THE FUTURE OF LOW-COST AIRLINES AND AIRPORTS. Eddy Van de Voorde Departement Transport en Ruimtelijke Economie Universiteit Antwerpen

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1 THE FUTURE OF LOW-COST AIRLINES AND AIRPORTS Eddy Van de Voorde Departement Transport en Ruimtelijke Economie Universiteit Antwerpen

2 1 BASED ON Macario, R., Reis, V., Viegas, J., Meersman, H., Monteiro, F., Van de Voorde, E., Vanelslander, T., MacKenzie-Williams, P. and H. Schmidt The consequences of the growing European lowcost airline sector European Parliament, December 2007

3 CORE CHARACTERISTICS OF LCAs High aircraft utilisation Internet booking Use of secondary airports Minimum cabin crew Lower wage scales Lower rates of unionisation among employees One class of seating Short ground turn-around times 2

4 3 CORE CHARACTERISTICS OF LCAs No cargo carried Very simple fare structures and price strategies Strict yield-management techniques E-ticketing Often no seat allocation No frills Point-to-point services and no connections

5 ECONOMIC MODEL 4

6 LIFE CYCLE FOR MARKET DEVELOPMENT OF LCAs 5 Europe Life cycle stages USA CANAD A UK Mainland East Europ e Asia Australia New Zealand Rest of the world 1.Innovation 2.Proliferation 3.Consolidation 4. 2 nd phase of entrants 5. Consolidation 6. Market maturity

7 KEY QUESTIONS Is the EU aviation sector moving in the right direction? Are the recently adopted EU measures sufficient to address the recent developments in the EU aviation sector? If not: how and through what measures can EU policy contribute to achieve an optimal result for the aviation sector and customers, taking into account safety and environmental concerns as well as EU requirements related to Competition Law and state aids? Does EU need a common approach towards airports, their capacity and their infrastructure? 6

8 7 TYPOLOGY The Southwest-copycats (e.g. easyjet) Subsidiaries (e.g. Snowflake) Cost-cutters (e.g. Aer Lingus) Diversified charter carriers (e.g. Thomsonfly) State-subsidised companies competing on price (e.g. Alitalia)

9 8 ADJUSTING BUSINESS MODELS Legacy carriers Discouraging potential entry of LCAs (e.g. price decrease, capacity increase, ) Acquisition of an LCA Creation of an LCA within traditional carrier Switch to more profitable markets Radical transformation of full service carrier into an LCA

10 ADJUSTING BUSINESS MODELS LCAs Tendency towards consolidation (e.g. Air Berlin); economies of scope? Revenue sources other than ticket sales (i.e. LCA evolves into LFA) Lower workforce costs Financing from airports and/or local authorities Customer on-board service 9

11 LCAs SOURCES OF COST ADVANTAGE 10 Cost reduction Cost per seat Traditional Carrier 100% Low Cost Carrier Operating advantages Higher seating density Higher aircraft utilisation Lower flight and cabin crew costs Use cheaper secondary airports Outsourcing maintenance /single aircraft type Product / service features Minimal station costs and outsourced handling No free in-flight catering, fewer passenger services Differences in distribution No agents or GDS commissions Reduced sales/reservation costs Other advantages Smaller administration and fewer staff / offices Low Cost Carrier compared to a traditional carrier %

12 11 COSTS PER SEAT-KM Cost per seat-km Index (British Airways=100) Traditional carriers Austrian Lufthansa Air France SAS Alitalia British Airways Iberia Low Cost Carriers easyjet Ryanair Source: Doganis (2006)

13 UNIT COSTS ON INTRA EUROPEAN FLIGHTS (2003) 12 18,00 16,00 14,00 Cost per ASK (US cents) 12,00 10,00 8,00 6,00 4,00 Ryanair easyjet 2,00 0, Average Sector Length (km)

14 13 THE CURRENT LCA MARKET European LCAs have benefited from a very liberal legal framework and geo-political factors such as: The Single European Aviation Act Underdeveloped air capacities The enlargement of the European Union Open-skies agreements

15 WEEKLY PERCENTAGE SHARE OF SEATS IN EUROPE (summer 2006) 14 Weekly % share of Seats in Europe No-frills : 3.1 millions weekly seats No-frills 18,4% 55,7% 25,9% Other (mainly charter) Air Berlin bmibaby Germanwings Transavia Jet2.com ThomsonFly Wizz 24% Vueling Virgin Express SkyEurope Helvetic Airways Smartwings Hapag-Lloyd Express 6% 13% 26% 31% Ryanair AEA airlingus.com easyjet

16 PRODUCTION INDICATORS FOR LOW- FARES AIRLINES (2006) 15 Airline Passengers (million) Average load factor (%) Number of daily flights Number of routes Permanent employees Number of aircraft Ryanair , EasyJet , Air Berlin 1 16,8 77,9 n.a. n.a. 4, Flybe n.a , Transavia.com , Norwegian Hapag-Lloyd Express n.a. n.a. n.a. 18 Sterling , Wizzair Sky Europe Myair.com Sverigeflyg

17 16 AVOIDING MUTUAL COMPETITION? Ryanair: concentrates on smaller markets and regional airports easyjet: focussing on bigger markets and primary airports Important question: will potential overcapacity result in a price war and/or a consolidation wave?

18 EVOLUTION OF EUROPEAN ROUTES SERVED BY SINGLE CARRIERS 17

19 GENERATION OF NEW PASSENGERS THROUGH LOW FARES 18

20 19 TRENDS IN THE LCA MARKET The European LCA market continues to grow strongly: Ryanair (+23%) and easyjet (+16%) in 2006 Deusche Bank (May 2007): volume growth of ca. 15% per annum, as a combination of share shift, GDP growth and rising propensity to travel

21 ESTIMATED NUMBER OF AIRCRAFT AND PASSENGERS CARRIED BY EUROPEAN LCAs UNTIL F 2008 E 2009 E 2010 E 2011 E 2012 E Number of aircraft easyjet Ryanair others Total Passengers (millions) easyjet Ryanair others Total note: F - forecast; E - estimate

22 ESTIMATED NUMBER OF AIRCRAFT AND PASSENGERS (UNTIL 2012) Passengers (millions) F 2008 E 2009 E 2010 E 2011 E 2012 E Ryanair easyjet others Total

23 SOME PRODUCTIVITY INDICATORS (06) 22 Airline Daily flights / aircraft Passengers / aircraft / day Employees / aircraft Passengers / employee Ryanair ,571 easyjet ,986 Flybe ,235 Transavia.com ,486 Norwegian ,846 Hapag-Lloyd Express n.a. 700 n.a. n.a. Sterling ,396 Wizzair ,522 Sky Europe ,176 Myair.com ,789 Sverigeflyg ,000

24 23 THE RISKS Some inputs will become much more expensive, because of: Current full order books of aircraft manufacturers Pilots shortage Congested airports and airways Crucial: the speed of adjustment!

25 Year Airline Country Event 1999 AB Airlines UK Bankruptcy Color Air Norway Bankruptcy Debonair UK Bankruptcy 2002 GO UK Bankruptcy 2003 Air Lib France Bankruptcy Buzz UK Merger with Ryanair Goodjet Sweden Bankruptcy 2004 Air Polinia Poland Bankruptcy Basic Air Netherlands Merger with Transavia Duo Airways UK Bankruptcy Flying Finn Finland Bankruptcy Germania Express Germany Merged with dba GetJet Poland Bankruptcy Jetgreen Ireland Bankruptcy Skynet Airlines UK Bankruptcy V-Bird Netherlands Bankruptcy VolareWeb Italy Bankruptcy 2005 Air Andalucia Spain Bankruptcy Eujet Ireland Bankruptcy Intersky Austria Bankruptcy Maersk Air Denmark Merged with Sterling 2006 Air Tourquoise France Bankruptcy Air Wales UK Bankruptcy Budget Air Ireland Bankruptcy dba Germany Merged with Air Berlin Flywest France Bankruptcy HiFly/ Air Luxor Portugal Bankruptcy MyTravelite UK Reintegrated into MyTravel Airways Snalskjusten Sweden Bankruptcy 2007 LTU Germany Merged with Air Berlin 24 LCAs BANKRUPTCIES OR MERGERS

26 25 TYPOLOGY OF AIRPORTS Primary Hub Secondary Hub Feeder/Regional airport Low-Cost Airport Size in passengers per year > 20 million >10 million < 10 million Not applicable * Main airport of the national flag carrier Yes No No No Connections outside Europe Yes Yes or No Yes or No Possible but untypical** Examples Frankfurt, Charles de Gaulle, Amsterdam, Heathrow Barcelona, Gatwick, Copenhagen London-City, Bremen, Stuttgart Stansted, Luton, Lübeck, Frankfurt- Hahn

27 26 VARIOUS LOW-COST AIRPORT BUSINESS MODELS Lower aeronautical charges, leading to lower financial return, so that one looks for other non-aeronautical revenue sources Airport s hinterland influences bargaining power and positioning Low-cost market is highly volatile Constant threat to abandon service

28 OPERATING PROFIT PER PASSENGER 27 Airport Company Operating Profit (Airport Performance Indicators 2006) Operating Profit (Airline Performance Indicators 2006) Hub dominating airline AENA (Spain) 19% 1.6% Iberia Aéroports de Paris 17% 2.3% Air France/KLM Amsterdam 22% 2.3% Air France/KLM ANA (Portugal) 15% -0.7% TAP Copenhagen 40% -2.7% SAS Frankfurt 4% -0.4% Lufthansa London-Gatwick 30% 8.3% British Airways London-Heathrow 37% 8.3% British Airways Munich 4% -0.4% Lufthansa Stockholm 27% -2.7% SAS Swedish Airports Group 4% -2.7% SAS Vienna 32% -4.0% Austrian Average 21% 0.6% Average

29 UNDERSTANDING THE IMPACT OF LCA GROWTH Impact on prices Impact on the environment Impact on regional economies Safety and security Freedom of movement of persons Competition in the air transport sector Competition and coorperation with other modes of transport 28

30 IMPACT OF ROUTE COMPETITION ON AVERAGE FARES (2004) 29

31 30 IMPACT ON REGIONAL ECONOMIES Three main classes: Direct effects (e.g. employment in activities directly related to air transport) Indirect effects (as a result of the increase in flows of people) Catalyctic effects (e.g. incoming investment)

32 BENEFITS FOR REGIONAL ECONOMIES FROM THE LCA ACTIVITIES 31 Airport, Region Carcassone, France (a) Main findings Passengers generated (2003): ; Direct income: 8.4 millions ; Indirect income: 135 millions ; Induced income: millions. Cologne Bonn, Germany (b) Pisa, Italy (c) Taxes paid 91 millions ; Cost & productivity advantages for companies in region: millions ; Average spent per incoming passenger: Passengers generated (2003): ; Average spent per business incoming passenger: Average spent per tourism incoming passenger: Total economic impact of foreign passengers: millions.

33 MARKET SHARE OF EUROPEAN LCA OPERATIONS IN SOME COUNTRIES 32

34 MODAL SHARE EVOLUTION BEFORE AND AFTER INTRODUCTION OF HST SERVICES TGV, Paris - Lyon line AVE, Madrid - Seville line 33 Before (1981) After (1984) Change Before (1981) After (1984) Change Aircraft Train Car and bus Total (ª) ( b ) (ª) Total traffic increased by 37%. A total of 10% is related to the estimated trend of growth and 27% is considered as induced traffic. ( b ) btotal traffic increased by 35%.

35 34 CONCLUSIONS (1) Consolidation trend Contestability characteristics should be guaranteed LCAs generate extra income from other sources; any limit? Avoid abuse of support by airports to new airlines Monitoring needed of all cost items

36 35 CONCLUSIONS (2) Reaction of LCAs to the new European regulations such as compensation of travellers is not yet known Information is still insufficient on the possible reactions of primary airports towards LCAs Some airports and airways are subject to congestion, resulting in a shortage of good slots

37 36 CONCLUSIONS (3) Unlike the airline sector, the European airport sector is expected to remain healthy and profitable There is competition between airports of the same size or role within the transport network Entries into the market are possible, most obviously by redeveloping former military airfields

38 37 CONCLUSIONS (4) No evidence that LCAs are causing any significant financial difficulty for larger airports It is clear that a unique LCA-model does not exist, even if most of the European LCAs use the southwest model as their basic reference