Large businesses like airports deal with many clients within a year and require a ton of money to run and maintain. Without a budget, it becomes challenging to determine whether the airline is bringing any profits to the table or not. That is why it’s essential to learn how to execute a budgeting process.
This article discusses how airports can handle elaborate budgeting processes in detail.
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There are two primary factors that determine the budgeting process of an airport: the amount of revenue it generates and the expenses it incurs. As such, we’ll go ahead and look at the sources of revenue in an airport and the costs involved in maintaining an operational airline.
1. Estimate the Revenue
We’ll discuss the revenue in terms of airport funding, which is necessary for the construction or expansion of an airport, income required to handle operation costs, and privatization, the last resort when income sources are insufficient.
- Airport Funding
Establishing and running an airport is a project that requires a lot of funding. There are some primary sources of capital available for airports which can be public, private, or both.
The money required to build or expand an airport could come from government grants, commercial loans, international organization loans, and bonds from private investors or banks.
It’s also possible to get funded by a foreign government, but this mostly happens in under-developed countries with limited resources.
- Airport Income
The income an airport generates is generally used to handle the costs of maintaining the business. This money could come from renting services, airline charges, transport services, parking, and more. The service fees typically fall on the passengers and cater for the facilities and security provided in the airport.
The rent charges usually apply to the space provided in ticket counter sections, luggage areas, and parking. If there is a wide difference between the estimated revenue and the operation costs, you can resolve it with government subsidies.
There could be additional revenue if the airport sells fuel to the planes that stop for refueling during long-distance flights. Plus, if there are some unused runways, the airport can rent them out for driving courses or other activities that can generate income.
- Airport Privatization
It’s possible to have an airport privatized which could be necessary for reasons like insufficient revenue, high maintenance costs, or future expansion. It mostly happens when a loan provided has become challenging to pay back for the business. The privatization can contract management, a long-term lease, or complete sale of the airport. This often results in higher revenues, lower risk of poor investments, and better provision of amenities.
2. Determine Airport Expenses
After determining the revenue sources you have available, the next thing to consider is the cost of building and maintaining the airport. These costs can be categorized as capital expenses and operational expenses.
- Capital Expenses
These costs typically include the price of constructing the airport or expanding the infrastructure of the airline, including funds for labor, materials, and the equipment used. They are fixed expenses that don’t require additional funding once the project is complete.
These costs are incurred during the building of runways, taxiways, various structures, and terminals. It also includes purchasing Ground Support Equipment like luggage carts and vehicles such as tractors and buses.
- Operational Expenses
Operational costs are the ones that are directly related to the smooth function of the airport. They involve the money used to maintain the purchased assets, provide utilities, pay salaries and wages of the airline staff, and purchase various supplies.
There are various maintenance requirements that an airport has, which, when dealt with, allow the airline to run seamless operations. First, we have the cost of maintaining the flight system in the aircraft to ensure the safety of the passengers and flight crew. This ensures that the aircraft won’t unexpectedly malfunction as it carries people or cargo by air.
It also includes the price for repairing runways, servicing fleet vehicles, safety inspections, regular cleaning, and replacement of equipment parts. All these actions ensure that the airport delivers a safe and reliable service that will improve the chances of retaining its customers.
- Materials and Supplies
One of the materials that take a significant amount of operational costs is fuel. The rate of fuel consumption depends on the type of aircraft and the length of the flight. One of the strategies some airports adopt to cut fuel costs is buying fuel contracts that convert it to a fixed cost.
This expense could also include the services and supplies that an airport provides without help from agencies. This includes the cost of heating, sanitation, air conditioning, water, electricity, communication services, etc.
- Salaries and Wages
The last operational expense to consider is the cost of labor. This includes the salaries and wages of the people working in the airport, such as security personnel, sales agents, cleaning staff, flight crews, and others.
The salaries could also have more details like pensions, allowances, bonuses, and various employee compensations. This expense carries a significant portion of the operational costs you incur since they could recur weekly or monthly.
Like any other business, an airport should bring a return on investment, which is why it’s crucial for the management to formulate a budget and use the appropriate tools to get the job done right. Your budget will help you assess the revenue your airport generates against the expenses that it incurs. This ensures that you can make appropriate adjustments to get the profit the airport is expected to deliver. To learn how MIBAR can help your airport run as efficiently and profitably as possible, check out our webinar Cleared for Takeoff: Challenges and Opportunities for Terminal Management in the New Normal.