Airport Economics and Informed Decision Making

Proven Economic Tools and Methods to Strengthen Airport Operational Health & Regional Competitiveness  

By Alejandro Solis, Ph.D., and Mark Day, P.E., AAE

More than 75 years after the commercial flight business took off after World War II, the discipline of airport management continues to evolve in response to increased customer demand, ongoing changes in the legal and policy environment, and the introduction of various airline business models. 

In the U.S., airports are adapting and investing in major capital programs, infrastructure projects and new developments to protect long-term operational health, provide an exceptional customer experience, and support regional economies. Their goal is to make sound capital program investments to remain competitive, mitigate operational risks, and grow revenues. But accomplishing this can be difficult without a broader understanding of the economic impacts and community value.

Economic methodologies and analytic tools can help owners/operators make informed decisions tailored to their airport’s operations, workforce and customer needs, and the local and regional economy. Understanding different economic analyses and tools and when to apply them help airport decision-makers make informed capital investment strategies that provide operational resiliency and deliver better outcomes. 

Understanding Economic Methodologies and Applications 

Economists use benefit cost and economic impact analyses to estimate the predicted impact and value of investments. For example, airports may wonder if they are in a good position to develop freight hubs, whether it’s a good idea to invest in warehousing or new landside facilities. A strong economic development study can help them make that decision in an informed way, tailored to their community and local economy. 

Market assessments and business case analyses can help airports evaluate potential opportunities within their property to determine the best investment project. Airports considering expansion plans can use site selection assistance to determine the best location for their improvements. 

In today’s rapidly changing market, below are three specific airport operational needs where the application of economic methodologies and tools can uncover key insights to help owner/operators make informed decisions:

1. Identification of Alternative or Non-Aeronautical Revenue Streams
2. Managing Long-term Operational Risk and Uncertainties
3. Evaluating Local Investment Options Based on Market Elasticity

1. Identification of Alternative or Non-Aeronautical Revenue Streams

Non-aeronautical revenue is an important part of increasing revenues and providing ever-improving passenger experiences. Globally, Airports Council International has determined that non-aeronautical revenue contributes around 40% of airports’ revenues. At larger airports that can rise to 50% or 60%. And the market is growing quickly. Research service Global Insight Services estimates that the non-aeronautical revenue market will grow from $4.5 billion in 2024 to $8.2 billion in 2034.

Outside the U.S., many airports are privatized, but the funding and revenue structure of U.S. airports poses notable challenges for their overall business health and sustainable operations. Airports owned and run by public entities often receive the bulk of airport revenues from airlines through charges such as cost per enplaned passenger, landing fees and terminal rents. Airport owners are responsible for maintaining and investing in the infrastructure and operation to provide safe and reliable service to all of their customers and workforce.

When airlines shift their business strategies unexpectedly due to economics, international geopolitical influences, surging fuel prices and/or impacts by labor availability, airport revenues can be reduced, impacting airports’ ability to meet their financial obligations, including significant infrastructure investments. The effects of these changes can be catastrophic. Worse, many of these drivers are out of the airport’s control. Like a diverse investment portfolio, diversifying airport revenue sources can help blunt these impacts.

Generating non-aeronautical revenue can strengthen an airport’s financial model and make them less dependent on income from airlines. Additional benefits include allowing airports to consider lowering fees charged to airlines. This in turn encourages airlines to add more flights due to the lower cost leading to more users and creating a virtuous cycle of growth. Non-aeronautical revenue also helps airport facilities be more competitive and attract economic investments by others.

Land Use & Site-Specific Strategies for Alternative Revenue Streams

Airports have pursued various methods for increasing their non-aeronautical revenue. Some strategies are embraced by almost every airport — retail sales, concessions, car rentals, parking garages — and would no longer be thought of as alternative offerings. Others, such as business parks, industrial activities and logistics centers, are specific to the airport and its market. 

Opportunities at airports vary considerably depending on landholdings and size. The location of available property plays a large role in determining what’s possible. Is the airport in a residential neighborhood, near rail lines, close to the intersection of multiple interstates, etc. What is the impact of the local hydrology or floodplain? What environmental considerations apply to which sections of property? A land use and economic development study can help airports understand localized constraints and identify opportunities that offer the best value.

For example, a less common method of non-aeronautical revenue generation is oil and natural gas drilling on property. Airports in Pittsburgh, Dallas and Denver have generated revenue through energy development. Other examples of monetizing unused land include Atlanta’s airport land lease with the North American headquarters of Porsche, which includes a 1.6-mile track and museum that attracts car enthusiasts year-round. In Canada, airports in Edmonton and Vancouver lease space to expansive outlet malls. 

Evaluating Emerging Trends and Local Viability

One emerging market trend is the evolution of energy needs and demands, with many airports considering on-site generation and distribution in coming years. Particularly in the development of land adjacent intermodal spaces and logistics hubs, the diversification of energy and integration of renewable energy sources will be a major factor in evaluating site options. Why? Many of these facilities will incorporate technology that requires more energy such as autonomous equipment and chargers for that equipment and zero emission vehicles. 

Other commercial facilities such as cold storage for perishable food or biomedical supplies also require a higher level of energy than other options. Understanding these needs and incorporating them into sustainable business plans backed by economic and due diligence studies will be an important part of ongoing and informed airport development. 

Airports can combine site-specific information with expert insights on industry trends to leverage emerging opportunities sooner rather than later. A market analysis that says what’s needed now and in the future can also suggest mixed-use or multipurpose strategies that are flexible and can shift between land uses as demand shifts — a hangar that can shift between charter use and a cargo company based on need, or a parking structure with flexible options for expanding or contracting for-hire vehicle space as demand changes. 

2. Managing Long-Term Operational Risk and Uncertainties

In addition to identifying opportunities for new revenue, economic tools can also provide robust risk management insights for airports. Economists can use scenario analysis to plan for long-term uncertainties, such as policy changes or economic shifts. For airports, this means opportunities to: 

• Develop flexible master plans that account for passenger growth under various scenarios.
• Use predictive models to assess the impact of technological advancements (e.g., autonomous vehicles or drones).
• Identify adaptive strategies for climate resilience and sustainability.
• Evaluate the impact of capital development choices: If we put a new hotel in, will it pay for itself? How long will it take? What’s the hotel market around the airport? Should it have 50 beds or 200 beds? Alternatively, would expanding a security checkpoint result in faster passenger processing and more dwell time for post-security concessions?
• Assess the impact of specific risks: What happens if an airline drastically reduces its service? How would a change in terminal lease pricing affect retail occupancy? What are the local regulatory and political impacts if a new tenant requires substantial changes in vehicular traffic patterns?
• Analyze how cargo and passenger demand respond to external factors like trade policy or fuel prices.
• What is the range of future prices for a specific infrastructure given the materials needed for its construction and the local and global macroeconomic conditions?

All of these economic analyses can help airports improve their risk management strategies and create strong and actionable strategic growth plans.

3. Evaluating Local Investment Options Based on Market Elasticity

Assessments by economists can also measure the elasticity of demand for a specific service and how sensitive it is to changes in price or other factors. To use cargo as an example, economists could study potential cargo tenants and how the industries they serve may be affected by local and regional demand. Economic and market studies can help answer questions like: 

• Will investments in specialized facilities such as cold storage drive demand or be a good investment?
• Would dynamic pricing for cargo operators pay off – tying costs to volume? What’s the right mix of different types of cargo?
• How do seasonal changes in volume affect infrastructure needs and would creating flexible facilities that can be used for multiple purposes pay off? 

In other words, economists can help airports get the most value from the land and infrastructure they own by making informed decisions based on a better understanding of macro- and micro-economic conditions and impacts. 

Holistic Planning, Backed by Economic & Engineering Expertise

Working together with a diversified team of airport planners, designers, constructors and operators, economists play a vital role in uncovering the best opportunities to enhance operations, fiscal health and regional competitiveness. Economic analyses, market studies, and activity forecasts by economists provide airports and their community with critical insights tailored to their unique operation and region. Knowing potential business impacts, operational needs as well as viable market opportunities, airports can begin to evaluate, prioritize and make informed decisions about their long-term infrastructure investments.

About the Authors

alejandro.solis [at] hdrinc.com (Alejandro Solis) is HDR’s director of economics and statistics for our transportation program. He is an applied economist with an in-depth understanding of international logistics and freight dynamics in North America. 

mark.day [at] hdrinc.com (Mark Day) is a senior aviation consultant, supporting clients in airport infrastructure, planning and development efforts. Before joining HDR, he served many years in commercial airport management, overseeing planning, design and other facility development.