9. Addressing the Challenges Facing the Airport in 2013 and Beyond
9. Addressing the Challenges Facing the Airport in 2013 and Beyond
9.1. The core objective of this study is to identify whether there are any development opportunities that are realisable at acceptable cost, that can help improve the Airport's financial position, in the short-medium term, either by reducing or sharing costs, securing additional revenue or some combination of the two. Complementary objectives are to increase (or at the very least maintain) the Airport's contribution to the local economy and improve existing connectivity to other parts of the UK and the wider world.
9.2. Taken together, this represents a challenging agenda, especially in light of the numerous material constraints identified in the opening chapters of this report, notably:
- the infrastructure and operational constraints identified in Chapter 3;
- the difficulty of reducing the Airport's cost base significantly, without substantially reducing its fire cover, opening hours or ability to handle commercial passengers, because of the underlying fixed costs associated with providing fire-cover, air traffic control and security (Chapter 4);
- the competition from other airports, but particularly Edinburgh, and the dearth of opportunities for generating non-aviation property related income in Chapter 5;
- the ticket price and scheduling issues highlighted during interviews with key stakeholders in Chapter 7; and
- the high operating costs per passenger at Dundee, its inability to attract the passenger volumes associated with low cost carriers or the limited scope attract non-passenger related aviation activity because of a lack of physical space as other peer small regional airports have done (Chapter 8).
9.3. However, previous chapters have also identified a number of opportunities which could help to make a contribution to both core objectives, including:
- The fact that increasing the airports throughput substantially should not require much by way of increased operating costs, probably until around 250,000 passengers, and beyond that point economies of scale would continue to kick-in as additional revenues outpace additional costs (Chapter 4).
- There is the underlying market to develop new domestic and add international services, and this could give rise, depending on the success with which the Airport can attract airlines who can then attract passengers from within Dundee's core catchment areas to passenger throughputs of between 75,000 and 400,000 passengers (Chapter 5).
- A steadily increasing catchment population, a number of sectors and major businesses/organisations with quite a high propensity to fly and the prospect of additional inbound visitors being attracted to the V&A and wider Waterfront area, should all expand the potential aviation market over time (Chapter 6).
- Scope exists to generate additional revenues from Business Aviation, Helicopter and GA traffic and also from aviation related property development to service their needs as they grow (Chapter 5).
9.4. In our view, the first challenge must be to maintain the existing London service to allow time to have a long-term replacement lined-up which can take advantage of the airport's potential eligibility for PSO funding from the UK Government[4]. Then to set about realising current known opportunities to capture additional activity, while developing a more detailed and coherent long-term strategy and 5 year business plan to make targeted investments to turn the Airport round.
9.5. In this context, it is worth referring to the seminal study led by Cranfield University for the European Commission back in 2002[5], which concluded that although there would be variances either side, 500,000 WLUs[6] should represent the break-even point for small regional airports (exempting depreciation). This is consistent with our own indicative analysis of what might be required to achieve break-even at Dundee, depending upon the assumptions that are made about what happens to operating costs, the revenue that is achievable per passenger (or WLU) and the scale of increased passenger volumes.
Figure 9.1: Breakeven Analysis for Dundee Airport
Source: Consultant's analysis
Notes: Based on the assumption that 2013 operating costs remain constant until after a threshold of 240,000 pax pa is reached, where-after provision is made for increased in staff costs.
9.6. If revenues per passenger can be sustained at current levels (c£13/pax), whilst growth is achieved in passenger volumes and costs are held steady, then Figure 9.1 points to a breakeven at around 360,000 passengers, perhaps less if other income streams allow the intersect point to move to the right. But we consider it unlikely all these conditions will be in alignment and when additional operating costs are included and revenue per passengers are reduced to £11/pax to allow for discounts and route incentives, then under our "realistic" line breakeven is closer to 500,000. Again this figure could move to the right, but our costs assumptions have made no provisions either for servicing of any CAPEX related debt needed to cater for passenger numbers beyond the estimated 150,000pa capacity of the terminal and apron in their existing form, or for marketing associated with route development. As there is currently only £20,000 pa in the budget for marketing then unless substantial external resources are injected to support the marketing effort, the timeline for achieving this commercial sustainability threshold may need to be substantially extended.
9.7. What is clear, is that there is no imminent likelihood of a material dent being made in the current level of subsidy, and that although investing in non-passenger based commercial activities at the airport could substantially increase current levels of revenue in percentage terms for virtually no additional operating cost, at Dundee this element of the commercial strategy will only ever make a modest contribution because of the physical constraints of the site - it is certainly not the definitive answer to the airport's operating deficit. A commercially sustainable turn round will need, therefore, to be focused much more heavily on attracting new routes and additional passenger volumes. In the face of strong competition from other Scottish Airports (see Table 9.1 below), and this cannot be achieved with current levels of route development and marketing spend.
Source: Consultant's Analysis
9.8. These circumstances are going to put a premium on:
- Marketing the airport heavily to the right carriers so that services can be provided at a price and frequency which will prove attractive to the catchment area - we have good evidence that there is a willingness to pay a premium to use Dundee, but exactly what that premium is on each route and whether that will make the service viable requires further work.
- Offering an airport environment that is attractive both to airlines (in terms of charges and route development support), and to customers (as a result of speedy processing, good local accessibility, competitive car parking prices and an attractive terminal environment).
- Securing the support of key local businesses and other stakeholders.
- Raising the level of awareness within the catchment area.
- Addressing wherever possible any infrastructure constraints to optimise operational flexibility for as many carriers and aircraft types as possible.
- Maintaining a high quality service that attracts repeat users and local pride and commitment to look to Dundee Airport first for their air travel and only thereafter look elsewhere.
9.9. However, implicit in the study brief, was not just a focus on making Dundee Airport more commercially sustainable, but also the need to look at other options such as:
- Closing the airport and hoping a combination of moving the GA activity elsewhere and improving public transport connections to Edinburgh would mitigate some of the economic impact of such action.
- Relocating some or all of the airport's activity to Perth Airport.
- Examining and possibly market-testing alternative governance/ operational options for the Airport (e.g. a tendered management contract or JV with a private sector partner) to see if this can provide better value for money if on-going subsidy continues to be needed - as seems likely for several years at least.
9.10. With this in mind, the next chapter sets out a list of scenarios and associated options, which having consultation Transport Scotland, we have then subjected to a high level evaluation compatible with the STAG stage 1 appraisal.