and non-aeronautical revenue. Aeronautical revenue is mainly derived from landing fees, aerobridge charges, check-in-counter charges, parking fees and the passenger service charges.
Traffic Growth –increases in passenger movements or in the number and size of aircraft movements
Fees charged to Airlines–the level of aeronautical charges is driven by airport costs, the charges at alternative or comparable airports and commercial considerations such as attracting high-value traffic.

13. Example
CHARGES
Aeronautical charges, or commonly known as 'Airport Charges,' which are approved by the government can be divided into two categories:
Passenger Service Charge (PSC) (formerly known as 'Airport Tax') which is paid by departing passengers.
Charges to the airlines which includes parking, landing, aerobridge and check in counters.
The level of aeronautical charges are determined and approved by the Government authorities and are applied on a standard basis across all airports in Malaysia. Any increases or decreases in these charges are within the purview of the Government authorities and MAHB fully respects this, as can be seen in the case of the current LCCT, where the Government reduced the PSCs.
It has been contended that the higher the cost of building a terminal, or for that matter, an airport, will result in higher charges to airlines operating into that particular airport. This is not the case. For example, when KLIA was built and the airlines moved from Subang, aeronautical charges at KLIA were not increased; similarly, the case for Langkawi, Kota Bharu, Alor Setar, Bintulu, Tawau and Limbang Airports. This will therefore also not be the case for newly upgraded airports in Kuala Terengganu, Melaka, Labuan, Kuching and Kota Kinabalu. Any increase is applied uniformly across all airports.
Charges paid by airlines at Malaysia's airports are already low and discounted against those charged by neighbouring competing airports. These charges are intentionally kept low to provide low cost operations for airlines operating in and to Malaysia. Therefore, the issue of high aeronautical charges applicable to airlines does not arise.
In fact, it needs to be emphasised that the landing and parking charges in Malaysia have not been increased for the past 27 years.
Airport charges applicable to airlines constitute only a small proportion of their total costs. For example, in the case of AirAsia, it is believed that this constitutes approximately only 2.5 percent of their total annual costs. When incentives are given, this percentage is further reduced.

14. Non-aeronautical revenue
Non-aeronautical revenue is generated from non-aircraft related commercial activities in the terminals and on airport land.
The commercial activities including:
Concession fees (e.g., rentals and profit-sharing arrangements with concessionaires such as restaurants and retail shops)
Revenue derived from rental of land, premises and equipment (e.g., hotels, and airline cargo space and office space rent),
Management of parking facilities
**Concession is the payment that the owner of commercial activities in the airport have to pay to the airport authority. Airport concessionaires (such as restaurants, banking) typically pay rent for the space they occupy.
Non-aeronautical revenue comprises revenue generated from commercial activities, including duty free operations, hotel operations, free commercial zone operations, management of parking facilities and the lease of commercial space.
Non-aeronautical activities include
Concession fees (e.g., rentals and profit-sharing arrangements with concessionaires such as restaurants and retail shops)
Revenue derived from rental of land, premises and equipment (e.g., hotels, and airline cargo space, kitchens and office space rent),
Income derived from the airport's shops and services (e.g., baggage handling, and parking), and various fees charged to the public.
Normally more than 50% of the total revenue of the airport generate by Non-aeronautical charges .

15. aeronautical vs non-aeronautical revenues
In most busy airports, Non-Aeronautical revenues are about 50% of total revenues.
Airport – Operating Revenues vs. Operating Expenses
Summary
Airport revenue provides for the operations, maintenance,
and capital improvements of the Pierce County Airport –
Thun Field. The three-year goal is for airport operations to
be self-supporting through user fees and tenant charges.
The operating expenses: associated with the airport include maintenance of airport systems and facilities, power and other utilities, and supplies and administration.
The operating revenues come from leases and rental charges for land, hangers, tie-downs, and other facilities at the airport and a share of concessions.
Performance Goal
The Airport Operating Revenues will cover all Operating Expenses (excluding depreciation).
Capital costs consist of the component costs (e.g., labor, materials and equipment) of construction of the airport and its component parts.
An airport seeking to expand its facilities must raise sufficient capital to finance such infrastructure development from public or private sources.
Sources of capital for airport development include:
Governmental or international organization loans and grants,
Commercial loans from financial institutions
Debt (typically, bonds) from commercial capital markets, including private investors, banks investment houses, or fund pools, and the
Extension of credit from contractors and suppliers.
Operating Costs
Such operating costs include expense items as interest and reduction on debt, taxes, and maintenance and administrative costs, including salaries, power, and repairs.
Cash Flow
Air side revenue streams include landing fees, fuel taxes, and maintenance and cargo facility leases.
Land side revenue streams include terminal rents and gate leases, concessions, parking fees, and various taxes, such as, in the United States, Passenger Facility Charges.
In addition to government grants and subsidies, the airport turns to its tenants -- the airlines, concessionaires, parking -- and the passengers they serve to finance its maintenance and operating costs, and debt service.
Airports derive revenue streams from rents, charges and fees imposed upon airlines, various concessionaires, such as car rental companies, restaurants, newsstands, taxi and van services, catering and baggage services, fuel providers, and parking.

16. The taxes/fees on my ticket helps to support airports . How?

17. Ticket Taxes
The portion of a ticket that is composed of taxes and fees depends upon the airfare and the passenger's journey distance
Normally, airports charge a Passenger Facility Charges (PFCs) & Security Charge (SC).
PFC is a service charge for using the airport facilities & SC is a service charge for using security facility.
The portion of a ticket that is composed of taxes and fees depends upon the airfare and the passenger's itinerary.
Airports receive a portion of the federal excise tax and segment tax included in the price of a ticket from the Airport Improvement Program (discussed in the next section).
As referenced previously, airports may also charge a PFC.
An excise or excise tax (sometimes called an excise duty or special tax) is a type of tax charged on goods produced within the country (as opposed to customs duties, charged on goods from outside the country). It is a tax on the production or sale of a good.[1]
Typical examples of excise duties are taxes on gasoline, tobacco and alcohol (sometimes referred to as sin taxes).

18. PFC & SC PFC also referred as Passenger Service Charge (PSC)
For example, airport in Malaysia, passengers are required to pay a Passenger Service Charge (PSC) as well as a Security Charge (SC).
For Example:

19. Airport Revenues Airport Operator Service Providers Airlines
Property Rents, unregulated charges etc.
Aeronautical Charges
Property Rents, unregulated charges etc.
Service Providers
Retail, car parking, hotels etc.
Fundamentally, in order to deliver an attractive return on investment, airports must increase their revenues; &
where these revenues are subject to price regulation, airport operators will seek to:
find ways to realise revenues outside the scope of regulation; &
find ways to realise increased regulated revenues, where the regulatory system allows this; &
‘outside the scope of regulation’ might mean:
through commercial activities; &
through vertical integration; &
through common interest; &
regulatory systems may reward ‘efficiency’ & so airports may over-forecast expenditure in order to benefit from this.
Airlines
Fees
Passengers
Fares

21. How are Airport Facilities & Services priced ?
Question
How are Airport Facilities & Services priced ?

22. Aeronautical charges Landing Fees - based on MTOW of aircraft
Aircraft parking charges – based on Aircraft size
Passengers charges/Terminal Fees - Based on Maximum
Seating Capacity of aircraft
Aerobridges – per embarkation or disembarkation.
Hangar charges – rental monthly
Navigation charges – per mile per aircraft within control zone.
Sources of Revenues
Landing Fees
•Fee imposed based on each landing of an aircraft
•Usually the largest source of income at an airport
•Normally charged to jet and turbo prop aircraft only
•Same rate for both International vs Domestic arrival
•Based on Gross Takeoff Weight of Aircraft:
Terminal Fees
Imposed on scheduled and charter passenger carrying aircraft that use the Terminal Building
Normally one of the largest sources of revenue for an airport
Separate rate for International versus Domestic Arrival
Based on Maximum Seating Capacity of the Aircraft
Aircraft Parking Fees
•Normally charged to aircraft that are parked for periods greater than one day.
•Based on the Gross Take Off Weight of the aircraft
•Rates are normally by the day, month or year
Other Operating Fees
Examples of other fees are listed below. Airports may or may
not choose to levy these fees:
•Loading Bridge Fee – Flat Rate (Calgary is $51 per
connection)
•Customs Pre-clearance Fee – Rate per passenger (Calgary is
$2.14 per originating passenger)
•Aircraft Plug in Fee: Flat Rate
•Flight Information Display Fee: Flat Rate per line
•Police and Security Fee: Based on maximum seating capacity
of aircraft (Ottawa is $0.95 per landed seat)
Fuel Flowage (normally AVGAS)
Piston aircraft (smaller single engine and twin) do not
pay landing fees
Airport derives revenue from piston aircraft via Fuel
Concession Fee charged to fuel companies
Airport will charge fuel companies 4 cents to 8 cents
(normal range) per litre for AVGAS sales 22

23. Aeronautical charges Landing Fees
Fee imposed based on each landing of an aircraft
Usually the largest source of income at an airport
Same rate for both International vs Domestic arrival
Based on Maximum Takeoff Weight of Aircraft (MTOW)
DOW=Dry Operating Weight (aircraft basic weight)
Payload=Passenger + Cargo

24. Aeronautical charges Aircraft Parking Fees Charge per day (24 hours)
Based on the Aircraft size –wing span x fuselage dimension.
The Parking charges are
charged per 24 hours or part thereof, with the first 3 hours free.

25. List of Fees and Charges applicable in Changi Airport
Aeronautical charges
List of Fees and Charges applicable in Changi Airport
Airlines pay rental charges for the space they occupy at ticket counters, gates, baggage handling, maintenance, and catering facilities, and also pay takeoff and landing fees, parking fees, and fuel fees.
Two methodologies dominate computation of airline fees and charges under airport use agreements – the residual method, and the compensatory method

26. Aeronautical charges Passengers charges / Terminal Fees
Imposed on scheduled and charter passenger carrying aircraft that use the Terminal Building
Normally one of the largest sources of revenue for an airport
Separate rate for International versus Domestic Arrival
Based on Maximum Seating Capacity of the Aircraft

27. Non-Aeronautical charges
Hotel – building rental
Offices – to airlines and businesses monthly rental sq ft
Rental of check in counters - per counter per flight
Car parking – per car per hour
Retail shop outlets - rentals monthly based sq feet size of the retail outlet (the biggest non-aeronautical revenue) 27

28. Quick Test
The airport revenues are derived from ____________ and __________________`.
Aeronautical revenues are come from______________ while non-aeronautical revenues come from___________
Aircraft parking are charged per hour and calculated based on aircraft sizes which are _________ X ________.
The format to calculate the landing charge of an aircraft is based on the aircraft’s weight or MTOW. MTOW is stand for ____________________________-.