Benchmarking Airports Based On Their Profitability Frontier - Presentation ICCL 2012

GERMAN AIRPORT
GERMAN AVIATION
PERFORMANCE
BENCHMARKING
Internet: www.gap-projekt.de Contact: info@gap-projekt.de
Benchmarking selected European Airports based on a Profitability Envelope A Break-Even Analysis
Branko Bubalo University of Hamburg GAP Research Project Berlin

branko.bubalo@googlemail.com
3rd ICCL at Shanghai Jiaotong University Shanghai, September 24th 2012
ICCL Shanghai 23.09.2012 Branko Bubalo
partner/sponsor:
Page 1
GERMAN AIRPORT PERFORMANCE
GERMAN AVIATION BENCHMARKING
Contents
1. 2. 3. 4. 5.
Introduction Theoretical Background and Data description Application of the maximum profitability envelope Break-Even analysis Conclusions and Outlook
Page 2
Introduction and Motivation
Partial results from benchmarking studies on Norwegian and European airports Extension of financial and operational Database Limited perspective on Profits or Losses (EBIT) and ratio unit profits (EBIT per PAX) as main performance indicator Alternative ratios for measuring airport efficiency: EBITDA per WLU or Net Result per PAX
Critical Questions: What is the critical mass to achieve a break even? Where does the break-even point and the frontier shift over the years? How do individual airports perform relative to the envelope? How big are the potential efficiency gains?
ICCL Shanghai 24.09.2012 Branko Bubalo Page 3
Theoretical Background: Basic Model
Simple structured Input-/Output Model Just 2 aggregate measures: Annual EBIT and total PAX EBIT = Revenues Costs Depreciation PAX demand has input/output characteristics, especially when airport is viewed as server or hub.
Inputs Depreciation of Assets Costs Facility Capacity Outputs EBIT
Production Process
financial operational
Revenues
arriving PAX originating PAX
departing PAX terminating PAX externalities

Page 4
environmental
(Source: Own illustration)
Data Description: Revenues, Costs (log scale) and EBIT

Trends for 139 European airports over 9 years (2002 to 2010*) *except for
Italy & France until 2009
Break-Even Point on average at about 800.000 to 1 Mio. PAX per year

Total Revenues
Total Costs 900
EBIT 10,000
Power (Total Revenues) 800
Power (Total Costs)

Revenue and Costs in NOK (2010 prices) (log. Scale)
Poly. (EBIT)
Revenues = 108.7 * PAX1.03142 R = 0.96 700
1,000
500 100
Costs =
7841.136*PAX 0.72307 R = 0.92

400
300
10
Break-Even Points
1
200
100
Break-Even Line
0
EBIT = 0.0000006*PAX 2 + 34.0532*PAX - 25,972,498 R = 0.84
0 1,000 10,000 100,000 1,000,000 10,000,000
-100 100,000,000

Passengers (log Scale)
EBIT in NOK (2-010 prices)
600
Millions
Millions
100,000
1,000
Page 5
US Case: Revenues, Costs (log. Scale) and EBIT

Trends for 185 US airports over 9 years (2002 to 2010) Break-Even Point on average at about 1-2 Mio. PAX per year
Millions
Operating Costs
Operating Revenues
Earnings before Interests and Taxes (EBIT)

Power (Operating Costs)
Revenues = 13.13x 0.977 R = 0.935
350
Revenues and Costs in constant 2010 US Dollars (log. Scale)
300 Costs = 35.86x 0.887 R = 0.912
100
Power (Operating Revenues)

Poly. (Earnings before Interests and Taxes (EBIT))
250
Millions
1,000
400
200
10
150
100
50 1
Break-Even line
-50
(Source: Own illustration From US Report 127 data, Airports w. less than 2 PAX per Flight and more than 60% Cargo of Total WLU are excluded)
y = -0.0000x2 + 0.9607x - 3,165,992.2051 R = 0.2522 0 10,000 100,000 1,000,000

Passengers (log. Scale)
-100 10,000,000 100,000,000
EBIT in constant 2010 US Dollars
Page 6
Norway Case: EBIT and EBIT per PAX over time

Critical Mass to make profits lies around 2 million PAX Lower end of Airports has sharply increasing Losses per PAX How can the dynamic trend be captured?

Data points relative to the envelope and break-even line

Keep it simple approach: Groups 1 and 2 consist of unprofitable airports / Groups 4 and 5 are making profits / Groups 2, 3 and 5 represent benchmarks which define the Profitability Envelope
EBIT per PAX Group 1 Group 2 Group 3 Group 4 Group 5
Profits
+
Break-Even line
(maximum) Profitablity Envelope
Losses
: Data Point : Benchmark

not profitable, benchmark not reached not profitable, benchmark break-even point profitable, benchmark not reached profitable, benchmark
PAX
Page 8
Algorithm producing the profitability benchmarks: i = 1 to n PAXi < PAXi+1 < < PAXn i=1 Benchmarki = EBIT per PAXi # n = Number of airports in the sample. # Sort PAX column in ascending order. # Initialize with first data point in EBIT # per PAX column; # Loop: From the second entry onwards, # new entry is compared, if larger than # last Benchmark. If yes, it is set as new #EBIT per PAX Benchmark (Envelope).
FOR i = 2 to n STEP 1 IF EBIT per PAXi > Benchmarki-1 THEN Benchmarki = EBIT per PAXi ELSE Benchmarki = Benchmarki-1 NEXT END.
Application of the Profitability Envelope on the dataset

1,000 10,000 100,000 1,000,000 10,000,000 100,000,000
500
Break-Even Point
Break-Even Line 0
-1,000 Profitability Envelope Data Points

-1,500
-2,000
-2,500
-3,000

EBIT per Passenger in NOK (2010 prices)
-500
US Case: EBIT per PAX Data and Profitability Envelope

Passengers (log .scale)
10,000 20
100,000
1,000,000
10,000,000
100,000,000
10
EBIT per PAX in 2010 constant US Dollars
Break-Even line
0
-10 Benchmarks
EBIT per PAX -20
-30
-40
(Source: Own illustration From US Report 127 data)

Europe: Annual Profitability Envelope (2002-2010)

1,000 10,000 100,000 1,000,000 10,000,000 100,000,000
500
Break-Even Line
-1,000
Profitability Envelope 2002 2002
Profitability Envelope 2004 Profitability Envelope 2006 Profitability Envelope 2008 Profitability Envelope 2010
2004 2006 2008 2010 -2,000

-1,500
-2,500

-3,000
EBIT per Passenger in NOK (2010 prices)
-500
Page 12
Break Even analysis

Cumulative EBIT and EBIT incl. efficiency gains for 140 Euro airports Shift of Break-Even Point
Percentage Rank of Sample of 140 European Airports ordered by EBIT
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
60,000 Cumulative EBIT in 2005 Cumulative EBIT in 2007 Cumulative EBIT in 2009 Cumulative EBIT incl. efficiency gains in 2005 Cumulative EBIT incl. efficiency gains in 2007 Cumulative EBIT incl. efficiency gains in 2009
40,000 50,000
Efficiency Gain
30,000
20,000
Shift of Break-Even point
10,000

-10,000
Page 13
Earnings before Interests and Taxes (EBIT) in Norwegian Kroners (2010 prices)
70,000
Millions
80,000
Conclusions
Maximum profitability envelope gives benchmarks relative to airport size without the need of arbitrary classifications. Feasible Efficiency gains, by adjusting to best practices, are substantial. Scenarios towards changes in Revenue/Cost structure can be quantified, e.g. in a cost-benefit analysis (CBA) regarding changes in Airport Charges scheme.
Page 14
Thank you for your attention! Questions? Suggestions and Comments are welcome. Please see paper published in Lecture Notes in Computer Science 7555 (ICCL Proceedings).
branko.bubalo@googlemail.com www.gap-projekt.de
Page 15

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GERMAN AIRPORT

Internet: www.gap-projekt.de Contact: info@gap-projekt.de

Benchmarking selected European Airports based on a Profitability Envelope A Break-Even Analysis

Branko Bubalo University of Hamburg GAP Research Project Berlin

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

ICCL Shanghai 24.09.2012 Branko Bubalo

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

Introduction and Motivation

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

Theoretical Background: Basic Model

arriving PAX originating PAX

departing PAX terminating PAX externalities

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

Data Description: Revenues, Costs (log scale) and EBIT

Break-Even Point on average at about 800.000 to 1 Mio. PAX per year

Power (Total Costs)

Revenues = 108.7 * PAX1.03142 R = 0.96 700

7841.136*PAX 0.72307 R = 0.92

0 1,000 10,000 100,000 1,000,000 10,000,000

(Source: Own illustration)

Passengers (log Scale)

EBIT in NOK (2-010 prices)

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

US Case: Revenues, Costs (log. Scale) and EBIT

Earnings before Interests and Taxes (EBIT)

Revenues = 13.13x 0.977 R = 0.935

Revenues and Costs in constant 2010 US Dollars (log. Scale)

300 Costs = 35.86x 0.887 R = 0.912

Power (Operating Revenues)

y = -0.0000x2 + 0.9607x - 3,165,992.2051 R = 0.2522 0 10,000 100,000 1,000,000

-100 10,000,000 100,000,000

ICCL Shanghai 24.09.2012 Branko Bubalo

EBIT in constant 2010 US Dollars

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

Norway Case: EBIT and EBIT per PAX over time

(Source: Own illustration)

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

Data points relative to the envelope and break-even line

(maximum) Profitablity Envelope

: Data Point : Benchmark

(Source: Own illustration)

ICCL Shanghai 24.09.2012 Branko Bubalo

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

Application of the Profitability Envelope on the dataset

-1,000 Profitability Envelope Data Points

(Source: Own illustration)

EBIT per Passenger in NOK (2010 prices)

GERMAN AIRPORT PERFORMANCE

GERMAN AVIATION BENCHMARKING

US Case: EBIT per PAX Data and Profitability Envelope

EBIT per PAX in 2010 constant US Dollars

EBIT per PAX -20