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Embracing change

The task of managing an airport has never been more expensive than it is today. Rising passenger volumes are translating into capacity issues for many airports, and changing regulatory and security requirements continue to cause havoc. The price of construction materials continues to climb, putting increased pressure on airports that are planning expansion or renovation projects. The list goes on and on.

A growing number of the world’s 836 international airports, however, are realizing significant savings by shifting to a lifecycle cost or asset lifecycle approach to procurement. When done correctly, this organizational shift can lead to cost savings in the millions of dollars per year, or as much as 15% of an airport’s operating budget.

The total cost of ownership approach to asset management certainly isn’t new. References can be found in the railway industry in the 1920s and the elevator industry in the 1960s. Many industries, including water and wastewater, automotive, financial services and information technology, have employed the lifecycle cost approach to asset management with success.

However, many large airports have been slow to embrace this approach, in part because asset management has not traditionally been viewed as a core business. In addition, in many geographies, there are challenges associated with the way the airports are funded or structured by local governments, in which the focus is more on short-term decision making than long-term planning.

Lifecycle cost approach
At its simplest, total cost of ownership refers to taking into account all of the cost elements your airport will face today and those it will face in the future related to a specific asset the organization is looking to purchase or build, whether that be a terminal building, runway, parking garage, or retail area within a terminal.

Clearly, these are large, expensive assets. However, at many airports, the management decisions associated with financing, designing, building, maintaining, operating, and eventually deconstructing or replacing these assets (which is growing in importance because of the increasing scarcity of certain building materials), have traditionally been made in isolation from one another. In part, this is a function of the setup of these organizations and the governance structures they have in place.

The result? You end up with situations in which a special project team is created to make the decision around the initial investment for a major asset. The objectives and mandate of this project team are limited to the acquisition or creation of the asset. They want to make sure it is state-of-the-art, that it includes features that passengers want, and that the project will be completed on time and on budget.

Then, once the decision around the initial investment is complete, the project team is dismantled and the asset is transferred to the maintenance department, which has had no input into the process up to this point in time. The maintenance team has no choice but to accept the asset as it is, with all of its inherent drawbacks and difficulties, and to determine which maintenance schedule to apply.

 

Right: The rising price of construction materials puts pressure on airports planning expansion or renovation projects

 

Improving the process
This traditional, disjointed approach to procurement is ineffective and, in the long run, much more costly than adopting a total cost of ownership or asset lifecycle approach. Here’s a quick example of how we’ve seen this play out in numerous airports around the world: Let’s say an airport is looking to build new retail space within a terminal building. Under traditional construction and procurement practices, the materials and systems for the individual retail spaces would be built with a target lifespan of 30 years. These decisions and investments would have been made without taking into account that from a marketing and sales perspective, the ‘look’ of these stores would need to be refurbished and modernized in intervals of about every seven years.

The result? Invasive, costly and unnecessary construction that takes place less than a quarter of the way through the intended lifespan of the asset. Under a more integrated, lifecycle cost approach, the worlds of construction, maintenance and marketing would have been brought together at the outset of the project to determine the appropriate lifecycle for this asset, resulting in a solution that would allow for easier refurbishing every seven years and which would translate into major cost savings for the airport.

Another common example we’ve seen at several major international airports has to do with the construction of runways. Once again, the project team making the decision on the initial investment is looking at a 20- to 30-year timeline and is focused on getting the best up-front cost when it comes to concrete, construction, etc. And because they embarked on the project without the maintenance team having a seat at the table, the initial project team is unaware that the runway will need to be broken up after approximately 10 years to allow for maintenance of the water system that resides below the runway surface. The investment lifecycle and maintenance lifecycle were not in alignment because those decisions were being made in completely different departments, resulting once more in inefficiencies, added disruptions and costs that could have otherwise been avoided.

Successful transformation
Making the shift to a lifecycle cost approach to asset management requires the organization to undertake a culture shift and transformation program to realign departments and functions to support the new framework. The goal is to achieve best-in-class asset management by optimizing the investment decisions for new-build assets and generating maximum value from existing assets. Ultimately, this should lead to significantly reduced costs over the lifecycles of the various assets.

There’s an expression that a dollar saved in procurement is a ‘real’ dollar saved. After all, if an airport is successful in increasing its revenues, the profit on that increase might be 10%. However, if an airport is able to invest a lower amount over the lifecycle of an asset, it gets to keep 100% of those savings. And when dealing with such large-scale projects, the potential savings associated with a total cost of ownership approach can be substantial.

The procurement department can and should play a lead role in connecting the various departments within the airport organization (procurement, asset management, project management) and ensuring they oversee the total impact of an investment decision, rather than simply focusing on obtaining the lowest up-front price.

 

Left: Lifecycle and total cost of ownership approaches have been applied during the Airport Development Program at Toronto Pearson International Airport

 

One organization that has made good use of this approach is the Greater Toronto Airports Authority (GTAA), which employed lifecycle and total cost of ownership approaches during its ambitious Airport Development Program (ADP). “During the ADP, large equipment such as elevating devices and baggage systems, were tendered, evaluated and purchased. Coupled with other requirements, the criteria for this process included equipment capital cost and an additional bid for the operation and maintenance,” says Mike Riseborough, director, Aviation Infrastructure, Energy and Environment with the GTAA. “This influenced purchase decisions that met the technical threshold, and provided the best value over time. A second and significant advantage was that the care and thoroughness of the installation was positively influenced by the contractor’s longer-term commitment to equipment maintenance. From the business case stage through to procurement, we routinely consider the lifecycle, recognizing that the operating and maintenance costs are the largest portion of the total cost of ownership.”

One of the key hurdles in successfully adopting a total cost of ownership approach to asset management is making the change from a maintenance and construction organization to a management organization. Many airports are accustomed to handling all aspects of construction and maintenance themselves. To become more efficient and successful, however, airports would be well served to focus instead on transforming themselves into organizations that manage those various suppliers, activities and assets in the most efficient manner possible.

It goes without saying that airports are large, complex organizations with multiple lines of business and which require different data from many disparate systems. Accordingly, a transformation project of this variety and magnitude will require a significant amount of foresight, cooperation across multiple business lines, and attention to detail throughout the planning and execution phases, to maximize the odds of success. 

Indeed, adopting a lifecycle cost approach to procurement and asset management is proving to be an effective alternative for an increasing number of airport executives looking for ways to generate cost savings without compromising quality, customer satisfaction, or risk requirements.

While such a transformation can typically take 18-24 months to complete, a growing number of airport executives are embracing these types of programs as worthwhile initiatives and strategic investments that can have a positive impact on the organization’s bottom-line performance and which can pay financial and operational dividends for many decades to come. 

About the author
John Tros is a partner and Head of Procurement Advisory at KPMG Netherlands, and also serves on the leadership committee of KPMG’s Global Procurement Advisory Center of Excellence. John and his team have supported procurement transformation and cost reduction initiatives at major international organizations, including several prominent airports.

November 13, 2014

 





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