Increases in Wages and Benefits:
What are the Potential Impacts
on Airports?
Prepared for: 2016 ACI – NA / World
Prepared by: InterVISTAS Consulting
Steve Martin, Sr. Vice President
It’s Headline News
PHL workers rally in
pre-DNC bid for better
pay, representation
Wage Campaign at Port
Authority Hits an Impasse
MSP airport workers
seek $15-an-hour
minimum wage
Workers present case
to Metropolitan
Airports Commission.
2
Airport companies agree to
$10M settlement over
minimum wages
Placing wage and benefit increases into context
• The issue of raising minimum wages to a living wage is controversial
• Advocates argue it improves employee financial well-being, enhances job performance,
improves customer service and reduces employee turnover and absenteeism
• Critics argue wage and benefit increases to low-wage employees hurt small businesses for
which labour counts as a significant cost
• This issue has surfaced at several major U.S. airports
•
Several major airports, including San Francisco, Seattle, and Minneapolis-St. Paul have
implemented minimum wage policies that exceed those requirements imposed by local
cities, counties or states. Others are currently facing pressure for wage/benefit increases
• However…
•
Relatively little has been written about the effects of such wage and/or benefit increases on
the airport and its associated employers
• Airport governing authorities want to better understand the potential implications of
proposed increases in minimum wages/benefits.
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What are the key questions for airports?
• What effect would minimum wage and benefit
increases have on the prices of products and
services purchased by travelers visiting airport
facilities?
• What impact would wage increase have on
employment in affected industries?
• What impact would further minimum wage and
benefit increases have on an airport’s
competitive position – for example, with
respect to airfares?
Copyright - Frank Rogozienski
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• What impact would wage/benefit increases have
on the revenue generated by the airport’s
concessions program?
Background: research on wage/benefit increase impacts
• There is a large volume of academic research on the broader social effects of minimum
wage/benefit changes. We are setting aside any consideration of these issues.
• Rather, our focus relates to how changes in wages/benefits might affect airports:
• Impacts on airports and local governments
• Impacts on industries that are associated with airports (e.g., food service)
• Impact on employment
•
In general, increases in minimum wages result in small but negative impacts on employment
in industries of interest to airports
•
•
•
Low-wage labor demand in many industries is relatively inelastic, at least in short term
Increases at the lowest end of the pay scale produce “ripple effects”
Some evidence that minimum wage increases reduce annual wage growth over time
• Impact on business
•
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Impacts are mixed
•
•
•
•
Wage costs increased
Employee turnover reduced (with particularly significant effects for food service and hospitality)
Improved employee satisfaction and productivity
Some impact on pricing
Key Considerations
• Impact of changes in wages and benefits depend on three main variables
1. Whether businesses are directly affected by the policy change (e.g., airline employees versus
concession workers), and if they are subject to different state wage requirements
2. Whether an airport tenant or concessionaire is subject to a “street pricing” concessions
policy where off-property competitors operate with lower labor costs
•
Ancillary consideration: How vigorously the concessions policy may be enforced
3. Whether affected businesses report fundamental changes in profitability due to airportimposed wage/benefit policy, thereby causing firms to renegotiate their concession
agreements
•
•
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Loss of revenue due to decreased sales stemming from price hikes to cover wage increases
No change of prices, but losses of net margin
The workforce of interest at the airport
• Employment at airports span across many industries
• Airlines, Government (Federal, State/Local), Ground Handling, Concessions, Security, Cleaning,
Maintenance…etc.
• Bear in mind, however…
•
•
Not all employees are subject to the wage policy
A lot of workers at airports will not be subject to a wage/benefit policy:
•
•
•
•
Typically affected industries include:
•
•
•
•
•
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Airline employees
Government employees (FAA, CBP, law enforcement, etc.)
Skilled trades (e.g., electricians, carpenters, plumbers, etc.)
Passenger Related Security Services
Cargo Related & Ramp Services
In-Terminal and Passenger Handling Services
Cleaning Services
Concession Services
The importance of airport concession policies
• Airport concession programs
•
•
Airports derive significant revenue from nonaeronautical sources, which includes concession
programs
The ability for these programs to stay competitive is
of critical importance to the airport
• The pricing policy tends to dictate the
competitiveness of the concession program
Between 41% and 46% of the
airport operators surveyed
indicated the use of street pricing
plus 10% for their food and
beverage, convenience retail, and
specialty retail concessions, while
between 33% and 38% indicated
that they use street pricing with
no markup.
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• Concept of “street pricing”
• The prices of a particular good or service offered at the
airport is identical to the same good or service off the
airport – that is, on “the street.”
• Airport concession program policy
•
•
Most frequently used policy is street pricing + 10%
… followed closely by street pricing with no mark-up
Consider the pricing pressures on concessionaires
Copyright - Frank Rogozienski
In-terminal concessionaires
• In general, airport concessionaires can
base their prices to consumers against
similar businesses off-airport (e.g., food
service, convenience stores, and other
retail)
• If wages increase, the extent to which
labor costs are passed along to
consumers depends on the market and
the concessions pricing policy
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Copyright - Ed Suominen
On-airport property tenants
• There are no comparable off-airport
comparison firms against which prices
can be evaluated (e.g., ground handlers)
• If wages increase, the costs are likely to
be passed on to the airport or airlines
• There is no off-airport competitive
equivalent that would constrain price
increases
Our findings: Impact on prices
• In general, most employers made no changes to their prices offered to
downstream purchasers …. at least in the short term
•
•
Relatively few firms are able to adjust prices to account for the higher labor costs,
in some cases due to contractual constraints (for the short-term only)
Where firms raised prices, impact was relatively minimal.
• Therefore impact on traveler is considered insignificant.
Key survey findings…
1
Over
80%
of unique surveyed firms did
not raise prices after the wage
policy implementation
2
3
10
17%
13%
of firms raised
Only
wage policy
prices between 2014 and 2016…
of surveyed firms rose prices directly
in response to the
Our findings: impacts on employment
A large portion of the employment base remains unaffected -- many earn
more than minimum wage
Key survey findings…
1
2
3
11
Between 2014 and 2016, all surveyed firm employment increased
Employment in among covered services rose
25%
14%
with increases in
every job categorization
Therefore… No short-term significant employment impacts observed for
“covered services” due to contractual obligations
Our findings: Impact on airfares
Copyright - David McKelvey
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•
Very complex issue that depends on a
number of factors
•
Hint available from: U.S. Government
Accountability Office studied how airlines
would adjust prices in response to change in
Passenger Facility Charges (PFCs).
•
Airlines may be able to pass through costs to
passengers in less price-sensitive markets,
but not in others.
•
Bottom line: The only stakeholders that
know are the airlines. Competitor pricing,
fuel costs, and (new) agreements with
pilots/flight attendants will drive pricing
more than relatively small increases in
airport-related costs
Outstanding questions…
Copyright - Nicola Delfino
What are the results over a longer period, after existing pricing contracts have expired?
How will concessionaires react when it is time to renegotiate agreements with airports?
How will these changes affect an airport’s aeronautical and non-aeronautical revenue
streams?
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Contact Information
Steve Martin
Senior Vice President
InterVISTAS Consulting
p: 1-202-688-2236
c: 1-240-731-7803
e: [email protected]