Economic Impact of London Luton Airport

Abstract

The current report assesses the extent to which airport management is attempting to increase the positive economic impacts of airport operations and to make recommendations for future improvements in this area. Through a critical assessment of London Luton Airport with regards to certain foundational constructs regarding direct, indirect and induced impacts, it is clear that there is a strong reliance on commercial activities of an airport in ensuring that economic impacts are maintained and therefore in increasing these operations will have the effect of increasing the economic impact. This may necessitate an reconsideration of airline partnerships with the airport in order to increase traffic through the airport itself.

Impact on Surrounding Areas

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Managing the economic impacts of airports necessitates the development of policies which will assist and manage the impacts. Policies that have been developed to assist the management of economic impacts associated with airport operation and development include transport policies, planning policy, aviation policy and general economic policy. These policies will be used to position the airport within the existing economy by allowing for access and management of the economic impacts with regards to integration into the existing transport system, managing the commercial and residential development around the airport and recognition of the associated social benefits of airport activity (ACI, 2004). It is against these policies that one can analyse the associated economic benefits of London Luton Airport (LLA).

The economic impact of airports in general, as well as those applicable to LLA includes direct, indirect, induced and catalytic impacts. Broadly, there are a number of categories of impacts that one can observe in attempting to account for the economic impact, namely revenue impact, employment impacts, personal income impact, and tax impacts (TRB, 2008). These impacts are as a result of the fact that airports are large generators of economic activity and as such, the commercial activity associated therewith provides a significant opportunity for micro- and macroeconomic growth (Graham, 2008). The wider catalytic benefits include the contribution that these factors make to broader economic activity, such as inward economic development and the development of the tourism industry. It is clear that LLA does contribute to these broader catalytic benefits, however the focus of the current report will not consider these impacts as they are difficult to measure due to the prevalence of tourism in the Greater London area. The prevalence of London as a tourist destination is renowned globally and therefore isolating the impact of LLA on these economic indicators is difficult to measure.

An easily observable economic impact of LLA is the direct revenue generation opportunities that it provides to the local economy. As a result of airport operations there are significant opportunities available for direct business expenditure on goods and services with these profits likely to be reinvested in the local community (Halcrow, 2010). This impact is extended to the broader community by a multiplier effect of this income generated by the spending of this income by local employees and businesses (CDM Smith, 2012). This multiplier effect is an induced impact as it is a result of a supply chain creation within this community. This therefore extends to anyone within the up- or downward supply chain of these business enterprises and the employees thereof. This direct revenue income is a result of increased wages and salaries paid to employees, direct business expenditure, direct profits and revenue resulting from the multiplier effect (Halcrow, 2010).

The most easily measurable economic impact of any airport is employment, as an airport provides a variety of different levels of employment opportunities. Employment exists on many different levels to a variety of stakeholders, including direct employment as a result of airport activities measured as 4,100 employees in 2011 (LLA, 2011), indirect employment, induced and related employment (TRB, 2008). The economic impact of increased employment opportunities through LLA extends to a wide-variety of stakeholders at various levels of business enterprise and across all sectors, including on- and off-site employment.

The government or State is also a large beneficiary in terms of economic impact of LLA, as it receives income based on the business operations of the airport in the form of business and personal taxes paid (Halcrow, 2010). In addition to business taxes, enterprises are required to pay rates on their properties which provided an income of ?19.8mil in 2010 to the State. Air passenger tax also provides a source of income for the State as Civil Aviation Agency provides different passenger duty costs for different kinds of passengers. In 2010, the State received ?144mil revenue from air passenger tax (Halcrow, 2010). These are direct impacts as they would cease to exist if LLA no longer operated.

It is evident therefore that LLA is a major generator of economic activity in the local area, providing significant opportunities for the expansion of current enterprise and the resultant employment and revenue opportunities that this provides, as well as a useful and important source of revenue for the central government. Direct, indirect and induced impacts of LLA are inclusive of a broad range of stakeholders providing important revenue generation and an overall increase in economic activity as a result of their operations.

Airport Management Policies

LLA is a publicly owned company with Airport Concessions & Development Ltd. (ACDL) as the majority shareholder. ACDL owns and operates 47 other airports around the world and have extensive experience in airport management (LLA, 2013). It stands to reason therefore that the experience of managing policies for maximum economic impact implemented at LLA would be an extension of the knowledge and experience gained in the course of business.

With rising fuel costs affecting the affordability of travel options, low-cost airlines have become increasingly prevalent with the adoption of a low-cost model whereby airlines negotiate significantly lower aeronautical charges with airports seeking to make up the shortfall in revenue with increased passenger volumes expected from offering lower-airline fees (Frances, et al., 2004). LLA has introduced three major low-cost airlines into their business model, namely easyJet, Ryanair and Wizz Air. Initially the aeronautical charges were given in a format whereby easyJet, as the principle low-cost airline, paid a reduced rate per passenger that came through the airport. However, when Barclays became a shareholder in LLA it was reported that the financial performance of the airport was adversely affected by this negotiation (Ibid). This was then adjusted so that the low-cost airlines qualified for the reduced aeronautical charges, where after the charges are reduced according to the passenger volumes.

In addition to the increase in passenger volumes through low-cost airline negotiation, there was a significant shift in management focus to increase the overall income per passenger and between 1995 and 2001, this was achieved through doubling the retail space in the LLA airport terminal (Ibid). This is a realisation by the marketing strategy of LLA that the majority of airport revenues are not generated by aeronautical charges (Castillo-Manzano, 2010). Jarach (2010; p.2) notes that the extent of the economic impact of an airport will be a result of factors such as the type of visitor (business or tourist), the type of scheduled service (international, domestic and long-haul flights), the magnitude and origin of charter operations, the relative isolation of the airport and the availability of other modes of transport. This highlights a shift in perspective of the airport as part of the air transport pipeline, rather than focusing on airlines as the primary customer of the airport, revenue generation is now concentrated on attracting retail customers (Jarach, 2001). Expectations as to the levels of income that can be expected through the support goods and services in the airport allows the airport to make accurate predictions on the income expected for the airport as an operation and to negotiate aeronautical charges based on these predictions (Frances, et al., 2004). As a result of the increased importance of concession revenue (resulting from commercial operations), revenue sharing arrangements are also becoming increasingly popular agreements between airports and airlines, although research indicates that often airports would rather replace the airline than enter into such agreements (Zhang, et al., 2010).

The marketing strategy therefore of LLA has been redirected in recent years to ensure that concession revenues are increased, with reports that the reliance on low-cost airlines for the majority of passengers based on a reduced charge has had an adverse effect on the financial outlook of the airport (Frances, et al., 2004). The Financial Report of LLA (2012) for the end of 2011 indicated that the revenue from commercial activities and from aeronautical charges was relatively equal indicating that there is a large reliance on commercial activities to supplement the income of the airport itself (see table below). In addition, there is a continuous assessment and commitment by the management of the airport to improving facilities and providing additional services to the visitors on a consistent basis (LLA, 2011).

IncomeYear Ended 31 December 2011 (? ,000)Year Ended 31 December 2010 (?,000)
Traffic Income50,10045,742
Commercial Income49,67945,287
Tenant Income12,28311,158
TOTAL112,062102,187

(LLA, 2012)

Conclusion

From the perspective of airport management therefore, the increase in revenue is the primary concern of commercial activities, with regards to both airline traffic revenue and concession revenue. The economic impact of the operations of the airport is an important priority for management, as privately owned airports, such as LLA are profit driven business enterprises. From the financial statement reflecting the revenue income of the airport, it is evident that there need be an increased emphasis on increasing the concession revenues of the airport. Commercial activities in an airport are essential to the financial success of the enterprise (Torres, et al., 2005) and have the potential to contribute to up to 90% of the total income of the airport ((Zhang & Zhang, 1997). Currently, LLA is not maximising the potential of the commercial activities of the airport and therefore it is the recommendation of this report that the retail operations and services available at the airport be upgraded to allow for significantly more commercial revenue. This will have the impact of ensuring that the revenue of the airport is increased and that there is a greater direct income from these activities, as well as increased employment opportunities through the various direct, indirect and induced impact that this will have. The government income will also be increased according as there will be higher business and personal taxes payable. Increasing the commercial operation of the airport will also necessitate a strategy to ensure greater traffic volumes in the airport terminal itself which can be achieved through the increased participation with airlines through offering revenue-sharing contracts to ensure that higher volumes of passengers are directed through the terminal rather than other neighbouring airports.

References

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