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FinalReport–April2017HeathrowAirport–ReviewofCommercialRevenuesCivilAviationAuthorityFinalReportApril2017Ourref:23049601Clientref:2553SteerDaviesGleavehaspreparedthismaterialforCivilAviationAuthority.
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HeathrowAirport–ReviewofCommercialRevenuesCivilAviationAuthorityFinalReportApril2017Ourref:23049601Clientref:2553Preparedby:Preparedfor:SteerDaviesGleave28-32UpperGroundLondonSE19PDCivilAviationAuthorityCAAHouse,45-59,KingswayLondonWC2B6TE+442079105000www.
steerdaviesgleave.
comApril2017ContentsExecutiveSummary.
i1Introduction.
1Backgroundtothisstudy.
1Scopeofthestudy1Sources.
1Pricebases.
2IntroductiontoHAL'scommercialrevenuesperformance.
2Thisstudy.
42Commercialrevenuesbenchmarking.
5Introduction.
5BenchmarkingAnalysis.
5Summary.
103Retail11Recentperformancetrends.
11DriversofRetailperformance12PerformanceversusQ6Settlement24LessonsfortheH7process.
27Bestpracticefromotherairports.
29Methodstoincreaserevenuesfromexistingsources.
31Meanstoincreaserevenuesfromnewsources.
32Challengesandopportunities.
324CarParking.
35Recentperformancetrends.
35DriversofCarParkingperformance35PerformanceversusQ6Settlement42LessonsfortheH7process.
43Bestpracticefromotherairports.
46Methodstoincreaserevenuesfromexistingsources.
47Methodstoincreaserevenuesfromnewsources49April20175Property.
52Recentperformancetrends.
52DriversofPropertyperformance52PerformanceversusQ6Settlement56LessonsfortheH7process.
57Bestpracticefromotherairports.
57Methodstoincreaserevenuesfromexistingsources.
57Meanstoincreaserevenuesfromnewsources.
586FurtherAnalysis59KeyFindings.
59RecommendedActions.
61FiguresFigure1.
1:HALcommercialrevenues(gross)in20153Figure2.
1:UKairports–Totalcommercialrevenuesperpassenger,2015.
6Figure2.
2:Internationalairports-Totalcommercialrevenuesperpassenger,2015.
6Figure2.
3:Internationalairports-Retailrevenuesperpassenger,2015.
7Figure2.
4:Internationalairports-Propertyrevenuesperpassenger,2015.
8Figure2.
5:Internationalairports–Carparkingrevenuesperpassenger,2015.
8Figure3.
1:HAL–Retailrevenuemix,2015.
11Figure3.
2:NetRetailrevenuesperpassenger(2015prices)12Figure3.
3:HeathrowAirport–Annualpassengertraffic,2013–2016.
13Figure3.
4:HeathrowAirport–Annualpassengertrafficbygeographicalmarket,2013–November2016MAT.
13Figure3.
5:HeathrowAirport–Passengernationalitymix,2013–Q32016.
14Figure3.
6:HeathrowAirport–Passengernationalitymixperterminal,Jan-Sep201615Figure3.
7:Averageincomeofpassengersattop4UKairports,201515Figure3.
8:UKretailsalesgrowthtrends–2006-201616Figure3.
9:HeathrowAirport–Indexofretailsalesperpassengervs.
leadingexchangerates20Figure3.
10:HeathrowAirport–Tobaccosales(2015prices)22Figure3.
11:HeathrowAirport–Retailsales2013-2015(2015prices)23Figure3.
12:HeathrowAirport–Retail*salesperpassenger2013-2016(2015prices)23April2017Figure4.
1:Carparkingrevenuesperpassenger(2015prices)35Figure4.
2:HeathrowAirportmodalsplit,Jan-Sep201636Figure4.
3:%ofpassengersaccessingHeathrowwithaprivatecar.
37Figure4.
4:UKairports–offairportparkingspacesperMPPA.
38Figure4.
5:ParkingspacesperMPPA–LeadingEuropeanairports.
39Figure4.
6:Parkingpromotion-recentGatwickexample.
48Figure5.
1:Propertyrevenuesperpassenger(2015prices)52Figure5.
2:HeathrowAirport–Tenantedpropertymix,December2016.
54Figure5.
3:HeathrowAirport–Property('000sq.
m)perareaoftheairport,December201654Figure5.
4:HeathrowAirport–Propertyrevenuecontributionbyairportarea,2012-2015(2015prices)55TablesTable1.
1:HALCommercialrevenuesperpassenger,20153Table2.
1:HALCommercialrevenuesbycategory–20155Table2.
2:LeadingEuropeanairports–Retailrevenuesbyproductcategory,2015*7Table2.
3:UKairports–Parkingrevenuespernon-connectingpassenger,2015*9Table2.
4:BenchmarkingHeathrow'scommercialrevenues–Keyissues.
10Table3.
1:HeathrowAirport–Retailspacepermillionpassengers17Table3.
2:HeathrowAirport–Airsidemixandsalesperm218Table3.
3:HeathrowAirport–RetailKPIsperterminal,201518Table3.
4:HeathrowAirport–recentairlinemoves.
21Table3.
5:HeathrowAirport–Tobaccosalesperpassenger(nominal)22Table3.
6:HeathrowAirport–Recent%marginsinRetail23Table3.
7:HeathrowAirport–Retailrevenuescumulativeperformance,Q6toendof2015(2015prices)24Table3.
8:HeathrowAirport–Q6Retailrevenuesperformancecommentary.
26Table3.
9:Alternativeairportretailbusinessmodels.
29Table3.
10:HeathrowAirport–MinutesspentfromcomingthroughSecuritytoleavingmainshoppingarea31Table3.
11:HeathrowAirport-MinutesspentbetweenleavingthedepartureloungeandexpectedtimeofflightDeparture.
32April2017Table4.
1:HeathrowAirport–DevelopmentofUKresidentnon-connectingtraffic,2013-201536Table4.
2:HeathrowAirport–privatecarusers37Table4.
3:TariffComparisons–KeyUKairports.
41Table4.
4:T4ShortStaytariff41Table4.
5:HeathrowAirport–CarParkingrevenuescumulativeperformance,Q6toendof2015(2015prices)42Table4.
6:HeathrowAirport–Q6CarParkingrevenuesperformancecommentary.
43Table4.
7:BenchmarkingDistributionChannelsforprebookingatkeyUKairports.
49Table4.
8:Prices–T5PODvsT1-T5BusinessParking.
49Table5.
1:HeathrowAirport–PropertyGuidePriceindex,2010-201553Table5.
2:HeathrowAirport–Propertyoccupancy,December201655Table5.
3:HeathrowAirport–Propertyrevenueyield(perm2),2015.
56Table5.
4:HeathrowAirport–Propertyrevenuescumulativeperformance,Q6toendof2015(2015prices)56Table5.
5:HeathrowAirport–Q6Propertyrevenuesperformancecommentary.
56Table6.
1:Proposedactions.
61HeathrowAirport–ReviewofCommercialRevenues|FinalReportApril2017|iExecutiveSummaryOverviewThisreporthasbeenpreparedfortheCAAbySteerDaviesGleaveandisahighlevelstudyoftherecentcommercialrevenueperformanceofHeathrowAirportLimitedalongwithopportunitiestodevelopthesefurther.
Thescopeofthestudyis:BenchmarkingofHAL'scommercialrevenuesagainstrelevantbenchmarks;AnalysisofthedriversofcommercialrevenuesincludingexplanationofdifferenceinoutturnrevenuesversustheQ6settlement;LessonslearnedthatcanbeadoptedfortheCAA'sH7process;Identificationofmethodstoincreaserevenuesfromexistingsources;Assessmentofthescopeforincreasingnetrevenuesbyintroducingadditionalcommercialusesofasimilartype,furthertypesofcommercialdevelopment,and/orimprovingthemixofcommercialactivities,takingintoaccountthewiderinterestsofpassengers;andSuggestionsofpossiblefurtheranalysistosupportthedevelopmentofreliableconclusions.
KeyFindings&RecommendationsRetailItemComments2015*tradingperformance(net)422million,5.
63/passengerPerformanceversusCAAQ6Determination(cumulativeApril2014-December2015):CAA700million,actual721million.
HowevercumulativeretailrevenueperpassengerisbelowtheCAAforecast,reflectingasignificantlyhighervolumeofpassengertrafficthanassumedfortheQ6Determination:CAA5.
49,actual5.
45.
BenchmarkpositionHeathrowisabenchmarkintheworldofairportretail.
Itgenerallyhasasuperiorrevenueperpassengerperformancethanpeersinindividualretailcategories,andinoveralltermshasthehighestlevelofretailrevenueperpassengeramongstthemajorairportswehavecompareditagainst.
KeyfindingsTheairporthasdirectrelationshipswithandthepresenceoftheworld'sleadingluxurybrands,andtradesitsspaceveryeffectivelytodrivesalesandmargin.
Changingconsumershoppingbehaviourfacilitatedbythedevelopmentofe-commerce–whileitisimpossibletopredictthefullimpacte-commercewillhaveonTravelRetail,themillennialswhohavegrownupwithe-commercewillexpecttoexperiencethesamedegreeofflexibilitytowardstheirshoppingattheairportaswhentheyareathome.
ThismeansthatthefoundationsforthischangemustbeconsideredanddevelopedsothatHALisreadyforthiseventuality.
Anewbusinessmodelcouldbeconsideredtoradicallygrowsales,combiningHAL'sretailande-commercecapabilitywiththeairlinesaccessto100%ofpassengerstravellingthroughHeathrowAirport.
HALanditsairlinepartnerscouldbethedisruptortoTravelRetail.
Mostairportsdeliverstepchangeintheirretailrevenuesasaconsequenceofexpandingtheirretailspace.
ItisclearthatintheabsenceofmaterialadditionalspacebeingavailableatHeathrowoverthemediumtermcombinedwiththefacttheyarealreadyspaceconstrained(comparedtoexistingbenchmarks),thereisreasonforconcernoverfuturerevenuegrowth.
Thisisamajorissuebothcommerciallyandforpassengerexperience.
Conversely,developingnewspacewillbeveryexpensiverequiringinnovativesolutionsinordertodeliversuccessfully.
Possiblylinkedtospaceconstraints,itappearsthatHAL'sstruggletoHeathrowAirport–ReviewofCommercialRevenues|FinalReportApril2017|iiItemCommentsgrowsalesmateriallyhasdriventhemtoadapttheirapproach,sacrificingflexibilityinsomecases(forexamplethroughawardinglongercontracts,atimprovedmarginsforHAL,whichcanbringrevenuebenefitsintheshorttermbutwhichalsolengthentheperiodinwhichaconcessionairecanoperate,potentiallycreatinganissueforthefutureshouldsalesperformancestagnateordeteriorate).
Whilethishassupportedrevenuesintheshorttermthereisalimittohowfartheycangowithoutcausinglongtermdamageasaresultofmovingawayfromprincipleswhichmadethemsosuccessfulinthefirstplace.
WehavementionedareaswhereHALhasmoreorlessinfluencebutitisdifficulttoseehow,intheabsenceofsignificantlymorespace,whereHALwillderivemateriallevelsofincrementalrevenue.
Thereisarisktheairportcouldthereforebecomemoreexposedtoareasoutsideofitscontrolsuchasexchangerates,shoppinghabitsandaboveallelse,adisruptortothesector–the'Uber'ofTravelRetail.
RecommendedfutureanalysisCommissionadetailedreviewofcommercialspacetodefinetheoptimalamountofretailspacegoingforward.
ToincludeafullreviewofSatellitebuildingsoutlininghowtheycouldbecommercialisedandcostbenefitanalysisonthedevelopmentofretailspaceovercostofdelivery.
Explorepotentialfuturelegislativeimpactsonretailsales,upsideordownside.
ReviewopportunitiesorthreatsintermsofHAL'sabilitytocontinuetocontrolthepassenger-relatedretaildistributionchannelgivenchangesledbye-commerce.
Considermeanstoincentivisetheairportcommunity(HAL,airlines,retailers)tocollaboratetodrivecommercialrevenuesgrowth-anewbusinessmodel.
CarParkingItemComments2015*tradingperformance107million,1.
43/passengerPerformanceversusCAAQ6Determination(cumulativeApril2014-December2015):CAA173million,actual185million.
Cumulativecarparkingrevenueperpassenger:CAA1.
35,actual1.
39.
BenchmarkpositionAtheadlinelevelHeathrow'scarparkingrevenuesperpassengerareonasimilarpartothoseofothermajorleadingairportsand/orairportgroupsinEurope.
HowevertheheadlineresultsareinfluencedbyfactorsincludingthedemographicmixofairporttravellersandHAL'spoliciestowardsreducingthenumberofcarjourneysinordertocontrolenvironmentalemissions.
AdjustingforsomeofthesefactorsHeathrowattainshigherparkingrevenuesperpassengerthanGatwick.
KeyfindingsIncomparisonwithitspeers,HALleadstheairportparkingmarketthroughits:Consumerstrategyofferingawidechoiceofqualityproductsandcompetitivepricingparticularlyduringoffpeak;andParkingoperationdeployingbestpracticetechnologyandprocessesinahighlycompetitiveenvironment.
ItappearsthatthereisalimittowhatHALcanlearnfromotherUKorInternationalairportsthatwouldmakeanyrealdifferencetoparkingrevenuesgivenitsgeographyandavailablecapacity,saveforreviewingitsdistributionstrategyandassessingwhetherawiderstrategywithaffiliatessuchasairlinesandotherconsolidatorscouldindeedgeneratematerialparkingrevenues/providewidercommercialopportunities.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportApril2017|iiiRecommendedfutureanalysisConductahighlevelreviewofcarparkoperatorandHALmarketingcosts(aspartofanoverallHeathrowcarparkingcostreview)andbenchmarkwherepossibletootherbestpracticeairportstoidentifyanypotentialforfurthercostsavings.
ReviewtimebandanalysisforHAL'sshortstaycarparkstoassessopportunitiesforfurtherrestructuringtoprovideadditionalrevenueopportunitiesi.
e.
byminute/differentialpricingbyTerminal.
PropertyItemComments2015*tradingperformance112million,1.
49/passengerPerformanceversusCAAQ6Determination(cumulativeApril2014-December2015):CAA203million,actual195million.
Cumulativepropertyrevenueperpassenger:CAA1.
59,actual1.
47.
BenchmarkpositionThereissomeevidenceofoutperformanceinpropertyrevenuesbyindividualpeers,althoughHeathrowistowardstheupperendoftherangewhencomparedtootherleadingairports.
Fromapurebenchmarkingperspectiveoneshouldnottaketheperformanceatfacevalueassomeairportswithhigherrevenueareknowntooperateunderadifferentmodel,theyactasthedeveloper,investmoremoneythanHALandasaconsequenceenjoyhigherreturns.
Withnomaterialnewspacecomingon-linebeforeR3thisisamodelHALmightneedtoexplore.
KeyfindingsWhileHALdoesnotnecessarilyleaditspeersinrelationtoPropertyrevenueperpassengeritisimportanttorememberthatHAL'spropertyrevenueinandaroundtheterminalareasislargelyinfluencedbytheGuidePriceFormula,overwhichithasnocontroland,inthecaseofpropertylocatedaroundthePerimetertherearelimitationsduetolocalcompetition.
HALhasdevelopedalternative,passenger-facing,waystodevelopPropertyspacee.
g.
payonentrylounges.
Theturnoverbasedrentscanmatchandpotentiallyexceedtheguidepricerentsiftheloungesaresuccessful.
AswithRetail,thereisageneralshortfallinpropertyspacewhichshouldbereviewedasthiswillconstrainrevenuegrowth.
RecommendedfutureanalysisDetailedPropertyStrategy,reviewingallspace,whatdoHALown,howisspaceused,opportunitiestomateriallychangethewaytheydobusinesstodaye.
g.
lowercostbuildings.
Note:*2015isthemostrecentperiodcoveredbytheHALRegulatoryAccountsatthetimeofwritingofthisreport(March2017)HeathrowAirport–ReviewofCommercialRevenues|FinalReportApril2017|ivGlossaryACCAirlineConsultativeCommitteeANPRAutomaticNumberPlateRecognitionAOCAirlineOperatorsCommitteeAPCOAAPCOAParkingAPHAirportParking&HotelsATVAverageTransactionValueCRMCustomerrelationshipmanagementCTACentralTerminalAreaE&MElectronic&mobilecommerceETRCEuropeanTravelRetailConfederationF&BFood&BeverageFBPFinalBusinessPlanHALHeathrowAirportLimitedHEXHeathrowExpressH7Regulatoryperiod(next)IAPAIndependentAirportParkingAssociationIATAInternationalAirTransportAssociationIPDUKMonthlyPropertyIndex(publishedbyMSCI)KPIKeyperformanceindicatorMATMovingannualtotalMPPAMillionsofpassengersperannumMSCPMultistoreycarparkONSOfficeforNationalStatisticsPRTPersonalRapidTransitQ6Regulatoryperiod(current)ROIReturnoninvestmentRPIRetailPriceIndexR3HeathrowwiththreerunwaysTDATobaccoDisplayAreaWDFGWorldDutyFreeGroupWHSWHSmithVATValueaddedtaxYoY%Yearonyear%changeHeathrowAirport–ReviewofCommercialRevenues|FinalReport1IntroductionBackgroundtothisstudy1.
1TheCAAisstartingtopreparefortheforthcomingH7reviewofairportchargesatHeathrowAirportandisgatheringevidenceonHeathrowAirportLimited's('HAL')revenuesandcoststoaiditsassessment.
1.
2TheCAAhascommissionedSteerDaviesGleavetodevelopahighlevelstudywhichexaminesHeathrow'sperformanceingeneratingcommercialrevenues.
TheresultsofthisstudywillbeusedtomakeinitialjudgementsaboutpriorityareasandtosupplementtheprocessofConstructiveEngagementbetweenHALandairlinesinsummer2017.
Scopeofthestudy1.
3ThefocusofthestudyisonboththehistoricallevelsofperformanceofcommercialrevenuesatHeathrow(inabsolutetermsandalsoversustheCAA'sQ6Settlement),andalsothescopefordevelopingthemfurtherinthefuture.
1.
4Thescopecomprises:BenchmarkingofHAL'scommercialrevenuesagainstrelevantbenchmarks;AnalysisofthedriversofcommercialrevenuesincludingexplanationofdifferenceinoutturnrevenuesversustheQ6settlement;LessonslearnedthatcanbeadoptedfortheCAA'sH7process;Identificationofmethodstoincreaserevenuesfromexistingsources;Assessmentofthescopeforincreasingnetrevenuesbyintroducingadditionalcommercialusesofasimilartype,furthertypesofcommercialdevelopment,and/orimprovingthemixofcommercialactivities,takingintoaccountthewiderinterestsofpassengers;andSuggestionsofpossiblefurtheranalysistosupportthedevelopmentofreliableconclusions.
Sources1.
5Ourreporthasdrawnonvarioussourcesinthepublicdomain,includingHAL'spublishedRegulatoryAccounts,andhasalsobeeninformedbyconfidentialmaterialssharedwithusbyHAL.
1.
6Wehavealsointerviewedthefollowingorganisations:HAL(Retail,CarParking,Property);Concessionaires:WorldDutyFreeGroup(WDFG);andCarparkingManagingAgent:APCOA.
EuropeanTravelRetailConfederation(ETRC);andHeathrowAirport–ReviewofCommercialRevenues|FinalReportAirlines(representativesofIATA,HeathrowAOC,HeathrowACC,BritishAirways).
Pricebases1.
7Unlessstatedwehaveexpressedsalesandrevenuesin2015realprices.
Thisrecognisesthatinformationinthepublicdomain,notablyHAL'sRegulatoryAccounts,isatthetimeofwritingofthisreportonlyavailableuptoandincluding2015.
1.
8Wherewehavereceivedconfidentialornon-publisheddatafromHALfor2016,inpartorthefullyear(e.
g.
Tobaccosales),wehaveconvertedthisto2015pricesunlessstated,andsimilarlyhaveadjustedanysupportinghistoricaltimeseriesinthesameway.
1.
9InallcaseswheredataisconvertedtorealpriceswehaveusedpublishedONSRPItables.
IntroductiontoHAL'scommercialrevenuesperformanceHowHALderivesitscommercialrevenues1.
10ServicestoPassengers–thisincludesareassuchasretail,food&beverage,bureauxdechange,advertising,carparkingandcarrental.
Withtheexceptionofcarparkingtheseservicesareoperatedonaconcessionairemodelwhereathirdpartyisresponsibleforthefrontlineprovisionoftheserviceandtheairportreceivesaconcessionfeebasedonapercentageoftheconcessionaire'snetsalesturnover.
Inmostcasestheconcessionfeeisunderwrittenbyaminimumguaranteedrent.
CarParkingisbasedonamanagementcontractwherebyHALcollectsalloftherevenueandthecarparkoperatorispaidafeeplusoperatingcostsforprovidingcarparkservicestothepassenger.
ThisparticularlybenefitsHALasalloftherevenuegrowthfrompassengersandtariffincreasesisfullyrealisedbyHALratherthanbeingsharedwiththecarparkoperator.
1.
11Servicesprovidedtoairlinesandotherbusinessusers–thisincludesareassuchascheck-indesks,officerental,airlineloungesandwarehousing.
Chargesfortheseservicesareoftenfixedorvolumerelatedandasaconsequencearelesslikelytoincreaseatthesamerateaspassengergrowth.
1.
12ThescopeofthisreviewencompassesHAL'scommercialrevenuescontributingtothesingletillcalculationofthepricecontrol.
Atpresentthesecompriserevenuesfromthefollowingnon-aeronauticalactivities:Retail:Duty&TaxFree;AirsideSpecialistShops;BureaudeChange;Catering;OtherRetailincome;-includesBookshops,CarRental,Advertising,OtherRetailactivities;Carparking;andProperty.
Recentperformance1.
13HAL'sregulatoryaccountsshowthatthecompanyearned641millioninnetcommercialrevenuesincalendaryear2015,comprisingthefollowingmix:HeathrowAirport–ReviewofCommercialRevenues|FinalReportFigure1.
1:HALcommercialrevenues(gross)in2015Source:HALregulatoryaccounts20151.
14Inoveralltermstheactualrevenuesachievedin2015werefractionallyhigherthanthoseassumedbytheCAAfortheQ6Determination(Actual:658mgross,CAA654m).
1.
15Howevertheactualperformancewasderivedfromamateriallyhighervolumeofpassengers(75.
0million)thanthoseassumedbytheCAAfor2015(72.
0million),indicatingthatperpassengerrevenueshavefailedtodevelopfullyinlinewithQ6Determinationexpectations.
Table1.
1:HALCommercialrevenuesperpassenger,20152015Retail&CarParkingPropertyTotalCAA7.
471.
619.
08Actual7.
281.
498.
77Note:Grossrevenuesincl.
retailexpenditure1.
16Adjustedforinflation,HAL'scumulativecommercialrevenuesperformancefromApril2014–December2015hasalsobeenclosetotheCAAforecast.
In2015pricestheairportgeneratedrevenuesof1.
093billioninthisperiod,+1.
0%morethantheCAAforecastof1.
082billion.
1.
17Theactualcumulativeperpassengerrevenueshasbeenlowerthanprojected,at8.
26perpassengerversustheCAA'sexpectationof8.
49(-2.
8%).
HeathrowAirport–ReviewofCommercialRevenues|FinalReportThisstudy1.
18Intheremainderofthisreportwe:SummarisetherecentperformanceofcommercialrevenuesatHeathrowversusthoseatpeerairports;Assessthekeyscopeareasastheyrelatetoretail,carparking,andpropertyrespectively.
Summariseourmainfindingsalongwithrecommendationsforadditionalanalysis.
HeathrowAirport–ReviewofCommercialRevenues|FinalReport2CommercialrevenuesbenchmarkingIntroduction2.
1ThissectionofthereportintroducesHAL'srevenueperformanceintheareasofscope,andcomparesittorelevantUK,Europeanandglobalairportbenchmarksforwhichthereisdataavailableinthepublicdomain.
2.
2In2015HALearnedthefollowingrevenuesfromitsregulatedcommercialrevenues:Table2.
1:HALCommercialrevenuesbycategory–2015CategoryRevenues(m)Revenues/PassengerDuty&TaxFree1281.
71AirsideSpecialistShops1001.
33BureaudeChange530.
71Catering450.
60OtherRetailincome1131.
51Retailexpenditure-17-0.
23Retail(Total)4225.
63Carparking(Total)1071.
43Property(Total)1121.
49Total6418.
55Source:HALRegulatoryAccounts2015BenchmarkingAnalysisPerformanceattotallevel2.
3AtanoveralllevelHeathrowachievedthehighestlevelsofcommercialrevenueperpassengeramongtheUK'sleadingairports.
Theairportearned8.
55perpassengerfromitsregulatedcommercialrevenuesstreams,over1perpassengermorethanatManchester,and2.
30morethanatGatwick.
2.
4ThedataforsomeoftheairportsshownbelowincludesrevenuesfromsourceswhicharenotregulatedatHeathrow.
AdjustingthecomparisontotakeintoaccounttheincomeHALearnsfromtheothernon-airportchargesstreams(Rail,OtherRegulatedCharges,Other)reportedinitsregulatoryaccountswouldwidenthegapsubstantiallyfurther,withHALgenerating13.
95perpassengeracrossallitsnon-airportchargesrevenuesin2015.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportFigure2.
1:UKairports–Totalcommercialrevenuesperpassenger,2015Source:SteerDaviesGleaveanalysisofpublishedairportannualaccountsNote:Calendaryear2015exceptforthefollowingairportsforwhichthedatarelatesto2015/16;Manchester,Gatwick,Stansted,Birmingham.
Definitionsofcommercialrevenuesmayvarybetweenairports,notablyinrelationtoclassificationofancillaryrevenuessuchasoperationalfacilitiesincome.
2.
5Heathrowalsogeneratesahigheramountofcommercialrevenuesperpassengerthanitsleadinginternationalpeers.
Figure2.
2:Internationalairports-Totalcommercialrevenuesperpassenger,2015Source:SteerDaviesGleaveanalysisofpublishedairportannualaccountsNote:Revenuesrecordedinlocalcurrencyandconvertedtosterlingataverageratesfor2015.
Airportgroupcomponents:ParisAeroport–CharlesdeGaulle,Orly;MilanSEA–Linate,Malpensa;AeroportidiRoma–Fiumicino,CiampinoHeathrowAirport–ReviewofCommercialRevenues|FinalReportPerformanceatcategorylevelRetail2.
6Heathrowgenerallyhasasuperiorrevenueperpassengerperformancethanpeersintheretailcategories.
Figure2.
3:Internationalairports-Retailrevenuesperpassenger,2015Source:SteerDaviesGleaveanalysisofpublishedairportannualaccountsNote:Allairportfiguresarefor2015exceptforGatwickandMAG(2015/16).
Foreignairportrevenuesrecordedinlocalcurrencyandconvertedtosterlingataverageratesfor2015.
Heathrowretailfiguresarenetofexpenditure.
Airportgroupcomponents:MAG–Manchester,Stansted,EastMidlands,Bournemouth2.
7EvidencefromindividualretailproductcategoriessuggeststhatHeathrowgenerallytendstooutperformpeersatthisleveltoo,althoughGatwickhasastrongerCateringperformance:Table2.
2:LeadingEuropeanairports–Retailrevenuesbyproductcategory,2015*AirportDutyFreeSpecialistShopsBureaudeChangeCateringLHR1.
711.
330.
710.
60Gatwick1.
170.
950.
570.
68ParisAeroport2.
48**-0.
170.
24AeroportidiRoma0.
630.
440.
140.
43Amsterdam---0.
41Sources:SteerDaviesGleaveanalysisofpublishedairportannualaccountsNote:*allairportfiguresarefor2015exceptGatwick(2015/16)**DutyFreeandSpecialistShopsappeartobecountedtogether.
Foreignairportrevenuesrecordedinlocalcurrencyandconvertedtosterlingataverageratesfor2015.
Property2.
8Thereissomeevidenceofoutperformanceinpropertybypeers:HeathrowAirport–ReviewofCommercialRevenues|FinalReportFigure2.
4:Internationalairports-Propertyrevenuesperpassenger,2015Source:PublishedairportannualaccountsNote:Allairportfiguresarefor2015exceptforGatwickandMAG(2015/16).
Foreignairportrevenuesrecordedinlocalcurrencyandconvertedtosterlingataverageratesfor2015.
CarParking2.
9Carparkingisacategoryinwhichouranalysis,assessingparkingrevenuesintermsoftotalpassengervolumes,suggeststhatsomepeerairportsareperformingbetter.
Figure2.
5:Internationalairports–Carparkingrevenuesperpassenger,2015Source:PublishedairportannualaccountsNote:Allairportfiguresarefor2015exceptforGatwickandMAG(2015/16).
Foreignairportrevenuesrecordedinlocalcurrencyandconvertedtosterlingataverageratesfor2015.
2.
10However,theresultisskewedbytherelativeproportionsofconnectingtraffic(aspassengerstransferringbetweenflightswillnothaveaccesstoHeathrowAirport–ReviewofCommercialRevenues|FinalReporttheirowncar,exceptattheairportsatwhichtheystartandendtheirtrip).
Inaddition,thecomparativeresultsareinfluencedby:Heathrow'shighershareofforeignresidentpassengerswhodonothaveaccesstoaprivatecar(forparking);HAL'sSurfaceAccessstrategywhichaimstoreducethenumberofcarjourneyspassengerstaketotheairportinordertocontrolemissions,andwhichtargets45%ofpassengersusingpublictransportby2020,and50%by2030;andHeathrow'srangeofalternativesurfaceaccessoptions.
2.
11AdjustingtheanalysisfortheUKairportstonon-connectingtrafficonly:Table2.
3:UKairports–Parkingrevenuespernon-connectingpassenger,2015*AirportRevenueperpassengerMAG2.
74Heathrow2.
22Gatwick2.
04Source:SteerDaviesGleaveanalysisofpublishedairportannualaccounts,CAANote:*RevenuefiguresforMAGandGatwickarefor2015/16.
Non-connectingpassengersderivedfrom%splitsinCAADepartingPassengerSurvey2015timestotalpassengers.
AreasinwhichotherairportsoutperformHeathrow2.
12Fromtheanalysisabove,areasinwhichthereisevidenceofoutperformanceversusHeathrowthatcouldbeinvestigatedfurtherinclude:RetailCatering:Gatwick(Heathrow'sissuesrelativetoGatwickarelikelytobeconstrainedspace,ahigherproportionoffullserviceairlinesprovidingfreefoodanddrinkonboard,connectingpassengermixandculturaldifferencesinpassengermix).
CarParking:MAG.
Property:Amsterdam,Sydney.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportSummary2.
13Thekeyissuesarisingfromourbenchmarkinganalysisare:Table2.
4:BenchmarkingHeathrow'scommercialrevenues–KeyissuesAreaCommentTotalcommercialrevenuesHeathrowaheadofUKandglobalpeersRetailAsaboveatoverallRetaillevelSlightlybehindGatwickforCateringrevenueperpassengerParkingAdjustingtocomparingrevenuesonanon-connectingpassengerbasis,HeathrowisaheadofpeerswiththeexceptionoftheMAGairportsPropertyHeathrowgenerallyaheadofpeers,withtheexceptionsofSydneyandAmsterdamHeathrowAirport–ReviewofCommercialRevenues|FinalReport3RetailRecentperformancetrends3.
1HAL'sRetailactivitiesgenerated439millioningrossrevenuesduring2015.
Thelargestcategory(byrevenue)wasDuty&TaxFree(128million).
Figure3.
1:HAL–Retailrevenuemix,2015Source:HALRegulatoryAccounts,20153.
2HAL'sRetailrevenueshavegrownstronglyinrealperpassengertermsinthepasttwoyears.
In2013/141theyaveraged6.
64(includingCarParkingrevenues),thisgrewby6%to7.
05in2015.
1DatafromHAL'sregulatoryaccounts,thesemovedfromafiscaltocalendaryearbasisafter2013/14.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportFigure3.
2:NetRetailrevenuesperpassenger(2015prices)Source:HALRegulatoryAccountsNote:Basisofregulatoryaccountschangedduring2014fromfiscaltocalendaryearbasis,2014resultsreportedforApril-Decemberonly.
CarparkingrevenuesnotseparatelyreportedinHALRegulatoryAccountsbefore2014.
3.
3However,overthelongertermrealperpassengerrevenueshavefluctuatedinarangeof6to7.
In2010/11theywereverycloseto2015levels(whichrepresenttherecordoverthepast10years),andhaveremainedat,orabove,6.
60perpassengersincethen.
DriversofRetailperformanceTrafficvolumeandmix3.
4HAL'scommercialrevenueperformanceduringQ6hastakenplaceagainstabackdropofgenerallysteadygrowthintrafficvolumes,withtheexceptionof2016whentrafficgrowthslowedtocloseto0%intheperiodfromApril2016onwards.
Overthe2013-2016periodannualtrafficgrowthaveraged+1.
5%.
3.
5PassengervolumeshavealsobeensubstantiallyhigherthanassumedfortheQ6Determination,exceedingtheCAA'sforecastsbyabout3millionpassengersinboth2015and2016.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportFigure3.
3:HeathrowAirport–Annualpassengertraffic,2013–2016Source:HAL3.
6Asoneoftheworld'slargesthubairports,Heathrowservesawidearrayofglobalmarkets.
Figure3.
4:HeathrowAirport–Annualpassengertrafficbygeographicalmarket,2013–November2016MATSource:HALNote:Marketindicatesflightpointoforigin/destination3.
7RecenttrafficgrowthhasbeenstrongesttoLatinAmerica(CAGR2013-November2016MAT:+5.
5%)andtheMiddleEast(+5.
4%).
3.
8VolumeshavedeclinedtoAfrica(CAGR-3.
6%),wheretraffictoNorthAfricahasbeendisruptedbytheeffectsofterrorismand/orcivilunrestinLibya,TunisiaandEgypt.
3.
9VolumeshavealsofallenonUKdomesticroutes(CAGR-2.
4%).
ThisisinlinewithamoregenerallongtermreductioninUKvolumesservedfromHeathrowAirport–ReviewofCommercialRevenues|FinalReportHeathrow(2005:6.
67millionpassengers,November2016MAT:4.
65million)coincidentwithstronggrowthininternationaltraffic(2005:61.
01million,November2016MAT:70.
76million).
3.
10ThespreadofHeathrow'sglobalroutenetworkalsoinfluencesthenationalitymixoftravellersusingtheairport.
InrecentyearsUKnationalshaveconstituted36-37%ofthepassengermix,withothermajorgroupsincludingnationalsfromtheEuropeanUnionandEFTAcountries(2015:25%),NorthAmerica(2015:c.
18%)andEastAsia/Australia(2015:c.
8%).
Figure3.
5:HeathrowAirport–Passengernationalitymix,2013–Q32016Source:HALPassengerProfiler(departingsurvey)3.
11Notablerecentmovementsinthenationalitymixbetween2013-2015included:HigherUKnational%share;LowershareofEU/EFTAnationals;LowershareofEasternEuropeans(importantasRussiansaretraditionallyhighspenders);IncreaseinNorthAmericans(importantasthisgroupistraditionallyrelativelylowspend);andIncreaseinEastAsia/AustraliasharedrivenbygrowthinEastAsians(assumedtobepredominantlyChinesewhoareimportantspenders,butlesssothanothergroupssuchasRussians).
3.
12Thesurveydataindicatesfurthershiftsinthenationalitymixin2016,althoughitisnotcleartowhatextentthesereflectseasonalityimpacts(atthetimeofourreview2016dataonHeathrow'spassengerdemographicshasonlybeenavailableuptotheendofQ3)orrealmixchanges.
3.
13ThemixbypassengernationalityisnotuniformacrossHeathrow'sterminals.
Atanyonemomentintimethiscaninfluencethecomparativeretailrevenueperformancebetweenterminals.
However,itisalsoimportanttoconsiderinthedynamiccontextofairlinerelocationfromoneterminaltoanotherforoperationalreasons.
Suchmovescanresultinhighorlowspendinggroupsmovingterminals,aneffectthatcanpotentiallybebeneficialoradverseforretailrevenuesdependingonthepassengergroupsandterminalsinvolved,andreflectingthealignmentbetweentheHeathrowAirport–ReviewofCommercialRevenues|FinalReportretailofferinindividualpartsoftheairportandthetypesofpassengersprovidingfootfallinandaroundthosefacilities.
Figure3.
6:HeathrowAirport–Passengernationalitymixperterminal,Jan-Sep2016Source:HAL3.
14ThesurveydatashowsthatTerminal4isthemostdependentonUKnationals,accountingfor40%+ofitspassengermix.
Incontrastlessthan30%ofthepassengersusingTerminal2arenationalsoftheUK.
Therearealsodistinctdifferencesbetweentheterminalsinthecompositionoftheirforeignnationalitytraffic.
3.
15Inadditiontonationalitycharacteristics,spendingpowercanalsobesupportedbythewealthofpassengersusingtheairport.
OnaverageHeathrow'spassengershavehigherincomelevelsthanthoseatotherleadingairportsintheUK.
Figure3.
7:Averageincomeofpassengersattop4UKairports,2015Source:CAANote:*averageofGatwick,StanstedandManchesterHeathrowAirport–ReviewofCommercialRevenues|FinalReportUKHighStreettrends3.
16Heathrow'spassengerdemographicisinfluencedbyglobalmacroeconomictrendsaswellasthoseintheUK.
Nevertheless,itishelpfultoconsiderwiderUKHighStreetretailsalestrendsandthebackgroundtheymayprovidetohistoricalmovementsinsalesatHeathrow.
Figure3.
8:UKretailsalesgrowthtrends–2006-2016Source:ONS3.
17ONSdatafortheperiod2006-2016indicatesthattherehavebeenthreedistinctperiodsoverthepast10yearsinwhichUKretailsalestrendshavemovedindifferentways:Autumn2006-Summer2008:retailsalesvolumesexperiencedcontinuousgrowth.
Growthininflationwaslowerthanaverageweeklyearnings,providingrisingrealearningswhichinturnsupportedconsumerspending.
Thiswasalsosupportedbyincreasesinconsumercredit.
Autumn2008–Summer2013:Retailsalesvolumesfluctuated,withperiodsofincreasesfollowedbydeclines.
UKeconomicgrowthwassubduedinthisperiod(whichincludedtheGlobalFinancialCrisisaswellasrecessionintheUKin2012),andtherewasasubstantial20%+reductioninconsumercredit.
Fallsinrealearningsalsodampenedtheretailsalestrend.
Sincesummer2013:Therehasbeenasignificantpickupinsalesvolumes.
Retailpriceshavefallenthroughmuchoftheperiod(althoughtherearesignstheyarestartingtoriseagainnow),andconsumercredithasrebounded,coincidingwithareductioninthehouseholdsavingsratio.
3.
18Insummary,totheextentthatwiderUKretailsalestrendsimpactonairportretailgrowth,theyhavebeensupportiveduringtheQ6periodtodatealthoughitshouldbenotedthatonlycirca37%ofHeathrow'spassengersareUKbased.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportCommercialspaceandlayout3.
19Mostairportsaroundtheworldoperatewithbetween600-800m2permillionpassengersofretailspace.
Thisisnotbecauseitistheprovenoptimumbutinsteadisageneralconsequenceofthewayairportsaredesignedi.
e.
aterminalisdesignedtoaccommodateacertainnumberofparkedaircraft,processingspaceisthenrequiredforallofthedifferentpassenger-facingareassuchascheckinandsecurityandmanyotheraspectsoftheoperationand,insimpleterms,whatisleftisavailableforretailandthisisgenerallysomewherebetween600-800m2permillionpassengers.
ItisraretofindanairportwithtoomuchretailspaceandwewouldcertainlyexpectanairportsuchasHALtofutureproofandbuildmorespacethanthebenchmark.
WeweretoldbyHALatQ6thatT2couldhavebeenleased2or3timesoverduetodemandfrombrands.
3.
20Attheendof2015Heathrowwasoperatingwith654m2permillionpassengerswhichistowardsthelowerendoftheusualrangeofspacepermillionpassengers,andalsobelowbenchmarkairportsandthe1,000m2itcouldpotentiallysustaintooptimiserevenue.
3.
21Toachievespaceequalto800m2permillionpassengersHALwillneedtogrowfrom49,000m2totalspaceto60,000m2andaround75,000m2toachievewhatwebelievetobetheoptimumsolution(1,000m2permillionpax).
ItisdifficulttoseewherethisspacecouldbedevelopedaheadoftheR3Master-plan.
Thesespaceconstraintswillmostprobablyresultinanegativeimpactonsalesandrevenueperpassengeraspassengervolumesincreasewithstaticspace.
Table3.
1:HeathrowAirport–RetailspacepermillionpassengersTerminalm2perMPPAAirsidespaceas%ofTotalT2T3T4T5TotalSource:HAL3.
22Mostairportsareplanningtooperatewith85-90%ofthetotalretailspacelocatedairside,recognisingthisasindustrybestpractice,unlesstherearespeciallocalcircumstancesthatrequirealargerlandsideoffer.
WiththeexceptionofT3,HAL'sterminalsareclosetothebenchmarkalthoughthesignificantshortfallinoverallspaceisthekeyissuetobeaddressedwithallterminalsurgentlyrequiringadditionalspace.
3.
23Thekeycommercialzoneislocatedairsideaftersecuritywheremostairports,againfollowingindustrypractice,tendtoallocatecategoryspacewithintherangessetoutbelow:3.
24TheHALairsidespacemixandsalesperm2forthesecategoriesisoutlinedinthetablebelow:HeathrowAirport–ReviewofCommercialRevenues|FinalReportTable3.
2:HeathrowAirport–Airsidemixandsalesperm2CategoryMix%ofT2airsideT2salesm2Mix%ofT3airsideT3salesm2Mix%ofT4airsideT4salesm2Mix%ofT5airsideT5salesm2DutyFreeShopsCateringSource:HAL3.
25InmostcasesDutyFreeenjoysamuchlargerproportionofairsidespacethanwemightotherwiseexpecthowever,withtotalspacebeingsomewherebetween20-35%belowbenchmarkitisunderstandablethatDutyFreehasbeenprioritisedoverothercategories.
3.
26Theshopssalesperm2inT3andT5arereflectiveoftheInternationalpassengerdemographicusingthoseterminals.
3.
27Cateringhasbeenconstrainedsignificantlyandprobablyfortherightcommercialreasonsbutclearlyrequiresadditionalspaceforcustomerserviceaswellasunlockingun-tappedrevenue.
3.
28ThetablebelowsetsoutsomeoftheotherKPI'sacrosseachterminal:Table3.
3:HeathrowAirport–RetailKPIsperterminal,2015KPIsT2T3T4T5HALTotalSpendperpaxRevenueperpaxSales/m2Revenue/m2Margin%Source:HAL3.
29Aspassengernumberscontinuetogrowaheadofairportexpansionthechallengeofaffordabilitywillmakeanyinfrastructureprojectstoincreasespaceincreasinglychallengingtojustifyanddeliver,thishasbeenrecognisedbyHALandtheairlines.
ThereisthereforeriskofHALoperatinginanevermorespaceconstrainedenvironmentoverthenext5-10years.
Pricingpolicy3.
30HAL'spricepolicyhasalwaysbeenakeydriverofitsRetailperformancealthoughthereisevidencethatthevaluepropositionisatriskoferosion.
3.
31FollowingtheabolitionofIntraEUtaxanddutyfreein1999theownersofHALdecideditwascriticaltotheongoingsuccessofretailsalesatallofitsairportstocontinueofferingtaxfreepricestoallpassengersregardlessofwheretheyweretravelling.
Thisenabledtheairporttomaintainoneclearmarketingmessage,reduceconfusionandtobeoneofthefastestairportsinEuropetoreturntopre1999saleslevelspostabolition.
3.
32HAL'scurrentretailpricepolicyisthatallfashionandluxurystoresofferfullVATsavings(adiscountof16.
66%)toallNonEUpassengers.
Inaddition,exceptforfivebrands,allotherluxuryandfashionstoresofferfullVATsavingsforallpassengersregardlessofdestination.
Therearealso3furtherexceptionstothispolicywhereBootspricein-linewiththeirHighStreetstores,WHHeathrowAirport–ReviewofCommercialRevenues|FinalReportSmithspriceinlinewiththeirotherUKTravelstoressuchasrailwaystations(Boots&WHSmithshaverecentlyintroducedapricethresholdoverwhichNonEUPassengersareabletopurchaseatataxfreeprice)andDixonsfollowsitsHighStreetpricewhileguaranteeingitspricesarelowerthanthewebpricesofAmazon,JohnLewisandArgos.
Italsoofferstopaydoublethedifferenceifashopperfindsanitemcheaperonthosesites(HALhascarriedoutextensiveresearchwithDixonswhichhasshownthekeyvaluepropositionisallaboutdefeatingtheonlineretailerratherthanthetaxfreemessageand,sincemovingtothispropositiontheyhavestemmedtheerosionofsalesfromonlinecompetitors).
ItisimportanttonotethatmanyoftheproductssoldbyBootsandWHSmithsareexemptfromVAT(books,magazines,newspapers,certainsandwiches,biscuits,pharmacyandhealthcareproducts).
3.
33Productsnormallysubjecttoexcisedutysuchaswhisky,vodkaandcigarettescanonlybesoldatdutyfreepricestopassengerstravellingoutsideoftheEU.
ThedutyfreeoperatorbenchmarksitspricesagainsttheUKHighStreetandforEUpassengersliquorissoldasperitscontractualobligationswithHALand,wherethereisaUKHighStreetequivalent,benchmarkedagainstit.
3.
34ThereisalsopressurefromGlobalbrandstoequalisepricesacrosstheWorldtoensurethereisnotafavourablepriceadvantagewithintheUKversusothergeographicalregions.
3.
35ThepricepolicyatHALisownedbythemandconcessionairesarerequiredtoadoptthepolicyaspartoftheircontractualobligations.
HALusesindependentcompaniestoauditshoppriceswhichgenerallymeet100%compliance,insituationswherestoresdonotcomplythepricesarecorrectedswiftly.
3.
36Adiscountofatleast16.
66%onmostretailproductsprovidesahugeincentiveforpassengerstoshopandbuywhiletravellingthroughtheairport,anydilutiontothisofferwouldundoubtedlyimpactnegativelyonsalesandrevenue.
ManyUKairportshaveconsideredmovingawayfromtaxfreepricingbutinmostcaseshavedeterminedittobethebestpolicyashasHAL.
3.
37Whiletaxfreesavingsareincrediblyimportantindrivingretailsalesandrevenue,duringourinterviewwithWDFGitstressedhowimportantdestinationpricinghasbecome,particularlyinacontextwhereconsumersaremoresavvythaneverbeforeandhavetheabilitytocheckcompetitors'pricesinrealtimeviatheirmobilephone–passengerswillshopattheairportwheretheycangetgenuinesavingsandthebestdeal.
Asaconsequence,theremustbeaclearandgenuinepricepolicywhichalsorecognisestheneedtopricecompetitivelywithInternationaldestinations,taxfreepricingissimplythebasichygienefactor.
HALbelievethegreatestrisktoerosionoftheirvaluepropositionistheincreasingtransparencyofInternationalpricing.
3.
38Whilepricingisclearinallstores,HALpromotesacombinationofvalueandservicetoitspassengersratherthanovertlyfocussingonpriceatanairportlevel.
Impacts-ExchangeRates3.
39HALandWorldDutyFreeGrouphavebothpointedtotherecentimpactofexchangeratemovementsonsales.
3.
40ThepotentialimpactofthesemovementsonperpassengersalesisillustratedinFigure3.
9.
Theperiod2012-2015wasmarkedbyagradualdeclineinsalesperpassengerwhichgenerallycoincidedwithappreciationinthevalueofsterlingagainstmajorworldcurrenciesledbythedollarandeuro.
AtHeathrowAirport–ReviewofCommercialRevenues|FinalReportSeptember2016YTDsalesperpassengerhadrisenbyover7%on2015levels,againstabackgroundofsignificantdepreciationinsterlingsincetheBrexitvote.
3.
41Mediareportshavealsopointedtotheopportunitiesforenhancedsalesintheluxurygoodsmarketpost-Brexit,asillustratedinarecentSundayTimes(January15th2017)article:"Burberryisexpectedtoreportasalesriseasitcontinuestobenefitfrombargain-huntingtouristsdrawntoBritainbytheweakpound''.
WDFGhadalsomentionedtousthefloatingcustomertypewhotraveltothecountrieswheretheycangetthebestdeals.
Figure3.
9:HeathrowAirport–Indexofretailsalesperpassengervs.
leadingexchangeratesSource:HAL,OANDANote:*shoppingdefinedassalesfromDuty&TaxFreeandSpecialistShops.
Salesperpassengerin2015prices.
Impacts–Airlinemoves3.
42InrecentyearsHeathrowhasundergonealargenumberofairlinemoves,designedtosupporttheintroductionintooperationofTerminal2,andtomoregenerallyachieveagoodbalanceandallocationofpassengerdemandtothecapacityavailableintherespectiveterminals.
3.
433.
44ThefulllistofairlinemovesatHeathrowsince2012isasfollows:HeathrowAirport–ReviewofCommercialRevenues|FinalReportTable3.
4:HeathrowAirport–recentairlinemovesToFromTerminalT1T2T3T4T5T1United(6/14)Germanwings(10/14)Swiss(10/14)SNBrussels(10/14)CroatiaAirlines(10/14)LOT(10/14)AirNewZealand(10/14)Asiana(10/14)SouthAfrican(10/14)TAP(10/14)Icelandair(5/15)AerLingus(7/14)Aegean(7/14)LittleRed(9/14)USAirways(6/14)TAM(5/15)Transaero(10/14)ElAl(4/15)BA(10/14,6/15)T2T3AirCanada(6/14)AirChina(6/14)ANA(6/14)EvaAir(7/14)Thai(8/14)Turkish(8/14)SAS(9/14)Singapore(9/14)Egyptair(9/14)Ethiopian(9/14)Lufthansa(10/14)Austrian(10/14)Turkmenistan(7/15)Iberia(3/12)T4Delta(4/14,10/14,9/16)SriLankan(7/14)Philippines(10/16)T5BAL/H(10/15)NewentrantsAvianca(7/14)Garuda(3/16)ChinaSouthern(6/12)Aeromexico(12/12)Vietnam(3/15)OmanAir(4/16)Source:HALNote:NumbersinbracketsdenotemonthandyearofmoveImpacts–Tobacco3.
45StatisticssharedwithusbyHALdemonstratethatperpassengerTobaccosalesfellfollowingimplementationoftheTobaccoDisplayActin2015.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportTable3.
5:HeathrowAirport–Tobaccosalesperpassenger(nominal)Year/PeriodTobaccosalesperpassenger()20142015Source:HALNote:figuresarecalendaryeartotals3.
46WhiletherecentlegislationhascontributedtothefurtherdeclineinTobaccosalesandrevenues,thisispartofamuchlongertrendwhichstartedinthelate1990s,and,withsomeexceptions,hasresultedinyear-on-yeardeclinesintobaccosalesatHeathrowthroughmuchoftheperiodsincethen.
Figure3.
10:HeathrowAirport–Tobaccosales(2015prices)Source:WDFG,HAL3.
47Keylegislativeandothereventsinfluencingtobaccosalesinthisperiodhaveincluded:1999:EUDutyFreeabolition2002:TobaccoAdvertisingandPromotionAct2004:EUEnlargement(10countries;plusRomaniaandBulgariain2007,Croatiain2013)2015:TobaccoDisplayActimplementationatHeathrowPlainpackagingwillbeenforcedonMay202017andHALexpectthistohaveamaterialimpactonsalesandrevenue.
WDFGareexpectingsalestodecline.
e-commerce(Retail)3.
48IntheUKtheshareoftotalretailsalesviae-commercehasincreasedfrom13.
5%in2013to15.
2%in2015andisforecasttohavereached16.
8%whenfiguresarereleasedfor2016(source:CentreforRetailResearch).
Bycontrastretaile-commercesalesatHALaccountforlessthan1%oftotalsales3.
49Thisisaconundrumgiventhatconsumersareexperiencingonlineshoppingasafeatureoftheireverydaylives,withdeliveriestohome,theofficeoracollectionpointoftheirchoicethroughcompaniessuchasDoddle.
Onemightreasonablyexpectairpassengerstodemandasimilarlevelofservicewhiletravellingtowhattheyexperienceathome,perhapswithdeliverytodestinationhotelorcollectwiththeirluggageatthereclaimbelt.
3.
50E-commerceisunlikelytohavehadamajorimpactonHALrevenuespositivelyornegativelyinrecentyearsand,isnotexpectedtoimpactmateriallyoverthenext3-5years.
HALbelieveitiscriticalforthemtostayabreastofconsumershoppingbehaviourandthate-commerceshouldbeacorecapabilityoftheirmanagementteamhowever,atthisstagetheybelievethebenefittosaleswillbelowanditsrolewillbetocapturecustomerdatathatwillenabletargetedmarketingand,playakeyroleinunder-pinningHAL'soverallproposition.
3.
51AswithHighStreetstores,airportshopswillalwayshavearoletoplayintheshoppingprocess,whetheritbeimpulse,self-treat,giftforothers;theHeathrowAirport–ReviewofCommercialRevenues|FinalReportremainingchallengeisfindingawayfore-commercetomakeamaterialdifference,deliveringeaseandconvenienceofshoppingfortravellers.
3.
52CurrentlyHALofferarangeofcustomerserviceswhichareinwhole,orinpart,facilitatedbye-commerceandsupportthegenerationofsalesandrevenue:ShoppingCollection/homedelivery,PersonalShopper,Reserve&Collect,TerminalShoppingTransfer,HeathrowRewardsandHeathrowShopperPromisewhicharecommunicatedviawww.
heathrow.
com.
3.
53ItwouldbeariskforHALnottocontinueinvestingine-commerceastheywouldceasetofulfilcustomerexpectationsandtheywillfindotherways(andchannels)toshop.
HALareworkingonandinvestinginnewcapabilitiessuchasaCateringpre-orderappduetolaunchinQ22017andnewwaystopromoteretailandotherairportservices.
SalesPerformance3.
54TogetherthefactorsabovewillhavecombinedtoinfluencethevolumeofsalesachievedintheretailconcessionsoperatingatHeathrow.
3.
55InoveralltermssaleslevelsatHAL'sretailconcessionsfellintheearlypartofQ6,ledbyasubstantialfallinBureausales.
ExcludingBureautherewasnomaterialrealchangeinRetailsalesbetween2013and2015.
Figure3.
11:HeathrowAirport–Retailsales2013-2015(2015prices)Source:HAL3.
56TakingintoaccountSeptember2016YTDtrendsinsalesperpassenger,Bureausaleshavecontinuedtofall,butotherwise2016hasseenincreasedlevelsofsalesperpassengerinthekeysegmentsofDutyandTaxFreeandSpecialistShops.
TherecentdepreciationofsterlingaftertheBrexitvotemayhavebeenacontributoryfactortothis.
Figure3.
12:HeathrowAirport–Retail*salesperpassenger2013-2016(2015prices)Source:HALNote:*excludescertain'otherRetail'categoriesCategoryMix&Contractualmargins3.
57Table3.
6:HeathrowAirport–Recent%marginsinRetailHeathrowAirport–ReviewofCommercialRevenues|FinalReportPerformanceversusQ6SettlementResults-Retail3.
58Takingintoaccountretailexpenditure,cumulativenetRetailrevenuesperpassengerhavebeenrelativelyclosetotheCAAforecastoverthecourseofQ6(actual5.
45,forecast5.
49).
Table3.
7:HeathrowAirport–Retailrevenuescumulativeperformance,Q6toendof2015(2015prices)Apr–Dec20142015Q6CumulativeApr2014–Dec2015CategoryCAAActualAct-CAACAAActualAct-CAACAAActualAct-CAARevenuesDuty&TaxFree111102-9155128-27266230-36AirsideSpecialistShops697339910011681734Bureau353725053385905Catering283134145469767OtherRetail67757931132016018827Sub–Total311317643843917497567Retailexpenditure-21-183-28-1711-49-3514NetRetailIncome29029994104221270072121PerPassengerDuty&TaxFree2.
001.
77-0.
232.
151.
71-0.
452.
091.
74-0.
35AirsideSpecialistShops1.
251.
260.
011.
381.
33-0.
041.
321.
30-0.
02Bureau0.
640.
650.
010.
690.
710.
010.
670.
680.
01Catering0.
510.
540.
040.
570.
600.
030.
540.
580.
03OtherRetail1.
221.
300.
081.
291.
510.
221.
261.
420.
16GrossRetailIncome/Pax5.
625.
53-0.
096.
085.
85-0.
235.
885.
71-0.
17NetRetailIncome/Pax5.
235.
21-0.
025.
695.
63-0.
075.
495.
45-0.
05Source:HALRegulatoryAccountsNote:Resultsfor9monthsendingDecember2014rebasedto2015prices(RPI)3.
59Intheirrespective2014and2015regulatoryaccountsHALmadethefollowingcommentsthatarehelpfulinunderstandingsomeofthevariancesbetweenactualandforecastperformance:2014:DutyandTaxFreeunderperformanceversusCAAforecastwasattributabletothisbeingthesolelineinwhichtheCAArevenuestretchwasapplied.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportWithinRetailthiswasoffsetbytheover-performanceofAirsideSpecialistShops,BureauandCatering.
TheseareasweredrivenbyincreasedpassengerspendsintheTerminal3andTerminal5shops,andarevisedcommercialagreementandgoodperformanceinTerminal2.
OtherRetailalsoover-performed,supportedbygreaterdemandandhighertransactionvaluesinCarRental,andcomplementedfurtherbygrowthinrevenuesfromAdvertisingandTelecommunications.
2015:Mostofthecommentsprovidedinthe2014regulatoryaccountswererepeatedin2015.
Additionalcommentsincluded:-UnderlyingRetailperformancebroadlyinlinewithforecast.
3.
60MorespecificcommentaryprovidedtousbyHALincludes:HeathrowAirport–ReviewofCommercialRevenues|FinalReportTable3.
8:HeathrowAirport–Q6RetailrevenuesperformancecommentaryCategoryHALcommentaryRetail–Duty&TaxFreeT5mainstorerefurbishedandreshapedtofacilitateopeningofChanel&LVluxurystores,noadditionalspace,completed2015.
T4mainstoredevelopmentincreasedspaceandfrontageofstoreoffsetbyclosureofBeautyStudioandChocolateBoxstores.
Broadlysamespacecompleted2016.
Retail–AirsideSpecialistShopsPriceandvaluecontinuetobekeydriversofperformanceevenwithintheareaofluxurygoods.
Luxuryperformancehasbeenaidedbythevalueofferedversusotherlocations(fullVATdiscount)togetherwithfluctuationsinthecurrency.
SterlingdevaluationsinceBrexithashadasignificantbenefitonsomespecialistshopssalesbuttheoutlookfor2017isuncertain.
Boots,WHS&Dixonshavebeennegativelyimpactedbythe'boardingcardchallenge'whichstartedinthesummerof2015andwhichrelatestomediareportsthatthesecompaniesweretakingboardingcarddetailsfromallpassengerssoastoobtaintheVATsavingfromHMRConNonEUpassengers,howeverwithoutsellingtopassengersatataxfreeprice.
Thereremainsarollingprogrammeofcapitalinvestmentinretailareasinmanycasesdrivenby"operational"necessities.
Whilstthishasnotaddedsignificantamountsofspace,ithasallowedare-definitionoftheretailportfoliotocreateanimprovedmixofstoresandenvironment.
TheT5luxuryprojectwascompletedin2015withremainingworksfromacategoryperspectivecompletedinOct'16.
Terminal4hashadsignificantdevelopmentthisyearandthiswillbecompletedfirstquarterof2017.
Boots'T5upperstorerelocatedintoabiggerspace(toallowforsecurityexpansion).
TwonewlandsideBootsstoreswereopenedinT4&T5.
T4airsidewentfrom1storelocatedintheluxuryzoneto2Bootsstoresinthehighstreetarea(luxurystoreclosed).
Technology:VodafoneinT5landsideclosedtomakewayforBAfasttrack.
HALopenedanewadditionalDixonsstoreinT2B,inQ22016.
HALalsointroducedanumberoftechvendingmachinesaroundtheterminals,withmixedresults.
AnewdealwasstruckwithSimlocaltoprovideSimvendingmachines,providingabetterproposition.
Retail–CateringNumerousrefurbishmentstodateandanumberofbrandchanges.
Lotsoffocusgiventothepicnicrange.
KidsEatFreeofferhasgrown.
CompletionofT5Cateringareas–CaviarHouse,Itsureinstated.
Starbucksrelocatedtoaprimelocation.
Pretcurrentlybeingrefurbished(completiondueendofJan2017).
Retail–BureauInthelast5yearshavehadAmex,ThomasCookandMoneycorpassecondarypartnersallwhohaveresignedcontractwithin2yearsofcommencement.
Walkupbureautransactionscontinuetodeclinebyatleast6%ayearwithnoindicationofthisslowingdown.
UKismostmaturemarketinworldforpre-ordercurrencyandadaptionofmoneycards.
Retail–BookshopsWHSwillhavebeenimpactedbytheboardingcardchallengewhichstartedinthesummerof2015andthe2newBootslandsidestores.
AnewbookshopopenedinT5.
T4storeshavebeenreconfigured.
T3transferstoreclosedQ3of2016.
Focusonstandards.
Merchandiserangehasbeenreviewedleadingtoanumberofhealthandbeautylines(distressitems)beingremoved.
Introductionofa99pbottleofwater(early2016).
Retail–AdvertisingHeathrowremainstheonlyUKairportwithamediabusinessofanyscale.
ContinuedinvestmentintheassetsanddemandsfrominternationalbrandshasenabledHALtocontinuetosellinventoryinachallengingworldwidemarket.
Retail–CarRentalContractrenegotiationincreasingincome.
Brandacquisition/consolidationwhichstartedapricewaranddilutedrate(andthusHALincome).
Source:HALHeathrowAirport–ReviewofCommercialRevenues|FinalReportQ6ForecastMethodology-Retail3.
61ThemethodologyandassumptionsusedforRetailwerebasedonthedataprovidedbyHAL,theeconometricmodelusedbyHAL,andstakeholderopinion.
HAL'skeyassumptionsfortheirQ6incomeforecastfellinto3categoriesalthoughinheadlineterms,growthfromconcessionswasforecasttobemuchsloweralbeitwithrobustgrowthinSpecialistShops,offsetbyflatrealDutyFreeincomewhereperformancewasassumedtobeimpactedbyeffectssuchasTDA'sandtheopeningofT2.
Otherconcessionsrevenueswereexpectedtoachievemodestgrowth:3.
62WhileairlinestakeholdersbelievedQ6incomeshouldbe1-2%higherthanforecastbyHAL,retailstakeholdersweremorepessimistic,largelyduetostructuralchangesinsectorssuchasbookshops,bureauxdechangeaswellastheongoingdeclineintobacco.
3.
63FurtherrecommendationsgeneratedbySDG'sreviewofcommercialrevenuesincluded:DutyFree:weassumedalowernetrevenueimpactof12-20%fromtheimplementationoftheTobaccoDisplayActin2015comparedwithHAL'sforecastof40%.
.
WedidnotassumeanybanondutyfreetobaccoduringthelifetimeofQ6whileHALhadassumedafullbanby2018/19.
Wealsoproposeda1%increaseinthedutyfreeconcessionmarginovertheQ6period.
Advertising:webelievedthereshouldbeastretchinadvertisingincomeequalto500KperannumoverandabovetheHALforecast.
OtherCategories:webelievedprojectionsfortheotherretailcategorieswereplausible.
3.
64Therearemanyfactorsthatcanimpactonretailrevenuewhichareoutsideoftheairport'scontrol.
Wehavedemonstratedtheimpactofexchangerates,particularlytheweakorstrongeurorelativetothepoundwheresalesperpassengerdeclined2013-2015whentheeurowasweakandthenimprovedsharplywhentheeurostrengthenedagainstthepound.
ThestrengthofthedollaragainstthepoundisalsoakeyfactorthatimpactsonretailrevenuesatHAL.
3.
65LessonsfortheH7processStakeholderopinionsHAL3.
66HALwouldliketofindbetterwaysofworkingwiththeairlinecommunitytodeliverrevenuegrowth.
HALbelievethatgenerallytheyandtheairlinecommunityhaveworkedwelltogetherbutonoccasionscommercialopportunitieshavebeenslowedorevenhaltedduetoairlineslookingatthemprimarilyfromanoperationalperspectiveandnotwiththesingletillbenefitsinmind.
3.
67AviewthatHALbelievesissharedbytheairlinesisthatitwouldbegoodtodevelop,inadvanceofH7,clearrulesonthelevelofengagementrequiredfordifferenttypesofprojectssothattimeisspentreviewingtheimportantinitiativesthathaveapotentialimpactonotherswhilethemorestraightforwardprojectsareallowedtofollowaneasierandfastergovernanceroute.
3.
68HALbelievee-commercewouldbeagoodareainwhichtoworkmorecloselywiththeairlines.
TherewouldbeplentyofopportunitiesforHALHeathrowAirport–ReviewofCommercialRevenues|FinalReportandairlinestocollaborateondatasharinginordertopromoteproductsandservicestopassengers.
Airlines3.
69AirlinesrecognisetheimportanceofachievingthemaximumvaluefromcapitalinvestmentinH7,inthecontextofpotentialtimescalesforairportexpansion.
CommercialrevenuesareanimportantcomponentoftheSingleTillinordertokeepchargesdown,maintainpassengersatisfaction,andtorespondtotheincreasingopportunitiesfordigitalinteractionwithcustomersandtoexplorealternativeconceptsincludingalternativedeliveryanddistributionarrangementfortheshoppingexperience.
AirlinesbelievetheremaybeopportunitiestocombinetheiraccesstothepassengerwithHAL'sexceptionalretailcapabilities.
3.
70Inadditiontoe-commercetheairlinecommunityhaveoutlinedanumberofotherareaswheretheybelievetheformalH7reviewcouldimprovetheoverallprocessaswellastheoutcome,thislargelyrelatestovisibilityofreportsandinformationthatwillinformtheprocess:HowsuccessfulhavetheQ6projectsbeen–PostProjectAppraisalstocompareplannedReturnonInvestment('ROI')withtheactualperformanceaswellasimpactsonserviceandpassengerexperiencee.
g.
ImpactfromopeningT2,ImpactfromopeningescalatorinT5SouthandtherecentretaildevelopmentsinT5;Detailedreviewofcommercialspacetodefinetheoptimalamountofretailspacegoingforward.
ToincludeafullreviewofSatellitebuildingsoutlininghowtheycouldbecommercialised;Reviewofadvertisingperformanceandopportunitiesforgrowth;AnoutlineofHAL'snewideasforgrowingrevenue;ImpactsfromR3duringH7;andBrexitimpacts.
Concessionaires3.
71WDFGpointtothedeclineinTobaccosales,whichtheybelieveisanunderlyinglongtermtrend,inadditiontotherecentreductioninsalesforcedbytheTobaccoDisplayAct.
Theroleoftraffic3.
72Giventhedependencebythevariousparties(HAL,airlines,CAA)onpassengerforecastsasakeydriverofcommercialrevenueprojections,itisdesirabletohaveanaccurateassessmentoftrafficprospects.
3.
73ThetrafficforecastswereconsideredatlengthbyHAL,airlinesandtheCAAaheadoftheQ6Determination,atthatpointagainstthebackdropofalargeoverforecastoftrafficvolumesinQ5.
DuringQ6todatethatpositionhasbeenreversed,withactualpassengervolumesrunningsignificantlyaheadofforecast.
3.
74Ourreportdoesnotfocusonthedetailofthetrafficforecastsused,butweanticipatethatHAL,airlinesandtheCAAwilltakeintoaccountthelessonslearnedinbothQ5andQ6whenassessingprospectivepassengervolumesforH7.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportBestpracticefromotherairports3.
75WhilearguablyHAListhebenchmarkacrossmostareasofairportretailtherearedifferentbusinessmodelsadoptedbydifferentairports:Table3.
9:AlternativeairportretailbusinessmodelsFullyoutsourcetospecialistswithcompetitioninallcategoriesFullyoutsourcetoMasterConcessionairesacrosscoreproductcategoriesSelf-managesomeorallofthecommercialoperationSimilartoaShoppingMallConcessioncontracts%rent&minimumannualguarantee1xDutyFreeOperatorforcoreDutyFreeIndividualConcessionsforallshops3xmainCateringOperators+somesingles1-3BureauxOperators1xNews&BooksOperator1xPharmacyoperator1xTechnologyoperator1xAdvertisingoperatorRequireslargeteam-contractmanagementConcessioncontracts%rent&minimumannualguarantee1xRetailcontract1xCateringcontract1xBureauxcontract1xNews&Bookscontract1xPharmacycontract1xAdvertisingcontractRequiressmallerbuthighercalibreteamtohandlefewerbiggercontractsSimilartoaDepartmentStoreBuyandsellproductsDirectlymanagetheshopsandrestaurants,mightalsoincludeCateringfranchises1xBureauxcontract1xPharmacycontractDirectlymanagein-houseadvertisingRequireslargeinhouseteamcoveringallareasoftheretailoperationAirporttakesalloftheprofitandalloftheriskSource:SteerDaviesGleaveanalysis3.
76Whileairportsoftenreflectahybridoftheabovemodels,thethreesetoutabovearereasonablytypical.
3.
77Forthepast20yearsHALhasalwaysfullyoutsourceditsretailoperationstoindividualspecialistsandthenemployedateamtoensurethebestmixofoperatorsisselected,andmadesuretheydelivertotheircontractaswellasoptimisingsalesandrevenue.
Asageneralrule,specialistsdeliverhighersalesthangeneralistsastheyarehighlyfocusedontheirbrand/conceptandensurethebestpossiblecustomerexperience.
3.
78AirportssuchasBrussels,ParisandIstanbuloperatewithmasterconcessionairesacrossthecoreproductcategories,albeitfashionisoperatedthroughajointventurebetweentheairportandLagardereretailatParisCDG,andatBrusselstheyarestartingtointroducesomeindividualretailoperatorsastheirterminalcapacityincreases.
Thesecontractsusuallyprovidehighermarginsasaconsequenceofgreateroperatingefficiencies,butlowersalesthanspecialists.
Althoughwehavereferencedlargerairports,thismodelismorecommonatsmallerairportsastheydonothavethevolumeofpassengersforittobeprofitableforindependentspecialisttooperate.
3.
79DubaiandDohaaregoodexamplesofairportswhichsuccessfullyself-managetheirretailandcateringoperationsinhouse(somecateringoutsourced),thiswasalsothemodelatAbuDhabiuntil2008whentheydecided,andlaterproved,thatitwouldbemoreprofitabletoadopttheindividualspecialistoperatormodel.
3.
80DublinAirportAuthoritythroughitsinhouseoperatorARIisagoodexampleofahybridmodelwherebytheyruntheirowndutyfreebutworkwithindividualspecialistsformostoftheshopsandcatering.
3.
81WhiletherecouldbemeritinreviewingHAL'srelationshipwithairlinesandretailersinresponsetotheopportunitypresentedbye-commerce,weHeathrowAirport–ReviewofCommercialRevenues|FinalReportdonotthinkthatafundamentalshiftfromthecurrentoutsourcemodelwouldmateriallybenefitrevenueandcustomerexperienceatHAL.
3.
82Airportsarerecognisingthechangeinconsumershoppingbehaviouroffairport,wherebypurchasescanbemadeon-lineaseasilyasvisitingastore,andinmanycaseson-linepurchasescannowalsobemadeinstore.
3.
83Similarly,consumerscantakegoodswiththem,orderforhomedelivery,orarrangecollection.
Ultimatelyconsumerscantailorthemethodofpurchaseandfulfilmenttosuittheirparticularneeds.
ThishasallbeenfacilitatedbythedevelopmentofE&Mcommerceandatsomepointwillbegintohaveanimpactonairportretail.
Whetherthisimpactispositiveornegativewilldependonhowairportsrespondandtheemergenceofanydisruptorsinthesectori.
e.
theairportretailequivalentofUberorAirbnb.
3.
84Fromtheperspectiveofairportshopping,thepassengerinterfaceswiththreepartiesaspartoftheirairporttravelexperience(i.
e.
airline,airport,andretailer).
Asageneralrulethesepartiesworkindependentlybecausetheirbusinessmodelsarenotaligned.
Thepassengerdoesnotcareaboutthesetypesofissue,andgoingforwardtheywillonlycareaboutenjoyingasmoothshoppingexperience,comparabletothatwhichtheyexperienceintheirlocalmarket.
Ifairlines,airportsandretailerscouldworktogetherasacollectiveandservicethepassengerateachtouchpointintheirjourney,salescouldpotentiallydeveloptoagreaterextentthanmightotherwisebepossible.
Itisencouragingthattheairlines,HALandWDFGhaveallidentifiedworkingmorecloselytogetherasanopportunity.
3.
85ThereisalreadyevidenceintheindustryofdutyfreeoperatorsandairportsdevelopingagreementswhereriskandrewardissharedthroughJointVentureagreementse.
g.
SocietedeDistributionAeroportuaire('SDA')themainretailingJVbetweenAeroportsdeParisandLagardereTravelRetailcoveringtheParisairports.
However,wearenotawareofanytri-partyJV'sthatincludetheairlines.
GebrHeinemann,theWorld's5thlargestdutyfreeoperatorbysalesin2015,ispossiblythemostdevelopedintermsofe-commerceand,withairportJVagreementsalreadyinplacewithATUandTAVAirportsinTurkey,SchipholAirportRetailinAmsterdamand,fromJanuary1st2017FraportinFrankfurt.
InarecentstatementabouttheFraportJV,oneofHeinemann'sExecutiveDirectorsstatedthat"e-commercewasamongthedrivingforcesbehindthemove"and"thisisanewage,otherairportpartnershipswillrequiremoreflexibilityandattentiontoconsumerneedsthaneverbefore".
Heinemannalsomadereferencetothetraditionalconcessionagreementsandthelackofflexibilitytodrivesalesbecauseoftheminimumguarantees"thefutureisintrialanderrorandmovingfromtrialtosuccesswithnewwaysofdoingthings.
Therewillbenewmodelsinthebusinessanditwillbeabigissuefortheindustryinthecomingyears".
3.
86BothHeinemannandSunriseDutyFree(SunrisehasrecentlyannouncedastrategicpartnershipwithTencent,aChineseinternetservicescompany)haverecognisedthevalueofdatacollectionfrome-commerceand,inthecaseofSunrise,theopportunitytodevelopavirtualshoppingmall.
3.
87SunrisestatedithasenteredintoalongtermalliancewithTencentdesignedtotakeadvantageofthefast-growingbutequallyfast-changingairportconsumermarket.
Thegoal,saysSunrise,istousesocialmediaplatformstoexcelasanonlinetoofflineshoppingprovider.
ItaimstoembraceandblendtheHeathrowAirport–ReviewofCommercialRevenues|FinalReportbestofthee-commercechannelwiththeattractionsofpuretravelretailoffers.
MethodstoincreaserevenuesfromexistingsourcesStakeholdersuggestions-HAL3.
88AsageneralprincipleHALsupportclosercollaborationwiththeairlinecommunitytodevelopcommercialrevenues,buildinguponthegoodworkunderwayondwelltime.
3.
893.
90TheoldconnectionscentreinT3iscurrentlybeingredevelopedandwilldeliverasmallamountofadditionalretailspacearoundthemiddleof2017,otherwisetherearelimitedspaceopportunitieswithintheexistingterminalbuildings.
3.
91Satellitebuildingscouldbedeveloped,3.
92Usingnewtechnologyandcustomerdatatobettertargetpassengerswithinformationthatisrelevantshouldhaveapositiveimpactonsalesandrevenue.
Whilethisisnotexpectedtobematerial,atleastinthenearterm,HALbelieveitiscriticaltounderpinningtheirexistingrevenuesandinensuringtheykeepuptodatewithcustomer'sexpectationsandneeds.
Stakeholdersuggestions-Airlines3.
93Ourdiscussionwiththeairlinescentredontheworkneededtobeundertakeninordertoestablishopportunitiesasoutlinedearlierinthissectionofthereport.
Stakeholdersuggestions-Concessionaires3.
94Opportunitiesfordwelltimeimprovements3.
95From2013to2016thegeneralpatternhasbeenfordepartureloungedwelltimetoreduce(atTerminal3byalmost14minutes),albeittheyhaveincreasedslightlyatTerminal2.
Table3.
10:HeathrowAirport–MinutesspentfromcomingthroughSecuritytoleavingmainshoppingareaTerminal2013201420152016Terminal2n.
a69.
470.
271.
2Terminal396.
692.
382.
882.
8Terminal475.
874.
872.
674.
0Terminal580.
079.
773.
675.
6Source:HAL3.
96ItisprobablethatdwelltimeinTerminal2hasbenefitedfrombeinganewterminal.
InTerminal3thereduceddwelltimehascoincidedwiththeopeningofTerminal2andthetransferofflights,clearlyhavingareducingimpactoverall.
3.
97Whiletherearenoconcretebenchmarksdemonstratinghowlongerdwellcanleadtohighersales,duetothemanyvariablesofoperatingatanairport,weneverthelessbelievethatlongerdwelltimecanreasonablybeexpectedtoenablelongershoppingtimeforthosethatwishtoshop,andthereforecansupportsalesgrowth.
3.
98Inmostcasestimeafterleavingthedepartureloungehasdecreasedslightly,(soforthesameoveralltimeattheairport,thiswouldimplyHeathrowAirport–ReviewofCommercialRevenues|FinalReportlongerloungedwell-time),butwiththeexceptionofTerminal2thishasnotyetresultedinlongerdwelltimeinthedeparturelounges.
Table3.
11:HeathrowAirport-MinutesspentbetweenleavingthedepartureloungeandexpectedtimeofflightDepartureTerminal2013201420152016Terminal2n.
a69.
164.
466.
9Terminal365.
266.
465.
565.
2Terminal475.
273.
272.
473.
1Terminal563.
364.
464.
562.
9Source:HAL3.
99HALandtheairlinesworkedtogetherthroughout2016onfinetuningdwelltimeandcalltogateprocessesinordertoimprovepassengerexperienceandrevenue.
Thiswasrolledoutattheendof2016andHALwillcontinuetomonitorthebenefitsoverthecomingmonths.
MeanstoincreaserevenuesfromnewsourcesStakeholdersuggestions-HAL3.
100T2Phase2–subjecttodeliveringhighqualitycommercialspace,T2coulddelivertherequiredextracommercialspacetodriverevenuegrowth.
However,suchadevelopmentisunlikelytobeopenuntil2025-2026.
3.
101Stakeholdersuggestions-Airlines3.
102Theopportunitytoincreaserevenuesbyleveragingtheuseofe-commercealongwithHAL'sretailexpertiseandtheairlinesaccesstothepassengerwasdiscussedatlength.
Otherareasofopportunityareexpectedtofalloutofthereviewsrequestedbyairlinesearlierinthissectionofthereport.
Stakeholdersuggestions-Concessionaires3.
103WDFGbelievethatBrexitcouldbepositiveforHeathrowastheoreticallyHALandallotherUKairportsshouldbeabletoreturntosellingatdutyandtaxfreepricestoallIntraEUpassengers.
However,theeconomicmodelhaschangedsignificantlysinceintraEUDutyandTaxFreewasabolishedin1999.
AnyagreementfromHMRCwillrequirechangesinlegislationtorealiseanyopportunities.
3.
104AreturntodutyfreepricesforintraEUpassengersisexpectedtohaveapositiveimpact.
HeathrowAirporthasastrongnon-EUpassengermix.
ChallengesandopportunitiesRetailspace3.
105Quantityandqualityofspaceremainsoneofthekeydriversofrevenueatallairportsanddependingonwhichbenchmarkisselected,HALisshortofspaceintheorderof10,000to25,000m2.
3.
106Itisclearthereisnoreadilyavailablespacetofindwithintheexistingterminalswhichmeansthedevelopmentofspacepre-R3couldbeaHeathrowAirport–ReviewofCommercialRevenues|FinalReportcomplicatedandexpensiveprocess.
ValidationofthetotalspacerequirementwouldneedtobeevaluatedinconjunctionwithHALalongwiththemixofspacebyproductcategory.
Brexit3.
107BrexitcouldbeabenefittoHALthroughtheincreaseininpassengerswhowillbeeligibletoshopatdutyandtaxfreeprices,subjecttothenecessarylegislationbeingpassedinatimelymanner.
3.
108HoweverapotentialriskisthatafterleavingtheEU,theUKautomaticallywouldbecomeaNonEUdestinationforpeopleflyingintotheUK.
ThiswouldmeanthatpassengersflyingtoHeathrowfromEuropewouldbeabletoshopatoriginairportsintheEUatdutyfreeprices.
IfasolutionhasnotbythenbeenagreedwithHMRC,HALandotherUKairportscouldbeatapricedisadvantageleadingtoanegativeimpactonsalesandrevenue.
ETRCviewsofkeychallengesfacingtheIndustry3.
109TheETRCisanindustryassociationforthedutyfreeandtravelretailindustryinEurope,servingtheindustryanditsmemberstohelpcreatetherightenvironmenttoallowtheindustrytoachieveitspotentialandprotectitwhenchallengesarise.
Keyareasofcurrentfocusareoutlinedbelow:AviationSecurity–responsetoLiquids,AerosolsandGels(LAGs)andSecureTamperEvidentBags(STEBS).
Nomajorchangestothecurrentsituationareexpectedinthenext5yearswhentheappropriatetechnologycouldbeinplacetoaccuratelyscreenliquids.
Thereisevidenceofcountriespreventingtransferringpassengersfromcarryingliquidstotheironwarddestination,forexampletherehasbeenarecentrulinginIndiatothiseffectand,inThailandapassengertravellingfromtheUKtoBangkokcannotthentransferontoPhuketwithliquidspurchasedataUKairport.
Thissituationcreatesconfusion,thereisriskofsalesstaffnotfullyunderstandingtheinternalrulesofparticularforeigncountries,andhowthesearechanging.
Thisultimatelycreatesconfusionforthepassengerandmayresultinthemnotpurchasingonfuturetripsduetoriskofconfiscation.
AlthoughETRCfeeltherevenueimpactfromtheliquidsissuewillbeneutral,shouldmorecountriesstartbanningliquidsonparticularroutesfortransferringpassengerstherecouldbeanegativeimpactonliquorrevenue.
AirPassengerRights–securingtherightofairpassengerstocarryairportshoppingonboard.
ETRCcontinuetolobbyforairlinestoallowpassengerstotakeonboardatleastonebagofairportshoppingforfreeinadditiontotheircarry-onluggage.
Cabinbaggageisanissueparticularlyonshort-haulflightsduetolackofspace,increasinglypassengersaregiventheopportunitytoputtheircabinbagsintotheholdforfreeattheboardinggate,asairlinesstarttoclampdownoncabinbaggage.
RyanairannouncedinJanuary2017thattheyareconsideringareturntotheonebagonlyrule.
ThisissueisgrowingbutwillonlyimpactHALifthefullserviceairlinesstarttoadoptanti-retailmeasures.
ConsumerInformation–protectingtheindustryaroundEUandnationallegislationrelatingtoproductlabelling.
Requirementstoprovideproductinformationinvariouslanguagescouldresultincertainproductsnolongerbeingavailableintravelretail,reducingchoice.
Thisisanissueforallproductcategories.
Alcohol–ensuringtheresponsibleretailingofalcohol.
Thereisagrowingissuewithdisruptivebehaviouronboardaircraft,inpartdrivenbyinebriation.
ItappearstobeanissueatcertainUKairportsandoncertainroutes.
Theindustryisaddressingthisthroughavoluntarycodeofconduct.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportTobaccoretailingindutyfree–workingwiththeauthoritiestofindpracticalsolutionsthatmeetpolicyrequirementswhilesupportingthedutyfreesector.
PlainpackagingwillbeintroducedinMay2017,andwhiletheimpactisnotyetknown,itisbelievedthatitwillbelessofanissueatregionalairportswhereUKpassengersrecognisetheirbrandandwillbeshoppingforthesamepacketsastheypurchaseintheirlocalstores.
Howeverforeignpassengerswillbelessusedtoplainpackagingandmaythinktheproductsarecounterfeit.
BoardingCard&Pricing–acodeofpracticehasnowbeenagreedbetweenairportsandretailers.
Itappearstobeworking,butmediainterestcontinues(althoughitmaybeunlikelytoimpactonrevenue).
Brexit–ETRCisalreadyliaisingwiththeUKGovernment,andconsidersthatthebestoptionistoreturntothe1993situation,whichwouldbethesamemethodashowUKairportssellto'3rdcountry'passengerstoday.
AsArticle50wastriggeredinMarch2017theUKcouldleavetheEuropeanUnioninMarch2019.
AtthatpointtheUKcouldbecomea3rdcountry,andpassengersflyingtotheUKfromtheEUcouldagainbeabletobuydutyfree.
However,intheUKcurrentExciseandVATregulationswouldneedtochangeinorderforpassengerstravellingfromtheUKtotheEUtobenefitfromanyreturntoDutyfreeshopping.
Otherissues:Whatwillbetheimpactonretailoflowcostcarriersservinglonghaulroutes.
Growingnumberofdutyfreeonarrivalstores–thiscompeteswithdutyfreeondepartureshops,recentlyRussiaandChinahaverolledoutarrivalshopping.
HeathrowAirport–ReviewofCommercialRevenues|FinalReport4CarParkingRecentperformancetrends4.
1HAL'sCarParkingactivitiesgeneratedrevenuesof107millionduring2015.
4.
2CarParkingrevenuesarenotreportedseparatelyinHAL'sregulatoryaccounts.
However,datasharedwithusbytheairportoperatorindicatesthatperpassengerrevenueshavebeengrowinginrealtermsinthepastfewyears.
Figure4.
1:Carparkingrevenuesperpassenger(2015prices)Source:HALDriversofCarParkingperformancePassengermix4.
3Thevolumeofnon-connectingUKresidentpassengerscanbeanimportantinfluenceonthenumberofusersofanairport'spubliccarparksasthisisthegroupthatinprinciplecanuseprivatecarstoaccesstheairport,andthuspotentiallyusetheparkingfacilities.
4.
4AsshowninTable4.
1,thevolumeofpassengersinthissegmenthasgrownearlyintheQ6period:HeathrowAirport–ReviewofCommercialRevenues|FinalReportTable4.
1:HeathrowAirport–DevelopmentofUKresidentnon-connectingtraffic,2013-2015YearTotalpassengers(m)Ofwhich:Non-connecting%Non-connectingpassengers(m)Ofwhich:UKresident%UKresidentnon-connectingpassengers(m)201372.
363.
4%45.
955.
0%25.
2201473.
464.
8%47.
554.
5%25.
9201575.
064.
3%48.
255.
1%26.
6Source:HAL,CAASurvey4.
5AllotherthingsbeingequalthistrendcanbeexpectedtohaveassistedthedevelopmentofparkingrevenuestodateduringQ6.
Modalshare4.
6Heathrow'snon-connectingpassengersuseavarietyofdifferentmeanstoaccesstheairportasillustratedbelow:Figure4.
2:HeathrowAirportmodalsplit,Jan-Sep2016Source:HAL4.
7IntheyeartoSeptember201627.
6%oftheairportsnon-connectingpassengersusedaprivatecartoaccesstheairport.
Thisgroupofpassengersincludesthoseusingthepubliccarparksaswellaspassengerswhoaredroppedoff/pickedupattheairportona'kissandfly'basis.
4.
8DataprovidedtousbyHALindicatesthattherehasbeensomereductionintheproportionofnon-connectingpassengersusingtheirownprivatecarstoaccessHeathrow,reflectingHAL'scommitmenttoincreasetheshareofpassengersusingpublictransporttogetto/fromtheairport.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportFigure4.
3:%ofpassengersaccessingHeathrowwithaprivatecarSource:HAL4.
9TheequivalentpassengervolumesrepresentthesizeofthemarketofusersofHAL'sparkingproducts:Table4.
2:HeathrowAirport–privatecarusersYearO/Dpassengersusingprivatecar(m)%ofnon-connectingUKresidentpassengers20147.
5029.
1%20157.
5628.
6%Source:HAL,SteerDaviesGleaveanalysisNote:fullyear2016datanotavailableCompetition4.
104.
11Itshouldbenotedhoweverthatmanydistributorsandoffairportoperatorshavemultiplebrandswithsometimesupto4or5brandsbelongingtothesamecompanysoitisdifficulttoaccuratelyassesslevelsofoffairportcompetition.
4.
12HALcurrentlyprovidesMeetandGreetandValetparkingproductstoaddressoffairportcompetition.
ValetparkingisaforecourtproductandMeetandGreetisofferedfromtheshortstaycarparks.
Basedonacourtrulingin2010,PurpleParking,HAL'smainoffairportcompetitor,wontherighttocompeteonan"equivalentbasis"foritsownoperationanditsIAPAmembers.
InterestinglyPurpleParkingandtheotheroffairportMeetandGreetoperatorsthenchosetooperatefromthecarparksratherthantheforecourts,asoperationallyitwasmorebeneficialtothem.
4.
13Accesschargesforoff-airportcommercialoperatorsareleviedbyHALfor:Offairportbussedoperationsbasedonavehiclemovementcharge(inlinewiththemajorityofUKairports);HeathrowAirport–ReviewofCommercialRevenues|FinalReportForecourtpermits;andUseofshortstaycarparksforoffairportmeetandgreetoperatorsatdiscountedratesrelativetonormaltariffs.
4.
14Figure4.
4providesaUKairportcomparisonofoffairportspaceprovision.
Figure4.
4:UKairports–offairportparkingspacesperMPPASource:SteerDaviesGleaveanalysisNote:HeathrowO/DexcludesconnectingtrafficCapacity4.
15AdditionalcapacityprovidedduringtheearlypartofQ6includedthenewmultistoreycarparkofcirca1,250spacesatTerminal2andafurther800spacesatTerminal5(Business)inFebruary2015.
However,800BusinessPlusspaceswerelostinordertodeveloptheAuthorisedVehicleAreatohousetheprivatehirevehiclesonthenorthernperimeterroad.
Totalpublicparkingprovisionincludingvaletstoragenowstandsat27,738spaces.
HeathrowAirport–ReviewofCommercialRevenues|FinalReport4.
16Figure4.
5showshowHeathrow'sparkingprovisioncomparestothatatotherUKandEuropeanairportsonaperpassengerbasis.
AtheadlinelevelHeathrowAirporthasoneofthelowestcarparkingspaceprovisionspermillionpassengerscomparedtootherleadingairportsinEurope,andevenwhenadjustedtoexcludeconnectingpassengersitcanbeseenthatHeathrowisnotamongtheforerunnersintermsofparkingcapacityavailabilityperMPPA.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportFigure4.
5:ParkingspacesperMPPA–LeadingEuropeanairportsSource:AirportwebsitesNote:Valuesfor2013exceptHeathrowTransactions,ProducttrendsandPricing4.
17Heathrownowhasawiderangeofproductswiththemajorityavailableforprebooking(www.
heathrow.
comforproductdetails):ShortStayBusinessLongStayValetparkingMeetandGreetHeathrowPodParking(T5only)HeathrowHotelandParkingDropandRide(T4only)Motorcycleparking(free)4.
18In2015HALgeneratedatotalof107.
2minrevenuefrom4.
19ShortStaygeneratedoverin2015,circaoftotalparkingrevenuewithovertransactions.
Valetparkingdeliveredafurtherwiththeremainderofparkingrevenue()fromlongstayandbusinessparking.
4.
20Valetparkingaccountedforonlyoftheparkingbusiness(comparablewithpreviousyears)howeverwithanaveragetransactionvalue(ATV)ofcircaitisavaluableproductcomparedwiththeaverageATVfromcombinedlongstay/businessparkingof.
HAL'sstrategyistoensuretheValetandMeetandGreetoperationsareoperationallymanageableandthatyieldismaintained.
4.
21PrebookingatHALnowaccountsforoftotalparkingrevenues.
Thetrendtopre-bookingfromrollupcontinues,howeverproactiveyieldmanagementandpricingoptimisationtools(suppliedbyIdeas)ensuremaximumyieldsaremaintainedwithinaverycompetitiveenvironment.
HALmainlydistributesHeathrowAirport–ReviewofCommercialRevenues|FinalReportitsprebookedproductsthroughitsown"Advance"bookingengineaccountingforofallprebooking.
Pricingforprebooking(sampleperiod12th-16thJanuary2017)currentlyoffersa"Winter"propositionof50forthelongstayproduct(servingT2andT3withbustransfer)representingthecheapestonairportproductavailable.
ThiscomparestotheoffairportPurpleParkingproductof54.
95(withbustransfer).
4.
22Additionalbrandedproductsofferedviastand-alonewebsitesanddistributedbyotherconsolidatorsisnowcommonpracticeatUKairports,forexampleMAG'sJetParksproductsarenowimplementedatallofitsairportsandParkandGoatAberdeenisprovidingmoreproductchoicecompetingdirectlywithoffairportoperators4.
23HALhasalsointroducedasecondAirportbrandedproduct,GoodToGoParking(www.
goodtogoparking.
com)providingbothParkandRideandMeetandGreetservicesutilisingonairportcapacityanddistributedbyanumberofconsolidators.
Forthesampleperiod12–16January2017,(HAL'sspecialWinterPricePromotion),thepricequotedwasjust31.
43withbustransfertoT2.
TheMeetandGreetproductforthesameperiodwasonly41.
93.
BothGoodToGoproductswerecheaperthanallproductsofferedbyotheroffairportsuppliersandtargetedatHAL'soff-peakpricesensitivemarket(source:pricecomparisonwebsites/consolidatorsforexampleairportparkingshop,parking4less,holidayextras,APH).
4.
24ItisunclearastotheimpactofGoodToGoonHAL'sprebookbusiness.
HALbelievestherehasbeensomedilutionrateatpeakperiods,althoughthelevelofsalesiscappedinordertomitigateanynegativeimpact.
HALhasobservednegligiblelevelsofdilutionatoffpeaktimeswheretheproductistargeted.
ItisclearhowevertheGoodToGoproductsarecompetitivelypricedandwellreceivedbycustomers,with97%ofcustomerspreparedtobuytheGoodToGoproductsagain(source:Revooonlinecustomerfeedback).
4.
25HALhasmetitsstrategicobjectivesofloweringpricestonewcustomers(basedonpreviousresearchwhichshowed10millionpassengersdidnotparkonairportatHeathrowasitwasconsideredtooexpensive).
ByintroducingthebudgetpricedGoodToGorangeofproductsandMeetandGreetparkingHALhasintroducednew,lowerpriced,parkingproducts,andprovidingachoiceofparkingoptionsbetteralignedtotherequirementsofitscustomers.
4.
26FocusbyHALonyieldmanagementhasprovidedupsellopportunitiesbyleveraginggreatervaluefromtheirmostconvenientandhigherpricedprebookproducts(shortstayandvalet)toimproveyield.
4.
27TheshortstayproductatHeathrowhasbeenenhancedwiththeadditionofMSCP2in2014.
Thequalityofthisproductisatleastequivalentcomparedtootherairports,suchasStansted,ManchesterandGatwick,andarguablysuperior,withlatesttechnologyforpaymentandbaysensingtoaidvehicleway-findingandprovidetheoperatorwithreal-timeoccupancydata,benefitingboththeoperatorandHAL'scustomer.
Comparisonsofshortstaypricesaresetoutbelow.
4.
28ItshouldbenotedHeathrowrestructureditstimebands(upto2hours)fromJanuary2014,increasingthepriceof30minutesto1hour,eliminatingthe1-1.
5hourtimebandandintroducingahigherpriced1-2hourtimeband.
ThisstructurehasbeenmaintainedandisnowinlinewithotherairportsandtherearenoplansbyHALtomakeanyfurtherchangestoshortstaytariffstructures:HeathrowAirport–ReviewofCommercialRevenues|FinalReportTable4.
3:TariffComparisons–KeyUKairportsTimeBandHeathrowHeathrowFastTrackT2&T5GatwickGatwickPremiumManchesterStansted0-30minutes3.
603.
504.
503.
503.
6030-60minutes6.
707.
009.
006.
007.
201-2hours10.
8011.
00(0-2hours)12.
0014.
009.
5012.
402-3hours13.
4020.
50(2-6hours)14.
0018.
003-4hours17.
5046.
50(6-9hours)18.
0023.
0018.
00***22.
00***4-5hours21.
6067.
00(9-24hours)21.
0028.
006-9hours26.
8024.
0033.
009-12hours39.
1038.
00**48.
00**12-24hours50.
50Eachadditional24hourperiod57.
7045.
0055.
0040.
00(upto24hours)42.
00(upto24hours)Source:AirportwebsitesNote:*T4hasbeenoperatinganexperimentaldifferentialtariffsinceNovember2013,withanamandpmpeaktariffasfollows(itisunderstoodthisisshortlytobesuspendedduetoanairlinechangeatT4)**for6-12hours***upto4hoursTable4.
4:T4ShortStaytariffTimebandAMpeakPMpeak0-30minutes4.
104.
6030-60minutes7.
207.
701–2hours11.
3012.
00Source:HALNote:AMPeak=06.
00-08.
00hours;PMpeak=18.
30-20.
30hours.
AdditionalrevenuesforpeakpricinggeneratedincrementalrevenuetoHALofcirca100kperannum.
ThetariffdifferentialbetweenT4andothershortstaycarparkshadnoimpactonutilisationofthecarpark.
AllothertimebandsarethesameastheCTA/T5shortstaycarparks.
4.
29WeunderstandthatpeakpricinggeneratedincrementalrevenuetoHALof.
ThetariffdifferentialbetweenT4andtheothershortstaycarparkshadnoimpactonutilisationofthecarpark.
AllothertimebandsarethesameastheshortstaycarparksintheCentralTerminalArea(CTA)andT5.
4.
30ThemaincomparisontableshowsHeathrowisinlinewithothermajorUKairportsforstaysofupto2hours.
Heathrowhasalwayshadahigherupto24hourrate,originallytopriceoutbusinessuserstothecheaperbusinesscarparksintroducedduringthelate1980stoaddressconsumerpricingissues.
4.
31ItisinterestingtonotethattheT4ShortStaypeaktariffsareunlikelytodeterusers(asstatedtousbyHAL).
TherecouldthereforebeanHeathrowAirport–ReviewofCommercialRevenues|FinalReportopportunitytointroducepeakamandpmpricingatHeathrow'sothershortstaycarparks.
4.
32DifferentialpricinghasbeenimplementedatotherUKairportssuchasStansted(MAG)wheretherearedifferenttariffstructuresfortheindividualOrangeandGreensurfacecarparkshortstayzones(basedonproximitytoterminal).
AtHeathrowwithinspecificproducts,HALonlyofferdifferentiatedpricinginShortStayfortheFastTrackparkingzonesinT2andT5.
4.
33HALhasnocurrentplanstorolloutdifferentialpricingacrossHeathrowshortstaycarparks.
HALnotedthatitwouldonlylooktousepeakpricingatothercarparksifthesefacedoperationalchallengesthatsuchdifferentialpricingmighthelpresolve.
4.
34IntheUSandEuropeshortstaytariffstructuresaregenerallybasedontheprinciplesofproximityandwhetheraproductiscovered/MSCPwithratesbasedontypicalhalfhourand1hourtimebands.
4.
35SomeofHAL'speershaveadopteddifferentialpricing:Madridairport(andotherAENAownedairports)hasa"byminute"pricingstructure.
ParisCDGandOrlyairportschargeper15minuteintervalsbetween1hourand4.
5hours,and1hourand7.
5hoursrespectively.
ChangiairportinSingaporehasimplemented"byminute"charging(alsovariablechargingbycarpark).
4.
36TomaximiseprivatecardropoffrevenuesvariousformsofforecourtchargingarewidelyinuseatotherUKairports.
HALhasnocurrentplanstointroducethisatHeathrowalthoughthereisanincreasedfocusbyHAL'soperationalteamstomovepickupactivityintotheshortstaycarparksfromthedesignateddropoffzonesontheforecourts.
PerformanceversusQ6SettlementResults–CarParking4.
37CumulativeCarParkingrevenuesperpassengerhavemodestlyoutperformedtheCAAforecastoverthecourseofQ6todate(actual1.
39,forecast1.
35).
Table4.
5:HeathrowAirport–CarParkingrevenuescumulativeperformance,Q6toendof2015(2015prices)Apr–Dec20142015Q6CumulativeApr2014–Dec2015CategoryCAAActualAct-CAACAAActualAct-CAACAAActualAct-CAACarParkingIncome7378+5100107+7173185+12CarParkingIncome/Pax1.
311.
35+0.
041.
391.
43+0.
041.
351.
39+0.
04Source:HALregulatoryaccountsNote:Resultsfor9monthsendingDecember2014rebasedto2015prices(RPI).
Initsrespective2014and2015regulatoryaccountsHALmadethefollowingcommentsthatmaybehelpfulinunderstandingsomeofthevariancesbetweenactualandforecastperformance:2014:CarParkingrevenuewasaboveforecastasaresultofimplementationaheadofscheduleofachangetoshortstayparkingprices.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportRetailExpenditurewas14%lowerthanforecastduetolowercarparkmanagementcosts.
2015:Parkingperformancesupportedbyincreasedparticipationrates(increaseintransactions).
4.
38MorespecificcommentaryprovidedtousbyHALincludes:Table4.
6:HeathrowAirport–Q6CarParkingrevenuesperformancecommentaryCategoryHALcommentaryCarParkingCarParkRevenuegrowth:PhasedShortStayRollupPriceIncrease/BenchmarkandTimebandRestructureatthestartofQ6;AnewBusinesscarpark(c800additionalspaces)openingatT5inFebruary2015;OpeningofnewMSCP2providinganadditional1,250spaces;Investmentinmarketinganddirectacquisitionofpre-bookparkingwithinacompetitiveenvironment;andDevelopmentofnewproducts,inparticularMeet&GreetwhichallowedHALtocompetemoreonpriceaswellasoperateathigherlevelsofcarstorageandmovements.
AuthorisedVehicleArea:OpenedinJune2016toencourageprivatehirevehiclesoffthelocalroadstoenhancethesurroundingcommunities.
Source:HALLessonsfortheH7processStakeholderopinionsAirlines4.
39AirlinesfeltthatcustomerswishingtobepickedupontheforecourtweredisadvantagedasatsomeTerminalscustomerswereforcedtobepickedupinthecarparksandquestionedwhethertheintroductionofa15minutegraceperiodwouldhaveamaterialcosttoHAL'sparkingrevenueversusimprovingcustomerservice.
4.
40Airlinesfeltstaffparkingvolumesmayreduceovertime,allowingmorecapacitytobegivenovertopublicparking.
ManagingAgent4.
41APCOAisaManagingAgentratherthanatypicalretailrevenuesharingConcessionaire.
ItisresponsibleforprovidingarangeofcarparkingandtravelrelatedservicestoHAL,andinreturnHALpaysallopexcostsandamanagementfee.
APCOAisconsideredaleadingexpertintheairportparkingmarket.
4.
42CarparkrelatedbussingservicesareprovidedbyMenziesanotherkeysuppliertoHAL.
4.
43HALretainsallcommercialresponsibilityforpricing,productdevelopment,marketinganddistributionofthepublicparkingproducts.
APCOAprovidethedaytodayoperationalexpertise,processesandparkingtechnologytodeliverHAL'sparkingservices.
Withcirca250APCOAstaff,HeathrowisoneofthelargestpublicparkingoperationsinEuropeandleadsthewayinparkinginnovation.
HeathrowAirport–ReviewofCommercialRevenues|FinalReport4.
44APCOA,asaglobalparkingbrand,sharesnewtechnologyacrossallitsparkingsitesfrombettermanagementofCO2emissions,taximanagementtechnologytoanonlinestaffbriefingtooltoreducemanpowerdowntime.
However,APCOAbelievesHALhasgreaterknowledgeandexperienceinleveragingrevenuesfromprebookingthrougheffectiveyieldmanagementandpricingoptimisationthanitspeersinEurope,albeitprebookingandthewiderrolloutofproductssuchasvaletparkingtotheleisuremarketarenowgrowinginGermanyandScandinavia.
4.
45APCOAbelievesHAL'sstyleofmanagementcontractisanexcellentvehicleforworkinginpartnershipwithanairportowner,providingincentivestotheoperatortodemonstrateitsoperationalexpertisewithinacontractstructurethatisfair,butdrivesexceptionalperformance.
4.
46HALiscurrentlyimplementingaprogrammeforconcessionairesandbusinesspartnersknownasBrilliantBasics.
APCOA'sparticipationinthisprogrammeisfocusedondeliveringalloperationalaspectsoftheparkingservicetothehighestpossiblestandard,forexamplebyincreasingthereliabilityoftheparkingequipment,drivingdownmaintenancecostsandinturnreducingoperationalcosts.
4.
47AsaManagingAgent,APCOAwillcontinuetoworkproactivelywithHALtoadaptanddeliverserviceswithinachangingandincreasinglycompetitiveenvironmentbringingoperationalknowledgeandscalablemanpowertomeetfutureneeds.
4.
48AcurrentexampleofAPCOA'sadaptabilityinmeetingHAL'sneedsistheincreaseinvaletparkingservices.
HALwantedtoprovideamorecompetitiveproductsointroducedanadditionaltwoMeetandGreetproducts(onairportandGoodToGo)acrossthecampusinadditiontotheforecourtbasedValetparkingproduct.
Heathrowhasacomplexanddistributedgeography,acongestedCTAandlimitedparkingcapacity,however,theproductsarehighlysuccessfulfrombothacustomerandyieldperspectiveandAPCOAnowstorescustomervehiclesacrossthecampus,accountingfor5,550spaces(approximately20%oftotalpubliccapacity).
Q6ForecastMethodology–CarParking4.
49ThemethodologyandassumptionsusedforcarparkingwerebasedonthedataprovidedbyHAL,theeconometricmodelusedbyHAL,andstakeholderopinion.
KeytothecarparkingforecastsbeingdeliveredforQ6wastheadoptionbyHALofthefollowingstrategicobjectivesindeliveringitsbusinessplan:Marketingactivity(mostimportantfactorfordrivingrevenueintheRedRouteModel)wouldbeincreasedforprebookingresultinginanuplifttoparkingrevenuesof0.
9%.
Additionalcapacitytobeprovided(particularlyT5businesswhereutilisationhadreached97%).
T2MSCPwouldbedeliveredforsummer2014.
TheNorth-sidePerimeterParkingproject(NPP)maximisingcapacitywouldberealised,favouredbytheAirlinestakeholders(additional3.
5%growthdelivering11.
6mbutlaterwithdrawnaswouldonlybepossibletoachieverevenuesifdeliveredearlyinQ6).
4.
50AirlinestakeholdersbelievedHALcoulddeliveranadditional1%to2%revenuestretchtarget.
HAL'splanstodeliverstretchwereincludedinitsFBPandcomprised:Progressinge-businessdevelopment,bundlingproductsandimprovingconversionrates/usingCRMdata;HeathrowAirport–ReviewofCommercialRevenues|FinalReportRollupYieldManagement;ImprovementstoValetproduct;HEXcrosssell;Loweringpricestonewcustomers(researchindicatedthat10millionpassengersdonotparkasitistooexpensive);UpsellinglongstaycustomerstoshortstayprebookandValetincludingHeathrowmeetandgreetproduct;Theintroductionofanewhotelandparkingproduct;andReducingoperatingcostsbyconsolidatingAPCOA'soperationintoonecontrolcentre.
4.
51ItisunderstoodfromHALthatitdeliveredmuchofitsstretchplansduringtheQ6period.
4.
52FurtherrecommendationsgeneratedbySDG'sreviewofcommercialrevenuesincluded:Widerdistributionofproduct,byconsolidatorsandotheraffiliates,particularlyviaairlinessuchasBritishAirways.
Structuralchangestoshortstaytariffs(upto2hourmarket).
Greaterenforcementofterminalforecourtstomovemorepickuptrafficintoshortstaycarparks.
Differentialpricingbetweenshortstaycarparks.
Greaterdiscountingofshortstayprebookbackfillproductsandvaletparking.
Promotionalprebookoffers-allprebookproducts.
4.
53Althoughthestretchtargetwasconsideredachievable,HAL'slackofparkingcapacity,offairportcompetitionandconcernsoverpress/stakeholderreactiontopricingincreaseswouldbeexpectedtolimitHAL'sabilitytoachievethestretchgoalsenvisagedbytheairlines.
TheseconsiderationswereincludedinSDG'sassumptionsaccordingly.
Assumptionsonimpacts4.
54SDG'sfinalassumptionsdrivingourQ6revenueforecastsfortheCAAatHeathrowcomprisedstructuralchangestoshortstay(i.
e.
15minutetariffupto2hrs)andgreaterpromotionthroughdiscounting/specialoffersofallprebookproducts.
4.
55Basedonperformancesincethen,learningpointsinclude:Carparkingyieldmanagementiscomplextomodelanditisdifficulttoisolateanyproductsubstitutioninachangingandcompetitiveenvironment.
Responsetocompetition(offairportorothermodessuchastaxi/privatehire)makesmarketingandpricingoutcomesuncertain.
Althoughthereweresignificantareasofdisagreementatthetime,HALsubsequentlyduringQ6adoptedsomerestructuringoftheupto2hrshortstaytariffin2014andincreasedmarketingofprebookproducts,reducingpricingdifferentialsforprebookshortandvaletproductstoincreasetheattractivenessoftheseproductsinlinewithotherairportssuchasGatwick.
HALhas,sincethelastCAAReview,beenmakingsignificanteffortstobackfillavailableshortstaycapacity.
T5shortstayrevenuein2015comprised34%prebook,delivering8.
9manda2%YoYincreaseinrevenueover2014.
T5Valet(includesmeetandgreetproduct)deliveredthehighestprebookedvaletparkingrevenuesat5.
1mandgenerated4%increasesinrevenueYoYsince2013.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportBestpracticefromotherairports4.
56UKairportsareseenasleadersintheglobalairportparkingmarket.
4.
57Whereparkingiscontractedouttothirdparties,airportshaveusedthemostcommerciallyastutemanagementcontracts,wheretheairportsretainingallrevenuebenefitsfrompassengers,andcontrolovertariffsandproductdevelopment.
ThereisnomaterialbenefitinHALoperatingthecarparksdirectlyasitwouldonlysavetheAPCOAmanagementfee.
AlloperatingcostsarestrictlymonitoredbyHALandtherehavebeensavingsovertheQ6period(suchasacentralisedoperatorcontrolroom).
APCOA'scontractatHeathrowspecificallyincentivesitformakingoperatingcostsavingslargelybyintroducingtechnologyandinnovation.
4.
58AirportparkingisamaturemarketintheUKandairportshavewelldevelopedcarparkproductswithcustomercentric,easytouse,prebookingwebsitesandareleadersinyieldmanagementandpricingoptimisationtechniques.
HALhasdevelopedawiderangeofproductsand,withitsyieldmanagementsupplier,Ideas,hasnowcreatedaresponsiveyieldmanagementsystemtoeffectivelymanagetheHeathrowparkingportfolio.
4.
59Fromaproductperspective,Schipholisthekeycomparableairport(theparkingoperationisownedandoperatedbySchiphol)withanumberofwell-developedparkingproductsandaneffectiveprebookingsystemintroducedin2004,deliveringover70%prebookedtransactionsatpeaktimes.
Prebookingwasprincipallyintroducedtotackletheissuesoffallingpenetrationandtoaddressgrowingoffairportcompetition(over25competitors),butlikeHeathrownowprovidesSchipholwithbettercustomerprofilingfromcustomerdata,growingtheoveralle-commerceopportunity,aswellasincreasingparkingrevenuesfromupsellingandtargetedpromotions.
4.
60Schipholprovidesqualityparkingproducts,forexampleitsExcellencebusinessproductoffersawaitingareawithWiFiandotherfacilities,widerbays,baysensorsandanumberofpaymentoptionssuchascreditcardpaymentonentryandAutomaticNumberPlateRecognition(ANPR)forprebooking.
Valetparkingoffersadditionalrewardpointswhenbookingancillaryservicessuchascarwash,tyrechange,andcarservice.
4.
61OtherEuropeanairportsofferthesamecorerangeofproductsbutwithsomenewproductssuchas"LadiesParking"(womenonly)atFrankfurtairportwithreservedrowscolourcodedinpinktoaidwayfindingandwiderbayswhichsparkedasexismrowwhenintroduced.
4.
62AlthoughtherearesimilarlevelsofoffairportcompetitionatEuropeanairports,theUKairportsattempttomanageandlicenseoffsiteoperatorstotryandmitigatetheircompetitiveimpact.
HALlicensesbussedoperatorsandprovidesdiscountsintheshortstaycarparksforoffairportmeetandgreetcompetitors.
4.
63WiththeimplementationofHAL'sbudgetpricedGoodToGoproduct,comparablewithMAG'sJetParksportfolioofproducts,HALisnowdirectlycompetinginthemarketplaceforthecustomerwhotraditionallyatHeathrowwoulduseprivatehireoroffairportparking.
HALismonitoringvolumesandanydilutionimpactswiththisproductonitsotherprebookbusiness.
ByadoptingthisapproachHALwillensureparkingyieldsareoptimised.
4.
64AlthoughprebookingisbecomingmorecommonplaceinEurope,peerairportssuchasParisHeathrowAirport–ReviewofCommercialRevenues|FinalReportCDGandOrlyhavelimitedreservedparkingbutinthemainprovidediscountsbysubscriptionorloyaltyprograms.
Thisoftenresultsinahigheryieldperspacewiththemajorityoftransactions'rollup'.
4.
654.
66Theglobalgrowthofprivatehire(inparticularUberandLyftetc.
)isachallengeforallairports.
IntheUS,whereprovisionoffreecellphonelots(waitingareasprovidedbytheAirportforvehiclespreaccessingtheforecourttodropoffcustomers)isthenorm,airportoperatorsarenowtryingtorespondtofallingparkingrevenuesbyactivelymarketingtheirparkingservicesandadoptingaprebookingstrategy.
4.
67IntheUKandinparticularatHeathrowwheretherehasalwaysbeenahighlevelofcompetitionfromtaxisandprivatehire.
HAL'sresponsehasbeentocreateadesignatedcarpark(locatedonthenorthernperimeterroadabovetheCTAtunnel)withachargingstructuretomoveprivatehirefromwaitingonadjacentresidentialroads.
ThishasbeeninoperationsinceJune2016andhasbeenwellreceivedbylocalresidents.
Intandem,tighterenforcementofforecourtsandairportaccessroadswillhelptomanagetheissueoperationally.
AlthoughitistooearlytoassesstheimpactonHAL'sshortstayrevenuesinanydetail,earlyindicationsshowthatthereisagreaterproportionoftransactionsinthe30minutetimebandintheshortstaycarparks.
ThisincreaseinvolumehasdeliveredanincreaseinrevenuebuterodedAverageTransactionValue.
4.
68OnbalancethereappearstobelittlethatHeathrowcanadoptfromotherUKorEuropeanAirportsintermsofitsapproachtocarparkingthatitisnotalreadyaddressing.
Methodstoincreaserevenuesfromexistingsources4.
69HALisproventobecompetitivewithitsprebookedproductsversusoffairportcompetition,anditcompareswellwithotherkeyUKairportswithitsshortstaytariffstructure.
4.
70SincethelastCAAReview,HALrestructuredtheshortstaytariffs(upto2hours)in2014andintroducedtrialpeakpricinginshortstaycarpark4foroperationalreasons(thisisshortlybeingwithdrawn).
4.
71HALhasbeenclearthatitcurrentlyconsidersthepricingstructureappropriateanddoesnotintendtoleverageanymorevaluefromitsshortstaytariffsbyrestructuringorbyintroducingdifferentialorfurtherpeaktime/daypricingsuchasmovingto"byminute"or"15minutesegment"pricingasusedbysomeofitsEuropeanpeers.
However,itremainsopentoreviewofdifferentpricingoptions,asitunderstandstherolepriceplaysinbalancingshorttermfinancialreturnwithlongtermdeclineinpenetrationanduseravoidance.
4.
72IntheeventthatotherUKairports,suchasGatwick,movetoadifferentstructureitispossibleHALcouldreconsider.
4.
73AstheyieldmanagementsystemprovidedtoHALbythesupplierIdeasislargelybespokeitisnotpossibletocomparefunctionalitydirectlywithothersuppliers,howeverthesystemhasbeendevelopedovermanyyearsandHALhasconfirmedthatitiscapableoffullyanalysingandoptimizingyieldandthatitdoesnotneedtouseanyotheryieldorpricingautomationtools.
TheChauntryprebookingengineusedbyHALisalegacysystembuthasthesamecorecapabilitieswhencomparedtootherleadingbookingenginesuppliersinthemarketsuchasInventiveIt,Aeroparker(MAG'ssupplier),AdvamandRezcomm.
HeathrowAirport–ReviewofCommercialRevenues|FinalReport4.
74Customerrelationshipmanagement(CRM)dataisusedbyairportsinmarketingprebookcampaignsandemailpromotionsofferingotherretailproductsandservicestocustomerswhohavepreviouslyprebookedparking.
Figure4.
6:Parkingpromotion-recentGatwickexampleSource:GatwickAirportLimited4.
75Heathrow(alongwithotherairportsintheUKandEurope)isadoptingasimilarapproachindevelopingitse-commercestrategy.
4.
76WithregardtoprebookingHALhasadoptedastrategyofworkinginamorelimitedwaywithbookingconsolidators/affiliatesusingitsownbookingchannel"Advance"forsellingitsonairportproductsandusingconsolidatorssuchasHolidayExtrasandAPHtodistributetheGoodToGoproducts,alongsideotheroffairportproducts.
ThiswasaconsciousdecisionbyHALtoprotectbrand,controlcosts,increasemarginandownthecustomer.
RegionalairportsintheUK,suchasGlasgow,haveadoptedafulldistributionstrategy,astheybelieveitisbettertobewidelyknownintheprebookconsumermarket.
BycomparisontoHAL,MAGallowsallproductsatManchesterairporttobedistributedbythetop3consolidators,HolidayExtras,APHandPurpleParking,inordertoachieveawiderdistribution,withthelevelofrevenueincreaseoffsettingcommissioncostsandincreasingtheirpresenceinthecarparkingmarket.
4.
77MAGhasbeenparticularlysuccessfulingrowingitsJetParksproductatallofitsairportsresultinginreducedoffairportcompetitionatManchester,hardlyanyoffairportcompetitionatEastMidlandsandlimitedcompetitionatStanstedairport,contributingtothehighestrevenueperpassengerofallofHeathrow'speers.
4.
78Thefollowingtablebenchmarksairportproductsdistributedviatheairport'sownchannelandbythethreetopcarparkingbookingconsolidators.
Itshouldbenotedalloftheconsolidatorslistedalsooperatetheirowncarparks:HeathrowAirport–ReviewofCommercialRevenues|FinalReportTable4.
7:BenchmarkingDistributionChannelsforprebookingatkeyUKairportsChannelHeathrowManchesterGatwickStanstedAirportownedAllonairportAllonAirport&JetParksAllonAirportAllonAirport&JetParksHolidayExtrasNotonairportGoodToGoonlyAllonAirport&JetparksOnlyonAirportLongStayAllonAirport&JetParksAPHNotonAirportGoodToGoonlyAllonAirport&JetparksOnlyonAirportLongStayAllonAirportbutnotShortStayEconomyPurpleParkingNoneAllonAirport&JetparksNoneOnAirportLongStayandMeet&GreetSource:SteerDaviesGleaveanalysisMethodstoincreaserevenuesfromnewsources4.
79CarparkcapacityremainsanissueforHAL.
Thecurrentparkingcapis42,000spaces.
HALhadconsideredconsolidatingthecarparksonthenorthernperimeterroad(NPP)andwereviewedtheseplansaspartofthelastCAAReview.
TheintentionwastoalsoextendtheuseofthePersonalRapidTransit(PRT),currentlyusedforT5PODparking,fromthenewconsolidatedNPPcarparksthroughoneofthesmallsidetunnelsintotheCTA.
4.
80ItshouldbenotedanyadditionalPRTsystemwouldrequireasignificantcapex.
AspartoftheQ6constructiveengagement,HALproposedprojectsconnectingothernorthernperimetercarparkstoT5andtheCTAusingaPRTsystembutthesewerenotagreedwiththeairlines.
AlsoofnoteisthefactthattheexistingPODcapitalinvestmentwasexcludedfromtheRABbytheCAA.
TheCAAdecidedtosetHAL'spricecontrolexcluding:Thecapex,bothpastandfuture,onthePRT;ThereturnontheRABanddepreciationfromthePRTexpenditure;TheprojectedopexonthePRT;andAssociatedrevenuesgeneratedbythePRT.
4.
81ProvidingadditionalqualitycapacityservedbythePRTwould,however,allowHALtopriceitsbusinesscarparksservingtheCTAatthesamelevelastheT5PODparking,contributingtoincreasedparkingrevenue.
Forexample,thepricingdifferentialbetweenstandardbusinessparking(allTerminals)andT5PODparkingcurrentlyisshownbelow:Table4.
8:Prices–T5PODvsT1-T5BusinessParkingTimeBandBusinessParkingT1-T5T5PODParkingTues-Thurs29.
5037.
50Fri–Mon26.
5033.
00Source:HAL4.
82HALcurrentlyhasnopublishedplanstointroduceaccesscharging.
HoweverchangestotheCTA(demolishingcarparks1and1A)wouldprovidetheopportunitytocreatemoreroad/forecourtinfrastructure.
ItisHeathrowAirport–ReviewofCommercialRevenues|FinalReportunderstoodbyHALhoweverthatcarpark1willbedemolishedin2-3yearstomakewayforeitheralogisticsareatofacilitatethedemolitionofTerminal1andbuildofTerminal2extensionortoenableanewPassengerTerminalInterchangetoenabletheroadintotheCTAtoberealignedandstraightened.
Theremaystillbepossibilitiestocreateaforecourtchargeableplazaandfuturemassrolloutofautonomousvehicles(likelytobeafterH7)couldcreatealargemarketforsuchaproduct,howeveratthisstageitseemsunlikely.
4.
83AlthoughatthetimeofwritingHeathrow'sairlineshavenotcontributedtothisreport,inthelastCAAreviewtheyprovidedopinionfromNyrasonbehalfofBritishAirwayswhichconcludedthataccesscharging,particularlyforprivatehire/taxi,andtheNPPprojectwouldbedesirableingeneratingadditionalrevenues.
4.
84DistributionofprebookparkinghasbeenreferredtoearlierinthisreportashasHAL'sstrategicapproachinonlyusingitsownchannel"Advance"todistributeitsonairportpositionedproducts.
HALstatedthattherehavebeenpastdiscussionsaboutincludingHeathrowparkingproductsinthebookingflowsofBA(theBAValetserviceisa"whitelabelled"product),butthesehavenotadvanced.
ThelevelofcommissionairlineschargeairportownersandissuesoverownershipofcarparkingCRMdataarefactorsthatmakesuchdealswithairlinesdifficulttomake.
Additionally,thereareissuesoverdilutingrevenuesifsalesthroughtheairlinesarenottrueincrementalsales.
However,awiderdistributionmayprovidesomeopportunityforadditionalrevenue,especiallyatoffpeaktimesandHALremainsopentoworkingwithairlinesonincludingHeathrowproductsintheirbookingflows.
However,successwilldependonfindingacommercialmodelthatworksforbothpartiesandforairlinestomoveawayfromawiderdealandpartnerwithjustHeathrow.
CarRental/PrivateHire4.
85CarrentalmodeshareatHeathrowhasremainedstableat2.
7%during2014and2015.
4.
86Revenueshavebeenunderpressureinrecentyearsfromindustrybrandacquisitionandconsolidation,whichhasdrivendownpricesandHAL'srevenues.
Carrentalcompanieshave,however,beeninnovatingoverthelastfewyearsandutilisingtechnologytoprovidemoreself-serviceoptionsforcustomers,reducingmannedfacilitiesandtherebycuttingoperatingcosts.
HALhasbeensupportiveofsuchdevelopments(forexamplewithHertz,andbyprovidingcarrentalcompaniesprimespacesintheshortstaycarparks),howevertheopportunitytomateriallyimproveHAL'scarrentalproductofferingandrevenuecanonlybedeliveredbyprovidingaconsolidatedcarrentalcentre.
4.
87HALandthecarrentalcompanies/BVRLA(tradebodyforthevehiclerentalandleasingsector)arehopingthatoncetheR3schemehasbeenfinalisedtheywillbeabletoidentifysuitablelandtolocatethistypeoffacilityincorporatingcarstorageandvaleting/fuellingfacilitiesaswellasanimprovedfrontofhouseexperienceforcustomerswithmorechoiceofcarrentaloperator.
4.
88TherearemanyexamplesintheUSandEurope,forexampleNiceairport'sConsolidatedCarRentalCentrehasover2,000spaceshousedinadedicatedMSCPandgenerates80%ofallcarrentalactivityintheimmediateregionand10%oftheFrenchtotal.
Heathrow'scarrentaloperatorshaveintotaljustover1,000spacessplitacrossfiveremotelocationswithadequatewayfindingforthecustomeranhistoricissue.
4.
89Privatehire/taxihasgrownfrom25.
8%sharein2014to27%in2015.
Historically,thishasalwaysbeenastrongmode,competingdirectlywithHeathrowAirport–ReviewofCommercialRevenues|FinalReportHAL'sparkingproducts.
Withtheriseofconsumersbookingprivatehirebymobilephoneapp,thegrowthofcarandridesharingcompaniessuchasUberandLyfthasbecomeaglobalphenomenon.
4.
90AtHeathrowtheproliferationofcompaniesusinglocalroadsandcommercialsitesforwaitingoffsitebeforecollectingcustomersattheterminalforecourtshasbeenanissueforlocalresidentsandbusinessesandalsoresultsinmuchgreaterroadcongestionaroundtheterminalsandinCTAroadsystem.
HAL'sintroductionofadedicatednorthsidecarparkisahelpfulstartinmanagingtheissue,howeveritispossiblethatgrowthintheseservicescouldseriouslyimpactairportrevenuesandHALcouldconsiderhowtofurthercommercialisetheseservices.
HeathrowAirport–ReviewofCommercialRevenues|FinalReport5PropertyRecentperformancetrends5.
1HAL'sPropertyactivitiesgenerated112millioninrevenuesduring2015.
5.
2AprincipledriverofPropertyrevenuesisspaceratherthantrafficvolume.
Asaresult,onaperpassengerbasisPropertyrevenueshavebeenunderpressureinrecentyears,reflectingcompetitionfrom,andtheprioritisationof,airportspaceforoperationalandothercommercialuses.
Figure5.
1:Propertyrevenuesperpassenger(2015prices)Source:HALRegulatoryAccountsDriversofPropertyperformance5.
3HAL'spropertyrevenuesaredrivenbyseveralkeyinfluencingfactorsincludingrentalrates–ledbytheGuidePrice–theamountandtypeofspaceavailabletorent,andoccupancylevels.
GuidePrice5.
4TheGuidePriceisanannualrentalgrowthindexappliedtoHAL'spropertieswhichisinformedinequalpartsby:Growthintotalpassengernumbers;RPIchanges;andHeathrowAirport–ReviewofCommercialRevenues|FinalReportChangesinthePropertyIPDindex,anindexbasedonanaverageoftheindividualIPDindicesforCentralLondon,OuterLondon,andWestLondontoproduceaweightingappropriatetoHeathrow.
5.
5RecentmovementsintheGuidePriceindexaresummarisedbelow:Table5.
1:HeathrowAirport–PropertyGuidePriceindex,2010-2015YearPax%YoYRPI%YoYIPDCentralLondon%YoYIPDOuterLondon%YoYIPDWestLondon%YoYIPDHeathrow%YoYGuidePrice%YoYComments2012+0.
9%+3.
1%+4.
1%+2.
1%+0.
8%+2.
3%+2.
1%AppliedApr2013-Mar20142013+3.
4%+2.
7%+5.
6%+3.
7%+1.
1%+3.
4%+3.
2%AppliedApr2014-Mar20152014+1.
4%+1.
6%+11.
0%+7.
8%+3.
0%+7.
3%+3.
5%AppliedApr2015-Mar20162015+2.
2%+1.
2%+11.
9%+8.
1%+3.
2%+7.
7%+3.
7%AppliesApr2016-Mar2017Source:HAL5.
6ItcanbeseenthatduringtheQ6periodtheGuidePriceindexhasbeenheavilyinfluencedbygrowthintheIPDindices,whereasthecontributionsfrompassengergrowthandRPIhavebeencomparativelymodest.
Spaceandoccupancy5.
7AsatDecember2016HALhada677,000m2propertyportfolioconsistingofspaceintheterminals,CentralTerminalAreaandontheairportperimeter.
5.
8Thespacesupportsavarietyoffunctionsanduses:TicketdesksIndustrialPassengerloungesOfficeaccommodationStorageOtheron-airportsitesincludingfuelfarmOff-airportresidentialunits5.
9Thelargestcategoryisotheron-airportsites,accountingfor72%ofthetotalspace.
However,officespace(17%)isalsosubstantial.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportFigure5.
2:HeathrowAirport–Tenantedpropertymix,December2016Source:HALNote:excludesresidentialproperties5.
10Themajorityoftheportfolioislocatedontheairportperimeter(77%),howevertheindividualterminalsandCTAalloffersizeableamountsofpropertyforrent.
ThisisparticularlynoteworthyatTerminal5,wherethe74,500m2ofpropertyincludesnearly34,000m2ofofficespace,presumablyareflectionofthepositionoftheterminalasBA'soperatingbaseon-airport.
Figure5.
3:HeathrowAirport–Property('000sq.
m)perareaoftheairport,December2016Source:HALNote:excludesresidentialproperties5.
11ThestatisticssharedwithusbyHALindicateaveryhighlevelofoccupancy,which,ifcorrect,suggestafurthertighteningoftheavailableHeathrowAirport–ReviewofCommercialRevenues|FinalReportsupplyversusdemandinthepast3years.
AtthetimeofourreviewfortheCAAofHeathrow'spropertyrevenuesin2013wereportedanoccupancyfigureof93.
6%.
Table5.
2:HeathrowAirport–Propertyoccupancy,December2016AreaVacantspace(m2,000s)Occupancy%Terminal22.
687.
6%Terminal31.
495.
5%Terminal41.
691.
3%Terminal50.
199.
9%CTA0.
496.
9%Perimeter0.
899.
8%Total6.
999.
0%Source:HALRevenuecontribution5.
12InrecentyearspropertyrevenueshavebenefittedfromincreasesinincomederivedfromspaceinTerminal2,aftertheopeningofthenewfacility,and,toaslightlylesserextent,fromnon-terminalsitesintheCentralTerminalArea.
RentalincomehasgrownmoremodestlyinTerminals4and5,andfalleninTerminal3andintheperimeterareas.
Figure5.
4:HeathrowAirport–Propertyrevenuecontributionbyairportarea,2012-2015(2015prices)Source:HAL5.
13Theyieldsobtainedfrompropertiesinandaroundtheairportalsovarybyarea,withspaceintheterminalsattractingaboveaverageyields.
Thecentralareayieldsareskewedbecausetheyincluderentalincomerelatingtothecontroltowerforwhichtherentiscalculatedonthede-capitalisedcostofconstructingthetowerratherthanonguidelineperm2rates.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportTable5.
3:HeathrowAirport–Propertyrevenueyield(perm2),2015AreaYield(perm2)Terminal2688Terminal3670Terminal4644Terminal5356CentralTerminalArea961Perimeter71Total183Source:HAL5.
14Thissuggeststhatprojectstodevelopterminalareapropertywillgenerallyrepresentthebestopportunitytooptimiserevenues,especiallygiveon-airportspaceconstraints.
PerformanceversusQ6SettlementResults-Property5.
15CumulativePropertyrevenuesperpassengerhavebeenlowerthantheCAAforecastoverthecourseofQ6todate(actual1.
47,forecast1.
59).
Table5.
4:HeathrowAirport–Propertyrevenuescumulativeperformance,Q6toendof2015(2015prices)Apr–Dec20142015Q6CumulativeApr2014–Dec2015CategoryCAAActualAct-CAACAAActualAct-CAACAAActualAct-CAAPropertyIncome8783-4116112-4203195-8PropertyIncome/Pax1.
561.
44-0.
121.
611.
49-0.
121.
591.
47-0.
12Source:HALregulatoryaccounts5.
16SpecificcommentaryprovidedtousbyHALincludes:Table5.
5:HeathrowAirport–Q6PropertyrevenuesperformancecommentaryCategoryHALcommentaryPropertyT2OpeningsawareductionintheamountofsupportaccommodationleasedbutanincreaseintheamountofCIPloungespace.
T5AIndependentLoungesawtheconversionofanunderperformingcateringunitintoanindependentloungegenerating.
T3Re-letofex-SingaporeLounge.
FollowingSingaporerelocationfromT3toT2,theirvacatedloungehasbeenre-lettoanindependentloungeoperatorandhasprovidedexpansionspaceforCathayPacific.
Source:HALHeathrowAirport–ReviewofCommercialRevenues|FinalReportLessonsfortheH7processStakeholderopinionsAirlines5.
17Airlineswouldliketosee:PreparationofadetailedPropertystrategy,reviewingallspace,whatdoHALown,howisspaceused,opportunitiestomateriallychangethewaytheydobusinesstodaye.
g.
lowercostbuildings.
AnalysisoftheBrexitimpactonexistingpropertyleases-HALcouldavoidenteringintolongtermleasesfortheirownuseassomeoftheirownpropertymightbecomevacantasaconsequenceofBrexitandcompaniesmovingoutoftheUK.
AssessmentoftheimpactsofR3duringtheH7period.
Impactsofspaceconsolidation5.
18Thereisclearlydemandforpayonentrylounges,businesscentresandterminalconnectedhotels.
WelearnedthattheopeningofT2in2014andsubsequentconsolidationbyairlinesandhandlingagentsfreeduppropertyspacewhichhasenabledtheexpansionofloungesandtheArrivalsHotelatT3.
5.
19ThisalsoreducedthemixofspacecoveredbytheguidepriceformulaastheloungesandT3hotelareoperatedonturnoverbasedrentshowever,independentloungesoftengeneratetheequivalentofguidepricerentwiththeopportunitytoexceedthisbasedontheirturnover.
Thetruerevenuefromthesenewopportunitieswillnotbefullyreflectedintheoverallrevenuenumbersuntiltheendof2017andearly2018astodatethesesiteshavebeenundernegotiation,contractanddevelopmentwithonlyacoupleoftheseloungescomingonlinetowardstheendof2016andthroughout2017.
Bestpracticefromotherairports5.
20AirportssuchasAmsterdamSchipholtakeadirectinterestinpropertyinvestmentandbywayofexample,inthecaseoftheirAirporthotelAMSdesigned,built,fittedoutandthensetupamanagementcontracttooperateit.
TherevenuefromthisiswithintheirpropertyrevenuelinecontributingtoAMSpropertyrevenueperpassengerof1.
93(HAL1.
49).
Bycontrast,atHALtherearehotelsunderconstructionatT2andT4whereHALhasprovidedthespaceonalongleaseforwhichtheyreceiveagroundrentandthedeveloperhandlestheoperation.
5.
21ThereisanexceptiontothismodelatT3wherevacatedofficespaceintheEastWingOfficeBlockisbeingconvertedintoahotelduetolackofdemandforofficespace.
InthisinstanceHALhasstrippedoutthespaceandhandedthesitetothedeveloperwithshellandcorefinish.
UnderthisarrangementHALwillreceiveaturnoverbasedrent.
5.
22HALcouldadoptmoreofaninvestmentapproachtoareassuchashotels,hangars,warehousingandsmallindustrialunitsreceivinghigherrentinreturn,howeverthiswouldrequireadditionalupfrontcapitalinvestmentbyHALandwouldneedtobeevaluatedinsomedetail.
Methodstoincreaserevenuesfromexistingsources5.
23HALwillcontinuetolookatmixopportunitiestogrowrevenuebutthisismuchmoredifficultduetogeneralspaceconstraints.
HeathrowAirport–ReviewofCommercialRevenues|FinalReport5.
24ThreehoteldevelopmentsareunderwayinT2,T3andT4.
ThesewillprovideHALwithrealopportunitytodriverevenueastheT2andT4hotelsarebasedonturnoverbasedgroundrentandtheT3developmentbasedonturnoverbasedrent.
WithagoodmarketingstrategyHALcouldinfluencethesuccessofthis.
5.
25PayonentryLoungesareunderdevelopmentinT3&T4Arrivalsand,T5Departures.
TheseareturnoverbasedrentdealsfromwhichHALcaninfluencethelevelofrevenueachieved.
5.
26Considerationcouldalsotobegiventousingthehighoccupancyratesasleveragefornegotiatinghigherrents.
HoweverasthiscanonlyhappenaroundthePerimeterarea,whichmustcompetewithoffairportpropertyrents,astrategysuchasthiswouldbeveryshortterm.
Thereisariskthatitcouldleadtohighervacancyratesoverthemediumterm.
MeanstoincreaserevenuesfromnewsourcesAdditionalcommercialusesofasimilartype5.
27HALbelievethereislimitedopportunitytosignificantlydevelopPropertyrevenueaheadoftheR3Master-planbeingdeliveredastheyarecurrentlyspaceconstrainedbut,theyhavetoldusthereisstrongdemand,especiallyforindependentLounges,BusinessCentresandTerminalconnectedHotels.
Furthertypesofcommercialdevelopment5.
28Asalreadymentioned,HALcouldconsideradoptingadevelopermanagerapproachtoPropertywherebytheyfunddevelopmentcostsinreturnforhigherrents.
ThisisthemodeladoptedatsomeairportsalthoughHAL'sapproachhasbeentolettheexpertsdevelopandmanagewiththeairportsimplyprovidingtheland.
Thiswouldrequiremoredetailedreviewthanispossiblewithinthisstudyduetotheadditionalcapitalinvestmentrequired.
HeathrowAirport–ReviewofCommercialRevenues|FinalReport6FurtherAnalysisKeyFindingsRetail6.
1Whilethisshouldnotbeaconstrainingfactor,HALisabenchmarkintheworldofairportretail.
6.
2Theairportenjoyssomeofthehighestlevelsofsalesandrevenueperpassenger,hasdirectrelationshipswithandthepresenceoftheworld'sleadingluxurybrands,andtradesitsspaceveryeffectivelytodrivesalesandmargin.
6.
3Thekeyfindingsofthisreportwhichshouldbeconsideredfurtherinclude:Changingconsumershoppingbehaviourfacilitatedbythedevelopmentofe-commerce–whileitisimpossibletopredictthefullimpacte-commercewillhaveonTravelRetail,themillennialswhohavegrownupwithe-commercewillexpecttoexperiencethesamedegreeofflexibilitytowardstheirshoppingattheairportaswhentheyareathome.
ThismeansthatthefoundationsforthischangemustbeconsideredanddevelopedsothatHALisreadyforthiseventuality.
Anewbusinessmodelcouldbeconsideredtoradicallygrowsales,combiningHAL'sretailande-commercecapabilitywiththeairlinesaccessto100%ofpassengerstravellingthroughHeathrowAirport.
HALanditsairlinepartnerscouldbethedisruptortoTravelRetail.
Mostairportsdeliverstepchangeintheirretailrevenuesasaconsequenceofexpandingtheirretailspace.
ItisclearthatintheabsenceofmaterialadditionalspacebeingavailableatHeathrowoverthemediumtermcombinedwiththefacttheyarealreadyspaceconstrained(comparedtoexistingbenchmarks),thereisreasonforconcernoverfuturerevenuegrowth.
Thisisamajorissuebothcommerciallyandforpassengerexperience.
Conversely,developingnewspacewillbeveryexpensiverequiringinnovativesolutionsinordertodeliversuccessfully.
Possiblylinkedtospaceconstraints,itappearsthatHAL'sstruggletogrowsalesmateriallyhasdriventhemtoadapttheirmodel,sacrificingflexibility(e.
g.
dutyfreeextensionasrecommendedintheCAAQ6Report).
Whilethishassupportedrevenuesintheshorttermthereisalimittohowfartheycangowithoutcausinglongtermdamageasaresultofmovingawayfromprincipleswhichmadethemsosuccessfulinthefirstplace.
WehavementionedareaswhereHALhasmoreorlessinfluencebutitisdifficulttoseehow,intheabsenceofsignificantlymorespace,whereHALwillderivemateriallevelsofincrementalrevenueand,becomemoreexposedtoareasoutsideoftheircontrolsuchasexchangerates,shoppinghabitsandaboveallelse,adisruptortothesector–theUberofTravelRetail.
ThissuggestsHALisatacrossroadsHeathrowAirport–ReviewofCommercialRevenues|FinalReportwithitscurrentmodelandmayneedtothinkandactverydifferentlytoprotectandgrowretailrevenuegoingforward.
CarParking6.
4Incomparisonwithitspeers,HALleadstheairportparkingmarketthroughits:Consumerstrategyofferingawidechoiceofqualityproductsandcompetitivepricingparticularlyduringoffpeak;andParkingoperationdeployingbestpracticetechnologyandprocessesinahighlycompetitiveenvironment.
6.
5ItappearsthatthereisalimittowhatHALcanlearnfromotherUKorInternationalairportsthatwouldmakeanyrealdifferencetoparkingrevenuesgivenitsgeographyandavailablecapacity,saveforreviewingitsdistributionstrategyandassessingwhetherawiderstrategywithaffiliatessuchasairlinesandotherconsolidatorscouldindeedgeneratematerialparkingrevenues/providewidercommercialopportunities.
Property6.
6SomeofthekeyfindingsaroundPropertyinclude:WhileHALdoesnotnecessarilyleaditspeersinrelationtoPropertyrevenueperpassengeritisimportanttorememberthatHAL'spropertyrevenueinandaroundtheterminalareasislargelyinfluencedbytheGuidePriceFormula,overwhichtheyhavenocontroland,inthecaseofpropertylocatedaroundthePerimetertherearelimitationsduetolocalcompetition.
Fromapurebenchmarkingperspectiveoneshouldnottaketheperformanceatfacevalueassomeairportswithhigherrevenueareknowntooperateunderadifferentmodel,theyactasthedeveloper,investmoremoneythanHALandasaconsequenceenjoyhigherreturns.
Withnomaterialnewspacecomingon-linebeforeR3thisisamodelHALmightneedtoexplore.
HALhasdevelopedalternative,passenger-facing,waystodevelopPropertyspacee.
g.
payonentrylounges.
Theturnoverbasedrentscanmatchandpotentiallyexceedtheguidepricerentsiftheloungesaresuccessful.
AswithRetail,thereisageneralshortfallinpropertyspacewhichshouldbereviewedasthiswillconstrainrevenuegrowth.
HeathrowAirport–ReviewofCommercialRevenues|FinalReportRecommendedActions6.
7Basedontheanalysissetoutinthisstudywerecommendthatthefollowingactionsmightbeusefullyundertaken,supportedbytherequisitedatafromHALwherenecessary:Table6.
1:ProposedactionsCategoryCommentsRetailDetailedreviewofcommercialspacetodefinetheoptimalamountofretailspacegoingforward.
ToincludeafullreviewofSatellitebuildingsoutlininghowtheycouldbecommercialisedandcostbenefitanalysisonthedevelopmentofretailspaceovercostofdelivery.
Explorepotentialfuturelegislativeimpactsonretailsales,upsideordownside.
ReviewopportunitiesorthreatsintermsofHAL'sabilitytocontinuetocontrolthepassenger-relatedretaildistributionchannelgivenchangesledbye-commerce.
Considermeanstoincentivisetheairportcommunity(HAL,airlines,retailers)tocollaboratetodrivecommercialrevenuesgrowth-anewbusinessmodel.
CarParkingConductahighlevelreviewofcarparkoperatorandHALmarketingcosts(aspartofanoverallHeathrowcarparkingcostreview)andbenchmarkwherepossibletootherbestpracticeairportstoidentifyanypotentialforfurthercostsavings.
ReviewtimebandanalysisforHAL'sshortstaycarparkstoassessopportunitiesforfurtherrestructuringtoprovideadditionalrevenueopportunitiesi.
e.
byminute/differentialpricingbyTerminal.
PropertyDetailedPropertyStrategy,reviewingallspace,whatdoHALown,howisspaceused,opportunitiestomateriallychangethewaytheydobusinesstodaye.
g.
lowercostbuildings.
CONTROLINFORMATIONPreparedbyPreparedforSteerDaviesGleave28-32UpperGroundLondonSE19PD+442079105000www.
steerdaviesgleave.
comCivilAviationAuthorityCAAHouse,45-59,KingswayLondonWC2B6TESDGproject/proposalnumberClientcontract/projectnumber230496012553Author/originatorReviewerPaulCresswellStephenWainwrightOthercontributorsDistributionDavidGriffiths,MarieHart,MicheleTavani,StefanKourisClient:SDG:Versioncontrol/issuenumberDateDraftReport20January2017DraftFinalReport17February2017FinalReport(redacted)4May2017steerdaviesgleave.
com