Perspectives of Low-Cost Carriers in Europe

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1 Perspectives of Low-Cost Carriers in Europe Eric Heymann Deutsche Bank Research AER hearing The possible impact of EU-guidelines on the cooperation of regional airports and low-cost airlines. Is regional development at stake? Barcelona, 21 April 2004

2 Air transport: return to growth path Global air traffic volume set to increase by approx. 6% p.a. in 2004 and 2005 Above-average growth rates in Asia Air transport to remain a growth industry in the long term: over 4% p.a. in the next 20 years By 2025 air traffic volume will have increased to 2½ times the present level Demand in newly industrialising countries expands Economic ties between regions continue to grow Competition keeps airfares under pressure But: terror attacks as sword of Damocles 2

3 Slowing growth of air transport (RPK) Period Average growth p.a. % , , , , , (Airbus) 4, (Boeing) 5,1 Sources: ICAO, Airbus, Boeing 3

4 Competition in international air transport Competition hampered by restrictive bilateral agreements, rules on nationality of ownership, and subsidisation of airlines Sector has suffered for years from excess capacities a combination of strong volume growth and unsatisfactory earnings is typical Liberalised markets only within the USA and within the EU competition works better here Totally free access to foreign markets not permitted EU has started an initiative for an open aviation area with the USA 4

5 Strategic alliances: a response to the market order Alliances were practically born out of need Bilateral agreements and rules on ownership nationality prevent expansion into foreign markets External growth through M&As has been hindered so far Market share of the three large alliances in 2002: 55% Depth of integration and strength of capital ties between member airlines differ Main goal of strategic alliances: a wider and deeper network Another global alliance unlikely 5

6 Alliances from a competition policy perspective Strategic alliances increase concentration and place constraints on market access Advantages for customers (greater range of services, etc.) vs disadvantages for competitors The greater the overlap between members networks, the greater the constraints on competition Links between complementary networks are less problematic Since airlines have not been able to merge, alliances are more than a second-best solution 6

7 Agenda for more competition in air transport Bilateral agreements are anachronistic, should be replaced by multilateral agreements Rules on ownership nationality should be eased mergers must become normal Privatisation needed, not state nannying of airlines In the past, subsidies running into billions have evaporated without bringing any benefit; they have distorted competition and prevented loss-makers from exiting the market Airline as national status symbol: an antiquated view 7

8 Low-cost carriers continue to advance Exorbitant growth of cheap flights Initially only in UK & Ireland, now spreading in Western Europe; 221 international routes from Germany alone Currently, around 50 low-fare airlines in Europe Weekly available seats in Europe, : +300% and in Germany, 2002 alone: +400% Boost to growth of many regional airports LCCs generate additional demand, but also poach from traditional airlines Market share of LCCs (passengers in Europe) set to rise from approx. 10% to 20-25% by

9 LCCs barely affected by global competition rules LCCs not involved in intercontinental operations Rules on ownership nationality and bilateral agreements are irrelevant in EU single market Cabotage permitted in the EU since 1997 State influence on LCCs is weak Direct subsidies to LCCs are relatively insignificant No legal obstacles to market exit or consolidation in the sector Result: competition among LCCs in Europe is immense 9

10 Strategies of low-cost carriers I Well-known advantages on the cost side No frills : no free meals or snacks, no seat reservations, no frequent-flyer programmes, no lounges, etc. Single aircraft type: lower maintenance/training costs Aircraft on the ground for short times Lower wage costs or longer working hours Concentration on airports with excess capacities. Result: market power; not dependent on hubs Point-to-point instead of hub-and-spoke LCCs do not (yet) go in for cooperative arrangements 10

11 Strategies of low-cost carriers II Concentration on private customers and pricesensitive business travellers Private customers more important in the long run Private customers generally more price-sensitive than business travellers Business travellers interested in frequent flights and fast connections, thus a preference for hubs and traditional airlines Private trips will probably exceed business trips Flexible tourists increasingly use LCCs: northsouth services growing in importance Competing with charter airlines 11

12 Low-cost carriers: consolidation inevitable Excess capacities are pre-programmed and will exacerbate competition; pressure on airfares Increasingly, oligopolies on individual routes Number of M&As will increase Competition with traditional airlines, rail and road transport remains strong Governments unlikely to prevent bankruptcy of LCCs (unlike flag carriers) In the long run, a handful of LCCs will remain But: market access also fairly easy (aircraft leasing) 12

13 Regulation in the low-cost segment I Guiding principle: abuse of dominant market role (e.g. setting of landing fees) is to be prevented Both LCCs and airports can have market power: regulation is necessary in these cases Many cases of mutual dependence of LCCs and (regional) airports LCCs often have to use regional airports with excess capacities: access to hubs is blocked or too expensive Airports with spare capacity seek to generate additional revenues through business with LCCs 13

14 Regulation in the low-cost segment II Fierce competition among (regional) airports and among LCCs Market forces intact: ex-post regulation and monitoring should generally be sufficient Costs for extensive (ex-ante) market regulation can exceed benefits for consumers Direct subsidies for airports and LCCs distort competition If subsidies are given, they have to be permitted to every competitor (level playing field) 14

15 Agenda for policymakers Local policymakers must strive to create an appropriate framework/infrastructure Airports easy to reach; connections with other means of transport Environmental protection, noise protection Investigate possibilities for expansion well in advance Privatisation of regional airports would give them greater freedom in negotiations with LCCs Differential pricing, e.g. discounts for large customers Special offers to attract potential new customers This enhances the position in competition with other airports 15

16 Perspectives of Low-Cost Carriers in Europe Eric Heymann Deutsche Bank Research AER hearing The possible impact of EU-guidelines on the cooperation of regional airports and low-cost airlines. Is regional development at stake? Barcelona, 21 April 2004

2. Expansion of network / Enhance Competition:

2. Expansion of network / Enhance Competition: ADVANTAGES: Africa which could lead to an increase of tourists to South Africa and the creation of new business opportunities. Trade could also benefit through the availability of new airfreight links.