Taking flight on big spenders
You might think that landing and parking fees drive earnings at Hong Kong's busy airport, but a visit to the Foster + Partners-designed complex reveals the real money-spinners: 300 retail shops spread over the airport's two terminals.
Besides the usual airport shops selling electronic gadgets and duty-free cosmetics, there's a bevy of luxury brand outlets like Prada and Piaget that draw big spenders looking for handbags, watches and jewellery.
One of the 10 busiest passenger airports in the world, about 55 million passengers passed through it last year. Many of them were well-heeled Asian shoppers.
Retail and advertising revenue accounted for 37 per cent of the airport's total sales in the year ended March, up from 28 per cent five years ago. By comparison, the figure for BAA, which runs London's Heathrow Airport, Stansted Airport and four other smaller airports in Britain, was 23 per cent in the first six months of this year.
On top of the basic rent, shops at Hong Kong's airport pay a premium related to their sales to Airport Authority Hong Kong, the statutory body that operates the airport also known as Chek Lap Kok.
Over the past five years, retail licences and advertising revenue at the airport have nearly doubled to HK$4.5 billion, which the airport attributed partly to 'increased spending on liquor and tobacco, fashion and jewellery, and perfumes and cosmetics by mainland [Chinese] passengers'. According to the airport's data, 22 per cent of all passengers last year were from China.
'We have observed that Asian passengers, in general, are spending more on shopping than other travellers,' Albert Yau, the airport authority's general manager for retail and advertising, said. Last year, 69 per cent of total passengers who came through the airport were Asian, including mainland Chinese.
The big increase in retail-related revenue coincided with a jump in net profit, which increased 1.3 times to HK$5.3 billion in the year ended March from 2008. The hefty sales increase was against the backdrop of a modest 12 per cent increase in passenger traffic over the period.
An idea of individual passenger spending can be gleaned from data provided as part of the tender process last year for three categories of duty-free shop licences involving a total of 10 outlets.
According to the figures, average spending per visit in such shops in 2010 ranged from HK$608 on liquor and tobacco to HK$888 on general merchandise in shops in restricted passenger-only areas to HK$1,050 on cosmetics and perfume. Yau said the tender for the three licences drew an unprecedented 11 bidders with 20 proposals, attracted by the relatively high-spending passengers.
The airport authority also helps manage two airports on the mainland. William Lo Chi-chung, the authority's executive director of finance, said that besides the contribution from the retail division at the Hong Kong airport and stringent cost control, the investments at airports in Hangzhou and Zhuhai fuelled the authority's earnings over the past five years.
Zhuhai International Airport, which is managed by a joint venture between the Airport Authority and the Zhuhai Airport, started to turn around its losses in the 2010-11 fiscal year. Hangzhou Xiaoshan International Airport, in which the Airport Authority holds a 35 per cent stake, contributed HK$522 million to the bottom line in the year ended March, up 117 per cent from a year earlier.
At Hong Kong airport, expansion is in the air. By the end of 2013, some 10,000 square feet of new retail space featuring two-storey boutiques for Rolex and Chanel will be constructed in the East Hall.
That is in addition to the existing 500,000 square feet of retail area spanning terminal 1 and terminal 2.
Lo, however, stressed that the Airport Authority has been disciplined in growing the retailing business. 'Our colleagues at the retail arm have to fight for more space as there are many constraints to curb their expansion,' Lo said.
The retail area has to be confined to a certain size so passengers can easily move around the terminals, and because they need to be able to easily find boarding gates, shops cannot obstruct any airport signage.
By managing its twin functions as an airport and shopping mall, the Airport Authority has been on a 12-year profit streak and has paid back more than 70 per cent of the capital invested by the government over the years.
'We could pay back the government all its investment in the airport in the next two to three years or so,' Lo said.
Since the airport opened in 1998, HK$26 billion of the HK$36.6 billion the government invested in it has been repaid.
The airport was built at a total cost of HK$53 billion. The rest was funded by bank borrowings.
Looking ahead, plans call for the construction of a third runway, which has been approved by the government and is subject to environmental impact assessment considerations. The runway could cost north of HK$130 billion by the time it's expected to be finished in 2022, with debt and the added interest expense likely to weigh on the authority's profitability.
But given the financing of the third runway has yet been finalised, Lo said it was still too early to tell the exact impact it will have on the Airport Authority's bottom line.
The share of the airport's total sales that came from retail and advertising in the year to March