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Transcript of Airport Dawn of a New Era
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A p r i l
2 0 0 4
Prepar ing for one of the indust ry ’s
biggest shake-ups
Airports — Dawn of a New Era
BCG The Boston Consulting Group
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The Boston Consu l t ing Group is a genera l management consu l t ing f i rm that i s a g loba l
leader in bus iness s t ra tegy. BCG has he lped compan ies in eve r y majo r indust ry and mar -
ke t ach ieve a compet i t ive advantage by deve lop ing and imp lement ing winn ing s t ra teg ies .
Founded in 1963, the f i rm now operates 60 o f f ices in 37 count r ies . For fu r the r in fo rma-
t ion , p lease v is i t ou r Web s i te a t www.bcg.com.
© 2004 The Boston Consu l t ing Group GmbH. A l l r ights rese rved.
For in fo rmat ion and rep r in t au thor iza t ion p lease con tac t BCG at the fo l lowing address :
The Boston Consu l t ing Group
Marke t ing & Communicat ions /Lega l
Ludwigst raße 2180539 Mun ich
Germany
Fax: +49 (0)89 2317-4718
E-Mai l :marke t ing [email protected]
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A C K N O W L E D G E M E N T S 2
I N T R O D U C T I O N 3
E X E C U T I V E S U M M A R Y 5
N E W PAT T E R N S O F PA S S E N G E R G R O W T H 9
P R E S S U R E S T O A C T M O R E L I K E B U S I N E S S E S 2 1
S T R AT E G I E S T O S U C C E E D I N T O M O R R O W ’ S E N V I R O N M E N T 2 5
I M P L I C AT I O N S F O R A I R L I N E S , I N V E S T O R S , A N D G O V E R N M E N T S 3 1
B C G ’ S E X P E R I E N C E I N T H E A V I AT I O N I N D U S T R Y 3 3
K E Y Q U E S T I O N S 3 5
T A B L E O F C O N T E N T S
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Dr. Daniel Stelter is vice president and director at The Boston Consulting Group in Berlin and Global
Practice Area Leader for Corporate Finance and Strategy.
Dr. Achim Fechtel is vice president and director at The Boston Consulting Group in Munich and a BCG
airport and aviation expert.
Premal Desai is manager at The Boston Consulting Group in Frankfurt.
Our co-authors include:
Mike Deimler is vice president and director in Atlanta and Global Head of BCG’s Travel and Tourism
Practice Area.
Martin Koehler is senior vice president and director in Munich, a member of the Travel and Tourism
Leadership Team and a BCG airline expert.
Greg Sutherland is vice president and director in Atlanta, a member of the Travel and Tourism
Leadership Team, and a BCG airline expert.
We wish to thank our interview partners and experts who unhesitatingly provided us with information.
We also wish to thank the BCG project team under the direction of Premal Desai: Markus Hepp,
Matthias Osthoff, Amadeus Petzke, Keith Conlon, Hendric Fiege, Ralf Ermisch, and Patrick Buch-
mann.
A C K N O W L E D G E M E N T S
Contacts
For further in format ion on this study,
p lease con tac t your reg iona l exper t :
Europe: Dr. Daniel Stelter: [email protected]: Mike Deimler: [email protected]
Asia: Ross Love: [email protected]
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3
A s p a s s e n g e r n u m b e r s p i c k u p i n t h e w a k e o f r e c e n t i n t e r n a t i o n a l c r i s e s ,
i n c l u d i n g 9 / 1 1 a n d S A R S , m a n y a i r p o r t s a r e a n t i c i p a t i n g a r e t u r n t o t h e
s t a b l e , l o n g - t e r m g r o w t h t h a t c h a r a c t e r i z e d t h e l a s t t w o d e c a d e s . H o w e v e r ,
t h e r e a l i t y i s l i k e l y t o b e d i f f e r e n t , a c c o r d i n g t o B C G r e s e a r c h .
Although passenger volumes will rise, albeit more slowly than originally forecast, growth will be con-
centrated in a much smaller number of airports in the future, leaving many operators with far less
traffic than their already overly ambitious investment plans assume. True, low-cost carrier (LCC) traffic
has led to booming passenger numbers for some airports, but profitability of LCC airports remains a
major issue. To add to these challenges, operators will come under mounting pressure to act more like
businesses—not just infrastructure suppliers, with much lower costs and higher revenues.
In short, the rules of the game are about to change.
This report describes the forces driving these changes and their strategic implications for not only air-
ports but airlines, investors, and governments as well. Based on in-depth research and interviews with
executives throughout the aviation industry, it also outlines the strategies and business models that air-ports will need to survive and thrive. Most airports can succeed, provided they start preparing now. We
hope this report facilitates this process and, at the very least, provides a much needed wake-up call.
I N T R O D U C T I O N
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4
International
hubs
InternationalO&Ds
Secondary
hubs and
O&Ds
Regionals
Atlanta
Vienna
Example
High share of transfer traffic
Large catchment area
PAX in excess of 40M
Lower share of transfer traffic
Large catchment area
PAX in excess of 20M
Low share of transfer traffic
Sizeable catchment area but often
overlapping
PAX around 10M
Key characteristics
Main hub of major international airline
Leadership role in alliance
Main hub of international long-distance
airline or secondary hub of major airlineSubordinate or niche player in alliance
Main hub of regional airline or secondary
hub of major airline
Subordinate role in alliance
Regional airlines
LCC
Airline
18
32
~ 150
~ 2,400
No. of
airports
PAX = 79M
PAX = 12M
No transfer traffic
Smaller or remote catchment areas
PAX below 10M
Albany
International
Airport
PAX = 1.5M
Sydney
PAX = 22M
Source: BCG analysis
F O U R T Y P E S O F A I R P O R T S C A N B E D I S T I N G U I S H E D
E X H I B I T 1
This report distinguishes between four different types of airports: primary international hubs, second-
ary hubs, international “origin and destination” (O&D) airports, and regional airports. The table below
describes the key characteristics of each of these. (Exhibit 1)
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5
The drive for lower costs among the world's top airlines, coupled with the rise of low-cost
carriers, will substantiall y alter the distribution of passenger growth between airports.
The unprecedented string of international crises over the last three years—from 9/11 and SARS to the
Iraq war—has left many of the world's financially fragile airlines with unsustainable losses. To cut costs,
the members of the top three alliances will redirect the bulk of their long-haul transfer traffic into a
handful of mega-hubs, sidelining many of today’s secondary hubs. This trend will be accelerated by
“open-skies” deregulation, mergers, and the introduction of mega-planes, such as the A380, which only
the largest hubs with significant feeder capacity will be equipped to handle. In fact the share of total traf-
fic at the top 50 airports claimed by nine potential mega-hubs has already risen from 30% to 34% in the
last two years.
The expansion of low-cost carriers represents a second trend. Attractive O&D locations as well as some
regional airports stand to benefit from an increase in convenient and financially attractive point-to-point travel in the short- to medium range. This decentralization of traffic patterns might be repeated
in the long-haul segment, once new and cost-efficient equipment like Boeing’s 7E7 becomes available.
Among the large airports, only the mega-hubs and attractive O&D locations that feature prominently in
the alliances' schedules will enjoy significant long-term growth. Just 40 or so of today's 180-plus hubs are
likely to be in this position. Mega-hubs will profit from the consolidation of long-haul traffic. While they
are largely bypassed by LCC traffic, they will not be negatively affected by the general rise in point-to-
point travel with planes like the 7E7, since frequencies will increase as mega-hubs are too essential to be
bypassed by long-haul traffic.
Selected O&D locations as well as regional airports well positioned to attract LCC traffic will gain from
the rise in point-to-point traffic. The others, notably secondary hubs with weaker airlines, will experi-
ence much less growth than their overly ambitious investment plans assume. Long-haul traffic is conso-
lidated away from them into mega-hubs, and point-to-point travel threatens to bypass many secondary
hubs. This will force them to explore new avenues to cover the cost of their capital and to grow
profitably.
E X E C U T I V E S U M M A R Y
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With growing affluence in previously remote regions of the world and the further rise of LCCs, a signi-
ficant number of regional airports and smaller international O&Ds will also experience substantial pas-
senger growth. Still, overly ambitious plans speculating on this growth are in many cases risky, since the
winners in this group of airports are much harder to predict.
F a c e d w i t h l o w e r t h a n a n t i c i p a t e d g r o w t h , a i r p o r t s w i l l h a v e t o a c t m o r e l i k e
b u s i n e s s e s t o t h r i v e , n o t s i m p l y a s i n f r a s t r u c t u r e s u p p l i e r s . P r i v a t i z a t i o n s w i l l
i n t e n s i f y t h i s n e e d .
As state-owned and protected monopolies, airports have historically been treated as means to regener-
ate regional economies, not as businesses. This has not only led to massive investments that often bear
little relation to airports’ growth potential. It has also created an oversupply of hubs—often with excess
capacity, and bred unnecessarily high operating costs, which could in general be reduced by 20% to
30%. These costs will have to come down—in order to not just keep tomorrow’s airports profitable but
to satisfy carriers' demands for lower, more flexible charges.
Governments’ growing reluctance to subsidize and protect airports, reflected in a rising number of pri-
vatizations and more widespread deregulation of the value chain will add to this pressure. Under the
glare of the world's capital markets, privatized airports will be expected to deliver more aggressive
improvements in revenues. Non-aviation revenues such as retail will be critical, particularly for destina-
tions dependent on LCCs: in BCG’s experience, no LCC airport is likely to achieve profitability without
extraordinary focus on non-aviation revenues.
D i f f e r e n t t y p e s o f a i r p o r t s , s u c h a s m e g a - h u b s a n d r e g i o n a l a i r p o r t s , w i l l r e q u i r e
d i f f e r e n t i n v e s t m e n t a n d c a r r i e r s t r a t e g i e s .
Only airports home to a leading and financially secure main carrier in one of the alliances will be eligi-
ble to become a mega-hub. They will also need to be in a central location with a large, affluent catch-
ment area. Most of these airports still need to make sizeable block investments to accommodate future
growth. Their carrier focus will have to shift to the dominant member of their alliance. Providing out-
standing service and innovative products will be vital.
All other airports should freeze block investment programs and only add capacity on an incremental
“needs-musts” basis. Destinations that are likely to remain secondary hubs should concentrate on alli-
ance carriers, while international O&D airports must court intercontinental airlines and sweat existing
assets. Targeting LCCs in order to fill existing overcapacities can be a worthwhile consideration. Re-
gional airports should target LCCs, underpinned by tight cost management.
In all cases, operators will have to work much more closely with the carriers to optimize joint interfaces
and to leverage cost and revenue synergies. Such opportunities have been underexploited due to the
historically adversarial relationship between the two players.
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7
S e l e c t i n g t h e r i g h t p o s i t i o n i n t h e v a l u e c h a i n w i l l b e d e c i s i v e .
Few operators have the breadth of expertise and resources to optimize every link in a value chain as
diverse as an airport's. Retail, ground handling, and other links in the chain all require different skills
and business models. Tomorrow's winners will position themselves in the section of the chain where they can extract the maximum value based on their capabilities and the competitive outlook of their chosen
segment.
Some will specialize in particular links in the chain and leverage their expertise, especially in standard-
ized, labor-intensive activities such as facilities management and ground handling. Others will handle
broader categories of services. A minority, meanwhile, will act as “orchestrators,” coordinating almost
entirely outsourced elements of the value chain in order to ensure the suppliers deliver a consistently
high, cost-effective level of service. Each option will require a different business model, including differ-
ent skills, and different levers to lift revenues and reduce costs.
P l a n n i n g f o r t h i s n e w w o r l d m u s t s t a r t n o w — t h e p r o c e s s w i l l y i e l d i m m e d i a t e
r e t u r n s .
This new aviation landscape is likely to take shape within the next ten years. Already there is evidence of
airlines consolidating traffic into larger hubs and movement to introduce more competition into the
airport sector. To succeed in tomorrow’s environment, it’s essential that airport operators identify their
likely position in the new landscape, develop appropriate investment and carrier strategies, and position
themselves at the optimum point in the value chain.
The imminent trends will lead to a stronger segmentation among airports. They should proactively start
to enter this competition, not only by adding abundant capacity and thus adding cost, but by defining
their role in the future aviation arena and by differentiating accordingly.
Above all, they have to operate more like profit-driven businesses, reducing costs and pinpointing
opportunities to lift revenues per passenger. This can be done now and will generate rapid rewards.
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9
N E W P A T T E R N S O F P A S S E N G E R G R O W T H
For decades, the world's top airports have enjoyed relatively stable growth under the
protective wing of governments, encouraging many to invest heavily in additional capacity
on the assumption that tomorrow will simply be a continuation of the past. But their ulti-
mate paymasters—the airlines—live in a very different world. Their demands, not the least
of which will be for lower costs, will radically alter how future passenger growth is distrib-
uted amongst airports, thereby creating clear winners and losers.
A l i f e c y c l e o f a i r - t r a f f i c p a t t e r n s
The pattern of air traffic has been following a particular life cycle. Point-to-point connections between
the world's largest cities dominated networks in the early post-war period. Only a few routes had sufficient
demand to serve air traffic. With growth in demand came development of a large number of small and
mid-sized regional hubs and international O&Ds, a second stage of the life cycle. Most recently, increa-sing cost pressures as well as airline and alliance consolidation is leading to a concentration of long-haul
traffic into a few mega-hubs, with an accompanying rise in continental point-to-point traffic. This puts
massive pressure on the "middle tier," a significant number of secondary hubs. While this development is
already evident in the US and Europe, Asian air traffic is still in an earlier phase of the life cycle.
Exhibit 2 describes the current trend. Until recently, there was a clear distribution of roles in the aviation
landscape, with steady growth for all players. The emergence of LCCs as well as technological advances in
the construction of new planes have substantially redistributed the shares in the matrix. Growth will be
far less homogenously spread in this time of change. LCCs have increased the area of point-to-point tra-
vel, which is being further expanded by a new generation of planes such as the 7E7. The pressure exac-
ted on “established” airlines, signified by the shrinking size of the flag carriers’ pie, leads to an increasing
consolidation of transfer traffic into few mega-hubs. Let us look at these developments in more detail.
T h e p r o b l e m : a n o v e r s u p p l y o f h u b s
Airports are arguably the most comfortable members of the aviation industry. As natural monopolies,
protected by regulations and predominantly owned and subsidized by governments, most have enjoyed
stable, long-term growth. This is reflected in the fact that the rankings of the world’s top 50 airports asmeasured by passenger numbers barely changed between 1991 and 2003; as Exhibit 3 illustrates: seven
airports dropped out of the top 50 over this period, but none of them was a member of the top 30. It can
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also be seen in airports’ disproportionately high margins, relative to airlines’: on average, airports’ cash
and profit margins are roughly four times higher. In addition, their return on investment is more than
twice as high (see Exhibit 4).
The problem is that governments have not treated airports as profit-oriented businesses but as infra-
structure suppliers whose primary aim is to boost regional economies. In interviews with BCG,
government entities responsible for regional and international airports all cited regional economic
considerations, such as employment and tourism, as the key drivers of investment decisions. Although
this strategy has often had the desired effect—large hubs like Atlanta typically employ 45,000-plus
people-—it has produced three major difficulties:
An oversupply of hubs : This can be seen in the dense clusters of hubs inExhibits 5–7. Does US Air-
ways, for example, really need three neighboring hubs on the eastern coast of the USA (Exhibit
5)? Or does the SkyTeam alliance require four hubs in Europe within an hour’s flying time of one
another (Exhibit 6)? Since Asia is still in an earlier stage of the air-travel life cycle, the situation
there is somewhat different, with many aiports still engaged in a battle for mega-hub status. Even
those airports not achieving this status will enjoy significant (though smaller) growth over the
next decade (Exhibit 7).
A capacity imbalance between hubs: The emphasis on regional economic development at the
expense of commercial considerations has led to massive block investments that bear little
relation to airports’ growth potential, creating excess capacity at some locations and an under-
supply at others. In most cases, surplus capacity is the norm. As Exhibit 8 illustrates, based on a
group of North American airports that plan to invest $24.5 billion over the next two years, opera-
tors will have excess capacity of between 29 million and 352 million (3.9% to 46.9% of total
1 0
(1) Point-to-point
Note: Schematic representation
Source: BCG analysis
(2) Flag carrier P2P
(3) Low-cost P2P
(4) Flag carrier hubbing
Previously:
Clear role allocation—growth in all sectors
Today:
Substantial change—uneven growth
P2P(1)
High
(O&D airports)
Hubbing
(all hubs)
Hubbing
(all hubs)
Hubbing
(primary hubs)
Low
Short-haul Long-haul
Distance of city pair
A v a i l a b l e
R P K
f o r c i t y p a i r
FC P2P(2)
High
(O&D airports)FC hubbing
(increasingly
mega-hubs)
FC hubbing
(increasingly
mega-hubs)
Low
Short-haul Long-haul
Distance of city pair
LCC steal of FC P2P
A v a i l a b l e
R P K
f o r c i t y p a i r
FC hubbing(4)
(increasingly mega-hubs)
2
1
3
1 Technological change (e.g., 7E7)3
New P2P routes possible due to LCC's lower cost structure2
LCC P2P(3)
E M E R G E N C E O F L C C A N D T E C H N O L O G I C A L C H A N G E H A V E F U N D A M E N T A L L Y C H A N G E D A I R L I N E A N D A I R -
P O R T L A N D S C A P E
E X H I B I T 2
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1 1
(1) Classification of airports as private owned from start of prioritization processSource: Annual reports; ACI; authorities; press search; web pages; BCG analysis
Private owned(1)Public ownedM PAX, total PAX, about 3.4 billion
2533
30
79
273034
37
27
29 36
55
3753
25
33 69
TorontoChicagoMinneapolis
SeattleSt. Louis (20)DenverSalt Lake (19)Las Vegas
San Franciso
Honolulu (20)
Phoenix
Los Angeles
Atlanta
NewarkCincinnati (21)
DetroitBoston (23)
New York JFK (32)
Manchester (20)London LHRLondon LGWParis CDGBarcelona
Madrid
Palma deMallorca (19)
Paris ORY
RomeMunich
Frankfurt
Amsterdam
London STN (19)
3063
48
362223
24
4048
26
New York LGA (22)Baltimore (20)
Charlotte (23)
Orlando
MiamiHoustonDallas
Mexico City (22)
Philadelphia
Osaka (19)
Tokyo HND
Tokyo NRTFukuoka (19)
BeijingSeoul
Hong Kong
Bangkok
Singapore
Jakarta (20)
Sydney
24
27
2026
63
22
30
25
Stockholm, Copenhagen, Sapporo, Düsseldorf, Pittsburgh, Washington, and Zurich no longer among the top 50
R A N K I N G O F T O P A I R P O R T L O C A T I O N S H A S R E M A I N E D F A I R L Y S T A B L E O V E R T I M E
E X H I B I T 3
(1) Calculated with PAX multiple(2) First ten having available data(3) Airports: BAA, Fraport, Copenhagen, Vienna, Zurich; airlines: Austrian Airlines, British Airways, Lufthansa, SAS, Swiss(4) Ranked by revenues 2000Note: Airport companies with available data are most significant for analyses as data is published by companies that target profit maximizationSource: Airlines business; annual reports; BCG analysis
Top 10 airportcompanies
(3)(4)
Top 10 airlines(4)
Revenues
11,988
142,739
x 11.9
EBITDA(2)
5,070
17,483
x 3.4
Net result
1,414
4,160
x 2.9
= 18.7% oftotal
market(1)
= 35.3% oftotal
market(1)
ROE(3)
13% 7%
ROI(3)
11% 5%
Profit margin
12% 3%
Cash margin
42% 12%
A I R P O R T S H A D S I G N I F I C A N T L Y B E T T E R M A R G I N S T H A N A I R L I N E S E V E N B E F O R E R E C E N T C R I S I S
E X H I B I T 4
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1 2
STAR
= 18M PAX
Oneworld
SkyTeam
Other
(1) Assumes successful Air France-KLM mergerNote: Alliance capacity share is measured in percent of scheduled seat capacity in 2002, total PAX numbers from 2003, MXP from 2002Source: CSSB Hub Fact Book 2003; BCG analysis
Manchester (20)
Madrid (36) Barcelona (23)
Rome (26)
London LHR (63)
London LGW (30)
Vienna (13)
Milan (17)
Copenhagen (18)
Sabena grounding led todownsizing of flag carrier
Swissair grounding led tosignificant downsizing of
flag carrier. Entry to Oneworldprovides reorientation
Brussels (15)
Paris ORY (22)
Paris CDG (48)
Amsterdam (40)(1)
Zurich (17)
Frankfurt (48)Munich (24)
E U R O P E A N A I R P O R T L A N D S C A P E H A S O V E R S U P P L Y O F H U B S D O M I N A T E D B Y T H R E E M A J O R A L L I A N C E S
E X H I B I T 6
Note: Airline shares based on 2002 data, total PAX is 2003 dataSource: ACI; CSSB Hub Fact Book 2003; BCG analysis
What will be the consequence for individual hubs if airlines consolidate their hub strategy?
American
= 22M PAX
New York JFK (32)Detroit (33)Chicago (69)
Minneapolis (33)
Philadelphia (25)
Alaska Airlines
Delta
Continental
United
Southwest
U.S.
American West
Northwest
Non-hub
58%
51%
Dallas (53)
Houston (34)
St. Louis (20)
Denver (37)
Phoenix (37)
Las Vegas (36)
San Francisco (29)
44%
Seattle (27)
Los Angeles (55)
Salt Lake City (18) 77%
45%
82%
36%
23%
87%
Cincinatti (21)
Charlotte (23)
Atlanta (79)
Miami (30)
Does US Airways needthree neighboring hubs?
Could Atlanta drawtraffic from Cincinatti?
American Airlines startedto downsize St. Louis?
70%
91%
92%
79%
72%
49%35%
61%
72%
68%
81%
54%
Pittsburgh (14)
U . S . A I R P O R T L A N D S C A P E C H A R A C T E R I Z E D B Y D E N S E H U B S Y S T E M — M A I N A I R L I N E S W I T H L A R G E S H A -
R E S A T A I R P O R T S
E X H I B I T 5
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capacity) passengers by 2010, depending on the ratio between replacement investments and
investments into additional capacity and assuming passenger numbers grow in line with IATA’s
forecasts. And the situation is poised to get worse. By 2015, an additional $150 billion to $200 bil-lion will be invested into airports globally. The core problem with these investment programs is
that they are based on two overly optimistic assumptions. First, that passenger growth will return
to its historical long-term average. This is by no means certain. AsExhibit 9 shows, forecasts have
already been revised downwards in the wake of 9/11, SARS, and the Iraq War. While these crises
are now largely behind us, the geopolitical instabilities that caused some of them have not been
resolved: similar events in the short to medium term cannot be ruled out. The second, more dan-
gerous misconception is that any future growth will continue to be shared relatively equitably
between airports. However, as we discuss below, this is unlikely to be the case. There will almost
certainly be clear winners and losers, leaving many airports with even larger volumes of redundant
capacity.
Higher carrier charges: As monopolies, airports have been able to pass on the costs of excess
capacity to the carriers in the form of higher charges—costs that few of today’s financially unstable
airlines can afford (see below). San Francisco airport is a case in point: It recently expanded its
facilities on the ambitious assumption that passenger volumes would escalate by 7.9% a year
between 2001 and 2006, but traffic actually shrunk between 2000 and 2002 by 12.3% a year (and
still further in 2003), leading to a 23.8% rise in airlines’ landing and terminal charges to pay for
the costs of the expansion (Exhibit 10).
1 3
Free capacity
M PAX
20–40% growth in last 10 years
60–80% growth in last 10 years
< 100% growth in last 10 years
Prospective capacity in 2015(1) No exact figures about expansion measures availableSource: Annual reports; authorities; press search; Web pages; ACI; BCG analysis
SeoulCostly megaproject
Claim for hubComplex business site
BeijingTremendous domestic growthLimited capacity
BangkokHighly profitableLimited capacityMegaproject on the way
Japanese airportsGeographical capacity restraints
Unprofitable businessSeparated of domestic/international traffic
Hong KongMegaproject "in water"Partly hub statusProfitable business
SydneyClassic O&DRecently privatizedCapacity restrictions (noise)
Kuala LumpurAmbitious expansion projectNo long-haul traffic
SingaporeMain South Asian hubHighest service levelsMultitude of discounts
18.526.5
63.220
6.1
18.9 ITMHND
Central Japan Intl.Airport Project
Second airportpossible solution
1.2
18.8
10.6PEK
100
BKK
KUL
SIN
FUK
45 XX(1)
XX(1)
5.3SYD
7.319.3
24.4
30.2
17.5 24.7
24.7
23.2 HKG26.8
87
7.1ICN
100
19.9
1.5
CTSNRT
A S I A N A I R P O R T L A N D S C A P E C H A R A C T E R I Z E D B Y B A T T L E F O R M E G A - H U B P O S I T I O N S
E X H I B I T 7
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T h e f u t u r e : t r a f f i c w i l l i n c r e a s i n g -l y b e c h a n n e l e d i n t o m e g a - h u b s
The huge financial pressures on the major carriers will
leave them with little choice but to consolidate their traf-
fic into mega-hubs, sidelining many of today’s primary
and secondary hubs.
Although the airline industry has always struggled
with profitability, averaging a net profit margin of just
0.3% since 1975, the recent severe downturn in pas-
senger volumes, sparked by 9/11 and other inter-
national crises, has left many carriers with unsustain-
able losses. Between 2001 and 2002, IATA members’
losses amounted to $20.4 billion, borne predominant-
ly by the flag carriers in the three alliances (SkyTeam,
Oneworld, Star Alliance), which account for 55% of
global passenger volumes. Over half of the alliances’
airlines are unprofitable and often unsustainably so.
1 4
Note: Schematic representationSource: AEA; BCG analysis
1998
Revenue passengerkilometer in billionAEA member airlines
1999 2000 2001 2002 2003 2004 2005
SARS/Gulf War II
September 11
Recession
Forecast post-recession/ September 11 but preGulf War II/SARS
Original forecast
Forecast post-recessionbut pre September 11
New forecast
P A S S E N G E R G R O W T H F O R E C A S T S H A D T O B E R E P E A -
T E D L Y R E V I S E D D O W N W A R D S R E C E N T L Y
E X H I B I T 9
(1) IATA forecast for worldwide growth with 25% discount due to saturated market(2) Calculated as product of all available investments and average cost per new PAX worldwide of $187(3) Calculated as product of all available investments and regional average of cost per new PAX in North America $54Source: Annual reports; authorities; press search; Web pages; BCG analysis
2001 2010
647
M PAX
749
Requiredadditionalcapacity
Min.planned
capacity(2)
102
OvercapacityCost per PAX in $
131
Max.planned
capacity(3)
Totalinvestmentuntil 2006
454
$24.5B
29
352
54
54
187
CAGR
+1.65%(1)
C U R R E N T E X P A N S I O N P R O J E C T S W I L L Y I E L D S I G N I F I C A N T O V E R C A P A C I T I E S ( S C H E M A T I C C A L C U L A T I O N
F O R P L A N N E D E X P A N S I O N S I N N O R T H A M E R I C A )
E X H I B I T 8
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In the past, governments could usually be relied on tocome to the rescue but not in today’s more laissez-
faire political climate as Sabena recently discovered.
Nor will airlines be able to rely on an upturn in pas-
senger traffic to lift revenues to a sufficiently high
level to cover the shortfall. As Exhibit 11 shows, rev-
enue has been increasing slower than passenger
growth over the last 20 years, a trend that will
continue as LCCs expand. Airlines will inevitably have
to cut costs.
To reduce costs, each of the three main airline
alliances is likely to concentrate future long-distance
passenger growth into one mega-hub in each conti-
nent. These airports will have three key characteris-
tics: a central geographic location, a large and afflu-
ent catchment area, and a resident carrier that is
both, financially sound and a major player in its
respective alliance. In the U.S., Atlanta and Dallas are
examples of likely candidates; in Asia, Singapore and
Hong Kong are possibilities.
1 5
Average airport cost per enplanement(1)
(CPE)
SFO
19.99
DEN
16.28
MIA
14.25
LAX
5.80
DFW
3.48
ATL
2.80
$/PAX
Showcase San Francisco:
developments after recent expansion program
2000
159
2001
186
2002
281
89 119
70 67 102
179
CAGR: +23.8%
A
e r o n a u t i c a l
r e v e n u e s
2000
41.0
2001
34.6
2002
31.5
CAGR: -12.3%
P A X d e v e l o p m e n t
(1) Landing fees and user charges for air carriers calculated per PAX; estimate based on of 2001 numbersSource: Salomon Smith Barney Hub Factbook 2002; SFO; FAA Airline annual reports; BCG analysis
Since 2000 enplanement growth has been revised downward twice to 20–30% of previous projections
Landing feesTerminal charges
C O S T S F O R T O D A Y ’ S A I R P O R T I N V E S T M E N T S W I L L B E P A S S E D O N T O A I R L I N E S ( E X A M P L E S A N F R A N S I S C O A I R P O R T )
E X H I B I T 1 0
(1) Revenue passenger kilometersNote: Numbers roundedSource: British Airways; IATA WATS 86, 95–03; BCG analysis
Average airline net profit margin 1980–2000: +/-0%
RPK growth(1) since 1980
x 2.6
Revenue growth since 1980
x 1.7
Marginerosion
P A X G R O W T H A L O N E W I L L N O T B R I N G A I R L I N E S
B A C K T O P R O F I T A B I L I T Y
E X H I B I T 1 1
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The introduction of a new generation of mega-planes, such as the A380, which will require large hubs with substantial feeder capacity, will accelerate the shift to mega-hubs (as will any further international
crises).
There are already signs that traffic is starting to be consolidated into larger hubs. During the sharp
downturn in volumes between 2000 and 2002, , the smaller “bottom-quartile” hubs in the U.S. lost
12.8% of their traffic, while the larger top-quartile hubs suffered only a 6.3% fall. More recently, several
U.S. carriers have announced plans to rationalize their hub networks. US Airways, for example, is likely
to shed at least one of its hubs, while Delta and Northwest intend to focus traffic on select hubs. Similar
moves have been seen in Europe. British Airways, for instance, has moved services from Gatwick to its
larger neighbor, Heathrow, contributing to a 5.1% drop in passenger numbers at Gatwick and a 4.3%
rise at Heathrow.
None of this would be a major problem if hubs didn’t depend heavily on individual carriers, but the fact
of the matter is that the vast majority do: over three quarters of the world’s top 50 airports rely on a
single carrier for 40% or more of their traffic (Exhibit 12), rising to as high as 80% in several cases. Many
U.S. hubs are particularly dependent, raising questions about their long-term viability.
1 6
(1) United Air lines (2) American Airl ines (3) Mexicana and Aeromexico together
Note: Sorted by PAX
Source: Airport authorities; annual reports; press search; BCG analysis
Highest concentration at US hubs
North America Europe Asia/Pacific
Share of main carrier (in %)
Atlanta (ATL)Chicago (ORD)(1)
Chicago (ORD)(2)
Los Angeles (LAX)
Dallas (DFW)
Denver (DEN)
San Francisco (SFO)
Las Vegas (LAS)
Phoenix (PHX)
Houston (IAH)
Minneapolis (MSP)
Detroit (DTW)
Miami (MIA)
Newark (EWR)
New York (JFK)
Orlando (MCO)
Toronto (YYZ)
St. Louis (STL)
Seattle (SEA)
Boston (BOS)
Philadelphia (PHL)
Charlotte (CLT)
New York (LGA)
Mexico City (MEX)
(3)
Pittsburgh (PIT)
0 50 100
Share of main carrier (in %)
0 50 100
Share of main carrier (in %)
0 50 100
7949
35
23
68
61
51
36
45
81
82
77
54
58
22
21
60
72
44
30
70
91
24
8687
London Heathrow (LHR)
Frankfurt (FRA)
Paris (CDG)
Amsterdam (AMS)
Madrid (MAD)
London Gatwick (LGW)
Rome (FCO)
Munich (MUC)
Paris (ORY)
Barcelona (BCN)
Zurich (ZRH)
Brussels (BRU)
Manchester (MAN)
Milan (MXP)
41
59
57
53
59
51
47
49
60
53
66
24
36
51
Tokyo (HND)
Hong Kong (HKG)
Seoul (ICN)
Bangkok (BKK)
Singapore (SIN)
Sydney (SYD)
Tokyo (NRT)
Beijing (PEK)
Fukuoka (FUK)
48
31
41
51
46
44
24
34
50
A I R P O R T S H I G H L Y D E P E N D E N T O N M A I N C A R R I E R S
E X H I B I T 1 2
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T h e g r o w t h o f p o i n t - t o - p o i n t t r a v e l w i l l p l a c e s e c o n d a r y h u b su n d e r g r e a t e r p r e s s u r e
While intercontinental traffic, with some qualifications, is likely to be consolidated into hubs, the pat-
tern of continental traffic is somewhat more complex. The growth of point-to-point travel, which is more
cost-efficient, profitable, and convenient for both, carriers and passengers, will draw traffic away from
hubs, especially secondary hubs. This will be driven by two key developments:
The rise of LCCs: Regional, point-to-point LCCs, such as Southwest Airlines in the U.S. and
Ryanair in Europe are dramatically changing the way the aviation sector operates. These airlines
have already stolen up to 60% of passenger growth from the major flag carriers on selected routes
(Exhibit 13), predominantly in Europe, where they service 95% of primary airports, and increas-
ingly in the U.S., where they are expected to reach 80% of passengers within the next three to five
years. Asia’s LCC market is still relatively immature, but it too is gathering pace, reflected in a flur-
ry of recent LCC upstarts—among other Malaysia’s Air Asia, Singapore’s Tiger Airways as well as
Thai Air Asia. The continued growth of point-to-point LCCs will have a major impact on the
world’s hub network, as it will drain traffic from the hubs. Although all hubs will be affected,
including mega-hubs, secondary hubs that depend on relatively small regional airlines will be hit
the hardest. These airlines will not be able to compete with LCCs’ cost base and will switch to pro-
viding feeder services for their alliance’s respective mega-hub.
The arrival of the new Boeing 7E7: Designed mainly for intercontinental point-to-point travel
(although it also has regional potential, notably in long-haul continents, such as Asia), this jet and
others like it will be able to bypass hubs by providing direct point-to-point travel, thus offeringmore cost-efficient and convenient routes. Only attractive destinations capable of servicing this
plane will be safe. Mega-hubs will feel little impact as frequencies are likely to increase. But small
and less attractive secondary hubs will suffer. The increased 7E7 traffic at preferred secondary
hubs, however, will struggle to offset the losses incurred by the growth of LCCs, leaving them still
with unexpected overcapacity.
D e r e g u l a t i o n w i l l a c c e l e r a t e t h i s t r e n d , e s p e c i a l l y i n E u r o p e
“Open-skies” deregulation will not only give carriers the freedom to operate from hubs of their choice
in Europe, it will spark a spate of mergers between the airlines, sucking traffic into the lead carriers’
home hubs. Although the longed-for regulatory approval is unlikely to happen any time soon, there are
signs it is moving closer: in October 2003 the EU started negotiations with the U.S. government to estab-
lish the parameters of a U.S.-European open-skies accord.
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T h e r e s u l t : n e w p a t t e r n s o f p a s s e n g e r g r o w t h , u n d e r m i n i n gm a n y a i r p o r t s ’ i n v e s t m e n t p l a n s
It’s difficult to say with any certainty how rapidly global passenger volumes will grow in the long run.
Some organizations—usually those with a vested interest in painting a rosy picture, expect a return to
the healthy rates of the last decade—when the compound annual growth rate was around 4%: Airbus
and Boeing, for example, forecast 4.7% and 4.9% respectively up until 2020. Others are less optimistic:
IATA predicts 2.2% over this period.
What is unquestionable is that the consolidation of the hub network will radically alter how this growth
is distributed between airports. In fact, there is already a mismatch between different airports’ growth
rates, as Exhibit 14 illustrates. Looking ten years ahead, there will be even starker differences. Mega-hubs
will enjoy the greatest growth. O&Ds and regional destinations that are favoured by point-to-point car-
riers will also experience a significant increase in traffic. Most airports, however, will experience much
lower growth and, in some cases, an absolute decline in passenger volumes.
Exhibit 15 shows that there has already been a significant consolidation of traffic into mega-hubs
and away from secondary hubs during the recent crises. The share of total top 50 airport traffic
passing through nine potential mega-hubs increased from 30% to 34% in just two years. Exhibit
15 also indicates what the distribution of passenger growth might look like in the next five yearsup to 2008, owing to further hub consolidation. This is only intended as a rough indication of the
winners’ and losers’ shares, not a definitive outcome.
1 8
(1) Low-cost carrierSource: BCG analysis
(2) Flag carrier = established airline at location(3) Indexed
LCC topic hot in Europe, established in North America, emerging in Asia
Start(3)
100
Pricing: compete on marginal-cost basis• Focus on 60 segment• Provide introductory tickets• Guarantee availability on all flights
Improve cost position• Close gap to LCCs to maximum of 20–25%
Save on airport services• Fees
• Ground traffic services
Defense strategies of established airlinesLCC(1)
influence on established airlines at selected location
Year 3(3)
126
New demand: 40%
"Stolen": 60%
FC(2)
FC: 84
LCC: 42
L C C B O O M L E A D S T O F U R T H E R P R E S S U R E O N E S T A B L I S H E D A I R L I N E S
E X H I B I T 1 3
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1 9
(1) Forecast for mega-hubs: Average of Airbus and Boeing forecast (4.8%) plus 10% assumed mega-hub bonus due to consolidation trend.Forecast for remaining top 50 airports: IATA forecast for worldwide growth with 25% discount due to saturated market
Note: Nine potential mega-hubs: ATL, ORD, DFW, LHR, FRA, CDG, HND, HKG, SIN, others are the remaining top 50 airportsSource: Airbus; Boeing; IATA; ACI; BCG analysis
Hub consolidation already under way
20010
10
20
30
40
5060
70
80
90
100Share of top 50traffic (%)
Total PAX at top 50airports
Nine potentialmega-hubs
2002 2003 2008(1)
1,250
1,300
1,350
1,400
1,4501,500
1,550
1,600
1,650
29.8 30.4 33.9 38.0
70.2 69.6 66.1 62.0 Other 41 oftop 50 airports
Total PAX attop 50 airports
N I N E P O T E N T I A L M E G A - H U B S H A V E I N C R E A S E D T H E I R P A X S H A R E A T T H E E X P E N S E O F
S E C O N D A R Y H U B S
E X H I B I T 1 5
(1) Transfer to BA traffic from LGW to LHR(2) Transfer AF traffic from ORY to CDG(3) No data for 2003, change 2000–2002Source: Annual reports; company Web pages; press search; BCG analysis
STN
Average
BCN MAD VIE MAN MUC AMS FCO CDG LHR FRA CPH LGW(1) DUS ORY(2) MXP(3) ZRH BRU
58%
15%
9%7% 6% 5%
1% 0% 0%
-2% -2% -3%-6%
-11% -12%-16%
-23%
-30%
Swissair groundingOctober 2, 2001
Sabena groundingNovember 7, 2001
B E G I N N I N G A I R L I N E C O N S O L I D A T I O N W I L L B E D E C I S I V E I N S E T T I N G F U T U R E A I R P O R T L A N D S C A P E
I N E U R O P E ( P A X C H A N G E 2 0 0 0 – 2 0 0 3 )
E X H I B I T 1 4
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2 0
Exhibit 16 illustrates where different airports are likely to be positioned in tomorrow’s consoli-
dated hub network, based on the strength of both, their top carrier and their local environment—
the size and affluence of the catchment area, tourism potential, and geographic location. Airports
in the top-right corner, such as Frankfurt and Heathrow, will probably be mega-hubs for their
respective alliances, while Munich, Gatwick, and other players in the middle section will continue
to operate as secondary hubs. Interestingly, many of the airports in this segment of the matrix have
significant unused capacities already today. The hubs in the lower left corner will be relegated to
international O&Ds providing merely point-to-point traffic. Some of the players on the margins of
these areas, will probably engage in an “investment gamble”, trying to outbid rivals’ investments
in an attempt to secure their desired position as mega-hubs. Few airports will indeed be mega-
hubs, but many more follow investment strategies as if they were destined to be among this elusive
group—a dangerous game for the losers, who will be burdened with high excess capacity.
Source: BCG analysis
Environment
A i r l i n e
s
Frankfurt
Paris CDG
ParisORY
Munich
Madrid
Barcelona
Amsterdam
RomeManchester
Zurich
Milan
Brussels
Palma deMallorca
London LGW
London LHR
PAX million
Free capacity
Used capacity
S T A R T I N G P O I N T I S D E C I S I V E I N H U B C O N S O L I D A T I O N ( E X A M P L E F O R E U R O P E A N H U B S )
E X H I B I T 1 6
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2 1
The cozy world of the past has encouraged many airports to neglect operating costs, as wel l
as opportunities to lift revenues: most have funct ioned as infrastructure suppliers not busi-
nesses. In the future, carriers’ demands for lower charges, coupled with governments’ grow-
ing reluctance to support airports, will force operators to function more efficiently. Lower
than anticipated passenger growth at many airports will intensify this need.
Despite relatively high margins, the state-protected environment in which the vast majority of airports
has lived over the last eight decades has meant that most have not operated as competitive, profit-
driven businesses. This is most obvious in the field of investments, where the basic principle that invest-
ment growth should only be pursued once profitability is above the cost of capital, has been widely
ignored, especially at regional airports. Most regional airports are unprofitable yet still have ambitious
expansion plans. Operating costs have also been overlooked, partly due to the fact that fixed assets dom-
inate airports’ balance sheets. According to BCG’s analysis, airports could reduce their operating costs
by 20% to 30% on average, including 5% to 7% in the short run.
Three key developments will force airports to look much more closely at both, costs and revenues:
1 . L o w e r t h a n e x p e c t e d p a s s e n g e r g r o w t hThe drop in aviation and non-aviation revenues that will accompany lower than expected passenger
growth at airports will leave many struggling to service the debts of their existing investment programs.
To compound this problem, credit-rating agencies are likely to downgrade operators suffering steep
declines in passenger growth, increasing the cost of raising additional funds. Pittsburgh International
Airport provides a salutary warning of what the future might hold. Its General Airport Revenue Bond
(GARB) was recently downgraded from A to BBB by the Fitch Rating Agency after US Airways rejected
a lease agreement with the airport, suggesting the airline might abandon Pittsburgh as a hub.
2 . C a r r i e r s ’ d e m a n d s f o r r e d u c e d c h a r g e s Airport charges, including aeronautical and ground-handling fees, account for a substantial proportion
of carriers’ costs, typically one quarter of the price of the average airline ticket (Exhibit 17). In the past
airlines have found it difficult to negotiate reductions due to airports’ monopoly positions and igno-
rance of the operators’ true costs. Today, however, carriers increasingly have access to more detailed cost
breakdowns, thanks to governments’ demands for greater accounting transparency, placing them in a
stronger negotiating position. More significantly, they are acutely aware that their survival—and the
future of the airports, most of which depend heavily on a single carrier—hinges on lower charges. Thedrive to reduce these is further fuelled by the widespread sense of injustice within the aviation industry
over the large discrepancy between the two parties’ margins. As one executive said: “If one of the
P R E S S U R E S T O A C T M O R E L I K E
B U S I N E S S E S
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partners is losing his shirt while the other is counting money, it is no longer a partnership.” LCCs, which
have shown themselves to be more than willing to pull out of destinations if the figures do not add up, will add to the pressure, particularly if the European Commission puts a stop to regional airports offer-
ing LCCs sweeteners, as witnessed in the recent Charleroi ruling and Ryanair’s subsequent decision to
cut down on its Charleroi routes.
3 . G o v e r n m e n t ’ s g r o w i n g r e l u c t a n c e t o s u b s i d i z e a i r p o r t sGovernments are both politically less willing and financially less able to support airports. Free-market
solutions are increasingly the preferred option in most public-service sectors, especially as the widening
gap between tax receipts and public expenditure makes continued state support unsustainable. This is
reflected in two trends within the airport sector:
More widespread privatization: Since 1987, there has been a steep and relatively steady increase
in the number of airport privatizations that is due to pick up again after being halted in the recent
crises as Exhibit 18 shows. To date, over 60 airports have gone down this road, spanning virtually
every continent, from Europe and South America to Australia and Asia. Europe has the highest
concentration of privatized airports (nine out of the top 20), with several more due to join their
ranks. In the U.S., only few small operators such as Buffalo and Albany, have been privatized, a
reflection of the fact that airports remain one of the few avenues open to influence regional eco-
nomic development in this otherwise highly deregulated economy, as well as considerations of
national security. This situation, however, may be about to change, not the least of which is due to
severe budget problems, foremost the U.S. federal deficit, but also budgetary constraints faced by many states and cities.
2 2
(1) Fuel prices vary significantly over time; estimation based on 15-year average of 135 euro per tonSource: AEA benchmark study; Shell; BCG analysis
Total ticketprice
Ineuro
Profitmargin
Total cost Ticketingand sales
Crew Aircraftcosts
Passengerservice
Fuel andoil(1)
Admin.and other
En routecharges
Mainte-nance
Totalairport-relat-ed charges
Station andground
handling
Aero-nauticalcharges
144 4 140 24
18
16
10
10
88
12
34 24
10
2.9% 100% 17.2% 12.9% 11.5% 7.1% 7.1% 5.7% 5.7% 8.6% 24.2% 17.1% 7.1%103%
Profit Non-airport-related costs Airport-related costs
A I R P O R T - R E L A T E D C O S T S A R E S I G N I F I C A N T
E X H I B I T 1 7
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2 3
Source: BCG analysis; press search
Privatization to yield more efficient operations and to secure airport financing of infrastructure
BAA Vienna
Southampton
Prestwick
Liverpool
Copenhagen
Cardiff
Bournemouth
Belfast
Athens
London City
East Midlands
Perth
Naples
Melbourne
Kent
Istanbul
Düsseldorf
Bristol
Brisbane
Bolivia
Birmingham
Sanford
Rome
Skavska
Malaysia
Luton
Hobart
Hanover
Eindhoven
Costa Rica
Canberra
Australian Regionals
Auckland
ArgentinaAdelaide
ASUR (Mexico)
Wellington
South Africa
Jakarta
GAP (Mexico)
Stewart
Oman
Malta
Lima
Fraport
OMA (Mexico)
Zurich
Sydney
Madras
Kansai
Hong Kong
Ecuador
Chubu
Calcutta
Budapest
Bratislava
Bombay
Bangkok
BangaloreAtlanta
AdP
New Delhi
1987 … 1990–1992 1993–1996 1997 1998 1999 2000–2002 Planned
Narita
N U M B E R O F P R I V A T I Z A T I O N S A C C E L E R A T I N G A G A I N
E X H I B I T 1 8
Source: BCG analysis
Business-to-business servicesInfrastructure provision Business-to-customer services
Management
Support functions
Property and
utilization rights
Transactionmanagement• Inivitations to bid• Contract
negotiation• Takeovers
Flight operations• Tower• Runway traffic• Gates
Terminal operations
Safety (fire protection)
Retailing• Duty-free shops• Catering• Food and beverage
Space utilization• Outdoor space• Indoor space• Advertising space
Conferencing
Parking
Other
Ground services
Luggage services
In-flight services
Cargo services
Facility management
Security
Real-estate planning,development
Construction
1 2
Real-estate andinfrastructuredevelopment
Flight OPS
Terminal OPS(incl. security)
4a
4b
Facility
management
3
Ground
services
5
Space allocation
(non-aviation)
Other
services
6 7
A I R P O R T V A L U E C H A I N V E R Y D I V E R S E
E X H I B I T 1 9
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2 5
S T R A T E G I E S T O S U C C E E D I N
T O M O R R O W ’ S E N V I R O N M E N T
Airports will have to rethink their strategies and business models to survive and thrive in
tomorrow’s environment. The first s tep is to soberly assess your role in the new hub network
and expected passenger growth. This will determine your investment and carrie r strategy. It
will be equally critical to position yourself at the most competitively advantageous point in
the value chain, with a clearly defined role.
D e v e l o p i n g a p p r o p r i a t e s t r a t e g i e s
The redistribution of passenger growth will redefine airports’ roles, requiring different investment and
carrier strategies for different types of airports:
I d e n t i f y y o u r r o l e i n t h e n e w n e t w o r kTwo key factors will determine airports’ roles in the new landscape and, consequently, their relative
growth and capacity requirements:
Geographic location, including size and affluence of catchment area: Only airports with central
locations and large, affluent catchment areas will be eligible to be mega-hubs. International O&Ds
will need a similar catchment area to succeed.
Carrier’s strategic and financial strength: In addition to the right geographic location, mega-hubs
will be the primary home of a leading alliance airline. Heathrow, which is dominated by the
Oneworld alliance airline BA, is one example. Secondary hubs will also require a strong relation-
ship with a major carrier in an alliance. At all airports, from mega-hubs down to regional airports,
the financial health of the lead carrier will be paramount. This must be carefully analyzed, espe-
cially in relation to any investment plans. As Brussels Airport discovered, the impact of a finan-
cially ailing airline can be devastating: since Sabena went bankrupt, the airport’s passenger
volumes have plummeted by 30%.
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D i f f e r e n t s t r a t e g i e s f o r d i f f e r e n t t y p e s o f a i r p o r t s ( E x h i b i t 2 1 )
Mega-hubs: These must focus on the lead airline in their respective alliance, as well as regional
feeders. Providing the highest quality of service and innovative ways to spread capacity through-
out the day will be vital. Intelligent differentiation between premium and basic products will also
be required. Only mega-hubs will be in a position to make large “batch” investments to expand
capacity, secure in the knowledge that there will be long-term passenger growth.
Secondary hubs: Many of today’s hubs will be downgraded, making their overly optimistic invest-
ment plans redundant. All investments should be revisited and switched to an incremental,
“needs-must” basis. Attention should be concentrated on alliance carriers.
International O&Ds: The emphasis must be on sweating existing assets to extract maximum value
out of historically high investments. Airlines with a sound strategy, alliance, and financial position
should be actively courted to ensure commitment to the airport. Those international O&Ds that
stand to profit from an enlarging catchment area and subsequent rise in point-to-point traffic
should base their expansion strategy on careful foundations and sound planning, which should
always favor incremental investment approaches over block investments. Attracting LCCs to fill
existing overcapacities should be considered, but no capacity extensions to cater for LCCs.
Regional airports: The focus should be on LCCs and exceptionally tight cost control, not just to
satisfy LCCs’ demands but to return to or maintain profitability. In view of the likelihood that
these airports will continue to be used by governments as tools for regional economic develop-
ment, state funding for any (incremental) investments should be sought. Creating new regional
airports will, in most cases, be unwise.
2 6
International
hubs
International
O&Ds
Secondary
hubs and
O&Ds
Regionals
Atlanta
Sydney
Vienna
Example
Leading airline within alliance
Regional feeders
Intercontinental airlines
All other airlines
Member of airline alliance
All other airlines
LCC
Regional feeder
Airline focus
Quality leadership
Privatization imperative
Capacity management
Sweat your assets over the limit
Maximize return
Support your alliance airline
Stop investments
Streamline business model
Focus on LCC segment
Thight cost management
Acquire public funding
Key issues
PAX = 79M
PAX = 22M
PAX = 12M
Albany
International
Airport
PAX = 1.5M
Source: BCG analysis
W H A T T O D O : F O C U S O N B E S T B E T
E X H I B I T 2 1
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M a n a g i n g a i r p o r t s a s b u s i n e s s e s , n o t i n f r a s t r u c t u r e s u p p l i e r s
S e l e c t t h e r i g h t b u s i n e s s m o d e l f o r y o u r c h o s e n p o i n t i n t h e v a l u e c h a i n As mentioned earlier, few operators have the breadth and depth of resources and expertise to maximize
returns from each link in airports’ highly diverse value chain. Instead of acting as integrators of the
entire value chain, operators will have to identify a position within the chain where they can add maxi-
mum value, based on their capabilities and the competitive outlook of their chosen section of the chain.
Each part of the chain will require different skills and resources plus different levers to reduce costs and
boost revenues, as Exhibits 22 and 23 illustrate. Ground handling, for example, will depend on person-
nel allocation and process optimization to create value, while aviation-related services will hinge on cost
transparency, negotiation strategies, and investment control, among other demands. Some operators
will be best equipped to concentrate on individual links in the chain, others will benefit from taking
broader roles.
Generally, there will be four types of operators:
Specialists will focus on particular links in the value chain and leverage their scale and know-how
globally. Usually this will involve standardized, labor-intensive activities, such as ground handling
and facility management. As these are traditionally low-margin fields, scale will be critical. Already
several global specialists are emerging. In ground handling, ServisAir/GlobeGround
2 7
Source: BCG analysis
Management
Support functions
Trans-action of prop-erty and uti-lization rights
Real-estate/infra-
structuredevelopment
Facilitymanagement
Groundservices
Otherservices
Spaceallocation
(non-aviation)
Flight OPS
TerminalOPS (in. sec.)
1 2 3 4a
4b
5 6 7
Characteristics
Levers
Real estate Facility management
Capital-intensive
Customer: airport operator and airport-related external companies
Market for special properties hardly existent
Labor-intensive
Majority of total lifetime property cost acc rues during use
High competition in certain areas
Financing
Project management
Regulatory circumstances
Site analysis/knowledge of place
Property development
Specialization (technical FM)
Standardization (infrastructure and commercial FM)
Property usage
O P T I M I Z A T I O N L E V E R S A L O N G T H E V A L U E C H A I N ( I )
E X H I B I T 2 2
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operates at 39 locations, with a turnover of more than $800 million, while Swissport is present at
24 airports. Within the U.S., Delta Air Lines has also started to aggressively market its maintenance
services to other airlines, turning a $50 million side business in 2000 into a $160 million operation
by the end of 2003.
Layer-masters will handle categories of related services, for instance, business-to-consumer
services such as retail, conferencing, and parking. BAA’s retail managing contracts are an exam-
ple of this development.
Orchestrators will coordinate outsourced services at individual airports, ensuring consistent qual-
ity standards and cost control, as well as act as the interface with airlines to deliver innovative,
value-added products and services. Pure orchestrators have yet to emerge, but Athens Interna-
tional Airport is a pioneer.
Integrators will continue to handle the whole value chain, as Frankfurt does now.
D r i v e d o w n c o s t s
Operational excellence has to be the new management imperative. Exhibits 22 and 23 highlight the
main levers for reducing costs (and increasing revenues) in different parts of the value chain. The
golden rule, which has so often been broken in the past, is that no investments should be made unlessexpected profitability is above the cost of capital.
2 8
Source: BCG analysis
Management
Support functions
Trans-action of prop-
erty and uti-
lization rights
Real-estate/infra-
structure
development
Facility
management
Ground
services
Other
services
Spaceallocation
(non-aviation)
Flight OPS
Terminal
OPS (in. sec.)
1 2 3 4a
4b
5 6 7
Characteristics
Levers
Aviation Non-aviation Ground services
Capital-intensive
Specific flight and terminal operations knowledge
Regulated environment
Capital-intensive
Opaque passenger behavior
Complex demand structure (retailers)
Labor-intensive
Complex processes
Cyclical demand
Negotiation strategy
Investment control
Cost transparency
Process efficiency
Space allocation
Marketing
Personnel allocation
Process optimization
Airline affinity
Airport and terminal management
O P T I M I Z A T I O N L E V E R S A L O N G T H E V A L U E C H A I N ( I I )
E X H I B I T 2 3
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E x p l o i t n o n - a v i a t i o n r e v e n u e sIncreasing revenues per passenger through non-aviation channels, such as retail and parking, will be a
key driver of growth and profitability for all airports, especially those that experience lower than
expected passenger growth or even an absolute drop in traffic. In fact, in BCG’s experience, airports
that depend on LCCs will usually only be able to sustain profitability via non-aviation revenues. LoveField airport in the U.S. is a case in point: Its non-aviation revenues, which were three times higher than
aviation revenues, kept it in the black in 2001, with a modest $9.9 million profit (Exhibit 24). Its parking
revenues alone were five times larger than its landing fees and bigger than all its non-aviation revenues
put together.
Retail is likely to provide some of the richest pickings as BAA’s airports have shown. To maximize this revenue,
operators will have to persuade carriers to strike an intelligent balance between their demands for shorter
transfer times and the airports’ need to keep passengers shopping for as long as possible. This will ultimately
be in both parties’ interests: higher revenues will give operators more leeway to lower carrier charges.
C o n s i d e r p r i v a t i z a t i o nMany airports should consider at least partial privatization in order to raise funds, gain access to the
capital markets and trigger efficiency improvements. This can be done via an IPO—a route successfully
taken by Frankfurt and Vienna—or by offering stakes through a trade sale. Strict management of the
privatization process is essential for success and is controlled by an IPO task force: strategies must be
refined, resources mobilized, efficient controls put into place, and the organization aligned with the cap-
ital markets. Trade sales can provide an attractive alternative to IPOs, by recruiting strategic investors to
take significant stakes in the airport company. External know-how can thus be bundled to ensure greater
optimization of potential.
2 9
(1) Excluding grant receipts of $2.5 million, only c overs interest income and other non-operating revenuesSource: BCG analysis
Aeronauticoperatingrevenue
Non-aeronauticoperatingrevenue
Non-operatingrevenue(1)
Labor cost Communicationand utilities
Suppliesand materials
Otheroperatingexpenses
EBITDA Interestchange
Depreciat ion Net profit
7.7
24.2
6.8 6.0
2.5
10.7
1.4 18.1 1.66.6
9.9
Inmilliondollar
L C C A I R P O R T S C A N O N L Y B E P R O F I T A B L E W I T H T H E R I G H T R E V E N U E M I X — E X A M P L E L O V E F I E L D , T E X A S
E X H I B I T 2 4
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3 0
Tr e a t a i r l i n e s a s p a r t n e r sThe future of the airport sector lies in closer cooperation with the major airlines as business partners,
not just customers. As a first step, joint seminars and workshops could foster better understanding. In
many areas, there are considerable opportunities to leverage cost and revenue synergies, for example,
by pooling customer information to target high-margin passengers and by bundling together common
support services, such as IT, and by clearly defining interfaces. (Exhibit 25) Transparency and clearly
defined contracts provide the basis in all areas of cooperation. Service-level agreements should become
standards in strong relationships. Short-term aids in crises also work to improve the relationship, as
significant temporary reductions in landing fees at major Asian airports during the SARS crisis signified.
Source: BCG analysis
Win-win situation as result of open cooperation
Value chaininterfaces
Real-estate andinfrastructuredevelopment
Facilitymanagement
Groundservices
Spaceallocation
Otherservices
Terminal OPS
Flight OPS
Airportauthority
Airport authority,airline and sublease
companiesAirline
Airport authority,airline and sublease
companies
Airportauthority
Airline
Airport authority
Measures ofinterface
improvements
Bundling
Outsourcing
Jointly coordinate operations
Share scheduling information
Jointly optimize IT anddisposition instruments
Find trade-offbetween minimumconnection timeand retail-optimizedterminal design
Joint costreduction
Quality assurance
Risk reduction/planning reliability
Joint cost reduction
Additionalrevenue sources
Results
Transactionof property
Airportauthority
Airportauthority
P R O C E S S E F F I C I E N C Y G A I N S C A N B E Y I E L D E D B Y J O I N T I M P R O V E M E N T O F I N T E R F A C E S
E X H I B I T 2 5
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3 1
A i r l i n e s : B r i n g a i r p o r t s i n t o f o c u s a n d t i g h t e n o p e r a t i o n a l l i n k s
Airlines have long neglected the value potential of airports due to their focus on network development.
There are various levers to reduce airport-related costs and revenues:
By working closely with a particular operator, airlines can identify potential to improve process
efficiency. This will lead to reduced costs for airports and, via lower charges, for airlines. But the
more substantial contribution to higher airline margins will be through shorter turnaround times
and consequently higher aircraft utilization.
Airlines can support airport operators in increasing their retail revenues by helping them find part-
ners who are best suited for optimal exploitation of the revenue lever. Moreover airlines can con-
tribute by providing valuable information about their passengers, which allows retailers tocustom-tailor their offerings. Airports should then share the increased revenues with airlines,
creating a win-win situation that encourages all parties to move in the described direction.
Although severe frictions between airports and airlines characterize the current situation, both parties
should work towards easing the tensions since both will profit from a renewed partnership.
I n v e s t o r s : P i c k t h e r i g h t i n v e s t m e n t s a n d i m p r o v e p r o f i t a b i l i t y
It has never been a better time to invest in airports. Many owners face difficulties in financing their air-
port shareholdings and are increasingly willing to sell off stakes in attractive locations. But investors have
to thoroughly analyze the options before entering the complex airport business:
Investors should screen all possible targets and analyze long-term growth options based on airline
prospects as well as geographic and environmental factors. Only airports exhibiting a stable
growth outlook and a realistic perception of themselves will lead to long-term returns on adequate
investments.
From along the diverse value chain, investors should decide which business to invest in. Depend-
ing on an individual investor’s risk profile, capability portfolio, and investment strategy this can be
I M P L I C A T I O N S F O R A I R L I N E S ,
I N V E S T O R S , A N D G O V E R N M E N T S
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either in real estate, airport management, or business-to-consumer services. If investors do not take into account the ongoing deconstruction of the value chain, they risk an attack from better-
positioned competitors.
Investors must be aware of the various cost and revenue levers airports can pull to improve their
margins. The potential to increase efficiency and revenue per PAX is large at most airport loca-
tions and can significantly raise the returns on investment.
Well-advised investors with a clear strategy and a set of relevant investment criteria will emerge on top of
the current developments in the airport industry.
P u b l i c a u t h o r i t i e s : S e c u r e i n f r a s t r u c t u r e p r o v i s i o n w i t h o u ts u f f e r i n g n e g a t i v e r e t u r n s
Infrastructure provision as a means of regional development has always been the focus for public authorities.
This will remain the case in the future. But in times of dwindling public budgets, authorities are looking for
opportunities to reduce their investments and increase returns on airport shareholdings without neglecting
its infrastructural importance for their particular region. Key steps to take and issues to consider include:
Authorities must soberly analyze the growth potential of each airport. Although every region
would like to profit from a nearby intercontinental hub, only a few will enjoy this privilege. It is
fairly obvious which cities will be the location of mega-hubs as this is determined by airline net-
work strategies: authorities must understand and accept the reality of the growth prospects of
their airport portfolio.
To reduce requirements of public funding, governmental institutions should encourage airport man-
agers to exploit the revenue potential offered by retailing. Increasing revenues per PAX is a comparatively
easy option since its implementation does not require unpopular decisions like workforce reductions.
Authorities should ensure that airport managers implement a tight cost control, focusing on
process efficiency and adequate real-net output ratios. Significant efficiency gains are a direct way
of saving taxpayer’s money.
Alternative sources for financing airport investments should be explored. Getting private
investors involved is an excellent opportunity to trigger changes in airport management and
reduce airports’ dependency on subsidies.
These recommendations will not endanger the provision of airport infrastructure; they will ensure thelong-term survival of individual airports. Structural changes force all airport owners to act in order to
avoid deterioration in their shareholdings.
3 2
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3 3
B C G ’ S E X P E R I E N C E I N T H E A V I A T I O N
I N D U S T R Y
B C G h a s e x t e n s i v e e x p e r i e n c e i n t h e a i r p o r t a n da v i a t i o n i n d u s t r y
BCG works closely with numerous clients within the aviation sector—airlines, airports, and other
service providers—always with the goal of developing our clients’ competitive advantage, successfully
implementing it, and increasing their sustained earning power. Projects we have been involved in have
ranged from privatizations and profit improvement measures to value management, strategic position-
ing, and internationalization. All have shown bottom-line impact and enabled our customers to achieve
a superior strategic positioning within a changing business environment.
In addition to the frameworks described in this report we have developed a set of tools specifically for
the aviation industry. This includes a standardized airport “health check” to identify the measuresneeded to prepare our clients for the future.
If you would like to discuss this report’s findings in more detail or require assistance in any other field,
please contact one of our world experts.
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3 5
K E Y Q U E S T I O N S
Q u e s t i o n s f o r a i r l i n e s
1. What is the overarching network logic of my alliance and how does this affect my airport selection and strategy?
2. What are my main airports’ investment programs and how do they correspond to my
perspective capacity, service, and cost requirements?
3. How can I actively participate and influence airports crucial to my strategic positioning?
4. How can joint optimization of interfaces benefit my efficiency and service position?
Q u e s t i o n s f o r i n v e s t o r s
1. Does my investment portfolio account for individual growth prospects and asober assessment thereof by the respective airport?
2. Which steps of the airport value chain are most promising as investments?
3. How far has the airport’s efficiency potential been realized and is themanagement and ownership committed to delivering returns?
Q u e s t i o n s f o r p u b l i c a u t h o r i t i e s
1. What is a viable airport landscape for my region given expected growth rates and trendsand are funds distributed accordingly?
2. Are publicly owned airports sufficiently working to exploit non-aviation revenues andcontrol their cost position?
3. Should alternative ways of financing airport investments be explored and the expertiseof private investors tapped?
4. Are ways to better coordinate airport development on a supraregional andsupranational level being sufficiently explored?
Q u e s t i o n s f o r a i r p o r t o p e r a t o r s
1. Which role is my airport realistically going to play in the medium term given its locationand key airline(s)?
2. Do my investment plans accurately reflect this role?
3. Am I actively cooperating with my main customers?
4. Can my cost position be optimized?
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Amsterdam J. F. Kennedylaan 100
3741 EH BaarnNetherlands
Tel +31 35 548 6800
Fax +31 35 548 6801
Athens60 Vassilissis Sophias Avenue,
11528 Athens
Greece
Tel +30 210 727 9213
Fax +30 210 727 9168
At lanta600 Peachtree Street N.E.
37th Floor
Atlanta, GA 30308
USA
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Fax +1 404 877 5201
Auck land23–29 Albert Street, Level 30
Auckland 1
New Zealand
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Bangkok37th Floor, U Chu Liang Building
968 Rama IV Road, Silom
Bangkok 10500
Thailand
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Spain
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Hungary
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Fischertwiete 220095 Hamburg
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Akaretler, Besiktas 80680
Istanbul
Turkey
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Jl. Jenderal Sudirman Kav. 25
Jakarta 12929
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No. 8 Jalan Sultan Ismail
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1200–106 Lisbon
Portugal
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LondonDevonshire House
Mayfair PlaceLondon W1J 8AJ
England
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Los Ange les355 S. Grand Avenue
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USA
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Spain
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Australia
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Mexico C i tyTamarindos 400 piso 18 A
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Mexico
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Miami703 Waterford Way
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Italy
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Monter reyVasconcelos 101 Ote – 5°
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Russia
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Mumbai55/56 Free Press House
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India
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Germany
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NagoyaDai Nagoya Building 28–12
Meieki 3-chome, Nakamura-ku
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Japan
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New Delhi3rd Floor, DLF Centre
Sansad Marg
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India
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New York430 Park Avenue, 18th Floor
New York, NY 10022
USA
Tel +1 212 446 2800
Fax +1 212 446 2801
OsloKarl Johans gate 45
0162 Oslo
Norway
Tel +47 23 10 20 00
Fax +47 23 10 20 99
Par is4 rue d’Aguesseau
75008 Paris
France
Tel +33 1 40 17 10 10
Fax +33 1 40 17 10 15
PragueNa Prikope 15
110 00 Prague 1Czech Republic
Tel +420 2 22191444
Fax +420 2 22191330
RomeLargo Tartini 3/4
00198 Roma
Italy
Tel +39 06 85203420
Fax +39 06 85203665
San Franc iscoTwo Embarcadero Center,
Suite 2800
San Francisco, CA 94111
USA
Tel +1 415 732 8000
Fax +1 415 732 8200
Sant iagoAv. Isidora Goyenechea 3621
Suite 901
Las Condes
Santiago
Chile
Tel +56 2 338 9600
Fax +56 2 338 9602
Sao Pau loAv. Brig. Faria Lima,
3064 – 5th Floor
Sao Paulo, SP 01451-000
Brazil
Tel +55 11 3046 3533
Fax +55 11 3842 9638
SeoulKwangwhamun Building,
20th Floor
64-8, Taepyong-ro 1-ka,
Choong-ku Seoul
KoreaTel +822 399 2500
Fax +822 399 2525
Shanghai21/F, Central Plaza
227 Huangpi Bei Lu
Shanghai, 200003
China
Tel +86 21 6375 8618
Fax +86 21 6375 8628
Singapore50 Raffles Place #44-02/03
Singapore Land Tower 048623
Singapore
Tel +65 6429 2500
Fax +65 6226 2610
Stockho lmSkeppsbron 38
SE-111 30 StockholmSweden
Tel +46 8 402 44 00
Fax +46 8 402 46 00
Stu t tgar tKronprinzstr. 28
70173 Stuttgart
Germany
Tel +49 711 20 20 70
Fax +49 711 22 12 38
SydneyLevel 61, Govenor Phillip Tower
1 Farrer Place,
Sydney NSW 2000
Australia
Tel +61 2 9323 5600
Fax +61 2 9323 5666
TaipeiRoom 702, 23/F,
105 Tun-Hwa S.
Rd. Sec 2
Taipei 106
Taiwan
Tel +886 2 2755 0000 x722 &
702Fax +886 2 2784 1632
TokyoThe New Otani Garden Court
4-1, Kioi-cho
Chiyoda-ku, Tokyo 102-0094
Japan
Tel +81 3 5211 0300
Fax +81 3 5211 0333
TorontoBCE Place, 181 Bay Street
Suite 2400, P O Box 783
Toronto, Ontario M5J 2T3Canada
Tel +1 416 955 4200
Fax +1 416 955 4201
ViennaAm Hof 8
1010 Vienna
Austria
Tel +43 1 537 56 80
Fax +43 1 537 56 8110
WarsawSienna Center
Ul. Sienna 7300-833 Warsaw
Poland
Tel +48 22 820 36 00
Fax +48 22 820 36 36
Washington DC4800 Hampden Lane
Suit 500
Bethesda, MD 20814
USA
Tel +1 301 664 7400
Fax +1 301 664 7401
ZurichZollikerstrasse 226
CH-8008 Zurich
Switzerland
Tel +41 1 388 86 66
Fax +41 1 388 86 86
8/8/2019 Airport Dawn of a New Era
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BCG The Boston Consulting Group