pompos
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Economy of Scales not applying to airports?

Sat May 19, 2018 4:06 pm

Hi all,

Why are larger airports more expansive than smaller/regional airports? Shouldn't the economy of scales make operating a large airport cheaper on a per unit basis?
Some examples, from what I read on a.net, the landing fees for LHR are higher than for LGW, STN, and LTN. Similar, FRA and HHN or (I guess) CDG and ORY.
I understand that there is a supply & demand dimension. Airlines rather operate into LHR than LGW. However, I have the feeling that I am missing something here that cannot just be reduced to the pursuit of higher margins.
 
XXXX10
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:13 pm

The fee’s are not just related to cost. They charge what the market will pay. Airports like LHR attract the premium passengers and routes, their owners refelect that in the charges
 
msycajun
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:17 pm

A big factor is land acquisition and construction costs. These are much higher in congested major cities, especially if you have to build in and around active facilities.

However as you say airports with large scales and relatively few constraints like ATL and CLT have very low ($2-3) CPE.
 
jetero
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:23 pm

XXXX10 wrote:
The fee’s are not just related to cost. They charge what the market will pay. Airports like LHR attract the premium passengers and routes, their owners refelect that in the charges


Not true in the U.S. and Canada.
 
c933103
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:25 pm

Economic of scale benefit large airport so much so that they become much more congested than smaller airport leaving smaller airport almost empty, causing airports balancing themselves by subsidies paying out by smaller airports to airlines to start route from there and that large airport can charge high fee on airlines and still attract many users
This is a placeholder.
 
jetero
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:25 pm

pompos wrote:
Hi all,

Why are larger airports more expansive than smaller/regional airports? Shouldn't the economy of scales make operating a large airport cheaper on a per unit basis?
Some examples, from what I read on a.net, the landing fees for LHR are higher than for LGW, STN, and LTN. Similar, FRA and HHN or (I guess) CDG and ORY.
I understand that there is a supply & demand dimension. Airlines rather operate into LHR than LGW. However, I have the feeling that I am missing something here that cannot just be reduced to the pursuit of higher margins.


The dimension you are missing is the revenue side of the story. Airlines are happy to pay more if, through the combination of higher fares and higher load factors, are able to generate revenues more than offsetting the costs. It really is that simple.
 
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lightsaber
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:33 pm

msycajun wrote:
A big factor is land acquisition and construction costs. These are much higher in congested major cities, especially if you have to build in and around active facilities.

However as you say airports with large scales and relatively few constraints like ATL and CLT have very low ($2-3) CPE.

That sums it up. Real estate where many people want to fly is incredibly expensive. That means more floors per building (expensive due to lost space for elevators, stairs, and utilities between floors). Not to mention a sub-basement baggage system isn't cheap.

But if a big airport is well with run, the cost per passenger is low. The problem is politicians use airports as jobs programs. I'd be ok with it if this improved service, but too many airport personnel are not working as fast as private sector employees. Disagree? Show me the benchmarks.

I expect folding wingtips to be the norm after the 777X. Less expensive real estate cuts costs per pax.

Small airports often were built with outside money, cutting costs. For example, BDL was built up as a B-36 alternate, so it was only a terminal away from passenger duty. Large airports often subsidize around them (police, fire, roads).

Also compare wages, benefits, and taxes. LAX and JFK have far higher taxes than CLT.

If the cost of business gets out of bed with revenue, business moves. There is many a city struggling that priced out business and tries to Blame everything but the Laffer curve. Cest la vie. There is a reason Las Vegas, Orlando, and Dallas are today's convention cities. Remember when it was New York, Chicago, and Los Angeles? I have friends and relatives who book conventions as part of there jobs; attendees have value expectations and any planner who misses is off the committee forever.

For example, Seattle is adding a head tax. This will hurt costs. But it might improve economies of scale as Seattle, Boston, and Irvine are the three automation development centers. My friends who work automation are all fans of anything that increases the costs of employees (taxes, healthcare, or higher minimum wage) as that increases demand for their skills.

Lightsaber
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jetero
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:36 pm

lightsaber wrote:
But if a big airport is well with run, the cost per passenger is low. The problem is politicians use airports as jobs programs. I'd be ok with it if this improved service, but too many airport personnel are not working as fast as private sector employees. Disagree? Show me the benchmarks.


Um, lightsaber, I'd wager to guess that not even 1 out of every 10 employees you encounter at an airport work for the public sponsor in the U.S. that you're so quick to demonize. Airline and concession employees are all private-sector employees. With few exceptions, hub airports in the U.S. are far cheaper than their Asian and European counterparts, which explains why the U.S. airline industry has historically been so adamantly against privatization.
 
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PatrickZ80
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:46 pm

Large airports attract airlines naturally, any airline wants to serve a big airport. Therefor these airports can basically charge anything they want, the airlines will come anyway. No need to offer your services for cheap if you can offer them for expensive.

Small airports on the other hand often struggle to attract airlines, they don't get served naturally and therefor they need something that will attract airlines to them. Lower fees are one thing they can offer, and for some airlines that is actually the reason to pick the smaller airport over the bigger one. However it's a tricky situation as the small airport can't raise the fees too much. If they did, the airlines serving them might move to another airport leaving them with nothing. It's the difference between some income and no income at all, something big airports never have to worry about.
 
jetero
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 4:47 pm

PatrickZ80 wrote:
However it's a tricky situation as the small airport can't raise the fees too much. If they did, the airlines serving them might move to another airport leaving them with nothing.


And at the end of the day why would an airline leave if fees go up in this situation? Because they can't raise fares enough to cover the increase because not enough people want to fly there in the first place.
 
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lightsaber
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 5:13 pm

jetero wrote:
PatrickZ80 wrote:
However it's a tricky situation as the small airport can't raise the fees too much. If they did, the airlines serving them might move to another airport leaving them with nothing.


And at the end of the day why would an airline leave if fees go up in this situation? Because they can't raise fares enough to cover the increase because not enough people want to fly there in the first place.

Aviation has been proven to be a very elastic market. Just look at ULCC growth! People search for cheap fares. For example, a bunch of my cousins track flight costs to visit friends and family. If the trip is cheap enough, they do a few day juant. Time has a cost too... Airlines are already charging the maximum they can. That is just common business practice. If costs go up, flights are less profitable and eventually assets should be deployed elsewhere for greater profit.

I do system optimization for engineering. I work to make the system the most economical. Not just an engine. An airline executive has the job to make the airline the most profitable. For example AS just cut flights from NYC as moving the aircraft elsewhere was an obvious money making move for that West Coast based airline.

When hubs become too expensive, it is more likely the better return on investment is elsewhere. There is a reason certain hubs have stagnated and certain really grown. Eventually, the expanding hub host city benefits so much people forget that the old hub was once a dominant gateway and it is just natural.

I started, as a hobby, programming simulations as a kid back in the early 1980s. I still do so for work and fun. If an airline isn't simulating the network to see how best to optimize asset utilization, they are being silly. e.g., my brother simulates human behavior as a bunch of differential equations for Amazon. It tells them when to buy stuff and how much to keep in stock. Airport expenses and constraints are just an input. If Amazon can use this technology for better selling chocolates, shoes, and toys, why cannot airlines? Oh, wait, Amazon is for Prime Air. :) But that is another thread. (Amazon simulates all major expenses, tests versus actual costs and efficiency). e.g., my brother does stuff like moving conveyor belt simulations to feed cargo to aircraft to cut costs or redesigning a building for where trucks offload to feed cargo. I hope other airlines are becoming more adaptive. Airport costs are but one input, but every airline needs to optimize.



Lightsaber
IM messages to mods on warnings and bans will be ignored and nasty ones will result in a ban.
 
MIflyer12
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 5:34 pm

The OP - and respondents - really need to be specific in geography. The vast majority of U.S. airports with scheduled commercial passenger service are publicly owned and operated not-for-profit.

The OP should recognize there are many measures of cost (and productivity) not reflected in landing fees or per-passenger fees. Want to attract new carriers? Charge lower fees to air carriers - and then boost parking charges and concession markups paid by passengers, for example.

IMHO, folding wingtips won't do jack to lower airport costs. A few acres of land and linear feet of concourses don't cost much (relative to DEN or LHR T5), and there will be a full generation before big-wing 777, A350, A330/Neo and A380 aircraft are all retired.

If you want a cheap airport, build it in the middle of nowhere as a steel shed with port-a-potties out back. That will be cheap to operate. Will passengers rush to use it? I doubt it. Look at the history of 'build it and they will come' airports in the U.S.: Gary and St Louis/MidAmerica come to mind. Look at the history of 2nd-generation airports struggling against first-comers: Mirabel and Narita.
 
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PatrickZ80
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 6:59 pm

jetero wrote:
And at the end of the day why would an airline leave if fees go up in this situation? Because they can't raise fares enough to cover the increase because not enough people want to fly there in the first place.


Or because there is another airport offering them a better deal.

Look at Stockholm for example, this city has no less than 4 airports. Arlanda, Bromma, Skavsta and Vasteras. Ryanair, the kind of airline that is going for the cheapest airport, serves two of them (Skavsta and Vasteras). Arlanda, the big main airport, is too expensive for them so they don't fly there. Bromma is too small for a 737, so that leaves Skavsta and Vasteras. Both of them want to serve Ryanair as it's one of the few airlines they can get. Now what do you think would happen if one of them would raise the fees? Ryanair would instantly move all of it's flights to the other airport, leaving the one that raised it's fees with no flights and thus no income. It could even come to a point where serving Arlanda would become attractive to them, which so far isn't the case. So far, Skavsta and Vasteras still offer them a better deal but it's not guaranteed to stay that way. These airports have to fight every day to keep Ryanair on board, which means they can't afford to raise their fees.
 
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PatrickZ80
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 7:10 pm

MIflyer12 wrote:
The OP - and respondents - really need to be specific in geography. The vast majority of U.S. airports with scheduled commercial passenger service are publicly owned and operated not-for-profit.


And that's a difference with Europe where most airports are operated on a commercial basis, they exist to make money. Therefor I think the difference in fees between large and small airports is much bigger in Europe than it is in America. Take Newark for example, said to be the most expensive airport in the whole USA. Still a good number of LCCs can afford to use Newark. Compare that to Heathrow, the most expensive airport in Europe. Hardly any LCCs serve Heathrow because it's far too expensive for them.
 
Jetty
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 7:22 pm

jetero wrote:
XXXX10 wrote:
The fee’s are not just related to cost. They charge what the market will pay. Airports like LHR attract the premium passengers and routes, their owners refelect that in the charges


Not true in the U.S. and Canada.

Not true for at least many European airports either, where the government has to approve the fee's and won't allow exorbitant margins.
 
Aliqiout
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 7:53 pm

lightsaber wrote:
I'd be ok with it if this improved service, but too many airport personnel are not working as fast as private sector employees. Disagree? Show me the benchmarks

Lightsaber

That's not how it works, if you bring up a fact it's your responsibility to prove it. Asking everyone else to disprove it makes it sound like your just making it up.

I have no idea if your "fact" is true or not, but which public sector employees are you talking about? Most employees at most airports are private sector.
 
Dominion301
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 8:36 pm

Aliqiout wrote:
lightsaber wrote:
I'd be ok with it if this improved service, but too many airport personnel are not working as fast as private sector employees. Disagree? Show me the benchmarks

Lightsaber

That's not how it works, if you bring up a fact it's your responsibility to prove it. Asking everyone else to disprove it makes it sound like your just making it up.

I have no idea if your "fact" is true or not, but which public sector employees are you talking about? Most employees at most airports are private sector.


In Canada, the federal government privatized all of the country’s main airports in the 1990s. Most are run by not-for-profit private corporations. A few, such as YLW are city owned and operated.

Most remote airports are subsidized and owned and operated by a provincial or territorial government.

In fact Transport Canada for over a decade now have only fully owned and operated 18 airports, all of whom are small, and most are in very remote locations.
 
Aliqiout
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Re: Economy of Scales not applying to airports?

Sat May 19, 2018 9:48 pm

Dominion301 wrote:
Aliqiout wrote:
lightsaber wrote:
I'd be ok with it if this improved service, but too many airport personnel are not working as fast as private sector employees. Disagree? Show me the benchmarks

Lightsaber

That's not how it works, if you bring up a fact it's your responsibility to prove it. Asking everyone else to disprove it makes it sound like your just making it up.

I have no idea if your "fact" is true or not, but which public sector employees are you talking about? Most employees at most airports are private sector.


In Canada, the federal government privatized all of the country’s main airports in the 1990s. Most are run by not-for-profit private corporations. A few, such as YLW are city owned and operated.

Most remote airports are subsidized and owned and operated by a provincial or territorial government.

In fact Transport Canada for over a decade now have only fully owned and operated 18 airports, all of whom are small, and most are in very remote locations.

Yeah, that's how it works in most places, even in Alaska a lot if the smaller "airports" are run by the state, but the discussion was about LHR vs LGW and CDG vs ORL, and airports like that.
 
2175301
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Re: Economy of Scales not applying to airports?

Sun May 20, 2018 5:12 am

A smaller airport is not necessarily not cost competitive... if it is right sized for its market.

The example that comes to mind is what I historically have called the Central Wisconsin Airport (south of Wausau Wisconsin) and searving the Wausua/Stevens Point area. About 3 hour drive from Minneapolis, 4 hours to Chicago.

Principally flights to Minneapolis and Chicago. My recollection from long ago was more limited service to Marquette Michigan and Milwaukee as well. I flew out of it many times back in the days... DC 9' were probably the largest plane it ever saw.

I recall a local newspaper discussion about the airport cost and fee structure that compared it to other airports of similar passenger count. My memory was it was very good as the airport and terminal was not overbuilt. No one had fantasies about a potential large amount of traffic - or very long flights.

Have a great day,
 
jmchevallier
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Re: Economy of Scales not applying to airports?

Sun May 20, 2018 6:56 am

In matter of airport, small is beautiful ... and less expensive.

A small terminal is easy to operate and user friendly, but you cannot operate 20 small terminals side by side. Neither airlines, forced to operate out of several terminals nor passengers lost between so many terminals would like it.

So large airport are buildind sophisticated large terminals, with long corridors, people mover , expensive baggage handling system, and large terminal are always more costly per passenger than small ones.

This is because airports are not simple systems, where productivity increase with size. They are complex ones, where the need for interrelationship grows exponentially with size.
 
Andy33
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Re: Economy of Scales not applying to airports?

Sun May 20, 2018 7:22 am

There's another difference between the US and the rest of the world. It is quite normal in the US for an airline to lease gates, own gates, or even an entire terminal. In the rest of the world this is very much the exception and almost everything is at least in theory common user. As a result you'd expect fees charged by US airports to airlines to be lower in most cases, because some of the facilities needed are paid for directly instead of per passenger. Making international comparisons is pretty meaningless because of this.
 
XT6Wagon
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Re: Economy of Scales not applying to airports?

Sun May 20, 2018 2:06 pm

Folding wingtips will bring down costs at airports by a rather large amount. If you don't have to build new gates for a 777x, that's a savings. A future 787-10 that can fit in a 767 gate? That's billions worldwide, as airports don't have to rebuild terminals and lose gates because newer larger wingspan planes force larger spacing. Then of course there is the potential for the large increase in passengers by using a larger plane than previously fit there.

Tell me how much better a A321LR would be with folding raked wingtips on those long transatlantic flights. If those get better, airports would see more use of narrowbody gates which are much cheaper, both to build and use.
 
DLPMMM
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Re: Economy of Scales not applying to airports?

Sun May 20, 2018 2:19 pm

FYI

It is Economies of Scale.

NOT “economy of scales”

I have no idea how an economy would work with a scale as a basic unit of currency.
 
jetero
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Re: Economy of Scales not applying to airports?

Sun May 20, 2018 8:10 pm

KD5MDK wrote:
lightsaber wrote:
jetero wrote:

And at the end of the day why would an airline leave if fees go up in this situation? Because they can't raise fares enough to cover the increase because not enough people want to fly there in the first place.

Aviation has been proven to be a very elastic market. Just look at ULCC growth! People search for cheap fares. For example, a bunch of my cousins track flight costs to visit friends and family. If the trip is cheap enough, they do a few day juant. Time has a cost too... Airlines are already charging the maximum they can. That is just common business practice. If costs go up, flights are less profitable and eventually assets should be deployed elsewhere for greater profit.

This explains why Delta is leaving LGA and moving to BDL & ABE.


Hahahahahaha, and why F9's route map is so stable.
 
KD5MDK
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Re: Economy of Scales not applying to airports?

Sun May 20, 2018 8:14 pm

lightsaber wrote:
jetero wrote:
PatrickZ80 wrote:
However it's a tricky situation as the small airport can't raise the fees too much. If they did, the airlines serving them might move to another airport leaving them with nothing.


And at the end of the day why would an airline leave if fees go up in this situation? Because they can't raise fares enough to cover the increase because not enough people want to fly there in the first place.

Aviation has been proven to be a very elastic market. Just look at ULCC growth! People search for cheap fares. For example, a bunch of my cousins track flight costs to visit friends and family. If the trip is cheap enough, they do a few day juant. Time has a cost too... Airlines are already charging the maximum they can. That is just common business practice. If costs go up, flights are less profitable and eventually assets should be deployed elsewhere for greater profit.

This explains why Delta is leaving LGA and moving to BDL & ABE.
 
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eisenbach
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Re: Economy of Scales not applying to airports?

Sun May 20, 2018 8:59 pm

I think you overlook something :-)

In most parts of the world, airports get the majority of revenue not by landing fees, but by retail - and (in Europe) by parking fees. So, the more passengers you funnel through your airport, the higher your retail revenue. So it is in fact kind of economy of scale.

Furthermore legacy carriers want to provide good flight connections (and convenient links to the next city/economic centre). For them large airports with all kind of good connections are more interesting, as this is more attractive to business travellers.
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