TRAVEL, LEISURE & TOURISM Low cost airlines What's in it for tourism? Executive summary ADVISORY
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3 Introduction Methodology of research study The KPMG study is based on a series of primary and secondary research. Primary data was collected during January-February 2005 and included: Telephone survey of 1000 people on a national basis, representing the adult population of Hungary; Questionnaire-based personal interview with 400 passengers of low cost airlines, arriving or departing at Budapest Ferihegy airport; Questionnaire-based survey and indepth interviews with hotel managers, travel agents, top companies and airlines. In performing our analysis we have also considered statistics provided by The development of the low cost airline segment has changed the tourism landscape globally. Although these airlines have a rather short history in Hungary, they have generated new customers, opened up access to new destinations and also caused traditional airlines to rethink their business model and pricing strategies. But have low cost airlines changed the travel habits of Hungarians? Has the increased volume of air passengers presented the different sectors of the tourism industry with new profitable opportunities? The Travel, Leisure and Tourism Group of KPMG in Central and Eastern Europe has prepared a research study analysing what low cost airlines have brought to the Hungarian market and how the tourism industry could benefit as the low cost airline segment evolves further. This document combines the key findings of the study with some initial conclusions with respect to the potential impacts of low cost airlines. national and international tourism organisations, the Central Statistical Office, low cost airlines and passenger traffic figures from the Budapest Airport. For further information or to purchase a copy of the complete report, please contact Judit Drimmer at KPMG, at judit.drimmer@kpmg.hu or at 36-1-887-7349.
4 What can we learn from international experience? Market share of low cost airlines in selected Western European countries, for July 2004 Domestic Intra-Europe Austria 0.0% 15.9% Belgium 0.0% 26.5% France 4.0% 20.1% Germany 17.9% 16.3% Ireland 0.0% 42.2% Italy 13.9% 29.6% Netherlands 0.0% 19.4% Scandinavia 12.6% 20.6% Spain 0.1% 28.5% Switzerland 0.0% 17.0% UK 41.8% 39.4% Source: OAG Worldwide Ltd. Davy Analysis The penetration of low-cost airlines has increased significantly in Europe in the last few years. Europe has great potential for these airlines, given its favourable market characteristics: a large population base with great cultural diversity; an expanding European Union; and short distances between cities. Consequently, it is expected that the penetration rate of low-cost airlines will increase rapidly throughout Europe in the years to come. Ireland has the largest penetration rate, though it is almost entirely on Ireland-UK routes. The penetration rate of low cost airlines s in the UK is approaching 40% both domestically and intra-europe. Germany's domestic market is particularly competitive and indicative of the economic climate, with intense competition by a number of small low-fare (though not necessarily low-cost) operators. In Germany, the domestic penetration is the highest in Continental Europe, while intra-europe penetration has expanded from nothing to 16.3% over the last three years. While the product of low cost airlines is not differentiated ("no frills - just seat"), traditional airlines offer more complex products that include additional services on the ground or on-board of the aircraft. However, market competition has forced traditional airlines to reduce their fares. Furthermore, to be able to keep prices low and still remain competitive traditional airlines are under pressure to improve the efficiency of their operations and rethinking their business model. Some typical elements of the two different business models Low cost airlines Simple brand: low fare (even for one way) Short-haul, point-to-point service Direct booking over the internet or through a call centre (mainly) High aircraft utilisation (quick turnaround time) Traditional airlines Complex brand: price + service (e.g. business lounge, frequent flyer programme etc.) Short-haul and long-haul with connecting flight services Ticket sales mainly through travel agents Lower aircraft utilisation No cancellation or refund Cancellation or refund is possible depending on the fare/service structure
5 Evolution of passenger traffic at Budapest Ferihegy airport Hungarian air traffic has been recovering since the bad years of 2001-2002. In 2004 Budapest Ferihegy airport registered a record number of passengers: almost 6.5 million people embarked or disembarked in Budapest, which is more than a 28% increase compared to 2003. Thus, Ferihegy became the third busiest airport in Central Europe after Vienna and Prague. Total passenger numbers of selected Central European airports Source: airports' websites, KPMG research Based on the total number of passengers there are 5 low cost airlines in the top ten at Ferihegy airport. Low cost carriers could achieve spectacular growth last year: after one and a half years of operation in Hungary they already account for over 15% of the total market share at Budapest Ferihegy airport. It is also important to emphasise that low-cost airlines have contributed significantly to the growth of the air passenger market by focusing on a new passenger segment. Although there is certainly a "cannibalisation effect" generated by these airlines, international experience and passenger traffic at the Budapest airport show that low cost carriers grow the entire market. Market growth: number of passengers in the busiest month of the year Source: Budapest Airport
6 Will more people travel by low cost airlines in the future? Air travel became an affordable option for many people in Hungary. Market growth: air passenger traffic between Budapest and London in 2004 (total number of passengers) Source: Budapest Airport ---> start of operation on this route Since the appearance of low cost airlines in Hungary, we have seen increased competition between airlines on certain routes: the frequency of weekly flights grew significantly while ticket prices fell, even for traditional airlines. Since both leisure and business travellers are very price-sensitive in Hungary, low cost passenger traffic is expected to further grow in the coming years. Our survey demonstrated that more people would choose low cost airlines in the coming year. In fact, last year 5% of those Hungarians who travelled abroad used low cost airlines but about 14% who plan to travel this year will take a low cost airline. Source: KPMG telephone survey on a national basis
7 Have low cost airlines changed travel habits? New traveller segments have emerged in Hungary. The most preferred way for Hungarians to travel abroad is still by car: 68% of those who travelled abroad last year did so by car. The second most popular means of transportation was the coach; however, train came only after air travel. Considering the size and geographic situation of the country it is not a surprise that road travel is far ahead of air travel. Our survey also demonstrated that thanks to the low cost airlines, new traveller segments have emerged in Hungary: about one quarter of leisure travellers and 8% of business travellers would not have travelled otherwise. Would you have travelled even if there had been no such low fare opportunity? Source: KPMG Primary research Hungarians returning by low cost airline Why did you choose to travel by low-cost airline? Why did people choose to travel by budget airlines? It is obvious that most travellers choose low cost airlines for their low fare. However, 24% of our respondents preferred the schedule of a low cost airline to other airlines and 9% found that only a low cost airline had service to the required destination. Some business travellers also mentioned that a growing number of their business partners have opened offices or have their business located which are close to the airport from which low cost airlines fly. Source: KPMG Primary research Hungarians returning by low cost airline
8 How does the corporate market see budget airlines? It is not yet in the travel policy of big companies to choose budget airlines. We also found that low cost carriers have not yet been included in the travel policy of most of the large companies. Respondents of our survey mentioned that the top management of companies do expect high quality services at the airport or onboard of the aircraft (e.g. business lounge, participation in frequent flyer programme, on-board catering, etc.) Many times business travellers require to change the date of their travel at the last moment, therefore they need more flexibility in booking flights. Furthermore, low cost airlines often use airports such as, Beauvais (France), Charleroi (Belgium), Stansted (UK) or Bergamo (Italy) which are relatively far from a major city centres like Paris, Brussels, London or Milan. This also explains why the total cost savings potential for business travel by budget airlines is often overestimated.
9 What's in it for hotels in Hungary? Excellent year in tourism in Hungary with more international travellers and more accommodation fee income. According to figures from the Central Statistical Office, last year Hungary had an outstanding year in terms of international tourism arrivals and guest nights. In particular, 3, 4 and 5-star hotels had excellent performance: their occupancy rates increased by 4.6%, 6.2% and 9.8% respectively compared to 2003. Revenues from accommodation fees also increased by almost 11% compared to 2003. Change in international guest nights by holiday regions in 2004 Source: Central Statistical Office The winner of last year's incoming tourism was definitely Budapest in terms of international guest nights and revenue growth. Countryside hotels and other commercial accommodations did not benefit significantly from the increased number of incoming travellers. Growth of incoming air passengers and guest nights of selected countries (ranked by number of guest nights in 2004) Source: Central Statistical Office
10 More international arrivals from certain countries like the UK, Italy, Scandinavia. Although many factors can contribute to the performance of a tourism destination (e.g. Hungary joining the EU last May, extensive marketing activity of Hungary abroad, better economic performance of European countries etc.) but there is no doubt that improved accessibility of Hungary by air also contributed to the record number of visitors in 2004. For example the U.K., Italy, France, Norway and Sweden which were the key destinations of low cost airlines last year had outstanding figures in respect of guest nights. Our survey demonstrated that Budapest hotels have indeed experienced the impact of low cost airlines: According to interviews performed with hotel managers, check-in and check-out times have extended significantly (clearly due to late arrivals or early departure times of low cost airlines) Number of hotel bookings over the internet doubled last year when compared to 2003. Some hoteliers mentioned that 2004 was an outstanding year in terms of the number of guests arriving from the U.K. and Scandinavia (which is also reflected in statistics.) Our survey suggests that as a result of the availability of low cost airlines to Budapest, demand during the low season (November-February) has increased in 4 and 5-star hotels and occupancy levels have been more evenly spread. Would you have come to Hungary even if there had been no such low cost opportunity? Source: KPMG Primary research foreigners departing from Ferihegy by low cost airline
11 What can the future bring? Growing competition and a growing market of travellers. The development of the air travel market, driven by low cost airlines, has been increasing competition in the sector and Malév (and all other traditional airlines) will need to re-think new business concepts and new products to meet changing demands and new challenges. Due to market pressures, major international carriers have already started to transform their operations and either focus on the service-conscious passenger segments (e.g. British Airways and Lufthansa with premier services for their business class travellers; SAS introducing three classes of travel), or become more competitive by simplifying the product they offer (e.g. Aer Lingus eliminated business class and now targets budget travellers). Estimated growth of air passenger traffic in Hungary, 2005-2010 Source: Budapest Airport, KPMG estimations We assume that the competition will become fierce among airlines and some additional low cost carriers will enter the Hungarian market. The market share of low cost airlines will also grow over time. We expect that following the trend of other Western European markets, they will be able to partly cannibalise on the growth of charters by offering cheap flights to popular tourist destinations. Based on our forecasts, the gap between the market share of Malév and other traditional carriers will narrow and low cost carriers are expected to reach about 4 million passengers (i.e. 35% market share) by 2010. More need for airport developments in Hungary. The growing competition among airlines will increase the pressure on airport developments: Both Ferihegy airport and the accessibility to the city centre will need to undergo major developments in order for Budapest to successfully face the challenges of a growing air travel market. Hotels and other stakeholders of the tourism sector will have to focus more on travellers of budget airlines, and adjust their service offerings to the needs of this emerging segment. Such initiatives like the "Fly & Bus" program would definitely help countryside hotels to benefit from the growth of incoming travellers but regional airports may also contribute to local tourism developments. Furthermore, hotels could push their value proposition through joint promotions with low cost airlines.
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