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THE FUTURE OF LOW-COSTAIRLINES AND AIRPORTS
Eddy Van de VoordeDepartement Transport en Ruimtelijke Economie Universiteit Antwerpen
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Prof. Eddy Van de Voorde
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 low-cost airline sector
European Parliament, December 2007
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Prof. Eddy Van de Voorde
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
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Prof. Eddy Van de Voorde
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
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Prof. Eddy Van de Voorde
LIFE CYCLE FOR MARKET DEVELOPMENT OF LCAs
¦6. Market maturity
¦5. Consolidation
¦4. 2ndphase of entrants
¦¦¦3.Consolidation
¦¦¦¦¦¦¦2.Proliferation
¦¦¦¦¦¦¦¦¦1.Innovation
EastEurop
e
MainlandUK Rest of the world
New ZealandAustraliaAsia
EuropeCANAD
AUSALife cycle stages
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Prof. Eddy Van de Voorde
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?
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Prof. Eddy Van de Voorde
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)
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Prof. Eddy Van de Voorde
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
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Prof. Eddy Van de Voorde
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
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Prof. Eddy Van de Voorde
LCAs SOURCES OF COST ADVANTAGE
49%Low Cost Carrier compared to a traditional carrier
49-3Smaller administration and fewer staff / offices
Other advantages
52-3Reduced sales/reservation costs
55-6No agents or GDS commissions
Differences in distribution
61-5No free in-flight catering, fewer passenger services
66-7Minimal station costs and outsourced handling
Product / service features
73-2Outsourcing maintenance /single aircraft type
75-4Use cheaper secondary airports
79-3Lower flight and cabin crew costs
82-2Higher aircraft utilisation
84-16Higher seating density
Operating advantages
Low Cost Carrier
100%Traditional Carrier
Cost per seatCost reduction
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Prof. Eddy Van de Voorde
COSTS PER SEAT-KM
Source: Doganis (2006)
384.81Ryanair
556.9easyJet
Low Cost Carriers
729.03Iberia
10012.57British Airways
10012.57Alitalia
10413.02SAS
11614.52Air France
11714.62Lufthansa
12916.12Austrian
Traditional carriers
Index (British Airways=100)Cost per seat-km
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Prof. Eddy Van de Voorde
UNIT COSTS ON INTRA EUROPEAN FLIGHTS (2003)
0,00
2,00
4,00
6,00
8,00
10,00
12,00
14,00
16,00
18,00
0 200 400 600 800 1000 1200 1400 1600 1800 2000
Average Sector Length (km)
Cos
t per
AS
K (U
S c
ents
)
easyJet
Ryanair
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Prof. Eddy Van de Voorde
THE CURRENT LCA MARKET
European LCAs have benefited from a veryliberal 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
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Prof. Eddy Van de Voorde
WEEKLY PERCENTAGE SHARE OF SEATS IN EUROPE (summer 2006)
Weekly % share of Seats in Europe
Other(mainly charter)
AEA
No-frills
25,9%
55,7%
18,4%
‘No-frills’: 3.1 millions weekly seats
Ryanair
easyJet
Air Berlin
airlingus.com
bmibabyGermanwingsTransaviaJet2.comThomsonFlyWizzVuelingVirgin ExpressSkyEuropeHelvetic AirwaysSmartwingsHapag-Lloyd Express
31%
26%6%
24%
13%
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Prof. Eddy Van de Voorde
PRODUCTION INDICATORS FOR LOW-FARES AIRLINES (2006)
65064280.00.4Sverigeflyg
5190372473.01.1Myair.com
16850795977.02.7Sky Europe
9460496380.03.0Wizzair
241,1787412082.04.0Sterling
18n.a.n.a.n.a.79.34.6Hapag-Lloyd Express 3
206508316079.05.1Norwegian
271,4631057884.05.1Transavia.com
361,700116270n.a.5.5Flybe 2
624,000n.a.n.a.77,916,8Air Berlin 11214,22027876584.633.7EasyJet
1203,50044075083.040.5Ryanair
Number of aircraft
Permanent employeesNumber of routesNumber of daily
flightsAverage load
factor (%)Passengers
(million)Airline
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Prof. Eddy Van de Voorde
AVOIDING MUTUAL COMPETITION?
• Ryanair: concentrates on smaller markets and regional airports
• easyJet: focussing on bigger markets and primary airports
• Important question: will potential overcapacityresult in a price war and/or a consolidationwave?
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Prof. Eddy Van de Voorde
TRENDS IN THE LCA MARKET
• The European LCA market continues to growstrongly: Ryanair (+23%) and easyJet(+16%) in 2006
• Deusche Bank (May 2007): volume growth of ca. 15% per annum, as a combination of shareshift, GDP growth and rising propensity totravel
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Prof. Eddy Van de Voorde
ESTIMATED NUMBER OF AIRCRAFT AND PASSENGERS CARRIED BY
EUROPEAN LCAs UNTIL 2012 2005 2006 2007 F 2008 E 2009 E 2010 E 2011 E 2012 E
Number of aircrafteasyJet 108 120 143 160 177 194 211 228Ryanair 87 113 132 152 172 192 212 225others 152 181 221 260 302 347 395 458
Total 347 414 495 572 651 733 818 910
Passengers (millions)easyJet 28 34 38 42 46 51 55 60Ryanair 31 41 48 55 62 69 76 81others 45 56 67 79 92 106 122 141
Total 105 130 152 176 201 227 253 282
note: F - forecast; E - estimate
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Prof. Eddy Van de Voorde
ESTIMATED NUMBER OF AIRCRAFT AND PASSENGERS (UNTIL 2012)
0
50
100
150
200
250
300
2005 2006 2007 F 2008 E 2009 E 2010 E 2011 E 2012 E
Pas
seng
ers
(milli
ons)
Ryanair easyJet others Total
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Prof. Eddy Van de Voorde
SOME PRODUCTIVITY INDICATORS (06)
8,0008.31837.0Sverigeflyg
5,78938.06034.8Myair.com
3,17653.14623.7Sky Europe
6,52251.19137.0Wizzair
3,39649.14575.0Sterling
n.a.n.a.700n.a.Hapag-Lloyd Express
7,84632.56998.0Norwegian
3,48654.25182.9Transavia.com
3,23547.24197.5Flybe
7,98634.97636.3easyJet
11,57129.29256.25Ryanair
Passengers / employee
Employees / aircraftPassengers / aircraft / day
Daily flights / aircraft
Airline
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Prof. Eddy Van de Voorde
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!
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Prof. Eddy Van de Voorde
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
LCAsBANKRUPTCIES
OR MERGERS
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Prof. Eddy Van de Voorde
TYPOLOGY OF AIRPORTS
Stansted, Luton, Lübeck, Frankfurt-Hahn
London-City, Bremen, Stuttgart
Barcelona, Gatwick, Copenhagen
Frankfurt, Charles de Gaulle, Amsterdam, Heathrow
Examples
Possible but untypical**
Yes or NoYes or NoYesConnections outside Europe
NoNoNoYesMain airport of the national flag carrier
Not applicable *< 10 million>10 million> 20 millionSize in passengers per year
Low-Cost AirportFeeder/Regional airport
Secondary HubPrimary Hub
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Prof. Eddy Van de Voorde
VARIOUS LOW-COST AIRPORT BUSINESS MODELS
• Lower aeronautical charges, leading to lowerfinancial return, so that one looks for othernon-aeronautical revenue sources
• Airport’s hinterland influences bargainingpower and positioning
• Low-cost market is highly volatile• Constant threat to abandon service
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Prof. Eddy Van de Voorde
OPERATING PROFIT PER PASSENGER
Average0.6%21%Average
Austrian-4.0%32%Vienna
SAS-2.7%4%Swedish Airports Group
SAS-2.7%27%Stockholm
Lufthansa-0.4%4%Munich
British Airways8.3%37%London-Heathrow
British Airways8.3%30%London-Gatwick
Lufthansa-0.4%4%Frankfurt
SAS-2.7%40%Copenhagen
TAP-0.7%15%ANA (Portugal)
Air France/KLM2.3%22%Amsterdam
Air France/KLM2.3%17%Aéroports de Paris
Iberia1.6%19%AENA (Spain)
Hub dominating airline
Operating Profit (Airline
Performance Indicators 2006)
Operating Profit (Airport
Performance Indicators 2006)
Airport Company
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Prof. Eddy Van de Voorde
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
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Prof. Eddy Van de Voorde
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)
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Prof. Eddy Van de Voorde
BENEFITS FOR REGIONAL ECONOMIES FROM THE LCA ACTIVITIES
Passengers generated (2003): 316000;Average spent per business incoming passenger: 431.40€.Average spent per tourism incoming passenger: 496.52€.Total economic impact of foreign passengers: 149.2 millions €.
Pisa, Italy (c)
Taxes paid 91 millions €;Cost & productivity advantages for companies in region: 147.6 millions€;Average spent per incoming passenger: 285.42€.
Cologne Bonn, Germany (b)
Passengers generated (2003): 253000;Direct income: 8.4 millions €;Indirect income: 135 millions €;Induced income: 272.4 millions €.
Carcassone, France (a)
Main findingsAirport, Region
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Prof. Eddy Van de Voorde
MODAL SHARE EVOLUTION BEFORE AND AFTER INTRODUCTION OF HST
SERVICES
(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(b)10010037 (ª)100100Total
-83644-82129Car and bus
355116327240Train
-271340-24731Aircraft
ChangeAfter (1984)Before (1981)ChangeAfter (1984)Before (1981)
AVE, Madrid - Seville lineTGV, Paris - Lyon line
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Prof. Eddy Van de Voorde
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
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Prof. Eddy Van de Voorde
CONCLUSIONS (2)
• Reaction of LCAs to the new Europeanregulations such as compensation of travellersis not yet known
• Information is still insufficient on the possiblereactions of primary airports towards LCAs
• Some airports and airways are subject tocongestion, resulting in a shortage of goodslots
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Prof. Eddy Van de Voorde
CONCLUSIONS (3)
• Unlike the airline sector, the European airportsector 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