SINGAPORE: Singapore’s Changi Airport has created a league of its own in the region.
With over 100 airlines and 60 million passengers in 2017, the airport has won the Skytrax Best Airport award for the last five consecutive years.
But it is coming under pressure to break new ground and strengthen its value proposition to win over critical masses of consumers and airlines as competition intensifies.
Asian and Middle Eastern airports are fast developing their capabilities to be high-potential hub airports, meaning more hub airports competing to capture the region’s growing traffic.
Today, airports are more than just transport hubs. They are transforming into bustling lifestyle, entertainment and travel destinations.
Beyond function, airports today are all about creating a unique experience for the travelling public. They represent colour, culture, cuisine and connectivity. They operate for performance, efficiency and service excellence.
The Changi East development, with the Terminal 5 projected to be ready by the late 2020s, is the most recent strategic move to enhance Changi Airport’s competitiveness as well as to serve the growing demand for air travel.
Set to be one of the largest airport terminals in the world, authorities say it alone will be able to handle 70 million passengers a year.
This massive development will require significant investments. The magnitude of the project and its complexity alone suggests there will be many risks involved in its execution.
Questions have arisen in recent months. What is the airport’s investment strategy? Will the new development escalate airport charges?
Will this impact Changi Airport’s competitiveness? Will partner airlines and passengers stand to gain or lose?
RESPONSIBILITY OF A FEW?
According to a recent statement from the Ministry of Transport, a large portion of the funding for airport development will be borne by the Singapore Government. This is not unexpected as the country will benefit from the externalities and the value generated from such a strategic investment.
Another chief responsibility lies in the hands of the operator Changi Airport Group which has also expressed the willingness to fund the project partially by plowing back a significant percentage of their cashflow and raising debt using their balance sheet.
This would provide some relief to the Government as it grapples with a tightening fiscal position and competing development needs in other sectors, not least in rail infrastructure and healthcare.
It may be an easy option for the Government to pass the financial burden of development to the citizens. But it seems the Government recognises that it is not fair to raise income taxes to fund airport development as a significant percentage of airport users are not taxpayers.
A PRUDENT OPTION ARISES
It makes economic sense for direct beneficiaries of airport infrastructure development to partly fund such investments. Airlines and travellers may be willing to pay premium or minimum increase in charges for both better services and experience.
There are many airports around the world that are either considering or have already taken a similar approach. For instance, Japan is considering charging a departure tax of approximately S$12 later in 2018 to fund tourism infrastructure and promotions.
The Hong Kong International Airport has already been collecting between S$12 and S$31, depending on the class of travel and flight duration. In 2016, the Middle East airports in Dubai, United Arab Emirates and Qatar also introduced a departure tax of S$13 mainly to fund their airport development projects.
But is this the best option? As the argument goes, in countries that charge the highest flying fees, estimates suggest abolishing additional costs could significantly boost tourism.
According to the International Air Transport Association, if Australia were to abolish passenger movement charges (previously departure tax), it could garner an additional tourism revenue of A$1.7 billion (S$1.77 billion).
In this context, can Changi Airport increase airport charges and retain its competitiveness as an international air hub?
My view is we need to take a more nuanced view of how travellers make their decisions. The cost to airports as well as airlines to serve origin and destination (O&D) travellers versus transfer passengers is different. Similarly, there are clear differences in travellers’ propensity to travel and absorb related costs.
In my experience, over 90 per cent of O&D passengers lock in a destination even before they look at the price. They consider the overall trip cost, with the overall ticket price as a component (and airport charges as only a small sub-component).
In fact, more than 90 per cent of passengers in this category do not even recall the amount of airport charges they paid on their tickets.
Hence, the Hong Kong International Airport was able to take the approach of collecting up to S$31 per traveller. In fact, Hong Kong expects that seven in 10 passengers can expect to pay S$17.
Transfer passengers, on the other hand, can be more price sensitive. While many are willing to pay a premium for direct flights, there are also passengers who prefer to substitute a direct flight with an indirect flight to save money.
This, in a way, explains the current strategy of Changi Airport to levy much lower fees of S$6 on transfer passengers compared to O&D travellers who pay fees of S$34.
The impact on partner airlines of Changi Airport will be similar.
Although airport charges are a small percentage of the overall operating costs (less than 5 per cent of the operating cost of full service carriers at Changi Airport comprises airport charges), any increase should be carried out with care given the thin margins of airlines.
Therefore, it is important to evaluate any increase in costs against airlines’ ability to transfer these to the passengers. This is also important because airlines today face stiff competition resulting in strong pressure on yield.
While it is relatively easier for airlines to pass the costs if levied directly on passengers, the airport operator may need to ensure that such charges remain as a small percentage of the overall ticket pricing.
GOOD SENSE TO IMPLEMENT CHARGES NOW
As expectations that additional fees will be levied soon are rife, my view is it makes good sense to implement the charges now rather than wait until Terminal 5 is completed.
The costs of development are incurred now and collecting them now will save the compounding effects of costs.
There are also many precedence of charging ahead of completion of a project. Apart from Hong Kong, other airports such as Dubai, London Heathrow and multiple Canadian airports have introduced or raised airport charges to fund development projects.
To ensure future generation of airport users are not burdened, both airlines and consumers should look at it positively as paying it forward.
In return, Changi Airport will need to sustain its efforts and continue to deliver value as both an experiential lifestyle destination and an award-winning international air hub.
Hean-Ho Loh is partner and global lead for transportation infrastructure and airports at the Boston Consulting Group.