It’s not often that one hears Denver International Airport referred to as a hub in a global network of business operations that offer speed and global connectivity. In some airports, they also offer predictability, a key characteristic of efficient business processes. John D. Kasarda, PhD, the author of the term “Aerotropolis,” when speaking about the importance of airports, says,
They are also powerful engines of local economic development, attracting aviation-linked businesses of all types to their environs. These include, among others, time-sensitive manufacturing and distribution facilities, such as aerospace, biopharma, electronics, and e-commerce; hotel, entertainment, retail, convention, trade and exhibition complexes; and office buildings that house air-travel intensive executives and professionals.
This potential is driving many airports around the world to develop a set of design criteria that makes themselves more attractive to passengers, airlines, logistics operators, and investors. These airports have a long-term strategic focus on how to optimize the assets they own. They want to generate revenue, profits, jobs, and economic development for their regions.
Not all airports will be aerotropolises. Some are too old and crowded to make the adjustments necessary. Others do not have the necessary components like multimodal connectivity, hub or gateway status, or the land available for development. Others have the components, but have decided that a comprehensive strategic plan that incorporates the airport master plan, the aerotropolis master plan and the business development plan is not necessary.
This last model will develop its land, but its development will be in an ad hoc, uncontrolled, and haphazard manner, thereby running the risk of the sub-optimization of its development. What is the path that DIA and the surrounding communities will choose?
DIA and the surrounding land owners and communities want to attract and keep investors so that the revenue streams from the commercial development will attract great tenants, increase the local tax basis, and increase DIA’s revenue stream. If that occurs, then DIA can lower the fees it charges airlines; lower fees attract more airlines, flights, and destinations. This improves connectivity. With improved connectivity, DIA becomes more attractive to investors. And the cycle continues.
Financial investors, developers, and end-users that build their own facilities want to preserve the value of the assets in which they have invested. Financial investors are looking for strong tenants, annual rent increases, and accretive value of the asset over the term of their investment. The type of asset in which they invest must generate the returns required and meet the needs of their tenants. Many real estate investors who have a multi-country strategy often provide assets for the same customer in multiple locations. In essence, the customer defines they asset type.
The Need for a Master Plan
One way for the aerotropolis to ensure that the value increases is to have a master plan that defines the urban form, the aesthetics, the zoning restrictions, the setbacks, coverage ratios, landscaping, and the location of the different types of uses. If the investor does not see these types of plans, the site is less attractive. The master plan should also have a strategy for dealing with the stakeholders, an analysis of existing and targeted economic clusters to attract to the site, a governance model with easy access to the rules, policies and processes that have intuitive access, and a market analysis of the types, classes, and demand gaps for each type of commercial real estate. Denver, Aurora, Brighton, Commerce City, and Adams County began to work on a governance model. However, it appears that those efforts produced little of substance.
An aerotropolis has many stakeholders. Their interests are not stagnant. They change, evolve, and, at times, erupt to become crises. To manage these interests, a regular review of the master plan and the interests of the stakeholders are necessary. The reviews should produce conclusions and adjusted paths forward. Without this approach, conflicts will arise, policies will not get implemented, and opportunities will be missed. A “one-time plan” that predicts the future will most definitely not be successful. This is similar to forecasts which are always (1) wrong, and (2) will change.
In the November 19, 2015 Colorado Aerotropolis Visioning Study, Joint Study Review Committee, with Jeff Fegan, ex-CEO of DFW, he said,
The key to success is to communicate, cooperate, coordinate. Make the communities a part of the success. Show them how they will participate. Keep them up to date on progress. Build trust that cannot be challenged in the minds of the stakeholders.
The World’s Other Aerotropolises
In the United States, when compared to other countries, the development of the aerotropolis is a more politically complicated problem to resolve.
In Dubai, the government owns the new Al Maktoum Airport and the 140 square kilometers surrounding it. The Emirate is run by Sheikh Mohammed bin Rashid Al Maktoum. His uncle, Sheikh Ahmed bin Saeed al Maktoum is the Chairman of the Emirates Group and Dubai Aviation City Corporation. He has absolute control over the development of the Dubai Aerotropolis, Dubai South, and its 140 square kilometers of land. The rules for investment are easily available in the Dubai South offices.
Figure 1. Dubai South
At Moscow’s Domodedovo Airport (DME), one man, Dmitri Kamenshchik, owns the airport and the 40,000 acres around it.
Figure 2. Moscow Domodedovo and Its Land
At Zhengzhou, Henan Province, the government owns all the land (there are 100 other aerotropolises emerging in China). Questions about how to invest are easily available.
Figure 3. Zhengzhou Airport Economy Zone
In Singapore the government owns the airport and controls all the uses of the land, including the creation of a world class bioscience cluster. It is also the most proactive developer of the aerotropolis. It has defined its development plan, identified the clusters and has proactively marketed to the world.
Figure 4. Singapore’s Bioscience Cluster
In the USA there are typically multiple government stakeholders with critical interests in the operation of a gateway airport and the attraction of employers to the land surrounding the airport. In the emerging Denver aerotropolis, the political-entity stakeholders (Denver, Aurora, Adams County, Commerce City, and Brighton) have had input in the CDOT Visioning Study, in negotiations with DIA, in the creation of the inter-governmental agreement, and the resulting Aerotropolis Regional Transportation Authority (ARTA). They also have their own voters they have to please. “Pleasing” them may include such options as stopping development, denying the development of mineral rights, building only low-end residential developments to resolve the housing shortage, or to attract global supply chains, investors, tenants and their 3rd-party service providers.
Each of these communities have their own transportation plan that were consolidated into one plan for the region. Aurora’s NEATS (Northeast Aurora Transportation Plan) is a great example of a comprehensive transportation plan. Its “Aurora Places” is a great document that defines what the future vision for the development of the community is.
How these diverse interests are resolved with a comprehensive, metropolitan area master plan is a challenge not successfully navigated by communities in the US. It seems the local, parochial interests always prevail. However, it is not too late for Denver Metro to be the pioneer. Understanding the drivers behind the growth of air transportation is of fundamental importance.
Air Transportation for Passengers and Cargo
For an aerotropolis, the multimodal connectivity the airport offers is critical. A well-designed aerotropolis will attract Foreign Direct Investment (FDI). Seamless multimodal connectivity is a big advantage. If the airport is an international hub or gateway and its operations include long-haul, wide body aircraft, then the power of the magnet increases.
The global air transportation trend is away from reliance upon all cargo carriers to the use of the belly space of the wide body long-haul aircraft. A Boeing 777 ER can carry 25 tons of cargo in its belly. Ram Menen, ex-SVP of Emirates Sky Cargo, used to say, “These aircraft are my ‘invisible freighters’” and a critical component of their profitability. The operation of these aircraft brings additional revenue without additional overhead. It is marginal cost and marginal revenue. By using these passenger flights, the airline, the logistics operators, and the shippers provide better service at lower costs.
The Importance of Service to the Logistics Operators
Airlines depend upon the freight forwarders, 3PLs, and integrators (collectively, the logistics operators) to fill these bellies. These logistics operators determine which mode of transport, which airline, and which airport their cargo will utilize. If one airport operationally serves a catchment area better than another, the logistics operators migrate to that airport. If this happens, then the airlines that are dependent upon the belly cargo for profitability will follow.
To operationally “serve better’ means to have better speed and predictability in the cross-border transactions (customs clearance) and the transfer to the other domestic modes of operations once cleared. This is important to the logistics operators’ customers because bad things happen to supply chain performance if cargo is not cleared quickly, or if the clearance process is unpredictable. One consequence is that the product is not on the shelf when the consumer wants it. Another is the requirement to use faster and more expensive modes of transportation to compensate for the delays and, the third, is the need to build inventory along the supply chain that ties up working capital and reduces profitability. None of these consequences is good. If the logistics operators’ customers are not happy, the logistics operators are not happy. If they are not happy, the airlines are not happy. If the airlines are not happy, the airports are not happy.
The leading aerotropolises in the world understand the importance of their multimodal freight operations. They are also keenly aware of the importance of long-haul wide body aircraft connectivity for their passengers. The businesses behind the investment (manufacturers, 3rd party service providers, distribution companies, developers) in these aerotropolises understand that global business transactions require personal contact. McKesson, the healthcare company for wholesale medical supplies & equipment, and pharmaceutical distribution recently move its headquarters from San Francisco to Dallas’s Las Colinas master planned development. McKesson says, that without the connectivity DFW provides, they would have chosen another site.
If an airport does not have the international airfreight capability, it becomes less desirable as a site to establish multinational supply chain operations. If this process continues then the airport becomes a less desirable investment site and the money goes elsewhere.
Investor funds are fungible. That means they can go anywhere as long as the investor criteria are met. Investor criteria must be understood. They use these criteria to guide their purchase decisions, just like any consumer does when he or she wants to make a purchase. For an aerotropolis to facilitate the “sale” these criteria must be understood and how the competitive position of the aerotropolis compares to other investment opportunities they have.
Eventually, all of the land around a potential aerotropolis will be developed. Whether or not this will happen is not the question that should be of concern to the airport communities. What should be of concern are the following questions:
- Can the aerotropolis community ensure the appreciation of the investors’ assets by defining a plan and following it?
- Can the aerotropolis community create the products the investors will prefer over other opportunities at other sites in Metro Denver and at other aerotropolis developments elsewhere in the world?
- Does the aerotropolis community understand from a strategic point-of-view what are the economic drivers behind a path to accelerated development?
- Can the aerotropolis community incorporate this knowledge into the day-to-day management of the aerotropolis?
A competitive weakness DIA has today is its market position with international airfreight and international business passengers. DIA is working to resolve this. Recent additions of flights to foreign destinations bode well for the future. The influx of new industries and the strengthening of others in the Denver Metro area will provide the demand the airlines need to add destinations and flight frequencies.
Airlines, logistics operators and large multinational Real Estate Investment Trusts (REITs), private equity firms, Chief Supply Chain Officers, and Corporate Real Estate Officers are all parts of networks that keep them informed of changes that are of interest to them because they might affect the value of investment sites. Rest assured this trend in market share changes is being discussed.
It is important to understand that all investors are not alike. They all have their own investment criteria. Many of them have geographic scope, industry scope, and project scope. If their investment criteria do not include, for example, Eastern Europe and transportation and logistics, they will not invest in DME’s Aerotropolis. If they are not interested in the bioscience market then Singapore’s cluster will not be of interest.
There are strictly financial investors whose return comes from attracting tenants; there are developers who bring financing who are also dependent upon the tenants for their return on their investment (ROI), and there are the end-users who can also invest (manufacturers, logistics operators, hospitals and medical centers, educational institutions, F&B companies, etc.) who arrange the financing and who attract customers because of the magnetic force of the site and the service they offer.
The Denver aerotropolis community needs to understand the investment criteria of these investors and to develop and keep safe institutional knowledge about these criteria. This should be considered the intellectual property of Denver’s aerotropolis community.
Optimization of the aerotropolis
Without a comprehensive, multiple community master plan, the path to optimization of the aerotropolis will be more difficult. A good master plan will guide the community with the decisions that have long-term impact on the infrastructure required for decades to come. Building roads, lite rail, water and sewer infrastructure requires large capital investments. If the community decides to focus on infrastructure for only one part of the area and ignores the rest, it runs the risk of sub-optimization of that investment.
The Colorado Department of Transportation (CDOT) Visioning Study looked at a broad area. They had an understanding of how the aerotropolis will develop if managed properly and looked at this “Study Area:”
The Investment Cycle
If the existing economic clusters present in Denver increase their investments, add employees and, consequently, more flights to more destinations with more frequencies, then the impact on infrastructure will be far different from the impact of a single residential community, no matter how well designed and aesthetically pleasing it is.
The big picture is important.
If the elements are present the cycle of growth and investment can continue.
The Colorado Office of Economic Development and International Trade has a list of targeted industry clusters for development. DIA wants to attract those industries; the Colorado Air & Space Port and the Northern Colorado Regional Airport do as well; the cities of Aurora, Brighton, and Commerce City would welcome their investment.
In the creation of the master plan for many aerotropolises the management team requires the mapping of the supply chains of the typical company in the economic cluster and the structure of the cluster. They can then identify the strengths and weaknesses of each and work to attract the missing elements. Purdue University built this model many years ago, but it is still relevant today.
Model of an Economic Cluster
How does the Metro community resolve the competition for industries and clusters? It lets the market decide. Each community would adopt the comprehensive aerotropolis plan that “defines the urban form, the aesthetics, the zoning restrictions, the setbacks, coverage ratios, landscaping and the location of the different types of uses,” and the communities compete. The communities could execute a global road show and visit the headquarters of the target industries and promote the various community sites with land for development.
Texas is trying to attract investment from California. Their prospectus defines the advantages of Texas as an investment site. Houston, Dallas, and Austin then compete. The Minneapolis, Minnesota metro area is pursuing medical device manufacturers. Boston is after bioscience companies.
When potential aerotropolis investors consider the Denver Metro Area are they going to discover a comprehensive strategic plan that incorporates the airport master plan, the aerotropolis master plan and the business development plan. Or are they going to find an ad hoc disjointed approach to development? We shall see.
The Colorado Visioning Study captured the right idea in their Vision Statement:
A sustainable, efficient, well-connected, and globally recognized Colorado Aerotropolis that capitalizes on the economic opportunity surrounding the Denver International Airport through collaborative planning, development, and marketing.