Retail: Terminal velocity

Ever-increasing air travel is boosting the airport retail market. Christopher O’Dea reports on a global market taking off

The retail property sector faces various threats, not least consumer spending weakness and the growth of online shopping. But a buoyant global tourism is also providing some opportunities. Ever-increasing air travel is fuelling interest in airport property, a new frontier where retailers can access an affluent and captive consumer market.

Airports are often seen as a necessary evil for the well travelled. A place associated with long waits, delays and never-ending travelators. But today, airports are increasingly striving to treat their passengers more like honoured guests.

A terminal with state-of-the-art retailing amenities is set to open this spring in Munich, while Australian shopping centre developer Westfield has set up a specialist unit to work with airports in developing, testing and building new retail space. All this effort is aimed at turning air travel into a day on the high street.

“By applying a holistic approach like Westfield’s, we can provide more opportunities for airports, airlines and, ultimately, the travellers themselves,” says Todd Hauptli, CEO and president of American Association of Airport Executives (AAAE).

Those travellers could be spending $60bn (€55bn) annually by the end of the decade, according to consultancy Verdict Retail, which expects annual airport retail sales growth to accelerate from 8.4% in 2015 to more than 10% by 2020 as passenger traffic climbs more than 27%. Revenue from retail property can range from 20% to 40% of an airport’s total receipts. Investment managers that have the ability to generate such income can justify paying higher prices for key airport assets that offer the long-term cash flows institutional investors desire.

“Retail property is very important in making airport assets so attractive to infrastructure investors,” says Hywel Rees, investment director for airports at AMP Capital. 

“Airports are quite resilient businesses,” says Rees, provided retail offerings are “tailored to the local market”. That tailoring needs to follow two broad patterns – hub airports where passengers transfer between flights to and from all points of the globe, and destination airports, such as Newcastle, which tend to originate a high number of outbound flights. 

Hubs tend to have the most sophisticated offerings of international brands and luxury goods, Rees says. And because airline passengers tend to spend more money after clearing security in ‘airside’ areas, most investment and innovation in airport retailing focuses on major hubs.

In the first nine months of 2015, Heathrow Airport Holdings reported retail revenue of nearly £400m (€519bn), out of total revenue of £2.07bn. This was a 6% gain over 2014, compared with a 3% rise in aeronautical revenue. Upgraded retail space in Terminal 5 prompted a double-digit rise in revenue from luxury stores that cater to wealthy international passengers.

Retail and real estate revenue make up 42% of total revenue at German airport owner Fraport. Retail revenue per passenger rose 6.7% in the first nine months of 2015, with Chinese travellers posting the biggest increase in per-passenger retail revenue for Fraport, up 23% on a 12% increase in passenger traffic. 

“Revenue from retail property can range from 20% to 40% of an airport’s total receipts. Investment managers that have the ability to generate such income can justify paying higher prices for key airport assets”

This year Fraport will bolster the digital aspects of the retail experience in Frankfurt, adding online payment capability, a loyalty programme and home delivery options.

It is also important to feature local culture, Rees notes. A new satellite terminal at Munich Airport – expected to boost passenger capacity by 11m annually when it debuts in April – aims to do just that. Munich Airport and Lufthansa built a marketplace flooded with natural light to feature iconic German and international brands alongside popular Bavarian retailers and local bars and restaurants.

Last November, Westfield hosted the AAAE’s inaugural Innovation Forum at Westfield Labs, the company’s tech research unit in San Francisco. The forum focused on “the convergence of the physical and digital worlds at airports,” says Dominic Lowe, executive vice-president at Westfield. Lowe says: “Integrating digital solutions is a key component for increasing customer satisfaction and growing non-aeronautical revenue for airports and airlines to invest in operations and infrastructure.”

Capturing and holding the attention of passengers – and what airport retailers call ‘dwell time’ – is important, as is offering broader choice and easier ‘wayfinding’ through new technology that interacts with mobile devices. According to Swiss airport market research firm DKMA, an airport’s most satisfied passengers are twice as likely to shop and spend 7% more than the average on retail and 10% more on duty-free items.

“We’re seeing greater interest from airports and airlines in long-term partnerships that bring significant, upfront capital to the table,” says Lowe.

At the Tom Bradley International Terminal of Los Angeles International Airport, Westfield developed and manages a variety of restaurants, beverage stands and retail stores. Under a 17-year agreement reached in 2012 with the Los Angeles airport commission, the new space is expected to generate $331m in revenue, of which Los Angeles World Airports will receive a minimum of almost $17.7m in the first year, according to local media reports. Westfield and its concessionaires were required to invest at least $81.9m for initial improvements and $16.4m more midway through the life of the agreement. 

Westfield declined to comment on the agreement. But with more than 700 retailers encompassing over 640,000ft of retail and food services, Westfield-managed airport locations generate more than $860m in annual sales, the company says. 

“There’s huge value as an investor in airports if you have the experience and research behind you,” says Rees. “You can afford to pay more and you can extract more value out of that asset if you have the expertise in-house to optimise the retail offering.”

Digital investment boils down to a simple rule, says Rees: “You need to know the footfalls of your passenger.”