How Airports Make Money

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[Vider id=82 ]This video was made possible by Squarespace. After this, watch the video I made for their
channel. More about it after the video. Airports are incredibly complex and challenging
businesses but, in many cases, they’re businesses that make money. Many airports are owned by governments but
still then, they’re often operated as businesses—just businesses that are publicly owned. The majority of airports make their money
through what they earn from passenger carrying commercial flights using their facilities. Some airports are cargo focused and fund their
operations through cargo flights but the ones that you’ve most heard of, such as London’s
Heathrow Airport, rely almost entirely on passenger flights. While the amount of cargo going through Heathrow
is significant thanks to passenger aircraft transporting cargo in their holds, the number
of dedicated cargo flights is low in proportion to the airports 650 daily flights. They make their money off of the 78 million
passengers flying through each year. Heathrow is the busiest airport in the world
that is fully privately owned—the UK government owns no stake in it—and so it is perhaps
the best example of an airport built to turn a profit. It costs $1,485,650,000 per year to run Heathrow
airport. This includes costs like the $494 million
Heathrow pays in salaries to its 6,500 employees. Now, 76,000 people actually work at Heathrow
but only those 6,500 actually work for Heathrow. The company that runs Heathrow, Heathrow Airport
Holdings, is only really responsible for the oversight and administration of the airport. Within Heathrow’s walls, though, there are
hundreds of other companies operating. Those 70,000 other people work for the airlines,
the baggage handling companies, the air traffic control company, the restaurants, the rental
car companies, the bus companies, and all the other different employers at the airport. There are, of course, plenty of other costs
involved in running the airport from the $232 million per year in maintenance to the $113
million yearly utility bill for water, electricity, internet, gas, and more, but overall, that
number, $1.5 billion, is what it costs to run the sixth busiest airport in the world. That’s more than it costs to run the 1.3
million person country of Swaziland. So how do they pay for that? On a per passenger basis, it costs $19 to
run Heathrow Airport. Essentially, that means Heathrow needs to
make $19 from each passenger that passes through its doors in order to break even. Of course, some passengers are more profitable
than others. Arriving passengers generally just get off
the plane, go through customs, and leave immediately without buying anything while connecting and
departing passengers generally have more time to shop at the airport. Retail is incredibly important to the profitability
of any airport. This is part of the reason why its in the
airports best interest to make the check-in and security process as quick as possible—so
passengers have more time to shop. Heathrow makes money through retail by receiving
a cut of every sale made. On average, restaurants earn the airport 95
cents per passenger, retail stores earn them $5.15 per passenger, the parking lots add
on another $2.03, then all the other smaller sources of retail revenue such as rental car
companies and VIP lounges account for another $3.04. Rather uniquely, Heathrow also operates the
express train from the airport to Paddington Station in London which makes them another
$2.15 per passenger. All in all, the airport makes $13.32 from
passengers through purchases on top of their actual airplane ticket and, its worth pointing
out, this doesn’t mean that passengers spend $13.32—this means that Heathrow makes $13.32
per passenger. This is their cut—actual spending at the
airport per passenger is much higher. Now, you may think that this amount of retail
revenue per passenger is high and you’d be right, it is. In fact, it’s one of the highest retail
revenues per passenger of any airport worldwide. In comparison, Washington Dulles Airport makes
$5.68 per passenger, Auckland Airport makes $7.71, and Paris Charles de Gaulle Airport
makes $10.92 per passenger through retail. Heathrow is an expert in making passengers
spend. They use all sorts of tricks and tactics to
increase passenger spending. For example, in Terminal 3, to get from security
and to the gates, all passengers have to walk through duty free which increases sales enormously. Heathrow also doesn’t display the gate for
flights until around 45-90 minutes before departure. This is common in European airports, but uncommon
elsewhere. Because of this, passengers wait in the central
area where shops and restaurants are until just before their flight which leads to more
time with passengers exposed to the retail environment. Being one of the very few airports with non-stop
service to all six inhabited continents, Heathrow also has the advantage of being an airport
focused on long-haul service. These flights tend to carry the wealthiest
passengers and, while worldwide passengers arrive an average of 2 hours and 17 minutes
before their flight, Heathrow passengers arrive 2 hours and 51 minutes before which means
they have more time to shop at the airport. As mentioned, though, the airport needs to
make $19 per passenger and retail only earns them just over $13. The rest of it comes from flights. Each plane that lands at Heathrow pays the
airport an average of $9,500. Of course it varies hugely by aircraft—a
76 seat FlyBe Dash 8 isn’t paying the same as a 345 seat British Airways 747—but $9,500
is the average per visit to Heathrow. That goes to pay for things like gate space,
a check in area, and the runway time itself. The airport charges a fixed amount per aircraft
landing—for the small Bombardier Dash 8 it would be $999 while for the large 747 it
would be $11,600. On departure, airlines are then charged again
this time per passenger. For each passenger flying to a destination
outside of Europe the airline is charged a base of $58 but this charge is reduced if
a passenger connects through Heathrow rather than originating or if the aircraft is parked
at a remote stand rather than a gate. All in all, a fully loaded 76 seat FlyBe Dash
8 flying a domestic route to Edinburgh, for example, would be charged about $2,400 for
its whole visit, arrival and departure, while that British Airways 747 flying a long-haul
route to New York, for example, would be charged $31,700. It’s worth noting that these are the published
prices—in reality, many airlines with significant numbers of flights at Heathrow have agreements
with the airport that reduce their costs. Breaking it down, what those numbers mean
is that Heathrow gets, on average, $29 of the cost of every passenger’s ticket. As you can see that means that Heathrow makes
a fair bit more than it costs to run the airport. The company mostly uses this operating profit
to pay off debt from prior projects and to pay taxes so in the end, they’re only truly
making about $8.20 off of each of their passengers, but what these numbers also mean is that,
by design, Heathrow is incentivized to attract long-haul flights. The airport is currently at capacity. Their maximum number of flights per day is
657 and they currently have 650. They really have no more capacity which means
one of the only ways for them to grow financially is to bring in larger planes. The 76 seat FlyBe Dash 8 takes up the same
time on the runway that could be used by another 345 seat British Airways 747 while the airport
would make vastly more money by having that 747 land. This is no doubt part of the reason why Heathrow
is so poorly connected to the country that it’s in—the UK. The airport only has flights to eight airports
in the UK which means the airport has exactly the same number of destinations in the UK
as it has in China. Meanwhile, Amsterdam Airport Schiphol, in
the Netherlands, has flights to 25 destinations in the UK. That means that for the vast majority of UK
residents living outside of London, it’s easier to connect to wherever they’re going
through Amsterdam than the airport in their capital city. The reality is that Heathrow is a commercial
company. While most UK residents would likely want
to see domestic flights to their largest airport it just doesn’t make commercial sense to
operate short and cheap flights to Heathrow in the place of highly lucrative long-haul
flights. It’s not only less lucrative for the airport,
it’s also more costly for the passenger than flying to other smaller airports. Of course, not every airport is like Heathrow. Not every airport is a commercial company. That’s just because, in many cases, running
an airport the way the public wants it to be run is bad business. About two thirds of all airports worldwide
lose money. In many cases that’s because they’re government
run and just not that focused on making money. The US is a country that has not yet gotten
around to airport privatization like the UK. There is only one single privately owned and
operated airport in the US with commercial passenger flights—that’s Branson Airport
in Southern Missouri. Unlike Heathrow, which turns a considerable
profit, Branson airport is loosing money and has struggled to keep airlines flying there
for more than a few years. It’s not like Branson was the only attempt
at running a private airport in the US—National Express, a UK based transport company, took
over Newburgh airport 60 miles north of New York City in 2000, but it too failed and sold
the airport back to the government. The difference between airport privatization
in the US and the UK is that in the US, the smallest airports went private while in the
UK, the largest airports did. In the UK, ten of the fifteen busiest airports
are privately owned and operated. Meanwhile, only four of the fifteen least
busy airports in the country are privately owned. That’s because small airports, in most cases,
just don’t make money. Smaller airports being government run and
unprofitable in the US allow for a sort of indirect subsidy for airlines to operate there. In these cases, airports are willingly charging
airlines less than it costs to run the airport to operate there in order to attract them
to fly there. City, county, or state governments are willing
to do this because they view air service as a stimulant to economic development. The merits of private versus public airport
ownership can be debated, but proponents of publicly owned airports will argue that they’re
essential pieces of infrastructure while those for airport privatization will argue that
commercial ownership leads to lower costs and better service. Even in the UK public opinion is split on
whether airports are better off public or private. What’s sure, though, is that running an
airport, whether public or private, is not easy and that the fact that a few hundred
aircraft taking off per day is all it takes to fund the multi billion dollar business
of Heathrow is almost as impressive as the planes themselves. Now that you’ve finished this video, there’s
another one I made for you to watch. Squarespace asked me to make a video explaining
why, “design is not a luxury.” That phrase might not make sense now but the
whole point of the video I made is to explain it so make sure to watch it. You can either click the annotation on-screen
now or it’s linked at the top of the description. Oh, and fair warning, I go on camera in it. Thanks for watching and we’ll see you again
in two weeks for another Wendover Productions video.