yvr strategic analysis -final (march 2013) - ubc...

BASM 502 –Corporate Strategy

Carolyn Beaumont

Kalpana Bisht

Lucie Cornish

Mihir Ghael

3/26/2013

STRATEGIC ANALYSIS

Strategic Analysis: YVR and the Global Airport Industry BASM 502

C. Beaumont, K. Bisht, L. Cornish, M. Ghael 1

Contents Contents ........................................................................................................................................................ 1

EXECUTIVE SUMMARY .................................................................................................................................. 3

INDUSTRY ANALYSIS ...................................................................................................................................... 4

Industry Overview ..................................................................................................................................... 4

Scope of Analysis ....................................................................................................................................... 4

Industry Supply Chain ............................................................................................................................... 5

Porters Five Forces: ................................................................................................................................... 7

Competitor Analysis .................................................................................................................................. 9

PESTEL Analysis ....................................................................................................................................... 10

Dynamic Industry Analysis ...................................................................................................................... 11

INTERNAL ANALYSIS OF YVR ....................................................................................................................... 13

Activity Analysis ...................................................................................................................................... 14

Value Chain of YVR .............................................................................................................................. 14

Secondary Activities ............................................................................................................................ 14

Primary Activities ................................................................................................................................ 17

SWOT Analysis......................................................................................................................................... 19

Resource Analysis.................................................................................................................................... 21

Benchmarking ......................................................................................................................................... 22

RECOMMENDATIONS ................................................................................................................................. 27



We would like to acknowledge the assistance of YVR and the UBC Sauder School of Business, without

whom the following analysis would be less comprehensive. Thanks to David Gillen, Director of the Centre

for Transportation Studies and the YVR Professor of Transportation Policy at the Sauder School of

Business; Michael O'Brien, Corporate Secretary and Vice President of Strategic Planning and Legal

Services at YVR and Mike Brown, Senior Planner in the Strategic Planning division at YVR met with our

team on three separate occasions to provide clarification, answer questions and further expand our

understanding of YVR, its operations and strategic direction. These conversations are referenced

throughout the document. It is important to note that some facts, figures and opinions were recorded

through personal conversations and may not reflect the official position of YVR or the Sauder School of

Business.



EXECUTIVE SUMMARY

This analysis is a strategic review of the Vancouver International Airport Authority (YVR) and its position

both within the greater Vancouver community and the Canadian and global airport industries. It is

important to understand the history of YVR and the changes within the Canadian air transport sector to

analyze where YVR is positioned compared to its competitors. Additionally, knowledge of the global

airport industry, emerging market segments and differences among ownership and operations will help

to provide insight on YVR’s competitive advantages and help to form the basis for recommendations.

Key success factors for the airport industry include capital investments in infrastructure, physical

location, frequency of aircraft movements, number of city pairings and connections to globally

important locations, and balance of aeronautical and non-aeronautical revenues. Research suggests

that the industry is mature, yet dynamic evidenced by increased security, pioneering visa-in-transit

programs, the emergence of low-cost and long-distance carriers and changes in environmental

regulations, fossil fuels and carbon emission schemes. Airports need to be cognizant of these changing

aspects of the industry to remain successful and ensure that their short and long term strategic plans

are dynamic enough to remain competitive.

YVR is in a strong position both in North American and globally. Its focus on company culture provides it

with the knowledge and leadership to retain its strategic position in the world’s top 10 airports.

Additionally, its focus on capital investment in infrastructure and relationship building with airlines and

contractors is another key to YVR’s success. YVR has developed such a strong position that it has

expanded its operations to global consulting and ownership investment in other airports (beyond the

scope of this analysis). The organization had been able to position itself strongly despite limiting

regulations by Transport Canada and is a leader in lobbying for changes within the Canadian air

transport industry. YVR should be able to maintain a strong position into the future, competing

successfully in the global market.

Future success depends on YVR capitalizing on its current assets and new opportunities to maintain its

competitive advantage. In combination, these areas include: Diversifying risk and monitoring key

players, expanding and formalizing lobbying activities, further developing the full-service model and

infrastructure investments. Recommendations cover both short and long term planning and should

allow YVR to maintain or improve its position within the airport industry.



INDUSTRY ANALYSIS

Industry Overview

The global airport industry is just one sector of a much larger aviation industry that includes airlines, air

freight, aircraft manufacturing, tourism and more. Airports globally are owned and operated in different

structures and partnerships that vary by country. In North America, US airports are owned and funded

by municipal governments and operated by a fixed-base operator (FBO), a commercial entity granted

the operations by the city.1 Canadian operations were previously government owned by Transport

Canada, but starting in 1994, the Federal government leased the airport land to private, not-for-profit

organizations to run.2 UK airports are privately owned companies, formerly grouped under the British

Airport Authority, but recently splitting up.

The sector is a mature industry that is growing in conjunction with personal and business travel and

increased global shipment of goods. While growth declined in 2001 and in 2008 due to political and

economic events, overall airport traffic jumped 4.7% in 2012 and 3.5% in 5 years3

Scope of Analysis

The global airport industry is inclusive of all organisations that own & operate international, national or

civil airports and public flying fields. Additionally, support operations including aircraft refuelling, aircraft

parking, hangar space, air traffic control, baggage handling, cargo services and others relating to, or

located on airport property are included in the industry however these services are usually provided by

outside contractors.

Due to the nature of the information available, the scope of the following analysis of the industry and of

YVR includes all flight related airport operations for both passenger & cargo services. While a major

source of revenue for YVR and other airports, non-aeronautical revenues such as retail and other

contracted services are not directly under the control of the airport authority. All airports operate

differently, contracting and controlling different operations. However, in this report it is assumed that

Canadian competitors (YYZ and YYC) operate and contract similar services.

1 IBIS World Industry Report H4912-GL –Global Airport Operation. Jan 2013.

2 Gillen, D. (2013, March 6). Director of the Centre for Transportation Studies and the YVR Professor of

Transportation Policy (Sauder School of Business). 3 IBIS World Industry Report H4912-GL –Global Airport Operation. Jan 2013.



Industry Supply Chain

An understanding of the airport supply chain is key to understanding YVR’s operations and their ability

to differentiate themselves strategically from competitors. Globally, the airport supply chain is

summarized in Figure 1 which shows the key players and economic drivers that affect the supply chain.

Crude oil prices, the industrial production index, world GDP and tourism have a major impact on air

traffic, operational costs and passenger ticket prices which ultimately affect the industry as a whole.

Figure 1. Airport Supply Chain

The major players in an airport’s supply chain are

Airport suppliers

Airport operator

Airlines and air cargo operators

Passengers and freight

Airport suppliers play a critical role in the supply chain. These include government agencies, contract

service providers, fuel suppliers, and construction and engineering firms. Suppliers play a pivotal role in

an airport’s operations because all other players rely heavily on them for services.

Airport operators comprise of airline staff, ground-handling staff, government employees, security

personnel and more. Airports provide immigration, customs, security, air traffic control, and passenger

and cargo services. Flexibility and reliability of these services is a key success factor.

Airlines and air cargo operators are responsible for the safe transport of passengers and cargo. Their

role is to operate aircrafts and provide pre- and in-flight services to passengers.



Passengers and freighters are the ones who pay for the services provided. Passengers go through a

series of procedures and checks while utilizing airport services ranging from check-in service, security

checks to airline lounge service and more.

Figure 2. Passenger & Freight Process Flow

Figure 2 shows the key players that interact with airport operators to deliver services to passengers and

freight. It is imperative for operators to share information and collaborate with these stakeholders to

deliver services effectively to customers.

Airport Operator

Airp

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Co

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Cu

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Ha

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Ag

en

ts

Freig

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rwa

rde

rs

Go

vern

me

nt

Insp

ectio

ns

Imm

igra

tion

Air T

raffic C

on

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Porters Five Forces:

Figure3. Porter’s Five Forces

Industry Rivalry: (Medium)

Industry rivalry for passengers and cargo potentially comes from airports in nearby large cities

that can compete on price of tickets, frequency and timing of flights, and connecting hubs and

city pairs.

Rivalry for airlines is from airports with similar strategic advantage such as location, size and

scale of operations. Additionally, government control of air service agreements and airline city

pairs increases rivalry between countries and decreases the ability of airports to create a

competitive advantage.

Supplier Power: (Low - High)

The construction & engineering industry that undertakes the development & infrastructure

upgrades of airports worldwide has low differentiation. Some contracted suppliers such as retail,

food services, parking and airlines have low differentiation however other suppliers including

customs & border services, security, and air traffic control are monopolies and thus have



significant power in the industry. Ground handling services also have high supplier power as

there are only a few competitors in the industry and can exert a significant amount of control

over operations at YVR.

Buyer Power (Medium)

Passengers –Traditionally passengers have had little power because there are few competitors

within a reasonable travel distance. However as small, low-cost airports increase and airlines

can fly farther and ticket prices are decreasing, buyers are increasingly gaining power as they are

willing to travel farther for airline travel.

Airline Industry -Airlines are primary users of airport services. Both the industries are

dependent on each other and a major portion of airport revenues come from airlines. They have

some power, especially as new aircraft development allows flights to travel farther without

stopping, opening up previously inaccessible city pairs. However in Canada the government

controls air-service agreements in conjunction with airlines and negotiates them one-on-one

directly with other countries and airline competitors. Airports are excluded from these

discussions.

Air Freight Logistics Industry -This industry has grown significantly over the last decade or so.

The industry relies heavily on airport services and is one of the major sources of revenue for

many airports. On the west coast however, cargo logistics are increasingly difficult due to the

time difference with the major east coast business centers so YVR, SeaTac & LAX are less reliant

on cargo revenues.

Commercial Real Estate Industry -One of the major beneficiaries of the era of airport

modernization has been the Commercial Real Estate Industry. Real estate and retail rental at

airports has grown substantially over the years contributing close to 50% of airport’s revenues.

As the airline industry becomes increasingly commoditized, airports need to compete on full-

service amenities by renting space to retail and food service outlets. However, there is low

differentiation in this industry and so they have little buyer power.

Substitutes (Low-Medium)

Road, Rail and Waterway -Road, rail and waterway transport using cars, buses, high speed rail

or ships provide an alternate mode of transport over short or long distances for both cargo and

passengers. These modes of transport in emerging markets are cheaper and more convenient.

In developed nations; however, with highly competitive airline industry, flights are often

cheaper and more convenient than trains and boats. Busses are cheaper but long,

uncomfortable and not the obvious choice for passengers. These modes of transport take longer

than air travel over long distances.

Video- conferencing and Online Technology-With advances in Internet and wireless technology,

more and more businesses prefer video-conferencing and paperless transactions over travel to

far off destinations because it is cheaper, saves time and is convenient.

Barriers to Entry: (High)

Due to the large amount of infrastructure and capital investment required by airports, in

addition to government regulations, the threat of potential entrants into the market is low.



Recently, smaller, low-cost, no frills airports have emerged in smaller cities such as Bellingham,

Buffalo and Abbotsford that provide cheaper services for alternative airlines. In some cases

these are poaching traffic from large airports, however worldwide, most airports see these

smaller locations as generated traffic that would not have purchased tickets from a full-service

airport.

Competitor Analysis

Competitors are those North American airports that compete for airline traffic with YVR. With advances

in airline technology, flights are able to travel farther, therefore bypassing previous refuelling locations

and creating new competitors for the Asian market including Chicago O’Hare.

YVR4 Toronto (YYZ)

5 Chicago O’Hare

(ORD)6

SeaTac (SEA) 7 Calgary (YYC)

8

Business

Model

Not for profit ;

operated by

Vancouver

Airport

Authority

Not for profit ;

operated by

Greater Toronto

Airports

Authority

Municipal

Government

owned. Operated

by City of Chicago

Department of

Aviation.

Owned and

operated by Port

of Seattle

(Municipal

government)

Not for profit;

operated by

Calgary Airport

Authority

Strategic

Advantage

Located on

west coast;

gateway to

Asia

Commercial

capital of

Canada; Hub for

Air Canada

Hub for American

Airlines and United

Airlines; strong

international

presence. Lower

airport tax.9

Located on West

Coast; proximity

to sea making it

an attractive

destination for

cargo. Lower

airport tax.

Growing

importance as a

business hub;

attracts a lot of

business

travelers

Contribution

to GDP (B)

$ 1.9 $ 24 $ 38 $ 13.2 $ 6

Revenues (M) $ 369.2 $ 1,137,592 $ 879.2 $ 483.2 $ 290.1

International

Connectivity

10 locations in

Asia, 4 in

Europe

Over 20

destinations in

Europe, 10 in

Asia and 2 in

Middle East

Close to 20

destinations in

Europe, 6 in Asia

and 1 in Middle

East.

5 locations in

Asia, 5 in Europe

and 1 in Middle

East ( UAE )

1 location in

Asia, 6 in

Europe.

Passenger

traffic

annually (M)

17 33 66.8 31 12.8

Cargo traffic

annually

224000 tons 492171 tons 1443569 tons 346000 tons 100-200000

tons10

Figure 4. YVR’s direct North American competitors11 (2011 figures)

4 Vancouver Airport Authority 2011 Annual and Sustainability report

5 GTAA Annual Report 2011

6 http://www.flychicago.com/OHare/EN/AboutUs/Facts/Performance-Data.aspx 7 http://www.portseattle.org/About/Organization/Pages/default.aspx

8 YYC-Annual report 2011

9 http://en.wikipedia.org/wiki/O'Hare_International_Airport

10 http://www.yyc.com/en-us/media/factsfigures/factsheet.aspx



PESTEL Analysis

Airports do not compete in isolation and are subject to differing global factors depending on location.

Therefore, it is important to consider political, economic, social, technological, environmental and legal

implications on airports when examining competitive advantages.

Political

In Canada ASAs are developed in

conjunction with airlines and

Government (Transport Canada).

Airports are not involved.12

Previously a government

monopoly, Transport Canada

protects national carrier Air

Canada despite declaring

bankruptcy in 2003 and being at

risk of a second bankruptcy less

than 10 years later.

Airspace blocks are governed by

countries and subject to

negotiation and agreements

(currently undergoing major

changes).

The majority of airports

worldwide are fully government-

owned, while others are owned

by a shared public-private entity

or privately owned.

Economic

Industry revenue has increased

3.5% to $120.3 billion, including

a 4.9% jump in 2012. This stems

from passenger numbers

recovering 4.7% and operators

increasing prices.13

Expansion in developing

economies, primarily in the

Middle East and Asia.

Greater number of privately run

airports lead to efficiency gains

and wider profit margins.

High fuel prices dampen air

cargo demand.

Airport industry is in the mature

phase of its economic life cycle

It costs a Canadian carrier three

times as much to land a plane at

a Canadian airport compared

with a major European airport.14

Social

An increase in available leisure

time for consumers will

encourage higher participation

in air travel especially for cash-

rich, time-poor tourists, or

those wishing to visit remote

areas and thus demand for

airport operators.

As unemployment declines

people will have less time to

spend on leisure activities such

as travel, however business

travel may increase.

International events like the

World Cup and the Olympic

Games will further contribute

to rising passenger volumes.

An increase in tourist activity

boosts demand for airport

operations.

Technological

Electronic visas and Visa-in-

transit increase the ease of

travel.

Increased security measures

cause longer connections and

decreases the ease of travel.

Infrastructure changes, to

accommodate new A380 and

other new aircraft models, create

a competitive advantage for the

airports that invest in new

infrastructure.

The industry experiences a

moderate level of technological

change on both the passenger

Environmental

Fuel prices increase as the global

price of oil does and the airline

industry is one of the most

reliant on fossil fuels.

Noise pollution is a significant

concern of municipalities

surrounding airports and causes

restrictions on flight arrival and

departure time, affecting the

competitive advantage of

airports connecting with east

coast and European cities.

The carbon output of airlines

and thus airports is fairly

significant and when flights are

Legal

(Intersects with political,

economic and environmental

factors significantly.)

There are significant legal

regulations surrounding air

traffic safety and security.

Tougher regulations on

greenhouse gas emissions raise

prices for airlines and airports

and may be a deciding factor

when choosing between two

competitive airport

destinations.

11

Vancouver Airport Authority 2011 Annual and Sustainability report 12

Gillen, D. (2013, March 6). Director of the Centre for Transportation Studies and the YVR Professor of

Transportation Policy (Sauder School of Business). 13 IBIS World Industry Report H4912-GL –Global Airport Operation. Jan 2013. 14

http://www.conferenceboard.ca/economics/hot_eco_topics/default/08-10-

06/clipping_the_wings_of_canada_s_aviation_industry.aspx



-2

0

2

4

6

8

2008 2010 2012 2014 2016 2018

Global Airport Operation Industry Revenue

% change in

Revenue

and airline sides.

Runway technology is highly

advanced at major airports, and

is important to minimizing wear

and tear on aircraft when

departing and landing.

Technological developments in

self-serve kiosks for check in are

helping clear queues and

reducing wait times for

passengers and airlines.

price competitive, passengers

are generally unwilling to pay

additional costs to purchase

offsets.

The contamination of

surrounding soil due to jet fuel

spills, burning and ground

leakage is a concern.

Environmental events (volcano,

ash cloud, earthquakes, and

tsunami) affect air travel and

thus airports.

Figure 5. PESTEL of global airports.

Dynamic Industry Analysis

The airport industry will continue to grow as the rate of air transportation use grows. Industry revenue

is expected to grow at an annualized rate of 3.9% to $ 145.7 billion15. Passenger and cargo traffic is set

to increase particularly in developing countries increasing revenues for the industry.

Figure 6. Industry Revenue Graph16

Airports are investing in new infrastructure projects and technology to expand their current capacity to

handle cargo and passenger traffic, increase safety standards and provide customers with a whole new

shopping and entertainment experience. After the economic recession in 2008, the industry has

continued to grow but is still vulnerable to key drivers such as GDP and fuel prices. Competition is

15

IBIS World Industry Report H4912-GL –Global Airport Operation. Jan 2013. 16

IBIS World Industry Report H4912-GL –Global Airport Operation. Jan 2013.



expected to grow in the industry with increase in number of airports as air travel increasingly becomes

commoditized. The number of low cost airports in growing cities is expected to rise competing against

the more established high end airports in larger cities.

As demand for energy increases, fuel prices will continue to remain volatile increasing steadily each

year. Environmental and government regulations will become more stringent because of increased focus

on environmental issues and safety standards. These factors will increase the operational cost of

airports as well as airlines and as a result airfares will increase but increased competition in these

industries and improvements in fuel efficiency and passenger capacity of aircrafts will keep fares low

commensurate to income and inflation.

Emerging markets in Asia, Middle East and South America will continue to fuel the growth of the

industry with growth in middle class population, high disposable income and a growing economy. These

markets will attract tourist and business travelers from across the globe. With increase in demand for air

travel, the airline and airport industry in these markets is poised to become more competitive.

Governments in countries such as China and India have made huge investments in the airport industry

to increase the number of airports, expand current facilities, and improve infrastructure and raise safety

standards at key airports.

Advances in technology have made aircrafts bigger and more fuel efficient enabling them to carry more

number of passengers over longer distances. In future, this will lead to more number of direct flights

over long distances bypassing airports which would have previously been an in-transit destination.

Improvements in air traffic control technology means increased number of flights in a given airspace

allowing for increased traffic and flight paths while adhering to safety standards. With growing impetus

on reducing environmental impact and government regulations over safety standards, technology will

play a key role in achieving these goals.



INTERNAL ANALYSIS OF YVR

The internal analysis of YVR is divided into three parts; an analysis of activities, an analysis of resources,

and benchmarking. This helps to explain how YVR was able to move over 17 million passengers in 201117

and how they can meet future increases in air traffic.

Figure 7. YVR Operations

17

Vancouver Airport Authority 2011 Annual and Sustainability Report



Activity Analysis

Value Chain of YVR

Figure 8. YVR’s current activities

Secondary Activities

Infrastructure: The main infrastructure components for YVR’s value chain are explained below:

Financial System: As YVR is a non-profit corporation and has no access to shareholder equity,

they fund their growth and expansion needs with debt. Equity can be cheaper than debt

financing; however, not having shareholders allows YVR to make long term plans and projects

without focusing on short term evaluations. The financial model and community focus also

creates a unique advantage for YVR when dealing with government, because they are viewed as

being unbiased and only interested in community well-being. This increases YVR’s ability to

influence policies and regulations in favor for the airport.

Accounting: YVR has a ‘dual till’ system under which the two main revenue generators,

aeronautical and non-aeronautical business, are divided into distinct income and expenditure

accounts. A third source of revenue is the Airport Improvement Fee (AIF) that is collected from

passengers by the airlines on behalf of the airport to generate capital for capital intensive

projects.

The dual till system ensures that income from the aeronautical side of the business is used for

aeronautical expenditure, leaving the non-aeronautical income to provide for non-aeronautical

expenditure and to make up company profits. Most airports have a single till system where all

revenues of an airport are combined; however, this leaves airlines covering a larger portion of

the costs and results in higher landing fees. YVR's dual till system has better control of revenues



and can offer superior long term contracts to air carriers with regards to landing fees and other

costs.

Legal Affairs: YVR is restricted by regulation from the government. Bilateral Air Service

Agreements (Fig. 5) limit YVR’s ability to attract foreign airlines to Vancouver. Canada also has

regulations that limit foreign ownership of Canadian airlines to 25%, decreasing the

competitiveness of the Canadian airline industry and reducing available airlines to operate from

YVR. YVR has been successful in lobbying the Government of Canada to allow the adoption of

the China Transit Trial that reduces the requirement for Chinese citizens to obtain a transit visa

when connecting through YVR. This allows for more economical flights between YVR and China

by increasing the volume of travelers on the route.

Management: The Vancouver Airport Authority (VAA) board is comprised of directors from

government and the community. Transport Canada owns the airport land and leases it to VAA to

operate YVR as a “first class international airport”.18 The current ground lease has been

extended until 2072 and requires YVR to pay Transport Canada rent based on 12% of airport

revenues.19 20 YVR has a five tiered planning process to guide and manage the development and

operations of the airport in the short, medium and long term.21 A set of strong corporate

governance structures, policies and procedures ensures that YVR’s business is conducted

responsibly.

Human resource management: At the end of 2011 the airport authority employed 396 people, 306 of

which were member of the Public Service Alliance of Canada (union)22. YVR recognizes the value and

importance of their employees and uses the following four values as a guide for their corporate

culture.23

- Promotion of collaboration and team work

- Accepting accountability

- Pursuit of creativity

- Results driven focus

Employee development is promoted and the YVR target is to provide employees with an average of

35hrs of training per year (they exceeded this in 2011 with an average of 45hrs per employee)24.

Training activities include environmental management, cross-functional training, personal development,

safety and technical training.

18

Vancouver Airport Authority 2011 Economic Report 19

Brown, M. (2013, March 20). Senior Planner, Strategic Planning (YVR). 20

Vancouver Airport Authority 2011 Economic Report 21

Vancouver Airport Authority 2011 Annual and Sustainability Report 22



Vancouver Airport Authority 2011 Annual and Sustainability Report



Figure 9. YVR Employee Development

The airport authority has developed various safety initiatives and strategies that enable them to reduce

and maintain low levels of work-related injuries. These safety initiatives are extended beyond YVR’s own

employees to include everyone at the airport.

Figure 10. YVR Work-related Injuries

In 2011 YVR introduced a new performance management program to align employee objectives with the

YVR’s annual business plan and help to further develop an environment for open communication,

coaching, and feedback.25

Technological Development: YVR is considered as an industry leader and pioneer of technologies that

simplify passenger travel and reduce wait times. This means looking at how lead users and early

adopters are altering the airport’s service offering and using it as inspiration.26 Some of these

technological developments are listed below:

Common Use Terminal Equipment (CUTE) - 1996: This system allows the airlines to share

hardware and plug in to the airport’s host computers.27

25

Vancouver Airport Authority 2011 Annual and Sustainability Report. 26


YVR Future Travel Experience Fact Sheet.

2007 2008 2009 2010 2011

Total training and

apprenticeship hours21,698 22,985 16,695 16,462 17,200

Average

training/apprenticeship

hours per full-time

equivalent position

58 55 40 42 45



Common Use Self-Service (CUSS) Check-in - 2002: Using this service, customers self-check-in

and print their boarding passes for multiple airlines from one machine. YVR was the first

airport in the world to introduce CUSS check-in kiosks.28

On Board Check-in - 2003: Through this service, airline boarding passes are delivered

directly to the cabin of cruise ship passengers, and baggage is tagged on board the cruise

ship and delivered directly to the airport.29

CUSS Baggage Check-in - 2007: YVR expanded CUSS to allow passengers to print their own

luggage tags.30

Automated Border Clearance (ABC) -2009: This service automates the process of crossing

the border into Canada (reduced customer wait time from 90 min to 15 min) was a

partnership between CBSA and YVR. 31

Procurement: The Vancouver Airport Authority has concentrated on enabling its employees to do what

they best can and contracting out other aeronautical and non-aeronautical services to other specialized

suppliers. YVR also focuses on attracting more airlines to increase its aeronautical revenue. The

acquisition of services and goods at YVR is done through competitive bidding (open contract) or through

best value purchasing.32 YVR only makes exceptions to the way it allocates contracts under specific

circumstances.

Primary Activities

Inbound Logistics: We have considered inbound logistics as the activities that are specific to arriving

flights. The airport provides Canada Boarder Services Agency (CBSA) with space to provide customs

services for passengers and cargo arriving from international flights. YVR also invested $300 Million to

extend the sky train to the airport to improve accessibility to and from the airport and at the same time

helped YVR promote sustainability.33

Operations: Airport operations are the activities YVR performs for both arriving and departing flights.

These activities include cargo, seaport, ground handling, and baggage handling activities. As previously

mentioned, YVR choses to contract out a number of specialized activities including ground handling

services to other companies (Handlex, Servisair, and Swissport) to operate at the airport and provide

services to airlines without their own ground handling capabilities.34 YVR has chosen to take

responsibility for the baggage handling inside the terminal building, but once the baggage leaves the

building it is the responsibility of the airline’s chosen ground handling providers to load and unload it

from the planes.35

28

YVR Future Travel Experience Fact Sheet 29






www.yvr.ca 35

Brown, M. (2013, March 20). Senior Planner, Strategic Planning (YVR).



Outbound Logistics: Outbound logistics are activities specific to departing flights, such as passenger

security, de-icing, re-fueling, and passenger check-in/boarding. YVR provides airlines with the space and

equipment for passenger check-in and boarding; however, it is the airlines that provide the service to

passengers, not YVR. YVR also contracts out the mandatory passenger screening/security to G4S.36 The

airlines are responsible for purchasing their own fuel and have created a consortium that purchases fuel

and manages fuel logistics. It was in YVR’s best interest to invest in a fuel system that was installed

under the apron in order to improve safety at the airport. As a result, they own the equipment that is

being used for re-fueling planes; however, they do not generate any revenue from it and view it as a

benefit they provide to airlines.37 PLH Aviation Services has the contract for aircraft refueling services at

YVR.38 YVR has also chosen to control the de-icing contracts in order to improve efficiencies in

operations. YVR selects a single provider of de-icing services (Aeromag) that airlines pay directly based

on services used.39 YVR has again chosen to purchase the de-icing equipment in order to ensure that the

proper investments are being made and views it as a value added service to airlines.40

Marketing & Sales: YVR markets advertising opportunities for businesses by highlighting that they

provide a captive audience and have over 17 million passengers traveling through the airport. A variety

of advertising services are available including signage, information kiosks, floor displays, and flight

information video screens.41 YVR also needs to market their services to the public to reduce passenger

leakage to Bellingham and Seattle.42

Service: YVR views itself as a “full-service” airport and positions itself to provide the highest level of

service and customer experience as possible.43 These services enhance the passenger experience at YVR

and include shopping, food & beverage, duty free, hotel, free and unlimited Wi-Fi, and various other

services.

YVR has some of the best retail selection in North America, for example the first Victoria secret in B.C.

opened at YVR44. They also have the second largest duty-free space in North America with over 56,000

square feet in 10 stores.45 YVR is specifically targeting its retail to match customer demands, such as the

rare whisky and cognac business that is popular with the Chinese market.46 YVR has also moved away

from its previous overpricing strategy and instead now insists that stores offer “street prices” using

36

YVR Website 37


YVR Website 39

YVR Website 40


YVR Website 42

O’Brien, M. (2013, March 8). Corporate Secretary and Vice President of Strategic Planning and Legal Services

(YVR). 43


B.C.’s first Victoria’s Secret opens at YVR (http://www.straight.com/life/bcs-first-victorias-secret-opens-yvr 45

YVR reaches beyond the sky with expanding retail operations

(http://www.vancouversun.com/reaches+beyond+with+expanding+retail+operations/7096001/story.html#ixzz2ObcJKLJq) 46


(http://www.vancouversun.com/reaches+beyond+with+expanding+retail+operations/7096001/story.html#ixzz2ObcJKLJq)



Robson Street as a reference.47 This translates into the second highest consumer spending in

international terminals in North America. On average $20.11 per passenger is spent before boarding

flights from YVR.48 YVR is opening an outlet mall with 97 shops by 2014 that will create jobs in the

community, generate more revenue for YVR, and possibly act as a disruptor for outlet stores in the US.49

The Fairmont Vancouver Airport Hotel is directly connected to YVR and provides lodging, spa, and

conference facilities for YVR’s customers. Echoing YVR’s “full-service” mantra, the hotel has been voted

as the best airport hotel in North America in both 2011 and 2012.50

SWOT Analysis

In addition to understanding YVR’s value chain, it is important to categorize the activities, resources and

assets that contribute to YVR’s market position and whether they add to or subtract from its

competitive advantage both now and in the future.

47





YVR Website 50

Skytrax World Airport Awards (http://www.worldairportawards.com/)



Strengths

Strategically located – gateway to Asia - Pacific,

particularly China

Independent board of directors – incentive to

work towards the welfare of the stakeholders

Not-for-profit model gives them greater

lobbying power and possible tax exemptions.

Not having shareholders means YVR can make

long term decisions without worrying about

short term evaluations.

Dual-till model gives them a better

understanding of sources of revenue

Increased emphasis on safety, security and

sustainability helps to reduce cost and increase

trust levels among passengers.

Credit rating of AA ( second highest in the

industry) gives them easy access to capital

Considered as industry leader and pioneer of

technology. Credited with several operational

innovation using technology such as on- board

check in and automated border clearance

Weaknesses

Lack of free space limits future expansion of

infrastructure

Not having shareholders means YVR has to

raise capital through debt to fund investments

YVR Operates in a highly regulated industry

where most decisions are made by the

government, therefore it lacks the power to

take decisions that are in its best interest

YVR relies heavily on contractors with

monopoly powers to provide services to

passengers which lead to lesser control in

airport’s operations.

Opportunities

Improvements in infrastructure and use of

advanced technology to provide state-of-the

art services to passengers.

Infrastructure expansion to handle growing

passenger and aircraft traffic in the future

Increase non-aeronautical revenues by

providing superior value-add services such as

retail, food and entertainment and parking.

Air travel is fast becoming the preferred mode

of transport presenting an opportunity for YVR

to tap into.

Growth of Asian economies will increase air

travel to and from Vancouver which YVR can

potentially benefit from.

Threats

Increased competition from low cost airports

such as Bellingham leading to passenger

leakage.

Growing business importance of other major

cities such as Calgary

Lack of space on the Sea Island could restrict

YVR’s expansion plans raising environmental

concerns

Greater lobbying power lies with the airports in

the east such as Toronto and Montreal which

could work against their business interest.

Profitability depends on several external

factors beyond YVR’s control which makes

them vulnerable to changes in economic and

political environment.

The SWOT analysis is aligned with industry view of YVR as a currently strong airport with a good future

outlook. However, it is vulnerable to a number of threats that are both controllable and uncontrollable

by YVR. Considering these when planning for the future is imperative.



Resource Analysis

Resources are assets that help perform YVR’s activities and can be categorized into tangible and non-

tangible resources.

Tangible resources are physical and financial resources. As with any large airport YVR has a high

percentage of their assets as tangible assets, however, YVR also has a healthy financial position. Some of

their main tangible resources include:

Figure 11. YVR’s Tangible Resources.51 52 53 54 55

51


YVR Website 53

Vancouver International Airport: Quick Facts 2012 54

YVR Cargo 1992-2013 55

Airport Guide (http://airportguide.com/airport/Canada/British_Columbia/Vancouver-CYVR-YVR/runways.php)

Cash on Hand: $66,626,000 on December 31, 2011

Credit Rating: AA according to Standard and Poor

AA (low) - Dominion Bond Rating Services

Investments: $52,570,000 – in subsidiary Vantage on December 31, 2011

Runways: North Runway (08L/26R) – 3030m x 61m

South Runway (08R/26L) – 3505m x 61m

Crosswind Runway (12/30) – 2225m x 61m

Terminals: Main terminal = Domestic (DTB) & International & Trans-border (ITB)

- Approx. 3.5 million square feet

- 51 bridged gates + 16 ramp loading gates

South Terminal (STB) – 8 ramp loading positions & common use floatplane dock

Parking: Parkade (3 levels)

Economy Parking Lot

South Parking Lot

JetSet Parking Lot (formerly- Long-Term)

Retail shopping space: Approx. 166,000 square feet of retail space

Baggage handling system: Bags travel at a rate of 1.2m/s

Ground Run-up Enclosure: Approx. 1,950 sound-absorbing panels

Cargo Village: YVR handled 228,000 tonnes of cargo in 2012



Intangible Resources: are resources which are not physical in nature. It is YVR’s intangible assets that

allow YVR to continue to innovate and be a leader within the community. Their main intangible assets

include:

Benchmarking

The key performance benchmarking areas for the airport are:

Traffic activity - Total passengers, cargo, & operations.

Physical facilities - Number of runways, land area, taxiways, terminals, gates, parking space

Aeronautical related charges - Landing and take-off fees, aircraft apron, parking and gate fees

Design of the airport and efficiency of operations

Airport industry is highly competitive and in order to attract more customers (both passengers and

airlines), an airport needs to perform well in all the above mentioned parameters. However, it is also

important that an airport manages its funds well because the capital investments in an airport have slow

return on investments. Therefore, how and when the capital is invested is important.

Leadership:Approximately 160 years of combined YVR airport authority experience

on the current executive leadership team

Human Resources: YVR has 396 employees

Operations at YVR support 23,600 direct jobs

17 million passengers in 2011

Technology: 4 significant new technologies introduced since 1992

Reputation:Ranked as the best airport in North America for the 3

rd year in a row in

2012 (Skytrax World Airport Awards)

Ranked as the 9th best airport in the world in 2012 (Skytrax World Airport

Awards)

83% of Metro Vancouver residents gave the overall impression of YVR 4

out of 5 or higher in 2011.



Figure 12. Strategic Capital Investment of Infrastructure

YVR’s strategy (Fig.12) is to delay the influx of capital in the system until as close as possible to when it

is needed, this gives them an early return on investments and frees up capital faster. This strategy of

capital investment and infrastructure development at YVR has helped them churn capital quickly and

stay low on debt.

Almost all airports provide similar services and have similar supply chain components (Fig. 1), thus

benchmarking airports on operational or supply chain parameters would not have brought clarity to

performance. Thus, we benchmarked YVR’s financial performance against their competitors (Toronto,

Calgary, Seattle and Chicago).

The number of passengers travelling through YVR has been steady since 2002 and is expected to grow

despite that Settle and Bellingham are offering lower airfares. Chicago has the highest number of

passengers travelling through. Calgary’s airport at the same time has the lowest number of passengers,

but is growing quickly due in part to Calgary’s growth as business center.



Figure 13. Airport passenger traffic.

Because aeronautical and non-aeronautical services are the major revenue generators for airports it is

important to decide on how to account for them both. In the case of YVR, a key advantage is their

decision to operate as a dual till model, which is unique to them among their major competitors with

only SeaTac following a similar model. Referencing Fig. 4 it is important to remember the different

business models of North American competitors.

Figure 14. Selected financial data for YVR and competitors.

Figure 15: Selected financial metrics for YVR and competitors.

Figures 14 and 15 demonstrate that YVR was in good financial shape in 2011. It has the least debt

compared to other airports and its net income is positive. Both Seattle and YVR have similar financial

performance compared to others. The high return on sales represents high operational efficiency of the

airports in terms of profit produced per dollar of sales. Similarly, ROE indicates the net income returned

as a percentage of shareholders equity. Since Canadian airports are non-profits their shareholders

equity is equal to net assets, and thus ROE represents the return on net asset of the airport. ROA is the

Calgary Chigaco Seattle Toronto YVR

Revenue $ 290,064 $ 679,402 $ 483,172 $1,137,592 $ 369,262

EBITDA $ (123,425) $ 443,040 $ 415,968 $1,073,412 $ 198,781

Net income $ (239,410) $ (5,191) $ 107,750 $ (36,412) $ 59,060

Shareholders' equity $ 152,334 $1,392,546 $2,912,124 $ (719,758) $1,087,874

Total debt $ 1,244,560 $7,338,756 $3,510,594 $7,710,530 $ 547,389

Total assets $ 1,494,727 $9,480,843 $6,660,419 $7,199,891 $1,766,954

Calgary Chigaco Seattle Toronto YVR

ROS -82.54% -0.76% 22.30% -3.20% 15.99%

ROE -130.86% -0.29% 1.95% 5.42% 1.68%

ROA -16.02% -0.05% 1.62% -0.51% 3.34%

Asset turnover 0.194 0.072 0.073 0.158 0.209

Financial leverage 817% 527% 121% -1071% 50%



return on total asset and accounted by the net income generated by the firm. YVR is generating the

maximum profit relative to its total asset which is positive. Equally, the low financial leverage of YVR

shows its low dependence on debt financing which also strengthens its financial position.

Figure 16. Relationship between operations, assets and capital

Figure 16 represents the relation between operating efficiency (determined by ROS), asset utilization

(determined by asset turnover) and strength of capital structure (determined by financial leverage). The

position of the bubble is determined by the ROS and asset turnover and size is determined by financial

leverage. YVR’s dual till model is helping them to keep their debt low and run their operations

efficiently. Seattle is YVR’s closest competition and has been a both a disruption and simulator to YVR’s

business by causing passenger “leakage” but also stimulating the overall number of passengers

traveling. YVR is out performing their Canadian competititors; however, it is important to note that

Calgary is currently investing heavily into a 2 billion expansion plan.

Figure 17. Benchmarking

In Figures 17 through 21, benchmarking of YVR and its competitors on finacial parameters clearly show

that YVR is finacially very strong which gives them advantage to make decisions more independently.



Seattle also follows a similar revenue model and is on par with YVR. Calgary appears to be ina difficult

finacial situation, however this is likeley due to the execution of their investment-heavy expansion plan

currently underway.

Figures 18-21. Financial Benchmarking



RECOMMENDATIONS

YVR’s ability to maintain its top 10 global position is contingent on factors both within and beyond its

control. It is imperative that YVR continues to plan strategically in the future and recommendations for

future development fall into four main categories:

Diversify Risk and monitor key players

Diversifying Risk: Currently YVR is the second largest hub for Air Canada (AC) after Toronto

airport; however Air Canada continues to face financial difficulties since late 2000. Air Canada

had huge liquidity risk in its Q1 2009 and had problems conserving cash for its 2010 operations.

Air Canada is YVR’s largest carrier and thus highly dependent on AC for aeronautical revenue.

YVR should diversify its risk by becoming a hub for other airlines. As WestJet is a growing

competitor it is an attractive option for YVR.

Monitor loss to Bellingham/Seattle:

Figure 22: Increase in household ticket purchases56

Recently, YVR has lost passenger traffic to Bellingham (BLI) due to its close location and lower

fares. BLI can be termed as “The Classic Disruptor” to YVR by stealing away passengers. YVR

currently loses up to 1 million passenger trips to US airports annually. Figure 22 shows the

percentage growth of Vancouver households that fly since 1953. Since early 2000, passenger

traffic rose steeply from 35% in 2000 to 46% by the end of 201057. 75% of this growth is

attributed to fare generation58 leaving 25% of the 1M passenger trips being poached from YVR.

YVR has several options to curb this leakage:

1. Buy or invest in Bellingham

56



Brown, M. (2013, March 20). Senior Planner, Strategic Planning (YVR).



2. Create its own disruptor i.e. build a low cost terminal.

3. Ignore and focus on its own strategy

Currently, the best option for YVR would be to focus on its own strategy by growing organically.

YVR’s competitive advantage is the full- service it provides to its passengers so it should

concentrate on providing the additional value-added services included in these

recommendations.

Expand and formalize lobbying operations

Government regulations: To maintain its competitive advantage in the face of growing Asian

expansion and increasing destination cities for airlines, YVR needs to continue to push for

changes to the current Transport Canada regulations. It is recommended that YVR establishes a

dedicated team or department to continue to lobby Transport Canada and other global air

transport groups. It would be to YVR’s advantage if airports could participate in the negotiation

of ASA’s and the expansion of city pairs alongside the Canadian government and airlines. YVR

would also benefit from relaxation of the regulations surrounding rights of establishment and

foreign ownership of airlines (which maintains 75% of a Canadian-based airline must be

Canadian owned) which currently protects Air Canada and WestJet’s duopoly on domestic

flights.

Tour Operations: Additionally, the lobbying group could address regulations in the tourism

industry which would also benefit both YVR and Vancouver as a tourist destination. Currently,

tour operators in BC, Ontario and Quebec are required to be located within the province59. This

prohibits foreign tour operators and airlines from offering tour-packages from YVR and

therefore discourages them from choosing Vancouver as a destination, reducing flights and

passengers to the city.

Cargo-In-Transit: YVR had success in increasing airport traffic with the visa-in-transit program.

We recommend lobbying for a similar program for cargo. One of the reasons for YVR low cargo

volumes is because of the added complication of clearing customs, however, if a similar

exemption was made for cargo only passing through the airport, YVR would be able to increase

its attractiveness for cargo routes between Asia and the USA because they would be able to

send products to/from both Canada and the US on the same planes.

Further develop full-service model

Develop commercial space for passengers and community: Non-aeronautical revenues are an

important part of financial solvency for airports. As a result, YVR should develop commercial

space, making it more attractive to passengers. YVR is currently developing a mall with 94

designer outlets to attract tourists and the local community. Opening public access to retail

59

Gillen, D. (2013, March 6). Director of the Centre for Transportation Studies and the YVR Professor of

Transportation Policy (Sauder School of Business).



shops (like Schiphol airport) and pushing security nearer to boarding gates (as in Singapore) will

result in increased non aeronautical revenues and possible indirect increase in aeronautical

revenues as more passengers choose YVR.

Increase transportation options: YVR can further increase their full-service airport model by

increasing the transportation options to and from the airport. We recommend looking at the

option of creating a “cell phone” parking lot to ease congestion created by passenger pick-ups.

With widespread mobile use passengers are now able to call people picking them up to meet

them at the arrival gates. However, because it is hard to predict both the exact arrival time of

the passenger and driving time to the airport, people picking up passengers from YVR often

drive around in circles at the airport, creating excess emissions, or chose to park illegally in areas

that cause increased congestion. By creating a designated “cell phone” parking lot on or close to

Sea Island, YVR will make it more convenient for passenger pick-ups, reduce emissions, and at

the same time could generate revenue by offering retail and food services to those waiting

(Starbucks etc.). Another option to improve access would be a partnership with Car2Go that

would see the creation of Car2Go parking in the parkade. YVR could generate revenue from

Car2Go and at the same time would not be cannibalizing their revenues from parking because

the passengers who use Car2Go would not normally park at the airport.

Business services: Business customers have low price sensitivity and as a result are an ideal

match for YVR’s full-service model; however, Vancouver is not a major business hub in Canada

and as a result we recommend that YVR focus on increasing its attractiveness to business

travelers transferring through the airport. One method would be to create dedicated lines

through customs for business travelers connecting from an international flight. Another option

could be to have a priority luggage carousel for business class making it easier and faster to get

through the airport. An additional benefit is that with every minute they are not spending

waiting they are more likely to spend money in the airport60.

Tourist Attraction: YVR is an airport that is reflective of the culture and environment of Western

Canada. It is one of the few airports that immediately upon landing broadcasts the city, culture

and beauty of Vancouver. It is also developing a large retail presence both within the airport and

in nearby Richmond and was a significant investor in the Canada Line rapid transit. Therefore it

is recommended that YVR furthers its development as a unique tourist destination in addition to

just being a transport hub. YVR is working in 2013 to expand Flight Path Park a popular

destination for plane enthusiasts, to be a view point and environmental park for local residents,

tourists and employees on Sea Island. By developing a future waterfront park on the North side

of Sea Island and expanding existing summer children’s and family programs, YVR can become a

destination for locals and tourists encouraging more non-aeronautical revenue.

60

Brownlow, N. (2013, March 25) Sr. VP of Revenue Management & Information Services. InterVISTAS Consulting.



Infrastructure investments

Install fuel pipeline: Currently, most of YVR’s fuel requirements are delivered via a 40km pipeline

owned by Trans Mountain61, supplying fuel from a Chevron facility in Burnaby. The pipeline is

not sufficient to meet peak demand requirements and therefore YVR also ships fuel from a

BP/ARCO refinery at Cherry Point, Washington via tanker truck. This transport method has

increased safety concerns, traffic congestion, and carbon emissions, and is unsustainable.

Trans Mountain’s pipeline is old and being the only source of supply any disruptions could

impact YVR’s operations. Upgrading the pipeline or installing a new one would involve huge

investments while supply uncertainty remains. VAFFC currently owns a wharf facility in

Richmond on the south arm of the Fraser River62 which could store fuel delivered by barge or

taker. A new pipeline connecting to YVR airport will increase the reliability of fuel supply and

minimize environmental impact and safety risks. However, development is currently opposed by

the City of Richmond and may be subject to environmental conflict too.

Extending north runway: Currently, the North runway is used primarily for arrivals, restricting

YVR’s capacity of aircrafts. Extending the facility to also handle departures would increase YVR’s

runway capacity and double its departure capacity63. To extend the runway, YVR will have to

build a north-south taxiway allowing for simultaneous take-off and landing on both runways.

Extending the length of the North runway will allow long distance aircrafts to use the runway for

departures. Having two entirely functional runways will help YVR manage peak hour traffic more

efficiently and cater to the expected increase in traffic, generating additional aeronautical

revenue.

61

VAFFC – www.vancouverairportfuel.cawww.vancouverairportfuel.ca 62

VAFFC – www.vancouverairportfuel.cawww 63

YVR: Your Airport 2027: 20-year Master Plan

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