Hunting for Airport Revenue Optimization

Table of Content

A - Abstract

C - List of Figures

D - List of Abbreviations

1 - Introduction
1.1 Scope and Objective
1.2 Approach and Methodology

2 - Airport Revenue Structure, Retail & Processes
2.1 Airport Income
2.1.1 Aeronautical Revenue
2.1.2 Non-aeronautical Revenue
2.1.3 The Increasing Importance of Commercial Revenue
2.2 Airport Retail
2.2.1 The Significance of Airport Retail
2.2.2 Retail Categories
2.2.3 Airport Retail Calls for Modifications
2.3 Setting the Scene for Airport Retail
2.3.1 The Airport Travel Chain and Passengers Mindset
2.3.2 Shopping Motivation and Impulse Buying Tendency

3 - The Airport Retail Business - Concepts under Pressure
3.1 Different Perspectives but one Direction
3.2 Airline’s Ancillary Revenue Growth Efforts
3.2.1 Airlines Push Limits of Selling Onboard
3.2.2 Communication Beforehand
3.3 Airport Retailers on the Move

4 - Facing Future Challenges at Copenhagen Airport
4.1 Copenhagen Airport - The Vision of Retail Business Excellence
4.1.1 CPH - An Airport Profile
4.1.2 CPH and the Status Quo of European Airport Retail
4.1.3 Airport Vision and Strategic Focus Areas
4.2 Extraordinary Customer Experience
4.2.1 Airport Shopping has gone Digital and Mobile
4.2.2 Engaging Customers with Social Media
4.2.3 ‘CPH Advantage’ meets ‘Earn & Burn’
4.2.4 Redefining Luxury at CPH
4.3 Competitiveness
4.3.1 Advantage through customer surveys
4.3.2 Customer Segmentation and Service
4.3.3 Competing with Downton Retail
4.4 Efficient Operations
4.4.1 Security Control can make the Difference
4.4.2 Improved Passenger Guidance
4.4.3 Passenger Relaxation as a Booster for Retail
4.4.4 Successful Airport - Retailer Collaboration

5 - Management Recommendations
5.1 Competitiveness
5.2 Extraordinary Customer Experience
5.3 Efficient Operations

6 - Conclusion

E - Appendix

F - References

A - Abstract

The aim of this thesis is to investigate the latest challenges and trends in airport retail using the practical example of Copenhagen Airport. Driven by the steadily increasing cost pressure on European airports, operators need to develop new sources of revenue. The greatest po- tential in generating additional revenue to combine reasonable income with high profitabil- ity can be found in the non-aviation sector, particularly in the travel retail segment. The re- search, however, revealed that airport retail is not always a fast-selling item. The market experiences extensive challenges driven by advanced airline retail activities or online sales developments.

In order to face the recent challenges, the importance of commercial revenues for airport operators needs to be evaluated firstly. Moreover, characteristics and specialties of travel retail have to be analyzed. Based on that, the thesis explores some of the key factors, such as market trends, economical changes and technical developments, which are leading to an ever-challenging environment for airport retail managers. Finally, the research paper aims at elaborating resulting challenges and future opportunities by providing new ideas and solu- tions in optimizing airport retail for European airports in general and Copenhagen Airport in particular. To conclude the master’s thesis, a summary is presented reviewing all findings.

The overall research results reveal that Copenhagen Airport’s retail philosophy has adapted to the dynamic changes in the airport retail segment. However, there remains significant room for further improvement in order to combat future challenges on the travel retail market. Furthermore, my results and recommendations can be transferred to the benefit of other airport retail managements as well.

C - List of Figures

Figure 2.1: Global Airport Revenue Streams 2012 in Billion USD

Figure 2.2: Airport Operating Revenue Sources

Figure 2.3: Global Aeronautical Revenue by Source in 2012

Figure 2.4: Global Non-Aeronautical Revenue by Source in 2012

Figure 2.5: Relative Growth of Airport Retail in Europe

Figure 2.6: Segment Split of Revenue and EBITDA at Frankfurt Airport

Figure 2.7: Airport Retail Segmentation

Figure 2.8: Commercial Space Allocation in Airport Retail

Figure 2.9: The Airport Passenger Travel Chain

Figure 2.9: The Travel Stress Curve

Figure 2.11: Factors Influencing the Dwell-Time

Figure 2.12: Airport Impulse Maximizer Elements

Figure 3.1: Increase in Airline Onboard Sales

Figure 3.2: Increasing Onboard Sales with Innovative Approaches

Figure 3.3: BA’s Deliver-To-Seat Shopping Experience

Figure 3.4: Heinemann Pre-Order Concept

Figure 4.1: Annual Transfer and Passenger Statistics

Figure 4.2: Copenhagen Airport Terminal Layout

Figure 4.3: CPH ASC Retail Revenue / Revenue per Passenger

Figure 4.4: Retail Revenue per Passenger in Europe 2012/2013

Figure 4.5: Facts About Copenhagen’s ASC

Figure 4.6: Danish Products Presented in the Tax-Free Store

Figure 4.7: Tax-Free Pre-Order Offer on the CPH Landing Page

Figure 4.8: CPH Tax-Free Arrival Store

Figure 4.9: Promoting Retail Via the ‘CPH Airport’ App

Figure 4.10: Innovative Augmented Reality Allows Navigating Inside the Terminal

Figure 4.11: New E-Commerce Solution Providing a Mobile Tax-Free Offer

Figure 4.12: CPH Promotes Shopping Events on Facebook

Figure 4.13: Facebook Engagement Scale in 2013

Figure 4.14: CPH’s Customer Loyalty Program Components

Figure 4.15: ‘CPH Advantage’ Presence in the Mobile Application

Figure 4.16: Promoting Top Danish Designers at the ASC

Figure 4.17: The New ‘CPH Ideas’ Platform

Figure 4.18: CPH’s Chinese Mobile Application

Figure 4.19: Chinese Shopping Guides at CPH

Figure 4.20: CPH City Retail Competition

Figure 4.21: Security Waiting Time Information at CPH

Figure 4.22: Shopping Carts are Available at the Walk-Through Duty-Free Store

Figure 4.23: CPH Way Finding Via Mobile Application

Figure 4.24: Service Staff Equipped with Google Glasses

Figure 4.25: Long and Unassisted Walk towards CPH Go

Figure 4.26: The CPH Transfer Center

Figure 4.27: CPH Departure Gate Lounges

D - List of Abbreviations

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Chapter 1 - Introduction

1.1 Scope and Objective

Over the past decades, the airport industry has undergone major structural transformations. One can say, the nature of air travel in Europe has changed dramatically. De-regulation, changes in ownership structures, a new understanding of the mission of an airport and the significant growth of passenger numbers are just some of the main drivers of an ongoing change, which shows no indication of slowing so far. Another aspect is the almost unstoppable conversion of airports from ordinary means of public transportation into multiple purpose economic entities. Originally designated as simple departure and arrival points for passengers, today's international airports provide a vast variety of non-aviation related commercial services and facilities. Traditionally, airports have always been important components of regional economic development. Nowadays, though, the bandwidth of commercial services ranges from shopping and various hospitality services to car parking or rental and property management, just to name a few examples.

However, this development cannot hide the fact that the airport business has evolved into a dynamic and competitive industry. European airports are suffering from an ever-increasing pressure by airlines to keep their aviation costs down. The ongoing cost-cutting of carriers for instance has changed the focus of airport management in a certain way. Since the contemporary aviation environment is highly competitive, airports are hunting more and more for profitability; they are forced to be attractive and effective to survive. Consequently, the cost pressure is creating the constant urge to develop new sources of revenue.

Therefore the non-aeronautical sector has become a central component of airport income in the light of changing economics in the aviation industry. Modern airports regardless of their size and location have attempted to increase their share from commercial activities in order to reduce their dependency on airline fees. Furthermore, income from non-aviation related business is urgently needed to generate e.g. funds for investment in infrastructure and development. Regarding the fact that shopping is one of the most popular activities of travelers, the greatest potential in generating additional revenue from non-aviation activities can be found particularly in the retail business. Using retail sales to supplement airport incomehas become extremely important for airports to enhance revenue streams and subsequently the profitability of the airport business in general.

In the recent past, the economic pressure on airport retail activities has even increased fur- ther since airlines and major travel retail groups are trying to affect their market share in travel retail. Furthermore, these trends are reinforced by continuous developments in in- formation technology and the respective online channels. As a consequence, airports are aiming for more innovation and interaction with its retail customers in order to keep the pace of the air carriers.

A paramount example of an airport which successfully copes with the emerging threats can be found in Copenhagen Airport. Scandinavia’s largest airport is an aspiring hub in interna- tional air transport. Since decades, Copenhagen Airport fills a role model function in the field of non-aviation activities of the European aviation industry. Central to Copenhagen’s strate- gy has been the growth of retail operations at the own Airport Shopping Center. In the meanwhile, Copenhagen’s effort in generating additional income from retail operations has reached imposing levels. Based on a clear strategic focus and vision, the airport has applied a great variety of measures and promotional activities to increase revenue from retail opera- tions.

This master’s theses is going explore the diverse topics of airport retail by presenting and discussing basic principles as well as latest trends and developments of retailing within an airport environment. In particular, the thesis is based upon the following research questions:

Research question 1:

Can revenue from general non-aeronautical activities and airport retail in particular be considered as leading airport income sources of the future?

Research question 2:

What are the most recent challenges and retail trends commenced by airlines and ma- jor travel retail groups, which have the potential to endanger traditional airport retail?

Research question 3:

How is Copenhagen Airport approaching the upcoming challenges in order to meet the changing demands of the market and to assure a lasting retail success at the airport shopping center?

1.2 Approach and Methodology

In order to address the research questions accordingly, it is essential to break down the main topic into its elements and to plan a stepwise research accomplishment.

The first chapter is going to cope with the theoretical framework and offers some useful in- sights into the network of distinct revenue streams of an airport. Based on that, I am going to examine the increasing significance of airport retailing for the European aviation industry. Moreover, I will refer to important airport passenger processes and the respective customer behavior and motivation connected to airport retail. The theoretical basics are seen as a suitable starting point and are brought into focus in the progress of this thesis again.

Secondly, I am going to investigate the latest trends and changes in the aviation retail indus- try which have an economic impact on the success of airport operators. Beginning with a brief discussion on the general airport-airline relationship, I will outline some trend-setting measures and innovative examples applied by airlines and airport retail companies. Moreo- ver, subsequent technological challenges are highlighted as well. In the face of their future retail success, airport operators and retail companies should be aware of these trends and their associated circumstances.

Chapter 4 copes with the implementation of the previously elaborated theoretical principles into a dynamic airport retail environment using the practical example of Copenhagen Airport. This chapter is of key importance within this thesis. At this point, innovative methods and approaches will be encountered to keep the airport’s ability to grow retail sales and increase non-aeronautical revenue. The resulting findings will be supported by my personal perceptions from numerous research trips to Copenhagen Airport.

In order to review all findings and key information compiled before, the last and conclusive chapter will illustrate specific management recommendations for the airport operator of Copenhagen. Furthermore, considerable practical actions are proposed in order to further increase retail revenue at the Copenhagen Airport Shopping Center.

Finally, a conclusion will be presented summarizing all findings of the master’s thesis.

Chapter 2 - Airport Revenue Structure, Retail & Processes

This first chapter is going to cope with general theoretical basics and offers some useful in- sights into the network of distinct revenue streams of an airport. The classification of airport income sources is a valuable starting point for the following research. Based on that, the aim will be to highlight the importance of non-aviation revenue. In a second step, I am going to examine the increasing significance of airport retailing and how retailing operates within an airport environment. Finally, I will refer to important passenger processes at an airport and the respective customer behavior and motivation resulting from certain stages within the air travel chain.

2.1 Airport Income

According to the ‘Airport Economics Report 2013’ conducted by the global trade representa- tive of the world’s airports called Airports Council International (ACI), the total airport in- come reached USD 117 billion in the year 2012. The survey covers more than 650 interna- tional airports of varying size representing almost 70% of the worldwide traffic. The estima- tion of the ACI economists shows that the global airport income remained in stable position over the past few years, despite the ongoing economic uncertainties within the Euro area and the significant slowdown in major emerging markets such as China (ACI 2013a, p. 9 f.).

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FIGURE 2.1: GLOBAL AIRPORT REVENUE STREAMS 2012 IN BILLION USD (ACI 2013 A , P . 9)

As depicted in Figure 2.1 commercial airports usually derive revenue from two basic sources, aeronautical and non-aeronautical activities (Graham 2014, p. 75). The classification into two main categories makes it possible to differentiate between diverse revenue streams of an airport. On the other hand, both income sources are contributing to the airports total income. To visualize the income streams of an airport the figure below illustrates the various sorts of income.

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FIGURE 2.2: AIRPORT OPERATING REVENUE SOURCES (O WN I LLUSTRATION / G RAHAM 2014, P . 75)

In order to have a complete picture I will briefly examine and evaluate the individual components of each revenue source in a first step.

2.1.1 Aeronautical Revenue

Basically, aeronautical revenue is a source of income that is derived from airport services directly corresponding to activities connected to aircraft operation. It mainly encompasses fees for aircraft landing, parking and housing as well as passenger terminal and facility charges (Graham 2014, p. 75). The following figure provides a breakdown of global aeronau- tical income and gives an impression on the numerical proportions of individual income sources.

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FIGURE 2.3: GLOBAL AERONAUTICAL REVENUE BY SOURCE IN 2012 (O WN I LLUSTRATION / ACI 2013 A , P . 11)

As shown above, aircraft landing fees and passenger charges represent 61% of all aeronauti- cal revenues in sum. They symbolize the main income source of airports all along (Freathy/O ’ Connell 1998, p. 17). However, the system of aeronautical income is living through a change since the airline industry has progressively become more competitive (Graham 2009, p. 106). Powerful carriers on the one hand and a decreasing yield of the air- line industry on the other hand result in growing pressure on landing fees and passenger charges, particularly in the low cost carrier (LCC) sector (Freathy 2004, p. 191 f.). Secondly, the tightening regulatory framework and increasing economic regulations make their contri- bution towards decreasing aeronautical revenues (Graham 2009, p. 106).

Without any doubt, aeronautical revenue is still an important revenue source for airports. Nevertheless, already at this stage it can be foreseen that the relevance of this income component is diminishing and cannot be perceived as the major revenue component in the long run (Sulzmaier 2001, p. 11; Zenglein/Müller 2007, p. 3).

2.1.2 Non-aeronautical Revenue

Non-aeronautical income represents all sorts of income arising from commercial activities in the terminal and on airport land. Non-aeronautical income is not directly related to aircraft operations (Graham 2014, p. 75). In specialized literature one can often find paraphrases of non-aeronautical revenue namely commercial income or non-operating income. Basically all terms are addressing the same issue.

In contrast to their aeronautical counterparts, non-aeronautical services are very heterogeneous. Therefore it is important to evaluate all individual components of this income source as well (Evangelios et al. 2011, p. 3). Figure 2.4 shows the comparative share of non-aero- nautical income worldwide.

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FIGURE 2.4: GLOBAL NON-AERONAUTICAL REVENUE BY SOURCE IN 2012 (O WN I LLUSTRATION / ACI 2013 A , P . 12)

As we can see clearly, income from retail concessions is the key contributor to non-aviation revenue since they represent the biggest slice of the cake. According to ACI data accounted for the year 2012, retail services are the most significant segment, representing 34% of worldwide commercial revenues including food & beverage (F&B). Additional important nonaviation sources are car parking, real estate business and advertisement. ‘Other Revenue’ comprises a variety of many different items, e.g. charges for visitors, IT, consultancy services or other external business activities and shall not be underestimated too. However, the most significant single revenue item remains retail (Graham 2009, p. 108).

2.1.3 The Increasing Importance of Commercial Revenue

As prescribed before, revenues derived from aviation related services are traditionally the core income source for airports. Though, it was shown in Figure 2.1 that commercial income accounts for almost half of all global airport revenues in 2012. Additionally, literature offers

various surveys and statistics where some of world’s major airports report up to 70% or more of their total revenues from non-aeronautical services (Graham 2014, p. 79; Oum/Fu 2008, p. 5 f.).

However, the vital basic statement in the context of this thesis is that the airport industry continues to generate an increasing proportion of its total income from the non-aviation sector (de Giorgio 2013, p. 38). Originally focused on the aviation sector, airports have shifted their emphasis from aviation related services to a much broader view as an inherent provider of comprehensive services (Keidel 2010, p. 136).

It is probably not a secret that commercial revenue even grows at a faster pace than aero- nautical revenues because of the increasing competition of airports and airline industry over the past decades (Marvel 2006, p. 33). This change had a quite obvious economic reason. Since traveling by air has become a standard for cargo and passengers, airlines are continu- ously touting for passengers and market shares. Subsequently, the fierce competition for the best travel prices has forced carriers to operate on limited margins and keep their fares on a minimum. As a result, airports are confronted with a strong pressure from airlines to keep their aviation costs down. This has led to a radical change in the airports attitude towards income generation from sources other than aviation (Keidel 2010, p. 136).

As mentioned before, market liberalization and airport privatization have also amplified very early pressure on airports. Suddenly, they were prompted to identify new non-aviation related revenue sources ensuring a continued growth of income and maximizing profitability (Freathy 2004, p. 191 f.). Especially the relationship between airlines and airports has changed deeply. As sounded, airlines started to increase pressure on the airport industry to control the level of aeronautical charges claimed by airports. Subsequently, the progressive reduction of income from aviation fees has caused airports to expand their non-aeronautical operations in order to stay profitable (Graham 2008, p. 187).

On the other hand, the airport industry, however, was accredited with a greater freedom, motivation and expertise to exploit their commercial potential. In the meanwhile, the Euro- pean air transport industry has reached a maturity stage, making travelling by plane more convenient and affordable for passengers. As a consequence of this, an increasing number of air travelers are using the aircraft for private and business purposes. This new sort of experi- enced and sophisticated passengers has shown an emerging interest in using the commercial amenities of modern airports. Hence, the economic success of an airport is inextricably linked with business activities outside of the aviation sector (Graham 2008, p. 187 f.; Gra- ham 2009, p. 110).

Apart from the prescribed examples a couple of other reasons have contributed to the commercialization of airports as well. Nonetheless, the illustrated statistics have shown why airport operators are forced to generate income from alternative sources by increasing their share from commercial business. Furthermore, additional revenue from non-aviation activi- ties promises a higher profit margin which is an appealing key performance indicator (KPI) for airport operators and investors as well. Put simply, nowadays commercial revenues en- sure the viability of modern airports (De Neufville/Odoni 2003, p. 268). In my opinion, this fact is a crucial factor and makes us understand why non-aeronautical business is becoming a major topic for airport management. The rising importance of non-aeronautical revenue justifies increased investments in the expansion of commercial services or facilities and has a lasting effect on the revenue structure of airports (Evangelios et al. 2011, p. 5).

Nevertheless, the contribution of the individual non-aeronautical segments to the total commercial turnover of an airport varies strongly as shown in Figure 2.3. Additionally, not all non-aviation related revenue sources are equally profitable either. It was found, that retail concessions are the most cost-effective business segment of an airport. Since airport retail- ing is going to represent the central focus of this thesis, it will be examined in the next pas- sage in detail.

2.2 Airport Retail

Assessing the theoretical literature in this field, one can say that there is a lack of adequate definitions for airport retail. We could assume that this might be caused by the dynamic na- ture of this subject as retail is an ever changing research topic. Nonetheless, airport retail can generally be characterized as a composition of all retail and gastronomy facilities or amenities as well as all other trade services at an airport (Schulz et al. 2012, p. 52). This broad definition is leaving much freedom for financial reporting and analysis. The increasing importance of airport retail in Europe, however, is undisputed (Graham 2009, p. 110).

2.2.1 The Significance of Airport Retail

The increasing importance of commercial revenue has been extensively examined on the previous pages. However, the significance of the airport retail segment in Europe needs to be highlighted individually. The breakdown of non-aeronautical revenue sources in Figure

2.4 has shown, that airport retail (incl. F&B) is the largest single income item accounting for over one third of all commercial revenues worldwide. Moreover, Figure 2.5 highlights the relative growth of airport retail revenue across Europe in recent years.

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FIGURE 2.5: RELATIVE GROWTH OF AIRPORT RETAIL IN EUROPE (O WN I LLUSTRATION / B USH /S TOREY 2013, P . 13)

While the total share of non-aeronautical revenue at European airports is slightly volatile in the past years, income from retailing forms a growing part of airports’ overall revenue. In 2012, retail contributed around 15% to the total income in Europe increasing from 11% five years ago (Bush/Storey 2013, p. 11). In absolute terms, total sales from European duty-free and travel retailing operations rose to more than € 11 billion EUR in the year of 2012. Ac- cording to the Tax Free World Association (TFWA), the world’s biggest travel retail federa- tion, the global airport retailing market is forecast to expand sales to € 45 billion EUR by 2015 and € 90 billion EUR by 2020. This would implicate a rise of 100% within 5 years. The majority of this growth is coming from emerging economies especially in Asia Pacific and the Middle East (TFWA 2012).

As hinted before, some non-aeronautical income streams are promising a higher profit mar- gin than others. This implies that not all commercial revenue sources are equally profitable. Several studies have come to the conclusion that retail concessions are the most cost- effective business segment of an airport. That means that airport retail has not only the highest share in the non-aviation segment, it is also characterized by the highest profitability (Starkie 2002, p. 71; Adler et al. 2013, p. 450 f.).

An explanation for this statement can be found when we briefly examine how contracts are concluded between airport operating companies and retailers. Besides owner-operated op- eration, joint ventures or management contract retailing, the predominant type of retail operations of airports is the so called concessionaire-based approach . In contrast to e.g. owner-operated retailing, concessionaires are chosen by the management to provide and run the airports commercial retail facilities. That means that this segment is outsourced to specialist retailers on a concession model. The airport operator itself acts as a landlord and is responsible for the provision of physical facilities and additional contracted service require- ments e.g. light or heat (Freathy/O ’ Connell 1998, p. 43 ff.). In return, concessionaires and airport operators are sharing the growth of all retail activities. Retailers are obliged to pay a contractually agreed rent and in addition an individual share of their turnover to the airport company. Under certain circumstances this extra-payment can reach up to 50% of the monthly turnover (Schulz et al. 2010, p. 73).

Nonetheless, the economic success in airport retailing results not only from simple outsourcing of cost effective services. The selection of successful retailers and negotiation of sustainable commercial arrangements are the key to generate increasing revenue from airport retail (Bush/Storey 2013, p. 17). Hence, concessionaire-based retailing results in very little direct costs, associated capital investment and finally in a low financial risk. Ultimately, high profit margins are a consequence (Graham 2009, p. 108 f.).

This statement is proven by investigations underdone the major financial service company Credit Suisse. Underlying the same ratios as shown in Figure 2.3, analysts found that the average revenue from airport retail accounts for only 13% of total turnover. However, in terms of earnings before interest, tax, depreciation and amortization (EBITDA) they finally represent more than 40% of total profits ratio at European airports (Graham 2009, p. 109). This is an impressive correlation to my mind.

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FIGURE 2.6: SEGMENT SPLIT OF REVENUE AND EBITDA AT FRANKFURT AIRPORT (O WN I LLUSTRATION / F RAPORT 2014, P . 58)

As shown on the example of Frankfurt Airport (FRA) above, the retail and real estate activi- ties derive a revenue share of 18% only but they finally contribute 40% to the entire EBITDA of FRA. The whole non-aeronautical revenue segment even accounts for 77% of FRA’s total EBITDA. In contrast, ground handling represents only 4% in terms of EBITDA (Fraport 2014, p. 100; Döhle 2013, p. 42 f.). An exemplary look into the latest financial statements of other big European airports unfolds almost identical ratios.

Going into detail, the interdependencies between retail or other commercial and total pas- senger numbers result in an interesting fact to be considered. According to several studies, the share of commercial revenue at airports with annual passengers of more than 20 million is twice as high as at airports with less than 10 million passengers (Evangelios et al. 2011, p. 3). This circumstance might appear surprising at first glance. In my opinion, however, it is apparent that the higher the passenger number, the more profit can be gathered from commercial revenue especially from retail. In contrast, costs increase more slowly in propor- tion to passenger numbers because of the high fixed cost elements at an airport. With this, an increase in passengers crucially contributes to the airport’s profitability (Thelle et al. 2012, p. 4).

Nonetheless, during my research a direct comparison between airports is often complicated due to different declarations of commercial sub-categories. Unfortunately, there is no com- mon reporting of general income from commercial and retail revenue in particular. Depend- ing on the airport operator, income from retail operations can include for instance revenue from advertising. Other operators exclude the whole F&B segment or rent payments for concessions. In my opinion, this makes it really challenging to compare how specific airport companies are performing and how cost effective specific non-aviation segments are.

However, based on the statements and numbers presented before, it is shown impressively that an increasing share of non-aviation related revenue is combined with the highest profit- ability of all revenue sources of an airport. Without any doubt, especially the retail segment is a vital part of non-aviation revenue since it contributes high margins for airport operators. With this, airport retail can be considered as a key contributor to economic success and steady growth of airports. This makes us to understand why airport managers put so much effort into the development of their non-aviation activities in general and the maximization of revenue of airport retail in particular.

2.2.2 Retail Categories

As announced before, the exact definition of ‘retail’ can vary. Same applies to the retail cat- egories which are dedicated to this major commercial income source. Airport retail is often used as a substitute term for duty-free. However, modern airport retail is far more than that. Literature distinguishes three core commercial activities, namely duty/tax-free, F&B and specialty retail concessions (Jarach 2005, p.75). Figure 2.7 briefly defines all three categories.

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FIGURE 2.7: AIRPORT RETAIL SEGMENTATION (O WN I LLUSTRATION / ACRP 2011, P . 85 FF .; ACI 2013 B , P . 14)

However, the categorization of retail and its sub-categories rests on every individual airport.

Similar to the reporting of general non-aeronautical revenue, various publications of airport operators often provide an inconsistent picture according to my experience.

Besides the classification into the prescribed categories, airport retail is often divided into two local segments: landside and airside. Landside retailing comprises those outlets that are open to public and accessible to everybody at an airport. In contrast, airside retailing covers all shopping facilities which are located behind airport security and passport control. Usually, only passengers with a valid boarding pass get access to this area. Commonly, airside retailing represents the primary retail revenue source for airport operators (Freathy/O ’ Connell 1998, p. 34). Identifying the total commercial floor allocation, we can see very clearly that airside retail claims the majority of retail space within airports.

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FIGURE 2.8: COMMERCIAL SPACE ALLOCATION IN AIRPORT RETAIL (O WN I LLUSTRATION / L ANA 2009)

The depicted airside/landside split appears relatively unbalanced. However, the proportion of space which is dedicated to airside retail is going to grow even further (Barrett 2011). On the first glance one might find this relation striking since international passengers tend to spend 75% of their time landside (Graham 2009, p. 109). The following insights regarding passenger processes and stress levels at airports, however, will help us to understand why airport operators increasingly bank on airside retail. Even if landside airport retail offers great potential for optimization, I am going to focus on the airside segment in the course of this thesis.

2.2.3 Airport Retail Calls for Modifications

Without any doubt, airport retailing has become much more sophisticated in recent years by offering a board variety of opportunities which have been prescribed before. The increase in knowledge and best practices can also be traced back to the expertise that have been introduced by a growing number of shopping street managers who are employed at airports in the meanwhile (Graham 2009, p. 108 f.). Nonetheless, even if there are similarities with domestic shopping centers for instance, unique demands and characteristics exist with airport retail which must be taken into account.

Basically, the primary function of an airport terminal is to process passengers in an efficient and safe manner. Travel retail is only one component of the airport business and cannot be seen as a prime purpose. However, it is an essential secondary activity. In the best case, a certain balance between commercial and aeronautical aspects should be achieved (Freathy/ O ’ Connell 1998, p. 72; Graham 2009, p. 108). On the other hand, an airport is an attractive location for retailers since its elementary function implies a continuous flow of people. Addi- tionally, the air travelers can be considered as a captive audience because upon they have passed through security controls passengers are figuratively speaking ‘locked up’. With this, they are unable to leave the terminal with not many choices more than becoming potential customers. Furthermore, every single passenger, visitor or employee entering the terminal can be considered as prospective customers too (Jarach 2005, p. 73 f.). Especially at HUB- airports the majority of passengers are looking to fill their waiting time between flights, which could be up to several hours. Moreover, commercial facilities at an airport are used to longer opening hours. In most cases store hours exceed up to 24 hours a day in order to best service the traveling public (Berman/Evans 2012, p. 155 f.).

Airport retailers also have to adjust the layout of their stores. The mobility of air travelers can be seriously limited due to carrying handbags or briefcases. Additionally, retailers are confronted with restricted space for retail locations as well as special customs regulations concerning the inventory. Finally, the combination of high rents, extended store hours as well as high inventory costs, result in high labor costs for concessionaires and consequently in higher prizes charged to the public (Herring 2002, p. 9 f.; Schulz et al. 2010, p. 54).

However, airport retail promises a much higher sales density in comparison to the best loca- tions downtown at the same time. This can be manifested on critical metrics for retail per- formance e.g. sales per square meter (sq m). Thus, retail revenue per sq m at airports is sig- nificantly higher compared with revenues generated in shopping malls and downtown shops (Kasarda 2008, p. 52). Besides this, airport retail offers further outstanding opportunities in relation to normal high street retail. The extensive collection of data at an airport allows a high predictability of demand. For instance, airside retailers can profit from data and profiles concerning number, destination or purpose of passenger travel. Vice versa, the collection of transaction level details, which means tagging passengers to certain airside transactions, offers a rich database of e.g. sales-per-passenger, product or shop category and many other important KPI’s for airport’s commercial teams (de Giorgio 2013, p. 40). Nowadays, airports collect plenty of information on each passenger, starting from check-in towards the boarding gate. These data include who they are, where they are going to, at what time, on what air- line and in which class. However, the enormous amount of data needs to be well structured and shared to the local retailers. Based on the information collected, diversified customer profiles can be described precisely. At this point, individual customer behavior comes into focus. Airport management increasingly relies on passenger integration or customization and multi-optional behavior of passengers (Sulzmaier 2001, p. 17 f.; Mellery-Pratt 2013).

As this subject is of central interest, passenger behavior and customer motivation will be investigated in the upcoming sub-chapters in detail.

Furthermore, the previous findings have shown clearly that airport retail can be considered as a unique shopping environment. Thus, vital adjustments to traditional sales models are required. The prescribed demands and characteristics revealed specific differences that distinguish airport retail from domestic retail. They all have to be taken into account when it comes to operate a store at an airport. All these features must be understood as an underlying precondition for the following elaborations of this research.

2.3 Setting the Scene for Airport Retail

As shown before, the unique nature of airport retail differs from ordinary day-to-day chan- nels of distribution. We know that unlike other forms of shopping, the primary objective for the majority of travelers is to access the mode of air transportation rather than purchasing Swiss chocolate or one-liter bottles of alcohol. As a consequence, it is essential that airport managers as well as retailers know about passenger processes at an airport. Furthermore, both parties should be well aware of specific environmental and psychological issues linked with the travel chain (Lin/Chen 2013, p. 426). Therefore the conceptual background of air- port retailing is going to be addressed in the following. It comprises a description of the pas- senger process at an airport and the respective customer behavior resulting from certain stages within the travel chain. Based on that, traveler’s shopping motivations will be identi- fied in order to implement successful retail strategies.

2.3.1 The Airport Travel Chain and Passengers Mindset

Revenue from non-aviation activities in general and airport retailing in particular are inextricably linked with the characteristics and quality of passenger processes and the proper infrastructure setup (Keidel 2010, p. 136). Since passengers are the centerpiece of retail activities, airport operators have to establish ideal conditions for customers to reach the highest possible outcome from commercial facilities (Wolley 1996, p. 38 ff.).

In order to make the various influencing factors on passengers more comprehensible, I am going to examine the different stages passed by commercial flyers through their journey. Figure 2.9 on the following page depicts the passenger processes within an airport terminal in a simplified manner. According to Freathy/O ’ Connell (1998) and von Dietmann (2008) the process is subdivided into certain stages. The traditional travel chain at the airport finds his starting point at the arrival of the passenger at the terminal. Having accessed the airport terminal hall, a period of orientation is initiated. This phase is of high importance for any airport operator, as this dominates the first impression and is therefore influencing the whole travel experience. Thereafter passengers are directed to the check-in desks. At this stage, the number of available check-in desks, operational speed of service personnel and the length of waiting lines are key factors influencing traveler’s wellbeing. In a next step, passengers leave the landside section of the airport and have to pass through security con- trol. In case of international flights (Non-EU travel) immigration control has to be conducted before or after security check as well. Again, waiting time and passenger treatment have a vital effect on the overall airport experience. Upon passing the necessary control points, passengers are finally processed to departure gates via airside departure lounges (von Diet mann 2008, p. 75 ff.).

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FIGURE 2.9: THE AIRPORT PASSENGER TRAVEL CHAIN¹

For aviation experts who are used to fly, the steps of processing passengers as depicted in Figure 2.9 appear logical and reasonable. However, to ordinary travelers this process means more than just moving individuals from one stage to the next. In fact, the whole travel chain within an airport has a considerable influence on behavior, perception and sense of well- being of passengers. It can almost be described as an emotional roller coaster because pas- sengers often appear to be caught in a mental state between anxiety and heightened emo- tions resulting in unusual behavior (Pinna/Del Chiappa 2013, p. 6). Especially with reference to airport shopping, “[…] the potential customers are in a unique frame of mind which has an extremely important effect on consumer purchasing behavior (Crawford/Melewar 2003, p. 90)”. In other words, the mindset of passengers is primarily focused on the illustrated travel chain which marks an important difference in contrast to the normal every-day shopping (Keidel 2010, p. 136). The majority of passengers are confronted with questions: Where am I at the moment? Where can check-in and where is my gate? How long will it take me to pass through the security check? How much time is left? Will I be able to catch my plane?

The travel stress curve developed by Scholvinck (2000 cited in Crawford/Melewar 2003) helps us to understand how passengers feel and how stress levels and mindsets change dur- ing time spending in the specific phases of transition between arrival in the terminal and boarding operation.

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FIGURE 2.10: THE TRAVEL STRESS CURVE²

The Figure above clearly depicts the rise in stress levels from the arrival at the airport towards the stage of check-in and security control. The passenger’s mood change is additionally visualized by varying colors below the graph.

Since airport terminals are relatively large sites, the distance between check-in desks and boarding areas contributes to higher stress levels and anxiety for passengers whose primary aim is to get to their departure gates in time (McIntosh 2003, p. 21). At his point the rule says, the larger the airport the greater the stress level which can be expected. Researchers found that some air travelers who are passing through e.g. Heathrow Airport suffer from higher stress levels than Formula One racing drivers or policemen facing a riot (Lewis 2007). Reaching its peak during security and passport control the stress level decreases significantly during the following dwell-time (Pickering 2003, p. 15). In other words, the act of moving through security is not just a physical step but a mental one too. It completely changes the traveler’s mindset. That means passengers who have cleared security are in a relatively stress-free mood. Executives often refer to this phase as ‘golden hour’ or ‘magic hour’. This symbolic hour describes the point of time when high passenger excitement meets a decreas- ing stress level (Thomas 1997, p. 39 f.). During this period of excitement travelers spend their free time before flight departure with shopping or browsing. It is self-evident that a reduc- tion of stress has a positive effect on the spending behavior of airport retail customers. The lower the stress levels the higher the opportunity for airport retailing and vice versa (Keidel 2010, p. 137).

Another interesting anthropological theory concludes that passengers who have passed se- curity checks find themselves in a space that does not belong to a specific country while many of the norms of behavior do change. Due to the fact that flying it often associated with excitement, anticipation and even a hint of danger, some air travelers do even intentionally spend more money than normally because they feel less accountable to their normal lives (Robertson 2012, p. 33).

Without a doubt, these findings are of key interest and of utmost importance for airport retail managers. It implies that at this stage the airport has the highest chance to drag the attention of potential customers away from the airport processes towards the shopping fa- cilities. Once airport retailers have the attention of the passengers, it is crucial to give travel- ers enough time to satisfy their curiosity and to shop around (Keidel 2010, p. 136). It is exact- ly this critical variable of time which has a significant influence on the passengers shopping enjoyment. The reason is obvious. Several studies have found, that time pressure is an vital factor affecting passengers’ shopping behavior within an international airport terminal (Lin/Chen 2013, p. 427). For airport operators aiming to provide passengers with an suffi- cient amount of time in order to maximize revenues from retail, it is essential that pro- cessing the passengers though the airport works seamlessly. It is more than counterproduc- tive if travelers are losing time in the travel chain e.g. during arrival or long lines at check-in and security points. Passengers can only consider shopping as part of their through-airport experience if they have sufficient time and energy. In other words, the dwell-time that the captive audience has at their disposal inside the airport facilities should be maximized, while unnecessary additional stress needs to be reduced. Hence, it has to be guaranteed by the airport as well by airlines and agents that the processes within the terminal are conducted as smooth as possible (Castillo-Manzano 2010, p. 793; Bush/Storey 2013, p. 17).

Keidel (2010) gives us an idea of the importance of the right balance of aviation and nonaviation related activities. The aviation related factors depicted on the next page have a direct impact on the passenger’s dwell-time and are crucial for retail turnover subsequently. As a result, the passenger becomes a shared customer of both airports and airlines. This sometimes ends up in a complex commercial relationship with air travelers and is going to be described in the next chapter in detail (Castillo-Manzano 2010, p. 789).

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FIGURE 2.11: FACTORS INFLUENCING THE DWELL-TIME (O WN I LLUSTRATION / KEIDEL 2010, P. 137)

A variety of factors influencing the dwell-time are shown in Figure 2.11. As a matter of course, the time after passing security checks can be seen as the most important stage for airport retailing. The time air travelers have on their account to spend airside is going to in- crease significantly in the future. Today, new technology allows passengers to fasten the way through this process. For instance, checking-in via the internet and baggage self-service will have a lasting impact on landside passenger processes (Graham 2009, p. 110).

Since retail operations are not limited to the airside the whole terminal area needs to be optimized by airport operators as well. In order to maximize revenue from retail operations a calm and relaxed shopping atmosphere must be ensured along the whole airport travel chain. Only relaxed travelers are open for additional information and consequently receptive to airport shopping (Pinna/Del Chiappa 2013, p. 6). Thus, successful airport operators have to make sure that the airport exploits its full potential by making use of a convenient and comfortable environment that facilitate shopping as well as eating or drinking experiences linked with a smooth flow of passengers. Individual architecture and space conceptualization of retail areas have an enormous influence on passenger’s mood too. This can be positively enhanced and delighted by the right definition of spaces, the usage of lights, smells and sound (Robertson 2012, p. 33). Since this research field is of high interest for airport retailers this topic among others will be portrait in Chapter 4 in detail.

2.3.2 Shopping Motivation and Impulse Buying Tendency

Having analyzed the passenger process, it must be stated that the human factor and service quality at all stages of the travel chain is of utmost importance for the airport experience of each passenger. It was shown that airport environment and psychological effects of air travel complicate the buyer behavior process. At this point it has to be noted, that it is also necessary to have a comprehensive understanding of the relationship between travelers’ shopping motivations and the commercial retail activities at an airport. This allows operators and retailers to develop the right strategic and operational solutions in order to maximize performance in the airport environment (Lin/Chen 2013, p. 431).

According to broadly acknowledged tourism literature, shopping can be considered as the most popular tourist activity since it satisfies travelers’ desire for recreation and leisure (Kent et al. 1983, p. 3). Particularly holiday passengers spent a great amount of time inside the terminal being motivated for shopping and leisure. However, contrary to daily shopping rou- tines, an airport induces specific motivations for purchasing that differ from those for gen- eral shopping. Based on the special situation and the variety of unusual stimuli provided by an airport, Guenes et al. (2004, p. 619 f.) categorized four different types of airport shopping motivations:

(1) Functional Motivation

An attractive balance of good prices based on the tax-free concept combined with reasonable convenience which allows the passenger to buy food or other travel goods at any time. Additionally the quality of shopping is considerable since airport retail usually offers large and diversified product assortments, with both international brands and local specialties.

(2) Airport Infrastructure Related Motivation

Refers to the excellent service which can be expected at airport shops including multilingual staff, professional advice and high speed service.

(3) Experiential Motivation

Passengers wish to break with ordinary life routines and the customers’ desire for self-presentation and ‘self-fashioning’. The stay or layover at an airport often marks the beginning or the end of the traveler’s leisure time. Therefore people tend to by something with the aim to reward oneself. Others are using the cosmopolitan flair of an airport to meet and communicate with other people sharing similar interests.

(4) Airport Atmosphere Related Motivation

This motivation is generally determined by the reason of purchase influenced by the surrounding atmosphere of an airport. The bandwidth of occasions to make a purchase reaches from pre-planned buying over browsing/shopping to kill time towards impulse purchasing.

At this juncture it needs to be stressed, that the theory of impulse purchasing is of high sig- nificance for airport retailing. Omar and Kent (2001) found that airports provide a specific environment that allows retailers to trigger passengers’ impulsive buying behaviors under certain conditions. Various studies have found that the majority of purchases done by pas- sengers at the airport are not planned, but made spontaneously. Travel industry sources estimate that impulse driven purchases are reaching a share of up to 70% in certain catego- ries like confessionary (Bush/Storey 2013, p. 32; Crawford/Melewar 2003, p. 93). Impulse buying behavior refers to an unplanned and immediate, reactive decision to purchase often influenced by emotions (Hausmann 2000, p. 405). Hence, the decision to buy is a result of choices available rather than planned in advance. This marks an important difference in comparison to the shopping experience on a high street or with online purchases (Bush/ Storey 2013, p. 32).

The key question for airport operators and retailers in this context is obvious. What stimulates an impulse within an airport terminal environment? The research of Crawford and Melewar (2003, p. 92 f.) suggests ten incentives to impulsive shopping of passengers:

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¹ Own illustration referring to Freathy/O ’ Connell 1998, p. 76 and von Dietmann 2008, p. 75 Travel Stress

² Own illustration referring to Crawford/Melawar 2003, p. 90 and Oechsle 2005, p. 152