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Viewpoint
A new approach to Airport User Charges’

Edward Clayton
Operations Contracts Manager, British Airways, PO Box 10. Heathrow Airport (S754). Hounslow,
Middlesex TW6 ZJA, UK

The Airport User Charges system has not changed significantly for many decades, and has been
enshrined in documents such as ICAO 908214. Airlines are now developing new ways of think-
ing about these charges which may significantly change the relationship between airports and
their customers. This paper describes the current situation and offers an outline of an alterria-
tive system which airlines and airports are currently examining. 0 1997 Elsevier Science Ltd.

Keywords: Airport User Charges; airline-airport relationships; landing charges

For several decades airports and airlines have co-existed plemented by a list of additional charges for optional
in a framework defined by the Chicago Convention of services, and landlord-tenant contracts for leased offices
1945, and have accepted a system of airport charges and other areas.
suitable for two government-owned entities dividing costs Airlines now recognise that a new approach is required,
more-or-less equitably. Today many airlines are in private involving a well-defined commercial and operational
hands, and airport privatisation is starting to gather partnership between themselves and the airports they oper-
momentum, with several airports having already fol- ate to. This paper describes the current situation and offers
lowed the early example of BAA in the UK. Many more a possible alternative.
countries throughout the world are actively examining
or implementing privatisation or at least corporatisa-
tion of their airports. The current state of user charges
When airports have a goal of profit maximisation, the User Charges are airport landing, parking and pas-
current user charges system tends to be problematic. Airlines senger charges, terminal navigation (approach) charges,
accuse the airports of monopoly abuse as airports actively and en-route (overflying) charges. This paper focuses on
seek new ways of generating revenues, both from airlines the charges associated with airports. Included in the
and from commercial activities at airports. In its purest three types of charge mentioned above may be many
form the ‘single-till’ system, in which airlines pay the residual more-security, runway lighting, airbridge, etc. Most
cost of an airport after commercial income, does not airlines regard a charge at an airport as a user charge-or
provide an incentive for airports to either control costs or aeronautical charge-if it is generic, paid by all airlines
maximise the exploitation of non-aeronautical income which use the facility. Facilities where a choice of pay-
opportunities. ment exists (either because the airline may wish to choose
These problems are exacerbated by the ill-defined how much to use, or not to use it at all, e.g. check-in
contractual relationships between airports and airlines. In desk rental) are not normally regarded as aeronautical
most airports worldwide, the contract consists of the charges.
airport’s standard conditions of use, possibly sup- Aeronautical charging principles are set out in ICAO
document 908214, which recommends the way in which
charges should be levied, and the amount of money which
can be raised from aeronautical charges. Despite some
‘Disclaimer: The author is responsible for negotiating User Charges for
British Airways at airports throughout Europe and is the IATA User apparently clear language in this document, both airports
Charges Panel member for Europe I (Western Europe). He is also Chair- and airlines manage to justify a very wide range of practices
man of the IATA Airport Cost Evaluation Working Group within which whilst claiming to adhere to ICAO 9082/4.
many of the new airport charges concepts have been developed. The
views expressed in this article do not necessarily reflect the views of Airport charges have traditionally consisted of the fol-
British Airways or IATA, but are the personal opinion of the author. lowing elements:

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New approach to airport user charges: E Clayton

Charge ‘ljpe Charging Parameter Notes non-hub carriers when the charges are demonstrably
Landing Charge Aircraft Weight Usually charged once per cost-related.
turn-round, either on
landing or take-off. Airlines support the airport charges principles found in
Parking Charge Aircraft Weight Normally a free period of
ICAO 9082/4, which are:
I4 hours after landing.
Passenger Charge Number of Passengers May be reductions for
Cost-relatedness-a definable link between the costs of
transfer or transit
passengers. providing the facilities, and the amount of money
recovered from airport charges. This does not, however,
Deviations from this traditional pattern are becoming mean full cost recovery, as the single till will reduce the
increasingly common around Europe; the main trend need to levy charges on airlines.
observable at the moment is increasing complexity. Single Till-profits from non-aeronautical activities (e.g.
Significant current charges developments are: shops, car-parks) should be taken into account when
setting aeronautical charge levels; an airport should be
Security charges-driven in particular by the require-
seen as a single business.
ment for airlines to screen 100% of hold baggage. Airlines
Non-discrimination-all airlines should be charged on
and airports also want to know the total cost of provid- the same basis for facilities used, and the structure of
ing security; a separate charge helps to make this clear. charges should not be set in a way which clearly favours
Normally denominated by passenger. a small minority of customers.
Noise-related charges-increasing pressure from Consultation-airports should consult with their custom-
environmental groups and local government encour- ers, the airlines, about the structure and level of charges,
ages airports to be seen to introduce measures to deal and about any new developments which may affect
with noise. Generally a supplement is added to the these charges.
landing charge for noisier aircraft. Some airports also Regulation-an independent authority should act as
impose landing charge supplements when a particular arbiter in any disputes between airport and airlines
flight produces measured noise above a predefined limit. about the structure or level of charges.
In general airlines do not support these charges; they
There is an increasing realisation amongst airlines that
have minimal effect on actual noise produced, and are
these traditional principles, whilst working well in the
discriminatory. Additionally, airports often develop
past, will need to be modified to cope with privatised
extremely complex charging parameters which airlines
airports and project finance for new airport develop-
cannot realistically interpret and so tend to be ignored.
ments.
Movement of passenger charge into ticket tax box-
some airlines are pushing for the airport passenger
charges to be shown as an additional charge in the The airlines’ perspective on the European
ticket tax box, rather than included in the air fare. This Commission’s airport charges proposals
is believed to increase the fares passengers are willing
Airlines welcomed the European Commission’s initiative
to pay, as it lifts the price through the psychologically
to produce an airport charges regulatory framework for
important ‘99’ level, due to air fares normally being
the whole European Union. In particular, the consulta-
advertised net of taxes. Although not supported by all
tion paper produced in 1995 contained a clear endorse-
airlines, this change has now been implemented in
ment of the principles of transparency, cost-relatedness
Germany, Switzerland, Belgium and, from 1 January
and non-discrimination.
1997, The Netherlands.
However, airlines were concerned that the paper did not
Peak charges-introduced by some airports (such as provide for a mechanism to effectively regulate airport
BAA) to make users generating peak infrastructure charges or ensure that airlines could protect their rights in
requirements pay the associated costs. Other airports disputes with airports. It also failed to provide for incen-
use them to attempt to move flights into non-congested tives (either carrot or stick) to encourage airports to increase
periods. Opposed by IATA as discriminatory, arbitrary productivity and reduce costs. Thirdly, whilst on the one
and complex. Airlines often have no choice but to oper- hand supporting cost-relatedness, on the other hand it
ate during peak periods, owing to passenger demand, also strongly supported the principle of identical charges
aircraft utilisation requirements, and particularly for for intra-EU flights, regardless of length of flight or type
long-haul routes, the need to operate outside prohibited of passenger. Currently most EU airports charge domestic
time zones. passengers less than international ones, on the basis that
Emission charges-proposed by both Sweden and domestic passengers normally carry far less baggage, and
Switzerland; a higher charge for aircraft which produce spend far less time in the airport, than international pas-
higher amounts of pollutant. sengers. Clearly the average passenger on a Berlin-
Transfer passenger differentials-many airports have a Munich flight has a very different airport use profile to the
reduced or nil charge for transfer passengers, in order average passenger on a Manchester-Malaga flight, even if
to encourage this type of traffic. Only supported by it is the same individual using both services.

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 Nelv approach to airport user charges: E Clayton

The European Commission is expected to produce a on the grounds that the short-run marginal cost to the
final document in the next few months. Notwithstanding airport of additional traffic is very low; as traffic builds
the reservations listed above, airlines believe that this is a on the route, charges will revert to normal levels. Airlines
very positive step and look forward to a more effective are normally happy to see traffic grow at an airport, as
airport charges regime being introduced within the EU. this allows the high fixed cost element to be spread over
more traffic, thus reducing individual unit costs.
What is an acceptable level of discount? The discounted
Charge structures which help to attract
charges should still cover the marginal costs of the new
airlines and new routes
service. and discounts should reduce over time. A typical
Reconciling the principles of nondiscrimination and attract- incentive could provide for a discount of around 50%
ing new traffic can give airport marketing managers a big during the first year of a new service, and 25% during the
headache. Airline lawyers are currently fighting the volume secqnd, reverting to normal charges during the third year.
discount scheme in Brussels, which mainly benefits Sabena, In addition to these types of discount, airports may
and the large transfer passenger discount in Amsterdam, also consider investing to help to market new services.
which mainly benefits KLM and its partners, on the basis This could take the form of promotional material, advertise-
that these charges do not fairly and equitably allocate ments, free display areas in the airport or support for the
costs to the users. airline to promote the service itself.
However, there are two areas where airports can take
steps to encourage new traffic.

Cost-related (passenger weighted) charges What airlines get for their money
Airlines support cost-related airport charges. In particular, The normal ‘Contract’ between an airline and an airport
they are keen to see landing charges related to the cost of is the published airport conditions of use. This contains
providing the airfield, passenger charges related to the information about airport charges, methods of payment,
cost of providing the terminal facilities, and parking charges conditions about what aircraft operators are allowed to
related to the cost of providing parking stands and associ- do, and finally, a disclaimer. The disclaimer normally
ated infrastructure. Moving as much as possible of the contains words to this effect: “failure by the airport to
terminal cost into the passenger charge, and away from provide any facility or service does not excuse the aircraft
fixed charges such as rents, landing and parking charges, operator from paying normal charges”. In other words:
allows the airport to share more of the risk when airlines ‘you land-you pay’.
develop new routes. Keeping overall airport charges down
Airlines are increasingly discovering that they have very
by covering costs with commercial profits is also a great
few rights at airports. There is generally no list of facilities
help in making new routes viable.
and services which an airport provides in exchange for
If airlines only have to pay for terminal facilities when
aeronautical charges. Even where such a list exists, that is
they actually carry passengers, this makes starting new
all it usually is-a list. Few definitions are given of how, or
routes far less risky than when high costs unrelated to
to what standard, services and facilities should be provided.
passenger traffic are incurred. Airlines are therefore encour-
This leads to some airlines paying extra for services which
aged to start new services in the knowledge that they will
others at the same airport enjoy ‘free’, and great opportuni-
only incur high airport charges when the traffic is avail-
ties for endless dispute between airlines and airports, and
able to pay these charges.
Implementing a cost-related transfer passenger charge
between airlines at individual airports.
can also encourage new route development, particularly The only area in the world where airlines have a very
for hub airports. By having lower charges for passengers clear and legally binding contract with airports is the
feeding from new routes onto existing services, airlines are USA, where ‘Use and Lease Agreements’ set out in great
encouraged to develop routes with low-yield transfer traf- detail the rights and obligations of both airports and
fic, until point-to-point traffic makes the route independ- airlines. These agreements have developed from the require-
ently viable. These lower charges are justifiable because of ments of the FAA, which provided airport development
the lower impact a transfer passenger has on an airport-no grants, and also private bondholders who demanded the
need for landside road or rail access, no meeters and security of a forma1 relationship between airports and
greeters, and in many cases no need for check-in or immigra- airlines before they were prepared to lend money to the
tion facilities. airports to build new infrastructure.
Airlines outside the USA are now looking for a more
New route incentives clearly defined relationship with the airports they serve.
Where an airline starts a completely new route from an This process has started at Heathrow and Gatwick, where
airport (where no service currently exists), it can be argued airlines and BAA are working together to develop service
that discounted airport charges for a limited time are not level agreements covering generic standards of service in
discriminatory, as long as the discounts are available to all areas such as baggage systems, airbridge availability and
airlines on the same basis. These discounts can be given aircraft stand cleanliness (MMCCBAA plc, 1996)

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New approach to airport user charges: E Clayton

In Manchester and Hong Kong, airlines are also talk- very high rates of interest due to a high perceived
ing to the airports with the aim of developing a User risk-although airports in general are actually very
Agreements which will be far more wide ranging than low risk investments.
anything which exists outside the USA. 0 A circular flow of airport costs and charges-airlines

Airlines believe that a generic User Agreement, suitable recognising that eventually, they pay for everything
for implementation world-wide, would help, to protect which happens at an airport-no free lunch. A discount
airlines and airports from uncertainty and risk, and one year pops up as a higher charge the next year.
importantly, would provide the security needed in a world
where airports are no longer extensions of central or local Conclusion
government, but are private or semi-private entities, depend-
ent on commercial borrowing and raising capital on &he Airlines are therefore starting to recognise that the old-
bond or equity markets. style annual charges consultation, with head-office charges
experts sitting across the table from each other is not
satisfactory for them or the airports. By the time these
The key drivers of user charges negotiations take place, the airport cost base is basically
The traditional approach to airport charges has been that fixed, the traffic levels are open to argument, but neither
of an accountant. The total cost base for an airport was side really knows what will happen, and any commercial
divided between the total traffic at the airport, after subtract- income the airport does receive simply goes to offset the
ing income from commercial activities. Simple, easy to cost base. The only thing up for grabs is the charges
understand, and suitable for non-profit-making government- structure, which leads to the spectacle of airport directors
owned entities. chairing an argument between airlines about who should
In this model, the drivers are: take the smallest slice of the charges cake.
Instead, airlines need to work closely with the airports
l Amount of traffic at the airport to ensure that airport charges are kept low, that the airport
0 Level of commercial income infrastructure is adequate for the needs of airlines, and
l Airport cost-base
that new developments can be planned and built in time to
Today, airlines are recognising that they have to think provide adequate capacity. Additionally, airlines need to
more like economists, and less like accountants. New influ- recognise that airports need a financial incentive to reduce
ences which have caused this change in thinking: their cost base. A rigid accounting approach to airport
charges can lead to higher long-term charges than a flex-
Reduced willingness of governments to subsidise airports. ible economics-based approach.
No longer national assets generating intangible economic
benefits, but national investments generating tangible
financial benefits, either through privatisation receipts, References
or ongoing profit streams. ICAO 908214 (1992) Sratements by the Council to Contracting States on
Airport privatisation-ICAO 908214now allows airport Chargesfor Airports and Air Navigation Services, ICAO, Montreal
MMC4 (1996), BAA pie, A report on the economic regulation of the
cost bases to include a ‘reasonable rate of return’. London airports companies (Heathrow Airport Ltd. Gatwick Airport
Project Finance developments-bankers looking for L.tdand Stansted Airport Ltd), CAA, London

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