How Airports Make Money

Summary

This video explores the business of airports, focusing on Heathrow as a profitable, privately-owned example. It discusses how airports generate revenue through passenger flights, retail, and landing fees, highlighting Heathrow's strategies to maximize profits. The script also contrasts private and public airport ownership, noting the challenges and complexities of running such massive infrastructures.

Takeaways

• 🛫 Airports are complex businesses, often operated as publicly owned entities but still making money through various revenue streams.
• 💼 Many airports, like Heathrow, are privately owned and focus on profitability, with Heathrow being a prime example of a profit-driven airport.
• 💼 Heathrow's annual operating cost is $1.485 billion, covering salaries, maintenance, utilities, and more.
• 👨‍👩‍👧‍👦 Heathrow employs 6,500 people directly, but there are 76,000 others working for various companies within the airport.
• 💰 The airport's revenue heavily relies on passenger spending, with retail being a significant contributor to its profitability.
• 🛍️ Heathrow earns an average of $13.32 per passenger from retail sales, which includes restaurants, shops, parking, and other services.
• 🌍 Heathrow's focus on long-haul flights is driven by profitability, as these flights tend to carry wealthier passengers and generate more revenue.
• ✈️ Airlines pay Heathrow for landing and departing, with charges varying based on aircraft size and passenger destination.
• 💹 Heathrow's financial incentives align with attracting larger planes and long-haul flights over domestic or short-haul routes.
• 🏢 The airport's commercial nature means it prioritizes profitable routes over domestic connectivity, which is less lucrative.
• 🌐 Two-thirds of airports worldwide operate at a loss, often due to being government-run and less focused on profit maximization.
• 🇺🇸 The US has limited private airport ownership, with only one major privately operated airport (Branson Airport), contrasting with the UK's privatized larger airports.

Q & A

How are airports typically owned and operated?

Many airports are owned by governments but are often operated as businesses, with some being fully privately owned like Heathrow Airport.

What is the primary source of income for most airports?

The majority of airports make their money through earnings from passenger-carrying commercial flights using their facilities.

How does Heathrow Airport primarily generate its revenue?

Heathrow Airport primarily generates its revenue from the 78 million passengers flying through each year, not just from cargo flights.

What is the annual cost to run Heathrow Airport?

It costs approximately $1,485,650,000 per year to run Heathrow Airport.

How many people work at Heathrow Airport, and how many are employed directly by the airport?

While 76,000 people work at Heathrow, only 6,500 are directly employed by Heathrow Airport Holdings.

What are the other costs involved in running an airport besides salaries?

Other costs include maintenance, which costs around $232 million per year, and a yearly utility bill of $113 million for services like water, electricity, internet, and gas.

How does Heathrow Airport make money from retail?

Heathrow makes money from retail by receiving a cut of every sale made at the airport, with restaurants, retail stores, parking lots, and other services contributing to this revenue.

What is the average revenue Heathrow Airport makes per passenger from retail?

Heathrow Airport makes an average of $13.32 per passenger from retail.

How does Heathrow Airport charge for aircraft landings and departures?

Heathrow charges a fixed amount per aircraft landing and then charges per passenger on departure, with the fees varying based on the aircraft size and other factors.

How does Heathrow Airport's retail revenue per passenger compare to other airports?

Heathrow's retail revenue per passenger is one of the highest worldwide, with Washington Dulles Airport making $5.68, Auckland Airport making $7.71, and Paris Charles de Gaulle Airport making $10.92 per passenger.

What is the financial incentive for Heathrow Airport to attract long-haul flights?

Heathrow is incentivized to attract long-haul flights because they carry the wealthiest passengers and allow the airport to make more money from larger planes compared to smaller ones.

Why does Heathrow Airport not have many flights to domestic destinations within the UK?

Heathrow focuses on more lucrative long-haul international flights rather than operating short and cheap domestic flights, as it is a commercial company aiming to maximize profits.

What is the situation with private versus public airport ownership in the US compared to the UK?

In the US, the smallest airports went private, while in the UK, the largest airports did. The US has not widely adopted airport privatization, with only one privately owned and operated airport for commercial passenger flights, unlike the UK where many of the busiest airports are privately owned.

Outlines

00:00

🛬 The Business of Airports: Heathrow's Profitability

This paragraph delves into the complex business operations of airports, using Heathrow as a prime example. It explains that while many airports are government-owned, they are often run as businesses. Heathrow, being fully privately owned, is highlighted as a profitable entity, earning revenue primarily from passenger flights rather than cargo. The paragraph outlines the significant costs of running Heathrow, including employee salaries and maintenance, and emphasizes the importance of retail and other services within the airport to generate profit. It details how Heathrow makes money from each passenger through retail sales, parking, and other services, and notes the airport's unique revenue stream from the Heathrow Express train. The summary underscores Heathrow's status as a business designed to maximize profit, even employing tactics to increase passenger spending.

05:04

💰 Revenue Streams of Heathrow Airport

The second paragraph focuses on the various revenue streams that contribute to Heathrow's financial success. It discusses the fees charged to airlines for landing and departing, which vary based on aircraft size and passenger destination. The paragraph provides specific examples of the charges for different types of aircraft and explains how these fees contribute to the airport's overall revenue. It also touches on the concept of 'published prices' versus negotiated rates that airlines with a significant presence at Heathrow may receive. The summary highlights that Heathrow earns a substantial amount from each passenger's ticket and that the airport's design incentivizes the attraction of long-haul flights, which are more profitable. The paragraph concludes with a comparison of Heathrow's connectivity within the UK versus other international hubs and the implications of its commercial focus on long-haul flights.

10:06

🌐 Public vs. Private Airports: The Debate and Heathrow's Role

The final paragraph of the script shifts the discussion to the broader topic of public versus private airport ownership. It contrasts Heathrow's profitability with the struggles of smaller, privately-owned airports in the US, such as Branson Airport. The paragraph explores the reasons why smaller airports often do not turn a profit and how government-run airports in the US can indirectly subsidize airlines by charging less than the operational costs. It also discusses the difference in privatization approaches between the US and the UK, noting that in the UK, the busiest airports are privately owned, while in the US, it's the smaller airports. The summary wraps up with a mention of the divided public opinion on the ideal ownership model for airports and a teaser for another video by Wendover Productions, this time on the topic of design's importance in business, sponsored by Squarespace.

Keywords

💡Airports

Airports are complex businesses that often operate as publicly owned enterprises but are still managed to generate profit. In the script, it's highlighted that many airports, including Heathrow, make their revenue primarily from passenger flights rather than cargo. The video uses Heathrow as a case study to explain the business model of airports.

💡Heathrow Airport

Heathrow Airport is a privately owned airport in London, known for being one of the busiest in the world. The script emphasizes its role as a profit-driven entity, with detailed figures on its operational costs and revenue streams, making it a central example in the discussion of airport economics.

💡Passenger Flights

Passenger flights are the main source of income for most airports, including Heathrow. The script explains that these flights contribute significantly to the airport's revenue, both directly through ticket sales and indirectly through ancillary services like retail and parking.

💡Cargo Flights

While passenger flights are the primary focus, cargo flights also play a role in airport revenue. The script mentions that Heathrow has a significant amount of cargo transported via the holds of passenger aircraft, but the number of dedicated cargo flights is relatively low.

💡Operational Costs

Operational costs encompass all the expenses an airport incurs to maintain its services, such as maintenance, utilities, and salaries. The script provides specific cost figures for Heathrow, illustrating the high expenses of running a major airport.

💡Retail Revenue

Retail revenue is a significant part of an airport's profitability, as explained in the script. It includes earnings from restaurants, shops, parking, and other services within the airport. Heathrow's retail revenue per passenger is highlighted as being particularly high compared to other airports.

💡Aircraft Landing Fees

Aircraft landing fees are charges that airports impose on airlines for each landing. The script details how these fees vary based on the size of the aircraft and are a substantial part of Heathrow's income.

💡Passenger Spending

Passenger spending is crucial for airport profitability, particularly in retail areas. The script discusses tactics used by Heathrow to maximize spending, such as the layout of the terminal and the timing of gate announcements.

💡Long-Haul Flights

Long-haul flights, typically to distant international destinations, are more lucrative for airports due to higher ticket prices and the wealthier profile of passengers. The script notes that Heathrow's focus on long-haul flights is a strategic economic decision.

💡Airport Privatization

Airport privatization refers to the transfer of airport ownership from the government to private entities. The script contrasts the UK's approach, where major airports like Heathrow are privately owned, with the US, where only one airport with commercial passenger flights is privately owned.

💡Economic Development

Economic development is a broader goal that governments aim to achieve through air services, even at a cost to the airport's profitability. The script suggests that government-run airports may operate at a loss to stimulate economic growth in their regions.

Highlights

Airports are complex businesses that often operate as publicly owned entities but still aim to make money.

Majority of airports earn revenue primarily from passenger flights rather than cargo flights.

Heathrow Airport is a fully privately owned business example, with no UK government stake.

Heathrow's annual operation cost is $1,485,650,000, including a $494 million payroll for 6,500 employees.

Heathrow Airport Holdings is responsible for oversight, while numerous other companies operate within Heathrow.

Running the sixth busiest airport in the world costs more than running the country of Swaziland.

Heathrow needs to earn $19 per passenger to break even, with varying profitability among arriving, connecting, and departing passengers.

Retail is key to airport profitability, with Heathrow receiving a cut from every sale made on its premises.

Heathrow makes an average of $13.32 per passenger from retail, in addition to airplane ticket costs.

Heathrow's retail revenue per passenger is one of the highest worldwide compared to other major airports.

Heathrow uses tactics such as mandatory duty-free walk-throughs and delayed gate postings to increase passenger spending.

Heathrow's focus on long-haul flights caters to wealthier passengers who spend more time at the airport.

Aircraft landing and departure fees contribute significantly to Heathrow's revenue, with an average of $9,500 per plane.

Heathrow's charges for flights vary based on aircraft size, passenger destination, and connection status.

Heathrow makes an average of $29 from every passenger's ticket, using profits to pay off debt and taxes.

Heathrow's financial incentives align with attracting larger planes for more profit despite its capacity constraints.

Heathrow's poor domestic connectivity reflects its prioritization of profitable long-haul flights over UK destinations.

Airport privatization varies between the US and the UK, with the UK focusing on larger, busier airports.

Many airports worldwide operate at a loss, often due to government operation with less focus on profitability.

The debate over public versus private airport ownership centers on infrastructure importance versus cost and service efficiency.

Heathrow's success as a multi-billion dollar business is a testament to the complexity and scale of airport operations.

Transcripts

This video was made possible by Squarespace.

After this, watch the video I made for their channel.

More about it after the video.

Airports are incredibly complex and challenging businesses but, in many cases, they’re businesses

that make money.

Many airports are owned by governments but still then, they’re often operated as businesses—just

businesses that are publicly owned.

The majority of airports make their money through what they earn from passenger carrying

commercial flights using their facilities.

Some airports are cargo focused and fund their operations through cargo flights but the ones

that you’ve most heard of, such as London’s Heathrow Airport, rely almost entirely on

passenger flights.

While the amount of cargo going through Heathrow is significant thanks to passenger aircraft

transporting cargo in their holds, the number of dedicated cargo flights is low in proportion

to the airports 650 daily flights.

They make their money off of the 78 million passengers flying through each year.

Heathrow is the busiest airport in the world that is fully privately owned—the UK government

owns no stake in it—and so it is perhaps the best example of an airport built to turn

a profit.

It costs $1,485,650,000 per year to run Heathrow airport.

This includes costs like the $494 million Heathrow pays in salaries to its 6,500 employees.

Now, 76,000 people actually work at Heathrow but only those 6,500 actually work for Heathrow.

The company that runs Heathrow, Heathrow Airport Holdings, is only really responsible for the

oversight and administration of the airport.

Within Heathrow’s walls, though, there are hundreds of other companies operating.

Those 70,000 other people work for the airlines, the baggage handling companies, the air traffic

control company, the restaurants, the rental car companies, the bus companies, and all

the other different employers at the airport.

There are, of course, plenty of other costs involved in running the airport from the $232

million per year in maintenance to the $113 million yearly utility bill for water, electricity,

internet, gas, and more, but overall, that number, $1.5 billion, is what it costs to

run the sixth busiest airport in the world.

That’s more than it costs to run the 1.3 million person country of Swaziland.

So how do they pay for that?

On a per passenger basis, it costs $19 to run Heathrow Airport.

Essentially, that means Heathrow needs to make $19 from each passenger that passes through

its doors in order to break even.

Of course, some passengers are more profitable than others.

Arriving passengers generally just get off the plane, go through customs, and leave immediately

without buying anything while connecting and departing passengers generally have more time

to shop at the airport.

Retail is incredibly important to the profitability of any airport.

This is part of the reason why its in the airports best interest to make the check-in

and security process as quick as possible—so passengers have more time to shop.

Heathrow makes money through retail by receiving a cut of every sale made.

On average, restaurants earn the airport 95 cents per passenger, retail stores earn them

$5.15 per passenger, the parking lots add on another $2.03, then all the other smaller

sources of retail revenue such as rental car companies and VIP lounges account for another

$3.04.

Rather uniquely, Heathrow also operates the express train from the airport to Paddington

Station in London which makes them another $2.15 per passenger.

All in all, the airport makes $13.32 from passengers through purchases on top of their

actual airplane ticket and, its worth pointing out, this doesn’t mean that passengers spend

$13.32—this means that Heathrow makes $13.32 per passenger.

This is their cut—actual spending at the airport per passenger is much higher.

Now, you may think that this amount of retail revenue per passenger is high and you’d

be right, it is.

In fact, it’s one of the highest retail revenues per passenger of any airport worldwide.

In comparison, Washington Dulles Airport makes $5.68 per passenger, Auckland Airport makes

$7.71, and Paris Charles de Gaulle Airport makes $10.92 per passenger through retail.

Heathrow is an expert in making passengers spend.

They use all sorts of tricks and tactics to increase passenger spending.

For example, in Terminal 3, to get from security and to the gates, all passengers have to walk

through duty free which increases sales enormously.

Heathrow also doesn’t display the gate for flights until around 45-90 minutes before

departure.

This is common in European airports, but uncommon elsewhere.

Because of this, passengers wait in the central area where shops and restaurants are until

just before their flight which leads to more time with passengers exposed to the retail

environment.

Being one of the very few airports with non-stop service to all six inhabited continents, Heathrow

also has the advantage of being an airport focused on long-haul service.

These flights tend to carry the wealthiest passengers and, while worldwide passengers

arrive an average of 2 hours and 17 minutes before their flight, Heathrow passengers arrive

2 hours and 51 minutes before which means they have more time to shop at the airport.

As mentioned, though, the airport needs to make $19 per passenger and retail only earns

them just over $13.

The rest of it comes from flights.

Each plane that lands at Heathrow pays the airport an average of $9,500.

Of course it varies hugely by aircraft—a 76 seat FlyBe Dash 8 isn’t paying the same

as a 345 seat British Airways 747—but $9,500 is the average per visit to Heathrow.

That goes to pay for things like gate space, a check in area, and the runway time itself.

The airport charges a fixed amount per aircraft landing—for the small Bombardier Dash 8

it would be $999 while for the large 747 it would be $11,600.

On departure, airlines are then charged again this time per passenger.

For each passenger flying to a destination outside of Europe the airline is charged a

base of $58 but this charge is reduced if a passenger connects through Heathrow rather

than originating or if the aircraft is parked at a remote stand rather than a gate.

All in all, a fully loaded 76 seat FlyBe Dash 8 flying a domestic route to Edinburgh, for

example, would be charged about $2,400 for its whole visit, arrival and departure, while

that British Airways 747 flying a long-haul route to New York, for example, would be charged

$31,700.

It’s worth noting that these are the published prices—in reality, many airlines with significant

numbers of flights at Heathrow have agreements with the airport that reduce their costs.

Breaking it down, what those numbers mean is that Heathrow gets, on average, $29 of

the cost of every passenger’s ticket.

As you can see that means that Heathrow makes a fair bit more than it costs to run the airport.

The company mostly uses this operating profit to pay off debt from prior projects and to

pay taxes so in the end, they’re only truly making about $8.20 off of each of their passengers,

but what these numbers also mean is that, by design, Heathrow is incentivized to attract

long-haul flights.

The airport is currently at capacity.

Their maximum number of flights per day is 657 and they currently have 650.

They really have no more capacity which means one of the only ways for them to grow financially

is to bring in larger planes.

The 76 seat FlyBe Dash 8 takes up the same time on the runway that could be used by another

345 seat British Airways 747 while the airport would make vastly more money by having that

747 land.

This is no doubt part of the reason why Heathrow is so poorly connected to the country that

it’s in—the UK.

The airport only has flights to eight airports in the UK which means the airport has exactly

the same number of destinations in the UK as it has in China.

Meanwhile, Amsterdam Airport Schiphol, in the Netherlands, has flights to 25 destinations

in the UK.

That means that for the vast majority of UK residents living outside of London, it’s

easier to connect to wherever they’re going through Amsterdam than the airport in their

capital city.

The reality is that Heathrow is a commercial company.

While most UK residents would likely want to see domestic flights to their largest airport

it just doesn’t make commercial sense to operate short and cheap flights to Heathrow

in the place of highly lucrative long-haul flights.

It’s not only less lucrative for the airport, it’s also more costly for the passenger

than flying to other smaller airports.

Of course, not every airport is like Heathrow.

Not every airport is a commercial company.

That’s just because, in many cases, running an airport the way the public wants it to

be run is bad business.

About two thirds of all airports worldwide lose money.

In many cases that’s because they’re government run and just not that focused on making money.

The US is a country that has not yet gotten around to airport privatization like the UK.

There is only one single privately owned and operated airport in the US with commercial

passenger flights—that’s Branson Airport in Southern Missouri.

Unlike Heathrow, which turns a considerable profit, Branson airport is loosing money and

has struggled to keep airlines flying there for more than a few years.

It’s not like Branson was the only attempt at running a private airport in the US—National

Express, a UK based transport company, took over Newburgh airport 60 miles north of New

York City in 2000, but it too failed and sold the airport back to the government.

The difference between airport privatization in the US and the UK is that in the US, the

smallest airports went private while in the UK, the largest airports did.

In the UK, ten of the fifteen busiest airports are privately owned and operated.

Meanwhile, only four of the fifteen least busy airports in the country are privately

owned.

That’s because small airports, in most cases, just don’t make money.

Smaller airports being government run and unprofitable in the US allow for a sort of

indirect subsidy for airlines to operate there.

In these cases, airports are willingly charging airlines less than it costs to run the airport

to operate there in order to attract them to fly there.

City, county, or state governments are willing to do this because they view air service as

a stimulant to economic development.

The merits of private versus public airport ownership can be debated, but proponents of

publicly owned airports will argue that they’re essential pieces of infrastructure while those

for airport privatization will argue that commercial ownership leads to lower costs

and better service.

Even in the UK public opinion is split on whether airports are better off public or

private.

What’s sure, though, is that running an airport, whether public or private, is not

easy and that the fact that a few hundred aircraft taking off per day is all it takes

to fund the multi billion dollar business of Heathrow is almost as impressive as the

planes themselves.

Now that you’ve finished this video, there’s another one I made for you to watch.

Squarespace asked me to make a video explaining why, “design is not a luxury.”

That phrase might not make sense now but the whole point of the video I made is to explain

it so make sure to watch it.

You can either click the annotation on-screen now or it’s linked at the top of the description.

Oh, and fair warning, I go on camera in it.

Thanks for watching and we’ll see you again in two weeks for another Wendover Productions

video.