Economically Challenged

BOSTON — Some 2,300 airport executives and professionals from around the world gathered here in September for the ACI World/North America Conference & Exhibition. If there was consensus among the group, it was that there are serious issues facing airports globally, and they, like airlines, will need to rethink their business models. That was the core message from keynoter Dr. Alfred Kahn, who says privatization should be encouraged and rates and charges policies rethought. Security remains top of mind, with smaller international airports concerned that mandates often put undue stress on their ability to comply. Other hot buttons: congestion pricing and slot auctions; runway incursions; the environment; and airline consolidation, among others.

Despite the erratic ups and downs in the industry lately, despite record oil prices and increasing congestion, despite new and newer airline fees and heightened airport security; the most refreshing concensus is that everyone sees the industry moving continually in one direction…forward.

Director of ACI World Angela Gittens, who formerly headed up airports in Miami and Atlanta, highlighted the relationship of airports and airlines — citing rising operating costs, mergers, and bankruptcy as causes for long-term planning on all airport operational fronts. Gittens notes that the industry should expect a growth of 4 percent globally during the next 20 years. That growth could be the result of increasing privatization, which Jim Cherry, president and CEO of Aeroports de Montreal (ADM), says is a reality as “ACI is fundamentally opposed to regulation.”

Dr. Kahn, a 91-year old spry man known as the “father of deregulation” and professor emeritus at Cornell University, shares Cherry’s sentiment on privatization, stating that “to depend on Congress is to wait forever; [the industry] must be privatized.”

Dr. Kahn asks, “Have we reached a point at which we can’t continue to make it easier for people to travel all over the world?” His reply was, with oil at $100 per barrel, things may be manageable; at $150 per barrel … the situation could drastically change travel habits.

Regarding airport congestion, Dr. Kahn says the current system of weight-based pricing by airports is absurd. “You couldn’t devise a system of pricing that was more perfectly prepared to create congestion.” he says. Kahn presses the need for more intelligent pricing as well as more inter-airport competition.

“Leave it to the market, intelligent pricing, and the adaptability of the airlines,” says Dr. Kahn. Toward that end, he also calls for the privatization of the air U.S. air traffic control system.

John D. Clark III, A.A.E., executive director and CEO of the Jacksonville Aviation Authority, and the incoming chair of ACI-NA, finds merit on Dr. Kahn’s position.

Says Clark, “I agree with him 100 percent; in fact, I have this conversation often. An interesting thing to me about this industry is, year after year we do the same thing but there seems to be an expectation of a different result. There is a hesitation to truly change business models. It’s so institutionalized.

“Everything we do [at Jacksonville], we look at what kind of return are we going to get on that investment? And there are things that you decide that you just can’t get the appropriate return, so there’s got to be another way, and you don’t do it.

“At some point I think the airlines and airports have got to come together and understand that we’re really in the same business.”

Clark also agrees with Dr. Kahn on the need to privatize the ATC system in order to get it modernized, which he sees as the system’s number one challenge. “A privatized air traffic system, I think, would benefit the U.S.,” he says. “Why couldn’t we allow private interests to put the capital investment in and recoup the costs? We don’t have to do it in one fell swoop. Just like they have demonstration programs at TSA, or the FAA pilot program for privatization, why couldn’t you take a region of the country and begin with some kind of incubation program? FAA already contracts for some tower operations.”

Speaking of Congestion
Edward Faberman, executive director of the Air Carrier Association of America, raised an important question asking the panel of guest speakers: “Where have we protected competition, and what changes are being made that are going to promote and improve the airspace system?”

Slot auctions and passenger delays were at the forefront of the congestion management session.

“Delays are significant,” says Faberman, who referenced out-of-control flight delays over the last year which usually began at one of New York’s three metropolitan airports.

The delays are a result of major congestion at airports across the country. Takeoff and landing slot auctions have been proposed as a solution to congestion, though Faberman believes the auctions will only stifle competition among airlines. If the government were to put up 70 percent of airport slots into an auction format, then maybe that would increase competition, Faberman says.

“If you want someone to add flights and people want real competition from low-cost carriers, that isn’t going to happen by auctioning just a handful of slots,” says Faberman. “Yes, we support modernization of the system…, Congress has to move forward. Let’s not take small steps that are going to hurt our future just so we can say we’ve accomplished something.”

The privatized airport system of Europe has not had the same congestion problems as the United States, notes David McMillan, director general for Eurocontrol, the European Organization for the Safety of Air Navigation.

“We produce a myriad of statistics on a regular basis which show those airports which cause the most delays in the European air traffic network, and for the past couple of years, New York has figured very largely among those airports causing delays,” says McMillan.

McMillan talked of three ways to properly manage congestion: increase and optimize capacity; congestion pricing when necessary; and thinking in terms of the entire system as a whole.

“It is my belief that we need to stop talking about an air traffic control system, we need to stop thinking of airports as being nodes; and think about an aviation system where airports are absolutely integral to the planning, optimization, and management of the system,” McMillan says.

Douglas Lavin of the International Air Transport Association (IATA) suggests the use of IATA’s Worldwide Scheduling Guidelines, a process which governs the allocation of slots at congested airports. The guidelines, which have been used successfully for 60 years according to Lavin, are used at 140 airports worldwide.

“Why focus on economic experiments when we should be focused on increasing capacity?” asks Lavin. “The idea that you need to protect competition at New York airports is ludicrous, you look at the number of flights, number of carriers, number of destinations; I find it hard to believe that congestion at New York airports should be suffered at the expense of the so-called need for increased competition.”

The future of airline consolidation
The panel for this session agrees that airline consolidation is at least part of the solution for airlines struggling to stay aloft amid rising fuel costs and deteriorating cost savings. While consolidation may seem inevitable, a lively debate emerged about just how airlines should align with each other in a way that antitrust regulators, shareholders, and workers’ unions can all approve.

Bill Swelbar, research engineer at the Massachusettes Institute of Technology international center for air transportation, and, prolific industry blogger at swelblog.com, states that Wall Street has shown us that consolidation occurs in two ways: financial pressures and merger & acquisition activity.

“While true that some financial institutions may be to big to fail, can the same be said of the airline industry? And we do need to stop thinking about this in U.S.- centric terms,” said Swelbar.

Swelbar relates that the industry is fragmented; it has chronically over-expanded in the up-cycles, and has not had the discipline to remove uneconomic capacity in the down-cycles.

“Markets punish excesses- but aren’t many of the excesses in this industry the result of an industry that has too many stakeholders standing in the way of an industry that has needed to consolidate for years?” asks Swelbar.

Paul Rice, Deputy President of the International Federation of Air Line Pilots Associations (IFALPA), agrees that it is a global issue, not a U.S.- centric issue, but agreement between the two would be sparse throughout the rest of the session. Rice and IFALPA represent more than 100 pilot organizations in more than 150 countries, not all of which are labor unions, “but they all support this profession and its pilots.”

“I’ve seen the effects of deregulation, not only on the corporations, but also on the laborer, and I can tell you that the last 30 years has not been the kindest to laborers,” says Rice.

In the face of consolidation, Rice asks if this is something that labor can embrace. His answer: “If [labor] is part of the solution, it’s doable; if we are left at the end of the day with an ultimatum, than no.”

“Capital is global, and labor is local,” says Rice. “It puts labor at a distinct disadvantage. In order to bring this industry together, we not only have to look at laws of commerce, which seem to be looked at first as the world globalizes, but also we have to look at labor law.

“Unless there is a law that allows [pilots and flight attendants] to negotiate their wages, working conditions, and terms with their employer, which is now a holding company, we are not going to be able to sustain this industry as we know it.

“Are we going to get to big mergers? Yes, I think so. Are we going get to transnational mergers, again I think so…but labor has to be part of the equation, and it has to be part of the equation early.”

Swelbar disagrees with the “labor is local” mantra, stating that what makes labor local is seniority, and seniority marries labor to a carrier and “provokes the most fundamental, parochial protections that you can have.

“Until we take away the most fundamental issue of seniority, labor is capital,” says Swelbar.

Rice counters by talking about seniority’s genesis, which he states, was safety.

“We can’t get rid of seniority because it does have safety implications.”

The two areas that will lead this discussion on a global basis will be North America and Europe, relates Swelbar.

“All I’m suggesting is that I think there is something fundamental. I do believe there are potential for mergers, or capital to be exchanged between a U.S. company and a European company,” says Swelbar.

IT Strategies
Jan Marshall, chief information officer for Southwest Airlines, notes that Southwest was the only U.S. airline that saw a profit last quarter, thanks in part to an innovative technology department.

“There is a great deal of focus on product development for increased revenue generation,” says Marshall.

Marshall outlines various technology initiatives which are currently being utilized by Southwest. These initiatives include express baggage drop, paperless check-in and boarding technologies, mobile technology, and a new business select program. The business select program, introduced late last year, allows for priority boarding, rapid reward credits, and free drinks during flights.

As far as what’s most important, Marshall relates that “operating in more than 60 airports, it’s important to implement standards for common-use equipment at airports.”

Marshall says that Southwest is working to replace current standards with a stable vender who will provide independent industry standards for common-use equipment, using a single low-cost approach.

IBM’s executive consultant and Airline SME, Bruce Methner comments, “unlike many others who have worked in the airline industry, I gained my job through deregulation as opposed to lost my job through deregulation.”

Methner points out a well-known sentiment within the industry that airlines and airports do not always face similar dynamics. While airlines look to differentiate products, promote growth of a low-cost model, and extend the role of alliances while facing rising fuel costs and fleet modernization, Methner explains that airports face capacity constraints, retail development, increased revenue from alternative sources, and reassessment of changing models beyond landing fees to accommodate different models. Politically, airlines deal with issues of deregulation while airports consider privatization.

But the airport is an engine of growth, explains Methner, and jointly, airlines and airports can work together to increase passenger growth, decrease security costs, provide enhanced customer service, receive funding for capital improvement, and efficiently manage workforce as well as introduce and deploy emerging technologies.

“Many investments that airlines are making to retain customers and differentiate services affect the airport relationship,” says Methner. “We look to a variety of common solutions that will bring a standard to a particular location.”

Methner says that by 2010, the preferred method of check-in will be via mobile phones and personal digital assitants, a technology now available at Houston Hobby Airport. Regarding upcoming technologies for airports and airlines alike, Methner mentions paperless boarding and trusted traveler pre-clearing at security and screening; radio-frequency identification (RFID) technology and self-bag check-in; passenger value services like in-flight connectivity and wireless internet; biometric badging and non-intrusive scanning; and finally, airport authority linkages such as landside/airside collaboration and customer loyalty analytics.

“Touch-points between airlines and airports are growing significantly,” says Methner. “We are looking more toward a connected infrastructure which is linking together not only the airlines, but the third-party service providers and the airport’s facilities and services systems.”

The incursions hot button
According to FAA associate administrator for airports D. Kirk Shaffer, a priority at the agency is reducing runway incursions, be it aircraft or ground vehicle operations.

Measures being taken by FAA include airfield driver training, which must be done annually and will be required to complete.

“If [drivers] are on your airfield, I want them trained, and you should too…” says Shaffer, “…regardless of who signs their paycheck.”

Another major concern for safety is enhanced taxiway centerline markings, a measure that “is cheap (some $1500- $2000 per runway/taxiway intersection) and must be done,” says Shaffer.

“All pilots, regardless of their stripe, every one of them said this works. I will pay for it right off the top of the Trust Fund; no excuses for not doing this. Please, please, please push forward with enhanced taxiway centerline markings.” FAA has provided $240 million towards runway safety improvement projects, and between now and 2010, it expects to provide another $1.1 billion, according to Shaffer.

Yong Wong of the International Civil Aviation Organization (ICAO) indicates that air traffic based on the number of flights will triple by 2025 compared with 2005. Safety, says Wong, is ICAO’s first priority.

According to Wong, compatibility issues with airports accommodating new larger aircraft is something that must be addressed.

“The principle challenge of [airport] operators will be to provide sufficient [aircraft] capacity and efficiency without adversely affecting safety,” says Wong. “Aerodrome certification is an effective tool to ensure aerodrome safety, because through the certification process you make sure that airports are complying with safety requirements.”

Runway safety, as defined broadly by the Flight Safety Foundation, includes runway incursions, excursions, and confusion, says Bill Voss, president and CEO of the Foundation. Voss reminds that while there are not a lot of accidents, incidents are numerous.

Voss points to new data regarding runway excursions for this year warning that “this has been a horrendously bad year for runway excursions.” Voss relates that just because of the data regarding excursions, incursions and confusion should be paid attention to as well.

“It’s about severity and probability,” says Voss. “You need to be on-guard against runway incursions, but you also should realize it is absolutely clear from the data, the next fatal accident you’re probably going to have at your airport is probably going to be a runway excursion. The probability is just overwhelming.”

(The 2008 safety and accident report can be found on the Flight Safety Foundation website: www.flightsafety.org.)

Security Harmonization
Vigilance must be eternal, and so too must be the commitment to progress; falling behind will only bring terrible consequences, says Kevin McGarr of the Canadian Air Transport Authority. Progress, some say, includes the standardization of security at airports worldwide.
While there are benefits to not falling into predictable patterns, or promoting the same security outcomes at all airports, McGarr also notes that we do not need to treat all airports exactly the same.
“What is good for one airport may not be good for another,” says McGarr. “One size does not fit all in terms of security procedures. What interests us is not uniformity of procedure, but uniformity of result. We need to work more closely with local airports to develop solutions that work for them.”
The TSA’s Mike Golden began by explaining the checkpoint evolution. The three main areas of focus for the TSA are the people, the process, and the technology, said Golden. Golden, as the chief technology officer, focused on the tech aspect of airport security.
Advanced Technology Screening has been the workhorse of the checkpoint, says Golden. These machines give the TSA huge capabilities in terms of multi-view capability, advanced imaging technologies, and automated detection. New whole-body imaging technology gives TSA “phenomenal capabilities” despite the privacy issues the technology raises.
Baggage screening technology improvements have also been made which have reduced false alarm rates and improved image quality and detection, says Golden.
TSA’s Systems Integration Facility (TSIF), opening in December, is a testing facility which contains a full inline system to simulate an airport environment and a small cargo area to test cargo technology as well, explains Golden.
“We have also been trying to harmonize with our partners overseas,” explains Golden regarding international security standards. “Just recently, we have signed a number of agreements with our European Union partners; for the first time we are actually able to share classified data, so we can start harmonizing.”
Airports are in the business of human beings, and they have to find a way to understand how they are going to deal with this global challenge, says Monhla Hlahla, CEO of the Airports Company South Africa. Hlahla backed her claim with the fact that airports facilitated about 4.7 billion passengers worldwide in 2007.
Strengthening the weakest link, as Hlahla relates, includes thinking of civil aviation as a network, making aviation security an integral part of national and global security, a call for innovation in ICAO and strategy review, and taking a system view to the problem by seeking to maximize strategy.
“I believe that we must incentivize ICAO and government,” says Hlahla. “Together, our views on security must stop being just about a new screening tube, or new automatic technology. It’s got to be very systemic; we should approach it the way we approach our businesses, otherwise, the smaller airports in the world will grow in their weakness.”
Tim Anderson of Minneapolis St-Paul International Airport stresses the importance of creating equilibrium. Anderson calls for analyzing state government funding versus industry funding, system needs versus budget reductions, reality versus expectations, human factors versus technology, and security versus privacy.
“The new normal, as I see it, is the same as the new trend that we have, and that’s in trying to develop a balance amongst a number of different things regarding security,” says Anderson. “Creating that balance is not very easy.”
As far as funding goes, Anderson believes that if we have an ongoing war on terrorism, than it should be the national governments and the states that provide the funding, not the airports. Anderson adds that ACI’s position on the issue is clear: Aviation security is part of a national security.
“It is the state and its foreign policies that are a target of terrorism; airports are simply the stage upon which that is acted,” said Anderson.
Theresa Coutu, director for Jacobs Consultancy, echoes Hlahla’s remarks on strategy relating that airports need to implement a common approach to flexible solutions with strategic analysis.
Coutu says airports must broaden their perspective and push for international standards. “Sustainable security solutions need to be developed and adapted regularly using strategic planning and analysis that finds the sweet spot for maximizing investments…, and sustainable security solutions need to also address non-security issues,” says Coutu.

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