8. Benchmarking
8. Benchmarking
8.1. The purpose of this chapter is to benchmark Dundee Airport against other small regional airports to identify areas where its is under-performing, but also with a view to yielding useful insights into potential opportunities and business models, that could be of significant value when drawing up future development options for Dundee.
8.2. With this in mind, we have considered the following areas, drawing on our knowledge of small regional airports up to a passenger throughput of less than 1mppa, both within the UK and in Europe:
- Development and marketing of air services, including how to engage the business sector and local communities in this activity to give confidence to airlines, who themselves face difficult economic circumstances, to start new, or maintain existing, routes;
- expanding non-passenger based revenue streams;
- operating models and to maintain a tight control of costs;
- governance and funding models.
8.3. The scope of the study means the exercise is of necessity discursive rather than comprehensive, but it has nevertheless revealed some useful perspectives, not only in terms of commercial opportunities which may be able to secure some traction at Dundee, but also in providing evidence of some of the hard realities that need to be faced when considering Dundee's future.
8.4. First and foremost amongst these is that within the UK many small regional airports are grappling with the same challenges of scaling activity to a level where the minimum fixed costs of operating an airport safely and securely can be covered at a price which the market is willing to bear, or of finding other ways of cross-subsidising those core requirements. Whilst in Europe, these core costs are subsidised either directly or indirectly by the municipal or regional Government, for those airports in the UK that moved from under the umbrella of public ownership in the 1990's and 2000's, the problem is particularly acute, as there is no longer the fall back of public subsidy which most small airports in Europe rely on.
8.5. A good example of this is Plymouth, where the City Council, despite a petition of 38,000 residents, has either been unable or unwilling to step in to save the Airport once its former private sector operator, Sutton Harbour, gave notice of its impending closure. Similarly Galway in Ireland, which like Plymouth was dependent on a single carrier, whose prospects were significantly impacted by external third party decisions (in Galway's case loss of PSO routes), leading to a loss of frequency and passenger numbers and ultimately the closure or withdrawal of the carrier. Other examples include Sheffield and Swansea Airports, both of which served substantial cities but closed after the failure to retain key airlines or other commercial services.
8.6. In this respect Dundee has been fortunate in terms of the Scottish Government's willingness to step in and the availability of a vehicle (i.e. HIAL) through which to do so. The Welsh Government made a similar intervention at Cardiff in June this year, as historically the Irish Government and Northern Ireland Assembly did at Londonderry and Cornwall Council have at Newquay. The Isle of Man Government and the States of Jersey and Alderney and the Bailiwick of Guernsey, have always recognised the need to play a supportive role in terms of the provision of airport infrastructure (see Table 8.1). This appears to reflect recognition amongst public authorities in peripheral regions about the importance or maintaining or providing air services to connect them to national and European markets.
Source: Northpoint Aviation research
Notes: * Mothballed in 2010 ** Passenger services ended 2009
† Sale pending
1.1. 8.7. For airports that are still operating but are in private ownership, but serve less geographically remote regional communities, with access to reasonable surface alternatives or larger airports within an acceptable drive time, the prospects appear bleak at the moment. These include:
- Prestwick and Manston, both of which are heavily loss-making and in the process of being sold;
- Coventry, which is under threat of never re-opening to scheduled traffic having failed to find a scheduled airline to replace Thomson Fly;
- Blackpool that might have closed to scheduled traffic but for a contractual obligation with Jet 2 which the owners were unable to extract themselves from despite going to court; and
- Durham Tees Valley and Doncaster-Sheffield, where Peel Holdings were willing to step-in and have the resources and expertise to try to develop non-passenger based models to create a long-term sustainable future for the airports concerned.
Source: Northpoint Aviation research
Notes: * Estimates derived from a variety of sources ** Mothballed in 2010 *** Passenger services ended 2009
1.1. 8.8. Table 8.2 serves to make the point that while most small airports in the UK have seen their traffic decline substantially since their heyday in 2006-07, those worst affected have typically been in competition with larger airports on their doorstep. The industry trend since the onset of the recession, has seen large and medium sized airports perform less badly as they have increased their regional market share in line with consolidation in the airline industry, while small airports have suffered from regional airline closures and route volatility associated with the low cost carriers which in the early 2000's were the principal source of traffic growth (see Table 8.3). Hence in Table 8.2 the exceptions to the general rule have been:
- "island airports", where passenger declines have been modest, because there is no competitor competing for traffic, there is a base carrier and because in most cases there are direct links to the London market which has been relatively stable;
- airports such as Gloucester Staverton and Doncaster-Sheffield, which have strong catchment areas and are relatively new to scheduled traffic and are thus operating from a low starting base; and
- to a lesser extent airports such as Exeter and Humberside which are bases for key regional airlines (notably flybe and Eastern respectively). Inverness is also a good example of this, benefiting as it does from a strong flybe/Loganair presence (even with the former's pending withdrawal from the Gatwick route.
8.9. With strong competition from growing low cost and network carrier operations at Edinburgh, Aberdeen and to a lesser extent in the leisure market from Glasgow, Dundee has none of these inherent 'stability' factors. It has a London link, but one where passenger volumes are being priced-off by rising fares and there is reliance on a London City based carrier which is the subject of much speculation as to its long-term future as its parent (i.e. Air France/KLM) undergoes a series of consolidations.
8.10. The stable factors that Dundee does have, however, are firstly its much greater remoteness from London than almost all of the regional airports mentioned, and secondly the un-competitiveness of rail for day return business journeys from Dundee to London - whereas rail is a significant competitor for many domestic services from English regional airports. Nor is rail ever going to be competitive for day return business from Dundee.
8.11. But then Table 8.3 also highlights another important, but for Dundee, difficult truth, notably that those airports that have a diversity of income streams, are managing to transition the current economic environment better than those who do not. So for example, Gloucester Staverton, Norwich, Bournemouth and Exeter have not only a substantial property portfolio generating rent, but also other sources of aeronautical income (i.e. Business Aviation/GA and offshore activity) to fall back on. This is also a model that is being promoted at Newquay through its Aerohub Enterprise Zone, at Shannon through its new Development Corporation, and by Peel Airports through its core property expertise and its re-conceptualisation of Airports as focal points of associated local business and residential communities - 'airport villages' if you like.
Source: Northpoint Aviation research
Notes: * (-) When the airport had pax services; ** Mothballed in 2010; *** Pax services ended 2009
8.12. Where this is not possible as a result of land ownership and planning constraints, or a legacy of liabilities that prevent it - as at Plymouth, Blackpool and Coventry, the future looks bleak. Dundee could very easily fall into this category due to its restricted land ownership, which prevents large-scale property development, if positive action is not taken quickly to address it. And it is worth recognising, that the fallback of continuing to rely on on-going public subsidies, as Dundee currently does, is potentially also under threat from proposed changes to the EU state Aid Rules, which have as an under-current, the closure of loss-making airports whose catchment can be served from larger airports nearby, and general strictures on public finances. Several such small airports are under threat in in Finland and Sweden. And the experience of Galway and Plymouth show that threat is real.8.13. With this in mind, it is notable that even by comparison with some of its worst performing Peers, the level of subsidy per passenger required at Dundee (i.e. £52) is substantially higher than at other airports where we have been able to obtain detailed financial accounting information; and it is set to worsen if passenger numbers continue to decline (see Table 8.4). It should be noted, however, that this number is capable of sudden and material change as soon as services are added or removed and that because Dundee's capacity is so under exploited that you could get to at least another 100,000 pax p.a. at Dundee with virtually no change to operating costs, in which case the subsidy per passenger would fall considerably.
Source: Company Accounts
Notes: * Other HIAL Group Airports excluded from Peer Airport comparison
8.14. Moreover, revenue generation per passenger is also comparatively low despite the strongly business orientated traffic which uses the airport, which in theory should be willing to pay more for the accessibility it offers (see Table 8.5).
Source: Company Accounts
Notes: * Other HIAL Group Airports excluded from Peer Airport comparison
8.15. On the face of it, based on these comparisons, the prospects for turning round Dundee Airport's fortunes and reducing operational subsidies to levels that satisfy the Commission as well as Scottish Ministers look will be a challenge requiring positive collaboration from a range of key stakeholders. But there are business models, involving both public and private ownership, that appear to work. Amongst these Gloucestershire and Norwich Airports are perhaps the most interesting example for Dundee.
8.16. Owned by Gloucester City and Cheltenham Borough Councils, Gloucestershire Airport currently has around 15,000 scheduled passengers flying principally to the Isle of Man and Jersey. However, these flights made up only a small proportion (2-3%) of a total of 73,500 aircraft movements in 2012, the dominant category of traffic being General Aviation (training/testing, private and aero-club) flights. And yet despite this traffic mix, Gloucestershire Airport has made a small operating profit in each of the last 5 years, the principal contribution being rental income from a strong property portfolio and very tight cost control. Similarly Norwich, which was given borrowing powers by DfT in 2002 on the back of a strong financial balance sheet and has managed to maintain operational profitability other than in the worst depths of the economic downturn, has also benefited from a strong property portfolio and offshore related activity to reduce its exposure to fluctuations in passenger related revenues.
8.17. Meanwhile others peer airports such as Newquay, Shannon, Durham Tees Valley and Doncaster-Sheffield are all taking pro-active measures to reduce their exposure to declining passenger numbers and create new sources of revenue by combining:
- Strong cost controls.
- Provision of a competitive passenger offering (local, convenient, simple, efficient, cost effective) that allows airlines to attract traffic volumes that can sustain the cost and operation of core infrastructure.
- Marketing that offer strongly to the local catchment area so that there are high levels of awareness.
- Capital investment, usually with public sector support, to diversify income streams (aeronautical or property related).
- Securing buy-in to a clear business plan and pro-active support from a wide range of strategic stakeholders, both public and private.