The Low Cost Airline Phenomenon and its effects on airports

Transcription

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Low Cost
Airport Terminals
Report
Edition 1
2
Published by
Level 4, Aurora Place, 88 Phillip St
Sydney NSW 2000, Australia
Tel: + 61 - (02) 9241 3200
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www.centreforaviation.com
Editor:
Peter Harbison
Executive Chairman
Centre for Asia Pacific Aviation
Principal Author:
David James Bentley
Centre for Asia Pacific Aviation
UK Regional Manager
First Flight House, 29 George Street, Shaw, Oldham,
Greater Manchester, UK
Tel/fax +44 (0)1706 881560
[email protected]
Contributors:
Richard Pinkham, Derek Sadubin
and Ian Lowden, Managing Director, RDG Solutions, Manchester UK
© 2008 Centre for Asia Pacific Aviation
No part of this publication may be reproduced, or transmitted in any form,
without the prior permission of Centre for Asia Pacific Aviation. This report is
for internal use only by full time employees to the purchasing company.
Disclaimer: Centre for Asia Pacific Aviation has made every effort to ensure
the accuracy of the information contained in this publication. The Centre
does not accept any legal responsibility for consequences that may arise
from errors, omissions or any opinions given. This publication is not a
substitute for specific professional advice on commercial or other matters.
Low Cost Airports & Terminals Report
1st Edition, 2008
3
Editor’s Introduction
This report draws heavily from experiences, examples and case studies
involving European airports. This is where the most intensive LCC activity
has occurred over the past decade. As a result, airport operations and
behaviour have changed in many cases, sometimes beyond recognition.
The most dramatic impacts have been on “secondary” airports near – and
sometimes not so near - large cities. These were often previously often
unused, or greatly under-utilised. Life has been breathed into them by the
arrival of one or more LCCs.
At the same time they, as well as some longer-established airports, have
been catapulted into a world of competition for fast growing point-to-point
traffic. In the process, they too have demonstrated innovative and
competitive responses, reflecting the nature of the new airline type(s).
In essence, for the first time, airlines began to shape the way airports
operated.
However, unlike airlines, airports have only a relatively limited armoury of
competitive options. They are given their geography; infrastructure is largely
inflexible and long term, capital planning needs do not synchronise with
airline spending profiles, and, despite airline aggression (LCC and full service
alike) aimed at reducing aeronautical charges, reducing charges alone
cannot sustain air services where they are otherwise unviable.
This report therefore looks at the various ground-breaking ways in which
airports have reacted in this new and challenging environment. Some have
been more successful than others. The mistakes made will often provide
valuable lessons for others to learn from. But every airport is different, just
as every airline market is different in basic ways.
There are however two vital messages: (1) LCCs offer remarkable
opportunities for rapid growth, sometimes with proportionately higher risk;
and (2) the innovation and creativity of LCCs are necessary ingredients in
responding effectively to the new profile of airline operation.
Peter Harbison
January 2008
1st Edition, 2008
“LCCs offer remarkable
opportunities for rapid
growth, sometimes with
proportionately higher
risk and the innovation
and creativity of LCCs
are necessary
ingredients in responding
effectively to the new
profile of airline
operation”.
4
Table of Contents
Stop Press ............................................................................................................................ 7
Chapter 1 ............................................................................................................................ 15
The Low Cost Airline Phenomenon and its effects on Airports ....................................... 15
1.1 A brief history of the LCC ............................................................................................................ 16
1.2 Where is the LCC industry heading? ........................................................................................... 23
1.3 Is the LCC honeymoon over? ....................................................................................................... 28
1.4 Pressures placed on airports .......................................................................................................... 31
1.5 How do airports position themselves in this environment? .................................................... 33
Chapter 2............................................................................................................................ 36
The demands placed on airports by low cost carriers ...................................................... 36
2.1 The emergence of the two-tier and low cost airport ................................................................. 38
2.2 What do low cost airlines actually want from airports? ............................................................ 41
2.3 Case studies ...................................................................................................................................... 43
2.4 How airports can take advantage of the environment created by the LCCs – market
creation .................................................................................................................................................... 47
Chapter 3............................................................................................................................ 51
Creating a thriving new airport: Two case studies from Europe ...................................... 51
3.1 Liverpool John Lennon Airport ................................................................................................... 53
3.2 Positive parallels to be drawn........................................................................................................ 68
3.3 Pitfalls facing other LCAT operators arising from these case studies.................................... 69
Chapter 4............................................................................................................................ 72
Low cost airports & terminals in Europe ......................................................................... 72
4.1 United Kingdom ............................................................................................................................. 74
4.2 Switzerland ....................................................................................................................................... 91
4.3 France ............................................................................................................................................... 95
4.4 Belgium ........................................................................................................................................... 100
4.5 Hungary .......................................................................................................................................... 104
4.6 Poland ............................................................................................................................................. 106
4.7 Italy .................................................................................................................................................. 110
4.8 Iceland............................................................................................................................................. 113
4.9 Spain ................................................................................................................................................ 115
4.10 Finland .......................................................................................................................................... 118
4.11 Sweden .......................................................................................................................................... 122
Chapter 5...........................................................................................................................126
Low cost airports & terminals in North America ............................................................126
5.1 Introduction ................................................................................................................................... 128
5.2 Pittsburgh Airport ......................................................................................................................... 130
5.3 Chicago Midway Airport.............................................................................................................. 132
5.4 Baltimore-Washington International Airport ........................................................................... 136
5.5 New York J F Kennedy Airport ................................................................................................. 138
5.6 Austin Bergstrom Airport, Texas ............................................................................................... 142
5.7 Dallas Love Field .......................................................................................................................... 144
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Chapter 6...........................................................................................................................154
Low cost airports & terminals in Asia Pacific .................................................................154
6.1 Malaysia .......................................................................................................................................... 156
6.2 Singapore ........................................................................................................................................ 162
6.3 Thailand .......................................................................................................................................... 169
6.4 Macau Airport ............................................................................................................................... 173
6.5 Zhuhai Airport .............................................................................................................................. 175
6.6 Diosdado Macapagal Airport (Clark) ......................................................................................... 177
6.7 Melbourne ...................................................................................................................................... 179
6.8 Newcastle Airport ......................................................................................................................... 183
6.9 Gold Coast Airport ....................................................................................................................... 185
6.10 Sydney Airport ............................................................................................................................ 188
Chapter 7........................................................................................................................... 191
Prospects for the spread of LCATs .................................................................................. 191
7.1 India & South Asia ....................................................................................................................... 193
7.2 Indonesia ........................................................................................................................................ 198
7.3 New Zealand.................................................................................................................................. 200
7.4 North Asia...................................................................................................................................... 204
7.5 Africa ............................................................................................................................................... 207
7.6 Latin America ................................................................................................................................ 213
7.7 Middle East/Gulf States .............................................................................................................. 215
7.8 Russia .............................................................................................................................................. 218
Chapter 8.......................................................................................................................... 222
Airlines, airports and communities: A European perspective ........................................ 222
Chapter 9.......................................................................................................................... 227
Low cost airports and non-aeronautical revenues .......................................................... 227
9.1 Introduction ................................................................................................................................... 228
9.2 The way forward ........................................................................................................................... 230
9.3 Assessment of the key revenue streams .................................................................................... 232
9.4 The relationship with concessionaires ....................................................................................... 234
Chapter 10 ........................................................................................................................ 236
Other issues affecting LCATs ......................................................................................... 236
10.1 Opportunities for low cost cargo airports .............................................................................. 238
10.2 Economic impact and route development funding assistance to LCCs/LCAs ............... 241
10.3 Who are the passengers? ............................................................................................................ 248
10.4 Provision and use of lounges at LCAs .................................................................................... 251
10.5 Implications for ground handling companies ........................................................................ 252
10.6 Benchmarking and differentiating the costs and benefits of a separate low cost airlines
terminal versus a mixed-use one ....................................................................................................... 254
10.7 The costs and benefits to an LCC ............................................................................................ 258
10.8 What happens when FSCs and LCCs start to merge? .......................................................... 259
10.9 Can rail seriously challenge LCCs/LCATs? ........................................................................... 260
1st Edition, 2008
6
Case Studies
Case Study #1: – buzz – ‘a fair deal’ .................................................................................. 43
Case Study #2: – Southwest – ‘carrot and stick’ ................................................................ 44
Case Study #3: Creating new markets ............................................................................... 47
Case Study #4: Liverpool Airport – “above us only sky” .................................................. 53
Case Study #5: Frankfurt Hahn Airport ............................................................................ 60
Case Study #6: Coventry (West Midlands International) Airport – budget airport
ownership by an airline...................................................................................................... 74
Case Study #7: Robin Hood Doncaster-Sheffield Airport (RHDS) .................................. 77
Case Study #8: Glasgow Prestwick International Airport, Scotland – building a LCA with
support from cargo, property and MRO activities ............................................................ 80
Case Study #9: Three London airports compared – Stansted, Luton and Kent
International ...................................................................................................................... 82
Case Study #10: Geneva Airport – a political minefield .................................................... 91
Case Study #11: Marseille Provence Airport – Planning a dedicated low cost terminal ... 95
Case Study #12: Charleroi/Brussels South (BSCA) – Ryanair’s first European mainland
base ...................................................................................................................................100
Case Study #13: Budapest Ferihegy Airport – opening a low cost terminal that boosted
long-term investor interest................................................................................................104
Case Study #14: Warsaw Frederick Chopin Airport – operating a dedicated low cost
terminal in a former furniture shop ..................................................................................106
Case Study #15: Parma Airport – a low cost airport for Milan?........................................ 110
Case Study #16: Iceland – low cost airport driven by needs of an emerging airline ........ 113
Case Study #17: Don Quijote Airport, Spain – tilting at windmills? A textbook study in
regulation of a new low cost airport ................................................................................. 115
Case Study #18: Tampere-Pirkkala Airport, Finland – innovative use of a cargo building
but state aid issues cloud its future. ................................................................................. 118
Case Study #19: Lappeenranta, Finland – the low cost airport for Greater St Petersburg?
..........................................................................................................................................120
Case Study #20: Uppsala Airport – ‘a true LCA for the LCC’ – employs an airport
development forum ...........................................................................................................122
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7
Stop Press
The following developments have occurred in the opening
months of 2008.
Europe
Belgium
Brussels Airport announces plans to construct a Low Cost
Carrier Terminal (main report reference: Case Study #12)
The Board of Directors of Brussels Airport approved the construction of a
separate, dedicated low-cost terminal at Brussels Airport. The LCCT is
scheduled to be completed by Apr-09 at a cost of EUR20 million.
The project includes the reopening of part of the old passenger terminal and
the addition of a new, modularly extendable low-cost pier that, in a first
phase, will accommodate six aircraft at a time, extendable to 15 in the
future.
Currently only 3% of services at Brussels Airport are operated by LCCs. The
airport is targeting to increase LCC throughput to four million passengers –
or 10% of the total – to a level comparable to other large European airports,
although a timeframe was not disclosed to reach this target.
The airline has recently experienced increasing demand from LCCs, including
new services by easyJet, Vueling and Sterling.
Brussels Airport CEO, Wilfried Van Assche, stated that low cost travel is the
fastest-growing segment in intra-European air traffic and LCCs are
“increasingly opting for large international airports, on the condition that
they can use facilities tailored to their specific needs”.
According to Mr Van Assche, “by meeting this growing demand from the
sector, we safeguard the development of our airport in the coming years,
without compromising the full-service offer for which we enjoy an excellent
reputation both in Europe and around the world”.
The terminal is expected to reduce airport levies by approximately EUR6 per
passenger, with turn around times of less than 30 minutes.
The announcement comes after Brussels' main competitor, Charleroi Airport,
opened its much more expensive (EUR125 million) budget airline terminal on
29-Jan-08.
Officials hope the facility will eventually double the number of passengers
using the airport, located 45 km south of Brussels, from 2.5 million to 5.0
million per annum. Ryanair made Charleroi its main base in continental
Europe in 2001 and handles approximately 85% of total passenger
throughput.
The airport's operator, Brussels South Charleroi Airport (BSCA), is currently
76.4% state-owned, but 27.65% is due to be sold to private investors later
this year. Unnamed Chinese and French investors are reportedly interested
in acquiring the BSCA stake.
With two airports in Brussels actively chasing the LCC segment offering
dedicated facilities and reduced rates, airlines and passengers will be the big
winners. But as Europe’s LCCs head towards a 50% share of traffic in Europe
within the next decade, there will be plenty of budget passengers to go
around for the airport sector.
1st Edition, 2008
Brussels Airport: "Low Cost is
the fastest-growing segment in
intra-European air traffic. It is
expected that by 2015 low cost will
account for half of the traffic within
Europe. Low-cost carriers are
increasingly opting for large
international airports, on the
condition that they can use
facilities tailored to their specific
needs…by meeting this growing
demand from the sector, we
safeguard the development of our
airport in the coming years,
without compromising the fullservice offer…. With this new
development Brussels Airport will
also occupy a top-rank position in
Europe in the low-cost market
segment…the new low-cost
facilities will meet the specific
needs of the low-cost carriers,
allowing them to increase
efficiency by faster turn-around
times and a more efficient use of
staff and equipment. The airport
aims at turn-around times of less
than 30 minutes. Only direct flights
without transfers will be handled to
eliminate the need for an
automated baggage sorting
system. Business or first class,
and any related services such as
lounges and fast lanes, have no
part in this concept,” Wilfried Van
Assche, CEO. Source: Company
Statement, 08-Feb-08.
8
Finland (main report case study reference #18 Tampere and #19
Lappeenranta)
New low-cost terminal to open at Turku Airport (Finland)
Finavia, the governing body of Finnish airports, has introduced a ‘low cost’
concept at Turku Airport in Finland. The currently empty maintenance
building will be converted into a passenger terminal, which will have capacity
for between ten and 12 flights per day, at the beginning of Apr-08. Wizz Air
will be the first airline to take advantage of the concept, launching
international services between Turku and Gdansk, Poland.
The same pricing model as at Tampere-Pirkkala Airport will now allow LCCs
to operate from Turku Airport. Finavia’s subsidiary, Airpro, will rent the
terminal and operate passenger and ground handling services.
The new terminal will operate on the basis of Finavia’s low-cost concept,
which means that a single service provider produces, prices and carries out
all of the services that airlines require. Airlines will continue to pay the usual
airport charges, such as landing fees and navigation and security charges, as
per Finavia’s current price list.
The operating principle of the new terminal is based on a capacity that
allows only one aircraft to be serviced at a time. The terminal and ground
handling services will be provided at a basic level of service. Terminal 1 will
continue to provide the usual level of service.
Poland (main report section 4.6)
Meinl Airports International to develop a low cost airport in
Warsaw
Jersey based Meinl Airports International Ltd (MAI) announced plans to
develop a new airport for the metropolis of Warsaw and the Warsaw region.
The new airport at Sochaczew, located 40km West of Warsaw, will be
established primarily as an airport for LCC services and is intended to relieve
the existing Warsaw airport in this segment.
Following the signing of contracts, MAI and its local partners in the next few
weeks will finalise the development concept for the airport. The total
investment volume for the development of the airport amounts to
approximately EUR210 million, with the first services planned to commence
by 2011.
The airport has significant growth potential, as a considerable increase in the
capacity is expected for Warsaw. The existing Warsaw Okecie Airport will
reach its capacity limits in the coming years. It is expected that by 2012,
more than 2 million passengers per annum will be handled at Sochaczew.
Initially, MAI will acquire 40% of the new airport company, with the
remaining shares held by the state and a private Polish investor. It is
intended that MAI will, during the development process, increase its stake as
it becomes permissible in Poland, which is limited to 49% at the moment.
As a first step, MAI will provide the required equity to finalise the project
concept, and the local partners will provide the necessary land.
The project will be financed with a debt ratio of at least 50%. The definite
financing structure will be fixed at the start of construction in 2009 at the
latest. Based on the current plans, MAI’s equity investment in the project
will amount to approximately EUR50 million. The expected return on equity
for the project amounts to 17%.
MAI’s partner in the tendering process was the operating company of
Cologne-Bonn, which will also act as a consultant for the development of the
Polish airport. There are, however, no plans for the German airport to
acquire a financial stake in the project.
1st Edition, 2008
9
Cologne-Bonn Airport has substantial experience in developing a successful
low cost carrier concept. Since Germanwings, headquartered at the airport,
commenced its operation six years ago, the former regional airport
increased its passenger volume from 5.4 million passengers in 2002 to 10.5
million passengers in 2007.
Based on the final development concept, MAI plans to obtain necessary
approvals and permits by the end of 2008, so construction can commence
by 2009. After a construction phase of approximately two years and a
subsequent test phase, the new airport is expected to handle the first
passengers in 2011.
Based on a market and project study, Sochaczew is expected to handle more
than one million passengers one year after the commencement of
operations. Within five years of becoming operational, up to four million
passengers will be handled per annum, and in the long-term, annual
passenger volumes are expected to approach the two-digit million range.
Meinl Airports is taking a strategic stake of initially 10.1% in TAV
Havalimanlari Holding (Turkey), investing approximately EUR190 million for
the stake, and has the possibility to acquire a further 4% in TAV. MAI will
also gain a seat on TAV's Board. TAV has concessions to operate seven
airports in the region, including Istanbul Atatürk International, handling a
total of more than 30 million passengers per annum.
In the first transaction following its EUR700 million IPO in Apr-07 Meinl
Airports acquired Ulan Ude’s Mukhino Airport in the Lake Baikal region of
Russia, the first Russian airport sold to a foreign investor.
A relatively new company to the airport development scene, Meinl’s
Chairman was previously a senior executive at Flughafen Wien and the
parent company is the Austrian Meinl Bank.
Bremen Airport, Germany
The sale of a 27.65% stake in the Brussels South/Charleroi airport operating
company (see above) has raised the question of whether Ryanair, the
largest airline operator there by far, might take a stake itself. In fact Ryanair
has already ‘invested’ in airport facilities.
The airline loaned Frankfurt-Hahn airport, its important German base,
EUR12.5 million towards the funding of a new passenger terminal there in
2006. The following year it trumped that with a bigger deal at Bremen,
which will become its second German base. In this case it invested EUR10
million in the purchase of a low cost terminal facility there, a converted
former maintenance workshop, after emerging as the successful bidder in an
EU tender, and introduced 18 new routes in the first six months.
Typically for Ryanair it based the first aircraft there on 01-Apr, but this was
no April Fool joke. The management has once again spotted an opportunity.
The city of Bremen was down and out after its shipbuilding industries went
into decline but has since reinvented itself as a high-tech hub and has one of
the fastest growing local economies in the country. The airline claims an
enormous catchment area of 13 million potential passengers around an
airport that was largely ignored by foreign airlines before it arrived.
It also claims it will add 50% additional international passengers, create
1000 extra jobs and permit consumer savings of EUR100 million on air fares
in a year. Such is the typical manner of Ryanair claims that has endeared
the company to secondary and tertiary airport operators around Europe,
sometimes justifiably, sometimes not. The difference in Bremen is that
Ryanair has firmly put its money where its mouth is and it can point to the
generation of four million passengers at Hahn in six years.
1st Edition, 2008
10
North America
Chicago Midway Airport (main report section 5.3)
The City of Chicago issued a Request for Proposals (RFP) for a (minimum)
50-year lease on the city's Midway Airport on 13-Feb-08. It brings to a
conclusion over a year of negotiations with airlines, which collectively had to
agree the deal to a formula representing the extent of their presence there.
Five of the seven airlines have agreed and the other two have limited scope
to scupper the deal now. That, in itself, is an achievement.
Security has been an issue. The deal was first mooted at the time Congress
got stressed about the purchase of the US port operations of the British
company P&O by Dubai Ports World.
The operator will be attracted by a 50-year lease and by the fact it will not
be tied to a contract to build infrastructure within a rigid timescale.
Typically such leases are for 20-35 years globally though the original New
York one, under a 1996 pilot programme, was for 99 years. The City is
looking for a 'world class' operator and those like Aeroports de Paris,
BAA/Ferrovial (UK/Spain), Macquarie Airports (Australia), possibly Fraport
(Germany) and Schiphol Group (Netherlands), which has long had a
presence at JFK, will be attracted. In this (unusual) scenario 'the highest bid
(of the qualified bidders) wins.'
The fees the airlines pay will be regulated but non-aeronautical incomes will
not be. That will put pressure on the operator to maximise non-aero
revenues potentially at the expense of short check-in and rapid gate access.
One remaining problem is the fall out from the first pilot privatisation at
Newburgh (Stewart Airport), New York, where the new owner/operator, Port
Authority of New York and New Jersey (PANYNJ) says it will have to spend
USD500 million to prepare the airport as an alternative to JFK, LGA and EWR
airports. This on an airport that does not yet have one million passengers
annually. It begs the question of what the previous (private) operator,
National Express was doing for eight years and one would assume the
Chicago authorities would seek to learn from the experiment.
Austin-Bergstrom International Airport sees value in low-cost
terminal (main report section 5.6)
Austin Aviation Department and General Electric General Aviation Services
(GEGAS) are negotiating to construct a terminal at the South end of AustinBergstrom International Airport to serve ‘ultra-low-cost’ airlines. The airport
aims to operate two distinct airport products, one accommodating the
growing ultra-low-cost business model and the increasing numbers of
airlines adopting the low-cost operating structure, and the other to maintain
suitable facilities for ‘traditional’ network carriers.
Austin Aviation believes a low-cost terminal is the most suitable way to
recruit more LCCs to the airport, as it directly meets their needs and
requirements. Mexican LCC, vivaAeroBus, has already agreed to operate
between Austin and five Mexican destinations, provided the city and GEGAS
reach an agreement for the provision of low-cost airport facilities.
San Francisco International Airport reacts to LCC growth
San Francisco International Airport announced plans to renovate an unused
section of the airport to add up to 14 gates, as part of a redevelopment plan
that is expected to cost up to USD250 million.
The Airport Commission requested proposals to renovate part of the old
international terminal, known as Terminal 2 Boarding Area D, with the
renovation expected to take 30 months to complete. The renovations will be
funded by the airport’s capital improvement programme budget, and is
expected to take “at least another year of planning” for construction to
commence. Rising passenger traffic from the influx of LCCs, including Virgin
1st Edition, 2008
San Francisco International
Airport: "The new LCCs at SFO
indicate that they plan for very
aggressive growth within the next
two to three years. This… growth,
coupled with the continued
increase in international air traffic,
will impact the airport's ability to
accommodate the anticipated
increased flight activity in the
International Terminal, causing
SFO to be gate-constrained in
2010," John Martin, Airport
Director. Source: MediaNews, 07Sep-07.
11
America, Southwest Airlines and JetBlue Airways, have prompted the move.
San Francisco expects to handle 34 million passengers in 2008.
Asia Pacific
Australia
Melbourne Avalon Airport to handle international services (main
report section 6.7)
Melbourne Avalon Airport stated it would look overseas to attract airlines to
use the proposed AUD30 million LCC terminal. The new terminal would
facility international operations as early as 2009.
Linfox, the owner of the airport, is hoping the new terminal will be an
attractive alternative for long-haul LCCs emerging in the Asia Pacific region.
Linfox's plans, which are subject to Australian Government approval, include
a new terminal housing customs, quarantine, immigration, shops, duty free
and restaurants.
Linfox is hoping to at least triple annual passenger numbers at the airport
over the next three to five years as a result of the move and expected
domestic service expansion by Jetstar and other Asia Pacific LCCs. The
airport expects to accommodate two million domestic and international
passengers per annum once the terminal opens, in addition to freight.
China (main report section 6.5)
Guangzhou Baiyun to have an LCC terminal?
As a consequence of rising LCC entry into the Chinese market, Guangzhou
Baiyun International Airport (GBIA) confirmed it has launched a study to
evaluate the possibility of constructing an LCC terminal. This would be
China’s first dedicated LCC facility.
LCCs have been targeting other airports in the Pearl River Delta region.
Hong Kong and Macau airports are currently home to long haul LCCs Oasis
Hong Kong and Viva Macau, respectively, while AirAsia Group’s AirAsia and
Thai AirAsia operate to Shenzhen. Singapore’s Tiger Airways is the only LCC
currently serving GBIA, representing only 0.3% of total departing seats from
GBIA per week.
Despite its low base, international LCC traffic to China has been growing at a
rapid pace. OAG data reveals that in Mar-07, capacity on international LCC
services to China compared to Mar-06, doubled to 29,268 seats.
Xiamen to construct LCCT; Wuhan puts one in its Master plan
Xiamen Airport in China announced plans to construct a new terminal for the
exclusive use of LCCs. The USD36 million, 72,000 sq m terminal will replace
Terminals 1 and 2. Xiamen Airport handled 8.6 million passengers in 2007
and forecasts 10 million in 2008, making it the fourth largest airport in
China.
To the west, Wuhan Tianhe International Airport, in Hubei Province, has
released a long-term development Master Plan that calls for the construction
of four new terminals and runways. The airport is currently operating just
one terminal. The future Terminal 3 will be the largest among the four
terminals with total capacity of 30 million passengers per annum, while
Terminal 4 will cater exclusively to LCCs, although a potential opening date
was also not disclosed.
1st Edition, 2008
12
India
Mumbai Airport to have a separate LCCT by 2012 (main report
section 7.1)
Mumbai International Airport Limited (MIAL) announced plans to construct a
USD63.5 integrated LCC terminal by 2012 at (the existing) Chattrapati
Shivaji International Airport. Whether there are similar plans for the Navi
Mumbai (second) airport is unclear.
The proposed LCC terminal will have 150 check-in counters, 15 rapid taxibays, parking slots for more than 60 aircraft and car parking space to
accommodate over 5,000 vehicles. MIAL is planning to acquire more than
75,000 sq m of land by rehabilitating the adjoining slums to develop rapid
taxiways and parking slots. MIAL plans to shift the existing domestic
terminal at Santa Cruz to the international terminal situated at Sahar to
make a dedicated LCCT.
Malaysia (main report section 6.1)
Malaysia Airports considering transforming existing Kuala
Lumpur LCCT into cargo transportation hub once new LCCT is
operational
Malaysia Airports Holding Bhd (MAHB) stated it is considering transforming
the existing Low Cost Carrier Terminal (LCCT) at Kuala Lumpur International
Airport (KLIA) into a cargo transportation hub once the new LCCT is
operational in the next three to four years. The existing LCCT has capacity to
handle 10 million passengers per annum, which will be increased to
approximately 15 million passengers upon completion of renovation work by
year-end. The new LCCT, which is being fast-tracked by MAHB, will have
capacity to handle up to 30 million passengers per annum when it opens in
2010. Malaysia Airports Holdings Bhd is expected manage the facility, and
will be involved in the construction process, from design to issuing tenders
for various projects.
In 2007, passenger volume at KLIA reached 26 million, including seven
million utilising the LCCT.
The airport launched its ‘Food Garden @ LCCT’ at the budget terminal on 15Jan-08. The Express Rail Link, linking KLIA and the city centre, will be
extended to the LCCT once the terminal has a permanent location.
Thailand – Bangkok (main report section 6.3)
Difficulties persist at Suvarnabhumi Airport, well into 2008, as does the
‘vacillation’ referred to in the main text.
In Feb-08 the country’s Airline Operators Committee (AOC) called on the
new Sundaravej government urgently to raise operational standards at the
new airport. The AOC identified 19 critical issues including the need for the
government to commit to a ‘single airport concept for Bangkok’, with the old
Don Mueang Airport being used for LCCs. That would actually be a ‘dual
airport’ concept, and is indicative of the confusion that has seized the
proceedings like a vice.
Almost immediately, the Airports of Thailand (AoT) Chairman, General
Saprang Kalayanamitr, resigned, along with 14 board members, leaving the
newly elected People Power Party (PPP) coalition government free to appoint
a new Board.
AoT’s profits continued to fall in the first quarter of its financial year to 31Dec-07, by 33%. Most of the revenue gains (which were offset by higher
costs and much lower foreign exchange gains) came from the LCC sector.
Nevertheless the future for Thai and international LCCs as determined by
where they will fly to and from still remains unresolved. The AoT Board has
approved the proposed feasibility study for the Phase 2 of Suvarnabhumi
1st Edition, 2008
Malaysia Airports Holdings
Bhd: “When we originally opened
it early 2006, we expected it to hit
its 10 million capacity by 2012. But
traffic at the terminal has already
surpassed 7 million last year and
looks likely to hit full capacity
much earlier than anticipated…
The LCCT was always meant to
be a temporary solution. We will
be building a permanent low cost
terminal in three to four years time
near the main terminal,” Bashir
Ahmad, Managing Director.
Source: Singapore Business
Times, 24-Jan-08.
13
Airport but IATA will conduct it, reviewing not only the Master plan but also
the continued use of Don Mueang.
In the year to 31-Dec-07 Suvarnabhumi attracted 41.2 million passengers
(but –9.7% in Dec-07) while Don Mueang handled 4.8 million (-84.7%).
Middle East (Main report section 7.7)
Ben Gurion International Airport to convert Terminal 1 into LCCT
Ben-Gurion International Airport has announced plans to undertake a
USD890,000 upgrade programme to convert Terminal 1 into a low cost
terminal facility, scheduled to be completed in time for Summer peak season
in Jul-08.
According to Israel Airports Authority (IAA), the country’s Open Skies policy
is expected to bring about a large increase of international low cost and
charter services to the airport.
Ajman to have its own airport, driven by LCCs
A consortium of four Spanish companies will carry out the USD3.3 billion
Ajman International Airport project. The project was announced in Dec-07.
Ajman is one of the seven emirates comprising the UAE and is located
almost 30 km from Dubai. It has a population of less than 250,000 boosted
by migrant workers.
Construction of the international airport is set to commence in the second
half of 2008 in the Al Manama area of the emirate and to start operations by
2011. Spread over an area of six million square meters of, the Ajman airport
project will be completed in two phases. The first phase will comprise the
main arrival and departure terminal buildings, runway, cargo complex,
aviation school, aircraft maintenance workshop, free zone and commercial
area of 90 towers. The Ajman airport is projected to achieve more than one
million passengers in the first three years. Driven largely by low cost carriers
and cargo operations in the initial phase, the new airport expects to achieve
‘significant international passenger traffic’ in five years.
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Chapter 1
15
Chapter 1
The Low Cost Airline
Phenomenon and its
effects on Airports
The rapid development of low cost carriers (LCCs), also known as budget,
low fare, or no-frills airlines, has stimulated massive change in the airline
industry. Inevitably, changes of this magnitude have flowed onto other
parts of the aviation industry, as the increasingly powerful LCC sector has
pushed for cost savings and enhanced efficiency at every level of the
business. The airport segment has not been immune to these pressures.
Typically designed for traditional network airline operations, airports often
exhibit the same profile of ‘bundled’ services, many of which the LCCs do not
to require, yet still must pay for. Simultaneously, as network airlines adjust
their operations to compete with the LCCs (efforts that occasionally include
establishing their own low cost subsidiaries), they too are challenging the
airport pricing model.
In these circumstances, it was only a matter of time before airports also
began to diversify, with new facilities opening specifically to LCC traffic and
longstanding airports adjusting to meet the new demands by building low
cost terminals.
In order to understand the forces at work in this new environment, this
report will begin with a review of recent airline developments. Importantly,
the industry evolution now occurring is founded in a culture: the low cost
culture. This coincides with a growing consumer expectation much broader
than merely the aviation industry. In fact, ‘low cost’ is a catch-all generic
term that is now often applied as a marketing tool as much as a statement
of fact.
Low cost (not necessarily low price, which is a different thing but often
presented as the same) is a model that has been, and is still, applied to
other businesses, from bus travel to car hire to cinema seats to hotels and
now to even what was considered the ultimate luxury experience: cruise
vacations at sea.
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1.1 A brief history of the LCC 1
Deregulation, discounting and hub & spoke
Budget airlines first appeared in the USA in small numbers in the aftermath
of the President Carter era’s 1978 deregulation of the domestic US airline
industry. Then, budget carriers, often flying point to point, were known as
discounters rather than low cost airlines. They were complemented by their
alter ego, high revenue carriers. But eventually both modes faded away to
be replaced by carriers operating what was then regarded as the most
efficient model for transporting passengers in a country of the size and
scope of the USA: Hub and Spoke.
The model was supported by a new range of marketing gimmicks, such as
selectedly discounted fares and loyalty programmes. Given more convenient
service at competitive fares, customers stuck to the airlines they knew.
Marketing and distribution processes also favoured the larger incumbents, as
computer reservations systems (CRS) were progressively introduced. By the
mid-1980s, the first wave of discount carriers had subsided, with discounters
reduced to a slowly growing single-digit percentage of the domestic industry.
By this hub & spoke method passengers were carried from city A to city B by
individual airlines via airport C - or even airports C and D, in the case of
supporting major and minor hubs. Airport C might have a passenger
catchment area in its own right or it could exist primarily as a hub. Chapter
4 contains a section on a hub airport, Pittsburgh, which had little origin and
destination (O&D) traffic until its main tenant, US Airways, downgraded the
airport’s position in its system and the authority was forced to pursue pointto-point LCCs to fill part of the shortfall.
The hub & spoke method is tried and tested. The world’s biggest hub,
Atlanta-Hartsfield in Georgia, USA had 84.8 million passengers in 2006,
many of them simply passing through, and Chicago O’Hare and Dallas-Fort
Worth airports aren’t far behind, although the latter two are also large
population and business centres. The world’s biggest domestic and
international airports are still the hubs where there is an observable pattern
of connectivity between waves of arriving and departing aircraft 2 . Only in the
last five years or so have a significant number of US airlines sought to (re-)
introduce direct air services that avoid the hubs, operating to and from
smaller city airports if necessary.
Outside the USA, hub development did not follow quite the same pattern,
partly because the air transport industry did not have the same domestic
scope as in America and partly because no single airline was large enough to
take on the job itself.
Internationally, major hubs had naturally developed, where individual
airlines (occasionally those of small countries with a small indigenous
population) focused their services on the capital city or main airport,
applying two of the Freedoms of the Air 3 – the right to carry revenue traffic
to their country and the right to carry it from their country, back-to-back.
1
More detailed analyses of the rise of the global low cost airline industry are
contained in the Centre for Asia Pacific’s publications, “Low Cost Airlines in
the Asia Pacific Market” (2002), followed by a further report, "Low Cost
Airlines and the Asia Pacific Market: A Force for Change", in 2004. Other
useful source material can be found in the Centre’s publications, “Global
Airport Privatisation”, a 250-page report; the weekly newsletter, “Peanuts,
the Low Cost Airline Weekly”; and on the websites http://peanuts.aero and
www.centreforaviation.com.
2
London Heathrow airport, the world’s third busiest, is not really one of them
as most of its interconnectivity is random and unplanned.
3
The main Freedoms of the Air (simplified). One: The right of an airline to fly
over another country; Two: The right to land there for technical reasons;
Three: The right to carry revenue traffic from its country to that of another;
Four: The right to carry traffic from that country to its own; Five: the right of
an airline to carry traffic between two other countries, intermediate or
beyond. Six: the right of a country’s airline to carry traffic between two other
countries via its own – i.e. Freedoms three and four used ‘back to back’.
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This Sixth Freedom as it became known, helped, for example, KLM, SAS and
Swissair (Europe), Gulf Air (Middle East) and Cathay Pacific, Singapore
Airlines and Malaysia Airlines (Asia Pacific) become more significant
international airlines than their relatively small home country populations
would suggest. And the same applied to their respective home airports of
Amsterdam, Copenhagen, Zurich, Bahrain, Hong Kong, Singapore and Kuala
Lumpur.
In the 1980s, airlines such as Sir Freddie Laker’s Skytrain and Donald Burr’s
People Express challenged the power of the established airlines on
transatlantic routes, followed by Virgin Atlantic, which subsequently
metamorphosed into a mainstream carrier itself. Apart from the early
examples of LCCs within the USA, these were the first widely promoted
budget carriers and, especially in the case of Laker, best remembered.
They used established big city airports with big city prices, like London
Gatwick and New York JFK. At that time, stripped down airports to match the
stripped down onboard services had not been envisaged, nor surprisingly
were any significant efforts made to do so, perhaps because these airlines
were regarded generally as aberrations. Also, the home based airlines and
airports usually dominated or monopolised on-airport services such as
handling, catering and on-line maintenance.
After those airlines lost their battle, the concept of scheduled low cost longhaul travel took a back seat and was largely catered for by charter and
semi-charter services. The last 12 months has however witnessed a
resurgence of interest, with the emergence of a host of airlines like Oasis
Hong Kong and AirAsia X, specialised all-business class carriers like Eos,
Silverjet, Maxjet and L’Avion and hints that one or more presently short-haul
budget service operators like Ryanair may join them.
The rise of low cost operations
The one outstanding exception to the failure of the original LCCs in the USA
was, and is, Southwest Airlines. This airline has in particular profited from
the change in operating circumstances in the USA since the late 1990s.
Although it has been consistently profitable throughout its history,
Southwest too was generally regarded as an aberration in US domestic
markets. It was only the bursting of the high-tech bubble in 1999/2000 that
destroyed the traditional airline model in the world’s largest domestic
market. The effects of the reaction to the 11-Sep-01 terrorist attacks did
the rest.
Suddenly, the high-spending premium passenger market went into steep
decline, disclosing the thick layers of fat that the network carriers had built
up under the higher yields of the boom times. As the industry recovered
from the first Gulf War, it had been vibrant and the airlines expanded
rapidly. Unions took advantage of the growth to negotiate favourable
contracts that raised labour costs to unprecedented levels.
To cover these higher costs, airlines had attempted to raise fares, but leisure
travellers do not buy expensive tickets. So the airlines looked to business
travellers booking tickets on short notice, who valued the convenience of
frequent service at conveniently located airports. Business fares rose almost
50% between 1999 and 2001 4 . Last-minute business fares often were five
or six times more than leisure fares booked in advance. The strategy
backfired. In a newly constrained business environment, corporate buyers
and business travellers looked to travel on leisure fares even if it meant
advance ticket purchases and restricted stays. Then they started to look
again for airlines with cheaper fares. The discount sector flourished.
4
Many of the higher yielding business class fares were in fact
discounted/rebated, as full service airlines struck deals with Corporations to
keep their travel exclusive to their networks. One of the largest travel
accounts in the USA was Hewlett Packard, which was receiving up to 80%
discounts off premium fares just to keep its business.
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Southwest had grown rapidly to become the most profitable airline in the US
industry. Subsequently, many other discount airlines appeared such as
JetBlue, Spirit and Frontier. (Many also failed.)
As the majors struggled to regain profitability, it rapidly became clear that
the old fare structure was not going to come back, even if business
improved dramatically.
The established carriers have until recently, at least, stuck with the hub and
spoke system but the downturn at the start of this decade tested the
model’s ability to generate profitably. Only recently, and after massive
restructuring, is the hub-and-spoke model earning profits again.
Making sudden changes from this fundamental strategy involves massive
redirection and, for example, the renegotiation of an intricate framework of
contracts. If equipment and especially labour costs can be reduced (a prime
cause of the failure of those airlines in or only recently out of Chapter 11
administration), they can still do so and they may be able to while
challenging the discounters on price and offering more frequent services to
more destinations than the discounters.
Major airlines, led by Delta, mounted a last ditch attack on the divide
between the two basic carrier types in early 2005, with the introduction of
‘simplified’ pricing – essentially the removal of many yield-protecting
barriers to discounted fares, such as requirements for Saturday night stays
(designed to isolate business travellers who fly during the week). Previous,
more diluted, attempts had failed, but in most of the earlier cases the
attempt to reduce costs had been coupled with fare increases, whereas Delta
slashed them. The discounters operated on the fringe of the hub and spoke
system but since 2003 the number of secondary level airports to which they
fly has been growing.
1.1.1 Southwest Airlines – history and operating model
The significance of the Southwest model justifies a closer look at that
phenomenon. Southwest had become something of a legend in the industry
long before the late 1990s and is regarded as the grandfather of LCCs.
Many proposed LCC start-ups describe themselves as following the
‘Southwest model’ even where the only thing they have in common is a low
frills operation. In fact many derivatives have evolved, but the underlying
philosophy belongs with the Texas legend. 5
Starting life in fact before US inter-state deregulation in 1971 as a triangular
route, intra-state operator between its home base of Dallas and two other
major Texas cities, San Antonio and Houston, it was conceptualised as a fun
airline, as emphasised by its New York Stock Exchange designator LUV for
Dallas Love Field, its home airport.
Southwest Airlines – the essential facts
Founded
Owner
World
Rank
Profit
Base/s
Routes
Fleet
Founded in 1967, commenced operations in 1971
Publicly owned, listed on New York Stock Exchange
World’s 2nd largest airline by passenger numbers, 96 million (2006)
2006 net profit USD587 million (+38%)
7 bases, all in USA
64 destinations in the US
Over 500 B737s (-300, -500, -700s) with 129 on order. “One of the youngest
fleets in the US”, according to Southwest, at just under 10 years (sic)
Cost focused, but with increasing focus on yield, with new business traveller
products being added. Talking of expanding internationally
Remarkably it has not reported a loss since 1973. In 2006 its profit growth
disappointed and Southwest since took action to lower its capacity growth,
drop unprofitable routes and take only 19 aircraft deliveries in 2007 instead
5
In fact Southwest was not the first of its genre in the US; that was Pacific
Southwest Airlines as long ago as 1949, but Southwest is undoubtedly the
best known and longest surviving.
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of the 34 planned. It still had an operating margin of over 10% and an
operating profit of USD934 million with an average ticket price of USD105.
In its most recent quarter (3Q07), ended Oct-07, it managed to stay in the
black with a profit of USD251 million but higher fuel and staff costs and the
overly ambitious growth have all taken a toll, with most the troubles
reaching crisis point just as iconic founder, Herb Kelleher, stands down from
the Chairman’s spot.
The initial strategy Southwest developed included:
•
•
•
•
•
•
•
•
•
•
•
Low fares that competed with existing discounters such as (in the
1970s) Braniff, Continental and Texas International, coupled with:
Multi-functionality of staff;
High frequency point-to-point routes;
Quick gate turnarounds;
High aircraft utilisation, 13 hours or more each day
(six/seven rotations);
A demand for cost effective solutions at airports;
Standardised trip lengths, averaging 630 miles (1008 kilometres),
or 1.5 hours flying time;
Commonality of aircraft type (even now all its 490 aircraft are
Boeing 737 -300/-500 or –700);
Online booking – over 50% of reservations through the Internet,
subsequently rising to 70% in 2006;
No seat-assignment policy; and finally, but vitally,
A low cost culture which approaches religious fervour.
The four highlighted strategies are the ones that have done most to spawn a
new breed of airport - or at least a new type of gate/terminal operation.
Additionally, the core strategy of using secondary airports has been a
feature which airlines did not previously adopt.
1.1.2 Southwest’s wider influence
Many other airlines have sought to adopt some or all of the Southwest
design. The best known example is Ireland/Britain’s Ryanair, an airline that
was in severe financial difficulties on more than one occasion until it began
to mimic Southwest’s modus operandi in the early 1990s, and to take them
to new extremes, especially in the arena of cost control. Ryanair created a
network of airport bases in Europe from which to operate, and helped
expand many smaller ones that until then were little more than airstrips for
general aviation, enthusiasts and flying schools.
Ryanair – the essential facts
Founded
Owner
World
Rank
Profit
Base/s
Routes
Fleet
Founded in 1985
Publicly owned, listed on several Stock Exchanges
World’s 14th largest airline by passenger numbers, 42 million (2006)
2006-7 net profit EUR401.4 million (+33%), 1Q07 net profit +20%
Announced a profits warning for 2007
20 bases, all in Europe
454 routes across 24 countries (Apr-07)
Announced intention to launch a separate transatlantic airlines within four years
120 aircraft with 161 orders and 137 options (Apr-07)
New orders centred on single aircraft type – B737-800
One of the world’s youngest fleets, circa two years
Cost focused in extremis, as opposed to revenue focus
Spreads fixed cost over an ever-widening base
Announced a profits warning for 2007
Perhaps the most successful, but least loved, airline in the world
Europe’s other most significant LCC in the 1990s, easyJet, did not wholly
follow that pattern and continues to operate from primary, more convenient
airports. This is partly due to its take over of the British Airways LCC
subsidiary Go-Fly (Go) in 2002. That airline, initially sold by BA to a venture
capitalist, was never going to be an LCC in the Ryanair mould, with a focus
more skewed towards passenger-pleasing services and airports than cost
issues.
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Despite commonalities in other business operations – for example that both
airlines sell over 95% of their seats through the Internet – its costs (and
perhaps profits) compared with Ryanair’s reflect those choices. Ryanair’s
profit margin in 2005-6 was 21.8% compared with just 3.6% for easyJet and
7% for Southwest.
Subsequently Ryanair and easyJet spawned imitators elsewhere in the world,
partly because of their success and partly because senior staff moved on and
carried the concept with them with their new employer. Ex-Ryanair staffers
in particular are to be found in all corners of the world. In mainland Europe
Air Berlin and Air One have joined them in the same scale of operations , like
easyJet and Ryanair before it, and JetBlue in the USA; airlines that are
capable of placing a single order for in excess of 100 new aircraft.
AirAsia is another example. The Kuala Lumpur-based airline operates in a
similar manner to Ryanair, allowing for the differences in culture between
Europe and Malaysia. It even managed early in its present form to entice
Malaysians to make 55% of their reservations on AirAsia’s website, even
though only 20% of Malaysians then used the Internet. Its CEO is a veteran
of the cutthroat music industry and one time executive at both Warner Music
and the Virgin Group. Investors in its IPO were enticed by the prospects of
profits and stock market valuation at a similar level to that achieved by
Ryanair and the airline quickly signalled its intention also to finance an order
for 100 new A320 aircraft to supplement its modest fleet of 20 second hand
B737-300s: a very rapid business growth for the region at the time,
especially given the unproven nature of the business plan in the Asian
context.
Other new discount airlines in the region, particularly in Thailand and
Singapore, demonstrate operating similarities. In South America, the very
rapidly growing Gol SA, an airline that has reported profit margins as high as
30% (as did Ryanair consistently for several years), although they have
declined recently to nearer 10%, applies many of the strategies listed above
and, together with the Chilean-based LAN group, has revolutionised air
travel in southern Latin American countries.
Not all regions are able to apply the lessons, however. Kulula.com effectively
mimics Southwest’s fun concept in the Republic of South Africa but was
initially restricted by a low take up of Internet bookings and credit card
payment options, factors that also bedevilled LCC growth in other African
countries, parts of the Middle East and in Russia 6 . These obstacles, although
not entirely overcome, are being mitigated in Asia via the adoption of new
reservation and payment methods employing mobile telephone technologies
and direct sales through popular outlets such as convenience stores and in
Russia by payments through banks and department stores.
1.1.3 Rapid growth in the USA and Asia
Within the USA there has been an increase in LCCs since the beginning of
this decade, and especially since Sep-01. There are currently around a dozen
in the USA and a handful in Canada, led by the highly successful Westjet.
America West, now merged with US Airways, survived as an LCC for several
decades but mostly they are recently instigated businesses and many
behave differently from European LCCs, which are more typically
independent companies not linked to flag carrier airlines. The notable
exceptions to that rule in Europe are bmibaby (British Midland), Snowflake
(SAS, now defunct), Germanwings and Eurowings (Lufthansa), Clickair
(Iberia) and Virgin Express (Virgin Group), the latter having now merged
with network carrier SN Brussels. KLM’s buzz was acquired by Ryanair and
BA’s Go Fly, as mentioned previously, by easyJet.
In contrast, airlines such as Ted (United’s LCC subsidiary) and Song (Delta’s)
have been significant and important LCC subsidiaries in the USA of two of
the world’s largest airlines. Ted continues to be deployed on important
domestic routes as the parent’s equipment is allocated to more profitable
international services. Song did not survive as an LCC in its own right. Its
6
These factors are discussed in Chapter 5.
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high standards of service could hardly be differentiated from the parent. If
anything it was higher, and more costly.
In Asia Pacific there is a high degree of partial and full ownership of LCCs by
parent full service carriers. For example Nok Air is a partly owned subsidiary
of Thai Airways, which is considering raising its stake in order to exercise
greater control. Qantas has full ownership of Jetstar and 49% of Singaporebased Jetstar Asia 7 . Singapore Airlines owns 49% of Tiger Airways (Ireland’s
Ryan family has 16%). Air New Zealand owned Freedom Air (the region’s
first and now discontinued LCC), as does Air India with its LCC subsidiary Air
India Express. The Japanese carriers, Japan Airlines and All Nippon Airways
have low cost subsidiaries and Korean Air intends to launch an LCC
subsidiary in 2008.
The key issue of course is exactly what service/cost equation these major
airline subsidiary LCCs expect of their airport partners and how it matches
the expectations of the independent LCCs.
1.1.4 Less cost consciousness in new US LCCs
The main way in which US LCCs display noticeable differences from the
European ones is that they are not as transparently cost conscious. JetBlue,
Spirit and Song (while it existed) in particular offer(ed) one or more of:
comfortable cabins with a generous seat pitch, leather seats, high quality
food and refreshments (paid for or even gratis) and top of the range in-flight
entertainment; a far cry from the peanuts and pretzels image of Southwest
and its imitators, let alone from the very basic but equivalently low-priced
offer from, say, Ryanair in Europe. Song went as far as to tailor its in-flight
product to one very distinct segment – women and particularly the travelling
businesswoman, a very small segment of the overall passenger mix.
The philosophy of these airlines seems not so much to focus on cost savings
on the in-flight product as to promote it to a higher standard even than that
of the parent company or comparable legacy airlines, and to charge for it
where appropriate. Nevertheless, if they are to be the low cost carriers they
claim to be that means savings have to made elsewhere and the travel
agent distribution system remains well entrenched in the US.
It will become apparent in Chapter 4 how the higher standards of US LCCs
are reflected in the facilities at the airports that support them.
Some notable new exceptions include Skybus, a recently launched (May-07)
Columbus, Ohio-based carrier whose management ranks include a former
Ryanair director of operations. This company promises to be the USA’s
lowest cost airline, with fares starting at USD10 one way. In fact, the airline
is modelled on Ryanair, even going so far as to sell advertising across the
entire fuselage and on overhead lockers, two Ryanair mainstays, and even
though that detracts from the brand image of the airline itself. It sells online
hotels, cruises, vacation packages and event tickets.
Skybus has set out of its stall aiming to be the cheapest airline in the US, up
to 25% cheaper even than Southwest. Skybus is marketing itself as an Ultra
Low Cost Carrier (ULCC), a process referred to in some quarters of the US
media as ‘Ryanairisation’. But establishing a new network in the now
intensively competitive US market will be a challenge, however low its cost
base.
Another ULCC is Spirit, the Florida and Detroit based LCC that has
reinvented itself downwards as part of a strategy of differentiation from the
more upmarket JetBlue and which has built up an extensive network in the
Caribbean, Bahamas and Latin America amounting to 25% of its services.
Spirit describes itself as the US’s first ULCC and charges USD10 per checked
bag (high even by European standards) and USD1 for drinks. Discounted
airport parking, travel insurance and other services are offered for a fee. It
has outsourced its call centres to two new locations in the Dominican
Republic and the Philippines but retains its frequent flyer programme (as
does Southwest).
7
International ownership restrictions do not permit majority ownership.
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Virgin America’s application to begin flying in the US was initially rejected by
the US government on ownership and control grounds, while the new ‘open
skies’ agreement between the US and Europe remained on the drawing
board with US airline ownership an unresolved issue. (Despite its
superficially pro-competition posture, the US practises one of the most
restrictive domestic entry regimes in the world.) All other start-up
procedures have been completed and with the tentative open skies
agreement reached in Mar-07, services are now set to commence. Virgin
America will not be a ULCC, but it will certainly be cost conscious.
The arrival of foreign long-haul LCCs will also influence the industry in the
US. Hong Kong’s Oasis Airlines was planning to fly into Oakland, California,
rather than Los Angeles (but subsequently selected Vancouver instead),
Australia’s Jetstar already flies to Hawaii and AirAsia X may eventually fly
into the US even if it does not feature in its initial plans. The US also has a
start-up long-haul LCC of its own, Sapphire Airways, the first since People
Express, which will fly to India via Europe.
1.1.5 Development of secondary airports
As a result of these developments, the other trend that has been clearly
observed since 2001 is the development of secondary airports in the USA.
This has not occurred to quite the same degree as in Europe, where tertiary
level airports with very basic facilities are also part of the equation, but
several smaller US airports are now operating at levels of traffic inconsistent
with previous levels.
Examples include Fort Lauderdale, an airport that has experienced a
dramatic turnaround in its fortunes since the late 1990s by attracting such
LCCs as Southwest, Frontier, AirTran, Spirit and JetBlue and which now
offers more flights to US cities than does nearby Miami International Airport,
as well as a growing presence in Caribbean markets. It is a considerably
cheaper option than Miami. Others are Long Beach, Ontario, Burbank and
Oakland airports in California; Flint, Michigan; Akron, Ohio; also Chicago
Midway, which is featured in this report.
Skybus, the Ryanair-inspired ULCC, chose a whole host of airports to which
to operate that had not previously received any significant amount of
commercial air service, including: Portsmouth, New Hampshire (for Boston);
Richmond, Virginia; Bellingham, Washington (for Vancouver and Seattle); St
Augustine, Florida (for Jacksonville and Daytona Beach); Greensboro, North
Carolina (for Raleigh); and Chicopee, Massachusetts (for Hartford,
Connecticut).
Undoubtedly all of these airports have been chosen because operating costs
there are lower. As Chapter 4 points out though, they may have lower costs
but not to the same extent as European or Asian LCAs. It remains to be seen
how the US air traveller will adapt in particular to the extreme Ryanair style
approach of SkyBus to ‘out of town’ airports. Skybus has already begun to
brand them a la Ryanair, for example by making Web sales from Boston
(Portsmouth), Hartford (Chicopee) and Vancouver/Seattle (Bellingham)
airports. Indeed Skybus may come to be a valuable case study in the
targeted use of low cost secondary airports.
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1.2 Where is the LCC industry heading?
The intensity, vitality and variety of LCC operations suggest that this region
will point the future direction for the rest of the world.
Despite the recent spate of LCC failures, they will be a force to be reckoned
with for some years yet. There are around 150 globally, active or planned
(with over 60 in Asia Pacific), not counting the regional airlines that now
have similar and sometimes overlapping operational characteristics. Between
2001-2006, global LCC sales grew by 250% compared with 36% for other
scheduled services and 18% for charter.
1.2.1 Recent European trends
In many European countries, “charter” operators were the genuine
precursors of low cost airlines, but differed in being bundled with low cost
ground packages and in the way they were marketed. They have witnessed
a distinct downturn as passengers increasingly turned away from allinclusive packages to do-it-yourself arrangements. In many regions LCC
penetration has reached 25% of all operations and considerably more as a
percentage of all available seats on short-haul routes in some countries in
Europe.
Only in regions where premium product airlines were very well established
and regarded, for example in parts of Southeast Asia, where international
restrictions inhibit much of the potential market access, were those airlines
able to sustain their market share and prices when they have been
challenged by the LCCs.
On the other hand there are the first indications that the LCC boom is
starting to slow down in some regions. India’s LCCs for example have found
it difficult to make profits and there has been some consolidation already. In
Europe, and especially in the UK, LCC fares are no longer perceived to be
low, the brand message has gone out of the window and a tipping point may
soon be reached where an average fare of around GBP150 (USD300) for a
round trip on an LCC will be considered the maximum. For a typical family of
two adults and two children (who get no rebate) that amounts to GBP600 for
a vacation flight. Not so long ago such a price would have been considered
appropriate to a week’s all-inclusive holiday with accommodation and meals.
The difficulty for the European LCCs is that they are losing control of their
pricing. New European legislation requires them to advertise the final ticket
price inclusive of all taxes and charges, which can amount to 10 different
items including (their own) fuel surcharges, airport fees, government
security charge, local security fees, baggage screening fee and third-party
liability. Depending on the base fare, it is common for these additional
charges to account for between 20-90% of the full ticket price.
On top of that, many LCCs now charge for checked baggage and require
payment by credit card, for which they charge a fee. The increase in Air
Passenger Duty in the UK in Feb-07 has already had a detrimental effect on
UK traffic, which has recently stalled. Even London’s Stansted Airport
suffered three successive months of negative growth between Apr-Jul-07,
although August was stronger. Network airline competition and high fuel
costs are equally making life difficult for the LCCs.
1.2.2 Recent American and Asian trends
North America In North America, there is not so much a trend towards a
diversification into hybrid or ‘no-frills’ models as one towards a more
European prototype or ultra low cost airline (ULCC). The trend is optimised
by Spirit Airlines, which is based in Detroit and Fort Lauderdale and flies
within the US and to the Caribbean and Latin America. Already an LCC, it
introduced ‘standard ultra low cost’ (SULC) in Jun-06.
Spirit’s SULC ‘customised travel experience’ offers ‘benefits’ to passengers
like being charged for all checked bags, and charges for all onboard soft
drinks, off-set by fares claimed to be as much as 40% lower on many longer
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distance and international routes, on-line check-in, clean aircraft, friendly
staff, high utilisation and overall efficiency.
There are no unique selling propositions there and some of the claims could
be those of any airline. What is discernible is what has been described in the
US as ‘Ryanairisation’ – the introduction of ancillary charges. What is
different in the US is that any attempt to reduce fares usually sees them
start to creep back up to where their competitors’ prices are. If they do then
Spirit’s customers will be left with fewer amenities and services at the same
price.
Spirit is not alone. Another new entrant is Skybus Airlines, which received
final FAA clearance to begin passenger services from Port Columbus
International Airport, Ohio in May-07. Skybus is a ULCC modelled on Ryanair
and Southwest and advised by an ex-Ryanair and Tiger Airways (Singapore)
executive. It claims to offer fares significantly cheaper than does Southwest,
with point-to-point service only and charging for everything and with
extensive in-flight sales.
Skybus has ordered 65 A319s and has a route network that, as far as
possible uses secondary airports like Portsmouth MA (for Boston) and St
Augustine FL (for Jacksonville), some of which had little in the way of
commercial service beforehand. Skybus’ management has offered significant
incentives to help it build the business at its relatively obscure mid-west
airport HQ and the airline goes out of its way to discourage passengers from
any attempt to make connections; a typical Ryanair feature.
Ally these developments to expanded domestic service from Southwest now
that it has circumvented the restrictions of the Wright Amendment (q.v.) to
its movements out of Dallas Love Field airport (and the possibility of
international SW services), the preference of the legacy carriers to expand
internationally and the instigation of a low cost air terminal at Austin
Bergstrom airport in Texas at the behest of a Mexican LCC and it seems that
a new trend towards cheaper and more basic domestic travel is at least in
motion.
However, in the now highly competitive US marketplace, where LCCs are
increasingly going head to head, higher yield is becoming a driving goal.
Even Southwest has indicated it will follow the UK’s easyJet by moving
upscale through the introduction of new business-directed products.
Hybridisation may yet enter the system in the US. And carriers such as
JetBlue have turned to intermediaries to sell their product, as they strike out
increasingly onto international routes.
Latin America In Latin America all eyes are on the two biggest countries
and what is happening there – Brazil and Mexico. Brazil’s GOL set the world
alight over three years from 2003, making a success of LCC operations
where circumstances dictate against this modus operandi – for example the
lack of low cost airports or terminals and privatised facilities and little desire
for either. Now GOL has acquired the remnants of the once mighty Varig, as
it looks to link long haul (and hopefully low cost) services to its intra-South
American operations.
The temptation to buy into established airlines at knock down prices, in
order to gain access to long haul international service has even been too
great for Ryanair – which sought to buy Aer Lingus, but was prevented by
competition authorities. It remains to be seen whether the new grouping can
combine effectively. Brazilian LCCs have not been successful and only Sao
Paulo-based OceanAir survives, a part of the Avianca stable.
Mexico has seen the greatest growth in LCC operations in the region and the
six Mexican LCCs are doing well. In 2006 they together achieved a 50%
domestic market share even though some of them did not operate during
the full year. With very low fares, the airlines are stimulating the market by
first time flyers as well as stealing traffic from the legacy carriers. Viva
Aerobus attracted investment from Tony Ryan, co-founder of Ryanair. All
operate to a similar standard but now they are joined by a new regional
airline-cum-LCC, Quest Mexicana, which is designed specifically to service
high-value guests at hotels in the Yucatan peninsula, another example of
hybridisation.
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Southeast Asia Asia Pacific’s LCC development is widely diverse, reflecting
the massive region and its enormous diversity, cultural, economic and
political. Within three years of starting, the LCCs operating in Singapore
quickly grew to around a 10% share of the market but stabilised as
international route rights dried up. That will begin to change in 2008, as a
liberalisation sea change sweeps through the region – notably initially on the
key, tightly regulated Singapore-Kuala Lumpur route.
Air services agreements throughout the ASEAN (Association of South East
Asian Nations) countries are set to open up in stages as ‘open skies’ are
progressively introduced. But the full process of moving towards a single sky
is timed to take until 2015 and commercial pressures should cause that to
accelerate.
One of the Singapore based airlines, Tiger, has ventured into the Australian
domestic market where it intends to set out its credentials as a ULCC while
the incumbent and hitherto dominant Virgin Blue continues to move
upmarket as a ‘new world carrier’ – another hybrid adapting to its
environment! Australia’s other domestic LCC, Qantas subsidiary, Jetstar,
has adopted not only a long haul offshoot (with a massive order for B787s
coming its way), but also has established a corollary Singapore minorityowned subsidiary, Jetstar Asia, as well as a minority share in Vietnam’s
Pacific Airlines.
Malaysia is the home of Asia’s version of Ryanair, AirAsia. By far the most
successful Asian LCC, it has over 150 A320s on order, with options for 50
more and will be the largest airline in the region by the start of the next
decade. With minority share joint venture subsidiaries in Thailand and
Indonesia it hopes to enter the Vietnam market with another one. It will,
however, find increased competition from a resurgent Malaysia Airlines in its
home market.
For Asia, the main generic evolution of the model involves establishing
minority joint ventures with local interests. The cross-border joint venture
method of expansion is necessary in the international marketplace in which
these airlines operate. Otherwise, they are confined to the boundaries of
their home markets.
Indonesia is regarded as a key area of growth for no-frills airlines owing to
its geographical nature (3,000 islands) and the domestic market has grown
more than five-fold over the past eight years. A ban on foreign LCCs
operating to five major cities is in place (technically this only applies to
Singaporean carriers, but the ban is pervasive), although in principle
Indonesia welcomes the carriers at secondary destinations. Even so the local
population has taken to them, taking 34 million domestic trips in 2006
compared with 29 million in 2005 and just six million in 1998. There are
some 14 airlines operating domestically, of which most are LCCs.
The largest market share is held by Lion Air, which also operates some
international routes. Adam Air and Air Batavia, together with full service
carrier, Garuda International, these four accounted for 72% of domestic
passengers flown in 2006. The competition is brutal, but Lion Air is very
much a hybrid operation, holding its own among airlines which offer very
much a commodity priced – and often extremely low cost product.
LCCs have made inroads in Thailand, where many tourist visitors are
dependent on them. Nok Air, part owned by Thai Airways, Thai AirAsia and
One-Two-Go (a hybrid LCC/charter airline) are the principal LCCs, all
benefiting from difficult operating circumstances for the national carrier,
though all equally suffering from the much delayed opening of Bangkok’s
new Suvarnabhumi Airport in Sep-06 and indecision about how to utilise the
old one, Don Mueang. In view of the immediate under-capacity of the new
international airport, Don Mueang was reopened in 2007 as a domestic –
and mainly LCC – airport, offering service for “non-connecting” flights.
North Asia North Asia is not such a happy hunting ground for LCC
operators. But China does have some private airlines now, with more on the
way, and it is only a matter of time (and relaxation of minimum pricing
rules) before the LCC model prospers in this rapidly growing market.
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Aviation growth in China generally continues to be dogged by the imposition
of central controls on routes, fares, charges, distribution of fuel supply and
aircraft acquisition. None of this has dampened enthusiasm to test a low cost
airport model, as more foreign LCCs are, steadily permitted access.
LCCs have not yet prospered in Japan, partly due to the generally protective
policy attitude, where the two flag carriers, Japan Airlines and All Nippon
Airways, dominate at all levels; and largely to the fundamentally high cost of
operating in Japan. The LCCs which have started up have in all cases fallen
under the control of one or other of the majors, usually as they were failing.
A recent decision by Japan’s Transport Ministry to approve a “Gateway
Programme” proposal to ease restrictions on operations from 23 regional
airports capable of handling international services, in a bid to boost trade
and tourism, will allow foreign carriers to launch services quickly without
having to negotiate landing rights. This should encourage some LCC growth
at last. All Nippon Airlines is again considering an LCC subsidiary and
recently took a small stake in an existing one, Starflyer – although the goal
may have been mainly to secure valuable slots at Haneda.
In Taiwan & South Korea the problem is not so much competing legacy air
carriers as a very well developed high-speed rail network that has slashed
domestic air travel by up to 50%. Internationally, Singapore’s Tiger Airways
is also entering the South Korea market with a minority joint venture, and
this is likely to accelerate competitive responses from the incumbents, with
Korean Air already preparing its own LCC subsidiary to launch in early 2008,
to meet the threat head-on.
Finally, it should not be forgotten that Asia is home to the only three long
haul LCCs yet to see the light of day – Hong Kong’s Oasis Airlines, Macau’s
Viva Macau and Malaysia’s AirAsia X. Oasis, going head to head with the
powerful Cathay Pacific, is steadily expanding and Viva Macau, basing its
strategy on inbound travel to he gambling palaces of the SAR, is at a
similarly early stage of evolution. AirAsia X, which began flights (to
Australia’s Gold Coast) in Nov-07, has ambitions to expand into China and
Europe.
Another long haul low cost model, as mentioned above, is Jetstar, which is
essentially picking up international routes that its more expensive parent
cannot operate profitably.
Time will tell whether these airlines and those that follow will be able to
transfer enough of the short haul LCC concept into long haul travel to make
a consistent profit.
The picture which emerges from all of these examples is of a concept of LCC
which is flexible and adaptive. But in (almost) all cases there is the common
element of an overriding preoccupation with maintaining low costs, even as
yield targets vary.
1.2.3 Hybridisation of the model
Complicating all this is the growing uncertainty as to the future direction the
low cost carriers themselves will take or whether they will become
indistinguishable from the legacy carriers. The clearly defined nature of the
LCC beast is changing. Even the “model” LCC today shows less and less to
differentiate itself from its full service contemporaries. Southwest Airlines, of
all the carriers least likely to tinker with the model that it established itself,
began code-sharing with ATA, having unsuccessfully experimented with
code-share internationally, in co-operation with Icelandair, previously. It has
vowed still to evolve internationally and now has adopted increasingly
business-oriented characteristics.
In Europe the benchmark carrier Ryanair introduced in-flight entertainment
(IFE) as an experiment in Nov-04 8 and now features so many add-on
8
It was quickly withdrawn owing to poor take-up. Content was only in
English. But the short average stage length operated by Ryanair was the
main reason for its withdrawal.
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options on its website that the business of flying almost seems to take
second place, as it chases ancillary revenues.
Also, the hybrid, some-frills, carrier is (apparently) established and thriving;
for example Britain’s Flybe and Monarch Scheduled. Hungary’s Wizz Air
introduced a premium ticket, Wizz Bizz, which is fully modifiable without
charge, the first of many. easyJet too has moved upmarket with premium
services and faster check-in at a price. LCCs are co-operating on sales and
marketing – Germanwings with Poland’s Centralwings for example. And, of
necessity, long haul, low cost airlines like AirAsia X, Jetstar and Viva Macau
invariably offer two classes of service.
These are just several of many examples. Virtually all the LCCs are trying to
differentiate themselves, not from direct competitors on any one route but
from the herd. They often thereby mimic the previous behaviour of network
carriers that themselves now largely focus merely on procedural
simplification, cost reduction and price discounting.
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1.3 Is the LCC honeymoon over?
There have been suggestions that the honeymoon is over already for LCCs in
mature markets such as North America and Europe and that, in others,
equilibrium will be reached sooner than originally anticipated.
These questions are particularly pertinent to two regions that have only
recently begun to experience LCC operations – the new entrant European
Union countries since May-04 and Latin America; and to one where there is
a potential for them to develop if the main barriers, of regulation and airport
costs, can be alleviated – North Asia. These regions present contrasting
scenarios for the airlines and airports alike. The new entrant EU countries,
apart from the island states of Cyprus and Malta 9 , have a very low
propensity to fly, averaging 0.3 international passengers per head of
population versus the EU average of 1.3.
In Latin America it is estimated that less than 10% of the (500 million)
population has ever flown. In North Asia there is a high regional propensity
to fly within a culture of high costs. These regions face the prospect of new
low fare carriers and an equivalent airports network from highly variable
present day circumstances.
The bottom line is that the LCC – and the industry as a whole - is a work in
progress.
There are no conclusive outcomes at this stage in the
development of LCCs, either in mature markets or in the newer
environments of Asia and South America. Even in the intensely developed
European market, the apparently imminent demise of numerous LCCs –
promoted for example by Ryanair’s Michael O’Leary’s infamous “bloodbath”
projections in early 2005 – has not materialised. There has indeed been
some consolidation, led by easyJet and Ryanair, but it seems probable that
the proliferation of airlines will continue for some while yet.
New markets do still open up and new gateways are still introduced,
meaning that opportunities for smaller operators continue. These operators
may well come and go, but the probability is that they will keep coming,
given an increasingly market-oriented environment.
LCC worldwide capacity share (seats): Sep-01 to Sep-07 (%)
25.0%
19.7%
20.0%
16.9%
13.9%
15.0%
10.0%
14.9%
11.7%
7.9%
9.6%
5.0%
0.0%
Worldwide LCC share
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Source: Centre for Asia Pacific Aviation & OAG
LCC capacity continues to surge worldwide and their influence on the global
aviation industry is increasingly pervasive.
9
Small island states generally display a high propensity to fly, partly as
entrepreneurs must travel abroad to do business owing to the small domestic
market. In the case of Cyprus and Malta both have 5 international
passengers annually per head of population. Another (non-EU) European
example is Iceland. None of these countries have a developed LCC/low cost
airport system. Singapore, the best example, has two incumbent low cost
airlines already based there and will build a low cost terminal.
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Worldwide, LCCs have more than doubled their capacity in the past four
years. In Sep-07 alone, they offered 58 million seats on over 392,000
services, up 24% and 20%, respectively year-on-year.
LCCs now account for 19.7% of all available seats worldwide – one in every
five - compared to 16.9% in Sep-06 and just 7.9% in Sep-01.
LCC capacity is surging in Asia, Europe and smaller, but high potential
markets like the Middle East and Latin America, while their penetration of
the North American market has slowed in recent years.
LCC capacity share (seats): By region: Sep-01 to Sep-07 (%)
35%
30%
30%
27%
25%
20%
18%
15%
12%
10%
5%
5%
1%
0%
Within Asia Pacific
Sep-01
Sep-02
Within Europe
Sep-03
Sep-04
Within North America
Sep-05
Sep-06
Sep-07
Source: Centre for Asia Pacific Aviation & OAG
1.3.3 Effect on the industry of new aircraft types
1.3.3.1 The Airbus A380
Although the A380 has been promoted and sold as a premium product
aircraft, it has the potential to be a massively effective low cost operation.
With a 20% seat cost advantage over existing wide body aircraft when
configured at around 500 seats, that advantage increases dramatically once
the seating density is doubled! It is unclear how this might affect the
development of low cost airports. One disenchanted major airline CEO
describes the A380 as a “yield destroyer” for reasons such as this, as it
potentially adds enormous capacity onto selected routes.
The (currently) 500 to 850-seat aircraft, already envisaged in a stretched
1,100-seat version 10 , is aimed at very high volume hub city pairs, for
example where there are limited slots - so that an airline presently operating
two B777s or A340s in close proximity might operate one A380 instead, or
an airline like Emirates, which has very rapid expansion plans, can ramp up
its capacity using its existing slots.
It will also be suitable for high-traffic origin and destination point-to-point
routes like Tokyo Haneda–Osaka in Japan (although the A380’s optimum
range is much longer), where stretched B747s with very high seating
densities have been used, and between the Gulf and Indian points.
The launch airlines for the A380 (Singapore Airlines, Emirates Airline and
Qantas) are however reducing the number of installed seats across three
cabins to as few as 435. Thus far, no LCC has ordered it. There is no reason
why the new breed of long haul LCCs, should they prosper, would not use
the A380. The opportunities are certainly widespread; European and US
authorities have cleared it to operate from 45m wide runways, the most
frequently found width of the world’s runways.
10
The initial model is certificated to carry just under 850 passengers.
Emirates President, Tim Clark, has announced provisional plans for near1,000 seats on some of its A380s for use on India routes. Sir Richard Branson
envisages 1,100 seats and Tony Fernandes of AirAsia once talked – perhaps
tongue in cheek – of a 1200-seat LCC version.
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The A380 will undoubtedly have an impact on LCC operations in the medium
term, but in the hands of Emirates Airline, which has nearly 60 firm orders,
rather than existing LCCs.
Unless airlines which lead the order list decide to delay purchase, no units
will however be available for other airlines for some years yet. It is unlikely
however that specific LCC terminal facilities would be available, given the
two-level embarkation/disembarkation needs of the aircraft and the very
special terminal and other logistics involved in embarking and disembarking
1,000 passengers at once.
1.3.3.2 The Boeing 787
Boeing, by contrast, has focussed attention on passengers travelling directly
to their destinations and thus avoiding hub-to-hub services, using smaller
jets that can fly as far as the A380. Apart from its own B787, the B777200LR and some A340 versions can do that already.
Boeing’s position has been vindicated both by the most successful preoperation order book – in excess of 700 have been ordered – and by Airbus,
which rapidly launched a re-engineered A330 and is now actively selling the
A350 XWB, to compete with the B787. This probably reflects the reality that
global traffic growth will in fact generate sufficient volume for both
categories of route development to be substantial.
As Boeing has attained and exceeded its initial sales target for the B787 it
would be fair to assume that this cheap-to-operate mid-sized B767
replacement aircraft could find a niche with any of the plethora of start up
virtual airlines that have indicated an intention to fly long thin international
and intercontinental routes, possibly using facilities already in place at
alternative, low cost airports.
The first of these will be Qantas subsidiary, Jetstar, which will be the main
beneficiary of Qantas’ massive order for the aircraft. Other point-to-point
LCC operators that have already ordered the B787 include Air Berlin and
Monarch, together with Icelandair and First Choice, a UK airline and tour
company. It is not expected that the B787 needs will be any different than
the B767 or A330, both of which have some usage with long-haul LCCs.
Impliedly therefore, many of the questions about the future viability of long
haul, low cost airlines will quickly become academic, once these aircraft
become available, greatly expanding the options for long haul service to
second-tier airports.
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1.4 Pressures placed on airports
In this rapidly changing airline market, no airport will ever be a complete
master of its own destiny. The typical regional airport must deal with diverse
factors such as:
•
•
•
•
•
Concentration of hub power (to a varying degree in different world
regions);
Point to point growth (mainly LCCs, or perhaps regional airlines);
Airline consolidation;
Regulation – slots, price, open skies, environment, safety, security,
ownership; and
Costs – unit costs differentiated between aircraft types.
The view of ICAO, the specialized UN agency for the air transport industry
and ACI 11 , the global body for airports (from ACI’s website) is: “ACI and
ICAO have observed that LCCs are rapidly expanding their operations in
many areas around the world, increasing their market share and challenging
the full service carriers. Accordingly more airports and cities, and new city
pairs, are receiving direct services as lower travel costs encourage new
demands for air travel. These developments, in turn, are impacting on the
use of hubs. Most growth in many parts of the world is at hitherto
underdeveloped regional airports.
“Airports are exploring different ways of meeting requests of LCCs for
facilities that provide only the services they require, while respecting ICAO
principles of cost-relatedness and non-discrimination in airport charges.
While great demands are being placed on them, airports are committed to
reconciling effectively the needs of all segments of the airline industry.”
1.4.1 Implications of “virtual” airlines
A trend that has become apparent as a direct correlation of the growth of
LCCs is the restriction in ‘ownership’ of airlines of their product, as evidenced
by the increased leasing of aircraft and the buying in of services that range
from catering, via outsourced check-in staff to promotional services. In
effect this creates virtual airlines whose only tangible assets are routes and
the pilots that fly them (and, importantly the intangible asset of the airline
brand). Some of the network carriers have started to do the same.
This can place an onus on airports to provide more passenger support for
the same, or less, revenue when they perhaps ought to be matching their
costs to those of the airlines. The figures speak for themselves when some
LCCs are able to boast passenger per employee ratios six or even ten times
better than their network rivals: some of the tasks will be undertaken by
outsourced staff, but a definite burden also falls on the airport’s employees.
An example of what may be to come can be found in the UK, following a
High Court ruling in favour of a disabled passenger who was forced to pay
Ryanair for use of a wheelchair at London Stansted Airport. The judge
vaguely instructed both airline and airport to pay for the facility in the
future, thus setting in train a so-far unresolved dispute as to which party has
ultimate responsibility, while at the same time setting a legal precedent of
sorts for other similar LCA-LCC cost disputes.
1.4.2 Environmental impact of rapid airport growth
Point to point (LCC) growth has become the over-riding demand factor
affecting airports because it impacts across the others. Such is the oftendramatic growth of routes once an airport is identified as a new LCC base
(especially if it has not hosted substantial commercial air services
previously) that very rapid decisions have to be made concerning regulatory
issues.
For example, the augmentation or instigation of security systems, fire and
rescue, policing, immigration, customs and the infrastructure that houses
11
ACI represents 1550 airports in over 170 countries.
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them. The location of such an airport in a built-up area will lead to the
exposure of residents to hitherto unknown levels of noise and other types of
disturbance.
Environmental impact has become the most serious issue facing airlines and
airports in many countries and especially in Europe and North America
where airports have already experienced project delays based around noise
issues. The cause celebre now is carbon (CO2) emissions, although noise
remains a key issue for close-in communities.
At issue is the amount of CO2 emissions that the aviation industry
generates. The wilder claims of environmentalists put it at around 5%, while
the industry claims it is nearer 2%, rising to 3%. Environmentalists have
zeroed in on aviation, as a highly conspicuous industry, despite its flow on
economic benefits and the existence of much more significant impacts on
climate change than aviation.
Nevertheless, the aviation industry, conscious of the fact that it has lost the
PR battle already – at least in Europe - and that it will be seriously
constrained if it does not change its ways, has taken action; for example,
‘cleaner’ aircraft will take to the sky within the next ten years. easyJet has
already challenged manufacturers to come up with such an aircraft,
indicating it would be prepared to make an investment itself.
It is significant that the promotional message emanating from Boeing over
the B787, which “rolled out” in Jul-07, has changed in a subtle manner.
Originally intended to replace the projected Sonic Cruiser, which would have
flown faster than any other commercial aircraft since the demise of
Concorde, Boeing heavily promoted the B787’s use of carbon materials to
lower airline costs. That message has since been partially replaced by one of
its positive effect on the environment.
This is an issue that will also soon enter the consciousness in Asia and Latin
America. Public appreciation of the provision of new services at smaller
airports (which aid their local economies) tends to over-ride such disquiet
but only until the level of flights reaches a critical mass and/or night flights
come into operation. At that juncture there is no longer a distinction in the
resident public perception between the hub airport and the fledgling LCC
base. An example of this can be found at Liverpool, UK, one of the case
studies in this report. Local residents were initially pleased to be able to fly
from their own airport rather than travel 50 km to Manchester, and there
was considerable public pride. As the airport has grown rather more rapidly
than anyone anticipated, an anti-noise and pollution lobby quickly emerged,
questioning the value of further development. Prior to the dramatic growth
of Liverpool’s airport, Manchester’s environmental campaigners had fought
against a second runway there, insisting that additional flights should be
diverted to Liverpool!
This particular problem, centred mainly on noise disturbance, has diminished
as a correlation with the introduction of new equipment such as Airbus 320
series, Boeing Next Generation (NG), and Embraer models, to replace the
standard B737-200/300/400 models that have been heavily employed by
LCCs and which are still in evidence in some regions. However, the
environmental problem refuses to go away and is manifested now in the
form of attempts by governments to introduce emission related aviation
taxes that make up an ever-growing part of ticket prices.
At the heart of the environmentalists’ arguments is the notion that low cost
airlines, in the UK in particular, are fuelling air travel to an unacceptable
level vis-à-vis the pollution it generates and that taxation is the only answer
– i.e. pushing up the cost of the product at the point of sale whilst
correspondingly generating funds that can be (idealistically) used to improve
the environment.
As the kind of travel that underpins LCC operations there – last-minute
decision, foreign independent travel – is economically a marginal one, based
upon perceptions of price vs. disposable income, it is the LCCs that will
suffer the consequences to a greater degree. With many of their cost saving
and ancillary revenue measures already approaching exhaustion, they will
put airports under even greater pressure to reduce their costs to the LCC
users.
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1.5 How do airports position themselves in this environment?
With so much uncertainty, airports will need to decide if they wish to invest
in a future where LCC or low frills operations will dominate - or whether they
prefer to remain outside it, to stay mainstream or to develop other niches.
Those that opt in must reassess their costs. They need not necessarily make
immediate changes. Some airports have played a long game, waiting for the
LCCs to adjust their costs and expectations to the realities of infrastructure
providers that have themselves spent a great deal of time and money on
passenger facilities and branding. 12
These activities are sunk costs – they are not escapable ones in the short
term. Airlines may quickly enter and exit markets, and change their
appearance, on a hit-and-run basis, but airports have to look much further
into the long term. This is the negative aspect of airport
ownership/management, which often offsets the positive ones (especially
the relatively fixed and predictable costs attributable to airports) that
attracted so much airport privatisation activity from the end of the 1990s to
the present day.
Those airports that do decide to adapt to the LCC paradigm and to make
changes must reassess costs and procedures on either side of the revenue
platforms – aeronautical and non-aeronautical. Where necessary, they need
to decide on the allocation of existing facilities between low cost and
mainstream airlines and their passengers given that the full service airlines,
having often served the airport for many years, will be unwilling to accept
the new arrivals receiving more favourable terms.
They need to consider whether a particular terminal facility, possibly a newly
built one, is appropriate and how it will be funded. They may need to
reappraise the marketing strategy and to assess just how far they can go in
agreeing to the marketing demands of the new breed of aggressive airline
management that is sometimes only to be repaid to them in such relatively
intangible ways as local economic development, additional terminal retail
spend and future tourism growth in the region, rather than in hard cash
through landing and other aeronautical fees.
The publicly owned airports – at least in Europe - have also to balance all of
this with the equally strident demands of regulators that question the
allocation of any amount of public subsidy to an airline irrespective of the
intangible benefits mentioned earlier.
The questions then become: what will the rest of the marriage be like? And,
will this provide a precedent for the rest of the world? So, should airports
adapt their strategy to them or should they wait to see what comes next?
Will the LCCs simply continue to differentiate themselves (and how far can
they go in doing that?) or will it be impossible to tell them apart from the
network carriers other than by name?
For smaller airports, which perhaps are able to attract only one or two LCCs,
this does indeed indicate continuing risk profile fragility, but for larger
airports which either host several LCCs or a mixture of types, the prospect
remains that specialist facilities for various forms of LCC will continue to be
an attractive feature for some time.
Critically, for airports, what levels of facility will these airlines need, and at
what cost, when it is not even clear what they will, themselves, become?
Another complexity now being faced by airports like Kuala Lumpur and
Singapore, with separate low cost terminals, is the way in which the new
breed of long haul low cost airlines will wish to interface with (a) other short
haul LCCs and (b) network airlines (which, in the case of Jetstar includes its
parent, Qantas). For the former, they may prefer to operate into the
purpose-built low cost terminal. But, if they seek connectivity, the main
terminal may be preferred.
12
The UK’s Manchester Airport is a prime example.
1st Edition, 2008
“With so much
uncertainty, airports will
need to decide if they
wish to invest in a future
where LCC or low frills
operations will dominate or whether they prefer to
remain outside it, to stay
mainstream or to develop
other niches. Those that
opt in must reassess their
costs”…
34
And even a change of culture?
The uncertainty even impacts on corporate culture issues.
For example there are few airport management equivalents of the media
friendly LCC former airline chief – Herb Kelleher at Southwest, David
Neeleman (now departed) at JetBlue, Michael O’Leary (soon to go) at
Ryanair, Stelios Haji-Ioannou at easyJet, Tony Fernandes at AirAsia. If low
cost airports or terminals are to be developed should airport management
also change the sedate way it presents itself?
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“If low cost airports
or terminals are to
be developed should
airport management
also change the
sedate way it
presents itself?”
$
$ $
$ $
$ $ $
$
$ $
$ $
$ $ $
Chapter 2
36
Chapter 2
The demands placed on
airports by low cost carriers
This chapter offers a historical view of how the LCC operating model came to
influence the workings of airport operators. This trend is magnified by the
need of the traditional “leading” airports to find ways to attract the
increasingly important budget carriers back from the secondary facilities that
had begun to dominate the low cost sector.
The interplay between the two actors is complicated because the airport
owner/operator has extremely limited flexibility in terms of the infrastructure
it can provide its tenants. Permanent airport installations typically have a
20-30 year economic lifespan, while the airline planning process is
conducted on a timeframe that is rapidly narrowing from 10 years down to a
yearly or even seasonal spectrum.
The facilities constructed by Frankfurt am Main’s Terminal 2 and London
Stansted are indicative. Both have fixed jetbridges constructed at a time
when long-haul flying was viewed as the airports’ future but which have
proved inappropriate for LCC operations.
Overview
•
•
•
•
•
Airport infrastructure modifications to meet LCC needs are not
always possible
But airlines have learned to exert influence on airport’s operational
style
Trend began with buzz, later adopted – and intensified – by
Ryanair, easyJet and others
Public-private partnership attempted by Southwest in Seattle;
ultimately unsuccessful, but potentially precedent setting
Airports can recover some lost aeronautical and facility rent
revenues through innovative “market-making”
Case study #2: buzz
Cases show how airlines have begun to play a role in determining how the
airports operate. The first example is that of Dutch/Anglo LCC, buzz. The
KLM affiliate was ultimately unsuccessful and was purchased at a bargain
price by Ryanair. But its dealings with its airport partners set the stage for
subsequent interaction between airlines and airfields.
The manner buzz used in catalysing airports to provide – and charge for –
only the infrastructure and services the airline deemed essential was
conducted in a collaborative style, unlike that used by heavyweights Ryanair
and easyJet. However, its demands for: quick simple passenger processing
and turnaround; functional, efficient, unglamorous facilities; and innovative
approach towards revenue generation set the tone that continues to
predominate.
Case study #2: Southwest Airlines
In Seattle, Washington. Southwest Airlines proposed moving its local
operations from Seattle-Tacoma International Airport, where a renovation
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programme was serving to seriously boost charges, to an under-utilised
airfield close to town.
Although the carrier’s proposal to invest USD130 million to renovate Boeing
Field ultimately fell apart on environmental issues, it has set the stage for
potential future public-private partnerships between airlines and their most
important facility providers, and provided some teeth to the carrier’s
negotiations with airport facility charge-setters.
Case study #3: Making markets
Lastly, the chapter explains how airports looking at reduced airline charges
can innovate in “making” new markets, i.e., establishing new, nonaeronautical revenue streams. By following the LCC model of “sweating the
central asset”, airports can reap gains by filling in service holes created by
their cost-conscious tenants.
Examples cited include selling advertising on WiFi screens (provided either
free or for a charge), maximising retail and food-and-beverage sales
potential, and even selling naming rights, as occurred at Finland’s Omena
Gateway Low Cost Terminal, Omena being the name of a local hotel chain.
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2.1 The emergence of the two-tier and low cost airport
As debate intensified in the early years of this decade over the role of hubs
and the possibility that point-to-point services could make hubs redundant,
the relentless increase in budget airlines continued. While there clearly
remains a future for hubs, the way they are operated has been modified
under pressure from the LCC sector. This was especially the case on short
haul European routes, where the network flag carriers scrambled to adjust
their products to permit more cost-effective, tailored services.
Southwest Airlines, buoyed by its consistent profits when the ambition of
many of its contemporaries was merely survival, and Ryanair, which then
had a market capitalisation bigger then several European network carriers
combined and regular margins of 30% each quarter, were often cited as
examples of ‘the future.’ More importantly, in Europe, then the centre of LCC
growth, almost all of it was coming from regional airports (i.e., those
accommodating 0.5 – 5 million annual passengers). Looking at it another
way, since Sep-01 hardly any small European airports grew at all unless and
until they adopted one or more LCC airline services.
Some major airports that had for many years been in a virtually unrivalled
position began to find traffic leaking away to previously insignificant secondtier rivals where almost all the traffic was accounted for by LCCs. Taking an
example from the UK, Manchester lost some 250,000 passengers in a single
year to Liverpool (distance 30 miles/48 km – see the Chapter 3 case study).
Manchester subsequently found it difficult to decide on an acceptable
strategy to attract more LCC service to combat this leakage, at one time
considering the conversion of a maintenance base into a low cost terminal.
In the end, it concluded that it had to make do by converting extensive
space in three terminals that had been designed before the LCC boom
began.
Eventually it settled on a long-game strategy. It reduced its charges
selectively, mainly in the off-peak period, attracted smaller and start-up
LCCs and waited for the operating economics of the bigger budget carriers,
which were themselves changing as a result of competition, to fall in line
with its own. At the same time, some LCCs played the ‘short game’ –
withdrawing from a route when start-up discounts ran out, only to re-enter
when another qualification period began. During this period, Manchester
actually impounded an aircraft belonging to Ryanair for non-payment of
fees, something a smaller airport would only do as a very last resort.
After seven years, that long-game policy seems to be working. A
fundamental, grass roots paradigm shift on charges has taken place during
that time – an overall charges reduction amounting to 38% that was
inspired partly by criticism from airline representative bodies (especially
IATA) and applied across the board, not just to LCCs. Manchester can now
claim to host more LCCs than Liverpool, though it lacks the ‘big 2’ of
Ryanair, which only flies to Dublin and Shannon, and easyJet, which has no
presence at all.
During the rapid growth period of the LCCs in Europe, airports like Liverpool
became the preferred choice of the LCCs because they bore no relation to,
and were incompatible with, hub facilities. Hubs were perceived as offering
expensive infrastructure that neither LCCs needed. The hub operators took
the view that their facilities were in place, they could not be removed for the
benefit of the LCCs’ costs and that these budget airlines would need to pay
for them if they wanted to access the air gateways of the main cities.
Most LCCs have a basing strategy that involves a fleet of aircraft and crew
placed in morning start-up positions, with local maintenance and cabin crew.
Basing at full-service airport hubs is costly and slots are typically controlled
by the incumbent legacy airlines. Congestion affects on-time performance
and aircraft utilisation rates, so most LCCs tend to avoid these locations.
At the same time, in the wake of the Sep-01 terrorism and the constant
shocks that followed, hub airports could ill afford to ignore the business from
this new breed of carrier that was eating away at the business and profits of
their flag carrier tenants. Neither were the LCCs likely to be able to bully
larger, more substantial airport companies with demands for fee reductions
or market support. If an LCC operated to a hub airport it was because it
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needed to, or because some LCC operators took a strategic view to use key
airports, which offer more credibility, visibility or unit revenue.
The best example of these diverging beliefs is seen via the different
approaches taken by Ryanair and easyJet. Ryanair has not always followed
its mantra of flying only to secondary and tertiary airports. In its early days
(from 1985) it had no discernible plan as such, other then offering low fares,
without any reference to its costs, and flying to the established gateways. It
was only when the current CEO took charge, and when it was close to
collapse, that fledgling cost control measures and the focus on obscure
airports began. Both have since become a corporate obsession.
Ryanair was lured from its first London base, Luton, to Stansted, which was
then growing only slowly, by an aggressive BAA plc salesman. Stansted has
since gone on to be the leading budget airline airport in the world, driven by
Ryanair services. However, Ryanair has recently been relocating some
services back to Luton, in the wake of a continuing dispute with Stansted
over landing fees. EasyJet’s policy was to build up a base at Luton, but to fly
mainly to primary airports. This policy was reinforced when it acquired BA’s
Go Fly, as that airline never varied from BA’s preference for ‘proper airports.’
That policy has been extended to encompass the three main London airports
outside of Heathrow. There is now an extensive programme from Stansted
but the most telling comment about easyJet as that it has more services out
of London Gatwick than either Luton or Stansted – Gatwick being the world’s
busiest single-runway airport and therefore by implication prone to
congestion. By comparison Ryanair has just four services at Gatwick, three
to Irish cities and one to Paris Beauvais.
Air Berlin’s strategy is unclear. It flies into Stansted, but at Paris its services
are to Charles de Gaulle and Orly airports, rather than distant Beauvais. It
operates into Milan Bergamo (secondary airport) rather than Linate
(primary) but into Barcelona (primary) rather than Girona (secondary).
In Asia, airlines for the most part do not have the secondary airport option,
aside from the few examples illustrated in this report, with the result that
most services are between primary airports. It is interesting to note that
AirAsia makes clear specifically that at Kuala Lumpur its base its at the
‘LCCT’ (low cost terminal), something that airlines have been accused of
failing to do, leaving passengers at the wrong terminal with an expensive
taxi trip as the only remedy.
Thus has begun the complementary trends towards second-tier and low cost
airports. Only recently though has the second-tier option developed enough
momentum as to motivate the primary airport facilities to undertake the
development of a low cost terminal.
The interest of local municipalities in these trends is driven not only by the
number of passengers their airports could attract but also the tangential
economic development potential. Despite the fact that hubs handle large
numbers of passengers that will never visit the local area, they have had
much success in helping create new business opportunities and employment.
This is as true of old hubs like London Heathrow, Frankfurt and Amsterdam,
as it is of new ones like Munich, where employment doubled in the decade
following the opening of the new, larger airport. The attraction to companies
of course is that the hub significantly improves the number of readily
accessible cities for both outbound and inbound (visitor) travel.
Munich is an interesting case in that it was one of the first major airports to
have opened a low cost terminal, in Jun-03. It did it ‘in reverse’ though, by
building a new terminal for the hub traffic then allocating the original one to
point-to-point and, specifically, budget airlines.
On the other hand, hubs have not helped regional growth in cases where
domestic feeder routes that did not provide sufficient traffic were
discontinued in favour of international routes. This was a problem
throughout Europe in the first years of this decade. For example, between
1986 and 2002 twelve UK cities lost their air service to London between
1986 and 2002. BA has cut back to the point where its only domestic
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services are between Heathrow and Belfast, Edinburgh, Glasgow and
Manchester (i.e., the strategic ‘Shuttle’ routes of the 1980s).
It was during this period that Amsterdam Schiphol Airport adopted the
unlikely but accurate promotional proposal that it was ‘London’s Third
Airport’ on the grounds that it was connected to twice as many UK cities as
was London Heathrow. Latterly, something similar has happened in the US
as the major carriers have cut back on their domestic routes in favour of
more profitable international ones, leaving domestic routes to their regional
affiliates, or low cost subsidiaries, where they have one. Iberia is doing
much the same in Spain.
In this sense, the arrival of the LCCs at regional airports has been of great
benefit not only to airport management but also to regional economy
builders. They were able to deliver representatives of the (usually nation’s
capital-based) financial/investment community directly to where the funds
were sought. They were also able to create and develop a new market
segment – people who had never, or only occasionally, used air travel but
who could now do so because of the cheap fares on offer. Moreover, they
enabled relatively low-salaried people to visit formerly inaccessible regions
such as the Cote d’Azur (Nice, France) by offering budget travel to nearby
towns and, ultimately, directly into those city-regions themselves.
This is not always a popular development. Jersey (UK), in the Channel
Islands, decided back in the 1980s that it was an ‘upmarket’ resort island
and did not wish to attract budget holidaymakers. This was before the days
of the LCCs and it kept them away by encouraging high prices for
accommodation and tourist services and high air and ferry prices. It now
receives some LCC (Thomsonfly/TUI) and LCC/hybrid services (Flybe), but
most are by full-service and regional carriers like BA, British Midland, VLM
and Swiss. More recently the French coastal town of Deauville protested
about the advent of a Ryanair service into this sedate corner that is
regarded as the ultimate chic beach resort on the Normandy Riviera.
The economic benefits of LCCs have not been quite as apparent in the USA,
where significant distances between cities largely prescribed the need for air
travel anyway, but they were in Europe where distances are much smaller.
Recently, the benefits of LCC services have begun to be noticed in Asia,
especially in countries such as India, where there has previously been a
reliance on a creaking railway system, and China. Another country that
might benefit is Russia, where again there is an over-reliance on rail travel,
but only if the fledgling LCCs can fine-tune their proposal and if bureaucratic
restrictions such as the tax imposition on more fuel-efficient Western jets,
can be overcome once and for all.
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2.2 What do low cost airlines actually want from airports?
Significant differences have been emerging between low cost and network
carrier demands for several years, for example the need - or lack of it - for
transfer passenger facilities and lounges. But given the long-term
investment nature of airports, it took time for them to be more
comprehensively definable.
Background
There already existed considerable differences between, for example, the US
and European airport models. US airports tended to operate more as a
public utility, providing only a basic aeronautical structure. US airlines would
take long leases on their own terminals. European airports tend to operate
their own terminals and to provide services within them, ensuring better
control of gate allocation and overall utilisation. Some, led by Frankfurt and
Amsterdam Schiphol’s example, developed sophisticated retail operations,
successfully capturing substantial transit retail dollars.
Although there is movement towards change, for the time being most LCCs
operate within a single region, with limited intercontinental LCC flights. As
most have no ambitions in this regard, planning that includes varying airport
operational parameters does not affect the sector to the same degree as it
does the legacy carriers.
Attitudes have been changing towards terminal operation outsourcing.
Airports have been moving in the direction of inviting airlines or third parties
to competitively supply an increasing number of services by airlines or third
parties.
Low cost airlines have simplified processes in respect of check-in and fast
turnaround times, at both ends of the journey, avoiding the need for
transfer, bridge boarding and the more complex systems of the network
carriers.
However, both kinds of carrier need comprehensive airside facilities and
good on-time performance. Network, flag or legacy carriers cannot be
allowed to become synonymous with poor timekeeping.
Definable problems confronting LCCs and LCAs
Infrastructure issues: The problems of airport infrastructure facing
carriers, especially LCCs, are:
•
•
•
•
•
Major airport infrastructure usually has a long planning lead-in
time. For that reason, airlines, especially LCCs, often prefer minimal
infrastructure that can enable experimental expansion without
excessive financial exposure. But, where rapid measures are
introduced, it can lead to problems - see the section on Coventry
Airport in Chapter 4;
Airport infrastructure has an economic life of 20-30 years and is not
easily shifted;
By comparison, airline-planning horizons, once around than 10
years, have shortened considerably. Their largest investment
category – the fleet - is by definition highly mobile;
Airports can therefore easily build passenger terminals based on
earlier appropriate airline requirements that quickly become
unsuitable for current needs. Examples of this include Frankfurt
Main Terminal 2, which was built for long-haul when short-medium
haul intra-European travel was the growth area, and London
Stansted. In the latter case there were, and are, excessively large
distances from the check-in area to the satellite boarding gates and
expensive air bridges were provided that were inappropriate to the
LCC sector;
The question also arose as to how the low cost airline model would
work at congested airports. Congestion is anathema to the
scheduling of LCCs.
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Industry trends: In addition airline industry changes and trends can have
significant implications for airports, such as:
•
•
•
•
Consolidation of the business through mergers and alliances,
reinforcing the hub model and underpinning the demand for
adjacent gates and lounges;
Restructuring (or bankruptcy) of a key airline, with route and
frequency implications;
Greater reliance by airlines on alliance partner services – IT,
handling, maintenance and so on;
Growing emergence of LCCs serving primary airports.
The arguments for and against terminal operation outsourcing were
becoming clear. For example, as stated earlier, the terminal operator needs
a longer-term focus than does the airline and assumes the risk of over or
under-investment. It had become evident in the US that one way around the
difficulties was for low cost operators to develop their own low cost
terminals. And in the last few years have they have begun to do so.
In conclusion, airports have been moving more towards playing the role of
facility manager, and less the provider of services, although they continue to
be responsible for providing safe aeronautical infrastructure for airline
operations. They continually need to balance the growing competition in
airport service provision with service continuity and quality. Having begun to
adopt the US model of competition between terminals at larger airports, and
the joint development of terminals with (major) airlines or other companies,
opportunities began to arise for terminal developments that involve low cost
carriers.
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2.3 Case studies
Case Study #1: – buzz – ‘a fair deal’
The British airline buzz, a subsidiary of KLM, proposed the following shortly
before it was taken over by Ryanair in 2002 and the principles remain valid
today. buzz was an airline broadly respected by airport operators and
tourism authorities for offering fair terms of trade to them during a period of
very rapid growth by LCCs and when those airlines consequently could
negotiate from a newly found position of strength if they so chose.
buzz operated from London Stansted Airport and had a similar structure of
services to that of Ryanair – essentially leisure routes to and from secondary
airports. It focused on France and Spain, where there were known to be
extensive expatriate or second home communities and/or where tourism
agencies were keen to diversify away from reliance on domestic tourism with
greater numbers of international visitors. It was regarded as an airline that
probably would have failed altogether had it not been acquired by Ryanair –
it did not have the same ability to control costs and the main aircraft type
employed (BAe 146) was not wholly appropriate to LCC operations.
buzz sought:
Good operational capability
•
•
•
•
•
All weather operation;
No payload limitations;
Quick simple passenger processing and turnaround;
No unnecessary expensive infrastructure; and
Functional efficiency rather than glamour;
Good passenger services
•
Car hire, buses and trains to local towns. No mention was made of
the airline organising these services;
Commercial and entrepreneurial outlook
•
•
•
•
•
•
•
Good understanding of low cost airlines. The implication was that
new commercial airport operators already understood the LCCs’
needs better than established airports did;
Recognising it is a low unit cost, high volume business;
Willingness to ‘think outside of the box’;
An innovative approach to revenue generation;
An entrepreneurial approach to market prospecting (on behalf of
the airline);
Professionalism in the use of appropriate qualitative and
quantitative data;
A partnership approach, sharing risk and development ideas.
An example of the last point would be in the understanding of the technical
limitations of many smaller airports to receive even slightly larger or heavier
aircraft (or with larger loads) than the originally allocated type, if new routes
were successful.
Considering whether low cost airlines presented a dilemma or opportunity to
airports, buzz proposed that:
•
•
•
•
It was dependent upon the size of the airport and amount of
available capacity;
There was a particular opportunity for smaller airports that had
been by-passed by the larger carriers (who were themselves
downsizing as a result of global events);
LCCs have reduced the need for complex airport processes and
infrastructure;
They (buzz) had already demonstrated their ability to deliver high
volumes of new passengers;
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•
The regulatory environment in Europe did not sufficiently recognise
the positive impact of low cost carriers (the same did not apply in
the US and Asia Pacific).
Asking if airline demand for regional airports would reach saturation point,
buzz stressed that:
•
•
•
•
•
•
Saturation was currently occurring at hub airports while traditional
carriers tended to neglect or desert regional airports;
Low cost airlines not only initiated new demand but also generated
traffic away from congested airports to smaller secondary airports;
A focus on smaller airports can ease the burden on hubs. (A
contrary view might be that it would undermine hubs because
regional short haul feeds long haul);
The social and economic benefits of regional airport development
needed to be better recognised;
Additional infrastructure was still required;
Strong co-ordination of transport and regional development policy
was necessary.
The conclusion was that LCCs would continue to challenge the aviation
landscape and present more challenges and opportunities. They have – and
will continue to do so.
Case Study #2: – Southwest – ‘carrot and stick’
Underlying all airport relationships for low cost airlines is of course the level
of charges, while recognising the cost benefits of an effective operating
system.
A proposal by Southwest Airlines to a regional airport in the US, Seattle’s
King County Airport, shares the buzz argument’s reliance on economic
benefits to the local community (and to the airport itself), but contained a
more extensive financial commitment to the airport as well. The
commitment, to invest considerable airline funds to the construction of a
dedicated terminal, offered the airport a greater level of comfort. Once an
airline has made this level of investment in an airport, there is a feeling of
partnership in the future, and the prospects of a sudden withdrawal reduce
substantially.
The dual-runway King County Airport, also known as Boeing Field, provides
services to general aviation users, parcel services, the military and Boeing
itself. It was the city’s main commercial airport until Seattle-Tacoma (SeaTac) airport was built in the late 1940s.
Nearby Sea-Tac Airport, the region’s premier commercial airport, was
unwilling to contemplate charges reductions, leading to Southwest’s pitch to
a competing airport in the vicinity. Southwest proposed to design, fund, and
construct an eight-gate passenger terminal, parking garage, and fuel facility
at a cost of some USD130 million. Southwest would pay ‘land rental and
landing fees’, to generate revenues for the airport and the County, and
promised that the project would generate significant ‘advantages…to the
Puget Sound region, including a projected USD1.6 billion total annual
economic impact to the region as a result of estimated direct expenditures,
taxes paid, and the preservation of low fares in the region.’
There was of course a sting in the tail: “However, low fares are not possible
without low costs. Southwest must make difficult business decisions as the
airport costs at Sea-Tac rise dramatically. These rising costs could result in
inflated airfares or the reduction of competition at Sea-Tac. Either way, the
travelling public will pay more to fly out of Sea-Tac than they do today. With
this proposal, Southwest seeks to maintain and expand its low-fare service
to the public in the Puget Sound region.’
It continued, ‘Ever-increasing airport costs (such as landing fees and
terminal rents) at (Sea-Tac) are threatening Southwest’s ability to provide
the low-fare service that is the linchpin to Southwest’s successful business
model. If these airport costs continue to rise, Southwest may be forced
drastically to cut service at Sea-Tac. In an effort to preserve the Freedom to
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Fly [the company motto] in the Puget Sound region, this proposal examines
the benefits of low-fare service and the proposed details of future service if
King County allows Southwest’s operations to be relocated to King County
International Airport’.
After extolling the value and community contributions which Southwest
makes to local environments, the submission noted that: ‘Instead of growing
this vibrant market as the Company would like to, Southwest’s schedule at
Sea-Tac has been stagnant. The reason for this lack of market growth can
be primarily attributed to one thing: the escalating costs at SeaTac…according to the Port of Seattle’s cost estimates at one time, Sea-Tac
would rank as one of the most expensive airports in the United States’.
The County and airport’s contributions in return for Southwest’s capital
investment were to:

Deliver a site by an agreed upon date that is ready for the
commencement of construction;
Make necessary roadway and signage improvements facilitating
access to KCIA; and
Provide for other services as outlined in an exhibit to the Airport
Lease Agreement entitled ‘Project Development Agreement.’
Inevitably, a major part of the airport/county’s contribution was to be a
responsively low level of charges to the airline.
Conclusions
It is apposite to include the example of buzz here because, despite being
held in high regard and developing a sympathetic working relationship with
the management of the airports to which it operated, it was not financially
successful. This situation arose despite many of the airports applying the
measures listed above, including those with cost implications for themselves.
The airline’s own costs remained too high, for example its AVRO fleet,
despite its recognition of the importance of controlling them.
Ryanair took it over and threatened to axe some of the routes, although
most were reprieved. Even though Ryanair’s individual deals with the
airports were likely to be much tougher, at least most of them have survived
and thrived, and continue to operate in a commercial capacity. (Some of
them have been boosted by services of other LCCs; others have not.) Such
an outcome – survival - was not always certain for the airports when buzz
ceased its own operations and survival policies need always be part of the
development plan accordingly.
Times have changed and some of the demands made by LCCs like buzz have
changed or been answered satisfactorily, for example, the reference to car
hire, buses and trains. Many LCCs now take it upon themselves to organise
surface transport, in the form of franchised buses to the city, by arranging
car hire through the corporate website (sales of this variety can account for
a large part of an airline’s website-led earnings) or even selling discounted
rail tickets on board, as Ryanair does for passengers flying to London
Stansted Airport.
‘Social and economic benefits of regional airport development’ is much
better understood – but not always as positively as the airlines might like.
Many sector participants attempt to promote this benefit of LCC operation,
but it is increasingly coming under scrutiny by better-informed airport
management.
Otherwise, these criteria are as relevant to low cost airport/terminal
operators today as they were then.
The Southwest Airlines model proposed to King County International Airport
– ‘offering a unique opportunity for a true public/private partnership’ - is
one which is much more readily applicable in the US, where terminal
ownership by airlines limits the local (usually council) operator’s need to
raise capital for development.
By implication, US airports are less
commercial than many of their counterparts in Europe and in Asia. But,
even for private sector owners, whose interest is in maximising revenue
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opportunities, there are interesting aspects which may well eventually
become more mutually valuable for airports and airlines alike.
The public/private partnership concept is not only a useful device to limit
capital exposure for airports, but, importantly in a highly volatile airline
industry, offers some mutual risk sharing and a high degree of commitment
from the low cost (or even network) airline to maintaining air service at the
airport. These bankable assets will necessarily have a cost – notably in the
level of charges paid – but the benefits are increasingly measurable to
airports and to local communities, as experience grows.
The project did not come to fruition because the King County Executive,
following extensive public pressure based on environmental concerns,
rejected it. A similar proposal by Alaska Airways has since been rejected.
Ownership of the airport may now be transferred to the Port of Seattle,
which operates Sea-Tac airport. The value of the airport may be as high as
USD1 billion based on recent sales of land and improvement programmes.
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2.4 How airports can take advantage of the environment created
by the LCCs – market creation
Case Study #3: Creating new markets
Market making is a relatively new concept for airports but many low cost
(and other) airports have experimented with it in one form or another and
are making it an art form.
The simplest way of making a new market is the one for in-terminal
services. Virtually all commercial airports permit retail companies to set up
shop on their premises by way of a concession agreement in which rental
fees are linked to sales performance.
Other traditional non-aeronautical income streams comprise duty free, auto
parking, rental car concessions, property income from leasing of airport land
and offices, advertising concession income and transport concessions.
There is an increasing number of more sophisticated market-making
possibilities that are commercially sensitive and which can only be touched
upon here in very general terms. Broadly the opportunities arise out of
the same marketing forces that guide the LCCs – the desire to create
revenue sources out of operational areas that were not previously
considered appropriate to profit generation.
There is no practical reason why any low cost airport should not adopt a
similar outlook; they are representative of a whole new operational
paradigm. They include deals involving baggage handling and security
provision, both of which can provide spin-off revenues to airport operators.
The key point is that privatised entities are more responsive to commercial
needs and are therefore more likely to achieve consensus with commercially
run airlines and to seek such market making opportunities.
For example where third-party customer service companies deal with
baggage handling for airlines it is not unknown for the airline(s), airport and
third-party supplier to cut a deal to share the excess baggage handling
fees when passengers are referred back to the ticket desk for payment.
Typically, this might be shared in the proportion, with 15% going to the
customer service company, and the remainder split between airport operator
and airline.
If the airport operator controls the ticket desk then it holds these funds until
settlement is effected, thus improving its cash flow position. The funds are
significant – at peak times there could be up to three transactions per
minute and Ryanair, to take one LCC example, charges GBP5.50 per kilo.
Speed is of the essence; the entire procedure is geared towards rapid
passenger throughput, baggage allowances are small and more business
travellers (those with short-term excess baggage like samples and laptop
computers) are using LCCs. Left Luggage concessions interface into this
area.
Similarly, in the thorny arena of airport security, there are two ways in
which money can be made. A departure tax, covering several processes,
may be charged by a regional or national government authority, collected on
its behalf by an airline when the booking is made, and paid directly to the
authority. The airport then invoices the authority for the part of the tax that
covers safe passenger handling, which it provides. But the contract with a
private company to undertake the security procedures may be for less,
especially if it is on a per-passenger basis. It is not unknown for airports to
make up to 25% of their income from such measures.
Alternatively, the airport real estate tenants can be encouraged into taking a
security provision as part of their contract – in other words to be offered no
alternative of their own. Again, the actual cost of providing that security can
be less. In the present climate, ‘security’ is a word that has become
synonymous with cost. Moreover, it is considered unavoidable. No airline or
concessionaire wishes to be involved in a security incident, with all the
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negative publicity that engenders, so costs must be borne. This permits
airports to make a market from an administrative exercise.
The amount of revenues that can be earned from security is surprising. To
take one example, Frankfurt Hahn airport, which is a benchmark for
alternative revenue generation, earns 22% of its income from security. As
passenger volumes rise, the unit cost of passenger security processing goes
down and the profit differential increases.
Other examples that are less clandestine include naming rights deals for
low cost terminals. Although common in the USA, naming rights deals for
football stadia and commercial property developments have received mixed
responses from the marketing and advertising industry in Europe.
Management could consider a naming rights deal for a terminal. There is an
example in Chapter 4 of this report at Tampere, Finland, where the airport
operator did such a deal for its new low cost Terminal Two with Omena a
newly launched low cost hotel chain. ‘Omena Gateway’ was the emblem
emblazoned at the entrance to the terminal.
Taxi charges may be applied for picking up (and even setting down)
passengers. Friends and relatives can be charged for the same. In the UK,
airports normally start charging after the first ten minutes of parking with a
charge of GBP2.70 being the base level. Management could consider a
separate area where a drop off charge is paid on departure or entry to this
zone. A single coin is appropriate to the use of ‘basket’ payment systems
that avoid the use of more expensive machinery operated by electronic coin
acceptors. In all cases however, local goodwill and traffic flows are
necessary considerations in making these decisions.
Bus operator concession fees are another source of income.
The need for communication channels to be kept open constantly raises the
opportunity of making a market out of the provision of wi-fi facilities, as
well as egadvertising income from the airport’s web site.
By constructing the web site to take advertising an airport can leverage the
local tourism industry to spend money on web links and banner advertising,
plus other advertisers such as airlines, outstation destinations, promotional
offers and services on offer to passengers via local or national suppliers.
Maximising use of an airport’s web site to sell holidays is another underexploited business.
Cash can be collected in advance for services such as car parking or access
to lounges, through the airport web site. Income from car parking is well
known to represent one of the most important commercial income streams
available to any airport. How it is managed and ‘sweated’ can be critical.
Airport management might explore the possibility of incorporating car valet
concessions, or car washing concession within the car parking area.
Income from this source might be agreed on negotiation with a local service
provider.
Many airports work with private car parking operators that provide carparking services outside of the airport real estate. Concession fees can be
charged to these operators to be promoted by the airport authority.
Many airports outsource their advertising concession with specialist
companies like JC Decaux and Eye Corp. However, if an airport can secure a
service provider to erect and maintain sites, then the proceeds from the
sale of advertising on all indoor and outdoor airport sites can be kept inhouse with the potential of creating greater value release of this commercial
income. The downside to keeping advertising services in-house is that there
is a cost for sale. One employed marketing executive can be highly profitable
by focussing on selling this advertising and the advertising on the web site.
By keeping advertising income in-house, smaller local advertisers may wish
to spend money with the airport on additional sites adjacent the car parking
spaces or in other locations that the major outsource providers may not
consider viable.
Baggage trolley advertising or smart cart systems can increase commercial
revenues.
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Electronic message/advertising can be placed on ramp approaches to the
airport on boards as on motorways.
Where retail concessions are also shifting landside, ideas for concessions and
commercial income can include:
•
•
•
•
•
•
•
•
•
•
Paid-entry executive lounges;
Floating concessions i.e. ‘Barrow Boy Retailers’;
Internet kiosks, WIFI log in fees;
Retail promotion and product placement - product placement
companies show a lot of interest in airport floor space;
Static exhibition sites, (for example taken by car dealerships or
mobile phone companies);
Public gallery turnstile paid access (with appropriate security
controls);
Television advertising screen concessions;
Radio station concessions;
Toilet and washroom advertising; and
Toilet and washroom paid entry.
In the area of data processing, airports can process a vast number of
people. The sale of survey data can provide additional income. The data
from DART Tracking and cookie placing via the web site can also be a form
of lucrative data that can be sold. Secure document or data storage could be
a possibility. Airports often have redundant but large buildings adaptable to
storage requirements.
Airports can innovate in changing their name, although IATA/Civil Aviation
Authority restrictions may apply to renaming variations, management could
consider that some form of added value brand renaming could help support
merchandising. This includes selling t-shirts, mugs, souvenirs and other
memorabilia.
Airports often present a good environment for conferencing, meetings
and exhibitions. Facilities do not have to be top class. Location is more
often the key – accessibility by air and close to main highways where that
applies.
In the area of real estate, accepted Best Practice is to keep all real estate
income in house and not to sell off or let out transactions to third parties
such as property agents.
Added income revenue can be secured by providing a ring-fenced telecom
system.
Innovate, innovate and innovate – like the LCCs
In summary, innovation is key to developing long-term robust levels of nonaeronautical income streams by making new markets. With continued
downward pressure on aeronautical charges, airports continue to face added
pressure to increase non-aeronautical income. ‘Sweating the asset’ needs to
be more aligned to the way the LCC sector is working.
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Chapter 3
51
Chapter 3
Creating a thriving new airport:
Two case studies from Europe
This chapter presents case studies of two well-known European low cost
airports, Liverpool John Lennon and Frankfurt Hahn. They have in common a
disappointing profit history, with the former yet to generate a profit and the
latter only recently having done so, after 10 years of trying. Both have
benefited from the influence of parent companies in ways that are often
denied to other LCATs.
Overview
•
•
•
•
•
Endangered or moribund airports can experience a dynamic second
life as low cost facilities
Attracting low cost service is often a key to catalysing dramatic
passenger growth
However, profitability is not assured, especially when throughput
comes via the low cost sector, which places demands for low facility
costs on airport operators
Solid, experienced management team and well-funded ownership
are critical to long-term survival
Buyers have a responsibility to do their homework – revenues and
economic benefits promised by airlines are not always realised
This chapter illustrates how astute management and use of prior existing
facilities can see the successful conversion of an endangered airfield into a
thriving low cost gateway. It also, however, highlights the financial dangers
of assuming that attracting LCC service will necessarily represent a panacea.
Case Study #4: Liverpool John Lennon Airport
The first case presented is that of Liverpool John Lennon Airport. One of the
UK’s oldest airfields, it was by the end of the 1990s borderline irrelevant in
the national aviation sector, hosting only a smattering of charter services,
with all meaningful service to the north of England focused on nearby
Manchester International Airport.
That changed with the purchase of the Liverpool facility by the private Peel
Group in 1997 and the 1999 launch of services by easyJet, which had found
the user costs and operational structure of Manchester Airport inconsistent
with its preferred methodology. The arrival and steady build-up of services
by easyJet, and then Ryanair, catalysed growth in the facility’s passenger
base, from 800,000 in 1997 to just under 5 million by 2006.
Case Study #5: Hahn Airport
The case of Hahn Airport, near Frankfurt, shows how a dedicated airport
management company took an under-utilised facility, in this case a former
US Air Force base, and converted it into a thriving low cost hub.
After the US military withdrew operations from the facility in 1993, Fraport,
owner and operator of Frankfurt Main, bought a controlling 65% stake in
1998. Originally purchased to serve as a cargo facility to relieve the
overburdened freight operations at Fraport’s flagship facility, Hahn has
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experienced dynamic growth in the passenger arena by marketing itself to
the low cost sector.
Passenger levels were at 29,000 in 1998, the year before Ryanair initiated
service with two daily operations to London Stansted. That service helped
boost airport throughput to over 140,000. The carrier’s subsequent decision
to open its second Continental European base at Hahn has seen traffic
continue to blossom, reaching 3.5 million 2006.
Both cases show the economic advantages of inheriting and converting
technically serviceable facilities, but also cautions that high traffic levels do
not always equate to profitability. Liverpool has yet to break even financially
and Hahn only recently has earned surplus revenue. The analysis shows that
both airports have been able to ride out their disappointing initial financial
performance because of financial support from their parent companies.
In also showing how the parent companies’ core strengths – retail in the
case of Liverpool’s Peel Group and airport/cargo management for Fraport –
are key to the airports’ future viability, it highlights the risk of smaller
companies or municipalities going into the low cost airport field. Buttressing
the caveat emptor warning, the chapter further shows that LCC predictions
of economic benefits of service and retail revenue projections for airports do
not always materialise.
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3.1 Liverpool John Lennon Airport
Case Study #4: Liverpool Airport – “above us only sky”
When the management at the UK’s Liverpool (Speke) Airport in 2002
renamed the facility Liverpool John Lennon Airport in honour of its most
famous son, the ex Beatle, and added the motto (taken from his song
‘Imagine’), it seemed like the beginning of a successful future for the
privatised and rejuvenated airport. But while LJLA has just passed the five
million passenger mark, it is not all plain sailing and profitability remains an
issue.
LJLA is a prime example of a stagnant airport, previously limping along in
the shadow of a nearby world-scale airport, which found renaissance
through a focus on the low cost sector and associated airport planning. The
airport has operated since 1933 and was corporatised as a public limited
company in 1988 with five local authorities as shareholders.
Liverpool’s industrial relations problems handed the advantage
to Manchester
Liverpool, with Manchester, is one of two major conurbations in the
northwest region of England (population seven million). Together the two
city regions, which overlap, are the largest in the UK after London. Although
Liverpool was identified by the government in the 1960s as potentially the
best site for a Category 1 gateway airport for the whole of the north of
England, lethargy and industrial relations disputes there opened the door to
nearby Manchester Airport (23m/37km distant) to take on that mantle.
Manchester Airport’s management was much more focused and aggressive
and benefited from the construction of a nearby motorway link, one of the
nation’s first, and a subsequent rail terminal development; Liverpool still
does not have either although road access has been greatly improved.
Consequently, Manchester went on to become the international gateway
while Liverpool’s traffic dwindled to the point that closure was a possibility in
1977.
It did, however, retain a strong base of freight and small parcels services, a throwback to the days when Liverpool was the premier British transatlantic
port. That was – and enough to keep it in business. In 1990 British
Aerospace (now BAe Systems) acquired 76% of the equity, with
neighbouring the five boroughs of the Merseyside Metropolitan County
retaining the balance. British Aerospace drew up a very ambitious plan to
challenge Manchester, envisaging an annual passenger throughput of 30
million, but without ever clarifying just how it would achieve that.
Between 1985 and 1990, the airport’s traffic went from 258,000 passengers
to 474,000, which was decent growth but still represented just 0.5% of the
UK total. London services were withdrawn, leaving it without a link to the
capital. The only scheduled services of consequence were a daily flight to
Dublin by Ryanair and a regional route to the Isle of Man, a semiautonomously run island in the Irish Sea famous for offshore finance
activities.
Purchase by Peel Holdings was the turning point
British Aerospace’s agenda came under scrutiny. The company also owned
the motor vehicle maker Rover and the extensive land around the airport
and in the Mersey (river) Estuary was a logical site for manufacturing (both
Ford and General Motors have major plants in the area). Eventually BAe
Systems’ holding was put up for sale, in 1997, attracting bids from National
Express (then a significant operator of airports, now bowing out of its last
facility, in New York State), TBI plc (now owned by ADCL, the consortium of
Spain’s Abertis and Aena) and Peel Holdings, the eventual winner. The
agreed price was GBP20 million (about the same as a single soccer player at
Liverpool FC).
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There was still a paucity of scheduled passenger services, but in 1995 the
Scottish charter holiday company Direct Holidays had launched a
programme from Liverpool Airport, its first outside Scotland. Direct Holidays
was a pioneer of budget holidays sold directly (before the advent of the
Internet in its present form, utilising television Viewdata services) and its
products found instant favour in the region. It is felt by some that this
company’s support, selling charter vacation packages via old technology, is
the reason Liverpool Airport survived at all and it gave Peel Holdings a base
on which to build.
Peel Holdings, and its division Peel Airports, is a Manchester based
international property company with interests that also include the
Manchester Ship Canal (claimed to be the world’s first public-private
partnership), ports and a large up-market shopping centre in Greater
Manchester. Another, similar shopping centre is planned in Spain. Peel will
develop the huge Media City, new home of the British Broadcasting
Corporation, close to its HQ in Salford Quays and plans a huge residential
project valued at GBP4.5 billion close to Liverpool.
Total UK assets presently amount to over GBP1.6 billion. Its mission
statement is to “maximise returns to shareholders by investing in,
developing and managing high quality shopping centres, retail developments
and office properties throughout the world.” In May-01 it acquired the
remaining 24% of shares held by the municipalities and Liverpool Airport plc
became a wholly owned subsidiary.
Peel’s philosophy behind the LJLA purchase was based on:
•
•
•
•
The continuing saturation of the London airports (and at
Manchester at peak periods where there was at that time only one
runway);
The clearly definable growth of British regional airports (driven by
the budget airline sector);
The high propensity to travel in England’s northwest (second only
to London/southeast); and
The actual and proposed revitalisation of Liverpool as a commercial
and tourism centre.
Apart from renaming the airport in honour of John Lennon, Peel Holdings
concentrated firstly on improving the physical infrastructure of the airport,
the hangars and maintenance facilities, so that an airline base operation
became feasible. Over GBP50 million was invested in the first four years of
ownership, by Peel Holdings with a significant contribution from European
Union (EU) grant aid funding. Liverpool benefited from the EU’s Objective 1
status for city regions where GDP is less than 75% of the EU average, until
2006, with a subsequent extension of reduced Objective 1A status into
2007. EU grants had partially subsidised previous terminal developments at
Liverpool.
A focused campaign to attract budget airlines
With the necessary physical infrastructure in place, LJLA began a focused
marketing campaign to attract budget airlines, which were then coming into
the ascendancy. Ryanair increased its services to and from Dublin but was
committed to expansion in mainland Europe, at Charleroi, Frankfurt Hahn
and Stockholm Skavsta.
The biggest boost came from easyJet, which commenced six routes in
December 1999, including Amsterdam and Barcelona. LJLA found itself with
two new routes to commercial European cities but still no link to London.
Passengers exceeded one million in that year for the first time.
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It is reasonable to conclude that
Peel Airports tends to operate
where grant funding is available
to supplement its own funding –
at Liverpool, in South Yorkshire
(Doncaster Sheffield Airport)
and in Tees-side (Durham
Valley Airport). However, this is
not unusual. Other Objective 1
areas in the UK have included
Cornwall in the far southwest
and the principality of Wales –
regions where private airport
operators have sought to attract
such funds to build up airports
and mainly through targeting the
low cost airline sector. It does
not take into account the degree
of funding that the company has
applied itself, which is
considerably greater than EU
funding.
55
Traffic growth at LJLA since introduction of LCCs
Millions
LJLA traffic following LCC introduction 1996
6
5
4
3
2
1
0
1993
1995
1997
1999
2001
2003
2005
2006
Source: LJLA, ELFAA, Centre for Asia Pacific Aviation
Subsequently, easyJet expanded to a route network of 17 cities (May-07)
and Ryanair, which announced in Nov-04 that it would make Liverpool its
next European base, has progressively advanced to 33 (May-07) from just
four (Winter 04 schedule). Intriguingly, Ryanair even goes head-to-head
with easyJet at LJLA, something the two airlines rarely do elsewhere.
In Ryanair’s case, the airline was encouraged to expand by the award of the
status of European Capital of Culture 2008 to Liverpool, a prize that has had
a disproportionately beneficial effect on the tourist appeal of the city long
before the festivities begin and which has encouraged large-scale
redevelopment of the previously moribund city centre.
Several new carriers, mainly LCCs, joined them. One of these, Flybe, is a
hybrid some-frills airline, previously known as Jersey European Airways and
based at Exeter, in western England. Until overtaken by Air Berlin, it was
Europe’s third largest LCC. Flybe avoids mainstream airport locations,
especially London Stansted, and focuses on regional airports such as
Southampton (a BAA plc owned airport), Birmingham, Belfast City (now
named after soccer legend George Best), Edinburgh and Norwich. By
Summer 2005 it had six routes at LJLA, all within the UK. And LJLA was in
the enviable position of having all the top three European LCCs operating
bases there.
However, Flybe never progressed beyond those six routes and has in fact
scaled back its operations at LJLA to just two – Southampton and Jersey.
What it has done is to decamp to Manchester, where it has recently taken
over the routes of BA CitiExpress/BA Connect, presently operating 20 in all.
It is likely that Flybe deserted Liverpool due to the significant presence of
two low fare competitors.
Other airlines to have commenced operations at LJLA include the
Polish/Hungarian LCC Wizz Air (three routes, increasing to four in Oct-07),
Aer Arann, which has since withdrawn services, and Air Wales, which went
out of business in Apr-06. Other scheduled operators Air Malta and
Euromanx, are small and specialised niche regional airlines. VLM, the
Antwerp-based full service regional airline that specialises in routes
connecting financial services cities, began flights from LJLA to London City
airport in Feb-04, thereby re-establishing a route that has been on and off
for two decades, but has since scaled them back in the face of tough
competition from revamped rail services. VLM announced in May-07 that it
will abandon the route altogether, putting LJLA back in the position, for the
time being at least, of not having a service to the capital.
LJLA has an active and growing charter programme, operated by Airtours,
Balkan Holidays, Belair, First Choice, Flyglobespan, Goldtrail, Holidays 4 U,
Mercury Direct, Panorama and Thomson, almost exclusively in the summer,
and as a legacy from the Direct Holidays era. This charter build-up goes
against the trend whereby the growth of LCCs often equates with reduction
of charter flights. But none of these charter operators is based at LJLA and
the programmes are still somewhat thin in nature.
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Attempts to attract long-haul services
In the long-haul arena, LJLA did attract Irish flag carrier Aer Lingus back in
2004, which provided the local market one-stop transatlantic services via
Dublin. However, Aer Lingus was subsequently re-launched as a mostly
short-haul LCC, the emphasis on sixth freedom sales was reduced and,
unable to compete head on with Ryanair, Aer Lingus withdrew from LJLA
altogether.
The Scottish long-haul charter/LCC airline Flyglobespan in May-07
commenced flights to New York JFK and Hamilton Ontario, near Toronto.
While the US-Europe Open Skies agreement means that more airlines will
consider LJLA for transatlantic long-haul, it is too soon to say if these
services will be successful. Discouragingly, the LJLA-to-New York route has
not thrived. There was insufficient point-to-point traffic between the two to
justify a planned 2006/7 winter operation (the aircraft was used instead to
fly a Tenerife charter) and Flyglobespan does not offer any onward
connections at either end. Then the summer schedule was cut back before
the first month of operation was completed owing to poor loads and
recurring technical difficulties and it was finally suspended in Oct-07. All the
transatlantic carriers at Manchester report that up to 50% of their loads are
passengers requiring onward connections via established hubs.
Essentially, therefore, the renaissance of LJLA has come from the short-haul
budget sector and the emphasis is firmly on Ryanair and easyJet.
Manchester Airport is known to have attempted to entice easyJet away, an
airline that focuses less on costs than revenues, though so far without
success.
Traffic Breakdown at LJLA: 2004
Int sched
full service
1%
Other
1%
Int Charter
11%
Domestic
sched low cost
16%
Dom sched full
service
8%
Int sched low cost
63%
Source: LJLA website, Masterplan (no more recent figures are available)
New terminal development costly, but necessary
A new terminal building (GBP30 million) was completed in 2002 to cater for
a traffic prediction of three million passengers. Traffic growth in 2001 was
60%, and its posted far and away the largest increase in Europe and during
the period 1998-2003 the aggregate increase was 266%. In July and August
of 2004, more people passed through the airport than did in a whole year
just a decade previously, over 75% of them on easyJet. The full financial
year 2003-2004 however was in fact a period of consolidation that saw a
passenger increase of just 4.4%, mainly due to the fact that easyJet
introduced no new services in that period and Ryanair had yet to make an
impact.
This stop/start nature of passenger growth from a small initial base makes it
difficult to forecast supply needs. However, growth has been more consistent
in 2005 and 2006, with LJLA having consolidated the facility as the north of
England’s premier LCC airport. 2006 passengers totaled 4,962,000, 2.1% of
all UK passengers, an increase of 12.2% over 2005 and a 120% change over
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five years. However, it should be noted that it fell short of the 6.3 million
predicted only two years ago. It is not the highest level of growth – 10
others had a greater increase in that five-year period (although most from
extremely small bases). In 2005, LJLA traffic had grown by 31 percent.
Peel Holdings also applied for planning permission to further expand the
terminal to handle an anticipated 4.5 million passengers by 2006 – a figure
that was actually exceeded - together with additional car parking. The work
commenced in 2003 at a cost of GBP20 million, bringing total expenditure to
GDP80 million. The latest development attracted GBP5.25 million from EU
funds.
The current 25-year Master Plan calls for an expansion of long-haul services,
which has already commenced on a small scale and identifies the potential of
capturing synergies with the Port of Liverpool to develop an enhanced world
cargo market. In 2005, Peel Holdings acquired, through its Peel Ports
division, the Mersey Docks and Harbour Board, which operates the port of
Liverpool and several others in the UK. It is not yet known if this indicates a
strategy of building Liverpool into a sea/air cargo facility. Peel Holdings
already owns the Manchester Ship Canal, a 35-mile/56 km inland waterway
that links Liverpool and Manchester.
In the period 2006-2015 the existing terminal building is to be almost tripled
in size to provide for 8.3 million passengers p/a, via extensions at each end
and to the north. The runway is to be extended from 2286 m to 2600 m (it
is short for long-haul flights but at sea level) and the cargo facility expanded
to handle 40,000 tonnes per annum. This, with other improvements,
represents an investment of GBP350 million. By 2030, the annual passenger
total is expected to have risen to 12.3 million passengers p/a, and freight to
230,000 tonnes. In this period, 2015-2030, further expansion of the
terminal is envisaged to 128,000 m2, an additional Capex of GBP250 million,
totalling GBP600 million over 25-years.
Growth level causes difficulties with EU regulations
It has become evident that the actual number of passengers using the
airport in the immediate future could cause it to fall foul of EU regulations
concerning market support for start-up routes as the airport enters the ‘big
league’. Under current regulations marketing support given by airports for
airlines to open new routes, it is possible for airports in both the public and
private sectors up to a cut-off figure of five million passengers annually
although the regulation is expressly intended for public airports where public
funds are being used. LJLA passed the five million mark in Feb-07 on its
rolling passenger count.
The irony is that the city of Liverpool, being already in receipt of funding
from the EU as an impoverished area, may henceforth be seen as
somewhere to avoid by airlines, as they would not be able to gain the direct
or indirect financial support that many of the thin routes they operate from
such airports require.
That could affect Liverpool in two ways. Traffic could be driven back to larger
airports like Manchester (ironically a municipally owned airport and now the
only public facility left in Britain) where facilities are more comprehensive
(as LCCs seek to become ‘New World Airlines’ by adding frills) or to other
smaller airports – nearby Blackpool would be the case in point here – where
it falls within the parameters of the EU regulations and will do for the
foreseeable future. In Liverpool’s favour is that the EU State Aid Coordinating Committee is known to be flexible, especially where its actions
would conflict with those of other EU departments, as is the case here.
Retail activities on the increase
Given Peel Holdings’ interests in retail development, this aspect of the
business at LJLA was at first low key. However, with the retail units in the
new terminal developments now filled, LJLA began to advertise itself as a
stand-alone retail facility irrespective of the transport function – i.e. come to
Liverpool Airport to do your shopping, even if you are not flying. Retail and
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FBO units are equally shared between landside and airside and number 27
presently, with six more to be added airside by mid 2007.
Is Liverpool really a low cost airport?
There is some debate on this matter. The demands often made by the
airport’s premier client would hint that it is or that client would not be there,
but the airport management itself considers it more of a traditional facility,
in spite of the socio-economic make up of the passengers. Peel Holdings is
not known for cutting costs – its Trafford Centre shopping mall is the most
ostentatious in the country. Neither is Peel’s Doncaster-Sheffield airport,
which opened in 2005 as a conversion from an air force base, obviously a
make-do affair. Building materials used at LJLA included high-grade
limestone and a glazed frontage and there are adequate seats at every gate.
There is no requirement for passengers to carry their own baggage any
more than they would at a primary airport.
It is true that there are no air bridges: turnaround time would be severely
extended to a degree that Ryanair and easyJet would be unwilling to
accommodate. On the other hand, gate bridges are being installed, enabling
passengers to access flights from either of the two levels over a roadway
(multi-flow boarding) so that walking time to the aircraft is reduced to
seconds. There is also a central bus departure lounge for aircraft that are
remotely parked. In the old terminal (which has since been converted into a
Marriott Hotel), all departures were through just one single gate.
However classified, it is certainly the case that LJLA has attracted airport
managers from across the globe to see how a modern airport facility should
operate. Changi Airport executives visited it for example before they decided
on the design of their own LCT.
Financial results not encouraging
Financial performance to date has been uncertain. Indeed in the 74-year
history of the airport it has yet to report a profit, under public or private
ownership, and losses during the early 1990s were heavy. LJLA has some
similarities with Frankfurt Hahn (see below). Both have needed to invest
quite heavily to provide the infrastructure that dramatic growth necessitated
and both have had to find the resources to fund a high level of additional
security since Sep-01.
In Liverpool’s case (UK airports bear the cost of security), this has amounted
to some GBP5 million annually and in any case that figure would not easily
be subsidised given the objections of airlines like Ryanair to paying for
security, the responsibility for which they believe rests with governments.
On top of that Liverpool has been a hotbed of costly industrial relations
disputes, some of which recur occasionally now, even if they have declined
since the 1970s and 80s.
Cross subsidising of airports is not realistic in this case. Expenditure at Peel’s
other airports has been heavy. Doncaster Sheffield Airport was a brown field
site where an extensive clean-up operation was required to rid it of toxic
military waste (although it did qualify for grants as the Sheffield city-region
also fell within EU Objective 1 Support rules). The 75% owned Durham Tees
Valley Airport is situated in one of England’s most deprived regions and was
severely underused as nearby Newcastle Airport, part-owned by
Copenhagen Airports, has forged ahead. Again, substantial investment was
needed here.
In contrast the Ports, Land & Property and Trafford Centre divisions of Peel
Holdings typically derive good profits. In the year ending Mar-04 for example
the group reported an operating profit including joint venture activity of
GBP108.7 million (2003: GBP99.5 million). Although the other divisions each
reported profits, the airports division reported an increasing loss compared
to 2003.
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LJLA profits by division: 2003/04
Division
The Trafford Centre
Land & Property
Ports
Airports
Profit/loss 2004 (GBP m)
59.78
36.05
15.93
(0.54)
Profit/loss 2003 (GBP m)
53.78
38.97
9.36
(0.002)
Source: Peel Holdings website 2005
Note: No more recent information was available in the current corporate
brochure. The company has since de-listed from the London Stock Exchange
and no longer makes it publicly available. It is known that Peel Airports
increased revenues at its three main airports to USD80.2 million (+27.3%)
in the year to Mar-06 but that with a loss of USD15.8 million, its operating
margin was –19.7%, compared to –3.2% in the previous year. Losses
actually seem to be increasing.
The estimate being disseminated by management is that LJLA will be
marginally profitable in 2008 and may break even in 2007.
Future scenarios
Given the results so far, both operationally and financially, what can go
wrong in the future for this ‘low cost’ airport? It is an airport driven almost
exclusively now by passenger throughput from two airlines in one business
sector and the spin off non-aeronautical revenues that emanate from them.
At the time of writing, easyJet is reporting weakening load factors across its
network, which may point towards excess capacity. For its part, Ryanair
commenced its biggest-ever seat sale in May-07. Passenger figures were
down at many British airports in Apr-07, apparently from a combination of
factors, including the impact of a Bank of England base rate rises, high rates
of domestic air travel taxes and perhaps the first signs that the
tremendously influential environmental movement, extensively aired by the
British media, is beginning to sway public opinion.
LJLA went through a period when it offered little carrier/route choice, only
airport choice, i.e. its routes merely duplicated those at nearby airports. It
has surmounted that problem by attracting Ryanair in some force, which is
much bolder in its route selection than many other airlines and most of the
routes it operates from LJLA now cannot be matched elsewhere in the north
of England.
Possibly the greatest threat is from Manchester Airport, whose philosophy
has changed from one of an international gateway airport, which it still is, to
one of a regional low cost airport. Belatedly, Manchester has reduced its
airport charges, by up to 38% and now has its own stable of LCCs, including
Flybe, Jet2 and bmibaby. At the turn of this decade it would have shunned
all of them. The loss of a major carrier like easyJet, which is moving upmarket, to Manchester, would not be fatal to LJLA but would cause
considerable harm. Equally, the loss of the VLM London service (because of
extreme competition from the railways) has serious implications, as would
be the failure of the Flyglobespan flights, as neither is likely to be replaced
quickly.
LJLA also has to contend with the re-emergence of industrial relations
problems that have bedeviled the airport and the wider region in the past.
Finally, Liverpool and the Merseyside region needs to plan in advance what it
will do after the 2008 Capital of Culture year draws to an end. A great deal
of investment in the city has been based on this single event. Manchester
learned after the 2002 Commonwealth Games that there was a void that
was not filled, causing the city to fall out of the limelight internationally. This
‘shadow’ effect can have unplanned economic repercussions.
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Key points
•
•
•
•
•
•
•
•
•
•
•
•
Even if LJLA is not a low cost airport in the precise mould of some
of the others, it is representative of what can be done by a private
organisation with sound financial backing (and which knows how to
tap public grant aid), a vision, and the pertinent business focus;
The influence of the parent company should not be overlooked - a
wealthy and cash rich property developer, whose other divisions
have been able to carry Liverpool Airport’s very slow progress
towards profitability;
But its renaissance has been solely in one business segment – short
to medium haul. At the time of writing, long-haul is not working
and that will influence other potential low cost long-haul operators;
It must be of concern that this short – medium segment is
dominated by two carriers that historically do not like to be in close
proximity;
It has passed the threshold where European regulations on market
support for airlines come into play;
Competition from the railways on domestic routes becomes ever
more intense;
It has attracted the unwelcome attention of the more ardent
‘Greens’ and is moving into the league where more coordinated
opposition to expansion will be felt from pressure groups;
Re-emergence of industrial relations issues could have a
detrimental effect;
Potential overconfidence in the regional economy – there are
warning signs over the Capital of Culture year, notably a funding
shortfall;
Negative effects of government taxation on aviation starting to bite;
National economy slowing; and
For the moment John Lennon’s skies are blue, but the weather
forecast is ‘unpredictable’.
Case Study #5: Frankfurt Hahn Airport
On 09-Nov-06 Frankfurt Hahn Airport announced it had received the green
light to put its already extended runway into operation, by agreeing to
restrict encroachment on to natural habitats and to a reforestation plan.
Hopefully, this development will put to an end the capacity restrictions that
have plagued cargo aircraft operating there and will help put one of the first
‘low cost airports’ finally into profit. This section looks at Hahn’s history, how
it benefited from its pre-existing physical features, at the influence of
Fraport as investor and manager on its growth and how it has set
benchmarks for other low cost airports.
Hahn initiated the conversion of military airports in Europe
The airport now known as Frankfurt Hahn was a US military base from the
1950s through to 1993. Situated in a relatively unpopulated area there were
no night flying restrictions. Its conversion to a commercial facility prompted
appraisal of many other military aviation facilities in Europe for similar
adaptation.
Hahn Airport is centrally located at the core of a triangle formed by
Frankfurt, Cologne and Luxembourg, Europe’s richest country, and situated
in a heavily industrialised region.
Following the military withdrawal, the Rhineland Palatinate (RP) took over
the ownership of the whole real estate area. The sudden absence of the US
military was a blow to the local economy and the RP initiated a costly
regeneration package to try and replace it.
Subsequently, Fraport AG, owner of Frankfurt Main International Airport,
Europe’s third busiest, acquired 65% of the capital and took over the
management. As the ownership changed, so did the fundamental attitude
towards earnings. Put simply, RP was concerned with the regeneration of the
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surrounding area while Fraport, a partially listed company, wanted also to
make a profit.
Latterly, the State of Hesse (where the city of Frankfurt is located) took a
17.5% stake in the airport in 2005, with an investment of EUR20 million that
permitted Hesse to become an ‘active partner’ and increase the capital to
EUR50 million. The State Rhineland Palatinate remained the other
shareholder (also 17.5%) and between them Hesse and RP decided to inject
a further EUR42 million in the airport company between 2005 and 2009 to
create a solid financial basis for important investments at the airport.
Hahn Airport: Ownership structure
Source: Hahn website
There has been some confusion as to the Hesse State’s motives but it was
known to be keen to retain a broad air cargo interest in the wider Frankfurt
area to the benefit of companies located there, rather than see this business
leak away to rival cities such as Cologne.
Hesse State also expressed its confidence in Hahn’s low cost operating
model ‘as the future way forward’ for successful airport operations. Hahn
had been able to attract Ryanair, not only to operate there, but also to set
up a base, to supplement existing cargo operations.
German air transport system followed a different pattern
Until quite recently, air transport in Germany had followed a different
pattern from the typical concentration on the capital and one or two
commercial cities, as found in comparably sized countries like France, Spain
and the UK. Berlin’s three airports remain rather peripheral to the overall
scheme of things and only recently passed a combined 20 million passenger
per annum mark. Frankfurt International (Main) airport, situated in the
financial capital, became the leading airport by far despite the city’s
relatively small population, followed by Munich’s Franz Josef Strauss Airport,
in Bavaria, then Düsseldorf Airport in the industrial Ruhr, followed by
Hamburg Airport, in Germany’s second city. National airline Lufthansa is
based mainly at Frankfurt (Main) and Munich.
There appear to have been two driving forces behind Fraport’s decision to
invest in Hahn, which is located 120km west from the city of Frankfurt.
Firstly, to redirect some critical cargo services there and free up capacity at
the Main airport for passenger service growth. Secondly, to use it as a test
bed for budget airline operations in Germany, which were initially slow to get
going but which are now extensive. The catalyst for passenger growth at
Hahn has been, and is, Ryanair, which designated Hahn its second European
mainland base in 2002, shortly after the first, Charleroi/Brussels South.
When Ryanair commenced operations at Hahn in Apr-99 it was on a limited
basis, with just two flights daily to London Stansted. The operation there of
the Irish/British LCC justified to the Hahn management the construction of a
new passenger terminal, work on which commenced in the August of that
year and finishing in Jun-03. Subsequently T1 and T2 were connected so
that there was once again a single roof. There are tentative plans for a
further extension.
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Hahn fell well within Ryanair’s operating parameters, namely:
•
That there must be either a significant population at either end of a
route or if there is a small population at one end it must
demonstrate a high propensity to travel;
That there should be tourist demand at either end of a route. (Hahn
itself is a gateway for the Moselle Valley).
•
The physical location of Hahn such a distance from the city of Frankfurt and
other towns is an irrelevance from a public transport viewpoint, as it is at
most airports where Ryanair operates. The airline either operates bus
services in conjunction with local companies, to Frankfurt, Cologne,
Heidelberg, Luxembourg and ten other cities, or independent bus companies
have launched services.
Hahn is one of Germany’s top five cargo airports
Hahn has long been a successful cargo airport, and still remains consistently
in Germany’s top five. Claiming a three-hour turnaround (loading and
unloading) for a fully laden B747 freighter, the airport benefits from not
being situated close to a residential area and therefore has a 24-hour
operation and a claimed three-hour turnaround (loading and unloading) for a
fully laden B747 freighter. Airfreight increased from just 7,500 to 75,000
tons between 1997 and 2000 but then stagnated, only to pick up again
dramatically in 2003-05. Throughput was strong in 2006 and rose a further
9% in 2008.
Hahn Airport freight volume (tonnes): 1998-2007
300,000
250,000
200,000
150,000
100,000
50,000
1998
1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Centre for Asia Pacific Aviation & company reports
The catalyst for the freight side development, which preceded passenger
development by five years, was the selection of Hahn by Air France Cargo as
its cargo base/hub for Germany. This became operational in Jul-97. At the
same time Cargolux opted to use Hahn as its main alternative airport and
permission for permanent 24-hour operation was granted.
Throughout 1997 and 1998, cargo services were added by Turkish and
Iranian airlines, as well as Coyne Airways (UK), Swisscargo and Malaysia
Airlines Cargo. Lufthansa Cargo set up a call centre in Jun-98 and a new
4,050 sqm cargo terminal was commissioned, opening in Oct-99. The main
reason behind the sudden collapse of the airfreight business was the
decision by Malaysia Airlines Cargo to pull out, having built up a daily
service. This was brought about by a combination of factors including the
Asian financial crisis of the late 1990s. The business has built back up again
and to the levels recorded above. Lufthansa Cargo, faced with a night ban at
Frankfurt Main, could move some operations to Hahn.
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In Jan-05, a runway extension was approved, from 3,045m to a total length
of 3,800m, securing existing jobs, and expected to create around 1,300 new
jobs in cargo operations. It was completed in Dec-05 but is only permitted
for use of 3,500m in one direction and 3,300m in the other at the present
time.
Airfreight is, according to the management, “the second pillar.”
Bananas are hot stuff
For the purpose of business trips, Hahn falls within the ‘European Hot
Banana,’ a geo-economic zone identified in the late 1980s and within which
most of Europe’s economic development is still situated, especially that of
the high-tech variety. The Banana stretches from southeast England to the
Cote d’Azur in southeast France.
Frankfurt-Hahn promotional slide emphasising the European “Hot”
Banana
Source: Hahn Airport website
As a result of Ryanair’s establishment at Hahn, passenger growth has been
dramatic, some of the largest ever recorded in Europe. It peaked at 323% in
2001-02, although it reduced to a – still impressive – 15% for the first six
months of 2007. This compares with around 20% growth in 2006 and a
further 8% expansion in 2008. (Traffic at Frankfurt Main is stable by
comparison). Around 97% of passengers travel at Hahn on LCCs. 20% are
travelling for business reasons. Ryanair is supported at Hahn by the
operations of Wizz Air and Iceland Express airlines, LTU and Blue Air also
having flown routes in the past.
Hahn Airport passenger numbers: 1998-2007 (LCC entry in 1999)
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Centre for Asia Pacific Aviation & company reports
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A key determinant of growth at Hahn has been the changing perceptions of
the German public towards Frankfurt Main Airport, where environmental
factors held up the building of a new runway. Frankfurt Main has acquired a
reputation primarily as a medium & long-haul transit airport, leaving Hahn to
attempt to establish itself as first choice for short-distance intra-European
travellers.
Struggling to reach profitability
The financial circumstances of this growth have been difficult, given the
initial costs of regeneration. Hahn continued to post a loss before interest,
tax, depreciation and amortisation (EBITDA) right up to 2006, although the
loss has declined consistently over the last three years. The main factor has
been the relatively short runway that cargo aircraft, and some passenger
ones, can only use with limited capacity, thus restricting the opportunity to
attract new clients. That inhibiting factor will now be removed.
The airport management had forecast that it would post a positive EBITDA in
2007 and a net profit in 2008, but surprised observers by closing the 2006
financial year with a positive EBITDA of EUR446,500, an improvement of
EUR2.9 million over FY 2005. Revenues increased by 18% to EUR43.5
million.
But it took 10 years to turn Hahn Airport into a profitable stand-alone
business and the profit is mainly coming from cargo operations and non-aero
asset utilisation rather than passenger operations. Low cost airport
development is not a venture dedicated to short-term profit taking.
Hahn’s formula for financial growth – what privatisation allowed
it to do
One of things privatisation has encouraged Hahn Airport management to do
is to devise a formula for financial growth from the development of nonaviation ancillary revenue income streams. This is achieved from the
following sources:
•
•
•
•
Real Estate Income;
Terminal Concession Income;
Car Parking Income; and
Market Making.
Hahn Airport inherited a large real estate area that was built to high
standards by the American military, including a number of office and
accommodation blocks that were developed specifically to support the
military function. The airport’s owners have leased out many of these
buildings and have been successful in attracting business start-ups, call
centres and support services necessary to facilitate commercial aviation
passenger and cargo operations. There are 118 companies on-site.
Fraport’s experience of real estate utilisation at Frankfurt Main airport was
helpful in maximising this income stream. Additionally, the quality of the
buildings and infrastructure left behind by the Americans meant that the
capital cost to refurbish buildings has been kept to a minimum. No thirdparty letting agent or leasing company is involved within this operation; the
airport receives the income stream directly.
Hahn developed its terminal buildings using a modular low cost prefabricated steel and brick framework design. A very low amount of capital
expenditure went into the terminal developments with no air-bridges and
expensive fixtures and fittings. In some cases surplus, used, fixtures and
fittings were acquired from the parent company – baggage carousels and
trolleys for example. The same standard was applied to cargo facilities,
making them considerably less expensive than the big city airport
competition in central Europe.
Maximum concession space utilisation has helped to ensure that the terminal
lettings have occupancy rates close to 100%. The concessions are managed
by Fraport, which receives the income directly; again no third-party operator
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or letting agent is involved, thus ensuring the airport receives the income in
full.
Outlets include Duty Free, boutique, travel shop, gift shop, coffee shop,
video games, newsagent, a bank and even an erotic shop. Passenger
comforts are provided by budget hotel (a middle-range one is planned) and
VIP lounge, the latter hinting a shift in the clientele away from wholly leisure
passengers. Supporting this notion is the fact that Hahn offers a ‘corporate
card’ with benefits like free parking and VIP check-in and security to
business passengers (EUR700 per annum).
Development of terminal shopping retailing space (sqm) at Hahn:
2002 to 2005
2005
2004
2003
2002
0
500
1000
1500
2000
2500
3000
3500
4000
Source: ELFAA
By keeping direct aviation costs down for its airline partners, Hahn has
helped its main passenger airline partner, Ryanair, to grow passenger
numbers to an unprecedented level for a secondary airport. This passenger
growth in turn has helped to raise the enterprise value of Hahn, especially as
concession fees are usually linked to passenger numbers, especially when
rolling contracts come to be signed afresh. Hahn’s approach has been to
build passenger volumes and enjoy the ancillary income growth.
Because Hahn Airport is located some distance from the main city centres it
serves, the need to offer regular and reliable surface transportation service
is essential. Low cost airports like Hahn either organise the shuttle transport
in-house, or, more often, contract it out and thereby receive a concession
fee from the operator. One of Hahn’s local bus operators quickly grew its
business tenfold and there are now connecting service to and from 20 cities
on 13 routes. Thus transport concessions are a significant revenue source
for low cost airports.
Where surface transport is concerned, there are identifiable similarities
between Hahn and Ryanair’s first mainland Europe base at Brussels
South/Charleroi; also in respect of their catchment area. Hahn’s weakness in
this respect is a lack of road infrastructure to the same standard, unlike
Charleroi where there are several major highways in the immediate vicinity
and fast access to Brussels. Hahn airport is accessible mainly by secondarystandard roads, although it is within reach of the E42/A61 Central European
Artery Road. So long as the airport services only four million passengers
annually, this fact is not significant, but will become so as the airport grows
further.
The state of Rhineland-Palatinate is enlarging the access road to the A61 as
a four-lane connection and some sections are already finished. The whole
route as a four-lane connection is expected to be finished in 2009. It also
intends to reopen a stretch of railroad that had been closed down.
Ground surface transport additionally brings an important benefit to Hahn in
the form of car parking. One of the benefits of inheriting a military air base
is invariably that the land is flat and has ample acreage adjacent to the
runway. The airport entered into a contract with a firm of international car
parking and ticketing technology specialists, who, along with specialist car
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parking infrastructure engineering consultants, helped to develop large areas
of real estate to cope with passenger vehicles.
Hahn Airport has put little capital cost into the development of the car parks.
There are now two multi storey car parks but the other four parking facilities
were set-aside on the abundance of flat land available, a valuable resource
when the airport first commenced commercial operations. The proven
technology being applied means that the ticketing and car parking income
goes directly to Fraport - no third-party operator is needed to manage the
car parks. Higher passenger numbers have led to increased demand for
parking facilities and, consequently, higher parking revenues. Car parking
income is one of the biggest sources of ancillary revenue at Hahn.
Development of car parking at Hahn (thousands of spaces)
Thousands
14
12
10
8
6
4
2
0
2002
2003
2004
2005
Source: ELFAA
Making new markets
Market making is a fairly new concept for airports and many low cost
airports have experimented with it.
Probably the simplest way of making a new market is the one for in-terminal
services. Virtually all commercial airports permit retail companies to set up
shop on their premises by way of a concession by which rental fees are
linked to sales performance. An extreme example of this may be found at an
airport where the management secured the support of a local restaurant
chain to help extend a terminal for the use of a low-cost airline. The deal
involved an exclusive food and beverage arrangement for the restaurant
chain (i.e. it was the only one permitted to operate, in perpetuity). The other
and more interesting aspect to the arrangement was that the support of the
LCC was also acquired, to advertise the restaurant’s services to its
passengers.
There is a growing number of more sophisticated market making possibilities
that are commercially sensitive and which can only be touched upon here in
very general terms. Broadly they arise out of the same marketing forces that
guide the LCCs – the desire to create revenue sources out of operational
areas that were not previously considered appropriate to profit generation.
They include deals involving baggage handling and security provision both if
which can provide spin-off revenues to airport operators. The key point is
that privatised entities are more responsive to commercial needs and are
therefore more likely to achieve a meeting of the minds with commercially
run airlines and to seek such market marketing opportunities.
Influence of the parent has been crucial
As with the case of Liverpool, the influence of the parent company here,
Fraport, as a benign and supportive parent should not be overlooked.
Although it was a state-sponsored rescue package that saved Hahn from
slipping into oblivion in the first instance (as numerous ex-military airports
have done), it was the determination of the privatised entity to take both
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operational and financial control of Hahn, and to give it strategic direction,
which led to the dramatic growth that has brought about 3158 jobs at and
around the airport (Jul-07), an increase of over 20% in a year.
The American military facility had employed only 800 local residents even
though it was considered a vital part of the local community, accounting for
EUR125 million in economic income annually. 80% of the overall jobs
increase since 2002 is directly attributable to airport operations. Fraport’s
input also galvanised the remaining public sector shareholders into a further
and significant investment in essential infrastructure projects. Moreover, it
should be noted that Fraport itself had to develop a new business model for
Hahn, which is one of the earliest examples, possibly the earliest, of a low
cost airport. Few non-privatised entities would have been prepared to take
on that challenge.
It is almost certainly the case that without the intervention of Fraport, Hahn
Airport would not be as advanced as it is today, and that far fewer jobs
would have been created there. Inevitably, one or more LCCs would have
been attracted there, but it was the investment and infrastructure provided
by Fraport that convinced Ryanair to make the airport a base and to base
aircraft there, thus developing the need for a wide range of supporting
industries and services.
Irrespective of the parent’s business plan for its flagship facility, Hahn
continues to offer a useful outlet to Fraport, especially at a time when
capacity restraints at Main Airport hold back traffic growth in advance of the
anticipated 2010 opening of the fourth runway.
Key Points
Hahn Airport is successful operationally (and at last, financially) because of:
•
•
•
•
•
•
•
Shareholder structure - demonstrative support of Fraport sustained
by the regional authorities;
Slow but steady diversification away from reliance on one
passenger carrier (But more work still to be done here);
Change of public perception, to identify Hahn clearly as a low cost
airport and point-to-point airport for intra-European travellers,
quite distinct from the long-haul/transit function of Frankfurt
International;
Its ability to manage and develop ancillary income, including
innovative techniques;
The 24-hour unrestricted flight operations that have supported the
cargo income business, which provides strong additional aviation
income streams – the facility’s critical ‘second pillar’;
The large inherited real estate holdings that required minimal
capital expenditure; and
A good strategic location for cargo and passenger operations.
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3.2 Positive parallels to be drawn
There are positive parallels between Hahn and Liverpool that compensate for
the negative baggage these airports carry for being loss-makers. As stated
at the beginning, the influence of the parent company has been highly
significant. In Hahn’s case it is Fraport, supported by ambitious state
politicians from more than one relatively wealthy region of the world’s fourth
biggest economy. With the Liverpool, it is a wealthy and cash-rich property
developer whose other divisions have been able to support Liverpool Airport
throughout its renaissance and hopefully now towards profitability.
Finally, the ambition of politicians has been realised at least partly through
the large increases in employment opportunities that have materialised at
Hahn, as noted in the text, and also at Liverpool, where unemployment rates
have traditionally exceeded the national average.
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3.3 Pitfalls facing other LCAT operators arising from these case
studies
Some other low cost airport owner/operators do not have the support of
parent organisations to the same degree. They may for example be small
local municipalities operating under a licence from their central government.
Or the amount of investment capital available for works more significant
than those needed at pre-ready Hahn, or to develop the facility’s real estate
portfolio may be small.
In such situations, and where low cost airports are also situated in thinly
populated areas with little opportunity to develop origin traffic, the airport
can find itself at the mercy of LCCs that heavily promote the idea of the
‘value’ to the community of inbound destination tourism in terms of local
economic development and wider benefits through the economic principle of
the direct, indirect and induced impacts of the Multiplier Effect 13 . In many
cases this value can wind up being substantially less than promised.
For example, in 1998, when the Mexican airports system started to undergo
privatisation, it quickly became apparent that the anticipated growth in nonaeronautical revenues would not quickly materialise, other than at the small
number of airports specifically serving established tourist destinations, such
as Cancun. Most of its airports found themselves unable to extract impulse
purchase revenue from the local travelling population.
European buying habits indicate that it should be possible to grow these
income streams far more easily. But even in Europe, it is has become
apparent that a number of airports that acquiesced to the marketing
demands of their LCC tenants are simply not making money. This is more
likely to happen where the airport is a stand-alone entity without parental
support and supervision.
For example, there are some airports in thinly populated Scandinavia that do
not have domestic connections to the capital city, some of which in the past
hosted general aviation activities and flying schools. They have become
almost entirely commercially reliant on one LCC operating a limited route
network usually to foreign capitals or vacation destinations. The services
instigated by that LCC have not helped to attract other LCCs, as there is only
adequate demand on a select number of routes so the aeronautical revenues
anticipated from a broader development have not materialised.
Aeronautical revenues arising from the incumbent and hard-bargaining LCC
are low while capital expenditure to handle it has been high and the volume
of passengers does not merit substantial investment in non-aero revenue
generators. And their bargaining power is limited, as the event of the
incumbent LCC withdrawing services, wholly or even partially, could have a
catastrophic effect on the city-region, a fact the carrier knows too well.
In the short-term at least no airline would consider flying there, as there is
now no perceived demand for LCC services, let alone full service or network
ones. The winning airports are likely to be the nearest big city airfield, which
can attract the growing brand of LCC that is adjusting its own cost structures
to those of primary airports and the extra services they offer. The other
loser might be the low cost airline itself if it cannot or will not adapt to the
primary airport cost structure. One example would be Ryanair, which has
consistently advocated that secondary airports lower their costs so that “the
region gains”.
Ryanair understands that this argument would be met with resistance from
most primary airport operators, but that secondary airports often have no
alternative and will derive proportionately greater benefits from the new
service than their larger counterparts.
13
The Multiplier Effect is a basic economic concept, which refers to changes
in the level of activity that brings further changes in the level of other
activities throughout the economy. When an injection of expenditure into an
economy leads to an increase in national income more than the original
injection, this is the multiplier effect. For example, tourists’ expenditures in a
destination create new incomes and outputs in the region, which, in turn,
produce, further expenditures and incomes.
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It can be argued too that
LCCs have responsibilities,
both in the local interest and
for their own long term
success. Ideally, they should
be transparent about the real
benefits – and costs – their
services will generate for the
low cost airport. In this way a
responsible, mutually
beneficial financial
arrangement can be worked
out and agreed before those
services begin. Otherwise the
pattern of relationships could
break down before they have
begun to get established.
At the same time the LCAT
operator has responsibilities
too. In order to secure
sustainable service, it must do
its homework and carefully
assess whether the LCC they
are courting will serve
destinations likely to meet
with a positive response from
its home market.
70
It can be argued too that LCCs have responsibilities, both in the local
interest and for their own long-term success. Ideally, they should be
transparent about the real benefits – and costs – their services will generate
for the low cost airport. In this way a responsible, mutually beneficial
financial arrangement can be worked out and agreed before those services
begin. Otherwise the pattern of relationships could break down before they
have begun to get established.
At the same time the LCAT operator has responsibilities too. In order to
secure sustainable service, it must do its homework and carefully assess
whether the LCC they are courting will serve destinations likely to meet with
a positive response from its home market.
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Chapter 4
72
Chapter 4
Low cost airports
& terminals in Europe
This chapter uses case material to examine the experience of low cost
airport and terminal operators, as well as those who aspire to operate low
cost airfield facilities in Europe. The results of these ventures further
highlight that different baseline situations – from a home traffic base,
economic and regulatory viewpoint – can yield dramatically different results,
and that a low cost facility can be an ideal solution for some municipal
entities, and a recipe for disappointment in others.
Overview
•
•
•
•
•
European examples highlight some winning LCA strategies, as well
as some with flaws
Converting existing terminal facilities to LCTs can be a costeffective way to participate in low cost revolution
Proceeding without fully understanding local government’s
commitment to airport can result in bureaucratic costs and
expensive delays to development programmes
Understanding and adhering to the prevailing views of the presiding
regulator (in these cases, the EU) is critical step in success of
LCA/LCT
Alternative revenue sources (e.g., military or industrial usage) can
help ensure facility’s viability
Case Study #6: Coventry Airport
The first case explored is Coventry Airport in the UK. The airport is an
interesting example of several different phenomena – it was at one point
owned by a low cost airline, it exists in close proximity to a major facility,
but one that is an aggressive price-setter and it apparently launched its new
operation without a clear understanding of the local community’s views
were, an error in judgement that ultimately resulted in the owning airline
selling the facility to a property developer.
Case Study #7: Doncaster Sheffield Airport
Another of the several UK cases was Doncaster Sheffield Airport, which was
another example of converting a former military facility for commercial
usage. This airport has used its pre-installed facilities to sustainably offer
low charges and access to a wider catchement area to airlines. The carrier
community has responded with enhanced service levels that have pushed
the facility close to its targeted passenger-throughput levels.
Case Study #8: Glasgow GPIA
In Scotland, the experience of Glasgow’s secondary facility, GPIA, shows
how a minor airfield located near an important urban area can attract large
numbers of services. It also shows how an unconventional LCA move –
undertaking an expensive cosmetic rehabilitation – was determined to be the
best way to spur on increased retail and food-and-beverage activity.
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Case Study #9: Stansted, Luton and Kent International
Around London several airports claim the title of London catchment airports.
This study compares and contrasts three of these: Stansted, Luton and Kent
International.
Case Studies #10 and #12: Geneva Airport and BrusselsCharleroi Airport
In Continental Europe, the chapter looks at the benchmark Geneva Airport
and Brussels-Charleroi Airport cases, showing how structuring facility pricing
deals to entice and support low cost service both cleared and ran afoul of,
respectively, European competition laws.
Case Study #11: Marseilles Provence Airport
It also shows how Marseilles Provence Airport was able to assimilate the
experiences of the two critical low cost terminal cases to structure its own
LCT charging regime to great commercial success (European routes
increased from 15 to 33 in a single year), while also staying in the EU’s good
books.
Case Studies #13, #14 and #18: Budapest, Warsaw and Tampere
(Finland)
Examples from Budapest, Warsaw and Tampere (Finland), show how
airports have undertaken the cost-effective reconfiguration of existing
facilities (which in previous lives saw duty as a cargo processing zone, a
defunct, historical terminal and even a supermarket). Innovatively utilising
these installations has allowed the airports to participate in the low cost
revolution.
Case Study #15: Parma
Parma, near Milan, may be a test bed for further expansion by the foreign
company of a future network in Europe and possibly beyond.
Case Study #16: Iceland
Iceland, as a case study in making, has as yet no low cost airport and this
section looks at some of the ingredients involved in decision making on the
construction of a new facility.
Case Study #17: Don Quijote International Airport
The chapter also shows some of the possibly flawed LCA strategies that have
been put into effect, such as the Don Quijote International Airport near
Madrid, which put itself in the unfortunate position of relying on the
owner/operator of the facility it competes with for support and
infrastructure.
Case Study #19: Lappeenranta Airport
Lappeenranta Airport, Finland, has initiated operations with a business
proposition of drawing the majority of its traffic from St Petersburg, just
across the border in Russia. Although it has managed to entice some charter
services to Russia-appropriate destinations in southern Europe, low cost
service has thus far been elusive.
Case Study #20: Uppsala
The chapter finally looks at Uppsala, Sweden, shows how a community plans
to use the infrastructure of an existing – and still operational – military
facility to compete with Stockholm’s Arlanda Airport (which is as close to
downtown Stockholm as Uppsala) for passengers, with the budget sector its
main target.
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4.1 United Kingdom
Case Study #6: Coventry (West Midlands International)
Airport – budget airport ownership by an airline
Coventry Airport, or West Midlands International Airport as it has also been
known recently, is about as close to a genuine low cost airport as it is
possible to get. Its modest slogan is ‘More to offer than you’d imagine’. It is
also one of the first examples of an airport being owned and operated by an
airline. Coventry Airport’s owners, TUI and later Cafco, were involved in a
protracted dispute over planning permission for the development of a
terminal at the airport which was resolved in Jun-07, but not to the owner’s
satisfaction, casting doubt on the long-term future of the facility.
Coventry, a city of 300,000 people and undergoing a renaissance, is in the
most easterly borough of the West Midlands conurbation (2.6 million) in
central England. The major airport for the conurbation and surrounding
region is Birmingham International, Britain’s sixth-busiest, which handled
9.1 million passengers in 2006 and is approximately 15 miles/25 km from
Coventry Airport.
Birmingham Airport’s growth has stalled during the last two years, partly
because of failing airlines, partly because LCCs have been attracted to other
airports, partly because of the proximity of London Heathrow and its range
of long-haul flights and partly because of a short runway that will not
support services that might otherwise use it. Moreover, its airport charges
have always been on the high side. Two of the major shareholders,
Macquarie Airports and Dublin Airport Authority, sold their stakes in May-07
to Canadian and Australian pension funds and the future is presently
uncertain.
Coventry is very close to the centre of England, in proximity to two of the
country’s main motorways, linking London and the north of England, and
close to a major east-west trunk road too. The airport’s website, adopting
the new name West Midlands International Airport in 2004 described it as
“the best located airport in Britain.”
Despite this advantageous location, the airport, then owned and operated by
the City municipality, was no more than an occasional cargo facility for
livestock and home of a flight training, charter and corporate business
incentives operator, Air Atlantique, operating off a single runway of 2000 m
x 46 m. It made news only for negative reasons, with the loss of an Air
Algerie B737 freighter aircraft in the nearby suburbs in Dec-94 and the
accidental death of an animal rights protestor several weeks later. It is an
exceptional example of how an airport’s profile can be enhanced enormously
through low cost operations. In this case however, low cost means very
basic.
Coventry Airport was losing up to GBP1 million each year and Birmingham
Airport had turned down opportunities to acquire it. It was acquired in Feb04 for EUR10 million by the German travel and vacation group, TUI,
Europe’s largest, thus becoming the first instance in Europe of a major
airline/tour operator owning an airport. TUI owns the Thomson vacation
brand, previously better known for all-inclusive package holidays rather than
budget flights although, as with all such operators, the balance has been
swinging from the former towards the latter.
Indeed Thomson’s own strategy broadly swung in favour of budget airline
flights (as Thomsonfly.com) since it took over at Coventry and it went on to
commence complementary services from Robin Hood Doncaster Finningley
Airport, in addition to those at 20 other bases in Europe. The other major
carrier at Coventry was the LCC HapagFly, also in the TUI organisation, and
whose Cologne/Bonn air service was aimed more at business travellers from
the wider industrial West Midlands conurbation. Thomsonfly and HapagFly
were later merged (Jan-07) under the all-encompassing TUIfly brand.
The purchase amount of EUR10 million included projected investment costs.
In fact, investment, or lack of it, has been the problem since the acquisition.
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Builders’ huts were requisitioned as a makeshift terminal and the local
municipality threatened legal action on health and safety grounds. Longerterm infrastructure developments were not made clear and the Coventry
municipality and others in the vicinity appeared keen to challenge
development proposals. This is perhaps surprising as the airport’s alternative
prognoses were to continue underachieving or to be closed and perhaps
demolished in favour of a housing or trading estate.
The airport enjoyed quick success in terms of route development. There was
clearly a latent demand for low cost services despite several LCCs operating
from Birmingham International, also from Nottingham East Midlands (30
miles/48 km distant, such as easyJet and bmibaby) and from London
Stansted (70miles/112 km), the world’s biggest low cost carrier airport.
From virtually no scheduled passenger services in 2003, Coventry’s route
portfolio, all operated by the same company, quickly grew to include
Shannon, Cork, Faro, Malaga, Alicante, Valencia, Barcelona, Palma, Ibiza,
Lyon, Paris, Pisa, Naples, Venice, Salzburg, Cologne and Amsterdam. The
majority of the routes were leisure travel oriented and Coventry quickly
overtook much longer-established airports like Exeter, Humberside and
Norwich in passenger throughput.
Thomsonfly carried 500,000 passengers in 2004, roughly in line with its
target. 2 million passengers per annum were planned for within the existing
operating limitations, proving that British consumers will accept virtually any
circumstances to access ‘trade price’ opportunities for travel. The expansion
created 370 new jobs for the region, approximately 70% of which were in
Coventry and its environs. The Thomsonfly operation itself created 139 new
jobs, Skypartners who provide the food and beverages for the airport
created 25 new jobs and Coventry Airport Handling employed 70 new staff.
135 new jobs were created within the airport operating company.
Thomsonfly at Coventry Airport
Source: Thomsonfly
Where things did not progress so well was in the provision of the
infrastructure to handle this rapid growth. Having got around the problem of
having to use builders’ huts as a temporary terminal and a further dispute
concerning car parking, TUI then discovered that its proposed new terminal
was not an inadequate size to handle 2 million passengers. A new proposal
for a 10,000-sqm terminal, three times the size of the original, was made. In
addition to a 3,500-vehicle car park, the expansion called for a runway
extension. A Public Local Enquiry commenced in Feb-05, dealing only with
the Interim Passenger Facility, not the permanent terminal building, which
was to be considered at a later date.
During the enquiry proceedings, the airport was sold on, in Jan-06, to Cafco
Coventry (a.k.a. Cafco-C). This is a joint venture company constituting
Howard Holdings plc, an Anglo-Irish property development group, and
Convergence-AFCO Holdings Ltd. (CAFCOHL) an Anglo-American airport
management and development company. The name reverted to Coventry
Airport, as West Midlands International Airport had been TUI’s holding
company. AFCO owns, manages and operates airport facilities in 27 locations
across the USA, Caribbean and Europe.
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TUI had been restructuring and rationalising its UK operations, with no
particular commitment to any city-region, only to ‘the market’. Its total
turnover was down 0.1% in 2006, to EUR14.083 billion and when all Group
activities were included there was a Group loss for 2006 of EUR846 million.
Financial details were not disclosed, but it is highly likely that TUI,
essentially a people-moving company rather than an airport operator, will
have made a significant profit on its EUR10 million investment. TUI later
merged with the UK’s First Choice Holidays, one of a number of
consolidations in this sector.
The new owners insisted the airport would operate as previously and that
they would pursue the existing development plans, including further runway
improvements, expanded business aviation facilities, airfield ground lights,
NAVAIDS, air traffic control enhancements, freight facilities and a new hotel.
Cafco-C indicated the site was the first in a network of European regional
airports it was looking to buy. If they were as committed as they appeared
to be to opening a two million per annum passenger terminal, that might
have caused Birmingham Airport some problems in meeting its ability to
fulfil the role set out in the UK Government’s Aviation White Paper in 2003.
It is one of the more complex ownership examples to be found in the UK.
Apart from Cafco, Cafco-C, AFCO and Cafcohl, Coventry City Council still
owns the land on which the airport is built. A further complication is that
Warwick District Council is the responsible planning authority, as the airport
is within its boundaries.
The second public enquiry on the terminal concluded in Jul-06 and it
appeared that the airport might have to be capped at 1 million annual
passengers, a figure it would soon reach its limits at current levels of
activity. Certainly, major investment would be extremely costly.
Subsequently, (Jun-07) prevailing government agencies advised the West
Midlands airport of its decision to refuse its application to build a new
passenger terminal, the first time that a major airport expansion plan has
been turned down. The decision is perhaps representative of a growing antiaviation trend within the UK government, which in Feb-07 imposed a
swingeing tax on domestic and international air travellers that has slowed
growth dramatically. Birmingham Airport had opposed the plans as one
might expect (thereby inviting doubt about its own expansion), but so had a
coterie of other interests including the Greens and the Member of Parliament
for Warwick and Leamington, an upmarket residential area nearby who was
one of many to argue that local air travel demand could be adequately met
at Birmingham. Coventry City Council, to its credit, did support the terminal
proposal but Warwickshire County Council did not.
The Coventry Airport management remain bullish, promising ‘business as
usual’, and that its legal team is considering the impact of the decision and
that investment plans ‘will only be delayed slightly.’ GBP5 million has already
been invested, there is still capacity and the airlines remain confident.
Operationally, the airport is down to 13 Thomsonfly/TUI routes from a high
of 21, but it has been bolstered by Wizz Air’s three times weekly Katowice
service from Jul-07. Passenger numbers exceeded 600,000 in 2006 but have
not grown at the anticipated rate and in fact declined by 15% compared with
the previous year. Passenger facilities remain basic while the response to the
terminal verdict is being prepared. They include a café/bar (the only landside
facility), and, airside, a bar, refreshments counter, general goods shop and
foreign exchange counter.
In Jun-07, and in anticipation of the terminal verdict, the management
reduced landing charges by up to 60% in order to attract more commercial
and private airlines, typically from GBP16.30 per metric tonne to GBP10.
This means that the landing fees for an 80 tonne aircraft (a B737 for
example), which would have been GBP1340, are now only GBP800.
Passenger Landing Supplement, which used to be chargeable on arriving and
departing passengers, is now only payable on departing passengers. The fee
is GBP9.00 for international passengers and GBP5.50 for domestic
passengers. Aircraft parking charges have been changed to a flat fee of
GBP25 or GBP30, rather than a per tonne charge.
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Key Points
•
•
•
•
•
Coventry represents one of the most basic examples of low cost
‘terminals’ irrespective of whether it is a temporary or permanent
facility;
Had TUI not bought it there is every chance it would have been
closed down;
This low cost airport example was unique in Europe, as both the
airport operator and lead tenant were the same firm. There may be
more examples to come as the first questions about private equity
fund participation in airport ownership ask whether airline
ownership of airports with local government participation is a better
alternative;
But it serves as a warning that assumptions cannot be made in
airport planning, especially in the UK where there is growing public
antipathy towards further airport development; and
It is difficult to forecast the long-term future but closure still
remains a possibility. TUI could easily transfer its services to other
LCAs nearby, e.g. Doncaster–Sheffield and cargo/GA activity has
not grown. Essentially the airport remains dependent on one airline
whose parent company has already quit its management of the
facility.
Case Study #7: Robin Hood Doncaster-Sheffield Airport (RHDS)
RHDS is a ‘brown field’ conversion of an existing but redundant Royal Air
Force military airfield, previously RAF Finningley. It is situated 8 km from
Doncaster, a waning ex-mining town and 32 km from Sheffield, Britain’s fifth
largest city with a population of 530,000. It opened in April 2005. It is one of
few new build airports in Europe, let alone the UK.
The population of the South Yorkshire conurbation (the immediate
catchment area) is 1.3 million, but large parts of it have become industrial
wastelands, dependent upon European Union funding support for
infrastructure projects. A wider catchment area was envisaged comprising
also North Nottinghamshire and North Lincolnshire, with up to six million
potential travellers living within the borders. Development of RHDS was also
based on its potential ability to divert passengers from Manchester
International Airport (60 miles/96 km away), Britain’s third busiest. Up to
40% of Manchester’s traffic originates from the Yorkshire and Humberside
planning area and 60% is leisure travellers. RHDS, like Coventry Airport
targeted leisure travellers primarily.
It is the first newly built commercial airport in Britain since London City
Airport was constructed in derelict docklands in 1987 and (coincidentally)
Sheffield City Airport in 1997. The latter now serves as a general aviation
facility and is facing possible closure.
Peel Holdings (see also Chapter 3 Case Studies – Liverpool) had planned to
develop RAF Finningley since the late 1990s. The proposal at the time was
based on strong passenger growth at regional airports generally (even
before the LCCs had attained their present day standing) and a national
airports policy that had begun to favour the regions over London, i.e., the
same reasons for that organisation’s investment at Liverpool.
The South Yorkshire region was poorly served. The surrounding facilities
included Leeds Bradford Airport, which is difficult to access by road;
Humberside Airport, which is remote; Sheffield City Airport, which was
physically incapable of accommodating large aircraft; and Manchester
Airport, accessible with difficulty in winter across the Pennine Hills.
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RHDS Locator map
Source: RHDS
The existing infrastructure at Finningley included a workable runway; ILS;
lighting; hangars; offices and residential buildings spread over 800 acres.
The first requirement was to clean up contaminated areas. Externally, the
road network is only adequate – the M18 and A1(M) motorways pass within
five miles - but a rail station is planned for the Doncaster-Lincoln line
adjoining the northern boundary of the site, Doncaster station being a major
one on the trunk London-Leeds-Edinburgh rail line. Currently there is a
shuttle bus to and from Doncaster station.
The airport was first scheduled to open in 2004 with a plan to catch the
attention of 1 million passengers in its first year of operation by attracting
European budget airlines. A secondary consideration was that the long
runway could host long-haul charter flights, possibly transatlantic, as no
such option was available in this region. However, Nottingham East Midlands
Airport (also owned by Manchester Airports Group), 50-miles/80 km to the
south, moved quickly to acquire charter services to popular long distance
vacation destinations as a defence.
The interested local authorities also envisaged substantial inbound tourism,
but, apart from the Peak District National Park, the lingering legend of Robin
Hood and occasional local festivals and sporting events, there is little to
attract foreign visitors. There is even some doubt as to the commitment to
the Robin Hood brand as the name is rarely mentioned, the airport generally
being known as plain Doncaster-Sheffield or just (on many airport departure
boards) Doncaster, despite the recent unveiling of a statue of the
eponymous hero at the airport.
The opening date having been put back, RHDS eventually opened with a
capacity for 2.3 million passengers and 50,000 annual tonnes of freight in
Apr-05. The terminal building, in appearance similar to Liverpool’s, houses
22 check-in desks, three baggage reclaim carousels and various retail and
catering outlets including a large airside tax and duty free outlet run by
Alpha Airports, a landside food hall, coffee shop (landside and airside), an
airside bar, two outlets of the popular UK pub chain J D Wetherspoon,
convenience store, news stall and a games centre.
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Several operators, including TUI/Thomsonfly (scheduled and charter) and
Ryanair (one initial route: Dublin 14 ) made early commitments to RHDS, but
there was no certainty that other budget operators would be attracted with
so many low cost options available from neighbouring airports. As it
transpired, Thomsonfly increased its network to 35 routes by 2007 including
Florida and Mexico. Ryanair has three, Flybe and Wizz Air have one each and
Flyglobespan commenced a service to Hamilton, Canada (q.v.) in Jul-07.
EasyJet is not represented as it has a base nearby.
Attempts to attract a Pakistan based airline (Shaheen) have not yet been
successful. Supporting charter services are offered by eight operators,
including fly-cruise. RHDS, in common with its Peel siblings, is a very
marketing-led airport, for example concluding a deal with the tour operator
Sports Options for day trips to the England national teams soccer games in
the 2008 European Championship qualifying round.
Four of the top five routes reflect the ethnic diversity of the region (Dublin)
the ever-popular Spanish destinations for British vacationers, second home
owners and expatriates (Alicante and Malaga) and the newly popular citybreak still destinations (Prague).
60% of passengers originate from the South Yorkshire conurbation and
almost all the others from the eastern side of the Pennines. There are still
comparatively few inbound passengers, and the airport has not attracted
long distance travellers as has Liverpool with its extensive Ryanair and
easyJet networks.
The total investment by Peel Holdings and TUI combined was approximately
GBP150 million and had implications for employment generation. The airport
represents the largest single private investment in a decade in a run-down
former mining area. The target set by the region’s economic development
department is 7,000 directly attributable jobs by the time it reaches two
million passengers per annum.
Additionally, there are 70 acres of land available for aviation-related
employment usage, with 70,000 square metres of offices, industrial and
storage units available to let within an overall infrastructure of 800 acres.
The challenge in this respect is set by Nottingham East Midlands Airport,
which is already established as a leading air cargo and distribution facility. A
National Aviation Academy is planned for the site.
One of the ways in which RHDS can be identified as a low cost airport is
that, like Frankfurt Hahn, some of the original features from its military days
were already in place – a recently resurfaced runway, control tower, lighting
and hangars – but were deemed to be surplus to military requirements
following the end of the Cold War. Equally, there was no need for a multistorey car park. Moreover, the modern, simple design and décor of Peel’s
Liverpool terminal was replicated. Retailing opportunities were tailored to the
passenger profile. The original carriers required only simple, paper-based
check-in, but the management was prepared to commit to a more advanced
electronic/Internet-based one if a new carrier so required it.
For example easyJet is a user of electronic check-in on a wide scale and the
Peel management has learned from its experience at Liverpool. The available
space in the ticketing area will be determined by airline demands, reflected
by the percentage of tickets sold on-line. The airside and apron area has
been built with a jetty, a semi-air bridge operation, to offer to long-haul
carriers but the expectation is that the majority of aircraft will load and
unload via stairs.
Nevertheless there is a dispute as to whether RHDS is a low cost airport;
there is an argument that it has gravitated towards full service in the light of
the long haul and fly-cruise services but even Ryanair’s limited network
would not be there if that were the case – there are alternatives.
The original forecast (in 1999) was for 1.1 million passengers in 2004, rising
to 2.3 million by 2014. In Jun-06, it recorded 1 million passengers in the 60
14
This in itself was a major coup by RHDS. Ryanair’s Chief Executive
described the town of Doncaster in very uncomplimentary terms in Jun-04
and insisted the airline would never operate there.
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weeks from the opening date and 900,000 for the full year 2006 and so is
keeping roughly to its schedule. Traffic should continue to grow slowly from
this base, averaging one million ppa.
Key Points
•
•
•
•
•
•
•
•
RHDS is a good example of a converted military airport in the
Frankfurt Hahn mould, supported by private investment;
It is not obviously a LCA but displays many of the characteristics.
The full-service airport it aspires to be would have been unsuitable
for the area;
When the construction of this airport was first proposed, many
analysts were unconvinced. It was regarded as too remote, not in a
prosperous area and with too much nearby competition;
However, it got over the first hurdle by attracting a ‘home’ airline
with a large basket of short-haul leisure routes and which has stuck
with it, so far;
It has established a niche in the Yorkshire region and challenges the
investors in Leeds Bradford, the other regional airport;
Its growth has contributed to the stagnant growth at Manchester;
There remains a lack of supporting carriers. Ryanair’s operation
there is small and the next requirement is to crack long-haul
markets with sustainable services as the short-haul/low cost model
comes under regulatory and cultural pressure; and
The ample space around the airport has not yet been used to the
degree it might, but there are developments to come.
Case Study #8: Glasgow Prestwick International Airport,
Scotland – building a LCA with support from cargo, property and
MRO activities
Glasgow Prestwick (GPIA) is the low cost airport for Glasgow and southwestern Scotland. GPIA has an interesting history. It was a gateway
international airport with intercontinental services until BAA’s Glasgow
Abbotsinch (now ‘International’) Airport acquired that mantle. Subsequently,
GPIA declined and became reliant on dwindling cargo and maintenance
income. It was rescued by the company Stagecoach Holdings, another bus
and train operator, which dabbled in the airports sector during the late
1990s when it was in vogue for property companies and surface transport
operators to do so (almost all have now exited the sector).
Stagecoach positioned the airport as a cargo hub – there are two runways,
one of almost 3000 metres, and 24/7 operations. Eventually Stagecoach sold
it on to Omniport plc and Infratil (New Zealand), the latter taking full
ownership during 2004 under its subsidiary Infratil Airports Europe.
GPIA has a mix of airlines offering charter programmes to eight vacation
destinations, but its 27 city low cost scheduled programme is largely in the
hands of one airline, Ryanair, with 18 cities served. It also enjoys infrequent
services from Transavia, although Aer Arann and Wizz Air, bmi baby
withdrew in 2005. It is an important base for the Irish airline, which
established a maintenance station with a double-bay repair facility there,
and its influence has been considerable. GPIA could be in danger of overreliance on one carrier if Ryanair’s strategic focus were to shift elsewhere,
though a significant passenger base has been built up. Passenger traffic has
increased slowly from 1.97 million in 2003 to 2.4 million in 2006, with zero
growth between 2005 and 2006. The terminal capacity is three million,
expandable to 10 million.
That any growth is recorded at all is despite Scotland’s relatively small
population and the airport’s isolated location, 64 km southwest of Glasgow
and not in the main tourist area. To its credit, GPIA is now able to claim that
it delivers proportionally more inbound tourists than any other Scottish
airport.
Cargo traffic has been in decline but rose by 8.3% in FY 2006-7 to 30,512
tonnes. It remains a significant revenue source. GPIA handles more
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airfreight than all the other Scottish airports combined with more B747F
operations than any other UK airport, some 20 each week.
GPIA’s passenger facilities, based largely on a 1964-built terminal
surrounded by post-war buildings of a military appearance, were
increasingly inappropriate to the functions of an airport and a GBP2.5 million
upgrade programme commenced in Autumn 2004 in an attempt to become
“Scotland’s smartest-looking airport.”
GPIA interior artist’s impression
Source: GPIA corporate website
This mainly involved modernised shop-fitting, new signage, new floor
coverings and new retail units being added. It was intended to make the
airport “unique in a world of anonymous modern airport terminals.” (Quote
source: Executive Chairman, August 2004). The work is cosmetic only, with
no changes to the building infrastructure.
The first phase of the retail redevelopment programme is now complete and
includes a newsagent bureau de change outlet and restaurants such as
Starbucks, Peckham’s Deli, Yates’ (British pub) and even an Elvis Presley
theme bar. ‘The King’ changed aircraft at Prestwick in 1960, the only time he
ever set foot on British soil. Additionally, there is now a food offering airside.
It is anticipated the retail offer will be expanded further and a number of
prime locations have been identified within the main terminal building for
additional retail outlets. The management is seeking operators within retail
sectors complimentary to its current offer.
While Duty Free and F&B operations at Prestwick have performed well, carparking results have been disappointing – a worrying position considering
that public transport to the airport is limited. Considerable effort is going
into improving the offer including provision of a fully automated system,
construction of a long-stay economy facility, a price guarantee and
implementation of a parking department with a focus on customer service.
In contrast to the fairly limited investment at Prestwick, the BAA-owned
Glasgow International Airport has a 25-year master plan, unveiled in Oct-06,
which will see GBP290 million invested in ‘a world class gateway’.
On the property side, GPIA has expanded its offer with a variety of office
accommodation available within the Terminal building and in another block
nearby, and made available for both airport related and unrelated
businesses. Warehouse accommodation can be leased within the freight
handling area and a large amount of land is able for industrial, leisure or
even residential use. No additional land is required for expansion - the
airport occupies an 880-acre site with sufficient land for expansion of
passenger, freight and maintenance activities and with the opportunity to
tap into government grant funding for development.
This does raise some security issues in the light of the Jun-07 car bomb
attack on Glasgow International Airport and the ‘extraordinary rendition’ US
government flights carrying terrorist suspects that allegedly used GPIA and
caused protestor invasions of the airport in 2006.
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GPIA has a historical connection with the airline MRO business. Presently,
companies specialising in the aerospace structures, components and
systems sectors, such as BAe Systems, GE Caledonian, Goodrich Corporation
and Woodward Aircraft Controls, are represented in a cluster. GPIA has the
UK’s largest runway (2987m) and parallel taxiway north of Manchester plus
a second runway of 1,829m, meaning almost all types of aircraft can be
accommodated with no requirement for extension.
Mindful of the growing environmental lobby, GPIA is able to claim that it is
Scotland's only rail-connected airport, with some 30% of passengers arriving
by ‘AirTrain’. Glasgow International’s own rail link has been delayed and
GPIA’s is only a branch line rather than an express or trunk facility.
Nevertheless, it does provide a 45-minute connection to Glasgow Central rail
station, the same amount of time it can take to travel between that station
and Glasgow International by road. Another environmental positive is that
approaches and take-offs are over the sea or very sparsely populated
farmland. The airport is virtually fog-free, year round.
Key Points
•
•
•
•
•
Some comparisons can be drawn between Infratil’s operations at
GPIA
and
the
smaller
UK
based
CityHopper
Airports
(Wolverhampton & Blackpool). Both reduce their risk by focusing
equally on aviation and on a panoply of non-aviation activities, such
as maintenance and distribution/warehousing, in addition to the
more traditional non-aero revenue generators of retail and
property;
As far as passenger traffic goes, GPIA may already have reached its
ceiling. The population of Scotland is only five million, and
declining. Few English passengers travel north to use it, except
from sparsely populated regions like Cumbria;
GPIA has a strong environmental offer in terms of public transport
access and take-off routes;
It lacks the same degree of Master planning found at Glasgow
International, with an apparent plan of simply hoping and expecting
the principal carrier will continue to commit to it; and
The owner/operator has positioned GPIA as only one component of
its airport holdings. The other investments include Kent
International Airport in southeast England (q.v.) – now mainly a
cargo airport, Luebeck in northeast Germany – another LCA, and
Wellington Airport in New Zealand.
Case Study #9: Three London airports compared – Stansted,
Luton and Kent International
The London region counts no less than six commercial airports (Heathrow,
Gatwick, Stansted, Luton, London City and Southend), collectively handling
137 million passengers annually, and supported by peripheral airports at
Manston (Kent International), Biggin Hill (mainly general aviation), Ashford
(being developed) and even Southampton, which takes overspill from
southwest London.
This section briefly compares the fortunes of three LCAs: Stansted, still the
world’s largest, Luton, an airport that has reinvented itself as an LCA from a
charter facility and Kent International, an unfortunate case of an airport that
failed as it became overly reliant on a carrier to which it was financially
linked through common ownership.
Stansted Airport
Stansted, 35 miles northeast of London, was identified as appropriate for
development in the mid 1980s under the ownership of the then British
Airports Authority. At the time, it mainly handled vacation charter flights. A
new terminal was designed and opened in 1991. Despite this state-of-the art
facility, the improving economies in the nearby counties of Hertfordshire,
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Essex and Cambridgeshire and an ‘express’ 15 rail service to and from
London’s Liverpool Street rail station, in the heart of the financial district, it
initially grew only slowly.
The rate of growth increased from the mid 1990s when a number of LCCs
set up or increased services to take advantage of the recently liberalised
European aviation environment. Prominent among them was Ryanair, the
Irish airline that had twice almost gone out of business as it attempted to
sell low-priced air tickets without having an equivalently low cost base. The
arrival on the scene of the current chief executive and the adoption of the
low cost principles inherent at Southwest Airlines brought about the
complete change of strategy that is well known.
Supporting Ryanair were Debonair and AB Airlines, hybrid LCCs that sold
tickets through travel agents and did not survive, and Go-Fly, the low cost
subsidiary of British Airways that was surprisingly sold to the private equity
company 3i just as it made a profit for the first time, and subsequently to
easyJet, which was mainly based at Luton, thus establishing easyJet’s
Stansted base. In the meantime Ryanair acquired buzz, the LCC of KLM and,
crucially, was persuaded to shift its main UK base from Luton where it had
started, to Stansted.
By 2000, Stansted was handling 7.5 million passengers annually and was
growing in excess of 35% per annum, quickly overtaking Glasgow
International and Birmingham airports to become the fourth busiest UK
airport. Rail services were extended into the east and west Midlands,
ensuring that transits could be made at Leicester and Birmingham stations,
and a countrywide bus network developed. Stansted began to attract
passengers from all over the UK to flights that took them in the main to
secondary airports serving large cities, small towns and costal resorts across
Europe.
Several long-haul airlines attempted to introduce intercontinental services
during the 1990s, including American Airlines 16 and Continental Airlines, but
without commercial success. Latterly, Stansted’s route development focus
has shifted back in favour of long-haul and it has been able to attract two of
the three principle transatlantic high value/low cost airlines, Eos and Maxjet
(both US owned). The third, the British owned Silverjet, operates out of
Luton. Other long-haul carriers now include Pakistan International, El Al and
Israir (servicing the large Jewish community in North London and its outer
suburbs) and the Scottish charter-cum-LCC Flyglobespan.
However, Stansted, developed almost exclusively as an origin and
destination airport, lacks a transit facility, which inhibits further growth in
this segment. This fact has never prevented passengers arranging their own
tickets that effectively convert the airport into a hub, taking a chance that
they will not be delayed. One or two airlines, the latest example being Air
Berlin, have actually established a bona fide mini hub that guarantees
connections.
Otherwise, Stansted is dominated by Ryanair 17 , with almost 100
destinations, supported by easyJet with 24, and others – the main LCCs
being Air Berlin, Blue1, Centralwings, Fly Niki, Germanwings, Iceland
Express and Wizz Air, supported by a small number of network carriers like
Air Malta, CSA and Turkish Airlines. Additionally, there are charter flights to
some two-dozen resorts and an extensive cargo network: 34 airlines in all,
serving 34 countries and 160 destinations.
British Airways has no interest in Stansted since it sold its LCC Go, but a
previous Chairman once threatened to move there from Heathrow lock,
stock and barrel over charging regimes. It is possible BA could revive
interest in Stansted but not for any sort of short-haul LCC operation, more
likely to challenge the Eos/Maxjet long-haul budget services.
15
Actually quite a slow train with one or more changes required to reach
most London destinations
American Airlines intends to resume a Stansted transatlantic service (to
New York) from (northern) winter 2007
17
Ryanair will shed 20% of its capacity at Stansted, 40 aircraft reducing to
33, in northern winter 07 as it drops routes that would be unprofitable.
16
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The terminal, roughly the shape of a square, has been expanded in the
period 2000-2005 at a cost of GBP200 million, adding additional satellite
buildings. However, the existing single terminal facility now works at full
capacity for much of the day, the back-to-back layout of check-in desks
causing passengers to come into conflict with each other and an arrival to
gate time that can run to 45 minutes through a congested security area and
waiting time for the satellite train.
Stansted’s terminal
Source: London Stansted Airport
Stansted’s terminal offers the full range of retail outlets more appropriate to
a primary airport, including foreign exchange, FBOs, fashion shops,
chemists, book stores, Tax Free outlets, souvenirs and the ubiquitous
‘traditional British pub’; 70 in all, together with fixed line Internet access,
wifi facilities, showers and places of worship. Such a collection of facilities,
especially those that are landside, can and does add to the congestion
problem.
There is extensive car parking available on flat land running the length of
the terminal building and beyond, and from which the terminal is accessible
on foot. The M11 motorway is five minutes away and there are plans to
improve the access roads. There are several small office blocks but property
development has seemingly not been a priority and the car park operator
has been functioning out of a temporary cabin facility in the bowels of the
terminal
Total passenger traffic in 2006 was 23,687,000, overtaking Manchester to
put it into third place in the UK’s busiest airport league. It is operating close
to capacity at peak hours and having been identified in the UK’s government
White Paper ‘The Future of Air Transport’ as a priority in 2003 it aspires to a
runway extension, a new runway and a new terminal, under the banners
‘generation 1’ and ‘generation 2’ by 2015. Airlines, led by Ryanair, are
against the proposals on the grounds of cost (to them in charges). In the
meantime, the first terminal is to be expanded.
In Jul-07, BAA announced a timeframe of 4Q07 to submit a planning
application to develop the second runway and terminal. The GBP2.5 billion
project would more than double capacity to 68 million passengers per
annum by 2030. If approved, the first phase would to be completed by
2015.
Predictably, the proposal is anathema to groups representing environmental
concerns (destruction of woodland, noise and emissions pollution).
Furthermore, there have also been a number of accidents including a Korean
Airlines B747 cargo aircraft that crashed shortly after take-off into
woodlands close to a village. But finally, and crucially, there is a hard-core of
people who simply resent the fact that what was a pleasant Home Counties
market town (Bishops Stortford) has grown into a major city simply because
of the airport, tripling in size. Put simply, they want no more expansion,
period.
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The most pressing problems facing Stansted in the immediate future are not
dissimilar from those facing other UK facilities, namely the very powerful
environmental voices within both government and official opposition that
have already led to an increase in departure tax in Feb-07 and caused
people to question their travelling habits. In Apr, May and Jun-07, Stansted
recorded its first decline in passenger traffic for many years. Even though it
was only 1-2%, and mainly on domestic routes, it set alarm bells ringing.
Periodically, Ryanair threatens to pull out of Stansted, if charges are raised
for example, though it is hard to see just where it would go as few airports
could instantly handle its vast scope of operations. During the 1990s, Lord
King, the then Chairman of British Airways, threatened to do the reverse, to
move from Heathrow to Stansted for the same reason. Such threats are
usually no more than bargaining gambits.
Another threat, or possibly opportunity, comes from the potential break up
of BAA. The ownership of British airports generally is under scrutiny from the
country’s Competition Commission and it is possible, although unlikely, that
the BAA’s seven airports could be fragmented to ‘increase competition’
especially in the UK’s southeast. As things stand, the London region airports
have developed niches of their own: Heathrow for network carriers and
business; Gatwick for charter and scheduled LCCs; London City almost
exclusively for business; Luton for LCCs and charter and Stansted for LCCs
and cargo. Moreover they each have their own definable catchment area.
It is difficult to see what benefits would accrue from pitching Stansted
against Heathrow for network/legacy carrier routes and it would certainly
mean Stansted losing its mantle of ‘premier LCC airport’, which has been the
foundation of its development to date.
Key Points
•
•
•
•
Stansted remains the premier LCC airport and global role model for
the mass movement of budget passengers;
Its role is changing slightly with the addition of viable long-haul
services for the first time and may change more substantially if BAA
is broken up;
As with so many airports Ryanair is dominant, though not quite to
the same degree; and
Ryanair is opposed to what it considers to be unnecessary
infrastructure improvements, particularly the second runway and
there is intense opposition amongst the local population, raising the
game to a hitherto unprecedented level.
London Luton Airport
Like Stansted, Luton Airport also started off as a charter airport, but in a
much bigger way, as the base for large airlines like Britannia (now part of
the TUI Group) and Monarch. Vacation packages were the mainstay of its
business, supported by a large Irish population (Luton was Ryanair’s first
international destination, in 1986).
Luton is also situated to the north of London, about 30 miles, and about the
same distance west of Stansted. It is within four miles of the M1 arterial
motorway that links London with the Midlands and North of England, and
Scotland, but did not have a direct rail link. Passengers not arriving by car
took a shuttle bus from the town centre rail station. Such arrangements
were adequate for the level of charter business but not for the boom in LCC
activity, with passenger numbers jumping by 28% in 1998. At that time
Luton was comparable in size to Stansted, but the airport remained
constrained mainly by lack of terminal capacity. The facilities were, at best,
basic.
Originally under the ownership and management of Luton Borough Council,
the airport was leased to a consortium of Airports Group International (AGI),
Barclays Private Equity and Bechtel Enterprises, the US construction
company for 30 years from 1998 through its joint venture with Singapore
Changi Airport Enterprise [SCAE] (and known as Alterra Partners), with the
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quid pro quo that the consortium would finance and build new facilities. The
Borough Council retains its ownership.
Luton was the first British council to employ this concession method with
private finance initiative (PFI) risk transfer at its airport. AGI was
subsequently sold to the British property company TBI, which itself was
taken over for GBP550 million plus GBP200 million in assumed debt in 2005
by ACDL, a consortium of Spanish companies Abertis and Aena. (TBI had
also acquired the Cardiff and Belfast International airports and a variety of
others worldwide). ACDL was drawn to TBI by the potential of Luton, which
by then had clearly become its ‘jewel in the crown’ even though its
profitability was not that good - in 2004 it made just GBP20 million and had
a continuing PR problem. At this time SCAE sold its indirect stake in Luton
Airport to focus on airport developments in Asia.
However, the deal was influenced by the huge growth of air travel in the
British provinces, the slowly arriving end result of European air liberalisation
packages of the 1980s and 90s. In this sense ACDL has been vindicated.
Passenger traffic continued to rise dramatically. Between 1995 and 2003 it
rose by 376% to 6,800,000. Following a disagreement with BAA over unpaid
charges at Stansted, Ryanair announced in Jul-04 a USD240 million
expansion at Luton, trebling its aircraft stationed there and hinting at more
to come. So, as easyJet moved into Stansted, its archrival was moving into
Luton.
Terminal enhancements commenced though not without complaints from
long established operators about displacement. TBI’s intention had been to
expand capacity to 20 million ppa. and such developments continued from
1999 when a new GBP40 million terminal was completed with 60 check-in
desks together with six additional aircraft stands. Subsequently, in 2000 the
existing terminal building was refurbished to become a larger airside
departures and arrivals area with 15 new retail and catering outlets. Other
improvements in the last five years have included the building of a new
taxiway and more aircraft stands.
In Jul-05, the airport opened a new GBP35 million passenger terminal
development that included a 7400 m2 departure lounge & retail/catering
complex, a six-gate, 200 m long boarding pier and associated new security,
immigration and customs halls.
As for surface transport, the improvement here has matched that of the
terminals. In Nov-99, Railtrack (now Network Rail, the UK’s rail
infrastructure operator) opened the new GBP23 million London Luton Airport
Parkway station. Located on the Thameslink line that stretches south across
London to the English south coast and with courtesy buses taking
passengers 1.8 km to and from the terminal, the total journey time can be
less than 60 minutes from the aircraft doors to alighting in Central London,
matching or beating the experience at Stansted.
In Nov-05 Luton’s draft Master Plan was published and included a
replacement 3000 m runway. Planning permission was to be sought within
18 months. Luton fears it will reach maximum capacity in the next few
years. The 2003 UK Government White Paper on Air Transport did not
support the development of a second (replacement, full length) runway
there, preferring options at Heathrow and Stansted, but since then London
has been awarded the 2012 Olympic Games, which seems also to have
become a feature of this proposal at Luton. The White Paper envisaged that
Luton would expand from 7.5 million ppa. in 2004 to 30 million ppa in 2030.
For full details see:
http://www.london-luton.co.uk/en/content/4/1207/draft-masterplan.html.
In Jul-05, TBI abandoned its GBP1.5 billion expansion plan. According to
TBI, the returns available under the remainder of the 30-year lease were not
sufficiently attractive to justify the investment.
Luton continues to be one of Europe’s fastest growing airports and that
growth has been sustained. In 2006 it handled over 9.4 million passengers,
indicating a growth rate of 400% over 10 years. The airport employs over
480 people directly and around 8,000 indirectly and is now one of the major
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economic drivers of a regional economy that has been blighted by the
closure of vehicle manufacturing plants.
Scheduled services now count for 92% of the business volume, a figure that
was more appropriate to charter flights only 15 years ago. The charters do
remain though, with Thomsonfly, First Choice, Thomas Cook (all now
merged companies) Monarch, Astraeus, Eurocypria, Spanair, Sunexpress,
Onur Air and Pegasus accounting for the remaining 8%. The scheduled
airlines are easyJet, Ryanair, Wizz Air, Aer Arann, XL.com and Monarch
Scheduled in the short-haul segment, and Silverjet, which operates a daily
low density-price/high standard transatlantic service to New York with
B767s. There are 85 destinations in all.
Freight is a much smaller operation but Luton did still handle 25,000 tonnes
in the year ending Mar-06. The airport has the only HMR&C (tax authorities)
approved Transit Shed Operation (TSO) in the UK with a building measuring
2,600 sq metres (28,000 sq ft) and is an EU and DEFRA (UK Agriculture
Department) approved airport border inspection post for livestock operations
into the UK.
The terminal offers a broad range of retail outlets tailored towards the
largely leisure based clientele, some 30 in total.
Property development is restricted by the airport’s location close to the town
but a range of properties is managed including offices, hangars, workshops
and stores. The Properties department also actively pursues development
opportunities for both the airport and third parties. EasyJet’s corporate
headquarters is based here.
Key Points
•
•
•
•
•
Luton had the advantage of being established as a charter base on
a large scale;
Like Stansted it now has a healthier mix of carriers;
The access facilities have been improved tremendously during the
last ten years, turning it into a bona fide London region airport
rather than merely one for a decaying industrial town;
It was the first UK example of innovative PFI financing in the airport
sector and its performance has justified the decision of its various
investors; and
While growth has been both strong and sustained, adoption of a
Master Plan that is based heavily on demand during the few weeks
of an Olympic Games is questionable.
Kent International Airport
Infratil, the New Zealand-based investor that runs Glasgow Prestwick Airport
is also the operator of Kent International Airport after acquiring it from
previous owner PlaneStation, which collapsed in Aug-05.
PlaneStation was an operator of six regional airports in the UK, Germany,
Italy, Czech Republic, Denmark and the USA. Kent International (KIA) was
one of only two of these airports operated with any real ambition, which in
that guise and previously as Wiggins Group (a property investment
company) had at one time some very ambitious plans for a network of up to
50 regional airports across Europe. The other was Lahr/Black Forest airport
in Germany, which was ultimately disposed of to Churchill Airports (UK), a
company run by ex Alterra Partners staff (see Luton). PlaneStation had
owned KIA since 1998.
PlaneStation was part owner of Irish budget airline EUjet, KIA’s home airline,
and on which its strategy was based. Much of PlaneStation’s losses in
2004/5 were attributable to EUjet, in which Kent County Council took a
GBP100,000 stake (but not in PlaneStation). In Dec-04 a GBP30 million
rescue package was financed to safeguard both airline and airport for two
years. PlaneStation then ceased operations at Baltic Airport Schwerin
Parchim in Germany in Feb-05 when the lease ran out - an unusual decision
given that this airport is one of only a few in Germany able to handle the
A380, because of its runway width, but on the other hand revenues had
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been very low in 2004. At the same time it announced plans to convert an
existing military airbase at Szekesfehervar, 40 km southwest of Budapest,
Hungary, into a commercial passenger and cargo airport, whilst selling off
real estate assets to prop up EUjet.
PlaneStation went into administration in Jul-05, taking EUjet with it, and
with little prospect of any return to equity shareholders. Institutional
investors held a large part of PlaneStation’s shares, with around 30,000
retail investors holding 60%.
At this time there were a number of LCC failures in Europe, but the
PlaneStation/EUjet circumstances are unique. It was apparently the major
change of direction away from property investment and towards support of
EUjet irrespective of the price that influenced the major financial backer,
Bank of Scotland, to withdraw credit prior to the collapse, pulling the plug
altogether when debts of GBP35 million were announced, including GBP22
million owed to Bank of Scotland.
KIA was never going to make it by hosting LCC services only. It was built on
a false premise: that it could mimic Dublin Airport (EUjet was originally
registered in Ireland and the owner, Mr. P J McGoldrick, who previously
owned a collapsed Irish cargo airline, TransAer, optimistically believed that
he could emulate Ryanair, for which he had once worked).
KIA Location map (not to scale)
Source: KIA
The owners apparently failed to realise that while Dublin is a thriving capital
city, with a huge influx of foreign visitors and a gateway to the whole
country, KIA is well off the beaten track at one end of a motorway, almost
70 miles from central London (considerably further than Stansted) and with
no fast rail link. There is a market within the county of Kent itself but most
inhabitants are used to Gatwick and can reach it (as well as Heathrow) via
the M25 motorway. They can also catch the Eurostar fast train to continental
Europe from Ashford station, also in Kent. The immediate catchment area
was the poorer area of north Kent. Consequently the airline was hit by both
below-forecast passenger numbers and spiralling fuel costs.
The saving grace for KIA is that it was well established as a cargo airport
servicing the south of England, with a fully licensed Border Inspection Post
and close to several important sea freight ports. That fact seems to have
attracted Infratil in Aug-05 to speculate on its long-term future by moving
quickly to acquire the assets and business of KIA for GBP17 million from the
Administrators. No other PlaneStation assets were acquired.
Infratil targeted freight and passenger expansion at KIA to help attain
profitability within three to four years. Over the period 2005-07, capital
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expenditure was projected at GBP9 million, with operating losses of GBP8-10
million. Infratil declared itself ready to accept these short-term losses and
stated categorically that it would not be buying an airline.
The target for freight growth was:
•
•
•
Imports of fresh produce from Africa and the Middle East;
General imports and exports of general merchandise; and
Humanitarian and military service operations.
As for passenger services, Infratil expected KIA ultimately to be a strong
passenger outbound market to popular tourist destinations in Spain, Italy
and France, as well as having the potential to link Kent with key business
destinations in the UK and elsewhere in Europe – up to two or three million
p.p.a. by 2030. These expectations are similar to EUjet’s plan.
Infratil opened an issue of two infrastructure bonds to repay loans used to
acquire KIA. It claimed that the increased bank borrowing in respect of this
airport had only a small impact on gearing. Historically, Infratil has funded
about one-third of its assets through debt: an amount that had been in
decline prior to this transaction.
In Feb-06, KIA tentatively re-started passenger operations. A tour operator,
Seguro Travel Group/ Kent Escapes, introduced charters to Faro, Alicante
and Barcelona. A charter programme to Norfolk, Virginia, was agreed to
commence in 2007.
Ultimately (Infratil invests for the long haul as made plain in the section on
Glasgow Prestwick), the company expects to be able to recoup and exceed
the 350,000 p.p.a that EUjet was carrying on the basis of that historical
performance and the fact that over 500,000 people live within a 30 minute
drive of KIA, and 1.9 million people within one hour. Additionally, there is
expected to be a smaller market for turbo-prop services to regional UK and
western European destinations. These have not as yet materialised.
In the interim the airport is very reliant on freight, which is growing quickly.
KIA handled 2,665 tonnes of freight in May-07, a year on year increase of
more than 80% and a 20% improvement on the Apr-07 total.
The terminal remains uncongested and car parking for 1000 vehicles is close
by the entrance. Land is owned and planning permission held to construct an
adjoining further 1,000-car park. FBOs are appropriate to the scale of
custom attracted by EUJet.
As a military base similar to Finningley (Doncaster Sheffield), there is
sufficient land, both inside and outside the perimeter fence, for development
for warehousing and distribution centres. KIA is also promoted as a good
location for Maintenance, Repair and Overhaul (MRO) facilities for airlines or
third-party providers.
Key Points
•
•
•
•
•
KIA offers immediate opportunities for freight and associated
warehousing and distribution as it has done in the past;
Although it attracted several hundred thousand passengers in its
brief ‘heyday’ the expectations for its in-house airline were
extravagant. Too many assumptions were made based on the
figures achieved by other airports in entirely different
environments;
The previous owners were not sufficiently capitalised to carry it
through an extensive lean period;
The present owners are, and are focusing on increasing freight
traffic to give the airport a business base on which to build; and
Realistically it might take up to 10 years to realise their ambition. It
quite possibly might never happen.
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Kent International Airport
Source:
It is interesting to contrast these three London area Low Cost Airports. Two
of them, hardly any great distance apart, were able to tap into the demand
for no-frills travel generated by well-known and influential airlines. The third
was always on the periphery and was taken on by an ambitious company
when there was little to suggest that its ambition had any real foundation.
Now it is in the hands of a determined and energetic operator that
acknowledges it has a difficult job to get the return it seeks.
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4.2 Switzerland
Case Study #10: Geneva Airport – a political minefield
The political and legal implications of low cost airport development are
evident from events concerning a proposed LCC terminal at Geneva
International Airport (GIA), Switzerland, which the airport authority hoped to
adapt to reopen during the fourth quarter of 2005, to handle the
requirements of what it called ‘simplified aviation’.
The concept was to divide the airport into two sections. The first zone,
corresponding to the facilities that were opened in 1968 and which would
now be called Terminal 1, would continue to be utilised by those airlines
wishing to offer the usual standards of comfort and convenience. The second
terminal, up until then handling winter charter flights and special operations,
would be designated for ‘low cost’ flights, with reduced boarding fees and
basic facilities. It would handle 2-3 million passengers annually to start with,
possibly extending to 3.5–4 million in 2007-8. LCCs operating at the time easyJet, Hapag-Lloyd and Virgin Express – were carrying two million
passengers per annum, or nearly a quarter of the annual total.
EasyJet and Virgin Express in particular had helped GIA recover from the
difficulties experienced by the traditionally full-service national carrier Swiss,
with easyJet carrying more passengers than Swiss. The British/Swiss easyJet
had already renounced Zurich Airport as being too expensive and put GIA
under pressure to reduce its charges, threatening to pull out as early as
December 2003. GIA also planned to increase fees at its existing modern
Terminal One but subsequently backtracked on that proposal.
Geneva seems a surprising choice for such a terminal given that, to the
casual observer, it has a high proportion of business travellers from the
financial community and high net worth individuals passing through for
leisure purposes, but the market share obtained by easyJet seems to have
been an influential factor, quite apart from withdrawal threats.
The project was supposed to give new life to the old installations that were
inaugurated in 1949 and used as a charter terminal and subsequently
replaced with the present airport. To be called Terminal 2, it would be
restricted to point-to-point routes, as it would operate without luggage
sorting facilities. The concept left no room for misunderstanding. It would be
a terminal with lower investment and operating costs, allowing the levying of
a lower passenger charge, the lower costs coming from, for example:
•
•
•
•
•
Application of minimal equipment and comfort corresponding to
level of service D in IATA standards;
Transfer of some typical airport tasks to the passenger. No
boarding tickets or baggage sorting system, with baggage handling
being left largely to the passengers, who would load their hold
baggage onto a conveyer belt connected to the main carousel;
Aircraft access/egress directly from the apron tarmac;
No plans to install air conditioning so that no guarantee could be
given for passenger comfort in higher summer temperatures; and
No provision for lifts or escalators.
The proposed passenger fee at T2 was SFR14, versus SFR19 at T1. Other
charges would be around 40% lower than at Terminal One.
The project was opposed by Lufthansa and vigorously by Air France and
KLM, which have since merged. Air France complained to the Swiss
competition body, Comco, and filed a lawsuit alleging that easyJet in
particular would be handed an unfair advantage. It was rejected by a
Geneva court in Jan-05, Air France Group being given leave to appeal.
Etienne Rachou, Air France chief executive for Europe and North Africa
stated at the time: “The decision to lower costs is applied in a discriminatory
manner and only on part of the platform.” Air France is by far the dominant
carrier within France where its chief rival (if on a relatively minor scale) is
easyJet.
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Confronted by EU competition provisions (although Switzerland is not a
member of the Union), the Geneva Airport authorities embarked on a
dialogue with the Commission in developing appropriate charging schemes.
In broad terms, these were that the T2 project:
•
•
Must generate its own profitability, particularly through the optimal
use of its infrastructure; and
Will not profit from direct or indirect revenues from T1 or penalise
T1 users in any way.
In effect, GIA had agreed the parameters of the terminal development with
the EU before any public announcement on it was made.
The European Commission thus found in the airport’s favour while IATA
objected in principal to differential charging. IATA represents few budget
airlines and might be expected to take the side of its mainly network service
or ‘legacy’ members. Director General Giovanni Bisignani initially reiterated
that IATA would not accept any situation that saw the cross-subsidisation of
a redeveloped terminal two with revenues from terminal one. That situation
was resolved when the GIA management declared that would not be the
case. An IATA spokesman said: “Provided there is no cross subsidisation, it
is not for us to be happy or unhappy with it.” That might have turned out to
be a landmark statement.
The raison d’etre for the terminal, according to Geneva Airport
management in a statement lodged on the corporate website in
2005, can be summarised as follows:
The way to implement such a strategy (how best to cope with LCCs
requirements) varies very much amongst airports. Geneva is in a
specific situation because LCCs account already for almost 26% of
the traffic. They pay normal airport fees – in other words the aim is
not specifically to attract them but to adapt to their needs. Here
there is an existing ‘old terminal’ facility that can be turned into a
T2 at very reasonable cost (i.e. not to be compared with a new
investment from scratch) - in some cases the situation is completely
different and can be an obstacle to a similar move. Moreover,
the project economics is based on the principle that the reduction in
passenger fee tariff for T2 will be offset by the increase in volume
(price elasticity of demand) since the project will be launched only if
the airport gets the adequate volume commitments (and related
financial penalties) from airline customers.
Successful segmentation means a strong product difference
awareness that must be perceived and understood by both airlines
and passengers. This aspect is challenging and cannot be met by all
airports (depending on both technical and ‘cultural’ constraints).
Each terminal will have its own direct costs and revenues
accounting. There is no significant under utilised capacity in T1
since it is today close to its maximum capacity. In fact keeping all
the traffic in T1 in the next years would induce higher investments
than would refurbishing the existing charter terminal into a
‘simplified aviation’ terminal (T2). In other words, with T2 additional
capacity is created at a lower cost. There would be no
cross subsidies.
The LCC market will of course not grow forever and it is not
anticipated that it will exceed 30 to 35% of Geneva’s traffic. For
strategic purposes the management does not want to rest more on
this segment. But risks are always there (not only for LCCs – the
airport had to cope 3 years ago with the Swissair bankruptcy and
the new SWISS accounts now for less than 20% of the traffic).
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Consequently
the
business includes a
(whatever the reasons).
‘traffic drop’
scenario
The airport is bound by its federal operating concession and is
conscious of fulfilling its public role and serving the diverse
communities that make up the economic and social fabric of the
catchment area (including multinationals, small-and medium-sized
businesses and the general public). The airport management aims
to examine ways of enabling different types of aviation to be
represented in the best possible way to respond to market
expectations and to enhance the appeal of Geneva and its region.
To this effect, the management plans to segment its airport product
to reflect and continue the current segmentation of air travel with,
on the one hand, simplified aviation with low fares and minimal
services and, on the other, traditional aviation with a different cost
structure and offering a varied range of services and fares.
The airport will be able to offer all airlines the choice of handling
their flights in one or the other of the two terminals, subject to the
physical capacity limits of airport facilities. Each airline’s choice
would depend on their approach to the market and the level of
services offered to the passenger (consistency between the airport
product and the airline’s services upstream and downstream). The
airport does not intend to favour one aviation business model over
another, being convinced of their complementary nature, and
considers its mission to serve all airlines equally.
The airport feels it is protected against any legal actions that some
airlines may take to oppose the project as it has been submitted to
the Competition Commission of the EU as well as to the competent
Swiss authorities and has received approval. Critically, The T2
project must generate its own profitability, particularly through the
optimal use of its infrastructure, and will not profit from direct or
indirect revenues from T1 or penalise T1 users in any way.
However, the legal arguments continued to rumble on, and Air France-KLM
continued with its challenge, as it had been granted leave to appeal. In May07 the airline suffered a second legal setback when the Swiss Federal
Administrative Tribunal declared the French carrier’s case ‘irreceivable’. Air
France’s action in Switzerland is now seen as part of a wider legal offensive
against similar projects for LCCs at French airports.
Air France was left with a final avenue of appeal to the Swiss Supreme
Court. The court found in favour of Geneva Airport and the project can now
be realised. However, it has been put in abeyance, as the priority
momentarily is to expand the main terminal building, a project with an
anticipated completion date of Dec-09. In the meantime this part of the
terminal charges fees equally to all airlines irrespective of their operating
characteristics.
In the interim the main competitor, easyJet, now accounts for about one
third of the airport’s traffic, and the low-cost carrier Virgin Express – which
has since been merged into Brussels Airlines along with SN Brussels - has
expressed interest in the terminal.
The existing terminal T1 offers a capacity of around 10 million passengers a
year depending on the current distribution of traffic (peak hours,
seasonality, etc). With 9,963,000 (+5.9%) in 2006 and 7% growth recorded
in 1Q07, the airport has only a small amount of spare capacity and must
plan significant investments over the next few years to increase passengerhandling capacity. In Jul-07, the management announced a 5,000 sq m
expansion project to meet an expected 25% increase in passenger traffic to
over 13 million p.p.a by 2020. The project is scheduled to be completed by
2009.
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The opening of T2, if and when it comes, might transfer a significant share
of T1 traffic (theoretically up to almost 30%), freeing up handling capacity in
T1. As a result, there would be less need for future investment in T1.
Interestingly, non-aeronautical revenues now account for 52% of total
turnover at GIA, and this has made it possible to maintain aeronautical
charges in the existing terminal at the same level for the last five years.
That fact might encourage LCCs, especially those that are changing in nature
to take on network carrier features, to shun T2 as they have at other
airports.
Key Points
•
•
•
•
•
The Geneva Airport management identified a trend of ‘simplified
aviation’ in 2004; hardly surprising as the wider concept of
simplifying aviation procedures emanated from IATA headquarters
in Geneva at much the same time;
The LCT premise here is based on LCCs not to grow indefinitely but
the urgent need to cater for them and their passengers in a more
basic and cost-effective way. Events at other airports have shown
that the airlines do not necessarily always pick up on this and some
times stay in the traditional terminal;
Dialogue with the EU (Switzerland is not a member) established
appropriate principles for operating and charging at the low cost
terminal;
IATA opposition was quelled by agreement on cross-subsidisation;
and
The main opposition has come from Air France, an airline that
exists within a relatively competition free-bubble within its own
boundaries and which must fear the development of similar
terminals there that might spark a genuine LCC boom in a country
that remains underserved by this genre.
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4.3 France
Case Study #11: Marseille Provence Airport – Planning a
dedicated low cost terminal
mp² - Marseille Airport’s management solves the equation and
introduces a dedicated low cost terminal. Marseille Provence Airport’s
dedicated low cost terminal, named mp², was one of the first in mainland
Europe. Airlines have been attracted to the converted freight terminal by
very low user charges for domestic and intra-European services, but there
are threats to the future relationship.
Marseille is an important port city on France’s southern coast, across the
Mediterranean Sea from North Africa. With a population of 800,000 (1.25
million in metropolitan area), it vies with Lyon for the title of “France’s
second city” in a country where international air transport has been
dominated by the capital, Paris, and where there is a comprehensive and
highly efficient high speed rail network competing with the airlines for
domestic travel.
The airport’s catchment area overlaps to the east with that of Nice Airport,
160 km distant, and with those of new LCC supporting airports at
Montpellier, Carcassonne and Perpignan to the east. Nice Cote d’Azur Airport
has traditionally been the more influential regional airport, partly due to the
tourist offer of the famous Cote d’Azur and Monte Carlo, and partly because
of the growth of meetings, incentives, conferences and exhibitions industries
in the Nice city-region and Sophia Antipolis, which is worth some EUR4.5
billion annually in turnover and supports 20,000 jobs; one of Europe’s major
centres.
Nice hosted 9.5 million passengers in 2006 (+2%) and 10, 560 tonnes of
freight (-7%). Up to one third of Nice’s traffic comes from budget airlines,
but it has not catered specifically for this genre in the same manner as the
renamed Marseille Provence Airport (MPA) – Provence being the region in
which it is located.
As at most other French airports, the local Chamber of Commerce, under
concession from the national government, operates MPA (in this case since
1934) and the French government renewed the contract in 1987 for a period
of 30 years. The airport has been generating about EUR75 million annually
in revenues. It is currently one of ten major regional airports proposed to be
privatised under new regulations since 2005 but only if the (2006)
privatisation of Aeroports de Paris proves financially successful.
MPA is currently the third French provincial airport (i.e. excluding the Paris
airports) for passengers and second overall for cargo, with around six million
passengers (of which 275,000 are on LCCs) and 45,000 tonnes of freight
annually. Charter and scheduled services connect 91 cities in 37 countries
and MPA has the greatest network of services connecting to and from North
Africa of any airport, outside of the Paris airports. Of 30 commercial
scheduled airlines operating there, nine are LCCs – Brussels Airlines,
Ryanair, Aer Lingus, easyJet, bmibaby, MyAir, Jet4You, Atlas Blue and
Clickair, with a total of 19 cities served.
This is a distinct improvement on the position in 2004, when the low cost
terminal was in the planning stage. Then, of 25 scheduled airlines operating
during the Winter 2004/5 season only two were genuine LCCs: easyJet and
HapagFly. On the periphery were Aer Lingus, in the throes of converting
from full-service/network to point-to-point LCC, and Maersk Air (Denmark).
Market segmentation in the UK influenced the LCC terminal decision.
Viewing the market segmentation across the Channel in Great Britain and
the huge growth in budget airline flights that it assumed could be replicated
in France, MPA management nevertheless devised a plan to convert a freight
complex into a basic air terminal for intra-EU operations. With the high rate
of airport taxes and fees in France, management came to the conclusion that
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the only real option to drive growth was to lower the passenger service
charge, something that necessitated the provision of a low cost terminal
service.
As was initially the case at Geneva Airport (it was later changed there), the
proposal was for reduced charges to be offered – just one-sixth of those at
the main terminal - at this facility, but with a caveat that potential users
would be required to submit a three-year business plan to prove their
longevity. If they were subsequently seen to have under-estimated their
traffic, they would be subject to penalties. In doing this, the airport
management appeared to have arranged a trade-off of the variety that
would satisfy the European Commission’s proposals for more transparency in
airport-airline support packages, proposals that many airlines and airports
still struggle to adhere to.
Today the charges adhere roughly to that format for European services,
being EUR1.31 per passenger in mp² versus EUR6.12 in main Halls 1-4.
However, for domestic flights while the mp² rate is EUR1.31 the Halls 1-4
rate falls to EUR2.82 and for international services the rate is the same in
both. All other fees (parking, landing, etc) are equal for both.
One considerable difficulty that MPA encountered was the volatile and
vociferous French trades union organisations. They believed the terminal
would take passengers from the Air France Marseille – Paris Orly shuttle,
reducing passenger numbers for the shuttle by up to 15% and threatening
many jobs. Just when it seemed this would be an insurmountable issue,
easyJet stopped flights between the two cities, blaming airport taxes though
it appeared that tough competition from the fast and efficient high-speed
TGV trains might be as much to blame – the TGV has taken 1 million
passengers annually from the Marseille-Paris air route).
Remarkably, amid a European forest of LCCs, there is not a single
French home-grown LCC yet. The unions are powerful in France, and they
are extremely demonstrative where national interests are threatened. There
is, even today, not a single LCC or airline worthy of that label based in
France if one discounts easyJet’s large operation (second only to that of Air
France) despite there being 11 million LCC passengers each year in France!
The last one, the Reims-based Air Turquoise, lasted just one year until Jun06. Even Ryanair has scaled down its French operations, reacting to high
French airport charges by diverting resources towards the development of
Spanish routes. Therefore the new terminal development would attract
smaller foreign budget airlines, even if it resulted in new job creation for
French nationals. Those jobs are, however, perceived by the French unions
to be of ‘inferior quality.’
There is another issue about the TGV that affects LCCs. Rail travel over
short/medium distances (up to 600 km) is favoured over air travel by the
European Union, and especially so by the French government, which runs
the railways.
Analysis of airfares and rail fares between Paris and four cities (Lyon,
Toulouse, Nice and Marseille) has shown that rail fares hold steady almost
without exception between five weeks and one week before departure, while
airfares can rise between 100% and 400% during the same period to
provide the necessary profit level. This suggests that rail travel is being
subsidised to some degree.
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Development of passenger growth at Marseille Airport, 10 years
8,000,000
7,000,000
6,000,000
National
5,000,000
International
4,000,000
Total + transit
3,000,000
2,000,000
TGV Sep-11
1,000,000
mp2
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
Source: Marseille Airport Authority
(Note: The arrows refer to completion of TGV line Marseille-Paris, 11-Sep-01
and opening of mp² terminal. Total traffic in 2006 was 6,116,000, +4.4%,
with international traffic growing at 9.6% and domestic 0.6%. Top three
foreign airlines (2006) were Lufthansa, Air Algerie and British Airways.)
mp² - the total package
Marseille claims to be the world’s first airport offering a ‘two in one’ concept,
with differing services at diverse prices presenting choice to both airlines and
passengers. It would specifically target traffic currently travelling to the Nice
Cote d’Azur airport, an airport that has attracted fly-drive tourists, on
budget airlines, at the expense of Marseille. Going hand in hand with the
terminal launch, an international marketing campaign was created focusing
on the tourist attractions of a much-improved Marseille, which describes
itself as the gateway to France’s second largest city and tourist area after
Paris.
mp² opened in Sep-06, ten months after the foundations were laid. It cost
EUR16.4 million of which EUR6.7 million was financed by the General Council
of Bouches du Rhone, the local administrative division. Together with the
Provence region, the General Council aspires to see Marseille in the top 20 of
major European metropolises and believes that the terminal is a significant
step towards achieving that goal. The capacity is 3.5 million passengers
annually and it was expected to attract an additional 400,000 tourists in the
first year.
LCC Traffic Growth: 2000-07
Thousands
1,200
1,000
800
600
400
200
0
2000
2001
2002
2003
2004
2005
2006
2007
Source: Airport Authority
Of 1,832,000 LCC passengers between 2000 and the end of 2007, one
million will pass through in 2007 alone. European routes increased from 15
to 33 in one year
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Spartan facilities for airlines and passengers alike
Architects were briefed to stick to low cost materials and design elements
wherever possible, without turning it into a “hardship terminal.”
Infrastructure investment cost was kept low as an existing facility, the
freight terminal, was converted. Internally, all superfluous aspects were
reconsidered so that only security, safety and efficiency were the applied
criteria. Fitted carpet was rejected in favour of coloured concrete, air
conditioning by simple thermal air cooling, and, as often applies, air bridges
were rejected in favour of access to the aircraft via the ramp. There are six
boarding gates each associated with an adjoining ‘aircraft area’ and
passengers walk to the aircraft – there are no buses.
Passengers are expected to carry their own baggage from the hold to the
security checkpoint, and there is no common, or private, passenger lounge.
Seating areas are kept to the bare minimum and signage is of the simple,
fixed panel variety. There is scant provision for long-haul services as
departure gates can only hold 200 passengers at most. On the other hand,
the presence of border control facilities means that the terminal can
accommodate national, European and international services. There is no
transit system facilitating through check-in of passengers or luggage via the
terminal.
No office space, sales outlet, tour operator bank or reception desk is made
available on the ground floor or departure lounge although there is a shared
excess baggage and sales desk in the departure area. First floor office space
is offered without fixtures or furnishing.
Airport retail concessions are still fairly limited, comprising of a travel
agency, two restaurants and a general store - much in line with what was
planned.
Collectively these measures resulted in a saving to airlines of 30% on their
handling costs.
The terminal is one of the simplest of its type to be found and the
management has adhered as closely to cost considerations as does Ryanair.
It is unsurprising that Ryanair chose to make MPA a base virtually on the
day it opened. Whether or not ‘hardship’ has been avoided is for individual
passengers to decide and, if necessary to vote with their feet. So far they
are staying put.
MPA began by offering airlines 25-minute turnaround, and an 88% discount
on passenger service charges (EUR1.31 per passenger, from EUR6 as above
for domestic and European flights). This sort of dual pricing was previously
unknown in France but was approved by the French authorities because
cross-subsidisation was not sought and never has been. A 90% discount was
offered for new routes in the first year and 50% in the second on landing
and parking fees and free parking for overnight stopping aircraft. As part of
the route incentive, the airport also offered airlines ‘communication
expertise and targeted marketing tools to maximise media impact and to
promote the Marseille-Provence area.’ It also offered to help handling agents
cut fees by 25%. An online booking offer to passengers priced car parking at
EUR1 per day.
Ryanair expressed specific interest in operating from the terminal and
commenced with a base operation in Sep-06. Ryanair has moved into the
North Africa market on the strength of MPA’s influence in that region.
Interestingly, Air France looked at the LCC terminal, although it ultimately
did not choose to base operations there. As things stand, no full-service or
network carrier yet uses mp², whereas two ‘fringe’ LCC carriers, Morocco’s
Atlas Blue (a subsidiary of Royal Air Maroc) and Flybaboo used the main
terminal (however, Atlas Blue has recently moved to the low cost terminal).
Key Points
•
With so little LCC traffic, especially by comparison with its
neighbour at Nice and no French LCCs at all, MPA took a chance
with the LCC terminal but it seems to have paid off and might be
considered a ‘model’ for other airports of this size to follow;
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•
•
•
•
It is too early to say if has taken traffic from Nice. mp² has helped
MPA consolidate its position as a leading airport for the growing
North African market. In hard terms, the figures speak for
themselves. MPA’s 2006 Ebitda was EUR20.5 million on turnover of
EUR85.5 million; a margin of almost 24% and traffic increased
again in the first two months of 2007 by 12% - by 60% on
European routes;
This is one of the most basic terminals reviewed in this report but
no evidence yet that passengers see it as a ‘hardship terminal’;
Ryanair rapidly responded to the opportunity; and
As with other such terminals, it did not attract all LCCs initially
especially where there is little or no price differentiation between
the terminals (i.e. on domestic and European services) but the
trend is now for almost all LCCs to use it.
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4.4 Belgium
Case Study #12: Charleroi/Brussels South (BSCA) –
Ryanair’s first European mainland base
BSCA was Ryanair’s first European mainland base airport in Apr-01, at the
time Ryanair started its aggressive Continental growth drive. The airport has
become heavily and arguably over-reliant on that airline and became
embroiled in arguments over illegal airport support of airlines from public
funds.
BSCA is managed privately as a limited company since 1991 under the
authority of the Walloon region, as is Liege Airport. The Belgian State
transferred the management and operation of all regional airports to those
regions on 01-Jan-92, to be operated by limited companies under
commercial law. BSCA’s main shareholder is Sambrinvest Holding.
BSCA Investors
City Parking SA
0.3%
SA Sambrinvest
19.2%
Sabca
0.7%
Sonaca
0.7%
SOWAER
48.9%
RW Loco SOGEPA
27.7%
IGRETEC SC
2.3%
Koeckelberg SA
0.3%
Source: BSCA
Previous administrations found repeated initiatives to develop air service
mostly unsuccessful. The moribund facility’s first taste of success occurred
when Ryanair commenced a service from Dublin that attracted 200,000
passengers in its first year. In the year Ryanair went on to establish its
operational base with maintenance facilities (2001), BSCA handled 800,000
passengers. It could be argued that BSCA was the very first airport to be
developed as an LCA and that without that input the airport might not even
have survived.
Charleroi is a post-industrial steel town some 50km south of Belgium’s
capital that had fallen on hard times. It has a tourist offer of sorts, but was
hardly on the regular sightseer trail. To its advantage is its location at a
crossroads between France, Belgium, the Netherlands, Germany and
Luxembourg, direct motorway access and a large population in the
immediate catchment area.
Currently 38% of the airport’s users are Belgians, followed by 20% from the
Netherlands. Included in the ‘local’ population are over 20,000 well paid
European Union, Commission and related agency staff and additional NATO
employees working in Brussels for whom the low cost offer opened up many
new personal travel opportunities. To its disadvantage in some ways is that,
in its desire to improve its prospects, the authorities were open to the
inventive marketing methods that are legitimately practised by LCCs, by
which success can be measured by somewhat subjective tourist economic
impact projections.
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Location map
Source: BSCA
The impact of Ryanair was enormous. It took the airport from hardly any
scheduled commercial traffic to 2,035,000 passengers in 2004 but then
traffic fell back to 1,873,000 in 2005 mainly because of a cut back by
Ryanair as detailed below.
The existing terminal
Source: BSCA
The service to London Stansted, Ryanair’s premier base, was one of several
routes withdrawn by the airline following the fine imposed by the Belgian
Finance Administration to BSCA subsequent to a decision of the European
Commission on ‘illegal’ support given by the Walloon government to BSCA
and Ryanair. The case was brought following complaints by rival Virgin
Express, which operated from Brussels International Airport. The
Commission’s decision was that with this public support more passengers
were encouraged to take flights at BSCA rather than at other airports and so
more revenues were made.
BSCA was required to repay EUR4 million of the benefits gained and the
landing fee discount permitted to Ryanair was ruled illegal. The existing 15year support package was reduced to five years. The basis of the support
package lay in the expectation of the Walloon and local governments that
wider economic benefits would flow from Ryanair’s presence. That proposal
has been advanced many times before, and will be again.
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BSCA’s position was made worse by a tax liabilities demand of EUR1.6
million for 2001 and EUR4.4 million for 2002 that arose from the support
package. BSCA management felt that a similar tax calculation for 2003 and
2004 might force the airport operator into bankruptcy. The Walloon Airports
Minister has complained to the Federal Finance Minister that the issue
threatens to ruin the region’s chance for economic redevelopment.
Apart from the London service though, Ryanair, which has faced similar
probes at airports such as Aarhus in Denmark and Luebeck in Germany, did
not significantly downscale its presence and subsequently built it back up
again as it contested the ruling.
Owing to the threat that arose out of the incident, BSCA management tried
to add other airline services, partly so as to distance itself from too
obsessive a relationship with Ryanair, and succeeded in attracting Wizz Air
(Hungary/Poland) and Air Polonia, which has since ceased operations,
followed later by Blue Air and Jet4You. By 2006, 26 destinations were
established and passenger traffic (2,166,000) was at 15% of the level of
Brussels National Airport compared with 1% in 2000. Ryanair slated Jun-07
for the re-launch of its London service.
A new single story terminal is under construction to open in Nov-07, to
replace, rather than add to, the first. Planning and environmental permission
was granted in Feb-05, leaving the Societe Walloon des Aeroports to decide
on financing and construction arrangements. The cost was estimated to be
EUR61 million, inexpensive for something of this scale. The management
considers this to be “a fundamental strategic move… making BSCA
incontestably the country’s second airport.”
The present terminal, which has been expanded progressively, does offer
limited passenger comfort features such as a cafeteria and information stand
but is badly overcrowded despite improvements such as automatic check-in
and departure control systems. There have also been improvements such as
the addition of air conditioning and a corporate colour scheme of blue and
white, similar to that of Ryanair. At the time the second terminal was
sanctioned there were 230 BSCA staff at the airport, a ratio of 1 to every
8,850 passengers annually, and 700 jobs in total.
New terminal under construction
Source: BSCA
The new 30,000 sqm terminal is constructed to a functional design but “with
all the necessary retail concessionary facilities.” These include four food and
beverage outlets, newsstand, pharmacy, car rental and travel agent. It has a
capacity of five million passengers a year. The car park will have a capacity
of 5,000 cars. There will be ten aircraft stands covering an area of 9
hectares. No air bridges are envisaged for the first phase of this
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development. Instead, the management intends to continue the current
scheme of parking aircraft as close as possible to the terminal building with
immediate access and egress. Distances can be as short as 20 metres.
The terminal is expected to add 300 direct and indirect jobs to the current
total.
The twist here is that, possibly as a result of the Ryanair saga, the
management now stresses “practicality and efficiency in airport operation to
all airlines wishing to fly to the capital of Europe.” BSCA will henceforth be
developed as the ‘second airport’ of Brussels rather than as an outright LCA.
All appropriate airlines with point-to-point operations are being targeted and
BSCA promotes its ‘professional’ approach to route development, offering
detailed cost benefit analyses for each destination valid for four years. Its
prognostications are backed up by tailor made marketing plans
commensurate with the financial resources of the airline and support of sales
efforts in the catchment area through chambers of commerce, fairs,
associations, mailings and the diplomatic community.
This approach is indicative of how BSCA has moved away from its reliance
on Ryanair yet still, within the framework of European regulations that are
now a little more relaxed, especially for airports of less than five million
p.p.a., continues to offer all airlines comprehensive marketing support.
BSCA’s main competitor, Brussels International, is set to receive an
investment boost from owner Macquarie Airports, subsequent to that
company’s sale of its share in the Rome airports operator AdR. It has plans
over the next three to five years to make a ‘significant capital investment’ to
develop, amongst other things, LCC infrastructure. In the six months ended
Jun-06, Ebitda at the Brussels Airport Company increased by 13.7%, driven
by revenue growth across most business areas and improved productivity.
Key Points
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•
•
•
•
BSCA is not dissimilar from many of the other airports in this report
in that one airline is dominant – still on the order of 90%. That
airline twice kick-started a moribund airport by first launching a
speculative service and then establishing a base;
But it has shifted away from that carrier’s influence by necessity,
following a crucial case precedent on the legality of marketing
support by the EU at the behest of some LCC and network airlines
at nearby Brussels National airport;
The incumbent carrier stuck with the airport despite the fact it now
has 19 other European bases and traffic is now climbing again;
With the opening of the new terminal, BSCA, once an icon for
European LCAs, may move away altogether from its role as an LCA
to one of ‘Brussels’ second airport’. It is possible it might attract
some legacy airlines from Brussels National airport where there is
an organised environmental lobby. The old and basic terminal
would not have been able to do so. On the other hand Brussels
National is experiencing a resurgence and will improve its own LCC
facilities; and
BSCA has helped revitalise a stagnant local and sub-regional
economy.
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4.5 Hungary
Case Study #13: Budapest Ferihegy Airport – opening a low cost
terminal that boosted long-term investor interest
Hungary was one of the 10 new entrant countries to the European Union in
May-04 and one of the newcomers’ stronger economies. It experienced an
immediate upsurge in both business and leisure travel and the state
company Budapest Airport recorded a 71% rise in operating profit in the first
half of 2004 alone. Budapest itself is a city of two million people out of a
total for Hungary of 9.8 million.
The fairly limited development to date of airports outside the capital meant
that air travel growth was concentrated there at what is the only recognised
international airport, although that is starting change as at least some of the
regional airports gain more commercial flights and prepare for privatisation.
Budapest Ferihegy Airport was corporatised in preparation for the
privatisation that will occur when Terminal 2C is completed in 2008 – a
terminal allocated to full-service airlines according to current planning. BAA
bought a 75% stake in the airport in 2005 on a huge multiple of the airports
earnings. Subsequently, and following the takeover of BAA by Ferrovial in
2006, BAA sold its stake to a Hochtief-led consortium in Jun-07, Hochtief
AirPorts’ CEO describing the airport as ‘Hungary’s unique national asset’.
The new management pledged to expand and modernise the airport further,
investing EUR261 million in the next five years. The main Hungarian political
opposition party has threatened to re-nationalise privatised assets if it gets
back in power.
That the transaction went through so quickly, and attracted so many original
bidders (11) is down to the redevelopment of Terminal 1 as an LCC facility
because otherwise the airport had capacity problems that would have chilled
investor interest.
The airport management sought to attract more business from European
LCCs via the rebuilding and enlargement of the old 22,000 sq m Terminal 1,
now 57 years old, for their use. This terminal was already handling carriers
such as easyJet, Germanwings, Wizz Air, SkyEurope, Air Berlin, Jet2, Alp
Eagles and Snowflake (SAS). The rebuilt Terminal 1 should allow the airport
to handle two million passengers annually on this one site.
The project started in the autumn of 2004 and T1 was reopened in Sep-05
after investment of EUR12 million. The terminal has no air bridges, lounges
or passenger transfer facilities but its interior and facades were otherwise
renovated in homage to the original terminal, as required by the
requirements of the ‘Monuments Authority’. It has subsequently won
Hungarian and international architectural awards.
The combination of meeting 21st century technical and security
requirements in a protected monument building prompts the authorities to
consider the terminal, which has 19 check-in desks, to be ‘almost unique’ in
Europe.
It has been used by about four million passengers (about a third of
Ferihegy’s total throughput) since it reopened and is currently home to five
LCCs, going up to 10 in the autumn 07-08 schedules, which include Ryanair
for the first time. For the 12 months to May-07, total passenger traffic
reached 8.341 million, a 2.7% rise over the same period last year. The
terminal is connected to downtown via a rail link from Jul-07.
No data is available on expected job creation arising from this project.
A project to build a new low-cost airport in the village of Tolkol, south of
Budapest is beginning to take shape with interest coming from the private
sector. The TriGigant Group is looking to convert a former military field into
an international airport that would have good access to the highway system
and the Danube.
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Tourism prospects for Hungary remain good and Budapest has experienced
an explosion of inward demand since EU accession. However, there are signs
that the rapid growth is starring to abate. Hungary’s national airline Malev
joined the oneworld alliance in Apr-07. Malev was also sold in Apr-07 to
Airbridge ZRT, one of whose stockholders is Boris Abramovich of Russia’s
Kras Air and AiRUnion.
Key Points
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•
It has been important in establishing a perception of the airport’s
value, which has been manifest in the amounts paid in the two sale
transactions in 2005 and 2007;
The reopening of the terminal has doubled the total of destinations
in the UK, one of the largest providers of LCC traffic. This is
important because the airport’s traffic is in fact static; and
Designated low cost facilities are almost certain to open at
Hungarian regional airports.
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4.6 Poland
Case Study #14: Warsaw Frederick Chopin Airport – operating a
dedicated low cost terminal in a former furniture shop
Like Hungary, Poland joined the EU in May-04 and it also witnessed rapid
development of its air transport network, as Western businessmen seeking
new investment opportunities, and tourists alike, headed to the country and
its capital, Warsaw. This demand for inward flights was matched by an
exodus of hundreds of thousands of Poles heading west, often to the UK or
Ireland, seeking employment. Most of them are from regional cities rather
than the capital.
Most recently, the latest band of travellers has been
property owners and developers seeking to take advantage of low property
prices and abundant properties for sale in the main cities.
However, it has not been plain sailing for some of the low cost airlines that
emerged to take advantage of this opportunity. Air Polonia failed in Dec-04,
and others, including Eurolot (LOT’s regional arm), Getjet (started in 2003
and finished in 2004), Centralwings (a subsidiary of national carrier LOT,
launched in January 2005, based in Warsaw and Krakow and which has been
losing money) and Wizz Air, the joint Polish/Hungarian venture that has five
Polish bases including Warsaw, have all had some difficulties.
Alos active are SkyEurope, the second of the ‘big two’ in the region with
Wizz Air, which has far greater representation at Krakow than Warsaw, and
Ryanair, which is active at five Polish airports (main base Wroclaw) but with
only one service at Warsaw. EasyJet has a limited presence at Krakow and
Warsaw, but neither Air Berlin (Germany) nor Air One (Italy), the next two
biggest European LCCs, has a presence at all in Poland.
Unlike Hungary, not all local LCCs fly to and from the capital city. Poland is a
big country with strong regional identities in cities such as Krakow, Szczecin,
Wroclaw and Gdansk. There are 12 commercial airports.
Warsaw Frederic Chopin Airport (previously Okęcie International Airport and
still referred to by that name) handles about 50% of the air passenger traffic
in the country, down from 75% in 2003, from 100 scheduled destinations. In
2006 the airport handled approximately eight million passengers, an
increase of 57% since 2003 - much the same size as Budapest and the
figures indicating the shift towards regional services. Warsaw Airport is
located 10km southwest of the city centre and situated on approximately
500 hectares of land. It has a capacity
Warsaw’s low cost terminal is called Etiuda. It was opened at the end of Mar04 to supplement the existing Terminal 1 and is situated in the southern part
of the airport, away from the main buildings.
The useable floor space of the terminal is 2,281 sq m, including 677 sq
metres for departing passengers and 456 sq metres for arrivals. There are
eight check-in stands.
At present, the Etiuda Terminal handles passengers of easyJet,
Germanwings, Norwegian Air Shuttle, Ryanair, SkyEurope and Wizz Air.
The Etiuda terminal lacks bars, restaurants or retail opportunities but basic
facilities such as a newsagent, coffee bar/snack shop and drinks machines
have been provided. Owing to the fact that Etiuda offers customs clearance
only for passengers travelling to the European Union countries, it does not
offer a duty-free zone. The management admits the terminal is less
comfortable than Terminal 1 whilst stressing its safety/security features. It
does not have a designated car park of its own.
Etiuda began life as a new Arrivals Hall, the so-called Finnish Hall. It served
passengers arriving in Warsaw from 1979, following dramatic traffic growth
in the 1970s. (The main airport opened in 1969 with one terminal). The
main terminal, upon upgrading, was dedicated solely for departing
passengers. The Finnish Hall operated as an Arrivals terminal until mid 1992,
when the new Terminal 1 was put into operation. Later, the facility was re-
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organised and used as a supermarket, furniture shop and storage space until
the comprehensive redevelopment in early 2004.
Etiuda Terminal exterior/entrance
Source: Etuida Airport
The original Arrivals Hall
Source: Etuida Airport
Etiuda Terminal interior
Source: Etiuda Airport
Separately, a new Terminal 2 was built and the Arrivals Hall opened in Dec06 with the remainder to follow by the end of 2007. PPL, the Polish Airports
State Enterprise, commissioned a Polish and Spanish building consortium to
construct a modern air passenger terminal with a capacity of 6.5 million
passengers annually. There is interplay between T1 and T2 while T2 is being
completed – passengers being switched between the two as necessary.
Together with Terminal 1 and Etiuda, the overall airport capacity is now 10
million p.p.a.
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The terminal extension was accompanied by infrastructure projects: a new
road connection with the city centre and the A2 motorway and a train line
leading to the airport. PPL typically uses debt financing through European
Investment Bank loans to help finance these developments. PPL may be
partly or wholly privatised in the mid-term future.
Terminals 1 and 2 jointly host 29 airlines presently, including several LCCs.
It is assumed that once T2 is complete T1 will become the LCT and other
uses will be found for Etiuda.
4.6.1 Additional low cost airport developments in Poland
In other developments in Poland the airport owners, Military Property
Agency and Porty Lotnicze announced in Dec-04 their plans to convert the
Modlin Military Airport into a dedicated low cost carrier airport. Modlin
Airport, located 40 km north of Warsaw, is predicted to ease congestion at
primary facility Frederick Chopin Airport.
The airport was expected to commence operations in Jun-05 but work
progressed slowly. In Jun-06 Port Lotniczy Modlin, a private company,
announced plans to invest EUR5 million to upgrade the Modlin airfield for
commercial purposes: a much-reduced scheme. The project is now expected
to be completed by 2009, having slipped again from 2007. Modlin is now
situated in a Special Enterprise Zone where new businesses are encouraged
to set up. An existing rail link between Modlin and Warsaw would be
upgraded once the airport is developed. It would handle 2-3 million p.p.a.,
made up of LCC and charter traffic, with cargo services starting later.
In Sep-06, the Sochaczew County Government said it was considering plans
to construct a new airport for LCCs in Sochaczew County, also to alleviate
congestion at Warsaw Okecie Airport. The USD60 million project would be
privately funded.
The Military Property Agency also wishes to dispose of several airstrips
owned by the Polish Army. The Agency stated in Feb-05 that it would invite
tenders for the sale of Nowe Miasto and Slupsk airports, while the sale of
Wdzydze and Zegrze Pomorskie airstrips was already being negotiated. The
end of the Cold War was the catalyst for these developments and sales but
recent sabre rattling by Russia and fall-outs between the Polish and German
governments might elicit a re-think.
The New Zealand-based airport investor operator Infratil (see Glasgow
Prestwick/ Kent International) announced in Mar-04 that it would become
the major investor in a new low-cost terminal to be built at Kraków's Balice
Airport (known as John Paul II International Airport) in conjunction with
Kraków Airport Ltd.
Balice doubles as an important NATO airfield and the existing terminal,
modernised between 1999 and 2001, has annual capacity of 1.3 million
passengers. Danish airports operator Copenhagen Airports A/s also bid in a
tender procedure that originally involved fifteen bidders but it apparently
lost out because it was considered too traditional an airport operator
whereas Infratil could offer flexibility and knew the low cost business well
from its experience at Glasgow and Luebeck, Germany, from which it could
add experience in public private partnerships.
The criteria for the successful offer included previous experience dealing with
budget airlines, as well as having the appropriate financial resources. The
investment was expected to fall between PLN70 and PLN117.5 million
(EUR15 and EUR25 million). Balice Airport is Poland’s second largest. The
new terminal was scheduled to begin dealing with air traffic by the end of
2004 but the project has been delayed.
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Key Points
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Etiuda appears was built as a short-term hedge against high,
anticipated growth following EU accession and while the planning
and building of the expensive Terminal 2 was finalised;
With much of the growth coming from the budget sector it may
serve more than its original purpose but does not appear to be
readily extendable. Therefore its future is uncertain when T2 is fully
operational and T1 available for alternative use;
Facilities are very Spartan. According to anecdotal evidence, that is
regarded as a positive feature by the management and it is
promoted accordingly;
It has done its job well as a temporary facility; and
There are several plans for alternative LCAs in the region.
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4.7 Italy
Case Study #15: Parma Airport – a low cost airport for Milan?
Parma Airport Giuseppe Verdi is one of the more recent examples of a new
breed of secondary airport that has grown up in Italy to service a large
increase in flights into the country by LCCs, most notably Ryanair. The
airport is managed and partly owned by the Low Cost Airports Group
(LCAG), a relatively new company based in Cardiff (UK) with a brief to
provide a network of successful, profitable regional airports in Europe, which
collectively create synergies and are capable of growth, complementary to
other major gateway airports.
Borrowing from Infratil (q.v.) it is ‘committed to the long-term growth of all
of its airports.’ Other small companies with similar mission statements
include Omniport (Maastricht, Netherlands and Norwich, UK airports) and
Churchill Airports (Lahr, Black Forest Airport, Germany); also the defunct
Wiggins Group/PlaneStation (q.v.), which had plans for a network of up to
50 of them.
LCAG also has a cooperation agreement with the small airport at Osijek in
eastern Croatia, which lies close to Belgrade and the industrial city of Novi
Sad (Serbia).
LCAG is led by Chairman Paul Whelan, formerly of CityHopper Airports, a
group that owns and operates Wolverhampton and Blackpool airports in the
UK and which has a management contract at Biella Airport, a small facility
between Milan and Turin. LCAG has strategic partners:
•
•
•
•
Sydney and London Properties Ltd., a privately owned property
investment company;
URS Corporation Ltd, a leading business advisory professional
services firm;
Alder King LLP, a law firm advising on commercial property and land
development; and
KPMG, the corporate finance firm.
In Apr-07, LCAG acquired 5% of SO.GE.A.P. S.p.A, the management
company at Parma International Airport. Most Italian airports are run by
these corporatised entities and some have limited private sector interest. In
the case of Parma, SO.GE.A.P. S.p.A was formed in 1983 following the
integration of local economic, political and business organisations in the
Parma district, some banks and more than 130 private businesses. It is
regardedthe first Italian example of an airport management company with a
majority of private ownership, the shareholders being both investors and
service users.
Technically, under European Community Regulation 2408 Parma qualifies as
a Milan region airport, together with the city’s Linate and Malpensa airports
and Bergamo Airport. In only two other Italian regions are there multiple
airport designations like this: Rome and Venice. The airport might be
branded as “Milan South”.
The attraction of Parma, in the Emilia Romagna region, was its geographic
location in the centre of northern Italy, actually equidistant between Milan
and Bologna on the A1 motorway and close to the main motorway to La
Spezia on the coast (thence north to Genoa or south to Pisa and Livorno)
The main north-south high speed rail line, the Treno Alta Velocita or TAV,
also runs close to the airport and a railway station is planned for the airport
in 2008. There are currently major investments taking place in high-speed
rail in Italy and the journey time to Milan centre is said to be as little as 15
minutes. The immediate catchment is circa 2.7 million people in the core and
8.9 million people in the secondary area.
The consequence of this positioning is that it
leisure travel as well as VFR. Parma lies in
industrial region, said to be one of the richest in
no operating constraints at Parma. The runway
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can tap into corporate and
a wealthy agricultural and
Europe. Moreover, there are
has been expanded to 2300
111
m x 45 m, with the apron area able to host up to four 180-passenger
aircraft.
Parma International Airport proposed catchment area
Source: Parma Airport
The other factor is the expectation that major European airports will
continue to be congested and that it will get worse – precisely the same
thinking that led to the development of Liverpool and Doncaster-Sheffield for
example as LCAs. It is extremely difficult to secure a landing/take off slot at
Milan’s popular Linate Airport.
Finally, the background experience of CityHopper Airports must be taken
into account. This was, and is, a company that sells the concept of economic
regeneration of an airport’s hinterland by encouraging a variety of industry
and commerce to use the site, and particularly those with an aviation
connection.
LCAG is expected to invest over EUR60 million in airport over the next five
years and at the time of writing had made an offer to acquire 75% of the
equity. The investment complements one of EUR30 million from the Italian
government to extend the runway and introduce enhanced navigational aids.
The objective is to place Parma as a complementary airport to Milan’s
regional air transport strategy, capitalising on its strengths.
There are presently two domestic and four international destinations at
Parma. Ryanair operates four times weekly to London Stansted; Cimber Air
to Copenhagen and Odense; Alitalia to Rome and Olbia (Sardinia) and Belle
Air weekly to Tirana, Albania. Wizz Air confirmed that services would
commence,
together
with
a
tour
operator,
Ventaglio.
Further
announcements are anticipated from both LCCs and full-service airlines, and
route operators are sought for the US and Middle East.
The original terminal was built as a fixed base operation and, rather than
refurbish it, it will be more cost effective to build a new one, which will
account for the majority of the EUR60 million investment. The new terminal
is a condition of the contract with the present owners SO.GE.A.P. S.p.A. The
potential exists to add an extra runway. For what is essentially a new
airport, the capacity will be considerable, possibly up to 30 million p.p.a. The
target is 4-5 million in five years.
With hardly any history of non-aviation revenue generation here, concession
facilities will form an important part of the package.
As most of these airlines are network or regional carriers, the question is
whether Parma is a genuine low cost airport. The charging regime and
facilities apart, there are two factors to identify it as an LCA. Firstly, the
presence of Ryanair in a country where that airline has previously pulled out
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of airports in the past over disagreements concerning charges. The
circumstances have to be right for the Irish airline. Secondly, it is positioning
as a support airport to the Milan system, targeting airlines that would not
choose to fly there on cost grounds if there were a suitable alternative.
The management’s view is that it will not be judged a low cost airport by its
charging and facilities regime, rather that it will prosper by building route
development and other support partnerships with airlines, many of which
will be LCCs
The idea of a low cost airport for major cities in Italy seems to be catching
on. The Rome authorities are examining the development of a third airport
dedicated to LCCs serving Rome. Of the existing two, Fiumicino and
Ciampino, the latter mainly handles LCCs presently and is to have its total
daily movements cut by 30% to 100 from Nov-07. There also seems to be a
feeling that Ryanair has become too powerful at Ciampino so that more
alternative airports are needed. Three military airports are under
consideration for the new LCA role – Latina, Viterbo and Frosinone.
As for future developments LCAG may be interested in the forthcoming
privatisations of some regional airports in France, which the government
held back until after the IPO on Aeroports de Paris.
Key Points
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•
•
•
•
Development of this airport was instigated by a consortium of public
and private interests, one of the first such examples in Italy;
Their capabilities were enhanced by the later involvement of a foreign
company, and individuals, with prior experience of operating low cost
airports and of building supporting infrastructure for aviation-related
firms;
The position of the airport maximises its potential and it benefits from
an excellent public transport network;
Parma may be a test bed for further expansion by the foreign
company of a future network in Europe, possibly beyond, but other
such companies have been equally ambitious in the past without
being successful;
Partnership and cooperation are the twin planks of the airport’s
offer to LCCs rather than low cost/basic facilities.
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4.8 Iceland
Case Study #16: Iceland – low cost airport driven by needs of an
emerging airline
Iceland is an island country of just 300,000 people in the North Atlantic that,
like Ireland, hosts a disproportionately large aviation industry. In Iceland’s
case, it includes the FL Group, Avion, the world’s largest ACMI carrier, and
Icelandair. The national carrier, Icelandair, was one of the very first airfare
discounters, engaging in that activity for over 40 years to carry 6th freedom
traffic between North America and Europe, business that keeps the airline
going during the long, dark winter months. But its point-to-point airfares for
outbound Icelanders and inbound tourists were high. Iceland Express, an
LCC, commenced operations several years ago, virtually the only LCC to
have taken in the local might of Icelandair and survived, breaking its virtual
monopoly on European travel. Now it wishes to open an airport of its own for
domestic travel in Iceland and apply its brand of low cost operating
economics to airport operations.
Icelandair still dominates aviation there with six North American destinations
and around 20 in Europe, but Iceland Express has been growing over the
four years of its existence, to carry 300,000 p.p.a. with 13 European cities
served by three aircraft, including Copenhagen, Frankfurt Hahn and London
Stansted. Interestingly, in some cases Iceland Express does not operate to
LCAs, for example Paris, but in other cases it does not when there is such an
alternative, e.g. Stockholm Arlanda (where Skavsta, Vasteras and, soon,
Uppsala, offer alternatives), and Oslo (alt: Torp and Rygge).
Iceland Express also operates on two domestic routes: Akureyri, the second
city (pop. 17,000) in the north and Egilsstadir, a settlement that is also a
port in the east. The lack of any rail service and underdeveloped, though
much improved, roads means that air service is critical in Iceland both to
facilitate travel to the capital and beyond and also to ensure the country’s
many tiny communities do not become isolated. There are only a dozen or
air routes in Iceland, two of them offshore, and their number have been
shrinking. Some of them are PSO (Public Service Obligation, government
supported) routes.
Domestic passengers number around one million annually and are not
expected to exceed 1.2 million by 2015. Despite large numbers of tourists, it
is not a growing business and some of the nation’s airports remain open
really only so that emergency services could be flown in if necessary rather
than for commercial reasons. Nevertheless, Iceland Express proposes to
open a new LCA close to Reykjavik, the capital, for both domestic and
international services, partly to break the ‘monopoly’ of Air Iceland, an
Icelandair subsidiary, on the domestic routes.
Iceland’s two main airports are at Keflavik, about 30 miles from Reykjavik
on the Reykjanes peninsula, and the Reykjavik city airport, which is
downtown. Both were built during the Second World War to provide
protection to the Atlantic convoys. Keflavik, the international airport, has
had the benefit of being co-located with a US navy and NATO base that
provides many essential facilities such as snow clearance. Keflavik is noncongested and transfer to and from the capital (the origin and destination of
the majority of passengers) takes less than 40 minutes. Half the population
lives in Greater Reykjavik.
Yet it has been unable to attract LCCs apart from the home grown Iceland
Express as charges are quite high, certainly too high for the LCC mainstays.
The Leifur Eriksson Terminal, 20 years old, has been expanded and
extensively refurbished and offers a variety of cafes and stores – they have
doubled in number - selling refreshments and goods at “ half city centre
prices”, which are still high by most visitors’ standards. Extensive use is
made of art and design, the sort of thing the most cost-conscious LCCs
abhor. Passenger numbers were two million in 2006, expected to rise to 3.2
million by 2015 and 4.4 million by 2025.
The downtown Reykjavik Airport, home to Air Iceland and Eagle Air, handles
mainly domestic flights (400,000 p.p.a.), but also occasional international
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ones such as to Greenland and the Faroe Islands. It is situated so that
approaching aircraft must often fly over a business and residential part of
the city including a 100 m church tower on elevated land only 1 km from the
runway. Despite its infrequent services it has attracted complaints over the
years from residents, as most aircraft using it are noisy turboprops. The
airport is only licensed for commercial operation until 2016 and the
possibility of not re-licensing it has been discussed. It is the location of the
Icelandair headquarters and of one of the city’s main hotels and conference
centres, owned by Icelandair.
The fairly basic facilities were renovated in 2000 but it is still basic by
comparison with the Leifur Eriksson Terminal at Keflavik.
The debate about its future has taken three strands: (i) keep it open, some
still prefer this option because of its ‘city-centre’ convenience; (ii) move
domestic flights to Keflavik; and (iii) build a new one in the Reykjavik area.
Closing it would provide valuable land for housing. Moving to Keflavik would
inconvenience many people, for example the country’s main hospital is very
close by. The new airport option was not preferred because of cost but now
it appears that an airline would be prepared to take on the risk, and with it
the kudos of being ‘first mover’ to do something new and exciting in
Icelandic aviation. The population was split almost 50:50 in 2001 between
moving the airport out of the city centre and it staying put until 2016.
Several difficulties face the potential airline-cum-airport developer. There is
not a great deal of space in the Reykjavik area, which has (relatively
speaking) mushroomed during the last decade. New sites have been
suggested in the Hvassahraun area or on landfill sites in Skerjafiord Bay,
which would then become a domestic and an international airport, which
matches Iceland Express’ ambitions for a 6,500 sq m terminal. Reports
indicate that Iceland Express prefers a location close to the present day
airport. And much of the whole region is a lava field that is not easy to build
on, as the cracked and crumbling facades of too many downtown Reykjavik
buildings testifies.
A planning application has been lodged with Reykjavik city council and
aviation authority Flugstodir.
Key Points
•
•
•
•
•
•
•
This proposal is driven by high costs at what is virtually a monopoly
airport (an over-used term in many European countries now but not
here) together with inefficiency, security issues and uncertainty at
the existing domestic airport;
Domestic air travel in Iceland is falling as the surface infrastructure
improves…begging the questions of whether a new airport is really
necessary;
The potential operator has little knowledge of airport operations and
would have to co-operate in some sort of consortium, which may
prove difficult to assemble, as a facility that would max out at
500,000 p.p.a., and would not be able to attract jet services if too
close to the centre is unlikely to garner investor interest;
Iceland Express would have the backing of parent company
Northern Travel Holdings (created out of FL Group), which also
owns Denmark’s Sterling Airlines and half of Astraeus (UK);
The issue has concentrated minds well in advance of the 2016
deadline on Reykjavik Airport;
Construction circumstances are not helpful; and
A high-speed rail link to Keflavik Airport might be a viable
alternative. It has been discussed before.
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4.9 Spain
Case Study #17: Don Quijote Airport, Spain – tilting at windmills?
A textbook study in regulation of a new low cost airport
In Spain, almost all airports come under the control of Aeropuertos
Espanoles y Navigacion Aerea (Aena), the biggest operator of airports in the
world with almost 200 million passengers annually, and which also handles
air traffic control issues in Spain and its islands. Such is the size and scope
of Aena that few private firms have felt the inclination to take on the
challenge of developing a privately funded and operated airport although
there has never been anything in law to stop it. There are now a handful of
private developments, in Castellon and the most significant, at the Don
Quijote airport at Ciudad Real in the Castilla La Mancha region.
Five years ago, a succession of private airport operators including Flughafen
Wien (Austria) and TBI (UK) were attracted to the development of a green
field airport 120km south of the Spanish capital, Madrid, close to the city of
Ciudad Real, in the undeveloped Castilla La Mancha region. The airport was
named after the fictional character Don Quijote, whose story was set in this
region. Subsequently, and although neither Flughafen Wien nor TBI is still
involved in the project, it has become the most notable such example of a
private sector green field airport in Europe. Looking to target low cost
airlines, it is scheduled to open by the end of 2007.
The business plan is based on accessibility from Madrid via the high-speed
north-south AVE railway that passes by close to the airport on the MadridSeville (fourth city) line, allied to the construction of an east-west crosscountry motorway connecting Valencia (third city) with Lisbon, and passing
through several rather remote, thinly populated and underdeveloped regions
of both countries.
Local and regional governments heavily supported the project, for its jobcreation potential. The local University is one of the consortium members. It
also hoped to build a major central business and distribution park and
consequently cargo operations have been targeted from the beginning of the
project. This was a fortuitous development because although Madrid’s
Barajas Airport, to the north of the city, has been capacity constrained, its
bottlenecks were significantly alleviated by the opening of a fourth terminal
there in 2006.
The new terminal is directly responsible for both the major European low
cost airlines, easyJet and Ryanair, having been attracted to Barajas, where
both use it as a base, complementing the Spanish LCCs also based there. As
a result, it is unlikely that these airlines will have significant operations at
Don Quijote. Current projections are that the airport may be able to attract
long-haul charter services to and from Latin America (Spain is the major
European gateway for Latin Am flights). Whereas Spain-Latin Am services
were once the preserve of Iberia, several other Spanish airlines now ply the
route and there are a growing number of South American carriers in many
countries on that continent that would eye Madrid positively as a new
destination.
Apart from the Universidad de Castilla La Mancha, other shareholders in the
EUR1.1 billion investment are Aeropuerto Ciudad Real (the holding
company) and a variety of industrial and financial sector concerns including
Iberdrola, ICC, CCM and Del Monte, all with regional commercial interests.
The regulatory position is complex and the airport owners have found
themselves in the position of being ‘pioneers’, the government itself going
through a steep learning curve. The existing legislative framework did not
facilitate the planning application process.
Essentially, the problem is that the company making the planning application
(Aeropuerto Ciudad Real), despite being privately funded, was also the local
regulatory authority, the Ciudad Real municipality. The municipality was the
driving force behind the airport anyway, to increase and improve local
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economic prospects. Therefore, it was quite happy to ‘rubber stamp’ its own
planning application.
On the other hand, the state airport & ATM operator, Aena, operates all
other airports. Aena, which previously had a comfortable, even cosy
relationship with its managed airports, the airlines and the other interested
government departments - the Ministry of Transport, Ministry of Public
Works and Ministry of Development - requires that, to be licensed for
commercial operations, an airport must be classified as ‘an airport of general
interest’ – i.e. it will accept public scheduled and charter flights.
Before Don Quijote, the state required Aena to manage all ‘airports of
general interest’. Consequently there was a conflict of interest and Aena was
even required to approve the master plan for Don Quijote, an airport that
was planned to be Aena’s main competition for its Madrid Barajas base and
hub airport!
Eventually Aena did that and it is perhaps a good example of how regional
government autonomy is changing in Spain. It is understood how key
regions like Catalonia (Barcelona) and Andalucia (Malaga) have gained far
greater autonomy in most activities other than policing and defence, but it
less well known that even isolated regions like Castilla La Mancha and
nearby Extremadura are also gaining greater autonomy. In fact, most
regions now wish to run their own airports and a change in the law may
eventually be forthcoming to permit them to do so, effectively bringing the
holistic approach of Aena to an end, at least in the airport segment.
It will not do so in the ATM business though, and for the meantime Aena
remains short of air traffic controllers. This was a further issue in the
granting of a licence to Don Quijote; Aena could not promise to provide
enough controllers to man a 24-hour operation but the airport cannot, under
existing laws, provide its own. Thus the airport may have to open with
restricted operating hours until this situation is resolved.
As with the UK, there is an appeals procedure against major projects like
this, all of which have apparently now been exhausted. In the first instance
the appeal was against the land use – it was classified for residential use and
had to be re-classified as commercial/industrial. Secondly, a Spanish bird
protection agency found that the habitat of an especially rare bird would be
severely affected by the development and measures had to be taken to
ensure that it was protected.
The influence of the military is minimal. Their primary concern is that
commercial and military flight paths do not overlap, which was not the case
here but is in Murcia (southeast Spain) where a new EUR2.5 billion airport
will be built close to a military base that presently doubles as the region’s
commercial airport. Otherwise it is the Ministry of the Interior that takes
responsibility for security issues.
The airport’s total surface area is 1,200 hectares. The runway and taxiway
will support an A380, and 20 operations per hour in the first phase.
Navigational aids are in place to ILS Category 3 standard.
With Barajas Airport’s T4 having won the prestigious Sterling Prize for
Architecture, Don Quijote has a lot to live up to and plans an open and lightfilled space “like the La Mancha countryside”. It will include retailing areas,
restaurants, bars, passenger services such as Internet access and a ‘Siesta’
lounge and VIP lounges. Nevertheless, ‘great luxuries’ are eschewed in
favour of practicality and functionality in order to avoid unnecessary cost
increases or complications in the airport’s operation that could affect its
users.
The 24,000 sqm terminal will be able to process 2.5 million p.p.a.
There is a Visitor’s Centre with museum, conference hall and restaurant but
it is unclear whether its main purpose is to promote the airport development
like a housing development might promote its apartments or whether it is
intended to showcase the commercial and cultural offer of the region.
Now all it needs is airlines and passengers.
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Key Points
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•
•
•
•
•
Don Quijote is a gamble;
It is isolated in a thinly populated region despite the motorway and
rail link and reliant on the frequency of the train service from
Madrid (and Seville);
Few airlines have yet signed up and the airport has changed its
name and marketing to Aeropuerto Madrid – Ciudad Real;
It appears less likely now that the main LCCs will move there since
the opening of Madrid’s T4 released space for them;
It can fall back on cargo, for which there is a more than adequate
facility and could attract long-haul charters and secondary
scheduled airlines; and
What is has going for it is the unwavering commitment of its
backers built on regional pride, in a country that is ‘regionalising’
even more.
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4.10 Finland
Case Study #18: Tampere-Pirkkala Airport, Finland – innovative
use of a cargo building but state aid issues cloud its future.
A renovated former cargo terminal previously operated by DHL opened at
Tampere-Pirkkala Airport in Finland in Apr-03, as Terminal 2, a low cost
terminal that was the first of its kind in Finland. Interestingly, the airport
website refers to it as ‘a so-called cheap flight terminal’. The airport falls
under the control of Finavia, the Civil Aviation Administration of Finland that
operates 24 airports in all. Almost all Finnish airports come under the
auspices of Finavia, including the capital’s airport, Vantaa, and its growing
airport city, Aviapolis. Tampere is the main base of the Finnish air force.
A naming rights deal was concluded with a new start-up hotel chain called
Omena and the terminal was called Omena Gateway when it opened, the
quid pro quo being assistance with the refitting of the terminal.
Terminal 1 at Tampere is used for scheduled, charter and cargo flights.
Finnair and SAS are based there, as is Blue1, a low cost arm of SAS,
Denmark’s Cimber Air (regional) and Golden Air, a small Swedish regional
airline. Terminal 2, the LCT, is the sole preserve of Ryanair.
Tampere Pirkkala Airport
Source: Tampere-Pirkkala
Ryanair was the first client airline to use this low cost terminal, initially
operating two flights a day from the airport and now serving Frankfurt Hahn,
Riga (Latvia), London Stansted, Bremen, Dublin and Milan Bergamo, most of
which are Ryanair bases. Not all the routes have been successful, for
example a route to Liverpool (q.v.) was withdrawn.
Tampere-Pirkkala claims to have become the third-busiest airport in Finland
with 632,000 passengers in 2006, of which some 500,000 use the LCT. The
LCT is operated by Airpro Oy, also a state-owned company and Finavia’s
wholly owned ground handling and services subsidiary. Airpro’s website has
its own Ryanair pages, currently available only in Finnish.
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Tampere-Pirkkala check-in area, T2
Source: Tampere-Pirkkala
Situated some 100 miles northeast of the capital, Helsinki, Tampere is
Finland’s second city and home of telecommunications company Nokia,
which was founded in the small city of the same name nearby and also
within the Pirkkala province. Together with Turku, it forms the southwest
base of a triangle together with Helsinki and Tampere. This region accounts
for most of Finland’s high-tech businesses and a large slice of the 5.25
million population.
A Pirkkala CLX Business Zone is to be established near the airport and is
intended as the location for new companies during the next few years.
The terminal was renovated on a strict low cost principle - only essential
renovation work was carried out; the guiding concept behind the planning
being functionality and cost effectiveness. The architects’ task was eased
somewhat by the fact that it had been a passenger terminal before it
became a cargo one (as Warsaw’s Etiuda Terminal had been an Arrivals Hall
before it became a storage space), so the transformation was a ‘facelift.’
Lentokenttätekniikka, a service unit of Finavia, commissioned the work.
Airpro Oy is responsible for operating the terminal, and has rented the
building and its surrounding land. Airpro Oy operates at ten other airports
around Finland. Tampere-Pirkkala was chosen for the low cost operation
simply because a redundant terminal that would otherwise have been
knocked down became available, allowing for it to be reconditioned and put
at the disposal of interested airlines.
Initial research indicated that the terminal’s cost-effective concept was well
received by passengers and the intention was to expand this activity at
Tampere by attracting other airlines, not necessarily budget ones, to the
facility. However, there are some limitations in slots and handling services.
For example, as the terminal is quite small, only one slot per hour is
possible. One other LCC might be able to use it as long as its operations did
not conflict with those of Ryanair. Initially only manual check-in was
possible. There are now two computer terminals, but the software is basic.
Supplementing Finavia’s traditional types of terminal, the cheaper fares
embodied in the low cost concept were made possible by pruning the usual
services, with, for example, passengers largely taking care of their own
luggage. The terminal does have a restaurant but retail facilities are limited
– there are landside and airside provision shops operated by Airpro, but only
one external concession, for car rental. When the terminal opened a leasing
deal was agreed with Koti, a pizza restaurant operator, but it has since
lapsed and Airpro runs the restaurant, thus having control of all shops and
FBO, possibly a unique situation.
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The low-cost operations increased profitability and raised passenger volumes
significantly. More than 230,000 passengers made use of the low-cost
terminal in 2004, equal to almost half of all the passengers passing through
the airport. 66% of all international passengers were ‘low cost’ travellers, a
ratio that has remained. Around 50% of passengers are Finns, one third of
them from the Pirkanmaa province and a large number from Uusima
province, including Helsinki. Students and backpackers make up a large
proportion of customers and demographically many of the passengers are
also young, on average under 30.
Airpro’s research indicates that as many as a third of passengers would not
be travelling at all without the opportunity provided by budget flights.
Some of the arguments that have dogged the proposed budget terminal
development at Geneva (q.v.) surfaced here, too. However, in this case for
all airlines the landing and terminal navigation charges are basically the
same. Additionally though, and in Terminal 1 only, a passenger charge
(which covers terminal facilities) is collected, but not in Terminal 2, because
the CAA does not offer these services in that terminal (but has rented the
terminal to Airpro, which then negotiates commercial deals with airlines).
While the charging dispute receded, Tampere has subsequently (Jul-07)
been dragged into another one, this time with more serious implications and
it revolves around the commercial deals. In Jul-07 the European Commission
launched a formal state aid investigation into Berlin Schoenefeld, Dortmund
and Luebeck airports (all in Germany) and Tampere Airport, on the basis
that they might have entered into contracts that constitute illegal state aid.
In the case of Tampere, these include the operating aid granted to Finavia
and Airpro and aid for transforming and operating Terminal 2 of the
Tampere-Pirkkala airport. The Commission also questioned the compatibility
of the arrangement concluded with Ryanair, whereby the airline pays an allinclusive charge differing from the terms offered to other airlines at the
airport. The commission stated it had launched the probe following
complaints from a competing carrier.
Underpinning the EU enquiry is the question of the legal status of Airpro, i.e.
is it a private or public entity? It is 100% owned by Finavia but operates
commercially and seeks innovative solutions.
The other key issue arising out of this example is that when a ‘low cost
terminal’ is offered as an alternative to airlines, which was the case in
Tampere, the EC now requires that the operation of a different facility with
different charges should go through a tender process concerning its
operation, which was not the case here.
Key Points
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•
•
•
Tampere is another laudable attempt to use an otherwise
redundant facility to boost airline services and passenger numbers;
The theory has been proved in practice and the airport is far busier
than it would have any right to be without the very basic conversion
of the low cost terminal;
Once again, the charging mechanisms and allegations of
preferential treatment to an airline in return for ‘support’ is under
scrutiny. The Tampere case is further clouded by questions relating
to whether the operator should be classed as ‘public’ or ‘private’
and whether the LCT’s operation should have been (or should now
be) (re)-tendered; and
This particular case may prove to have as much significance for LCT
operators as that of Geneva.
Case Study #19: Lappeenranta, Finland – the low cost airport for
Greater St Petersburg?
Another Finnish airport that merits inclusion is Lappeenranta (LPP) in
southeast Finland, but for quite different reasons. Lappeenranta, Finland’s
eleventh largest city, is situated due east of Tampere and away from the
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heavily populated Helsinki-Turku-Tampere triangle. It is around 2.5 hours by
car from Helsinki and its one million residents, but, critically, the same from
St Petersburg in Russia (200 km), which has a population of seven million.
The total catchment area is put at 8.4 million, Finns and Russians, or a
population equivalent in size to Latvia, Lithuania and Estonia combined.
LPP is therefore not so much an airport for Finland as a cross-border one for
Russia, or at least that is the ambition of the management. Lappeenranta
does in fact have a tourist offer of its own, being situated in Finland’s ‘Lake
District’, and on the south shore of Lake Saimaa, but the driver behind this
development is the fact that the city is Finland’s main gateway to Russia and
Russia’s main entry point into the European Union. As the airport’s publicity
material would have it: Where east meets west. An air route between LPP
and St Petersburg that commenced in 1995 failed because of the proximity
of the two cities by surface transport.
Another factor is the relatively poor state of Russian airports outside
Moscow. That is not necessarily the case at the other major cities like St
Petersburg, where Pulkovo Aviation, the airport’s owner, has recently sought
investment partners for much needed infrastructure improvements.
Scheduling issues at Pulkovo Airport have kept passenger numbers down to
around five million p.p.a., small for such a large city. More to the point,
Russia does not have LCCs of its own and few foreign ones yet fly there. To
experience low cost travel, the nearest point for many Russians is LPP. The
presence of a Russian consulate in Lappeenranta makes the possibility of an
ad-hoc visit to Russia feasible for tourists visiting southeast Finland. A visa is
essential for any visit to Russia but can take several weeks to be processed
by mail in many western European countries.
The 2,500 m runway at LPP supports a terminal operation that might be
regarded as full-service rather than low cost as many of the 50,000 or so
annual passengers presently are businesspeople connecting to flights at
Helsinki. As with Tampere, it is operated by Airpro, which has drawn on its
experience there but with the proviso that potentially many actual and
potential visitors to the region are well-heeled tourist to the Lake District
and South Karelia regions and who require a high level of service.
Lappeenranta is also a wealthy city-region in its own right, with an economy
based on high-tech industries and wood pulp mills. Intriguingly, the offer
made by Airpro at LPP is that it can readily roll out the same service model
as it did at Tampere to suit an incoming LCC partner, especially in respect of
fast turnaround and innovative low cost solutions.
Low cost airlines can be accommodated within the existing infrastructure but
again the Airpro offer is to convert an existing building into a facility on low
cost lines should the demand emerge. The wide runway will also
accommodate freight services, as per design.
LPP currently handles mainly scheduled services to Helsinki operated by
Golden Air (Sweden) on behalf of Finnair’s regional subsidiary Finncomm and
summer charters to Malta, Italy, Bulgaria and the Canary islands. 11 new
country route opportunities have been identified for LCCs.
Key Points
•
•
•
LPP bears some similarities to Ciudad Real in that it is another
gamble, except for two important elements:
Firstly, hardly any capital expenditure has been employed to date.
The operator will respond to requests from LCCs for appropriate
facilities by applying a similar solution to that at Tampere. An
aggressive promotional campaign is under way;
Secondly, potential traffic is based on another country entirely, and
one where in the target market the airport infrastructure is
inadequate to serve a large population.
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4.11 Sweden
Case Study #20: Uppsala Airport – ‘a true LCA for the LCC’ –
employs an airport development forum
Uppsala is 75 km north of Stockholm and 20 minutes further north by road
than (and on the same rail link as) state-owned Arlanda, Sweden’s busiest
airport and main base for SAS.
Sweden Locator Map
Source: CIA World Factbook
Uppsala is a university city of 180,000. Its catchment area includes the
750,000 living in Stockholm and 2.6 million people within a one-hour drive
(approximately 30% of the country’s population). There are 40,000
university students and 6,000 employees in Uppsala and it is claimed to be
the largest academic institution in northern Europe.
The city is in a dynamic economic region in its own right, independent of
Stockholm, because of its academic base and also because of a broad and
fast expanding industrial foundation that includes a major science park.
Uppsala is also a partner in the Baltic Sea Palette II project, which seeks to
strengthen the relationship between metropolitan areas of Stockholm and
other Baltic region cities in order to counterbalance a strong central
European alliance.
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Uppsala’s location was a significant factor in the decision of the Swedish
military to establish a major airbase four kilometres north of the city in
1943. Until 2003 it was an F16 base for the Swedish air force. Following a
review by the government F16 operations ceased in 2003 and the base now
operates as a low level military airfield, training institute and flight school
with no active combat air squadron. However, the base is of huge
importance to the Swedish military and it is committed to a long-term
presence there and will be able to offer essential ground operations support
on a shared cost basis. In this respect a comparison can be made with
Keflavik Airport in Iceland (q.v.). Commercially, Uppsala already supports
civilian light aircraft operations and is also known locally as Ärna Airport.
Separately, it has been transformed during the last two years into a
commercial hub with the private airport operator Uppsala Air AB acting as
the developer/operator. The business model is dedicated solely to low cost
and the management has adopted the slogans ‘a true LCA for the LCC’ and
‘the world’s first dedicated Low Cost Airport’.
The infrastructure is functional, designed with the intention that airline
charges will be as low as possible. A passenger terminal has been
constructed on the north side of the airbase close to an access road that
leads to the E4 highway. Although described as ‘no marble’, there is not the
same degree of cost cutting as seen in some other examples. The terminal
will incorporate computerised check-in and baggage handling facilities that
might be found at Arlanda, a broad range of retail outlets and a dedicated
passenger lounge with Internet access.
The main runway can handle B737 and A320 aircraft. There are relatively
short distances between runway, apron, terminal and car parks and
anticipated aircraft turnaround time is 25 minutes. The short-term car park
is adjacent to the terminal and the long-term serviced by shuttle buses. As
at Frankfurt Hahn, it makes use of extensive flat land requiring little
conversion. Fully operational, the airport will have a capacity of 2,500
passengers per day (900,000 per annum) and the aim is to have six LCCs
offering regular services within four years.
Transit time to and from central Stockholm is 90 minutes, broadly equivalent
to that for Arlanda and claimed to be quicker than the already established
low cost regional airports at Vasteras and Skavsta. As for local traffic the
airport is 4 km north of Uppsala, Sweden’s fourth largest city.
The management envisages that Uppsala will provide a supporting role to
Arlanda and that because of its own central position it might attract some
regional or even network carriers, as Arlanda is partly environmentally
constrained. There are no known plans for differential pricing. Stockholm’s
city airport, Bromma, is also restricted by exacting environmental standards
and the mainly domestic traffic is in decline. It could close altogether.
The main competition for Uppsala in the LCC sector certainly comes from the
established Skavsta Airport (TBI/Abertis) close to Nykoping, 100km (62
miles) south of Stockholm, the premier Ryanair base in Sweden and also a
major cargo airport. Skavsta handles 1.7 million p.p.a. but suffers from poor
connectivity, especially from the north of the Stockholm city region. Vasteras
Airport, 70 km southwest of Uppsala, also has an LCC offer in place
momentarily with Ryanair once again prominent with daily services to
London and Dublin. Small as it is, Vasteras will provide tough competition for
routes to and from key markets.
Regarding incoming tourism, Uppsala’s marketing plan was decided long ago
and might be compared with that at Marseille (q.v.), where the tourist
proposal of the whole region is collated. The objective has been to avoid
web-based promotion, such as that of Bergen (Norway), which is overfocused on the Fjords and Newcastle (UK), which highlights ‘nightlife’ at the
expense of just about everything else. Innovative ways will be sought to
promote the entire region through joint media buying exercises with airlines
rather than offering unspecific ‘marketing support’ to airlines.
The holding Company, Uppsala Air AB, is owned and financed by several
high profile businesspeople in Sweden and two Swedish companies
established in continental Europe. The same developer is also said to be
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behind a project to build an airport solely devoted to Sweden’s leading ski
resort at Salen.
Uppsala’s Airport Development Forum
Uppsala AB is one of a growing number of airport operators to set
up an airport development forum, to represent a broad crosssection
of
political,
economic,
tourism,
commercial
and
environmental stakeholders that span the ‘value chain’ of the
airport’s future commercial activity.
The UADF will meet regularly to discuss the airport’s development
under terms of reference that include:
•
•
•
•
•
•
•
•
Consideration of the airport’s development plans and how
they affect the local community (Sweden is organised
governmentally along Commune lines);
To make suggestions to ensure the airport develops in
accordance with the best interests of the community;
To stimulate the interest of the local population in the
development of the airport;
To monitor the environmental impact and advise on
operating procedures to reduce noise and emissions
accordingly;
To protect and enhance the interests of users of the airport;
To consider the contribution of the airport to local, regional
and national economy;
To ensure route development is supported and integrated
into the wider City of Uppsala economic, tourism and
transport strategy; and
To report regularly on progress and developments to the
community.
The opening date remains scheduled for 2007 but the airport is currently
(Jul-07) going through its environmental permit process. As such, no airlines
have yet committed to commercial services. It is understood that easyJet is
the main target rather than Ryanair, which is embedded at Skavsta along
with Wizz Air.
Key Points
•
•
•
•
The developer is selectively plugging into the model applied by
Frankfurt Hahn for conversion of a military airport, allied to the
joint use by military and civil aviation as found at Keflavik and
elsewhere;
Unlike Germany and Iceland there are several competing, already
established airports nearby, making air service marketing difficult;
The airport development forum was set up early on and should
make a positive contribution; and
Until a recent change of government, the further development of
low cost air travel in Sweden was threatened by a planned aviation
environment tax that caused Ryanair to threaten to withdraw from
some airports altogether. That threat has been withdrawn for the
moment. Uppsala apparently targets easyJet rather than Ryanair,
which is already firmly established at Skavsta and Vasteras.
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Chapter 5
Low cost airports
& terminals in North America
This chapter looks at North America’s – surprisingly limited – experience in
operating low cost airports and terminals. With very few facilities of the type
that dot the landscape in Europe, the chapter principally looks at airports
that have pitched themselves to the low cost sector and how they have
made a compelling case for service, or service additions.
Overview
•
•
•
•
•
Airport system in US markedly different than in Europe, with
Spartan facilities not the key to attracting service
LCCs more often attracted to generous marketing budgets and user
fee discounts than a stripped-down operating environment
Airlines, which often own/lease their terminal facilities, have
exhibited a willingness to pay for their refurbishment
Likely future privatisation of Chicago Midway could set new
framework for airline-airport interplay in the country
Austin, Texas, airport the first to attempt a separate, Spartan,
terminal as part of its attempt to win LCC service. Could prove
precedent setting
The first case investigated is Pittsburgh. Once the largest hub in US Airways’
network, it found itself with empty gates and a passenger shortfall when
that carrier began its bankruptcy retrenchment. To fill the void, it
approached the low cost sector, using a combination of marketing funds,
user fee reductions and an articulate demonstration of the local appetite for
budget airline service to win operations from several leading LCCs.
Another interesting case is that of Baltimore Washington International
Airport – one of Southwest’s most important bases – to undertake a
USD1.8-billion expansion programme that had at its centre the construction
of a new terminal for Southwest. Many parties combined to cover the
expense of the terminal, but the authority itself bore much of the cost,
feeling it was a good investment to enable its most important tenant (with
approximately 50% market share) to continue its growth at the facility.
Also examined is New York’s JFK airport, which became an LCC base only
with the 2000 launch of JetBlue. That carrier’s growth saw it quickly outgrew
its facility at the airport, leading it to purpose-build (and fund) a new
terminal. The resultant facility illustrates how the LCT model has been
adopted to the ever-evolving nature of the US LCC sector. Although it has
cost-efficiency built into the design, its appearance is in marked contrast to
the Spartan facilities that service the budget sector elsewhere, as it has
high-end food/beverage outlets and attention to aesthetics wholly
inconsistent with what would find in Luton or Hahn.
The US airport that looks set to come closest to the global model is Texas’
Austin Bergstrom. Located in the state capital, it has long-standing service
by the country’s full-service carriers. However, the former US military
airfield is pinning its hopes for growth on the low cost sector – including
those coming from and serving Mexico. To attract budget carrier service, it
is, in what is perhaps a precedent-setting decision, building a stripped-down,
wholly separate terminal to cater to their requirements.
The chapter concludes looking north of the US border to Canada, where the
region’s closest approximation to a European-style LCA exists in Hamilton,
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Ontario. The facility sought to replace service lost with the departure from
the scene of former anchor tenant Canadian Airlines International with lift
from the budget sector.
Hamilton’s efforts were rewarded when national LCC leader WestJet
established its eastern base at the airport, located within driving range of
Toronto. Although WestJet has moved a lot of its services to Toronto, the
smaller facility has been able to entice service by other charter companies
and even long-haul LCCs such as flyglobespan to help fill the void.
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5.1 Introduction
The United States has long embraced the concept of the low cost airline and
the operation of airport terminals by its airlines, all of which are privately
owned. It often comes as a surprise to foreigners to find that almost all the
terminals at New York’s J F Kennedy airport, for example, are
leased/operated by airlines, and one of them, JFK4, opened in 2001 as the
country’s first privatised airport terminal.
In fact, before 11-Sep-01 and the advent of the 60,000 strong Transport
Security Administration, up to 95% of airport employees employed by the
private sector, most by airlines. As for ownership of airports, it presently
falls broadly into five categories: city, county and state governments, also
multi-jurisdiction airport authorities and port authorities with jurisdiction for
sea, air and other modes of transport (e.g. Port Authority of New York &
New Jersey, Massport [Boston] and SEA-TAC, [Seattle-Tacoma]).
The primary system of funding runways and sometimes terminals consists of
the FAA’s Airport Improvement Program (AIP), which comes out of general
taxation, together with tax-efficient (public) development bonds, which are a
popular method of raising infrastructure funds generally (New York’s
transport system is financed by USD14 billion worth of such bonds). These
bonds, known as General Airport Revenue Bonds (GARBS) are issued by
airports in agreement with their airline tenants. Most of the agreements
stipulate that if one airline fails the others have to make up the service
shortfall. Without this guarantee, such private financing would not be
possible. Other methods of funding include airline-sponsored terminals and
customer facilitation charges such as car hire facilities.
Otherwise, privatisation of airports as it is understood outside the US has
been limited to a very small pilot scheme that commenced in 1996. Latterly,
and for a variety of reasons, privatisation by way of lease has been
advocated for a small number of airports including Chicago Midway; Mitchell
Airport in Milwaukee; Austin, Texas; and Philadelphia, two of which feature
in this section. Additionally there are frequent calls from aspiring politicians
for their local airport to be privatised, usually to fund an urgent scheme such
as new hospitals and schools and, ergo, to generate useful publicity for
themselves. In 2004 an Atlanta politician called for the sale of Atlanta
Hartsfield airport, the world’s busiest, to pay for a new sewage system for
the city.
Outside of these random examples, there is little in the way of public
appetite for privatisation. Indeed, the trend may be going the other way.
New York State’s Stewart Airport, the first to be privatised and arising out of
the 1996 Pilot Program, has recently changed hands from its UK-based
operator, National Express, to the Port Authority of New York and New
Jersey, which has designs to make it a fourth airport for the city of New
York.
Without some of the key drivers found in Europe and Asia there is,
therefore, little urgency to develop budget terminals. Although the US LCC
business is well established now, accounting for more than 25% of domestic
traffic, most of the airlines are happy to share facilities with the majors,
facilities that have often become redundant anyway as the majors cut back
on routes post 11-Sep-01 (see Pittsburgh, below). They have little appetite
for involvement in infrastructure development. In addition, while LCCs do
pay attention to costs, the cost of operation (charges) at a US airport is only
4-6% of their total costs, owing to the airport having no need to recover
some operating costs because of the funding it gets from the AIP and ticket
taxes. Therefore airports can extend their non-aeronautical offer to branded
concessions with branded merchandise. That higher standard of merchandise
helps the operators recover costs also.
In general, the American travelling public tends to prefer to have access to
goods and services at airports, as they often have a lengthy wait anyway for
reasons of security and congestion.
Thus airports are more likely to attract LCCs by improving public
rather than running them down, sometimes irrespective of cost,
they believe these things to be important to the LCCs (whose own
offer is often of high standard, with leather seats and extensive
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entertainment) and to the public, and because they are confident they can
recover the costs.
In one noteworthy example Colorado Springs airport, which had the
reputation of having the highest charges of any major airport in the US,
opted not to cut back on its public services when it tried to attract LCCs after
network traffic decreased, but actually increased them by opening a USD5
million extension to the terminal, enhancing the already substantial retail
facilities (four restaurants, gift shops both air and landside), Wi-Fi
connection, family care rooms, children’s play area, hotel service desks,
valet parking, permanent and changing art exhibitions, even panoramic
windows.
Colorado Springs may be an extreme example, being at the centre of a
wealthy tourist region, but it does highlight the fact that infrastructural
improvement of this variety is often regarded as a key factor in wooing a
discount carrier in the US.
Nevertheless there are a small number of examples where the development
of a designated budget facility, or at least the adoption of some low cost
principles, by an airport has been noted. As is the case in Europe, LCCs in
the US vary between those that prefer to use smaller airports on the
periphery of major hubs to siphon traffic from major carriers and those that
are more directly willing to compete at the major carriers’ own hubs. Now,
with their 25% total U.S. market share expected to grow to 45%, more low
cost carriers are expected to take the latter option, though it may mean
acquiring their own terminals.
The remainder of this section gives some brief contemporary examples of
low cost airport/terminal developments in the US, with one comparative
example also from Canada.
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5.2 Pittsburgh Airport
– forced to adopt low cost principles by withdrawal of major hub
carrier, to the surprise benefit of the airport’s local community
Pittsburgh, one of America’s great steel cities, has witnessed a severe
decline in that industry but replaced it with other metal and high tech
industries that have collectively aided (with low housing costs) its
resurgence into one of the most forward looking and sought after industrial
cities for relocation in the USA. In the period 2004 – 2006 it also witnessed a
severe downturn in business from its principle air hub operator, US Airways,
one that caused Pittsburgh Airport to revise its entire strategy in favour of
low cost principles.
US Airways had been operating a standard hub model at Pittsburgh, as it
also did at Philadelphia at the other end of Pennsylvania, for many years.
Pittsburgh was one of many secondary hub cities in the region along with
Cincinnati, Columbus, Indianapolis, Cleveland and Dayton. That hub strategy
did not seek to capitalise on the small local travel market, but rather to
facilitate the transit of passengers from other flights via waves or complexes
of ‘spoke’ air services. Moreover, US Airways’ strength inhibited other
carriers from starting competing services at Pittsburgh, as is often the case
at a “fortress hub” in a small city.
When the carrier went into dire financial straits, it undertook severe
cutbacks at Pittsburgh, which had the smallest local market of its three
hubs, resulting in a reduction of daily departures from 510 in 2004 to 160 in
2006. It furthermore boosted fares for travel originating or terminating in
Pittsburgh, where it was still the overwhelming leader in terms of non-stop
destinations. Pittsburgh acquired the unwelcome reputation of being
amongst the four most expensive airports in the US, along with Philadelphia,
Cincinnati and Charlotte, and passengers purposely chose to drive to
cheaper airports further away.
The decision taken by the Pittsburgh management was to improve relations
with existing carriers and bring in some new low cost ones, a difficult
juggling act. It began to take action before the bankruptcy of US Airways
because it realised that all its eggs were in one basket anyway and in fact
began to target LCCs as early as 1999.
The airport worked in conjunction with the local business association, one
that had been by-passed by the hub/spoke operations of US Airways. The
procedure was a lengthy one given the perceived power of US Airways even
in its Chapter 11 incarnation, as it was able to charge whatever price it
wished while protected, a common complaint about the way the US system
works.
Airlines approached included AirTrack, America West, USA 3000 and
Vanguard and they were encouraged to compete on routes to reduce fares,
another risky strategy for the airport. Nevertheless the ploy worked and
Pittsburgh was able to acquire not only additional frequency from the major
legacy carriers but also to lure LCCs AirTran, Southwest, JetBlue and
Independence Air. Some of these have gone out of business, but their routes
were taken up by other carriers and Pittsburgh is now in a position to claim
it covers almost all the top 30 business markets.
The methodology applied by the airport management is somewhat different
from that found elsewhere. Few special facilities have been provided for
LCCs, certainly not the ultra basic terminals that are coveted in Europe and
Asia. The current two million sq ft., USD1 billion Midfield Terminal that was
opened in 1992 was already designed on rapid access principles with car
parking at one end and the gates at the other and extensive use of moving
walkways, even though the full travel distance can be 0.5 miles.
LCCs have been attracted and retained rather by selective route incentives.
For example when JetBlue decided to compete head-on with US Airways on
one route and United and US Airways on another the airport halved the
landing fees for the routes and worked with the airlines to produce a joint
marketing campaign.
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That joint marketing offer matches airline advertising up to USD50,000 on a
scale that varies according to the potential demand for the route. Routes
and airlines are advertised within the airport and on the website and
featured in the airport newsletter. The airport also sets up airline meetings
with interested parties in the local community. Beyond Pittsburgh itself,
meetings with community representatives are equally facilitated through the
efforts of the Allegheny Conference, which represents the interests of 17
surrounding counties.
Finally, the airport offers a hefty reduction in take-off and landing fees, up to
20%, and in office, counter and gate area rentals, to airlines that sign long
leases (presently to 2018).
As a consequence, the size of the O&D point-to-point market has increased
in size from 6.4 million, the peak when US Airways’ hub was fully
operational, to 8.5 million now. However, the total annual passenger
throughput has shrunk to 11 million from 20 million and 25 gates had to be
closed. In the most recent figures available (May-07), passenger traffic grew
by 3.7% compared to May 2006, the third month in 2006 to show an
increase. Nine of the 20 airlines reported increases, four of which showed
gains of more than 20%. US Airways remains a significant force with 48% of
traffic, but is not the dominant airline it once was and now views Pittsburgh
as a ‘focus city’ rather than a hub. US Airways’ nemesis, Southwest, is the
second force at Pittsburgh, with 13% of all traffic.
Employment has shrunk from 11,500 to 2,700 although 16,000 people
remain employed in the wider aviation business. To the consumer’s benefit,
airfares at Pittsburgh have shrunk to around USD10 less than the national
average for US airports. Another consequence appears to be high levels of
spend at Pittsburgh’s Airmall, which is a full-service retail and FBO offer with
over 100 units. In 2006, per passenger spending was USD13.14, said to be
the highest in the USA.
Key Points
•
•
•
•
•
Pittsburgh Airport had to undergo a massive transformation as a
result of circumstances largely beyond its control;
It decided to focus on its core home O&D market rather than on the
previous hub philosophy;
That choice resulted in painful losses of airline service, jobs and
status but the airport has bottomed out and is in a position now to
build on its newfound strengths;
Few physical concessions have been made to LCCs in terms of
facilities but they are rarely sought in the US anyway. Instead,
targeted marketing schemes and interaction with the local
community have underpinned the new business model; and
It is uncertain how the present terminal arrangement may suit the
new breed of ULCC such as Spirit and Skybus, should they
investigate Pittsburgh service.
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5.3 Chicago Midway Airport
– the US’s first genuine low cost airport, now available for lease
Chicago’s airports, especially O’Hare (ORD) face testing times as congestion
increases. ORD is currently the world’s second largest international airport
by both passenger volume and aircraft movements. Delays at ORD can
cause a ripple effect throughout the whole US air traffic system and into
Canada.
The city authorities have been planning significant expansion projects at
ORD costing USD15 billion over 20 years, and many are work in progress
now. Some opponents estimate the final cost to be as much as USD70
billion. Chicago is not only congested in the air - six railroads and seven
interstate highways converge on what is possibly the world’s biggest
transport hub and it is constantly in danger of gridlock.
Meanwhile, there are other airports competing for ORD’s business, especially
following the shock overnight closure of Meigs Field, an offshore airfield, in
2003. Late in 2004 two competing plans for a new ‘South Suburban Airport’
near semi-rural Peotone, an area badly in need of investment south of
Chicago, were proposed, one by US Congressman Jesse Jackson Jr, who
calls his proposal the Abraham Lincoln National Airport. The airport would
act as Chicago’s third facility.
At the same time, a proposal has arisen to develop Gary Airport, in Indiana,
to assume the same mantle and in Apr-05 the FAA approved the expansion
of the now renamed Gary-Chicago International Airport (GCIA) in a proposed
USD90 million project. Construction is scheduled to be completed as early as
2008. The airport operator also aims to make Gary the third major airport in
the Chicago area. The airfield is situated at the southern end of Lake
Michigan, 30 miles from downtown and like parts of Chicago is another
economically depressed city-region. Gary is ambitious, and has political
backing.
Relationship of Gary-Chicago Airport to the City of Chicago
As if there were not enough confusion, the already convoluted Chicago area
airport projects situation (O’Hare, Peotone, Gary, etc) was further
complicated by an announcement from the Greater Rockford Airport in Dec05 that it would change its name to Chicago-Rockford International Airport,
even though it is located 90 miles north of Chicago. The congestion situation
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at O’Hare is dire enough that Chicago’s mayor has stated that he would like
to see all the aforementioned developments come to fruition.
And these developments do not address the claims of Chicago’s existing
second facility, Midway.
In Mar-06 the City of Chicago announced that it was considering privatising
Chicago Midway International Airport, as a new candidate for the
aforementioned 1996 Pilot Programme (see Introduction section), under a
long-term lease. Legislation that has been passed in the Illinois Senate could
now make it possible to lease out the city’s second largest airport to a
private operator in an attempt to boost city’s revenues without having to
increase taxes.
An important element in the proposal is that airports receiving FAA funding
cannot make shareholder distributions. That is why Midway would have to go
into the Pilot Program, an invention of the Clinton administration to
circumvent that restriction. Another factor is the need to gain the agreement
of the operator(s) of 65% of the airport’s air services. Southwest currently
has 71%, making it the airline that needs to be convinced. The airline has
hinted that it would support – or at least not oppose – the programme,
leading the Mayor’s office to declare imminent passage of the movement.
Numerous airport operators, including Hochtief AirPort, BAA and Macquarie
Airports, have expressed interest in participating in the deal.
Midway handled 18.8 million passengers in 2006, making it the country’s
30th busiest airport. It is 16 km west southwest of downtown Chicago and
accessible directly from a major freeway and one of the Transit Authority’s
train lines in 25 minutes to the city’s ‘Loop’ central rail line. This is one of its
attractions, not only to potential investors, but also to Southwest and the
other LCCs (AirTran of Orlando, ATA of Indianapolis) that set up services
there. By comparison ORD is twice the distance away in the northwest,
much as Gary Airport is to the south.
Midway is heavily used by LCCs. Southwest’s 71% traffic share is supported
by ATA (12%) and Air Tran (6%) with just 11% falling to legacy carriers
Continental, Delta and Northwest (both United and American have major
hub/bases at ORD and ended Midway service in 2006). Given the need for
fast turnarounds and a larger number of movements by LCCs with their
strict timetables, Midway has a capacity of 65 ATMs per hour (which the FAA
intends to increase to 71 in the medium term) but typically has much less,
meaning that capacity as it stands is adequate for the next 18 years.
Concourse facilities are not segregated according to operator type. With such
a preponderance of LCC activity that would not be feasible. The concourses
diverge left, centrally and right from the main terminal building as shown
below.
Midway Terminals
Source: City of Chicago
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Southwest’s network is nationwide but with a concentration of service to the
East coast.
The airport lies within a one mile square site with five runways, one of which
is designated for GA. None of the runways exceeds 2000 m and because of
displaced thresholds caused by encroaching buildings they are actually
shorter still for take-off and landing. There are also load limitations and
stringent weather minimum standards. A recent incident (Dec-05) saw a
Southwest B737 slide off the end of runway 31C in bad weather into a
residential area killing a child on the ground. The airport is clearly geared up
to a specific and fairly restricted mode of operation.
The eastern quadrant is the passenger terminal and concourses, the western
quadrant is given over to corporate aviation, the northern one to airline
maintenance and the southern one to general aviation, ATC and some
military activity.
Midway Airport’s square configuration with intersecting runways Terminal buildings and concourses at bottom left
The airport has been transformed by an eight-year renovation programme
that was completed in its current guise as a single modern terminal costing
USD1 billion in 2004. No hubbing facilities were built into its design as that is
seen as the preserve of ORD. Although mainly a domestic airport,
international flights have operated since 2002 when a Federal Inspection
facility was opened.
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Midway’s main terminal with Southwest, Frontier and Delta counters
Midway still has work to do on developing non-aeronautical revenues. It is
well down the list of commercial income generators among US airports at
USD5.68 per enplaned passenger. A 50,000 sq ft food court was
incorporated into the new terminal design but does slightly better on car
park income. A new 6,300 car park space opened in Dec-05, increasing
spaces by 50% to 13,000.
Key Points
•
•
•
•
•
•
•
Until the expansion of O’Hare in the late 1950s, Midway was the
world’s busiest airport. It will never regain that title but it could
challenge London Stansted for that of world’s busiest LCC airport if
expansion continues;
It is a popular facility and foreign owenership, if permitted, could
give it a further boost;
It is quite the opposite of O’Hare and that airport’s dedication to the
hub concept, making Chicago similar to the large city-region multiairport systems operated in London and Los Angeles, both of which
have business plans oriented towards meeting the needs of LCCs;
The existing system Chicago is large and growing further with the
potential addition of Gary, Peotone and Rockford airports;
If all these airport developments continue and go ahead
competition for carriers and passengers will be intense;
Midway is a self-contained airport, almost the perfect design with
adequate expansion options within the terminal and plenty of
runways, but it is constrained by runway size and proximity of
suburbs. Even with four runways, it is at capacity for parts of the
day and the runway size means that larger aircraft may be
inappropriate;
The likely future privatisation of the facility through a long-term
lease will present a new set of realities for the airport’s users, and
possibly a precedent for the rest of the country’s airports.
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5.4 Baltimore-Washington International Airport
– Southwest’s terminal development is a forerunner of other
projects
Baltimore Washington International Thurgood Marshall Airport (BWIA) is
situated 53 km from downtown Washington and 13 km from downtown
Baltimore, and was the Capital Area’s poor relation for many years.
However, the growing strength of Southwest Airlines, which selected BWIA
as its first east coast gateway airport in 1993, on the eastern seaboard and
the relative inconvenience for parts of DC of Washington Dulles have helped
it attain a greater level of acceptability within the region. Southwest actually
selected BWIA as its first east coast gateway airport in 1993.
BWIA also benefits from having its own rail station (the first in the US),
served by the MARC/AMTRAK line that runs between Washington Union
Station and Baltimore, an unusual situation in the US where transport intermodality is not as well developed as in Europe. It was the first US airport to
have an inter-city rail station. Road connections are via an Interstate spur
that connects to I-95 that runs the length of the eastern seaboard and to the
Baltimore-Washington Parkway.
There were 20.7 million passengers in 2006, an increase of 5% over 2005
and the best figure recorded since 2000. Southwest’s market share has
hovered around 50% for many years with no other airline exceeding 10%.
Under the circumstances, and with limited space within BWIA’s existing
terminal despite a succession of pier extensions, the time was right for
Southwest to have a facility of its own. The result is an USD264-million,
510,000-square-foot 11-gate terminal concourse built exclusively for
Southwest and connecting to 15 existing gates on Concourse B, creating a
26-gate facility known as Terminal A/B. There are three other concourses
with legacy carriers mainly in Concourse A, US Airways Express operators in
D and international services in E.
The redeveloped terminal opened in May-05, the new building becoming
Southwest’s largest facility in the United States. It had initial capacity for
210 daily flights when Southwest had 162 daily departures.
The terminal is part of a larger USD1.8-billion expansion program at the
airport, which also included an expanded ticketing and roadway area,
skywalks to the hourly parking garage, expanded parking and a new rental
car facility. All were completed by the end of 2006.
Southwest may be famous for its limited onboard service, especially in the
early days (mainly peanuts), but the terminal does not mirror either that or
the Spartan conditions in some of the European LCAs. BAA Maryland, a
division of BAA plc, opened a large food court inside the terminal, together
with new shops and restaurants, many of them operated by local companies
rather than national chains. Most of these facilities are airside, and behind
the formidable security that is now a feature of all US airports.
Southwest is a point-to-point airline though, and there is no interlining (at
least in its traditional form, although increasing numbers of Southwest
passengers now connect between flights as they do on Ryanair). The
terminal is not shared with other airlines. It could also be expanded to add
five more gates in the future, to accommodate up to 250 total daily flights
by the airline.
The project was financed through a public bond, although Southwest, the
federal Transportation Security Administration, BAA and its tenants
contributed about USD40 million. Together, associated runway/apron work
and new roadway upgrades cost about USD95 million, borne by BWIA.
Southwest is developing its activities at both the main city airports of
Pennsylvania – Philadelphia, and Pittsburgh. Neither of these airports is yet
scheduled for this sort of (BWIA-style) terminal but Southwest opened a new
terminal at Phoenix, Arizona, on a smaller scale. Together with the New York
JFK terminal for JetBlue (below) this suggests that separate, major terminals
or concourses for LCCs will become a frequent and popular feature.
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Key Points
•
•
•
•
Because of the power of Dulles Airport, where United Airlines had a
hub for many years, and the resurgence of Reagan/National airport,
which hosts domestic flights and is on the Washington Metro
system, BWIA had always found it difficult to attract domestic
network and international airlines;
Southwest has been the driving force here, handling half the
airport’s traffic. The terminal refurbishment was a natural
development and was jointly financed by all the interested parties;
It is a model that Southwest can use elsewhere and does not
require a separate LCT located far from the main buildings; and
Good road and rail connections have made BWIA as accessible as
some of its peers in Europe, which assists LCC marketing.
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5.5 New York J F Kennedy Airport
–JetBlue terminal: stylish like the airline, at low cost
Collectively, New York’s three main airports – John F Kennedy (JFK), La
Guardia and Newark Liberty – handle over 100 million travellers, annually,
surpassing Chicago to become the busiest airspace in the United States.
They will shortly be joined by Stewart Airport, 60 miles away in New York
State, when it passes into the hands of The Port Authority of New York &
New Jersey (PANYNJ) later in 2007, from its present lessee, National
Express.
PANYNJ operates the two New York airports (Newark is located in
neighbouring New Jeresy) under lease from the New York City council and
each individually handles a mix of traffic with no clear cut definition of ‘low
cost’ applying to any of them. JFK has most international flights but also
offers extensive domestic service, especially to the west coast; La Guardia
offers mostly domestic service with a strong emphasis on the east coast;
and Newark Liberty is a hub for Continental Airlines. It is not yet clear what
role is envisaged for Stewart, which handles both LCCs and legacy carriers.
There are currently eight terminal buildings at JFK plus a helicopter terminal.
Most of the terminals are managed by the airlines and T4 is managed by the
Schiphol Group, owner of Amsterdam Airport.
JFK is undergoing a USD10.3 billion redevelopment, one of the largest
airport reconstruction projects anywhere. A new Terminal 1 has opened,
following the T4 opening in 2001 as a USD1.4 billion replacement for the
International Arrivals Building. Terminals 2,3 and 8 will be demolished or
rebuilt and Terminals 8 and 9 are being merged into one.
JFK witnessed an agreement in Jul-04 between the LCC JetBlue Airways and
PANYNJ for a new terminal based on and around the redundant T5. The
625,000 sq ft terminal was designed to have 26 gates fed by dual taxiways
and a projected 20 million annual passengers . JFK handled 42.6 million
passengers in total in 2006, the world’s 17th busiest airport. JetBlue
currently uses T6 as a temporary facility.
Construction began in autumn 2004 for a projected opening in 2008. As with
the Baltimore-Washington Southwest terminal, this indicates that not only
the airlines themselves regard the new breed of LCC as being in it for the
long term. Some view JetBlue’s terminal as the catalyst for regeneration of
JFK as a hub. Once arguably the world’s leading airport, it continuously lost
traffic to hubs at Chicago, Atlanta and Dallas from the 1980s onwards,
leaving point-to-point traffic as its major business.
The new T5 will be a low-profile metal and glass structure to replace use of
the existing facility by JetBlue (T6) with a view to it being sympathetic to the
airline’s needs and profile.
It is important to recognise the differences between European/Asian LCCs
and their US counterparts as mentioned earlier. Just as the US airports will
not cut costs and prefer to assist airlines’ low cost products through other
means, them there is often little comparison between the LCCs and those in
other continents either.
JetBlue is a stylish airline that pioneered the use of high tech in-flight
entertainment including direct live satellite TV. It assigns all seats prior to
boarding. Also it operates some longer haul (coast-to-coast) services but
was one of the first LCCs to break away from the traditional LCC format of
Boeing and Airbus 150-190 seat aircraft, with an order for 100 Embraer 190
aircraft, which have just 100 seats. Wi-Fi access is offered to all passengers.
Consequently, the new terminal at JFK will reflect this corporate image.
Interestingly, the architect was asked to pay homage to the former TWA
Terminal (T5), which stands opposite and which has laid waste since the
demise of that airline - it will form part of the JetBlue terminal. Not because
that airline is no longer with us, having been absorbed by American, but
because of the iconic style associated with it (of which many people are
aware thanks to the film ‘The Aviator’ about its one time owner, Howard
Hughes).
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The original TWA Flight Centre
(Architect: Eero Saarinen)
Source: Gensler
With due respect to the art deco image of TWA and its terminal there is no
room for wild cost cutting. As such, it is a complete contrast to many of the
very basic LCC terminals in Europe. However, it is designed with specific LCC
functionality. The terminal will be approached via a new departures roadway
or a bridge extension from the Airtrain (PANYNJ-run) rail station. As is often
the case at US airports where terminals feature more than one concourse
(here there will be three) a high number of concessionary food outlets will
be located at their junction with a variety of food choices to take on board,
in addition to places to dine before boarding. Despite the provision of
otherwise high-tech service features, complementary in-flight refreshment
still follows slavishly the accepted ethos at US LCCs: very little, or even
none.
Design for the new T5, JetBlue
Source: Gensler
Although the FBO concessions are not known presently, those in JetBlue’s T6
give an indication as to what might be expected. Pre-security (landside)
there are four FBOs and four retail/service concessions. Post-security
(airside) there are 18 FBOs and seven retail/service concessions. However,
food kiosks operated by one company (Cibo) and newsstands also by one
company (Hudson) at individual gates make up the majority of all the
outlets. Two facts emerge from this. Firstly it emphasises the drift towards
post-security retailing at all types of airport and secondly that there is little
in the way of fashion outlets and innovative ‘last minute’ retailing the like of
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which might be found in Europe. Other JFK terminals do have a broader
retail offer, but not by much.
The materials used in T5 are extensively metal with some glass, as was the
original terminal. It has an aluminium standing seam roof on the front and
aluminium corrugated cladding on the airside exterior. Glass is used
modestly, with no curtain walls - only storefront glass framing and ribbon
windows on the perimeter in the hold rooms. All in all a ‘frugal palette’ of
materials applied in minimalist fashion.
Although JetBlue was not in the same league as, say, Ryanair, or even
Southwest for cost-cutting - despite its LCC moniker – the architect,
Gensler, did put cost cutting first except where a long-term advantage was
perceived, taking the airline’s leather seats, which convey an image of
luxury but are especially durable and easy to clean, as a cue. For the same
reason durability was the most important factor in the choice of floor
covering. Considerable expense has been attributed to the provision of
seating and restrooms.
Requisition of basic items was simplified. For example, while similar
buildings might employ between 50 and 100 different types of light fixtures,
the JetBlue Terminal uses 17, all of which are commercially available.
As one of few new terminals designed and built since 11-Sep-01, security
has been paramount and is prioritised in the design, while attempting to
balance human considerations.
The traditional Cathedral-like grand ticketing hall has been replaced by a low
profile terminal with lower ceilings and correspondingly lower costs. The
asymmetrical design is partly to accommodate arrivals into the terminal
from different directions, for example Air Train passengers arriving from the
north. The passenger flows are expected to be different from most other
terminals. It is also designed almost exclusively for electronic check-in.
The ‘grand space’ in this case has been reserved for the concessions area,
reverting again to a low ceiling as the gates are reached. In architect-speak
the philosophy behind this approach is that it ‘establishes a sequence of
environments in which passengers instinctively know where they are going
and when they have arrived.’
To avoid unnecessary inter-mingling, which disrupts passenger flow, the
concession stands will be located on departing passengers’ right hand side,
while arriving passengers, who are generally more interested in finding the
toilets, will find these positioned on their right hand side as they move in the
opposite direction. (This design appears to use the same design matrix as
supermarkets.).
At the same time, intermingling is encouraged, for the reason that it creates
‘a feeling of excitement, triggered by the buzz of activity generated by
people coming and going.’
There will certainly be a lot of that. The terminal will have to cater
proportionally to more passengers than any existing terminal worldwide over 600,000 passengers per gate per year, as opposed to the average of
between 250,000 and 350,000.
JetBlue’s USD550 million bill for the terminal and airside utilities rises to
USD875 million when roadways and parking facilities are included. JetBlue
will reimburse PANYNJ on a 30-year lease.
Famous as one of the very few US airlines to make profits in the immediate
aftermath of 11-Sep-01, and the first US airline ever to start up with more
than USD100 million capital, JetBlue’s fortunes began to take a dive in 2005.
In fact, difficulties were evident in 2004 when, despite a 27% increase in
revenues to USD1.26 billion, net profit halved to less than USD50 million
and things got worse as it struggled to introduce the Embraer 190 into the
fleet. Operational issues, fuel prices, and low fares were adversely affecting
its financial performance.
In Feb-06, JetBlue announced its first-ever quarterly loss, sold five A320s
and deferred receipt of a further 12 of the same type to offset fuel costs.
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The full year loss was USD420 million. 2006-7 was better. It managed to
reduce full year losses to just USD1 million but it appears to be singularly
unlucky at times and operational issues continue to dog it. In early 2007,
1000 flights were delayed by snowstorms in the US northeast region.
Reimbursing passengers and updating operations to prevent a recurrence
was projected to cost the airline USD30 million or more.
Charismatic CEO David Neeleman stood down in May-07, three months after
the operational meltdown, in favour of President and Chief Operating Officer,
Dave Barger. Mr Barger, who has managed Continental Airlines’ hub
operations at the ultra-constrained Newark Liberty Airport, is noted for his
‘hands-on’ aptitude. With an expensive new terminal to pay for, despite the
cost cutting, a hands-on approach will be the least that is required.
JetBlue’s fortunes seem to have taken a turn for the better with an increase
in both operating revenues (+19.4%) and income (+55%) for 2Q07.
Key Points
•
•
•
The design decisions behind this commercial venture are motivated
by the bottom line and by JetBlue’s need to obtain a faster payback
as an airline than PANYNJ, as an airport operator might accept;
JetBlue wanted a building that reflected its commitment to service
and efficiency; and
That efficiency has been called into question by JetBlue’s financial
and operational difficulties.
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5.6 Austin Bergstrom Airport, Texas
– joint venture to attract LCCs
Austin is the fourth largest city in and capital of Texas, with a population of
710,000 in a metropolitan area of 1.5 million that is one of the fastest
growing in the US and home to many high-tech businesses (it is locally
known as ‘Silicon Hills’). It is currently in vogue with those desiring a
Bohemian lifestyle, attracting many nominations in ‘best places to live’ votes
and also awarded the accolade of ‘greenest city’ in the US.
Austin Bergstrom is a relatively new airport, and very new for the US,
having been converted from a military establishment in 1999 at a cost of
USD675 million. Its conversion was the largest new airport project since the
opening of the Denver International Airport in 1995. Sitting on 4,200 acres
of land and with two runways, it was one of the first military airfield
conversions in the US, potentially paving the way for dozens more. There
are two runways, of 3,700 m and 2,700 m.
Presently the airport is mixed use, with some emphasis on cargo shipments
to meet the demands of the high-tech companies. Most of the major legacy
passenger airlines are represented – American, Continental, Delta, United,
US Airways and Northwest, as well as their regional affiliates. Also operating
to Austin are Mexican carrier Aeromexico and LCCs Frontier, Southwest and
JetBlue. Intruigingly, Funjet Vacations also operates seasonal service – an
online low cost vacation package airline one of a new breed and not
dissimilar to the UK’s Jet2.com.
8,260,000 passengers used the airport in 2006, an increase of 7.5% over
2005, which was also a record year. The traffic is split evenly between full
service and low cost, with the leading carriers being Southwest, American
and Continental (all of which are headquartered in Texas). There is a
disproportionate amount of secondary level hubbing activity for an airport of
this size owing to its central position in Texas, America’s second-largest
state.
The 56,000 sq m terminal building has 25 gates.
Austin Bergstrom, which consists of a 56,000 sq m terminal building with 25
gates, does not take on the appearance of an LCA. Inside the terminal,
many local restaurants are leased concession space specifically so that
visitors can get a ‘taste of Austin’. Shopping is actively encouraged in the
passenger terminal, and not only for passengers. There are 16 FBOs, 14
outlets in the category gift shops and newsstands, and a variety of business
and personal services.
The terminal also has a live music stage on which local bands perform in
keeping with the spirit of Austin's proclamation as ‘The Live Music Capital of
the World’ – a reference to it being home to many musicians and music
venues, festivals and businesses.
The driver behind the decision by the city authorities to commission a study
into providing a low cost terminal is possibly linked to the advent of more
airport-cost consciousness on the part of the LCC community, especially
some of its newest members. Spirit Airlines, which is based in Florida and
Michigan, and Skybus, of Columbus, Ohio, as well as the growing number of
LCCs in Mexico, which are perceived as being more airport-cost conscious
than their US counterparts.
Spirit, which has a comprehensive portfolio in the Caribbean and Latin
America, is notable for conducting its business in the European LCC manner,
e.g., charging for baggage and in-flight refreshments. In fact, its approach
has been described in the US media as ‘Ryanairisation’. Spirit has
innovatively established a website, adioshighfares.com, for airports
interested in its offer to establish ten new routes and three new gateways
this year, particularly in cities that are underserved by their existing air
service, to submit proposals for service. Skybus, which is advised by a
former Ryanair executive, follows a similar model. Finally, Austin Bergstrom
will covet more business in Mexico, where there is a growing band of LCCs
that are more cost conscious than their US counterparts.
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It appears the authorities seek two quite distinct products at the airport, full
service and low cost, and that the present terminal is clearly not suitable for
the latter. The proposal is that the terminal would be constructed at the
southern end of the airport and served by separate access roads to enable it
to be more competitive in enticing LCCs. The philosophy behind the physical
positioning is to identify the terminal as a wholly different product.
To emphasise the difference, the new terminal will have aesthetic finishes
and floor designs entirely distinct to the existing terminal, with an aim to
minimize all expenses and charge airlines lower rents. There will be no jet
bridges at the new terminal, although it will probably feature a number of
concessions. The terminal will measure 25,000 square feet and will have
three or four gates. The building is modular in design, so it can be expanded
and reconfigured easily.
One of the Mexican LCCs referred to earlier, Viva Aerobus, has already
chosen Austin as a new destination. Stating that its decision was partly
influenced by the new terminal, it plans to begin service in Nov-07 to five
Mexican cities.
Austin-Bergstrom International Airport is not going it alone in this venture
and has joined up with a private partner, GECAS, to prepare a package of
incentives and proposal for a purpose-built terminal. Better known as an
aircraft lessor and financier, parent company GE was already involved in the
funding of some small general aviation airports in the US before its
Infrastructure division declared in Apr-06 that it intended to act as an
investment manager for organisations wishing to invest in airport facilities.
It has since entered into an agreement with investment bank Credit Suisse
as ‘Global Infrastructure Partners’ with the intention of developing airports
worldwide, an arena it has experience in thanks to its Oct-06 partnership
with AIG Financial Products (American International Group) to buy the equity
of London City Airport.
These factors all helped push Austin in to developing its LCC terminal with
financing by non-airline private sector interests, a new development for the
US.
Key Points
•
•
•
•
This proposal for a ‘bare bones’ terminal, still in its infancy as this is
written, is driven by the emergence of the LCCs plus the prospects
of attracting the vibrant Mexican LCC sector;
As such it is a first for the US;
It remains to be seen what sort of budget facility might be provided
by managers whose previous experience is with traditional terminal
facilities; and
It will also be a test for GE in a new operating environment. London
City Airport is quite different, and in fact more akin to the existing
terminal at Austin.
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5.7 Dallas Love Field
– LCAs, economic impact and political interference
Mention cannot be made of Austin’s airport without reference to Dallas Love
Field, home base to Southwest Airlines. The experience and lesson of Love
Field is complicated by convoluted, protectionist legislation, but it
emphasises the importance a low cost airport can have for a region’s
economic well being, especially at a time when network carriers are
retrenching at traditional facilities
Texas, like other ‘sunshine states’, has been at the forefront of US economic
growth for several decades while cities in the so-called rustbelt (northeast
states and Great Lakes region) have seen their economies decline. This
trend has enabled Dallas-Fort Worth Airport (DFW) to become the largest
hub for the world’s largest carrier, American Airlines, and the planet’s sixth
busiest airport. However, it was not enough to save the connecting complex
that rival Delta Air Lines had established at DFW.
American rode out the post 11-Sep-01 economic storm better than most,
but Delta, with a smaller hub there, did not. Its doldrums lasted until 2007,
when it emerged from Chapter 11 Creditor Protection in a reasonably
healthy position.
With its overall system in trouble and its DFW operation – a distant second
to American even in the best of times – failing, Delta announced a ‘de-hub’,
a virtually complete closure of its Terminal 2E operations at DFW from early
in 2005. When the exercise was complete, the carrier had reduced its daily
flights at DFW from 245 to just 21.
An economic impact report prepared by the University of North Texas
estimated that North Texas and DFW International Airport would lose
USD782 million annually when Delta completed this reduction in flights. The
reduction would cost the regional economy over 7,000 jobs, paying more
than USD344 million in annual wages, salaries, and benefits. Property
income from rents, dividends, and other sources would decrease by USD143
million each year. State and local governments would also experience an
estimated loss in yearly tax revenues of about USD58 million.
For the airport, lost landing fees would total about USD18m per year while
lost gate rents and increased operations and maintenance expenses would
be about USD13m annually. In addition, DFW Airport would lose USD3.6m in
concessions fee revenues due to lower passenger volumes in Terminal E.
This loss of landing fees, gate rentals, and concession income of
approximately USD35m was equal to about 7% of DFW's USD494m
operating budget.
DFW’s plan to counter this upheaval was to seek to attract replacement
airlines via a financial incentive program designed to fill the 22 gates in
Terminal E. In Jan-06, the Airport offered an aggressive multi-million dollar
incentive and stimulus package to all major U.S. air carriers to initiate or
expand service at DFW. The plan included financial aid and other incentives
totalling between USD10 and USD22 million.
In other locations, in Europe, increasingly in Asia and probably elsewhere in
North America, flexible low cost airlines might step in to ensure that
essential services continued, while ensuring they were established as a
viable alternative for travellers in the immediate and wider community.
However, at Dallas, home of the world’s most continuously successful LCC,
that was not the case, at least beyond the immediate environs. As
mentioned above, DFW had become one of the US’s major hubs. This fact is
partly due to the efforts of the Fort Worth representative to the US
Congress, Frank Wright, and his 1979 ‘Wright Amendment’.
The law was intended to protect the newly built DFW by limiting where
aircraft could fly from Greater Dallas’ other airport, Love Field. This airport
had been the major facility for the Dallas region until DFW opened in 1974.
Southwest preferred to remain at the older airport, which lies within Dallas
city limits.
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Under this legislation aircraft with more than 30 seats could not fly from
Love Field beyond Texas, and the neighbouring states of Louisiana,
Arkansas, Oklahoma, New Mexico, Mississippi, and Alabama – by Federal
Law. Bizarrely, it was not possible to buy a ticket from Love Field beyond
these states either – passengers had to buy two or more separate tickets
even if there were connecting flights on the same carrier. American Airlines
shifted most of its operations to DFW on the strength of this powerful
agreement, apparently concerned by the threat offered at Love Field by the
fledgling Southwest.
States that Southwest could fly to under the
Wright and Shelby Amendments
To put Love Field into perspective, it:
•
•
•
•
•
•
•
•
•
Hosts six million passengers annually (DFW had 60 million in
2006);
95% of traffic is on Southwest;
American Airlines and Continental Express (feeder) are the other
two main carriers;
Is an extensive General Aviation airfield with seven fixed base
operators;
Is 7 miles/10 km from the Central Business District;
Is owned and operated by the City of Dallas and financed mostly
from user fees;
Supports an estimated 25,000 jobs in the community;
Claims to contribute directly USD3.4 billion annually to the regional
economy plus another USD1 billion through economic impact; and
Once had 58 gates but with the demolition of the East Concourse
and as the result of a master plan study now has 32. Southwest is
now redeveloping one of its terminals.
Southwest began to seek to have the Amendments repealed in 2004. It
argued that DFW no longer needed protection, as it is one of the country’s
busiest airports now, indeed the world’s sixth busiest. For its part, DFW
asked Southwest to move from Love Field to help fill the Delta gap there but
Southwest – predictably – decided to stay put for a variety of reasons,
including the exceptional utilisation rates Love Field’s lay-out allows it to
post.
This might be a random and untypical case of a strange, anachronistic and
protectionist law but is had ramifications for the people of Dallas and its
environs, for whom the cost to their pockets was put at USD200 million per
annum according to one report – a ‘double whammy’ when one takes into
account the economic impact of the Delta retrenchment at DFW.
After debate on the subject began to gain Congressional support for the
Southwest position, Southwest, American, DFW and the cities of Dallas and
Fort Worth agreed to in Jun-06 seek full repeal of the Wright Amendment,
with several conditions. Namely that the ban on non-stop flights outside the
Wright zone (see map above) would stay in place until 2014, but through
ticketing to domestic and foreign airports would be allowed with immediate
effect. Love Field’s maximum gate capacity would be lowered further from
32 to 20; Southwest to operate from 16 of them.
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The obvious downside is that the 20-gate cap threatens to stifle service to
short-haul destinations when all restrictions are removed in 2014. Two
airlines, JetBlue and Northwest, attacked the anti-competitive nature of this
compromise on the basis that it does not allow any other airlines to operate
at Love Field.
The bill passed both Houses of Congress in Sep-05 and was signed into law
on 13-Oct-06, upon which Southwest requested approval from the FAA to
commence one stop flights to destinations outside the Wright limits.
Southwest services to 25 new destinations began that month, followed
immediately by new ones by American Airlines.
Key Points
•
•
•
•
Despite the ‘happy ending’ nature of this section the Love Field
example does indicate that wherever a low cost airport/terminal
facility emerges in the US, whether it is airline or airport driven,
local legislation could be introduced to protect the established hub
airport. One might expect this especially to be the case where the
LCA/LCT developer is not a US company;
DFW is big enough to stand on its own feet. Love Field is a
comparative minnow. If the same protectionist legislation were
permitted in Europe, airports like Liverpool would have closed and
others never opened;
Southwest’s growth prospects have diminished as a trade-off for
being able to offer ticketing beyond the current geographical
restriction, as airport capacity is now capped; and
Other carriers (including the LCC JetBlue) appear to be barred from
flying there under this compromise.
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5.8 Canada
– Hamilton, Ontario
Hamilton sets the benchmark for low cost airport operation in
Canada
One of the few genuinely low cost airports in North America is to be found at
Hamilton in industrial southern Ontario, Canada. Once overshadowed
completely by Toronto’s Lester Person International Airport, Hamilton is
rapidly forging an identity of its own since its adoption of low cost principles.
Canada although geographically contiguous is worlds apart from the US from
an aviation perspective, Its airports, many of which operate on a not-forprofit basis, exist within a totally different milieu. Whilst GDP is high, not
dissimilar from that of the US, distances are even bigger and the population
is much less and widespread (32.8 million, a little more than 10% that of the
USA), most of it in a thin 300-mile wide strip adjacent to the American
border. Of its provinces, Ontario is the most populous with over 12.6 million
inhabitants, which would, in fact, make it the fifth largest state in the US,
just behind Florida but larger than Illinois. In European terms, it is on par
with such nations as Holland, Belgium, Sweden and Portugal.
Ontario the premier business hub
Moreover, Ontario is the premier location of most Canadian and foreign
commercial and industrial enterprises, and a transport hub in its own right.
The highways that flow through northern and central Toronto include the
busiest in the whole of North America (#401).
At the centre of Ontario’s affairs is the capital, Toronto, the country’s largest
city (2.6 million in a metropolitan region of 5.9 million). It is Canada’s
economic hub, with strong finance (it has the world’s sixth largest stock
exchange), telecoms, transport, media, software and medical research
sectors.
Toronto is served by Canada’s busiest airport, Lester B Pearson, just outside
the city’s western boundary. Pearson hosts almost 30 million passengers per
annum, three times that of next-biggest Montreal. It is operated by the nonprofit stakeholder organisation the Greater Toronto Airports Authority
(GTAA). Other airports include the offshore Port Authority owned and little
used Toronto City or ‘Island’ airport in Lake Ontario close to the downtown
financial district, whose prospects have been improved recently by the
commencement of services operated by Porter Airlines (Regco Holdings),
which has renovated the airport); also Buttonville Airport, a General Aviation
facility. There are longstanding but so far unfulfilled plans to develop an
airport to the east of Toronto at Pickering, to international standards at a
cost of CAD2 billion and provisionally to open in 2012.
It is unusual for such a large city-region to have only one major international
airport. Until 2006, Montreal had two, although admittedly one - Mirabel, the
largest airport in the world when it opened - has since closed to passengers,
having become something of a white elephant, and may have a future as a
theme park instead. But Montreal is not Toronto.
GTAA’s high charges galvanised world opinion
But there are difficulties facing airlines at Pearson, where the GTAA raised
landing charges by 208% between 1998 and 2004, and threatened to raise
them again by a further 18% in Nov-04. That move initiated an investigation
into the land rents charged to many of the biggest airports by the Canadian
government and how they are reflected in charges to airlines. While rents
are now decreasing over the remaining 50 years of leases, the solution did
not offer immediate relief, and Canada’s airports continue to compete with
airports in North America that are receiving subsidies from their
governments while the Canadian government continues to use airports as a
source of tax revenue.
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The issue also focused the anger of IATA on the GTAA and Pearson airport.
IATA’s Director General regards the GTAA as the primary example of an
airport operator that has indulged in unregulated monopolistic practices.
IATA’s ire was further provoked when further charging increases that took
effect in Jan-06 made Toronto the most expensive airport to land at in the
world.
In fact, Canada’s four largest airports, Toronto, Vancouver, Montreal and
Calgary, rank in the top 20 most expensive airports in the world, which
caused the Air Transport Association (ATA), the trade association for the
leading US carriers, to warn that the continued failure of the Canadian
Government to reduce airport charges threatens cross-border trade and
travel, making Canadian destinations less attractive to US carriers. Canada
currently receives approximately 86% of its international passenger services
from the US, of which much of it is to Toronto Pearson, according to OAG
data.
Operationally, GTAA closed Pearson’s T2 at the end of Jan-07 after 35 years
in service, to make way for a CAD800 million addition to T1 (Pier F). The
pier has 25 new gates, increasing the airport’s capacity by seven million
passengers per annum to 38 million, and what is claimed to be Canada’s
largest Duty Free store. Pier F's opening marks the end of the eight-year
airport development programme undertaken by GTAA, including a new
runway, taxiways, utilities, roads, bridges, an on-airport train system,
upgrades to Terminal 3 and the introduction of the new Terminal 1, which
opened in Apr-04.
For all the reasons mentioned above, Pearson is probably not the sort of
airport that LCCs would make first choice, but the demand for low price air
travel in Canada that has been growing steadily – both for domestic flights
and international travel to the US, Europe and Caribbean - needed to be
satisfied.
Hamilton offers the LCC solution
The solution was to enhance and expand the airport at Hamilton, a major
industrial city to the southeast of Toronto and, because of its industrial
heritage, particularly in the steel industry, variously referred to the
Birmingham (UK), Sheffield (UK) or Pittsburgh (USA) of Canada. The city
counts 490,000 residents and 715,000 in the metropolitan region and it is
the fourth-largest municipality in Ontario, lying in the so-called ‘Golden
Horseshoe’ between Toronto and Niagara Falls wherein lives half of Ontario’s
12 million population. Hamilton is situated 62 miles (99km) from downtown
Toronto and a similar distance from Pearson airport. It is closer to, the
Niagara Falls honeymoon and vacation region on the American/Canadian
border than Pearson.
Location map: Hamilton
Although Hamilton’s heavy industry is in decline some new industries have
emerged, such as Health Sciences and Food & Beverage. The city is also the
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busiest of all the ports on Canada’s Great Lakes, handling 12 million tones of
cargo each year. Good road links make it accessible from all areas.
Flag carrier Air Canada, having taken over Canadian Airlines International,
was the dominant carrier at Hamilton until its financial problems forced a
withdrawal in 2003. Some of the shortfall was taken up by LCCs, which
subsequently appeared on the scene. These included Jetsgo (which ceased
trading in Mar-05), Canjet, Westjet and subsequently Air Canada’s own
subsidiaries Tango and AC Zip, which were later folded back into the parent
organisation. Development of LCCs became rapid in the western part of
Canada, particularly Westjet at Vancouver and at Abbotsford, a secondary
airport outside the city; but a base in the Toronto metropolitan region was
needed.
Westjet underpins Hamilton’s domestic operations
Westjet was founded by four Calgary-based entrepreneurs who saw an
opportunity to provide low price travel across western Canada, then the
whole country, following the example of Southwest Airlines in the USA.
Westjet’s solution was Hamilton’s J C Munro International Airport, from
where it now operates trans-Canadian services both east and westbound,
with further connections via Vancouver into smaller Canadian cities and
major US west coast cities such as San Francisco, Los Angeles and San
Diego.
Westjet, which operates over 50 B737 New Generation aircraft with more on
order, has been steadily growing and is an LCC leader, even after an
embarrassing incident in which it was caught engaging in questionable
competitive tactics with Air Canada came to light.
Its financial results swung wildly while it was going through its fleet
replacement programme of the original B737-200s, from a CAD60.5 million
profit in 2003 via a CAD17.2 million loss in 2004 and back to a CAD24
million profit in 2005 and CAD115 million in 2006. In Q107 it more than
doubled comparable earnings versus the previous year. Record load factors
and improved yields contributed to the result. The company has settled a
two-year court battle with Air Canada, by admitting ‘spying’ on its rival, and
agreed to pay CAD15.5 million. A threatened CAD220 million lawsuit could
have cost it 80% of its cash resources.
It is critical to a low cost airport to have at least one established low cost
carrier and Westjet now fills this role even though it has vacillated in its
support for Hamilton, shifting some services to Pearson in 2004 because
business travellers preferred the far superior range of connecting flights
there. Supporting Westjet is Canjet, based in Halifax, Nova Scotia, and
which has metamorphosed from an LCC into a full service charter airline,
Sunquest, a wholly owned charter subsidiary of the UK’s MyTravel Group
(which has now merged with Thomas Cook) and which flies from Hamilton to
popular Caribbean vacation hotspots such as Cancun, Mexico and Punta
Cana, Dominican Republic.
Also Transat Holidays, which replicates Sunquest’s flights to the same
destinations, Air Canada Jazz (Ottawa and Montreal since Jan-06), and, from
May-07, the web-based UK long-haul LCC Flyglobespan, to no less than 13
UK destinations. Hamilton’s diverse business model is clear and it is further
supported by complementary development of cargo services. In fact,
Hamilton originally made its name by challenging Toronto as a cargo airport
and rose to become (and still is) the largest integrated cargo-courier
(parcels) airport in the country, a Canadian version of Memphis (US). The
three cargo couriers presently operating there are UPS, Cargojet Canada and
Purolator Courier. Hamilton is able to offer a strategic location both
commercially and geographically, allied to 24/7 operations.
There are some parallels here with the development of London’s Stansted
airport, established as the world’s busiest short-haul low cost facility but
with a healthy and growing long-haul (bulk) cargo business, and now
moving, albeit slowly, into the emerging low cost/price passenger long-haul
arena.
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One downside to Hamilton’s operational functionality is that the balance of
the charter services have been oriented towards the winter programme,
when Canadians exit the country in droves to Florida and the Caribbean but
that imbalance will be redressed with the inauguration of the Flyglobespan
programme.
Hamilton’s growth can be traced to an ambitious expansion programme that
commenced in 2002 to ‘facilitate its growth into the top tier of Canadian
airports’. The short-term Phase 1, costing CAD15 million and largely
completed in 2002, was driven by cargo demand, the rapid growth of
Westjet and by a 450% increase in 2001 in winter tour flights.
From 2003 onwards the Hamilton management decided to dedicate itself ‘to
meet the needs of low cost’ carriers’ (source: corporate website). Passenger
levels, demand and growth projections from this sector would determine the
scope, phasing, final design and construction of further expansion projects
and the airport would ‘set new standards for low cost airport design and
construction’, including additional retail operations and the airport’s first
Duty Free facility.
Today Hamilton still claims to be one of, if not the, fastest growing airports
in Canada though that accolade must be tempered by the fact that it is still
growing from a fairly small base, something that low cost airports are often
able to do quickly, but not infinitely.
The original Phase 1 development that was finished in 2002 is now
complemented by another Phase 1 expansion, this time of the international
arrivals area, a CAD1.6 million project with a targeted completion date of
May-07. Construction of new facilities is dictated by growth projections,
airline needs and passenger demands and major works under ‘Phase 2’ are
yet to begin. The airport’s mid-term target for growth in its passenger
service is five million air travellers annually.
Around 1,000 hectares of land are required to handle growth during the next
25 years and will probably be sourced from surrounding farmland,
supporting businesses projected to generate 59,000 jobs by 2031. In
common with many cities worldwide an Aerotropolis (airport city) is
envisaged for Hamilton, in this case a 1,050-hectare industrial park close to
the nearby new Highway 6 Expressway and existing Highway 403. Political
considerations weigh heavily however; especially the cost to taxpayers, and
no firm decision has been made.
Hamilton’s impressive 179-page 2004 Master plan reaffirms the commitment
to achieving five million passengers annually, which would make the airport
one of Canada’s five busiest, in addition to being the #1 air freighter
gateway for the entire country. This degree of ambition is unusual for what
was not even a secondary airport in 1999, when there were just 22,561
passengers, increasing to 1,041,000 in 2003 when the Master plan was
created. The Master plan identified a parallel taxiway system, Category 2 ILS
and extension to Runway 06/24 as imperatives. The provision of a future
Light Rail transit network throughout the ‘Golden Horseshoe’ was raised.
Hamilton Airport in perspective – traffic figures
Total passengers enplaned and deplaned
Airport
Toronto/l.b. Pearson
Southern Ontario (*)
Montreal
Vancouver Int'l
Moncton
Year to Nov 05
27,600,000
553,000
10,075,000
15,140,000
498,000
Year to Nov 06
28,500,000
622,600
10,520,000
15,570,000
520,000
Variation % +/3.3
12.6
4.4
2.8
4.4
Source: Transport Canada
* = Hamilton/Toronto Island & Windsor airports combined
Ownership structure begets business agility
The ownership structure that has supported Hamilton’s growth is as follows.
Having been a military base it became a civil airport in 1964. In Dec-96
ownership of the airport (land and buildings) was transferred, under
Transport Canada’s 1992 National Airports Policy, from the Federal
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Government to the region of Hamilton-Wentworth. This regional government
considered that it lacked the experience to manage the airport and turned to
the private sector. Secondary/tertiary airports like Hamilton did not
necessarily follow the same path as the primary ones like Toronto, most of
which became private not-for-profit organisations with Board representation
from a wide variety of stakeholder interests like business, consumers and
organised labour, some of whom were in a position to paralyse growth if
they so chose; although few have actually done that.
While, the City of Hamilton still owns the airport, it retained TradePort
International Corporation – a consortium in which YVRAS, the Vancouver
Airport Authority, is the majority owner – to take on responsibility for
managing, developing and financing the facility from 1996. TradePort
continues to do so on a 40-year lease through its subsidiary Hamilton
International Airport Ltd.
TradePort is a consortium that includes WestPark Developments Ltd., a local
developer, the Labourer’s International Union of North America, and YVR
Airport Services Ltd., (YVRAS) a subsidiary of the Vancouver Airport
Authority. YVRAS is the majority owner.
So there are some similarities with the ownership structure and business
ethical stance at Toronto, also Montreal, Vancouver, et al, but Hamilton is a
little more nimble. Moreover, it benefits enormously from the input of
YVRAS, a global airport management company that has developed 18
airports on three continents including Cranbrook, Fort St John and Kamloops
(all British Columbia) and Moncton, New Brunswick in Canada. Only Moncton
bears any relation to Hamilton in size the others seeing just 90-150,000
passengers per annum.
Along with Calgary, Vancouver was one of the first airports to embrace the
Transport Canada concept of local government operating airports in
conjunction with local interests.
Limited retail opportunities set to be expanded
One way in which Hamilton does not yet match similar European and Asian
airports is in its provision of retail outlets. Momentarily, there is only one
significant landside facility, the ‘Corner Café, located opposite the check-in
counters, with fixed yet flexible opening hours to suit the demands of
delayed and cancelled flights and which doubles as a newsagent. In addition,
'Grab & Go' express food and beverage kiosks are located inside the
departure lounge, which operates during all outbound flight times.
The anticipated demand arising from the large programme of Flyglobespan
flights commencing in May-07 instigated a review of facilities and a
makeover of the terminal interior that, when complete, will include
appropriate shops.
Hamilton Airport Terminal layout
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Key Points
•
•
•
•
•
•
Despite the city’s industrial significance, Hamilton has been very
much a poor relation to Toronto;
Astute management in place. Broad based business model whilst
retaining emphasis on budget passenger operations and with focus
on one LCC;
Diversity and flexibility of its approach in combining cargo, charter
and now LCC short and long-haul business has paid off, leaving it in
a position to optimise the further development of LCC trans-border
services to and from the USA and Caribbean, and with potential to
do the same with new European low cost services. In a long-haul
LCC arena that looks set to grow dramatically this year, Hamilton is
well placed to handle that business;
Benefits from management by internationally competent company;
Non-aeronautical revenue generation has been limited in scope but
that deficiency is being tackled; and
Has favourable location for development of an airport city.
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Chapter 6
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Chapter 6
Low cost airports
& terminals in Asia Pacific
This chapter analyses the advent of low cost airport facilities in the LCC
movement’s newest region. With the business model still very much in its
infancy, the region’s airports have taken different approaches to catering to
and attracting service from the increasingly important market segment.
Overview
•
•
•
•
•
In world’s newest and fastest-growing low cost sector, airports are
racing to attract LCC service
Two key airports – Kuala Lumpur and Singapore – have used
purpose-built LCTs to promote the sector’s growth
Bangkok’s low cost stance remains a fluid situation, with LCTs and
even a full LCA mooted
Macau has used aggressive promotion, its proximity to Hong Kong
and the dramatic growth of inbound demand to become a key LCC
destination, even with full-service facilities
Australia’s LCA sector is hitting its stride, with Gold Coast and
Avalon using their lean facilities and charges to attract ample
domestic and long haul low cost services
The airport synonymous with the LCC sector in the Asia Pacific region is
Kuala Lumpur, home to AirAsia. The chapter looks at that facility as well as
that in neighbouring rival Singapore to examine the different paths
employed by both airport authorities to accommodate and catalyse,
respectively, low cost growth.
In Malaysia, the chapter illustrates how on the back of the carrier’s
incredible growth, the facility is becoming overburdened, with the facility’s
ceiling of 10 million annual passengers quickly looking inadequate to the
task at hand, with new solutions becoming critical.
At the same time, the analysis looks at Singapore’s decision to build the
region’s second (by a week) LCT, and how the smaller facility – 2.7 million
annual throughput, expandable to 5 million – reflects the situation in the
city-state. It also explores why the terminal’s take-up has thus far been
disappointing. Shunned by Jetstar and Thai AirAsia, Budget Terminal will rely
on Tiger’s growth for its throughput in the short term.
The stop-start nature of Thailand’s attempts to accommodate low cost and
full-service aviation growth in key hub Bangkok is also examined. With
uncertainty surrounding the role of former main base Don Mueang and the
possibility of a LCT at Suvarnabhumi, the chapter affords a look at the
planning and future prospects for dedicated low cost facilities in Bangkok.
The differing approaches to engaging the budget sector in China are also
instructive. The first mover here is Macau Airport, which was built for local
flag carrier Air Macau and therefore displays little of the basic infrastructure
associated with low cost airports. However, the authority has used ambitious
marketing budgets, the airport’s proximity to full-service haven Hong Kong
and the city’s gambling-led demand growth to become one of the regional
airports most served by the LCC sector.
Neighbouring Zhuhai features an airport that was overbuilt by the Chinese
Government, and sees a different type of low cost renaissance is in the
works. The Airport Authority of Hong Kong will participate in the LCC
movement (bound to dramatically increase on domestic PRC growth alone)
while keeping its flagship facility a full-service haven. AAHK took a stake in
Zhuhai’s airfield in 2005 and is now managing the airport. With ferry
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linkages between the two airports, it can both segregate and integrate the
two business models.
Meanwhile in Australia, the region’s most prototypical LCA, Gold Coast, has
thrived even in the shadow of Virgin Blue home base Brisbane, thanks to its
offer of an ultra-low cost facility to region’s LCCs. The decision to construct
its new terminal without airbridges was controversial, the chapter explains,
as it was thought it would handicap the area’s ability to attract long-haul
services, but that mindset, combined with an aggressive marketing
campaign, resulted in Gold Coast being the first destination served by
AirAsia X.
Meanwhile in Melbourne, the conventional facility is trying to beat the low
cost airport at its own game, as the chapter shows how Tullamarine Airport
was able to use financial support and a dedicated terminal to entice Tiger
Airways’ Australian unit away from Jetstar base and future AirAsia X
destination Avalon.
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6.1 Malaysia
Kuala Lumpur’s low cost terminal battles it out with Singapore’s
Kuala Lumpur International Airport’s (KLIA) opened its low cost terminal in
Mar-06, just a few days before a smaller and less expensive facility at the
rival Singapore Changi airport. The two remain the primary examples of this
sort of structure in Asia, although the KLIA experiment has prompted several
other such terminals to be proposed both within Malaysia and in other Asian
countries. The terminal has a complicated history.
The USD3.1 billion KLIA, which opened in 1998 is situated in Malaysia’s
‘Silicon Valley’, the Multimedia Super Corridor, close to a new administrative
capital development at Putrajaya. But it is 60km south of the capital. while
Subang Airport (formally Sultan Abdul Aziz Shah Subang Airport) is much
closer (20km). Nevertheless, the airport still accounts for about half of
Malaysia’s air traffic. The governing body is Malaysian Airports Berhad
(MAHB), which manages and operates five international airports, 16
domestic and 18 short take-off and landing ports in the country.
KLIA, managed by Malaysian Airports Berhad (MAHB), which manages and
operates five international and 16 domestic facilities, has achieved some
success, as evidenced by the award for ‘best airport in the 15-25 million pax
p/a category’ (Aetra), but it has not met its traffic growth targets and saw
airlines like British Airways, Northwest, All Nippon and Lufthansa withdraw
services. However, more recently, things have been looking up.
Issues involved in opening a new airport
The Government’s initial plan was to decommission Subang Airport and turn
it into a maintenance, airfreight, warehousing and distribution facility, on the
basis that the planned 25 million passenger annual capacity of KLIA was
adequate at least in the short-medium term and an express rail link was
being built, connecting the city’s downtown. However, a series of system
failures immediately after KLIA’s opening, together with surface transport
hold-ups, meant that some domestic airline operations were temporarily
retained at Subang, and Malaysia Airlines (MAS) relocated some domestic
services back there following a drop-off in traffic. It did not all run smoothly
and, taken with the experience at the New Bangkok International Airport,
there are valuable lessons for governments considering similar
developments.
Amongst the carriers staying at Subang was AirAsia. AirAsia is led by the
mercurial Tony Fernandes, a character in the colourful missionary mould of
Virgin Atlantic’s Branson, Ryanair’s O’Leary and easyJet’s Stelios and who
acquired the failing airline for a nominal MYR1. During 2004, the year in
which AirAsia held a successful IPO, the first for an Asian LCC, the
government ordered the carrier to move to KLIA.
AirAsia, having just placed an order for 100 A320s, did not want to move to
KLIA, which was inappropriate to AirAsia’s operating model. Ferenandes
lobbied the government to keep both facilities open, quoting examples as
disparate as Rome and Rio de Janeiro where two airports cater to different
market sectors. His attitude was encapsulated in the statement: “Give us
Subang and we will give the Singaporeans a run for their money. Why not
improve what we already have?” Subang would cost ‘only’ MYR25 million to
refurbish, as it was already an international standard airport while “KLIA is
as packed as the Don Mueang airport in Bangkok and Heathrow in London”.
That was perhaps an exaggeration at the time; KLIA was designed to handle
60 million passengers by 2020 and it sprawls over 4,000 acres, one of the
largest airport areas in the world.
The lower cost base at Subang, especially the reduced taxi-ing time at peak
periods and consequentially reduced fuel burn, along with the airport’s
proximity to the city, was critical to Fernades. He estimated the excess costs
at KLIA to be of the order of 20-30%. He also did not want to go head to
head with MAS, a feeling that was reciprocated. Moreover, it was going to
cost his passengers an extra MYR35 one way to use the train to and from
KLIA. KLIA management tried to be co-operative; to show that it was
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equally keen that the airport should work as a base for LCCs. Landing and
parking charges at Malaysian airports were broadly similar, the
differentiation being with passenger charges. But Fernandes still felt that
profitability could be achieved better at Subang.
A low fare hub for the region
In Jun-04, the Malaysian Ministry of Transport intimated it would consider
designating Subang as a budget, point-to-point airlines base and
commenced a study to investigate the value of that option versus building a
low cost terminal at KLIA. By now the Ministry’s wider strategy was to make
the country a “low-fare hub” for the region, to build on the strength and
reputation of AirAsia.
Malaysia Airlines (MAS) then became involved, declaring itself against any
low cost development at Subang. The flag carrier believed that reviving
Subang would be unfair, creating financial implications for MAS and that it
would not be able to compete with other airlines ‘on a level playing field.’ It
would also have an adverse effect on investments already made in the
Express Rail Link and an airport limousine company. By this time MAS had
moved all domestic and international operations to KLIA because it believed
in the government’s original objective of turning the new airport into an
international transport hub.
The government’s changing view is interesting to examine. As Asian low cost
airlines learnt from the tribulations of their compatriots in North America and
Europe so have Asian governments observed the arrival of low cost airports
and terminals there, notably in Europe, where Singapore Changi was known
to have studied examples such as Liverpool John Lennon Airport at first
hand. The growing success of LCCs in South and Southeast Asia was forcing
the airports to embark on a complete change of mindset and to look
seriously at creating low-cost airports to satisfy their ‘special needs’. (Even
if, at the same time, the government had a perceived stake in the success of
state-owned MAS.)
Most importantly the government understood that the mindset of the Asian
air traveller was changing. Asian airports were usually designed for
traditional airlines that wanted the best for themselves and their passengers
– aerobridges, lounges, ambience and the like. The New Asian Traveller was
a different creature entirely, ultimately interested only in the ticket price.
This was something of a culture shock.
As time progressed the Transport Ministry started to favour the plan to build
a separate terminal for budget airlines at KLIA instead of reconstituting
Subang Airport on the basis that KLIA seemed a more logical choice to
handle international flights of any variety. Moreover, a large sum had
already been spent building KLIA. What was certain was that the terminal,
wherever it was built, would be configured to provide the lowest operating
cost for operators, but that discounts on parking and landing charges would
not be offered: according to Dato’ Seri Bashir Ahmad, the Managing Director
of MAHB, LCCs had yet to come up with a compelling argument as to why
they should receive them.
In the short term AirAsia was given a special wing and gate allocations close
to its KLIA head office, which was based at apron level, thus facilitating
speedier turnarounds, a Holy Grail of LCC operation. Out of this experience
could be developed a specific terminal, for the use of AirAsia and other LCCs
like perhaps Tiger Airways of Singapore and Indonesia’s Adam Air.
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Government’s eventual decision to develop KLIA was no surprise
The Malaysian Government’s Cabinet unsurprisingly favoured KLIA in the
end, after many aviation-related parties – including regulatory bodies,
airlines, and airport operators – had voiced their views. Malaysia was making
a major decision that might well change the status of its aviation policy for
the next 5-10 years. One reason for the complexity is that Subang was
relegated in importance at just at the wrong moment, before AirAsia started
to succeed and to change the shape of the regional industry. And while the
debate raged, third parties emerged to influence it, like Singapore Changi
Airport and the many new LCCs that have materialised in the region.
It was decided that the low cost terminal’s structure would be simple and
basic, for example it would not include aerobridges, travelators or
escalators, and it would be built quickly, the work commencing in Apr-05.
The race was on to complete it before Singapore’s was finished to benefit
from the prestige of being the ‘first’ in the region.
Projected cost was MYR50-100 million for a 35,000 sq m edifice with 72
check-in counters. It would cater for up to 40 aircraft initially, offering a 20minute turnaround and have an annual capacity of 10-12 million passengers
with expansion capability to 50 million. The existing apron could
accommodate 23 aircraft simultaneously, and could be extended to
accommodate another 48 aircraft.
Food & beverage, retail and Duty Free facilities were provided, together with
a Foreign Exchange Counter, pay phones, Auto Teller Machines, Hotel
Reservation, Car Rental, Taxi Service and a Prayer Room.
One drawback is that it is located on the opposite side of the apron from the
main terminal building. Although this sounds innocuous it means a road
journey of 20km for passengers switching between terminals or if they
accidentally go to the wrong terminal. In contrast, Singapore’s LCT is a short
drive from the main terminals. Fortunately the government has now
approved a rail link between the main terminal and LCT at KLIA. The main
and satellite terminals are already connected by ‘Aerotrain’ a driverless three
carriage train.
KLIA Locator Map: showing LCT and Sepang F1 motor racing circuit
Source: Malaysia Airports
As a consequence, 2–3 million passengers per annum would be shifted away
from KLIA’s existing congested LCC area until a new satellite was built there.
Subang was to remain an international aircraft maintenance, repair and
overhaul centre, to capitalise on the regional increase in this business.
AirAsia gave up the fight
It was at this stage that AirAsia gave up the fight to remain at Subang.
Indeed a press statement issued at the time from Tony Fernandes stated
“We will refocus and re-energise ourselves to focus on making the low cost
terminal in KLIA into an efficient design for AirAsia’s low cost model, and
make it into the centre for low cost travel in Asia despite stiff competition
from Singapore. We will work closely with MAHB to develop our country’s
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first dedicated low cost terminal that will serve to meet the needs and wants
of a low cost airline. We are pleased that Malaysia Airports have delivered a
blue print of KLIA that will almost mimic Subang in KLIA, even down to the
low cost transport to the terminal.” At the same time the Transport Minister
stated that developing Subang along these lines would have cost MYR280300 million, considerably more than AirAsia’s estimate of MYR25 million.
The final cost of the LCT came to MYR108 million (about USD25 million), a
little over the maximum envisaged, and the terminal opened in the same
week as the one at Changi. Moreover, the new terminal made it possible to
free up capacity elsewhere at the airport for five million passengers, more
than the anticipated amount. For MAHB this was important for a number of
reasons.
MAHB had outstanding concession payments of over MYR800 million and in
fact had not made a payment for five years. There were solid reasons: The
Asian financial crisis in 1997/98, the September 2001 terrorism attacks and
their aftermath and 2003’s SARS outbreak. MAHB considered selling its
Sepang F1 motor race circuit to the government to repay the concession
fees and even a de-listing to pave the way for a restructuring. The new
terminal at least offered the prospect of more passengers overall, hopefully
spending more money in the airport.
In fact, the generation of non-aeronautical revenues, particularly from
shopping and food & beverage, has become a cause celebre for MAHB.
Pronouncements on this topic have become a regular feature, professing a
desire to increase KLIA’s revenue contribution from commercial or nonaeronautical activities to 50% from the current 35% by 2010. MAHB
management will be aware of the sophisticated non-aero offer of competing
airports like Singapore and Hong Kong. On the other hand when it complains
that “it has become harder to increase aeronautical charges (for example,
aircraft landing and parking fees) and to get airlines to pay for them…our
charges are already very low,” (Dato’ Seri Bashir Ahmad, 18-Mar-07) that is
at least in part a result of the move to establish a low cost hub at KLIA in
the first place. There is a price to pay.
MAHB reported a 7.0% year-on-year fall in net profit in the 12 months
ended 31-Dec-06 and corporate and financial restructuring, currently under
government consideration, remains on the cards. On the positive side, it
expects passenger traffic (all airports) in 2007 to grow by 7.1% to 45.5
million, to be aided considerably by increased traffic from the still fast
growing AirAsia and the now-restructured Malaysia Airlines.
As for the LCT, there are different ways of assessing its success. Apart from
AirAsia, and as big as that airline is, there is no other user of the LCT
terminal, apart from subsidiaries Thai AirAsia and Indonesia AirAsia, long
haul affiliate, AirAsia X, plus Cebu Pacific of the Philippines. Australia’s
Jetstar commenced a three times weekly service in Sep-07, but it operates
from the main terminal. This reflects Jetstar’s wish to access longhaul
connecting traffic in the main terminal.
Close to capacity after only two years
MAHB has approved expansion of the KLIA terminal as it is close to capacity
already just from AirAsia’s operations and additional parking bays have been
prepared to accommodate the use of bigger aircraft by AirAsia X for its
operations. (AirAsia X is the start-up long-haul low cost carrier that started
operations in Nov-07, having delayed the planned start-up owing to difficulty
sourcing available aircraft to lease and base at KLIA, which it hopes to build
into a budget intercontinental hub on the scale of Changi or Dubai.)
The terminal investment needed is not yet known while talks continue but
the expansion will take it up to 15 million p.p.a capacity from the current 10
million and will include a new food court. Ultimately, although not too much
emphasis should be placed on this momentarily, it is possible that MAHB
might have to look for a new site altogether if the LCT reached the expanded
maximum capacity.
4.7 million passengers used the LCT in 2006 out of 24.1 million in total at
KLIA and the management anticipates 7.4 million and 25.7 million
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respectively in 2007 (Visit Malaysia Year), which indicates a switch of more
network carrier traffic to LCCs. The LCT’s operation from Mar-06 to Dec-06
contributed about 8.4%, or MYR50.8 million, to KLIA’s revenue, about half
its cost.
By way of comparison, the Singapore Changi LCT, which also celebrated its
first birthday in Mar-07, saw 1.36 million passengers passing through the
terminal during the year (see the Singapore section). It is served by two
LCCs, Tiger Airways and (like KLIA) Cebu Pacific Airways. Unlike KLIA, retail
sales have been going up; retail and F&B revenues increasing by 80% and
60% respectively compared to this time last year.
“And the winner is…”
So, which terminal can claim to have had more success? Changi’s wins on
non-aero revenues. KLIA’s wins on passenger growth and has a greater
variety of airlines – just. But both are still really dominated by one carrier –
AirAsia (and subsidiaries) at KLIA and Tiger Airways (part-owned by
Singapore Airlines) at Changi. Neither can be compared with, say, London
Stansted, but that is an extreme comparison. Most European LCTs and LCAs
are supported by just one or two principal budget airlines with big networks
and ironically it is the older ‘redbrick’ airports that often really offer a greater
choice of budget airline where they have been able to find a way of
accommodating their cost demands. Singapore’s terminal was a little
cheaper, but on the other hand KLIA got a much bigger facility (Changi’s LCT
initial capacity is 2.7 million pax p/a) even if it is out in the boondocks
compared to Singapore’s. Both parties would probably agree on a
honourable draw.
Hidden benefits
MAHB has benefited from its decision to press on with the terminal in several
ways. Firstly, it has built an expandable facility designed to be able to handle
a new long-haul budget airline that had scarcely been thought of when the
terminal was commissioned, along with its complementary online transit to
and from the existing short-haul incumbent. This is something of a world
first and should help buttress Malaysian aviation’s ambitions to be the centre
of the Asian low cost arena.
Secondly, it provided the impetus for other LCT proposals at Malaysian
airports including Kota Kinabulu in eastern Sabah state and the Bayan Lepas
International Airport in Penang. The Kota Kinabulu terminal is open and
operational. AirAsia is reported to have requested that the State
Government donate the land for the Penang terminal, as well as award it the
rights to be the licensed operator of the proposed facility. Malaysia Airlines’
own LCC subsidiary, Firefly, which has commenced operations at its Penang
base, would also like to be part of the action here, so any such facility is
unlikely to be offered solely to AirAsia.
The latest information however suggests that MAHB is changing its mind and
will not build further LCTs at Malaysian airports on the basis that the cost
increase is not matched by an increase in passengers, i.e. it may be better
simply to adapt existing facilities at smaller airports, Kuala Lumpur having
been an exception. That has not stopped AirAsia from pressuring MAHB to
provide LCTs in Penang and now Kuching.
On the other hand, MAHB can use the LCT experience in its foreign ventures.
Overseas ventures were identified as a new source of income for the group
in the longer term in 2004. In Jan-06, MAHB was short-listed to build and
operate an airport in Kazakhstan. The company also provides airport
management services for Phnom Penh and Siem Reap airport in Cambodia
through a joint venture arrangement with Aeroports de Paris Management.
MAHB is also in discussions to manage a number of Middle East airports, in
Jordan, Saudi Arabia and Oman.
As this report is published, the issue of price discrimination has arisen. IATA
has criticised Malaysia’s move to cut departure tax at its two budget airline
terminals, saying it was discriminatory to other carriers and warning that it
could hurt tourism in the country.
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In Jun-07, departure tax for international passengers at the LCTs in Kuala
Lumpur and in Kota Kinabalu was dropped by up to 51% to MYR25. The rate
for domestic flights was cut by 33% to MYR6. At the Kuala Lumpur main
terminal and other airports nationwide the departure tax for international
passengers remains at RM51. For domestic travellers, the tax is RM15.
IATA insists that its member airlines have been dealt a cost disadvantage by
the lower tax charges at Malaysia’s LCTs and the Director General has
written to the Malaysian Prime Minister Abdullah Ahmad Badawi to call for a
‘level playing field’ for all airlines operating in Malaysia. IATA member
airlines account for 90% of Asia Pacific traffic. The strength of his argument
has perhaps been diminished by the statement of Malaysia Airlines CEO,
Idris Jala, that his airline will cooperate with AirAsia X in future.
MAHB has said it cut the tax rates as part of efforts to become a regional
hub for LCCs in Asia and to combat competition from Singapore and
Thailand.
Key Points
•
•
•
•
•
KLIA’s LCT has had more success than expected, in view of the stiff
competition from Singapore
It should go on to reap more rewards from the AirAsia X
involvement, although in itself that will concentrate attention on
how much AirAsia dominates the low cost scene here;
It was an expandable terminal but if growth is going to reach
previously unanticipated levels it is appropriate to be considering
another new terminal now, and one that has greater proximity to
the central terminal and associated buildings. Early negotiations
commenced for a permanent LCT for up to 30 million p.p.a. and
MAHB now seems committed to it. The terminal will boost capacity
by 60% to 50 million p.p.a. and the intention is that it will turn
Kuala Lumpur into a major regional hub for budget travellers to
combat KLIA’s inability to shift full service and hub/network traffic
away from Singapore and Bangkok. It will be situated adjacent to
the main terminal and should be ready by 2010;
The original LCT fitted in with MAHB’s foreign investment strategy
as a model terminal; and
The issue of discriminatory pricing, in limbo at Geneva, will affect
the prospects for any future LCTs in Malaysia.
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6.2 Singapore
Singapore’s low cost terminal - future model for small Indian
airports?
As noted, Kuala Lumpur International Airport’s low cost terminal opened at
roughly the same time as a smaller and less expensive one at nearby rival
Singapore Changi airport. The KLIA experiment has prompted several other
such terminals to be proposed both within Malaysia and in other Asian
countries and now it seems that the Changi Airports International/Tata
consortium to develop secondary airports in India will use the Changi LCT as
a model there. This section examines how the Changi terminal came to be
built and how it fits in with its opulent surroundings.
While there were seemingly interminable arguments about the location of
the LCT for Kuala Lumpur, there was no such complexity at Singapore,
where a decision was rapidly taken on a new terminal for LCCS, despite only
7% of traffic there being accounted for by budget airlines at the time.
A government organisation, the Civil Aviation Authority of Singapore (CAAS),
controls Singapore’s civil aviation: a statutory board under the auspices of
the Ministry of Transport. There are no known plans to privatise it; CAAS
regards its role of something of a ‘corporate citizen’, for example nurturing
the local aerospace industry (see the paragraphs on Seletar Airport, below),
and providing education through the Singapore Aviation Academy, one of its
divisions. Apart from the external operations undertaken by Changi Airport
International the CAAS’s airport operations are focused on the worldrenowned international airport at Changi and the smaller, less well known
one at Seletar (sometimes spelt Selatar).
The small republic of only 4.3 million people punches well above its weight
economically as a trade and transportation hub and financial centre and
Changi Airport handles around 10 million more passengers annually than
does Kuala Lumpur.
Seletar might have been the chosen LCT location
Effectively there is only one airport, the small Seletar Airport in the
northeast of the main island having been consistently overlooked to date for
commercial expansion. Seletar was in fact Singapore’s first international
airport, since 1929, operating as a civil airport between 1930 and 1937 and
is mainly used today as a general aviation airport for private and chartered
flights and flying schools with some small scale freight movements. It has a
single runway and 27 stands with 24-hour operation. Several proposals have
been made for a runway extension to 2,000m, which at sea level would
cater for most narrowbody jet aircraft that are typically employed by LCCs.
It is quite possible that had the decision been made within Europe, where
entire airports devoted to budget airline operations are commonplace,
Seletar would have been chosen to host that sort of activity, especially in
view of the low level of penetration of LCCs in Singapore at the time (indeed,
there have been recent suggestions that this may happen).
However, that is currently not the case and it appears that the future for
Seletar now is still in the SGD60 million 140-hectare Aerospace Park that is
expected to be completed by 2018, and jointly financed by Singapore’s
Economic Development Board and JTC Corporation. The purpose of the park
is to capitalise on the growth potential in Asia for MRO and manufacturing
systems services, much the same ‘fate’ as Kuala Lumpur’s Subang Airport
and (at one time) Bangkok’s Don Mueang.
A history of ‘low cost’ resources locally
The Singaporean government might have been influenced in its decision on a
low cost base location by the realisation that flag carrier SIA, a member of
the Star Alliance, built up a global reputation for high quality during the
1980s and 1990s, which also enhanced Changi Airport’s standing
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considerably, while employing a low cost structure of its own. In other
words, why waste such a globally recognised resource if there are no
aeronautical or land use restraints to prevent you working such a new
terminal structure into an existing plan to upgrade the airport with new and
refurbished terminals for network carriers?
Singapore was badly affected by the SARS outbreak in 2003/4 but bounced
back to record a high GDP growth of 8.1% for the full year in 2004 and has
continued in that vein since even though it has decelerated from 7.6% in
2006 to around 6-6.5% in the first half of 2007. Changi Airport was able to
attract back all its lost traffic from mid 2004 onwards and in the aviation
sector Singapore began to focus on growth oriented markets like India,
China and the ASEAN countries from 2005, backed by aggressive
liberalisation policies that were opening the doors to LCCs. It was also
instrumental in pushing for local LCC service development, for example on
the key Kuala Lumpur route which might yet lead to an open skies deal with
Malaysia before the end of 2008 and for transcontinental (Pacific) non-stop
services, also with fifth freedom rights through Australia for Singapore
Airlines, but this has met with stiff opposition. Changi had a record breaking
2006 with over 35 million passengers (+8%) and almost two million tonnes
of freight.
Extensive terminal upgrades
In order to accommodate this growth, infrastructure developments were
needed and have been put in place. The SGD240 million upgrade and
expansion of Terminal Two was completed and similar work will be
undertaken at Terminal One. The SGD1.8 billion Terminal Three is scheduled
to open in Jan-08 (two years later than initially planned, construction having
commenced in 1999) and will have capacity for 20 million passengers per
year, raising total capacity to 64 million. The three main terminals are to be
linked by a rail system to be completed in 2007; it currently connects T1 and
T2.
Several Air Hub Development Funds have been introduced and applied at
Changi, with the objective of strengthening its hub status by attracting new
airlines. The first such incentive was in 2003. The Fund, valued at SGD210
million, and valid for three years, offered airlines a 15% discount on landing
fees and property rentals. It was supplemented by a further SGD114 million
assistance (and with a 30% rebate on landing fees) as a direct response to
the SARS outbreak later that year.
A new SGD300 million fund with the same objectives - to strengthen
Changi's hub status - commenced in 2007 when the previous one expired
and with the additional objective of countering the effect being felt of the
very rapid development of Dubai Airport and Emirates airline.
With such a level of investment many other airport operators would have
opted to locate any designated LCC facility within the existing and planned
main terminals and indeed had T3 not been delayed with T2 under
refurbishment that might have been the case.
That the Changi management did not may also be connected to the fact that
although the original Air Hub Development Fund helped boost traffic by 23%
in 2004, it was only 7% in 2005 when the construction decision was taken.
At that time Changi was faced with the prospect of being swamped by Dubai
Airport, which was looking as if it could eclipse it in the race for transregional hub pre-eminence (see chart below), given that both airports rely
extensively on sixth freedom traffic 18 .
18
Sixth Freedom. The use by an airline of two sets of third and fourth freedom
rights to carry traffic between two other countries but using its base as a transit
point. For example, SIA carries sixth freedom traffic between London and Perth via
its base in Singapore and Emirates carries traffic between Paris and Mumbai in the
same manner, via Dubai.
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Dubai vs. Singapore: Annual Passenger volume (millions): 1991 to 2006
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
Dubai
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
0.0
Singapore
Source: Centre for Asia Pacific Aviation
With low cost airlines in the region growing dramatically and with Kuala
Lumpur and Bangkok at that point both seemingly intent on installing some
sort of stand alone LCT facility, Changi was faced with the real prospect of
losing out in that segment, too.
It also seems to chime in with a philosophy of countering the ageing process
of the airport by a variety of means – upgrading, providing completely new
facilities and adopting measures to provide a high level of customer service.
Interestingly, when Changi did decide to go ahead with the LCT it also
opened a commercially important persons terminal, emphasising this belt
and braces approach to the demands of its clientele!
CAAS funded and opened the LCT in Mar-06 at a cost of SGD45 million (then
USD28 million), somewhat less than Kuala Lumpur’s. It is also considerably
smaller, with an initial capacity of just 2.7 million passengers annually
(although it can be expanded to handle 5.0 million), within a 25,000 square
foot area: about one tenth the size of T1. LCCs by then accounted for 10%
of total traffic at Singapore Changi. Only two years before, there were no
LCC operations at all there.
The terminal was expected to break even in a few years and offered up to
50% lower charges for check-in counters and office rentals than Changi’s
existing Terminals 1 and 2. Additionally, no aerobridge charges are made, as
they are not provided (anchor tenant Tiger Airways says this saves it over
SGD1 million per annum). However, there is no difference in the landing and
parking charges between the main terminals and the LCT, be it for full
service carriers (who have yet to take up the offer to use it) or low cost
carriers, on the basis that the carriers use the same airside facilities such as
the runways and taxiways.
It opened with only one confirmed tenant, Tiger (part-owned by SIA and the
only airline to express any interest before the terminal was built – in 2004 so that it was dubbed the Tiger terminal), but quickly attracted service from
Cebu Pacific.
The local LCC sector has not embraced the terminal entirely, however. The
combined Valuair and Jetstar Asia (in which Qantas has a 49% stake),
elected to forego the less expensive facility, believing that the revenue
implications of staying in the main terminal outweighed the cost benefits of
relocating.
Despite this setback, Tiger Airways’ growth at the time meant expansion of
this comparatively small, simply designed and cheap LCC terminal might be
required sooner rather than later. The Singaporean Transport Ministry
expected the terminal to reach one million passengers by the end of 2006
and forecast the volume could rise even further, with current negotiations
with Malaysia on liberalising the bilateral air services agreement and the
proposed 'open skies' agreement between ASEAN countries and China.
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Cheerful and interesting
Situated on the Airport Boulevard, the terminal is designed to provide a low
cost operating environment to suit the business models of LCCs. The singlestory modular design, described in corporate literature as ‘cheerful and
interesting’ consists of two linked functional single-storey buildings with no
travelators, escalators, lifts or aerobridges, no seats at the six gate waiting
area and a simple baggage handling system with no individual flight sorting
facility. This design should facilitate seamless passenger flow as arrival and
departure procedures are processed in separate units. It does include
facilities such as foreign exchange services, Internet facilities, duty-free
shopping, and food and beverage outlets. For the first time, passengers
have to walk through the equatorial heat to their aircraft, but only for 20
metres.
Other associated works include a surface car park, taxiway and aircraft
parking stands, and there is a shuttle bus connection to T1/2 where landside
passengers can utilise the enhanced facilities for which Changi Airport is
renowned. The relative proximity of the LCT to the main terminals is a
distinct advantage to KLIA’s long distance drive between them.
Budget terminal entrance with shuttle bus transfer
In addition to some of the operational fees, office rentals are also up to 50%
below Terminals 1 and 2 levels. The success of retail/commercial activities at
the terminal, which account for 12% of total floor space, is important not
only to Changi but to other regional airports with similar plans. Some 3,000
sq m was put aside (10,000 sq ft out of 25,000 sq ft) for concession
facilities.
Changi Airport management visited Europe to view LCAs there before
awarding the design & build contract in Jan-05 for commencement in Mar05. One of the airports visited was Liverpool, a subject of the case studies in
Chapter 3.
There were considerable HR issues to tackle. Changi Airport Authority
reportedly worked with ground handling agents, unions and other agencies:
“to change the mindset (presumably of the workers) to accept multi-tasking,
and to ensure safe and smooth passenger flow, thereby improving the LCCs’
operational efficiency.”
As found in other LCT examples (e.g. Geneva, Marseille), the intention was
to pass on reduced costs to passengers through the application of lower
operational fees within the terminal. There was no equivalent outcry from
network airlines, but many of them fly mid to long-haul routes out of
Singapore that are outside the scope of the LCCs anyway. Potentially,
though, there might have been a dilemma in managing relations with
existing full service carriers on shorter routes and they were given the
option of using the LCT. IATA, supported by some existing full service
operators insisted, as at Geneva (which became a benchmark for these
terminals), that the pricing policy for the new terminal and access provided
should be non-discriminatory and open to everyone.
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Regarding the timing of the development and the ‘race’ to have first LCT in
the region – which it just lost - Singapore has been at the epicentre of the
region’s aviation drive for many years. However, it was handicapped in the
drive to gain supremacy in the low cost movement – which it feels will be
one of the key drivers of growth – by not being host to one of the leading
regional LCCs. Therefore, it felt that it needed to offer a receptive operating
environment, a commitment to provide dedicated LCT facilities and prompt
decision-making.
However, Singapore did lose some of its early advantage of making a quick
decision on building the terminal, while the row raged in Kuala Lumpur
between MAHB (Malaysia Airports) and AirAsia about where that terminal
would be located. The KLIA terminal was completed with almost indecent
haste, to the extent that they opened on almost the same day.
Just two airline clients in 2007 but the potential for foreign export
proves its value
As we move into mid-2007 the Budget Terminal has two clients: Tiger
Airways, which is still there and serves 16 destinations, and Cebu Pacific, the
Philippines based LCC, with three routes. Thus the terminal remains heavily
weighted towards a single carrier, and the risks therein, in the manner of a
whole host of European LCAs.
According to the CAAS, in its first year of operations, the terminal not only
delivered ‘healthy passenger traffic growth’, but also good growth in retail
sales, with retail and F&B revenues increasing by 80% and 60 percent,
respectively compared to this time last year.
1.36 million passengers passed through the terminal during the year Mar06/Mar-07 (these are the latest figures available from CAAS) and there was
a 120% increase in weekly flights from 124 to 276. Monthly traffic increased
from an average of 72,000 to more than 130,000, with a peak of 173,000 in
Dec-06.
Tiger Airways operates 250 of the 276 weekly flights. 14.6% of all weekly
flights at Changi are now operated by LCCs (Mar-07), up from 10.5% in Apr06. But not all budget airlines use the terminal, and 290 weekly frequencies
are flown by other no-frills airlines from other terminals (including AirAsia’s
Thai affiliate).
Tiger leaps up the capacity tree
The further development of the terminal may be influenced by Tiger Airways
entry into the Australia domestic market. The airline has been granted
permission to establish a locally managed airline in the Northern territory
although its main base may be Melbourne. If it is able to penetrate this
market, it could also in time provide opposition to incumbent carriers on the
main Singapore routes out of Australia, using Singapore as a hub in a similar
fashion to how AirAsia intends to at Kuala Lumpur with its long-haul venture.
Tiger Airways now operates nine A320-200 aircraft up from four in 2005 and
expects delivery of three more in Summer 2007, and a further eight new
A320s between 2008 and 2010. The airline secured a USD100 million loan
facility, over up to four years, from BNP Paribas to finance pre-delivery
deposits for this latest batch. At the Paris Air Show in Jun-07 Tiger signed an
MoU to buy up to 70 A320s by 2014, instantly catapulting it up the Asian
LCC capacity league table (see chart below). The airline is now positioning
for an IPO in 2008/9.
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Asia Pacific Middle East LCCs: by 2012 (total seats in fleet)
Total Seats in Fleet
AirAsia
Lion
Virgin Blue
Jetstar
Deccan
Indigo
Oasis Hong Kong
Tiger Airways
Adam Air
SpiceJet
Cebu Pacific
Mandala Airlines
GoAir
Air India Express
Viva Macau
Spring Airlines
One-Two-Go
East Star
Nok Air
Skymark Airlines
-
5,000
10,000 15,000 20,000 25,000 30,000 35,000 40,000
Current fleet
2012
Source: Centre for Asia Pacific Aviation * AirAsia includes AirAsia X
One interesting development, referred to at the beginning of this section, is
that Changi Airports International (CAI), the CAAS foreign airport investorcum-operator, has responded with its consortium partner Tata (India) to the
Karnataka State Government’s request for EOIs to upgrade and operate the
small Shimoga, Gulbarga and Bijapur airports. CAI is convinced that it can
‘sell’ the Changi Budget Terminal model, which it believes to have been very
successful and regards as a suitable model for these kinds of airports in
India. Given the boom in ‘LCCs’ in India, the BT model could be well suited
for the Indian airport market.
“And the winner is…”
So, which terminal of the two neighbouring rivals can claim to have had
more success? The non-conclusive answer is that Changi’s wins on non-aero
revenues. KLIA’s LCT wins on passenger growth. Carrier diversity is a
problem at both, but then most European LCTs and LCAs are also supported
by just one or two principal budget airlines with big networks. Ironically it is
the older ‘redbrick’ airports that often really offer a greater choice of budget
airline where they have been able to find a way of accommodating their cost
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demands. Singapore’s terminal was a little cheaper but on the other hand
KLIA got a much bigger facility, even if it is inconvenient compared to
Singapore’s. Both parties would probably agree on a honourable draw.
Key Points
•
•
•
•
•
•
•
The CAAS was able to make a quicker decision than at Kuala
Lumpur, helped by the lack of complication from two competing
airports but the haste with which the KLIA terminal made up for
previous indecisiveness;
The location of the terminal with regard to the others is much
better than at Kuala Lumpur;
A major factor in the decision was the needs of one airline (as at
Kuala Lumpur also), which can be dangerous but that airline is
expanding rapidly;
It lags KLIA in terms of passenger operations and throughput;
Retail sales, however, have been higher and that part of the plan
has worked well;
The majority of budget airlines do not use it; and
Again as with KLIA, the experiment can now be used as a model for
export for the international division of the operator.
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6.3 Thailand
- Bangkok’s Don Mueang airport – uncertainty, indecision and
vacillation
In Thailand, managers at Airports of Thailand (AoT) began to examine
options for the provision of tailored facilities for low cost carriers in 2004. In
Sep-05 AOT reorganised its administrative structure into three separate
business units:
•
•
•
New Bangkok International Airport (NBIA);
Bangkok’s Don Mueang Airport, which had provided service to
airlines for 46 years and had become the world’s 18th busiest
airport with 40 million p.p.a.; and
Chiang Mai, Chiang Rai, Hat Yai and Phuket airports.
Thailand’s air transport sector had completed a transitional period, with AOT,
operator of the country’s main airports, going through a successful IPO (Feb04) on the Thai Stock Exchange. Most of Thailand’s air traffic goes through
Bangkok, where the ageing, constrained, Don Mueang Airport was incapable
of handling the growth in the national aviation sector.
Accordingly, New Bangkok International Airport (NBIA), otherwise known as
Suvarnabhumi, was constructed at a cost of USD5.6 billion. NBIA was
designed to handle 45 million passengers per year initially, rising to 54
million after expansion, thence to 100 million. It was scheduled to be
completed in Jan-06, four months late, then Mar-06, but ended up opening
on 28-Sep-06. And its lateness was just the beginning of the government’s
problems.
Growth of LCCs has been quite dramatic in Thailand, pushing market share
well into double figures by 2005. The LCCs are Nok Air, a Thai Airways
subsidiary, One-Two-Go and Thai AirAsia, subsidiary of the Malaysian LCC.
At one point it was thought that Don Mueang would become an LCC/charter
airline base. Don Mueang could comfortably handle 20 million passengers
annually and, if developed into an LCC base, it might realistically challenge
the new-build LCC terminals at Kuala Lumpur and Singapore for regional
supremacy.
The nature of its future role was again changed when a decision was taken
to move only part of Don Mueang’s operations to NBIA in the first instance
and to retain LCC, charter and private jet operations at Don Mueang and
offer heavy MRO services. Then it was changed yet again – all traffic at Don
Mueang would be transferred to NBIA with the former remaining open only
for military and charter services – despite lobbying by LCCs, who wanted to
remain there, an echo of the situation in Kuala Lumpur.
‘Substandard services’ were quickly identified and the Thai LCCs, which
collectively asked the government if they could transfer back to Don Mueang
as maintaining two airports was not cost effective. The main talking points
were still what to do with Don Mueang, with aircraft maintenance and
charter flights now popular proposals; how quickly NBIA might be expanded
and whether it should become an ‘airport city’; how it might reinvigorate
Thailand’s role in the global aviation industry; the smooth change over from
Don Mueang; and whether the charging structure was right at NBIA and
whether charges should increase.
These debates were superseded by problems which began to surface at the
new facility from Dec-06, as illustrated in this timeline:
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Bangkok Airport timeline
Date
Dec-06
Event
Five critical issues are identified at NBIA: Noise pollution; Passenger
terminal safety; Slow freight handling; Mass transport system from
airport to the city; Management of the area surrounding the airport.
AoT recommends partial closure to tackle infrastructure problems.
National Legislative Assembly, a body formed after the Sep-06 coup,
reports irregularities in almost all the airport’s contracts. CAA will not
give NBIA a permanent operating certificate. Study by AoT favours
immediate reopening of Don Mueang to serve only non-connecting
LCC services, then all domestic and LCC operations while
government prefers to maintain NBIA exclusively as reopening DM
would postpone NBIA second stage development and defer third
stage. Tentative date for DM to reopen is set at 15-Mar-07, domestic
services only, no international connections.
Jan-07
Thai Transport Minister states more time is needed to consider the
DM reopening proposal. Cabinet has not approved the decision.
IATA opposes the move, as it will ‘undermine Thailand’s hub
ambitions’. Carriers are split. AirAsia’s CEO calls on Thai
Government to reopen DM for domestic and international services
or build a separate terminal for LCCs at NBIA. Obvious design and
congestion problems with runways and taxiways at NBIA. CAA still
reluctant to award an ICAO Aerodrome Certificate now on safety
grounds. 100 cracks identified in the runway and taxiways caused by
underground water and poor quality of construction materials – may
have to be shut down for repairs. AoT Chairman resigns.
Feb-07
DM will be reopened for international and domestic services so that
repairs can be conducted at NBIA. Cabinet decides to maintain two
international airports. Airlines had only prepared for DM reopening
for domestic services. IATA still against it. Bangkok Airways insists
most carriers want to go back to DM. NBIA may be closed entirely
for repairs according to government, then it changes its mind and
gives airlines freedom to make their own choice about moving to
DM. Prime Minister backtracks on plans to make DM the second
international airport. Airport committee will undertake a six-month
review. 90 airlines decline to resume service at DM. AoT reveals that
in the three months ended 31-Dec-06 both Ebit and net profit
reduced by over 50% and 147% increase in operating expenses
brought about by opening of NBIA. Stock market responds positively
to anticipated reopening of DM despite projected running costs of
two airports. DM to reopen on 25-Mar-07.
Mar-07
IATA calls on AoT to cancel 15% increase in landing and parking
charges in Apr-07 following increase of 40% in passenger service
charges and doubling of domestic ones in Feb-07. A total of only 71
domestic and charter services without international connections,
operated by Nok Air, One Two Go and Thai Airways commence
operating out of Don Mueang, reducing traffic at Suvarnabhumi by
17%.
May-07
AoT is reportedly losing approximately USD2.1 million per month in
operating Bangkok Don Mueang Airport, following the airport’s
reopening. Underutilisation is a concern for AoT, with the airport
processing only around 18,000 passengers daily, or 12% of capacity.
Prior to the airport's closure last year, Don Mueang handled up to 39
million passengers p/a, and between 700 and 800 services daily,
approximately six times the current usage. AoT reveals net profit fell
by 88% in fiscal second quarter to 31-Mar-07 due to NBIA/DM
issues, while passenger traffic is up by 7.7% driven by LCCs.
Jun-07
Thai Board of Airline Representatives will request the next elected
government to revert to operating one Bangkok airport, NBIA, to
improve Bangkok’s competitiveness. BAR will also propose that
domestic services from Don Mueang be suspended, and the facility
utilised solely for charter, non-commercial and special flights on the
basis that two airports is not a good solution because ‘airlines cannot
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move operations and people around.’ AoT announces its 2006/07 net
profit will fall short of last year's USD300 million, due to higher costs
at NBIA and the reopening of DM.
Jul-07
IATA safety study of NBIA finds that security standards are ‘unsafe.’
AOT announces details of a proposed new LCC Terminal at NBIA.
Construction of the facility is expected to cost USD15.7 million and
could be completed in 16 months from commencement. It would
have a capacity of 10-15 million passengers.
So, what next for Don Mueang? The 92-year-old airport once again
faces an uncertain future. Once Don Mueang reopened, it became
difficult to close it again, despite the reservations of airlines – there
are simply too many problems at NBIA and new ones seem to be
discovered every month. Even then one wonders if the airlines
themselves know what they want. Some were calling for Don Mueang
to be reopened (specifically for LCCs) even before NBIA opened
because of the higher costs at NBIA.
Sep-07
AoT announced it would “soon propose” to the Revenue
Subcommittee a plan to reopen Don Mueang Airport as an
international facility for LCCs, as part of its plan to boost earnings.
If the plan were approved, the International Terminal 1 at Don
Mueang would be reopened. The rationale put forward was that
“LCCs want minimum turnaround time. At Don Mueang, they can
operate with fewer officers, it is faster to check in, the runways are
shorter, and it is more accessible than Suvarnabhumi (NBIA).
Overall, it should reduce their operating cost and they should not
mind the fees.” In the light of all the previous twists and turns it
remains to be seen if this proposal will become actuality.
Nov-07
The Transport Ministry – its hand forced by increasing congestion at
Suvarnabhumi – announces its support for re-opening Don Mueang
to international services, even ahead of the completion of an ICAO
feasibility study on the issue. Outgoing Minister of Transport Theera
Haocharoen called for the issue to be resolved before the end of his
term, adding that the decision on which airport to use would fall to
the individual airlines.
Thai AirAsia, for one, said it would remain at the newer gateway facility,
next to which it recently moved its head office. Nok would presumably move
its few international flights to Don Mueang, where it operates the bulk of its
mostly domestic schedule. If Thai AirAsia were to remain at Suvarnabhumi,
it is uncertain how much the of the new gateway’s congestion would be
eased and AoT would find itself looking for new solutions.
One possibility that was mooted before the full reopening of Don Mueang is
separate LCT. Either way, AoT faces further investment in Bangkok. As for
NBIA its initial capacity, at 45 million, was hopelessly inadequate given that
almost 43 million people used the Bangkok airports last year and that
growth continues at close to 10% per annum.
The prospect of Don Mueang being a maintenance centre would only be to
put it into direct competition with established MRO operations in Hong Kong,
Singapore and China.
Key Points
•
•
While Bangkok’s hub prospects are important (and heavily
promoted by IATA), growth was coming mainly from the LCC sector
and this appears to have been overlooked;
There was insufficient consultations with LCCs, the opposite of what
happened in Malaysia;
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•
•
The dramatic change of government did not help. The previous
Prime Minister rushed NBIA’s opening and the closure of DM, then
was no longer there to deal with the repercussions; and
The government is still deciding what role Don Mueang should
have, even though many believe it was obviously an LCA just
waiting to come on line in a similar role to that of Stansted in the
UK and easily able to capably handle 20 million p.p.a. Reopening it
to international and domestic flights could cost less than the USD15
million estimated bill for an NBIA LCT and it would have saved
much confusion. The government may ultimately do that, but the
delay may mean that critical LCC Thai AirAsia maintains its
presence at Suvarnabhumi, where it recently moved its offices.
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6.4 Macau Airport
– Las Vegas of Asia and doorway to China
Macau SAR (Special Administrative Region) is experiencing a rapid increase
in GDP, as much as 28% in 2004 although it reduced to single digits in 2005
and 2006. Casinos, hotels and resorts have been built as Macau takes on the
mantle of the ‘Las Vegas of Asia’.
Macau holds around a 5% share of total passenger traffic in the Pearl River
Delta region, which is dominated by Hong Kong with around 49%.
Macau Airport, a corporatised entity, is jointly held by the Macau
government, the Tourism department and various local and Mainland
businesses and institutions, operated on a 25-year lease.
Macau Airport proposes itself as lower cost entry point to the Mainland China
market. This is significant because Hong Kong International Airport (“The
gateway of China and Asia’s Superhub” according to its own advertising),
with close to 44 million passengers annually, challenged by Guangzhou,
Shanghai and others, has continued to concentrate on expanding its present
earnings base, and has no plans to invest in low cost facilities.
Indeed, the Airport Authority of Hong Kong has spent HKD2 billion on a
140,000 sq m second terminal development, “SkyPlaza,” to serve as a focal
point for multi-modal transport between Hong Kong and the mainland. It is
part of the larger “SkyCity” development features high standard business
facilities, exhibition centre, and a 30,000 sq m retail and food centre.
Macau Airport was awarded The Centre for Asia Pacific Aviation’s Asia Pacific
Airport of the Year, 2004 for ‘undertaking aggressive marketing to reposition
the airport effectively, despite strong local competition, and establishing
itself as the most attractive LCC airport in the region, with the first north
Asian low cost airline operations.’
The airport only opened as recently as 1995, is operating under capacity
presently (five million passengers in 2006, +17% and, in 2007 up a further
11% to 5.5 million) and has the opportunity for future expansion. It
announced plans to double its airport capacity to 12 million passengers
annually within the next three years to accommodate increasing demand.
This, essentially, is the airport’s unique selling proposition, as a flexible
alternative to some of the region’s more congested international airports and
it offers world famous gambling facilities in addition. There is a broad mix of
airlines operating there including Air Macau, Xiamen Airlines and Shanghai
Airlines (PR of China), AirAsia, Tiger Airways and Transasia, Hainan Airlines
and EVA Air of Taiwan.
Only AirAsia, Tiger and Transasia could be regarded as LCCs per se,
although Air Macau is establishing its own JV LCC, Macau Asia Express, to
operate alongside Viva Macau, a budget airline that uses B767 equipment on
medium to long-haul flights and which might start flying to Europe and the
US. Air Macau was founded with a 25-year concession to be the sole air
carrier but had demonstrated little desire to take risks.
Already known as a gambling centre, Macau is marketing a future role as an
Asian entertainment and convention centre. In the USA and UK,
developments such as these have often gone hand in hand with an
expansion of low cost air services. The gaming businesses helped attract 22
million visitors in 2006 (+17.6%), 19 million of them from Mainland China or
Hong Kong. The number of Chinese visitors has increased since traditionally
high air ticket prices decreased following the introduction of LCC flights.
Gaming and resort centres are opening every few months.
In order to achieve its passenger traffic goals, Macau Airport is seeking to
attract more low cost airlines but also more international airlines that can
deposit passengers at Macau, leaving them to make their way separately to
Mainland China or the neighbouring region on LCCs after a stopover. (This
‘layover’ is a marketing tactic employed successfully by Singapore and Hong
Kong airports and supporting airlines like SIA and Cathay Pacific particularly
from the 1970s.)
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Because of the hybrid nature of the actual and potential business the
management will continue to improve the airport’s facilities by, for example,
launching customer VIP cards, rather than scaling them down. It considers
there is ample attraction for LCCs merely from the potential number of
Chinese visitors alone.
Commercially, the Macau promotion focuses on it being a vital link between
the Pearl River Delta, said to be the fastest growing economic region
globally, and the rest of the world. In the hinterland is Zhuhai, one of
China’s Special Economic Zones, and a regional manufacturing powerhouse.
But Zhuhai Airport, now under the control of the Airport Authority of Hong
Kong, challenges Macau directly, as it seeks to attract more Mainland airlines
itself.
The airport’s current USD500 million expansion project will be complete by
2012. The SAR Government has recently committed to invest USD750
million to expand facilities at the airport.
There is little in the present single terminal design and layout to suggest it is
a ‘low cost’ airport. There are high standard lounges available and a large
number of FBOs in the departure and mezzanine areas. Macau’s low cost
offer is based purely on its differentiation from Hong Kong and the high
charges there that relate to higher value network airline O&D or transit
passengers.
Key Points
•
•
•
Macau has identified and marketed itself as a low cost airport
merely by differentiation from Hong Kong, which could not be so
described in any way and which has no apparent desire to mimic
the approach of Singapore and Kuala Lumpur airports;
It has benefited from the establishment of airlines like Viva Macau
and will do so from Air Macau’s LCC subsidiary because there are as
yet hardly any Chinese LCCs, although there are private airlines. If
and when the Chinese LCCs materialise, expansion of flights could
be very rapid; and
There is little home-grown outbound traffic, as the population is
only 0.5 million. Future traffic will come from inbound gamblingminded visitors and on transfer passengers to and from the
Mainland. In the case of the former, the airport must not allow
standards to slip even if the clientele understand that it is a low
cost alternative to Hong Kong.
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175
6.5 Zhuhai Airport
– unnecessary opulence?
Airport Authority of Hong Kong (AAHK) invested HKD1.99 billion (USD240
million) in Apr-05 for a 35% stake in Hangzhou Xioshan Airport (HXIA),
China’s tenth largest and situated on the Mainland 180 km from Shanghai, in
Zhejiang province. This was its first investment outside the Hong Kong
Special Administrative Region.
Subsequently, AAHK completed a two-phase 20-year commercial
cooperation agreement with Zhuhai Airport in Guangdong province on the
west bank of the Pearl River, 35 miles from Hong Kong and bordering
Macau. Under Phase I of the agreement, AAHK would manage Zhuhai
Airport, and would then acquire a 55% shareholding in Phase II. AAHK
would guarantee a fixed business volume and annual earnings up to CNY300
million, and would help train airport management personnel. The USD900
million Zhuhai Airport was under-utilised – with annual capacity of 12 million
passengers, it handled 753,000, along with 13,000 tonnes of cargo, in 2004.
Zhuhai Airport reports total passenger numbers for the 12 months ended
31-Dec-07 rose to 1.0 million, while cargo volume increased to 10,000
tonnes. Zhuhai Airport aims to handle over 2 million passengers and 50,000
tonnes of cargo by 2011.
Zhuhai Locator Map
Zhuhai seems to have been envisaged as Hong Kong’s answer to the
regional LCC phenomenon. It would help AAHK segment its market
effectively, retaining premium business in Hong Kong, while providing a
lower cost alternative just across the Pearl River Delta. What is more,
Zhuhai would provide competition for Macau. The runway is notably long at
4,000 m and can comfortably handle every aircraft type.
Among its advantages are relatively uncrowded airspace and considerable
land area, though that seems to have been assigned for MRO, a logistics
hub, flight training, conferences and even recreation.
Zhuhai Airport
1st Edition, 2008
176
As with Macau there is nothing in the terminal design or features that
compares to LCAs in Europe, with an abundance of light.
The 90,000 sq m terminal is capable of handling 5,000 passengers per peak
hour and has 17 air bridges, a feature not often in vogue with LCCs. 30,000
sq m is given over to commercial use such as office leasing, catering, shops
and recreation.
Terminal Building Interior
Key Points
•
•
•
•
•
Zhuhai Airport is an example of a dramatically overbuilt airport
form another era, which may now take on a lease of life with the
arrival of a new generation of airlines;
Had Zhuhai Airport been designed and built by AAHK as an LCC
facility rather than the latter taking on a management contract at
an existing airport with a view to a later shareholding, its design
would have been different;
LCC sector standards may approach the rest of the world’s levels,
as CAAC has announced plans to ease regulations to promote the
development of domestic LCCs, including permitting operations to
secondary, tertiary and dual use airports, reforms to airport charges
and reducing route licensing and pricing restrictions. CAAC admits
the development of LCCs in China is still in the initial stage, and
that some small airlines still have fair complaints that they cannot
be successful LCCs, because of some of the policies and
regulations;
It is not yet clear whether AAHK is truly committed to the demands
that LCCs can make (but which are not yet so evident in North Asia)
- or whether Zhuhai is merely protection that gives another outlet
in the Pearl River region and that can be adapted to whatever is the
most pressing situation, be it LCC, network carrier or cargo
demand. After all it is a very similar airport to Macau; and
It may be the forerunner of other designated LCATs, for example
there are tentative plans to designate Tianjin Airport as a
secondary, LCC airport for Beijing and Guangzhou Baiyun
International Airport has launched a study to evaluate the
possibility of constructing an LCC terminal even though Tiger
Airways is its only LCC customer. This would be China’s
first dedicated LCT facility. GBIA is currently undergoing a USD2.2
billion expansion project, which includes construction of a new
international passenger terminal and a third runway to
accommodate A380 equipment.
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6.6 Diosdado Macapagal Airport (Clark)
– ‘accidental’ LCA threatened by arrival of flag carrier
A resurgent Philippine Airlines and increased flights by indigenous and
foreign LCCs have prompted a spurt in airport development in the
Philippines. President Arroyo announced that 29 new airports or terminals
would be opened, across the country by 2010. The direction that low cost
airports and terminals will take may be determined by the degree of success
of the Diosdado Macapagal airport, north of Manila.
The government of the Philippines has been promoting the Clark special
economic zone (linked with the Subic Freeport) – 50km north of metroManila – as a hub for low cost carriers for several years and has been in
discussions with a number of LCCs during that time for them to operate to
Diosdado Macapagal International Airport (DMIA), formerly the US Clark Air
Base.
Air Asia, Tiger Airways and local carrier Cebu Pacific are the main LCC users,
supplemented by Korea’s Asiana (the first international full-service operator
there) and regional airlines SEAIR, Hong Kong Express, Asian Spirit and CR
Airways/Rainbowjet, plus charter carrier Far Eastern Air Transport. Air Asia
and Tiger Airways have operated at DMIA since Apr-05 and SEAIR has a
franchise agreement with Tiger Airways.
The government’s objective was to grant unrestricted rights to over 50
airlines (it has an “open skies” policy for the airport), increasing the annual
passenger figure to 3.5 million by 2007, but these are the only users
presently.
Financed by a USD100 million bond issue, the 2,500 hectare airport may
eventually take much of the traffic currently handled by Manila’s Ninoy
Aquino International Airport (NAIA), which cannot accept new generation
long-haul aircraft like the A380 and which has been embroiled in a dispute
over the construction and use of its third terminal. With its long parallel
runways, suitable previously for regional base military operations, DMIA
could, and the 3.2 km runways are to be extended to 4 km for that purpose.
There is provision for a third runway in the future. An Executive Order
signed by the National Government has designated it as the Philippines
future premier gateway site.
The airport is owned and operated by the Clark International Airport
Corporation (CIAC), a subsidiary of the (military) Bases Conversion
Development Authority.
There is a Master Plan in place for the development of DMIA to 2025 and
beyond to ensure that short and medium term goals and decisions are
consistent with the long-term vision for DMIA, namely: To be the Best
International Service and Logistics Centre in the Asia-Pacific Region and the
future premier International Gateway Airport of the Philippines.
The growth of DMIA as a base for LCCs seems to have been coincidental to
its design rather than complementary and driven by the expansion of LCC
activity throughout the region generally rather than by any purposefully
decision by the CIAC.
There is a single passenger terminal building with several FBOS. The PHP2
billion (international) terminal expansion began in 2004 to extend the
capacity to 10,000 sq m with an additional 19 check-in counters and the
capability of processing up to three wide body aircraft concurrently. The
main passenger service feature addition was Duty Free outlets.
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178
Terminal Building
Since then, there has been a further expansion agreed, worth PHP56 million,
as DMIA will hit its capacity of two million passenger arrivals per annum by
2010. However, construction of a designated PHP2 billion budget terminal
(T2) is envisaged by then. One cloud on the horizon for LCCs is the
projected arrival of a rejuvenated Philippine Airlines (PAL), the country’s flag
carrier, at DMIA.
PAL, which has been profitable for eight consecutive years while under
creditor protection, will invest from USD30-50 million in putting up strategic
facilities at DMIA in preparation for the extension of PAL’s Manila operations
to Clark and the start of direct PAL service from DMIA to foreign
destinations. Having exited receivership in Oct-07, PAL plans direct service
from DMIA to international points - initially to Korea, Japan and China utilising new Airbus A320/A319 and the recently-ordered Boeing B777300ER due for delivery starting 2009. Locally there are political moves to try
to limit PAL to routes not flown by the budget airlines so they are not
‘drowned out’. Separately, Cebu Pacific is also planning a major expansion at
DMIA 19 .
Key Points
•
•
•
•
•
•
•
DMIA became a ‘low cost airport’ not by specific design but because
of the failings of Manila’s airport and the general growth of LCC
activity in the region;
Its main users now are LCCs but there has been no specific scheme
within the Master Plan to cater for them other than the proposed
T2, which should be an LCC terminal;
But even that proposal is brought into question by the potential
arrival of the restructured Philippine Airlines – now a potent
regional force;
Earlier examples of LCTs in this report have demonstrated how nonaeronautical revenue applications in particular can assist in the
financing of the airport but in this instance it seems to be the case
that the Mission Statement is still a very broad one;
Possibly, the completion of a specific terminal for LCCs, with
features incorporated that are useful to them, will identify DMIA as
a true LCA. The Philippines needs designated LCC facilities if it is
not to fall behind Singapore, Thailand and Malaysia, as it has done
before. In the long term LCC operations might even be better suited
to NAIA but there are no plans there either to build a new LCC
terminal or to make use of spare capacity at existing terminals; and
Designating DMIA and Subic Bay airports as ‘open skies’ zones –
which the government supports but incumbent airlines are against
– are valuable marketing tools – but clearly not a panacea.
Nonetheless, the airport should grow much more quickly, perhaps
at the expense of Manila Airport, where there is limited opportunity
for expansion.
19
The plans for PAL’s expansion at DMIA may have had some influence on Cebu
Pacific failing to receive regulatory approval to launch services from there to Hong
Kong, Macau and Bangkok (Aug-07).
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6.7 Melbourne
– Australasia’s busiest international airport to fight it out with
Avalon for the ever-expanding LCC business?
Deregulation of Australia’s aviation industry has led to the introduction of
LCC services and privatisation of its airports, which opened the door for LCCs
Jetstar and Virgin Blue to make domestic travel affordable for more of the
country’s citizens and visitors. In November 2007, Tiger Airways’ whollyowned subsidiary, further competitive fuel was added to the fire when Tiger
Australia, also commenced domestic services, based in Melbourne Airport.
Deregulation, subsequently complemented by airport privatisation, also gave
Macquarie Airports a boost; it has become the second largest airport
operator in the world, acquiring equity shares in many European airports in
addition to its operations at Sydney.
Australia, with less than 20 million residents, has a small population for its
geographic size, with most of the populace concentrated on large city-region
clusters mainly in the east and southeast. Before the advent of low cost
services, fares from the small townships to the cities were often so high as
to stifle demand.
Furthermore, tourists often found it prohibitive to venture outside the cities
and vacation hotspots, a situation that stunted traffic, contributing to the
unprofitability experienced by many airports. Since new airline entry in
2000, this situation has been reversed. However, one factor that has kept
LCC growth and profitability from their potential levels has been a lack of
secondary airports in the cities, other than Melbourne.
The birth of the national LCC sector can be put down to British entrepreneur
Sir Richard Branson’s decision to establish Virgin Blue (he was subsequently
joined in the venture by Australian investor Patrick Corporation. Virgin Blue
then partially floated in Dec-03 and is now majority owned by Toll Holdings,
Australia’s largest transport company). Watching Virgin Blue eat into its
market share, Qantas set up domestic LCC subsidiary Jetstar, having
previously established an international low cost subsidiary, Australian
Airlines, to fly mid- to long-haul international services on a lower cost/price
basis.
Australia has thus become a hot-bed of LCC activity and will be even more
so as Virgin Blue launches long-haul international flights and (possibly)
introduces a new ultra low cost model for selected routes, all at the same
time. Adding spice to the mix was the recent arrival of Singapore’s Tiger
Airways.
Melbourne International Airport
Thus Melbourne (MEL), Australia’s second busiest airport with around 21.5
million passengers per annum, is the right place to begin an assessment of
LCAT prospects in Australia.
The outlook for Melbourne Airport generally has improved after a difficult
few years that saw international service cutbacks by some key airlines.
MEL’s last remaining European carrier, Austrian Airlines, terminated services
in Apr-07. Many occidental airlines now use their alliance partners to feed
traffic into Australia via gateways such as Singapore, using codeshare
agreements in lieu of serving the city with their own equipment.
This trend has seen some movement back towards direct service, however,
although from a different type of carrier than formerly would land in MEL.
Now, capacity is being offered by Middle Eastern carriers (which offer
alternative hubs into Australia from Europe). Australia and Melbourne (or
Avalon) are also high on the service list for the new low cost long-haul
carriers, such as AirAsia X.
To lure international airlines into the airport, MEL recently announced a fiveyear pricing agreement with its international airlines, under which carriers
will be charged a flat AUD12.50 for each passenger arriving at the airport.
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MEL is currently the lowest-charging international airport in Australia.
Britain’s BAA is a shareholder (19.8%) at Melbourne since 1997 and, with
that organisation’s experience at London Stansted airport it should be in a
good position to capitalise on the improved environment for LCCs in
Australia. However, Ferrovial/BAA is divesting its international portfolio and
probably will not shape MEL’s strategy for long.
Long a full-service facility, MEL does seem to have a low cost future and one
that it might not have envisaged only a few years ago as indicated by the
decision by Tiger to base there. Tiger Airways will launch new budget
services to, initially, six destinations. These do not as yet include Sydney or
Brisbane.
MEL prepared for Tiger’s launch by designating one of the four terminals, the
reconstructed T4, for use by the LCC. Otherwise, T1 and T3, the other two
domestic terminals, are allocated to Qantas/Jetstar and Virgin Blue
respectively. T2 is the international terminal.
Previously (Dec-00) a domestic Express Terminal facility was opened for
Virgin Blue. Virgin had up until then been operating out of the International
terminal. It was the first additional passenger facility built there since 1971,
and was constructed with basic amenities such as a coffee shop.
Subsequently (Jul-02), as it grew, Virgin Blue also moved to the former
Ansett terminal, as it did at Sydney, owing to gate constraints.
From Ansett’s administrators, Melbourne Airport had acquired the former
Ansett Terminal – also known as the Southern Domestic Terminal – in May02 at a cost of AUD25 million, and subsequently upgraded it, leaving the
domestic Express Terminal to be employed in a freight capacity.
There is nothing about the terminals themselves that appears particularly
attractive to LCCs. Jetstar and Virgin Blue have to have a presence at
Melbourne although they do have alternatives in the area. Tiger Airway’s
decision to base at MEL appears to have been influenced by the Victoria
state’s skills base, its ‘approach to marketing’, and a ‘positive approach to
negotiations by state and airport’.
Tiger presumably opted for the full-service facility instead of the perhaps
more low cost-friendly airfields at Essendon and Avalon, on the basis of
commitments for financial/marketing support and the near-guaranteed
traffic base there.
Essendon was Melbourne’s premier airport until 1978 when Tullamarine
Airport (MEL) succeeded it. It declined throughout the 1980s and 90s,
leaving it with few commercial services and it was kept going by emergency
(police, air ambulance), Flying Doctor and general aviation services.
Subsequently it acquired corporate jet services and occasional charter flights
and became a maintenance centre.
Essendon is owned by Linfox, an Australian company that bills itself as Asia
Pacific’s largest supply-chain solutions company, jointly with Becton
Corporation. Apart from the emergency and MRO services there is extensive
commercial property development on and around the 350 hectare site, for
which the airport provides logistics access. More than half the 150
businesses on the site are non-aviation.
Despite its location to the north of and closer to the city than MEL, and
65,000 annual aircraft movements, Melbourne’s original airport is not likely
to regain much in the way of services with LCCs or any other type of
commercial airline. Having meandered along without any direction for
several years, its direction is now very clear – logistics businesses - and its
infrastructure is inadequate for serious commercial airline passenger
operations. Local residents wish to close it down for not having a safety
buffer zone. In 2004, a development plan was submitted for a 61,000 sq m
retail centre to capitalise on the success of a similar scheme at Moorabbin
Airport, a general aviation and flight-training airport to the affluent
southeast of Melbourne.
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Avalon Airport
The other Melbourne region airport owned and operated by Linfox is Avalon
Airport, located near Geelong. Avalon was formerly a training facility for
Qantas and some other international airlines, with a single, but very long
runway. It has much better prospects for LCC services, a fact that perhaps
was responsible for Melbourne Airport’s aggressive advertising campaign
that disparaged the newcomer as offering ‘less comfort and service’, with
airfares ‘no less than at Tullamarine.’
Situated on Port Phillip Bay, 55km southwest of Melbourne, near the State of
Victoria’s second city, Geelong. With local support, Jetstar established
Avalon as a base for operations to east coast capital cities and other routes
in 2004, so as to not cannibalise parent Qantas’ sales from Melbourne.
Presently, no other low cost operator currently uses Avalon and the only
other airline to offer commercial services at all is Sharp Airlines, a small
regional carrier. However, AirAsia X has announced that the airport may be
its second Australian destination, after Gold Coast, with service to
commence as soon as some facility modifications are completed (it will
require international facilities) and the carrier has secured a second aircraft.
Avalon was previously transformed with a modest AUD5 million facelift in
anticipation of Jetstar’s arrival, when it began operations in May-04. Since
then it has consistently operated services to Sydney, Brisbane, Adelaide and
Perth, now supplemented with occasional international flights. However, the
Qantas affiliate retains the bulk of its Melbourne operations at MEL, from
where it flies to secondary level and vacation cities with a bigger
international programme.
Avalon’s highly functional 600 sqm terminal building was refurbished and a
500-space car park added, to be extended incrementally as required. Public
transport exists to Melbourne, but not to Geelong, and in common with
many other LCAs, access will continue mainly to be by personal vehicle,
generating growing carparking revenues, supported by the expansion of
short stay holidays. The terminal operates with just one gate for arrivals and
one for departures, with three check-in counters, a lounge, cafeteria and
covered walkways. The modular development can be expanded to include
retail components in line with carriers’ progress there.
Avalon Check-in
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182
Avalon Departure Terminal
As for the future Avalon was once identified as a new site for Melbourne’s
wholesale fruit & vegetable markets, although the build-up of Jetstar and
AirAsia X make it unlikely that eventuality will come to pass. Linfox is
confident the airport can capture 10% of Melbourne’s domestic air market by
2010 and 20% by 2017: up to 3.4 million passengers, while also building up
revenues from freight, logistics, aerospace, pilot training, maintenance,
modification and display activities.
Key Points
•
•
•
•
•
•
Melbourne is the only Australian city to have two airports offering
major passenger services;
MEL is acquiring a future need to provide for LCCs that it could not
have envisaged, being suddenly home to three important carriers
while its international/full service traffic is static;
It has not fully prepared for this scenario and the LCCs are spread
between terminals, intermingling with other carriers;
If and when the competition causes costs – including inefficiency
costs – to be examined in more detail, Avalon Airport might come
into its own;
Essendon Airport is out of the equation because Linfox is not
committed to commercial passenger services there; and
The driving force will be Tiger Airways and AirAsia X and what
cost/service mix they demand as they seek to break up what had
become a comfortable, if not cosy, LCC duopoly.
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6.8 Newcastle Airport
– LCA aids the tourism appeal of an industrial city-region
Another Australian airport that has benefited from LCC services is Newcastle,
Australia’s sixth largest city (city-region population 470,000, with a
catchment approaching 750,000). Newcastle is a coal mining and industrial
town 150 kilometres northeast of Sydney, and its airport potentially serves a
similar purpose to Avalon’s in the case of Melbourne, although the distance
between towns is greater.
Newcastle Airport is a joint-use (military/civil) airport about 45 minutes’
drive to the north of Newcastle. After a brief spell as an international low
cost gateway, when New Zealand’s Freedom Air commenced operating in
2001 (only to terminate in 2003), and some operations by the short-lived
LCC, Impulse Airlines, Newcastle Airport was a beneficiary of the
introduction of domestic low cost services by Virgin Blue in 2003.
The later arrival of Jetstar saw both carriers commence operations at
Newcastle, which had the effect of rapidly growing the local market, while
not adversely affecting the existing regional Qantas Link loads. The most
recent arrival is Tiger Airways, with services from Melbourne.
Other airlines currently operating are Brindabella Airlines, a Qantas affiliate;
NorfolkAir, a government based enterprise operated by the Norfolk Island
government; and Aeropelican, a regional commuter carrier that flies the
short distance to Sydney’s domestic terminal.
At Newcastle, the entry of LCCs helped bring about a doubling of passengers
between 2003 and 2004, to 460,000, attracting some from Sydney’s
extended northern suburbs as well as passengers from regional centres such
as Forster and Port Macquarie, as well as from the cities of Armdale and
Tamworth, up to 200 miles away. This was a considerably greater catchment
area than that envisaged by the management. Apart from its industrial
credentials, Newcastle is also a tourist town with nearby wineries, which
became a more readily reachable attraction.
The growth in service – as well as a 2004 AUD120,000 tourism campaign
aimed specifically at Victoria State inhabitants – helped the city centre
report gains in tourism of up to 30 percent.
Following a risk analysis, plans were drawn up for an AUD14.5 million
terminal and multi-storey car park expansion, later increased to AUD20
million. Specifically, inexpensive car parking was identified as enticing more
passengers from the Greater Sydney area. There are now 1,200 covered and
external car park places with varying pricing options. The plans also
included: an arrivals area, a new departures area, expansion of the check-in
area
and
new
retail
facilities
with
an
expanded
range
of
food, beverage outlets and convenience items.
The existing facility was a small modern café and bar. There are now three
FBOs plus a news-stand/book/gift store. Business facilities have been
introduced in the form of meeting room hire and wi-fi access.
Present day terminal map: Newcastle Airport
1st Edition, 2008
184
Newcastle Airport Limited operates as a non-profit company limited by
guarantee, owned by two local councils. The Australian International
Aerospace Centre is co-located there within the boundaries of RAAF
Williamtown and the airport. Jetstar opened an A320 heavy maintenance
base, securing its long-term future there. The Newcastle and Port Stephens
councils have a 40-year lease to 2045 on 23 hectares of land that comprise
the civil operations of the airport (terminal building, apron and adjoining
land).
Currently all services are domestic but the airport envisages the
commencement of international services within the next two years. AirAsia X
is reported to be considering Newcastle for services, after it has taken more
aircraft and initiated operations to Gold Coast and probably Avalon.
The solid performance of the services it currently has make international
operations seem conceivable, as traffic has continued to grow dynamically,
by 65% between 2004 and 2005 and by 18% between 2005 and 2006 to
892,000 - 50,000 more than the forecast. The airport is now projecting 1
million passengers in the very near future, a remarkable growth trajectory.
To facilitate continuing growth, the authority has undertaken an upgrade to
car parking facilities and a drafted a 20-year Master Plan.
The Master Plan will consider:
•
•
•
•
•
•
The operational needs of the air force;
Civil aviation demand and likely growth, including changes in
aircraft types, technology and use;
Infrastructure requirements to accommodate growing demand,
including car parking, transport options, all services and amenities;
Land use options, such as where car parking, office
accommodation, additional hangars or expanded aviation apron will
most likely be required;
Development controls and staging; and
Potential environmental impacts.
At least partly as a consequence of the growth of the airport, investment in
the local Hunter Valley area has increased and includes The Vintage, an
AUD450 million residential development, another AUD60 million residential
development at Port Stephens and the AUD40 million Honeysuckle
development in Newcastle. The regional development authority also reports
some evidence of a population shift into the area despite the fact that
Newcastle was struggling to replace key employers like BHP Billiton, which
had left.
Key Points
•
•
•
•
•
•
•
•
The decision to develop Newcastle had an element of risk in that
industry was in decline and the region’s tourist appeal untested;
It has succeeded by convincing drivers that flying is quicker and
cheaper, resulting in an increase in leisure and VFR visitors and
greater uptake of services outbound by leisure and business
passengers for whom the only real alternative was a long drive to
Sydney;
Development of the airport has barely kept pace with passenger
growth and the Draft Master Plan is several years later than it
might have been;
Cargo services are underdeveloped;
The long-term relationship with the military is unclear;
Newcastle has done well considering that Sydney Airport continues
to expand solidly, recording 6.4% passenger growth in the 12
months ended Jun-07;
As at Avalon, the opportunities for long haul, low cost operations
look promising. For example entry by AirAsia X would take the
airport to a new level; and
Newcastle Airport ticks all the boxes for successful development of
a low cost airport, securing services within its original framework,
encouraging new demand for inward tourism where it exists (as it
does here), and offering a unique proposition that has attracted
outbound travellers from a wide catchment area.
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6.9 Gold Coast Airport
– Australia’s fastest growing airport benefits from runway
extension
The Gold Coast and Northern New South Wales region is one of
Australia's most popular tourism destinations.
Queensland’s Gold Coast Airport at Coolangatta is only 50 miles (80 km)
south of Brisbane, but despite the exceptional levels of growth recorded
at Brisbane Airport (+9% for the year ended Jun-07), it is more than
holding its own by targeting LCCs.
Brisbane is one of the toughest competitors an airport could have at
present, but Gold Coast Airport equally benefits from the fact that not
only is Queensland growing rapidly in its capacity as a tourism and
business destination, but over 1,500 new immigrants are settling in the
state every week.
The airport straddles the state boundary between Queensland and New
South Wales. It is now a wholly owned subsidiary of Queensland Airports
Limited (QAL, which also owns the airports in Mount Isa and Townsville),
having been privatised in 1998 when most of Australia’s airports were
sold off. It has since gone through several ownership changes.
The first years of the privatised entity were difficult because of, first, the
collapse of key tenant Ansett, and then the SARS epidemic. Its fortunes
started to change following the decision to seek approval for an AUD10
million, 458-metre runway extension, to attract more long-range flights
to distant Australian cities and to Asia. A Master Plan was finally
approved, two previous attempts having been disapproved by the
Federal Government. The runway extension finally opened in May-07. It
is 2500 m (8200 ft) and is complemented by a full-length parallel
taxiway.
The positive outlook of – and aggressive marketing by - the
management attracted airlines like Virgin Blue, which had set up its
initial base in the region, at Brisbane, and supported by Qantas Link.
Virgin Blue has been very much the driver of its success to date. The
Gold Coast is a leisure destination and previously suffered under the
Qantas and Ansett duopoly, as both carriers had high-cost operations
geared more towards business travel, a service portfolio that did not
make flying to Gold Coast feasible.
The advent of Virgin Blue created a situation in which passenger traffic
increased from 1.7 million to 2.3 million between 2001 and 2003,
quickly achieving 50% market share compared with 30% nationally.
Then Jetstar commenced operations in Feb-05.
International traffic also increased as the trans-Tasman Sea carrier
Freedom Air and Australian Airlines brought in foreign visitors, of which
there is still a high number of Indians, growing at 30% a year. The Gold
Coast tourism authorities opened an office in Mumbai to build on this
growth. The old Ansett terminal was redeveloped to handle Virgin Blue,
Freedom Air and Australian Airlines, thereby boosting per-passenger
spending, which tripled in three years. Subsequently, Terminal 2 was
expanded in 2004 in an AUD5 million project.
The airport, the facilities of which were part of an AUD25 million
infrastructure redevelopment programme intended to create a ‘global
gateway’ for tourism, business travel and shipment of freight to the
Pacific Rim, has since expanded to become the nation’s seventh largest,
and its fastest growing, with 3.5 million passengers in the full year
2005-06 (+11.5%) and further growth in the full year 2007, by 7.7%
year-on-year to 3.9 million passengers. Visitors to the region account for
approximately 80% of total Gold Coast Airport passengers, the majority
still originating from domestic destinations.
Apart from tourism, industry has been aided by the airport and the
region’s economic base has expanded to include ICT, food, marine and
health businesses.
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Gold Coast Airport
Source: GCAL
Improvements to the terminal have been largely cosmetic (T2 departure
lounge and car park extensions), but plans are now in hand to revamp
the terminal entirely at a cost of AUD100 million over two years. The
proposal is not without controversy because it does not include air
bridges. While European LCCs will often demand the exclusion of air
bridges to aid turnaround times it is not a feature that has yet caught on
in Australia and is regarded as ‘retro’ in the general media.
Comparisons have been drawn with a smaller Australian airport that
increased direct passenger service charge to pay for air bridges, and
with Brisbane, with its ‘world class’ facilities. The media have speculated
that the lack of jetbridges may hinder campaigns to get service from the
two biggest tourism growth markets – India and China. However, its
minimal facilities and associated charges were among the key reasons
Gold Coast won the distinction of being AirAsia X’s first destination.
The in-terminal facilities presently on offer reflect a desire to create a
mood or atmosphere concomitant with the region’s leisure proposal.
Consequently there is a variety of retail and FBO outlets backed up by
bright wall and floor colourings with little apparent skimping on style or
cost.
As with Avalon and Newcastle airports, Gold Coast experienced a sea
change in its business plan when Tiger Airways (as well as AirAsiaX)
commenced services in late 2007. Tiger operates out of Singapore’s LCT
where there are no air bridges; at Gold Coast, it operates at a similar,
newly refurbished terminal 3, adjacent to the main terminal. Qantas has
also been involved and the airport recently concluded an agreement
permitting Qantas and Jetstar to use the whole of the main terminal as a
common use one. Previously these airlines were limited to one end while
Virgin Blue used the other.
Six of the seven airlines operating at Gold Coast (AirAsia X; Freedom Air
(Air New Zealand LCC, soon to be phased out and replaced by Air New
Zealand from 30-Mar-08); Jetstar; Qantas; Pacific Blue (owned by Virgin
Blue); Tiger; and Virgin Blue, are LCCs. New direct air services are being
sought from Asia, India and the Middle East. The runway extension will
support them. Attracting airlines from these countries might change the
existing mix, but the airport will continue to focus on its low cost
strategy and profile.
Importantly for Gold Coast, AirAsiaX’s service also promotes domestic
connections with Virgin Blue, suggesting the eventual evolution of
greater domestic/international connectivity.
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Another development that is anticipated to win approval is an extension
of the Gold Coast Rail Line, which could lead to the construction of a
railway station at the airport.
Key Points
•
•
•
•
•
•
•
The Gold Coast Airport regards and promotes itself as
Australia’s number one low cost international airport;
It has done well to grow to its present level in the face of
serious competition from nearby Brisbane, which also benefits
from extensive Virgin Blue and Jetstar operations;
The airport shares with European LCAs the reluctance to
introduce air bridges. The management’s determination not to
incorporate them in the terminal revamp acknowledges the
highly significant part LCCs play in the business mix;
The owner has actively engaged with domestic airlines to help
cement its position as a flagship airport for the LCC sector;
At the same time, its growth has been driven by the popularity
of the region for leisure activities and as a magnet for émigrés;
The arrival of Tiger Airways, AirAsiaX and of, potentially,
foreign network/full service airlines could make future
development strategies more complex; and
It is heavily dependent on inbound leisure traffic, leading to a
system-wide directional imbalance.
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6.10 Sydney Airport
– an early example of a very basic LCT
Sydney Airport also has experience of a low cost terminal, and one that
was not dissimilar from the most basic European LCTs. In 2000, after
years of domination by Qantas and Ansett, which owned and operated
the domestic terminals, two new large jet airlines commenced
operations: Impulse Airlines (a regional and freight airline that
reinvented itself as an LCC in 2000) and Virgin Blue. While Ansett was
still flying there was inadequate airport capacity to accommodate the
newcomers.
Faced with popular demand for low cost travel, and on the verge of
privatisation, Sydney Airport Corporation constructed a new Express
Terminal in May-00 as part of its commitment to encouraging new
airline start-ups. It was situated within the domestic precinct of the
airport and the adjacent aircraft-parking apron was re-configured to
accommodate five B737-sized aircraft.
The new terminal was completed in just 56 days at a cost of AUD6
million. Its design reflected the operational and passenger processing
needs of its first two users, Impulse Airlines and Virgin Blue.
Passenger traffic through the terminal grew strongly as the two airlines
expanded their operations, attracting one million passengers by Mar-01
(half its design capacity), after only 275 days. The design and
construction of the terminal was in line with the specific (simple and
efficient) passenger service requirements of the new entrant airlines and
particularly those on the Sydney-Melbourne route, one of the world’s
busiest city pairs. It was essentially a narrow ‘tin shed’, with a direct
tarmac walk of about 50 metres to board the aircraft, with all baggage
handled manually. Following the sale of Impulse Airlines to Qantas (to
become Qantas Link, operating the B717s acquired by Impulse), Virgin
Blue became the dominant tenant.
Ansett Airlines collapsed in Sep-01, leaving its domestic terminal
virtually unused. During 2002, Virgin Blue’s rapidly expanding business
and passenger traffic placed strains on the limited capacity of the
Express Terminal. Following lengthy negotiations with the now privately
owned airport’s management, Virgin Blue moved to the former Ansett
Airlines Terminal, T2, in Dec-02.
The Express Terminal building still exists but is now closed and the
aircraft apron area is used for layover aircraft parking positions. The
negotiations addressed familiar themes – including considerably higher
rentals and a desire by management to use the in-place automated
baggage-handling systems.
Eventually, compromise was achieved,
following agreement on a scaled passenger charge, with lower rates
applying once thresholds were achieved.
Key Points
Sydney’s early example of a low cost terminal was influenced by a
sudden change in the domestic duopoly enjoyed by Qantas and Ansett,
both of which operated their own terminals, in favour of new-entrant
LCCs. The failure of Ansett in 2001 complicated matters, making its
terminal available to any airline that might need space at the hastily
erected domestic express terminal - as also did the absorption of
Impulse into Qantas. As a result, this limited capacity terminal ended up
with a role it was not originally designed for, while the budget passenger
airlines have since scaled up to a level of facility now more appropriate
to their circumstances.
The Gold Coast airport became what it is today as a direct result of mass
tourism. The Newcastle airport discovered inbound tourism almost by
accident, but has successfully used it, as well as local originating
demand, to grow services. And the Avalon airport – previously a military
and then a civil training and MRO facility - was not specifically planned
for LCC operations, but has developed LCC operations (albeit still mainly
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confined to Jetstar) because it is able to offer what no other Australian
city can – a second, complementary airport within striking distance of
much of the regional population.
These are not the only examples of the genre but they are the most apt.
Elsewhere, airports such as Ballina, Cairns, Coffs Harbour, Darwin,
Hamilton
Island,
Mackay,
Proserpine
(Whitsunday
Airport),
Rockhampton, Sunshine Coast, and Townsville have recorded passenger
increases of up to 70% as LCC services were introduced. The common
feature to these cities and regions is that they were not well served by
international flights, yet are appealing to independent leisure (and some
business) travellers, the most telling factor in the development of LCCs
and LCAs in Australia.
Budget airline flights have thus succeeded in opening up these formerly
isolated destinations to Australian domestic tourists but also to a new
generation of foreign independent travellers who previously might have
been restricted to a limited district such as the Sydney, Melbourne and
Perth metropolitan areas and/or a single and well-known inland vacation
resort like Alice Springs.
Even Canberra Airport once proposed itself as an LCA. Lying three hours
drive from central Sydney and somewhat less from the western suburbs,
the capital’s airfield regards itself as the ‘realistic alternative’ to more
airport development in Sydney. It points out that it is the only airport
around Sydney able to handle regular large passenger jet aircraft.
Indeed it promotes itself as Sydney’s second airport with low car parking
charges. Canberra sees its long-term role being fulfilled in the period
from 2012 onwards, when Sydney begins to reach design capacity.
Canberra’s three airlines are Brindabella, Virgin Blue and Qantas,
allowing it to claim some LCC input, but, as with Dublin, it is difficult to
imagine any government wishing to see its capital city airport dominated
by LCCs and the basic level of airport service that often goes with it.
This mindset would see Canberra classed as a full service airport,
appropriate to the city’s status. However, that could change if the
airport authority continues to shift its emphasis towards attracting
Sydney-based passengers, but fails to attract long-haul services.
It is unlikely that the very basic type of terminal design that Sydney
Airport employed in the face of an ‘emergency’ will be repeated today.
Australia’s airports have to deal with two separate developments, an
increase in budget operations, both short- and long-haul and a call to
increase inbound tourism from developing countries like India, Japan
and China. Potential visitors from these countries may not enjoy the
prospect of carrying their own baggage and walking large distances
across the tarmac; something that domestic and European travellers
have come to accept.
So a two-tier development pattern is likely to continue to emerge, with
the primary airports focusing their efforts on existing network airlines
and new entrants like Emirates and Etihad, while paying lip service to
the demands of the LCCs operating there. At the same time airports like
Avalon, Newcastle and Gold Coast will continue to cater for the LCCs and
the future for them looks rosy as the existing LCCs are joined by Tiger
Airways, AirAsia X, Virgin Blue’s possible Ultra Low Cost subsidiary.
And, given Australia’s open access domestic market, other airlines like
the recently announced Indonesia-based Lion Air could soon be players
in the market. For airports, LCC and others, this is all good news.
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Chapter 7
Prospects for the spread
of LCATs
This chapter focuses on some of the world’s emerging aviation arenas and
gauges the likelihood that they will – or could – host low cost airport or
terminal developments in the near future. In addition to analysing the
current status of each region/nation’s LCC sector, the chapter examines their
economic, full-service aviation and airport infrastructure characteristics in
determining where future developments are likely to occur.
Overview
•
•
•
•
•
•
•
•
Examination of key emerging aviation markets shows vastly
different levels of likely future LCA/T activity
Indonesia has many critical attributes and, with increased private
participation in the airport sector, is poised to be a growing market
for low cost airport/terminal operators
New Zealand matches many important criteria, but has a moribund
LCC sector
India is on brink of becoming a dynamic centre of LCA/T activity,
but remains constrained by bureaucratic inertia
North Asia LCC sector continues to be hamstrung by restrictive
access policies, but gradual liberalisation and Japan’s opening of
secondary facilities could key a boom
Africa and Latin America are years away from major movement,
although some isolated national players (e.g., Morocco and Mexico)
have potential
The Middle East is poised to open up on the back of a booming LCC
sector and the imminent launch of an LCT at Dubai’s Jebel Ali
Airport
Russia is largely behind the curve, but smaller developments in
Moscow could represent a beginning
India is a strong candidate for low cost airport developments. The low cost
sector is a huge player in the nation’s huge and growing aviation industry
and privatisation of airports is a front-burner issue. However, bureaucratic
delays and obstacles have slowed some of the progress that might have
been expected. An LCT terminal is in the works in Delhi’s new privately built
and managed airport, but other LCT projects have not progressed past the
concept stage. Still, the dynamics of the evolving national industry make
medium-term future projects likely. This is not the case in the rest of the
subcontinent region. Factors ranging from economic development, political
risk and excessive regulation mean that Sri Lanka, Pakistan and Bangladesh
are unlikely to host LCA/Ts anytime soon.
Indonesia is among the more naturally suited environments for low cost
airline operations, thanks to its population of 300 million scattered around a
vast archipelago. The situation furthermore looks appropriate to low cost
airport operations. With the current airport infrastructure inadequate to
meet growing demand, lack of government funding and a vibrant LCC
sector, Indonesia could see developments in the short term.
New Zealand also has several attributes suggesting future LCA/T
development, including a prosperous, travel-inclined populace spread over
two islands, and a local developer with experience in LCA operations.
However, the local experience with LCCs has not been positive, meaning
impetus will be slow in the near term, even as some airports with an LCAconsistent profile stand by.
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North Asia is perhaps the last big LCC regional market to remain dormant
mostly because of regulatory resistance, a situation that looks set for change
in the near-term, possibly opening the door for LCA/T movement. The
capacity choked nature of Tokyo’s airports has been a sizable obstacle to
growth in Japan, but the government has taken steps to open up access to
its regional airports – such as Kitakyushu – for international operations. This
move, and corresponding steps in Korea, China and Taiwan, could be the
genesis of meaningful low cost growth in the region, a vital precondition for
LCA/T installation.
Africa and Latin America also are explored for LCA/T potential. Africa is for
the most part incompatible with that type of operation because of a dearth
of short-haul flying and minimal LCC operations. Morocco, however, holds
potential because of its popular tourism offering, the advent of local LCCs
and the growth of budget service by European LCCs looking to capitalise on
its strong tourism and VFR traffic. The announced move by Air Arabia to set
up a base in national capital Rabat can only add impetus.
The LCC sector is more developed and vibrant in Latin America, with one of
the global industry’s stars found in Brazil’s Gol. However, the LCA/T concept
has not caught on and looks to be years away from doing so, in part
because the leading LCC would prefer to compete head-to-head with the
full-service players at the region’s leading airports. There is scope for LCT
movement, especially in Mexico, where more cost-conscious carriers are
beginning to take root, with one Mexican airports operator reporting that
over 35% of its traffic is carried by LCCs.
The Middle East is primed for LCA/T development after years of inaction.
Perhaps motivated by the successes of nearby Sharjah, which provides a
functional facility for fast-growing, profitable Air Arabia, Dubai has engaged
the budget sector. After initially saying it was uninterested in hosting LCCs,
the influential emirate will now make an LCT one of the first operational
facilities at its new Jebel Ali airfield. Given Dubai’s trend-setting status, it
could well augur for more such facilities in the region.
The chapter also examines Russia’s aviation sector for LCA/T applicability.
Although the current system is not built with the type of functionality the
budget segment requires, there are some signs of down-the-road
developments. The move of nascent LCC SkyExpress to base at Moscow’s
third airport – Vnukovo – and the willingness of the private operator of
Moscow Domodedovo to do what it takes to attract service from every
corner are two key examples.
LCATs are now well established in Europe and appearing with greater
frequency in Asia and are also becoming fashionable in the US. This chapter
reviews the progress of this concept and whether it could be transferred
elsewhere, such as to Africa, Latin America, the Middle East and Russia,
where LCCs are also now established.
In looking to new markets, this chapter will consider the presence or
otherwise of the underlying criteria which have prompted LCAT development
in Europe, Asia and the US. An important driver of the development of new
low cost airline markets is the need of the major LCC incumbents to seek
new pastures in which to expand, as existing markets approach
saturation. The major European operators – and some investors from other
regions, including the US – are actively pursuing such new opportunities.
LCAT activity promises to be prominent in the Asia Pacific region, which
recent analysis shows will be home to 40-45% of the USD150-200 billion
that is programmed for global airport investment by 2015.
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7.1 India & South Asia
Only generalisations can be made about India because the entire aviation
infrastructure – airlines, airports, and air traffic management - is continuing
to undergo a radical reformation against a backdrop of ever-increasing
liberalisation. Most of the news is positive.
India – Key Data
Area Total
Population
Median age
Population growth rate
Literacy
GDP per capita
Railways
Airports with paved runways
Main ports and harbours
3,287,590 sq km
1,129,866,154 (July 2007 est.)
24.8 years
1.606% (2007 est.)
61%
USD3,800 (2006 est.)
63,230 km
243; 141 runways are 1524 m or longer
Chennai, Haldia, Jawaharal Nehru, Kandla,
Kolkata (Calcutta), Mumbai (Bombay), New
Mangalore, Vishakhapatnam
On the airports side, a study commissioned by the Government shows that
airport infrastructure will require USD30 billion in investment by 2020,
despite the money that has already been put in during the last five years.
That figure has grown from just USD4 billion at the start of this decade.
India is a dynamic growth-oriented market, with new private airlines being
permitted to fly domestically (and, soon, internationally), airlines taking
business off the railways and a sudden surge in ideology about privatising
airports or developing new private facilities. Privatisation ideology was not
always matched by speed of purpose, though things have changed since the
privatisation/modernisation contracts were signed for Delhi and Mumbai
airports early in 2006.
New greenfield airports at Hyderabad and Bangalore, part financed by the
private sector, are due to come on line in 1Q08, and there are plans for
second airports at Delhi and Mumbai, even a third airport at Mumbai plus a
myriad of greenfield airport proposals the length and breadth of the country,
35 in all, by 2010.
Despite the flurry of LCC entry, there are as yet no examples of LCATs in
India.
Other factors playing their part in the maelstrom that is Indian aviation
presently include:
Key Points:
•
•
•
•
•
•
Indian airport charges are reputedly the second highest among
Asian and Gulf airports. Airlines pay more yet receive service levels
well below those of Singapore, Kuala Lumpur, Dubai and Bangkok.
Emergence of an Airports Economic Regulatory Authority that would
be established as an independent regulator to regulate airport
charges and maintain airport standards.
The government professes to be unsure whether to continue with
its (hitherto successful) public-private partnership (PPP) model for
the construction or rehabilitation of airports because of trade union,
Parliamentary and public resistance. But it also says it will offer 300
airports and airstrips for development under the PPP model.
The CAA’s vision that no Indian should live more than 50 km from
an airport ‘in every nook and cranny of the country.’
A new policy of encouraging ‘merchant airports’ - private companies
that would construct and operate airports without government
funding - to meet that vision. This provoked an increase in Foreign
Direct Investment limits to 100%.
Entry of more foreign companies into India searching for
redevelopment and privatisation contracts, including Changi
Airports International (Singapore), Macquarie Bank/Macquarie
Airports, Dubai Aerospace Enterprise and GE, together with
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•
•
•
•
•
domestic partners such as Bharti Enterprises, Reliance Group and
Tata Group plus, on the fringe, newcomers like Valecha Engineering
and Maytas.
The continuing influence of Airports Authority of India, which is to
invest USD2.9 billion from internal sources, together with a USD5.9
billion contribution from private developers, to build six green field
airports and 50 smaller airports over the next five years.
Entry by Air India, which is being merged with Indian Airlines, into
airport operations, and perhaps financing.
Modernisation of 35 non-Metropolitan airports is taking place over
the next 3-5 years at a cost of USD1.2 billion. Airports Authority of
India intends to install aerobridges at 18 of them, which is not
conducive to low cost, LCC operations
Low non-aero revenues that can be as little as 20% of total
revenues even at airports like Mumbai
The CAA proposes to construct exclusive airports for private jets, to
assist in decongesting India’s major airports. They have similar
demands to LCCs (rapid turnaround).
Just how many LCCs India will end up with is unclear. At one time it looked
as if there might be as many as 15 (there were just three in 2003), but
some start-up plans have been deferred while others that have got
underway have found the going tough. Experience elsewhere says that it is
difficult for any market to absorb this many new entrants all at once. Neither
is it the case that all India’s recent start-up airlines are LCCs. There is a
history of ‘full service’ airline enterprise in India 20 and the standards
expected are high with some airlines even offering chauffeur drive to
domestic passengers. If they are not high, consistently low prices are
expected.
Many have got their domestic pricing wrong to some degree as they sought
also to compete with the railways and often at without a sufficiently low cost
base, which is what differentiates the successful European LCCs. A recent
survey indicated that over half of LCC passengers in India would still have
travelled by air if the fare had been double, going up to 67% in the case of
full service airlines.
Despite these difficulties, what does seem certain is that domestic travel is
expected to grow by up to 30% per annum until 2010 and by 15% for
international travel. Also that LCC domestic market share, currently 35%,
will reach 70% by 2010. More Indians than ever are travelling abroad, 8.3
million in 2006. Apart from the indigenous population, the airlines can count
on greater numbers of inbound tourists, whose numbers rose to 4.4 million
in 2006 (+13%) as a direct result of liberalisation – still less then 0.5% of
the population.
But the difficulties mentioned earlier may well mean a contraction of the
business to 2-3 full service carriers, 3-4 national LCCs and the same number
of regional operators. Consolidation has already begun with Air India and
Indian Airlines merging, also Jet with Sahara and Kingfisher with Air Deccan.
It is not at all clear if airport development will match airline development.
So India has a burgeoning LCC sector both domestically and internationally
even if the future prospects are vague. What specific LCAT developments are
catering for it?
Early in 2005 the Indian government revealed that it was considering
establishing a dedicated low cost airline terminal at Delhi Airport and that it
planned to relocate helicopter and small aircraft operations at Mumbai
Airport to nearby Juhu Aerodrome, to create additional space for LCC
operations there. This was the first time a designated facility like this had
been mentioned in India.
20
According to a recent survey by Centre for Asia Pacific Aviation, Full Service Carriers
still carry the bulk of business travellers despite paying a premium of about 60% for the
privilege of flying with an FSC. FSC clients also have a low propensity to book online,
and will generally buy through a travel agent (61%, as compared to only 21% using the
Internet).
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The Delhi terminal would be an existing structure re-allocated to LCC
operations. A ‘futuristic’ new terminal would be built separately, to handle up
to 80 million passengers per annum by 2025. The confirmation of plans for a
second Delhi International Airport in Greater Noida added impetus to the
need for an LCC terminal.
In the short-term, Phase I of the USD1.9 billion expansion works at Indira
Ghandi Airport commenced in Feb-07. It includes a four-storey integrated
international and domestic passenger terminal, to be completed before the
Commonwealth Games in 2010, with Phase I capacity of 35 million
passengers per annum, expanding to 80 million per annum by 2025. There
is no specific LCC provision in this development phase. This is the first of
three terminals. Fraport, one of the consortium members of Delhi
International Airport Limited and operator of the airport has previously
indicated that the LCT would be the conversion of Terminal 1B, one of three
terminals eventually envisaged for Delhi.
An LCT for Mumbai Airport has been planned since 2005, also with a goal to
improve on slow turnaround speeds. Shortage of space at Mumbai is the
major impediment to expansion and the airport is expected to reach
absolute capacity by 2012, hence the need for a new one (Navi Mumbai),
which will be built via a PPP agreement. The push for a new airport may
overwhelm the desire for an LCT at the existing one.
The developers of the new Hyderabad Airport, which is scheduled to open in
1Q08 are planning an LCC terminal there but there appears to be a ‘chicken
and egg’ situation: while the low cost carriers want the terminal to come
first, the airport operator wants increased operations by low cost carriers
before setting up a terminal for them. No LCC has a base operation currently
at Hyderabad.
A proposal by the carriers to use the existing airport at Begumpet as a
domestic airport, possibly for LCCs, was ruled out because: it is too small,
the high rate of incidence of bird strikes, and it is in the centre of the city.
Furthermore, the tender agreement between the state and the GMR group
(the operator) includes a clause that the Begumpet airport will cease
operations, once the new international airport begins operations.
In Bangalore, where the other large green field airport will open in 2008,
Hindustan Aeronautics Ltd (HAL) announced it hopes to continue domestic
operations of Bangalore HAL Airport after the new Bangalore Devanahalli
International Airport (BDIA) opens, despite an agreement to shift civilian air
traffic to the new airport.
Hindustan Aeronautics anticipates a spill over from BDIA and insists that
growth at HAL would have been much greater if it had not stemmed the
increase, due to non-availability of parking and terminal space. A
comparison might be drawn here with Bangkok’s New Bangkok International
Airport at Suvarnabhumi and the old Don Mueang airport. If the terminal
space could be redeveloped along simplistic lines and car parking space
provided HAL, with its central location, might be a suitable LCA.
The LCC Air Deccan plans to partner with unnamed developers to bid for the
construction of four low cost airports in Karnataka State. The State
Government recently issued EoIs for the construction of airports in Hassan,
Shimoga, Gulbarga and Bidar.
The country’s original and leading public-private cooperation airport at
Cochin in Kerala state – Cochin International Airport Ltd (CIAL) – has
resurrected its investigations into the operation of an LCC of its own, which
were first aired two years ago but turned down by the government. The LCC
would operate domestic and international services.
If the plan reached fruition, it would open the door to an LCT, as it is known
that CIAL is interested in the possibility of developing low cost terminals and
airports widely across India under the banner of Cochin International Project
Consultancy Services. Early in Sep-07 CIAL reiterated its interest in
establishing a separate dedicated low cost carrier terminal at the airport.
CIAL appears qualified to undertake this task, having already established its
credentials as an airport operator (aviation services and estate
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development). Passenger traffic has risen by 93% in four years. Its terminal
is efficient and similar to those found in regional low cost airports in Europe.
Now it will launch a cargo airline of its own, Air Kerala, using old Indian
Airlines aircraft converted to freight use. It is seeking a foreign investment
partner to take a 25% stake in the airport company.
Another organisation with the capability to introduce change rapidly is
Changi Airport International (CAI), which has teamed up with the Tata
Group to develop Indian airports. CAI brings with its lessons learned at its
own budget terminal at Singapore.
Fraport, the operator and consortium member at Delhi has formed a joint
venture with DLF, an Indian real estate developer also to develop and
manage airports in India. Fraport brings to the table experience gained at
Frankfurt Hahn airport.
Malaysia Airport Holdings (MAHB) is already involved with Indian airports at
the Hyderabad Airport and as it extends its activities outside Malaysia it may
take on a greater involvement, again drawing on its own experience, in this
case with the Kuala Lumpur LCT.
As for the merchant airports mentioned earlier (those green field or
unutilised airport projects that will be turned over to the private sector),
some 25 sites have been identified. Added to the 35 non-metropolitan
airports that are to be developed that totals 60 potential locations for LCTs,
or at least airports for no-frills operations, including:
•
•
•
•
•
•
•
•
•
•
•
Karnataka – Hassan; Shimoga; Gulbarga; Bidar; Mysore
Maharashtra – Shirdi; Jalgaon; Solapur; Akola
Kerala – Kannur
Tamil Nadu – Madurai; Tiruchirapelli
Assam – Rupsi
Rajasthan – Ajmer; Mount Abu; Kailashar
West Bengal – Behala; Cooch Behar; Malda
Orissa – Jharsuguda
Bihar – Muzaffurpur
Tripura – Kamalpur
Arunachal Pradesh - Passighat
Key points:
•
•
•
•
Collectively, this activity suggests that new low cost airports and
terminals are very much on the agenda in India, though when they
will actually come to fruition is another matter.
The area of non-aeronautical revenue generation is a weak spot for
AAI, and therefore a potential opportunity for private sector
partners;
The need to provide modern and adequate facilities to handle the
fast-growing numbers of air travellers becomes more pressing all
the time; and
Working in India’s favour is the presence in the market of high
quality foreign companies that know and understand how LCATs
work. All that stands in the way now is India’s – often momentumkilling – bureaucracy.
Pakistan, Bangladesh and Sri Lanka
There is little prospect of LCATs appearing in any significant number in
Pakistan, Bangladesh or Sri Lanka.
Pakistan International Airlines is in no position to introduce LCC service while
it tries to turn around poor operational performance that resulted in USD150
million of losses in 2006. There are several new private airlines including
Aero Asia, Airblue and Shaheen Airways, but none adhere aggressively to
low cost principles. There is also some new airport infrastructure at
Islamabad, Multan and Gwadar, plus the new private Sialkot Airport that
should open in 2007 and which may attract foreign management. Again, the
airports reflect the air service and no low cost terminals are called for
presently.
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In Bangladesh, Thai Airways intention to take operational control of the
airport at Chittagong, the country’s second city, fell through because of
political agitation against the deal. Despite having a population of 150
million and the second largest population density on Earth, aviation is
underdeveloped and most inter-city travel is still undertaken by train or
private vehicle, both of which are time intensive. It is also a very poor nation
despite its economic outlook improving and significant increases in Foreign
Direct Investment. National airline Biman is in constant financial and
operational difficulties.
There are, however, a number of private airlines such as GMG and United
that have domestic and international services and they may soon be joined
by UK-based Royal Bengal Airline and Air Sylhet, both claiming to be longhaul LCCs. For the moment at least Bangladesh remains without an LCC and,
therefore, without the need for a low cost airport or terminal.
The best prospect for an LCA comes not at Dhaka, Chittagong or Sylhet but
at Bangladesh’s (internationally) undiscovered holiday resort at Cox’s Bazar,
which boasts a 120 km beach. For the moment, the infrastructure is
inadequate with only 4,500 budget hotel rooms and one ‘five star’ hotel, and
the ruling political party is fundamentalist and essentially anti-tourist.
Nevertheless, even they have come to appreciate the possibilities and plans
are in hand to build an international cricket stadium, a golf course, and an
international standard airport.
The main problem facing foreign developers in Sri Lanka is that terrorism
has returned, as the peace process falters. Otherwise, Sri Lanka could
support LCATs. Sri Lankan Airlines has prospered under the guidance of
Emirates (although that relationship on 31-Mar-08) and several LCCs are
planned, including a subsidiary of India’s Air Deccan and a government
owned carrier, Mihin Air. The regime is very much ‘open skies’ with any
carrier allowed to operate international services.
Colombo’s Bandaranaike Airport has been improved but the most telling
development is the USD150 million second international airport at
Weerawilla, serving the tourist resorts. It should be completed by 2010 with
a 4,000 m runway and a terminal for two million p.p.a.
Sitting as it does on the edge of a major emerging market (India), but with
only inward modest tourism growth presently, it would be no surprise to see
Weerawilla being developed as an LCA before it opens, as long as the
domestic civil situation permits it.
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7.2 Indonesia
Indonesia is regarded as a key area of growth for no frills airlines owing to
its geographical nature – 3000 islands spread across 3000 miles (see locator
map). It is the world's largest archipelagic state and has the World’s largest
Muslim population. It has had more than its fair share of difficulties from the
Asian Financial Crisis of 1998, which affected it badly, via SARS, terrorism
and natural disasters such as the Tsunami of Dec-04 and an earthquake in
central Java in May-06 that caused over USD3 billion in damage and losses
plus others too numerous to mention here.
Indonesia Locator Map
This set of physical circumstances is a key reason why domestic aviation has
grown as quickly there as anywhere else on Earth. Whereas 1999 saw the
country with five carriers, there are now 20, with significant aircraft orders a
commonplace occurrence. LCCs include Lion Air, Adam Air, Indonesia
AirAsia, and Garuda Citylink. Yet it retains the potential for further growth
still. (But first it must overcome the handicap of a notoriously poor aviation
safety record, a record that led the European Union to ban all Indonesian
airlines from its airspace).
Indonesia – key data
Area Total
Population
Median age
Literacy
GDP per capita
Railways
1,919,440 sq km
234,693,997 (Jul-07 estimate)
26.9 years
1.213% (Jul-07 estimate)
90.4%
USD3,900 (2006 estimate)
6,458 km
Banjarmasin, Belawan, Ciwandan, Krueg Geukueh,
Palembang, Panjang, Sungai Pakning, Tanjung
Perak, Tanjung Priok
Indonesia’s airports are managed by two corporatised authorities, PT
Angkasa Pura 1 and 2. Its biggest airport is Jakarta Soekarno-Hatta, 20 km
west of the capital. Accommodating 31 million passengers annually (making
it the world’s 30th busiest), it falls under the control of Angkasa Pura 2.
From Jan-Oct-06, its growth rate was +11.5%, mainly as a result of
domestic service increases, with state airline Garuda reporting negative
growth on international routes.
A rail link is to be constructed between the airport and Manggarai Railway
Station in East Jakarta and the first services should operate in 2008 or early
2009. There are two terminals, domestic and international, the plans for a
third having been put back after the Asian Financial Crisis. Angkasa Pura 2
still wishes to build one with more modern design features, possibly for the
exclusive use of LCCs, with an LCT being mooted for operations by 2008.
Facilities and quality of service would be ‘more modest’ in the LCT and
designed to handle one million passengers annually. The ultimate master
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plan is to have five passenger terminals, one exclusive hajj 21 terminal and
four runways (there are presently two).
Indonesia may be regarded as a key area of growth for no frills airlines
owing to its geographical nature, but the government presently has policies
more designed with protecting state-owned Garuda than fostering the
growth of the budget sector. A ban on foreign LCCs operating to five major
cities is in place, although it welcomes the carriers at secondary
destinations. Even so the local population has taken to them, taking 34
million domestic trips in 2006, compared with 29 million in 2005 and just six
million in 1998.
In 2005, the LCC Lion Air (PT Lion Mentari Airlines), regarded as a
pioneering LCC in Indonesia, announced it had signed a contract to lease the
little-used Halim Perdanakusuma Airport in East Jakarta to accommodate its
growing fleet. It took delivery of the first of 60 new B737-900ER in Apr-07.
The decision to lease Halim airport, which was the country’s main airport
before the construction of Soekarno-Hatta, came after Lion Air’s own efforts
to build a terminal at Soekarno-Hatta Airport fell through. However, the
proposal never came to fruition and Lion Air’s main base remains at
Soekarno-Hatta.
The contract involved three parties: Lion Air, the Air Force, and PT Angkasa
Pura 2. It intended to rebuild a terminal and to construct additional facilities,
such as a shopping mall. The airport is used mainly for visiting statesmen,
top government officials and the Indonesian Air Force, and it will continue to
be used for State and military purposes. It has a single 9800ft runway.
Elsewhere in the country, officials at Bali’s Ngurah Rai International Airport
in Denpasar insist they would not construct a terminal dedicated to low cost
carriers, preferring instead to prioritise the development of the domestic
terminal to the same standards as the international terminal. Bali attracts a
wide variety of leisure visitors, from backpackers to honeymooners to
retirees vacationing in five-star hotels.
The Indonesian Government has been planning for greater private sector
airport investment in its underfunded airport sector. And privatisation
appears to be necessary if LCATs are to be built.
The government is on record as stating that it has only 17% of the funds it
needs to deal with necessary infrastructure projects. The airports at Medan,
Solo, Bali (the most important one for tourism), and Lombok, in addition to
Jakarta, have been identified by the government as most in need of new
terminal facilities. Many foreign investors would be keen to enter this market
should the opportunity arise if only because of the volume of domestic travel
and comparatively untapped non-aeronautical revenue generation
opportunities.
But that privatisation may be slow in coming while PT Angkasa Pura 1 and 2
fail to make the cut on to the government’s privatisation list. They were left
off the list of companies targeted for privatisation again in 2007.
Key points
•
•
•
Airport capacity is barely adequate in the capital and throughout
the country;
Despite the reluctance of the government to embrace the low cost
movement, the poor safety record and the inhibitors to both
domestic and foreign investors, the increase in budget airlines and
domestic passengers encourages investment speculation in
airports; and
The Indonesian authorities have fallen well behind their rivals and
have a lot of work to do to catch up if they are to build up
international LCC traffic.
21
Haj - the annual religious festival at Mecca, Saudi Arabia, which attracts millions of
Muslims from all over the world and often requires a separate terminal at airports to
handle the volume of traffic
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7.3 New Zealand
New Zealand is a country of only four million people, spread out over two
main islands stretching 1250 miles in length. As in all small island
communities, air services are essential to keeping communities in contact
and also fostering the critical inbound tourism sector. Air services have long
been deregulated domestically and on trans-Tasman routes to and from
Australia. The country’s main airport, Auckland International, was privatised
in 1998, partially floated on the stock exchange and is currently the subject
of speculation concerning a further sale.
An investment company, Infratil, bought a two-thirds interest in Wellington
Airport in 1999. Christchurch, in the southern island, and still owned and
operated by local councils, completes the trio of main airports. New
Zealand’s home based LCC is Freedom Air, an Air New Zealand subsidiary.
New Zealand city Locator Map
New Zealand – Key Data
Area Total
Population
Median age
Literacy
GDP per capita
Railways
268,680 sq km
4,115,771 (July 2007 est.)
34.2 years
0.95% (2007 est.)
99%
USD26,200 (2006 est.)
4,128 km
Auckland, Lyttelton, Tauranga, Wellington,
Whangarei
With responsibilities to promote the nation’s image internationally, none of
the three main gateways at Auckland, Wellington or Christchurch exhibits
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extensive LCA characteristics. Nonetheless, all three major airports have
adapted to the demands of the new low cost environment.
It should be noted though that Wellington’s part owner, Infratil, operates the
low cost airports at Glasgow Prestwick, UK (q.v.) and Luebeck, Germany and
has plans to develop an alternative airport for Auckland at a nearby military
facility at Whenuapai. It is entirely possible that ever-increasing
liberalisation in the region would prompt Infratil to develop Whenuapai in a
similar manner to Glasgow Prestwick, i.e. as an outright low cost alternative
to Auckland International.
One potential low cost facility is Hamilton Airport. Hamilton is the largest
inland city in New Zealand, with a population of over 100,000 people and is
a main rail junction. It is 128 km south of Auckland, a two-hour drive.
Limited domestic air services connect Hamilton with Auckland and
Christchurch with a more frequent service operating to Wellington.
Its proximity to Auckland makes it a marginal airport location for Auckland’s
southern suburbs, but the focus of promotion is on inbound tourism. Already
the fourth busiest airport in New Zealand, Air New Zealand’s former low cost
subsidiary, Freedom Air, operated international services to and from
Australia (Brisbane, Sydney, Melbourne, Gold Coast) and Fiji. Apart from Air
New Zealand the main airline is Sun Air. Origin Pacific Airways operated until
its demise in Aug-06.
In terms of facilities, the airport offers simple outlets geared towards
arriving and departing tourists – shop, cafeteria, foreign exchange and a
small lounge operated by Air New Zealand. Recent redevelopment was
intended to raise passenger growth by 50% and to double revenue over 10
years by encouraging point-to-point travel of four to five hours maximum –
benefiting domestic, Australian and South Pacific routes, but not Asian
destinations, which are mainly beyond that range (although Bali is a target
market). The airport expects passenger numbers to grow to 180,000 by
2010. The runway can be expanded to 3,500 m to meet demand from longhaul LCCs.
Hamilton is well placed to capitalise on the propensity of travellers from
metropolitan areas to seek out airports like this, within reasonable driving
time, if the route network and fares offer is attractive. It also offers
attractiveness to international independent seeking a regional gateway
airport with easy access to the countryside, supported by an established
local and national rail network and car rental facility.
There are several other New Zealand airports with similarities to Hamilton
and whose developmental future may lie with the LCCs. Palmerston North
and Dunedin airports have, like Hamilton, also attracted Freedom Air to fly
Trans-Tasman routes and secondary routes to Fiji.
Palmerston North (population 80,000) is known as Student City because it is
one of the main locations of New Zealand’s large and well-known Massey
University. Other strap lines employed are ‘NZ Central – where North meets
South’, and ‘Gateway to the lower North Island’. The airport promotes itself
as the ‘Premier Provincial International Airport in New Zealand’, claiming a
catchment area of one million people within 200 km; one quarter of the
country’s population. Palmerston North is slightly further from Wellington
than Hamilton is from Auckland.
What these many and varied advertising slogans suggest is a conveniently
situated airport supporting a large population within a thinly populated
country, a gateway for incoming tourism, and able to offer alternative
facilities to air travellers from other and larger metropolitan regions (in this
case, the Wellington conurbation). In other words: a mirror image of
Hamilton, and ripe for LCC exploitation.
One of seven international airports in New Zealand, Palmerston North was
originally a wartime military airfield. The operator, since 1990 is Palmerston
North Airport Ltd., the Crown having sold its shareholdings to Avion Holdings
in 1999. There were 542,816 passengers during the year ended 31-Dec-06
(461,542 domestic and 81,274 international) and passenger numbers are
growing steadily, with 700 monthly scheduled flights operated by six
airlines.
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The runway was extended in 1998 to a length that allows trans-Tasman
flights, which Freedom Air quickly commenced. When the subsidiary was
folded back into the mainline carrier, l trans-Tasman services looked
doomed, although Australia’s OzJet announced it would open services to
Brisbane, Sydney and Melbourne.
The present terminal building was constructed in 1991 and extended in
2000. Palmerston North fits the description of the archetypal low cost airport
in some ways – the basic facilities include a cafeteria/drinks machine, limited
duty free shopping, bookshop, tourism information, nursery, and Internet
kiosk, with 24/7 operation.
Unusually, there are meeting facilities and a small museum. There is no free
car parking, but parking can be as little as NZD7 per day. The airport
occupies a central location for freight and mail distribution and is therefore
not restricted wholly to the passenger side of the business. The Airport
Master Plan provides for industrial site development.
On the South Island, Dunedin (population 125,000, New Zealand’s fifthlargest city) has also benefited from direct trans-Tasman routes to Australia
flown by Freedom Air. Dunedin is in an isolated position close to the
southern tip of the very thinly populated South Island and therefore, unlike
Palmerston North and Hamilton, is unable to promote itself as an alternative
facility for larger metropolitan regions. Its outbound traffic is local; point-topoint, or connecting via Auckland, together with inbound tourists. The
emphasis is very much on developing the last category.
Inbound tourism is more significant here than at Hamilton and Palmerston
North. The country’s premier activity vacation resort, Queenstown, is four
hours by car and Dunedin is also a gateway for the popular Milford Sound.
Dunedin’s terminal facilities are similar to those found at Hamilton and
Palmerston North with limited shop, refreshment and duty free services, a
delicatessen, an Air New Zealand lounge and three conference rooms. There
are five car rental companies. The single car park charges NZD6 per day.
The major international airport on the South Island is at Christchurch
(population 350,000), which hosted 5.4 million passengers in 2006.
Christchurch is in a different league to the previously mentioned airports,
with a dozen international destinations, including Singapore, Tokyo, Osaka
and Dubai in addition to domestic and trans Tasman services. Services have
operated to Los Angles and Seoul, Korea in the recent past. Christchurch is
the only major hub airport for the South Island, whereas the North Island
has two.
Freedom Air’s demise spelled the end of services to Gold Coast, Australia,
but the airport also features service by Pacific Blue, New Zealand’s
international sibling of Australian domestic LCC Virgin Blue, which flies to
Brisbane, Melbourne and Sydney. It also enjoys Jetstar connections to
Sydney, Melbourne, Brisbane and Gold Coast.
As part of an ‘airport city’ project, a new NZD200 million integrated domestic
and international terminal is under construction from mid-2007, to be
completed in 2009 when the old domestic one will be demolished. It will
offer a single landside retail and food & beverage precinct with views to the
Southern Alps to cater for domestic and international passengers, friends
and family, and visitors and a large domestic passenger holding lounge,
including an enhanced retail and food & beverage offering. Car parking will
be increased by 40%. At present, plans do not call for specific LCC facilities,
somewhat surprisingly given the presence of three LCCs here, but Air New
Zealand and its non-LCC franchises occupy a powerful position in the
pecking order.
In concluding, it seems that meaningful LCC services were dealt – for now at
least – a death blow with the end of Freedom Air. Within a conservative
society with an older population base, LCC operations have not been as
successful in New Zealand as they have in Australia. There is good service at
present across the Tasman, with Jetstar and Pacific Blue having established
a presence, but it is unclear if this level of operation is sufficient to justify
separate LCA/T activities.
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Now they are to be joined by the Christchurch-based Kiwijet, which hopes to
start services in Nov-08, flying limited and non-contested trans-Tasman
routes such as Auckland-Newcastle, Wellington-Canberra, Rotorua-Sydney
and Christchurch-Hobart. Kiwijet does not know if it wants to be an LCC, its
original intention (“all Kiwis will fly”), or an ‘all jet regional airline’, which is
the current incarnation. That sums up New Zealand’s reaction to LCCs: it
does not really know if it embraces them or not, hence the reluctance to
provide specific airport facilities for them.
Few of these airports, as with their Australian counterparts, yet come
anywhere near the utilitarian model found, for example, in the UK. But then
again, neither are the LCCs the equivalent of, say, Ryanair or easyJet. Pacific
Blue for example offers live in-flight entertainment, as does the parent
company, and might better be compared with JetBlue.
One factor that might promote change is the emergence of long-haul LCCs,
which might find New Zealand’s thinly spread centres of population
attractive.
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7.4 North Asia
North Asia is arriving late to the low cost airline revolution – but,
importantly, it is now arriving there, pushed by the entry of Southeast Asian
airlines like AirAsia, Tiger, Cebu Pacific and Jetstar.
This belated LCC spring can be put down to three main reasons:
(1) the intrinsically high cost base in Japan and Korea (partly due to the
dominance of the respective flag carriers, but also to unhelpful and
restrictive regulation);
(2) the high quality, very fast domestic rail services; and
(3) the reluctance of China to permit international LCC – or other airline –
access.
LCC incursion is also hindered by an overwhelming focus on Tokyo, where
airport charges are among the highest in the world. The influence of fast,
efficient rail service between the main centres of population has also
reduced the appeal of any potential LCC offering.
Japan and Korea are now moving quickly towards more liberal relations and
there is growing interest at commercial level. It is only a matter of time –
months now, rather than years - before some of the vast potential of this
golden triangle is realised.
Japan
Most of Japan’s air service converges on Tokyo. Narita International Airport
alone handles 80% of all international traffic, 54% of total passengers, 49%
of total aircraft movements and 62% of the country’s cargo. For the time
being, Japan Airlines (JAL)’s attention is focused on an internal reform
programme affecting, which also encompasses its lower cost subsidiaries
JALways and JAL Express. However, a leaner and more profitable All Nippon
Airways (ANA) is in the process of designing an LCC subsidiary to defend
against incursions by foreign LCCs, expected as additional capacity comes
available at leading domestic facility Tokyo Haneda airport in 2009 and to
complement the existing subsidiary Air Next at Fukuoka.
There has been an airport building boom in Japan (there are almost 100 of
them now), somewhat alleviating the focus on Tokyo, but also increasing air
traffic congestion. For example the new Kobe Airport is one of three facilities
within a 25-mile radius. With capacity so choked, pressures on operating
costs are exacerbated, making it almost impossible for local LCCs Skymark,
Starflyer and Air Do to implement the low cost model.
While a debate continues on the need for a new airport when Narita and
Haneda airports reach capacity (by the end of this decade), the driver for
change has come from Japan’s fourth city, Nagoya, which sits in the middle
of the country.
The New Chubu Airport, also known as Central Japan Airport or “Centrair”,
opened in Feb-05. Developed as a private finance initiative with
contributions from companies like Toyota, it offers around-the-clock,
unconstrained access to an important regional centre, helping to divert
attention from established airports at Tokyo and Japan’s second city, Osaka
(the offshore Kansai International Airport). In theory this airport will assist
regional development of international routes, forcing JAL and ANA to lower
their costs to target these new markets with subsidiary airlines and inviting
foreign carriers to compete on new thin routes. The usual pattern that
enables meaningful LCC emergence could be not too far behind.
Competing airports such as Kansai announced the continuation of existing
landing charge discounts to airlines flying there, and new initiatives for
airlines that might wish to – up to 50%. Although the competition is
ostensibly with Centrair, 100 miles away, other airports such as Itami,
Osaka’s original airport and situated 30 miles away in the northwest
suburbs, have been drawn in as well.
Further afield, a new regional airport opened in Mar-06, on the northern tip
of the southern island of Kyushu, at the city of Kitakyushu.
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An offshore island airport, Japan’s second after Kansai. Kitakyushu is a port
city of 1 million people, Japan’s 11th largest, lying midway between Tokyo
and Shanghai. It is one of Japan’s largest centres for international trade and
industry and within the framework of an imbalance that sees Japan receiving
only five million foreign visitors a year while 17 million Japanese go abroad,
it is trying to enhance its tourist potential by targeting budget airlines. To
further this aim it has attained authorisation from the Japanese Ministry of
Land, Infrastructure and Transport to operate for 21 consecutive hours from
0500 to 0200, facilitating late night passenger and freight services.
The island was built to low cost principles by sharing dredging and landfill
costs with an unrelated port improvement project. The first phase permits
1.5 million passengers per annum, and there are plans to increase the
2,500-metre runway incrementally to 5,000 m and 3.3 million passengers
through the use of larger aircraft (it can currently accommodate B737 and
A320s).
The same philosophy of ‘start small, think big’ was applied to the terminal
building, designed so that it can adjust to any increase in demand for
facilities and services and built in two phases to include retail and event
space. The Japanese market is not yet ready for a Quantum Leap to the
position where little or no facilities are provided at airports. As with many
recent terminals, environmentally friendly technologies are incorporated to
reduce electricity consumption and emissions.
For the moment this is as close as it gets to an LCA in Japan. At least the
new airport facilities will help promote a travel experience that is virtually
unknown in Japan. For most Japanese a foreign trip involves a lengthy train
ride to a gateway city, usually Tokyo or Osaka, and an overnight stay before
checking in. Many people have never left their home country and even in
Tokyo the figure is just 20%. In rural areas it can be 5%.
On this basis the country seems ripe for an LCC/LCAT expansion if the
population would only embrace budget airlines. The airport sector has thus
far been a major obstacle, but the fundamentals are there for change, if
tweaked – there are 30 potential airports throughout Japan that could
handle medium sized jet operations if small adjustments to regulatory
controls were made, stimulating domestic services and international flights
to neighbouring China and Korea.
Some change could come from overseas. A Macquarie Airports (MAp)-led
consortium took a 9.6% ‘strategic’ holding in airport operator, Japan Airport
Terminal (JAT) in Jul-07 at a cost of USD165.1 million. MAp now holds a
4.8% interest in JAT, which operates three passenger terminals at Tokyo
Haneda Airport and F&B businesses at Narita and Kansai airports and
handles 60% of Japan’s domestic traffic. MAp is not specifically attuned to
LCATs but does operate Bristol Airport in the UK, which hosts easyJet as one
of its main airlines. High quality infrastructure and facilities are already in
place – recently constructed terminals and a fourth runway scheduled for
completion in 2010.
In South Korea, the country received a new airport, Incheon, in 2001,
courtesy of a private finance initiative, and in preparation for the 2002
Soccer World Cup. Along with it came a more liberal aviation policy to help
build a new North Asian Hub here, to challenge China. The region’s air traffic
is growing fast, and especially air freight, where Korean Airlines is one of the
world’s biggest carriers.
However, obstacles to serious LCC incursion exist here, as well. The
country’s domestic air services – from both full-service and low cost carriers
– are under threat from the recent advent of well developed high-speed rail
services connecting the main population centres. The small distances
involved (e.g., Seoul in the north to the southern cities of Mokpo and Pusan
is only 200 miles) make train service a compelling option. In fact, such was
the success of new high speed rail services introduced in 2004 that The
Ministry of Construction and Transportation ordered a delay to the
construction and/or upgrade of seven regional airports and the national
budget for airport construction was cut by almost 70 percent.
On the other hand Korea is very much in fashion right now. During 2006
Korean airports handled a record 32 million passengers (+10.2%), partly
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due to the reputation of its pop culture in neighbouring countries, sucking in
hordes of young travellers – those to whom LCCs appeal most. And, the
teenagers apart, Korea has the second largest international travel market in
Asia with 21% of the population travelling each year.
Both the two main airlines, Korean Air (KAL) and Asiana, are strong, but the
prospects for Korea’s fledgling budget airlines (Jeju Air and Hansung Airlines
together with the potential start-ups South East Air, Incheon Air and Junbuk
Air) look brighter. The Korean press refers to the Hansung and Jeju airlines
as ‘regional low cost airlines’, apparently inventing yet another, but probably
accurate, category.
Most critically, Tiger Airways announced that it has entered into a 49-51
partnership with the municipality of Incheon to launch Incheon Tiger Airways
in Aug-08. The carrier will start with 5 A320s and aims to operate services
around the region.
Korean Air responded by announcing the formation of Air Korea, a start-up
LCC (it aims for 70% of the costs of the mainline unit) that would launch in
May-08, using two B737s and two A300s to serve domestic and regional
routes.
A potential obstacle is being placed in the way of both by the government’s
stated intention of passing legislation requiring locally based carriers to
operate domestically for three years before initiating transborder services.
This regulation – which may not come into effect – would surely have a
chilling effect on Tiger, especially given the impact high-speed trains have
had on the domestic market.
Compared with China and Japan, Korea has the best chance in North Asia for
a vibrant LCC sector, at least on international routes. The duopoly market,
shaped by KAL and Asiana’s high fares, is there for the taking. Both of the
current LCCs remain, for the moment, peripheral players with Jeju Air best
positioned by reason of its base location on the resort island, which is
unreachable by rail. The arrival of Tiger and Air Korea will naturally
drastically alter the landscape.
Incheon airport is being developed as a passenger and cargo hub for North
Asia, is slated for an IPO in 2008, and low cost terminal facilities are low on
its list of priorities. The Incheon City Municipal Government plans to
establish a special purpose company during 2007 to launch a short-haul
international LCC of its own by 2010. Cities in Japan and east Russia, as well
as Shanghai, Qingdao and Beijing are targeted. Domestic airlines and/or
other qualified investors have been invited to join the project. Taken
together with KAL’s plans, this might influence a change of direction.
As in Japan and Korea, the issue of high-speed rail continues to pose a
threat to development of domestic air services in Taiwan. Taiwan’s new
(Jan-07) railway covers the 345 km between Taipei and Khaosiung in 90
minutes, easily comparable with an air journey and vastly quicker than the
five hours by conventional rail. There are close to 300 weekly air frequencies
on the route, but their future is plainly in doubt.
There are many cities in Japan that could have the ability to escape the
shadow of Tokyo and pursue their own commercial development agenda if
affordable air services could be introduced. Kitakyushu has the potential to
be a benchmark for the new era’s low cost airlines and airports. Korea is
unlikely to be any more than a fringe player where LCATs and concerned and
Taiwan is off the radar altogether.
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7.5 Africa
Africa accounts for around 5% of global air traffic but most forecasts see the
region growing as rapidly – in percentage terms – as Asia Pacific and the
Middle East over the next 20 years, albeit from its very small base. The
continent’s GDP growth will be 6.2% in 2007 (more than a percentage point
greater than the world average) according to the World Bank, slowing to
5.8% in 2007. If it holds true that airline growth is twice that of GDP, the
sector sees a big future. Indeed, in the first six months of 2007 passenger
traffic increased by 13.2% overall. But there are many caveats in Africa.
A high degree of attention has fallen on Africa in recent years from the G8
countries, with upwards of USD50 billion of aid agreed though little of that
will go to aviation - the relief of poverty, disease and debt being rightly
much higher up the agenda. One feature of the potential for economic
advancement of the continent is the accepted wisdom that more must be
done to improve living standards generally, for example by increasing
tourism. However, the aviation business on the African continent, with a few
exceptions, is not yet adequately developed for the mass tourism traffic that
is an important feature elsewhere.
European airlines continue to dominate Africa airspace at the expanse of
local carriers. And now US airlines are slowly commencing services that are
often not reciprocated by Africa nations. The ‘Yamoussoukro Agreement’
(1988/1999) that was supposed to lead to continent-wide open skies is
making painfully slow progress. Nowhere is the conflict between the ideology
of ‘open skies’ and the reality of protectionism more evident than in Africa.
Another key feature of the African sector is safety, problems with which
constantly make the news. The European Union, in particular, is often keen
to block African airlines from flying within its boundaries – 50 from one
country alone.
There are a few pan-regional emerging hubs, for example in South Africa
(Johannesburg, for southern Africa), also at Accra (Ghana), Dakar (Senegal)
and Cape Verde for West Africa, and at Nairobi (Kenya) and Addis Ababa
(Ethiopia) for East Africa. Any of these regions could create LCCs and LCATs,
but there is little evidence of either to date.
Apart from tourism, another way in which LCCs have stimulated traffic in the
mature European markets is by enabling friends and relatives to keep in
touch much more easily - notably in their facilitation of long distance
relationships that might have been instigated by the other wonder of the
age, the Internet. This is not easily transferable to much of Africa, where
dominant tribal cultures ensure that life is lived more locally and where
disposable income may not be so readily available for regular journeys. The
possible exceptions are at the extreme north and south of the continent.
Taking all the above into account it is therefore perhaps not surprising that
new avenues such as low cost airports and terminals have not really been
explored. There is little in the way of an LCC business to start with and
getting the basic airport infrastructure right is a priority before ways can be
found to start reducing service cost levels.
The northern countries of Morocco and Tunisia, those that are closest to
Spain, are starting to come into line with European economies and even
covet eventual entry into the EU. Morocco already has an open skies
agreement with the EU. In the short term, there is a continuing immigration
flow from these countries (and also from those countries to the south, in
sub-Saharan West Africa) into southern Europe. North Africa also is home to
four of the five largest economies in the continent (Algeria, Morocco, Tunisia
and Egypt), collectively attracting half of the total African inward investment.
Additionally, Morocco and Tunisia attract large amounts of leisure visitors
from Europe, mainly on package vacations.
It is no surprise that Morocco is home to two of Africa’s five LCCs (the other
three being in the Republic of South Africa) namely Atlas Blue, a subsidiary
of Royal Air Maroc, and Jet4You, both in Morocco. Both have done
moderately well considering the competition from European LCCs and the
fact that Jet4You has only two aircraft. Tunisia is another possibility. The
Turkish company TAV will operate Monastir and Enfidha airports and is
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building the 22-million capacity Enfidha Airport to operate it on a 40-year
lease. TAV has experience of the demands of LCCs in its own country, in
Egypt and the Middle East, and is geared up towards future airport
investment in India.
There are proposals for the privatisation and expansion of the airports in
Morocco and Tunisia. In Morocco a project aims to assist the attraction of 18
million visitors a year by 2010 – double the present amount – by building
new terminals. Of all the North African countries, Morocco seems best suited
to the constructions of LCATs.
Egypt maintains a conservative aviation policy, at least among its
neighbours, which is not conducive to home-based LCC development, so that
its prospects in this context will be limited in the short term. However, given
its attractive tourism market for European travel, several major European
LCCs and charter airlines operate to Cairo, Sharm El-Sheik, Hurghada and
Luxor (although selling restrictions often prevent one way sales ex-Egypt).
Carriers such as Air Berlin, Condor, Excel Airways, Redsea, Thomson (TUI)
and Transavia, as well as regional LCCs, such as Air Arabia and Jazeera
Airways have extensive arrays of service to Egypt. As is the case in many
other airports, local pressures for change depend on the operation of a
locally based airline, so that, despite the variety of services, there is often a
‘take-it-or-leave-it’ attitude towards external carrier requests for special
facilities.
Egypt - Key Data
Area Total
Population
Median age
Literacy
GDP per capita
Railways
1, 001,450 sq km
80,335,000 (estimate Jul-07)
24.2 years
1.72%
71.4%
USD4,200 (2006 estimate)
5,063 km
72, 67 runways are 1524 m or longer
Alexandria, Damietta, El Dekheila, Port Said, Suez,
Zeit
Two-thirds of Egypt’s economy is now run by the private sector and the
trend is becoming apparent in the airports sector, where Aeroports de Paris
Management and Fraport respectively manage five regional airports – Sharm
El Sheikh, Hurghada, Luxor, Asswan and Abu Simbel (all mainstream tourist
resorts) – and Cairo Airport.
Looking at the broader picture, the government, through the Egyptian
Holding Company for Airports and Air Navigation, intends to invest EUR2.5
billion in its airports during this decade. World Bank loans of USD335 million
have been provided for expansion at Cairo (where TAV was the contractor)
and Sharm El Sheikh, where a new terminal was opened in Jun-07. It has
instigated plans for seven new airports to be built under BOT schemes
including those at Burj Al Arabi (Alexandria), Farafra, Bahariya and Ras Sidr.
Just as Cairo dominates Egypt’s airports, so does Egyptair, Africa’s second
largest airline, dominate the skies. It has a new regional subsidiary since
Jun-07, Egyptair Express, but it is not an LCC. It also has stakes in Air Sinai
and Air Cairo. Another regional airline will be launched in Sep-07, Nile
Airlines.
Thus there is no LCC per se in Egypt although there are all manner of
entrepreneurs wanting to set one up. The important factor is the growing
number of Middle East LCCs that are flying into Egypt, adding to the
European ones, and which might collectively begin to demand the provision
of dedicated services at the vacation resort airports and the major centres of
population such as Cairo and Alexandria.
In many ways, these North African countries are not greatly dissimilar now
from southern European countries such as Spain and Italy and tend to follow
closely what they do. The prospects for low cost airport development would
change dramatically if a major LCC were to put up a base in southern Europe
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to work these North African markets. Ryanair, for example, has grown its
Spanish business dramatically, overtaking the number of flights it offers in
France. Ryanair also has a base at Rome, and has 160 new aircraft on order
but a declining number of European markets to grow now.
Such a base need not be in Spain or Italy. Marseille has been identified in
Chapter 4 as having the greatest number of connections to North Africa of
any airport after those in Paris, has a designated LCT, and the city has a
very high percentage of North African immigrants in its population.
So, despite the lack of existing LCC flights, the opportunity for one or more
low cost airports or terminals here is high, supported by:
•
•
•
•
•
•
•
Strong economies (by African standards);
Receptiveness to adoption of business principles fashionable in the
EU;
Large numbers of potential VFR travellers;
Net recipient of high inward investment funding from both public
and private sources;
Modern and expanding fleets;
Private airlines permitted; and
Strategic plans in place to expand airports.
The other part of the continent that offers the best opportunity is the
Republic of South Africa (RSA), the economic powerhouse of the subSaharan part of the continent, and the only sub-Saharan country to have a
low cost airline. (Kenya did, but “Flamingo Airlines” was folded back into
parent Kenya Airways in 2004 after recording poor results.)
Republic of South Africa - Key Data
Area Total
Population
Median age
Literacy
GDP per capita
Railways
1,219,912 sq km
43,997,828
24.3 years
-0.46% (2007 est.)
86.4%
USD13,300 (2006 est.)
20,872 km
Cape Town, Durban, East London, Port
Elizabeth, Richards Bay, Saldanha Bay
South African Airways (SAA) is going through a difficult time as it struggles
to reduce costs, allowing LCCs to claim greater market share domestically
and to neighbouring African countries. Three LCCs are operating here,
Kulula.com, 1time and Mango, a subsidiary of SAA that commenced
operations in Nov-06 with a more modern fleet than its rivals.
The LCCs tend to operate mainly on the trunk routes, in serious competition
with each other and especially on the main routes between Johannesburg,
Cape Town and Durban. Finding flights between secondary cities can be
difficult. On the fringe are hybrid full service/low cost airlines, such as
Comair (itself the owner of Kulula), South African Express and Nationwide,
which additionally has limited international operations and a single
intercontinental route. Common to all RSA’s airlines is an ageing fleet of old
B737s and in some cases MD80s, usually leased. There is precious little
investment in aircraft, hinting at a cash-strapped industry.
Momentarily a price war is raging. South Africa’s leading independent LCC is
kulula.com (Kulula is Zulu language for “Easy”). It connects the main cities
and presents itself aggressively as a cross between Southwest Airlines and
Ryanair – Southwest’s ‘fun’ approach and Ryanair’s commercial acumen and
frugality. For example it only has one check-in counter for all departures
even if they are concurrent. The other independent LCC, 1time (local slang
for ‘for real’), has a similar, smaller route structure to that of Kulula. It was
the subject of examination by Virgin in 2005 with a view to a takeover and
re-launch as Virgin South Africa but is now to be listed on the Stock
Exchange. Both Kulula and 1time have overcome slow take up of web-based
online reservations and use of credit cards.
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With such a limited LCC sector, it is unsurprising there is not a greater
demand for LCATs.
There are factors both for and against low cost airports and terminals here.
A very small proportion of South Africa’s 44 million population flies
domestically each year given the physical size of the country - just three
million. That figure will grow as per capita incomes rise. The airports
infrastructure is largely in the hands of the state agency ACSA, which has
done a good job in modernising the airports to support bids for sporting
events such as the Rugby and Soccer World Cups. ACSA has recently
increased its capital expenditure investment plan from USD730 million to
USD2.7 billion, to accommodate forecast increases in passenger traffic
through to 2012, which it will pay for by increasing passenger service
charges by 11% on average per year over the next five years, the biggest
increases being foisted on domestic and regional passengers.
Republic of South Africa Locator Map
The focus so far has been on the two main city airports of Johannesburg and
Cape Town, and latterly on Durban, which will eventually be replaced by a
new airport. The King Shaka airport at La Mercy, North of Durban is part of a
wider Dube TradePort and is scheduled for completion in time for the 2010
FIFA World Cup.
Cape Town International Airport has been the recipient of heavy investment
as the country’s primary tourism gateway, and is eventually to get a second
main runway as part of a ZAR2 billion project to increase capacity to 12
million passengers by 2015.
Johannesburg OR Tambo International Airport (JIA) is the hub airport for all
of southern Africa, hosts over 13 million passengers annually and
contributes 70% of ACSA’s profits. It has been the focus of most of the
recent investment. Even so, its users do not hold it in high esteem and ACSA
is presently facing calls for it to be closed down to make way for a new
airport. Over the course of a decade JIA has been criticised for poor
customer service, crime, poor planning (e.g. shortage of car parking places)
and insufficient passenger capacity.
ACSA applies charges equally to users. There is thus little impetus from
ACSA for the development of alternative secondary airports and the current
volume of LCC activity has not prompted budget terminal developments.
A whole series of plans have been forthcoming from the private sector for
private development of airports, such as a military airfield at Dunnotar,
north of Johannesburg. The existing Lanseria Airport, also to the north and
well located between Johannesburg’s wealthy northern business district and
suburbs. Lastly, the capital city’s airport, Pretoria, was expanded with a
refurbished terminal and runway extension and started to attract interest
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from LCC operators, but that interest fell away. The airport is the country’s
most important one for general business aviation.
In Oct-06, the Gauteng Province Government announced plans to upgrade
Lanseria International Airport before the 2010 Soccer World Cup in a
USD13.1 million project that includes a new terminal. It has begun to attract
limited LCC services again – Kulula operates a flight to Cape Town - but is
still dependent on charters.
Lanseria, run by a consortium of private investors, is precisely the sort of
airport that would be developed and operated as a ‘low cost airport’ by a
private company in Europe, possibly even by an airline. Its main weaknesses
– lack of public transport access and (relatively) poor roads compared with
the motorways around JIA – should not stand in the way, as car parking is
cheaper than at ACSA airports at ZAR45 per 24 hours (USD6.25). There is a
small restaurant.
The ACSA-managed Pilanesburg Airport near the Sun City luxury vacation
and gambling resort in the Northwest Province (formerly Bophuthatswana) is
another possible location of an LCA. Surprisingly it attracts little commercial
scheduled traffic on its 2,750 m runway, mainly charter and general
aviation, but is able to accept B737, DC-9 and MD80 aircraft – the mainstays
of RSA’s LCC fleets. Following a major upgrade in 2001, that also saw a
revamped terminal, it could be used by long-haul LCCs with only a limited
additional expansion.
A major new airport, Kruger Mpumulanga International (KMI), opened in
Oct-02. This venture was 90% financed by the Swiss/Swedish company ABB,
to generate more tourism to the Kruger National Park region and to help
surrounding communities, which own a 10% share. Whilst targeting
international charter flights from Europe, it would also be appropriate to the
location of low cost airline services from major cities, and especially from
Johannesburg, although almost exclusively for tourists.
Budget short-haul services have so far failed to materialise, even though
fares charged by the dominant airline, SA Airlink, are said to be amongst the
highest per mile in the world. Nationwide is also represented at KMI, as is
Interlink, a small regional airline. Moreover, despite a charging regime that,
it is claimed, is from 10% to 500% less than comparable charging at ACSA
airports, the management declines to follow the European LCA example
because of:
•
•
The lack of breadth of services offered by the three LCCs – i.e.
international charters must take precedence in the strategy; and
The lack of non-aeronautical revenue generating possibilities to
underpin reduced costs to airlines.
KMI was not altogether successful in its early days. The operator of retail
services pulled out in Dec-03 and was not adequately replaced. Now there is
just a small restaurant, coffee shop, bureau de change and curio shop. One
area in which it has been successful is in the creation of (direct and induced)
employment opportunities in a relatively poor region of the country. The
local Mbuyane community receives a contribution from every departing
passenger to fund the development of small and medium-sized businesses.
Essentially KMI is a tourist airport, to serve the nearby Park and other
tourist attractions. With a 3.1 km runway it appears more appropriate to the
long-haul charters from Europe and the Middle East that it was originally
targeted at but which have so far failed to arrive in adequate numbers.
To conclude, the presence of the LCCs in RSA does hold out some promise
for LCATs, but if SAA, which is fighting for survival, is successful with Mango
at the expense of the other two LCCs then there will be little future for
LCATs there. Lanseria is the most obvious example of where it might
happen.
In the longer term that might prompt similar low cost secondary airports in
neighbouring countries like Namibia, which follow RSA’s example. For
example, Windhoek’s Eros Airport is just 2.5 miles from the city centre
compared to 28 miles for the International Airport. It has a 2,200 m runway
that appears to be wasted on general aviation and safari traffic. Air Namibia
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has a limited programme there, the only scheduled carrier. Angola, a
relatively stable country now, could host an LCC for international flights that
might help diversify its economy with tourism, but state carrier TAAG Angola
Airlines enjoys too much government protection for it to be feasible yet.
In the central part of Africa it is difficult to see where an LCC will come from,
let alone a LCAT.
In the continent’s “Horn” region. Ethiopian Airlines is one of Africa’s success
stories; a regional airline whose influence overlaps into other parts of the
continent and the Middle East. It also flies to cities in Europe, Asia and to
New York and Washington DC – a ‘flag carrier’ for sub-Saharan Africa.
Finally, it pioneered East to West trans-African services. Without them,
African travellers had to fly into mainland Europe to cross their own
continent.
However, Ethiopia remains a poor country, its 76 million people still largely
dependent on international aid. There is little prospect of LCCs and LCAs for
them. Ethiopia’s strength lies in its position close to Saudi Arabia and the
Gulf States, with Kenya bordering the south, which might attract the
growing band of Middle East LCCs to support labour movements to and from
the Gulf area as the Indian sub Continent has done before. Addis Ababa
offers an alternative to Bole International Airport (the USD130 million
‘aviation capital of Africa’) at the old Lideta Airport, used mainly by general
aviation and the military.
Nigeria’s booming economy looks attractive and there is a population of in
excess of 120 million but there are obstacles to LCC operations. The
country’s geographical location means that international single aisle LCC
operations would be limited to West Africa as there are no regional migration
patterns. More than in almost any other African country wealth is
concentrated in the hands of the few and they demand full service. It is also
an inefficient country in which to conduct operations, with corruption a
major cost of doing business.
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7.6 Latin America
Latin American aviation has been dominated by failing airlines during the
last decade but both the airline business and the economy generally now
seem to be on the up. There are new airlines and restructured older ones
competing. There are two notably successful airlines – the full service Lan,
(Latin Area Network, previously just LanChile now including subsidiaries LAN
Peru, LAN Ecuador, LAN Dominicana, LAN Argentina and LAN Express),
which has overtaken Varig, TAM and Aerolineas Argentinas as the leading
regional long-haul carrier, and Brazil’s GOL, a low cost carrier that has
produced quarterly profit margins at the top of the global industry.
Other notable airlines are Central America’s Copa and Taca and their
derivatives, and Aeromexico, which is scheduled for privatisation in 2007.
The local sector is facing more competition from the US, as American
carriers are expanding overseas in an effort to diversify away from the yieldchallenged domestic market. American, Continental and especially Delta
leading the way and European, Middle East and Asia carriers are also
introducing or expanding service.
The number of LCCs in Latin America has rocketed to over 15 and most of
them are in Brazil or Mexico, which is being hailed as the new Brazil, as it
features a large population with a well-developed airports network. The
Mexican airport operator GAP reported that 35.5% of domestic traffic at its
airports in 2Q07 was from LCCs.
Mexican LCCs
Airline
Avolar
Alma de Mexico
Click Mexicana
Interjet
Volaris
Viva Aerobus
Start-up Date
Sep-05
Jun-06
Jul-05
Jun-06
Mar-06
Nov-06
Base
Tijuana
Guadalajara
Mexico City
Toluca
Toluca
Monterrey
Fleet/Current
8/B737-300/500
8/CRJ-200
16/Fokker 100
7/A320
11/A319
3/B737-300
Viva Aerobus is partly owned by a bus company and partly by Ireland’s Ryan
family. As these new airlines have achieved solid market shares, the Mexican
legacy carriers have started to combat them, especially by cutting back
ticket prices, even though they are handicapped by high labour costs and
inefficient fleet structures.
The situation in Brazil is somewhat different. Flag carrier Varig collapsed
completely and was resurrected by Gol, which bought out its successor, New
Varig, in Mar-07, with the two companies proceeding with separate business
models. For the moment the leading airline is TAM. Another important
Brazilian airline is Ocean Air, the premier regional carrier.
Brazil’s airlines are recovering from a period when most of them experienced
financial difficulties and there is still an occasional blip, such as the one in
1Q07, when both TAM and Gol reported losses. Furthermore, the national
infrastructure is in a mess with congested airports, frequent strikes and air
traffic management failures. There have been two serious accidents in the
last 12 months. The International Civil Aviation Organisation has called for
more capital investment in the entire aviation system.
Privatisation of the airports is an indicator of secondary airport growth
potential here. Since the late 1990s the major airports have been privatised
in Mexico and Argentina by a process of concession agreements to various
foreign airport operators, and to a lesser degree in other countries. In
Mexico, there have been secondary sales and two IPOs.
Brazil, however, still exercises state control over its civil airports, though
some privatisation pilot schemes are in operation. As a direct result of the
infrastructure logjam, President Lula has approved a plan to sell shares in
Infraero, the state airport and ATM company, to help raise capital to
overcome infrastructure deficiencies that are constraining not only the sector
but also the wider economy. Brazil’s GDP grew by just 3.7% in 2006, due in
part to the growing infrastructure bottleneck.
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The capital requirement is enormous after years of under-investment since
the Latin American debt crisis of the 1980s. In Jan-07, the government
announced a four-year, USD250 billion investment plan in transportation,
energy and ports, but few of the funds have been invested to date, due to
bureaucratic delays.
Foreign capital is still noticeable by its absence. For all the positives coming
out of Latin America aviation sector, investors are still wary of the region
because of the scandals that have rocked previous airport privatisations,
notably in Argentina.
So will any of these developments pave the way for LCATs?
Two positive factors are that it is estimated that only 10% or so of the
continent’s 500 million population has yet flown and that the second largest
minority group in the USA are Hispanics, many of them from Latin America
and thus likely to fly within the region. There is great potential for LCCs.
Mexus Airlines of Fort Worth was set up to tap the US-Mexico market but
never got going. Now Viva Aerobus wishes to do the same out of a low cost
base at Austin Bergstrom airport also in Texas.
Some cities have secondary airports that could cater specifically to LCCs if
the level of demand required it, such as Santos Dumont, close to the centre
of Rio de Janeiro, Brazil. Sao Paulo’s Congonhas or (more likely)
Guarulhos/Cumbica, Viracopos/Campinas or Jundiai airports might be
developed in the same fashion, also Aeroparque Jorge Newberry in northern
Buenos Aires, Argentina.
The situation in Brazil has become confused by the authorities’ decision to
take punitive action against Congonhas airport following the Jul-07 crash
there, limiting Congonhas to flights of maximum two hours duration and
axing its hub status. They also declared Brasilia airport to be the nation’s
main hub for the North and Mid-West of Brazil, and Rio’s Galeao Airport to
have priority for flights to the Northeast and to Europe and the US. Until the
fall-out from the incident is settled, there can be no clear decisions made on
what will constitute future low cost airports.
Not all of the Latin American concessions have been successful and there
has been criticism of the performance of privatised monopolies. Franchises
typically run from 15-30 years and often have an exclusivity clause that
prevents another facility competing with them. When agreements are
negotiated, passenger traffic and growth can be factored in and affect the
basic economic conditions of the deal – not conducive to the competition
that sustains both LCCs and LCAs. Moreover, most airports, currently underused anyway, can handle expansion so it would not make commercial sense
to promote another airport nearby.
Where the government has benefited from an airport privatisation, through
leases and royalties, the money rarely goes towards new aviation
developments like new airports – there are pressing social problems to deal
with first. Many airports in this region also face a lack of acceptable levels of
alternative non-aeronautical revenue generation if aeronautical fees are
reduced.
The region’s leading LCC, GOL, believes there is still not enough traffic
overall to split airport operations between full service and low cost. From
Gol’s perspective, it is important to operate in the same airports as other
airlines because it is still competing with them for the same ‘type’ of
passenger – there is not as yet the type of passenger differentiation
identified elsewhere. In a deviation from the traditional LCC model, it is in
Gol’s plans to interline with international airlines to distribute their
passengers in Brazil, and thus it needs to be in the principal airports.
It will be interesting to see how the low cost terminal experiment at Austin
Bergstrom influences thinking (if at all) in Latin America. The whole
continent also closely monitors developments in Florida, as Miami is the
principle Latin American gate of entry for the whole world even if it is in the
USA. It is well known in Latin America that Fort Lauderdale’s intercontinental
traffic is growing, as did its domestic traffic earlier, directly as a result of its
costs being much lower than those at Miami.
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7.7 Middle East/Gulf States
Passenger traffic shows little sign of an immediate slow down in the Middle
East, where it increased by 13% in the first six months of 2007, led by Abu
Dhabi (+27%), Kuwait (+20%) and Dubai (+17%).
At one time, the prospects for low cost airlines in the Middle East and Gulf
looked as promising as they did in Asia Pacific, but actual progress was
much slower, finally picking up in 2006-7, which saw the arrival of Saudi
carriers National Air Services (NAS Air) and Sama, to add to the existing
players Air Arabia (Sharjah) and Jazeera Airways (Kuwait). Saudi Arabian
Airlines has announced plans to establish a low cost subsidiary to respond to
increasing competition in the domestic market.
Air Arabia is now reporting consistently good profits and up to 10 new LCC
entrants are anticipated during the next five years including one in Iran
(Ease on Air). LCCs have arrived in the region.
The Middle East would not hitherto have been first choice for a start-up LCC
point-to-point operation, having been characterised traditionally by big
state-owned, full-service airlines, reflecting the general economy of the oilrich regional countries and the high disposable incomes of their users or, in
the case of those states not fitting that pattern, a concentration on sixth
freedom long-haul discount traffic through hubs.
The local regulations – historically aimed at protecting the local flag carrier –
have been but one example of the problems facing development of the
budget sector. Other factors negatively affecting the prospects for LCCs have
included:
•
•
•
•
•
•
•
Restrictive practices emerging from uncompetitive ground handling
situations mean that turnaround times are slower in this region;
Passengers prefer to have assigned seating, further slowing down
the operation 22 ;
Internet marketing can be limited, not by technology, but because
credit card usage is not high in the region;
Costs in the region are not low;
The problems of capacity restrictions arising from tough bilateral air
service agreements and lack of open skies policies;
The lack of secondary airports, meaning that, at least in the
beginning, business models would have to be based on operations
at primary airfields; and
Level of comfort requirements of regular travellers in the region.
Air Arabia is much more like a traditional European LCC, with a wide range
of international routes in the Middle East, Gulf and Indian sub-Continent,
online booking, a bus service to Abu Dhabi and Al Ain, newspaper ticket
promotions and competitions. Air Arabia seems to have come closest, so far,
to copying successful European and Asia Pacific LCC principles. Furthermore,
basing at Sharjah gives it access to the other, nearby and heavily populated
Gulf States.
Sharjah Airport began a major expansion project costing DHS227 million in
Jan-05. The new facilities will enable the airport to cater to eight million
passengers and feature a new check-in area, departure and arrival lounges,
holding lounges, a bigger duty-free area, coffee shops and food court,
seating area as well as prayer areas for males and females. The number of
airline offices increased from 16 to 40 and the check-in counters increased
to 40. There is additional parking for 800 vehicles. In the absence of low
cost terminals in the region, Sharjah will probably become the benchmark
airport for low cost operations.
An airline called Smart Jet was set up to operate out of Dubai International
Airport, a full service airport with no provision for budget airlines because of
lack of capacity and which previously professed an unwillingness to host LCC
services.
22
The recent incident in Rome (Jul-07) is a good example when three Qatari princesses
refused to be seated next to males they did not know on a full British Airways flight.
Eventually they were removed, after three hours of negotiations.
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The opinion of the Dubai authorities has begun to change since then even
though Smart Jet did not get under way. The Emirate has been at the
forefront of aviation development in the region and will want to stay that
way: a great deal of money is being sunk into tourist and residential
developments. Airlines are to be offered the option of their own terminals at
the new Jebel Ali airport (Dubai World Central), which is set to begin open in
2008 and which will become part of an extremely ambitious target of 140
million passengers annually through the two Dubai airports by 2020
(currently 25 million at the existing facility).
It is now the intention that an LCT will be built at the new airport, to handle
at least five million passengers a year in the first phase of the airport’s
construction. In fact, the first phase of Dubai World Central will be expressly
for logistics services and low-cost carriers. Rates at the new airport will be
lower.
Kuwaiti-based Jazeera Airways launched in 2004. Following the Kuwaiti
government’s decision to open its aviation borders to competition, the
carrier now flies to 13 destinations, has a fleet of five Airbus A320s and has
ordered 30 more. The airline has now listed on the Kuwait Stock Exchange
and will make a secondary listing in Dubai, where it has opened a new
operating base/hub, later in 2007.
So Sharjah and Kuwait are established as LCAs without having any of the
facilities that are typical. Kuwait’s Jazeera is in a position to tap into traffic to
and from southern Iraq should that country ever free itself of its
predicament. Dubai will follow suit and it is highly likely that the designated
LCT there will follow the principles established at Singapore (q.v.), which is
Dubai’s chief pan-regional competitor.
Other potential hotspots for LCATs include marginal states like Fujairah and
Ras-al-Khaimah, which are both keen to establish themselves as airports
with a role to play regionally.
Middle East/Gulf State Locator Map
Another potential LCA spot is Oman, where the two main airports went
through a painful and failed privatisation process in 2004 when the banks
got cold feet about investing in a volatile part of the world. Much will depend
on the direction Oman Air takes. It wants to start long-haul flights but faces
five years of losses.
The airports in the Middle East, and certainly those in the Gulf, need to
differentiate themselves. As things stand, the main airports are all chasing
much the same sort of traffic, i.e. high net worth individuals to shop in glitzy
arcades and sixth freedom passengers from and to every corner of the world
via their particular hub. Whether they can all survive and prosper remains to
be seen. One way in which they can differentiate is by providing facilities for,
and encouraging, LCCs. Dubai has set the ball rolling by prioritising its LCT
at Dubai World central.
Small secondary airports in the European fashion do not exist in the Middle
East, so if LCATs are going to be part of the scene at all they will feature at
existing airports.
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United Arab Emirates – Key Data
Area Total
Population
Median age
Literacy
GDP per capita
Railways
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83,600 sq km
4,444,011
30.1 years
3.997% (2007 est.)
77.9%
USD49,700 (2006 est.)
None
Al Fujayrah, Khawr Fakkan, Mina' Jabal 'Ali, Mina'
Rashid, Mina' Saqr, Mina' Zayid, Sharjan
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7.8 Russia
Despite its huge landmass (twice the size of the US), widely spaced cities,
populous city-regions in the west, recently enriched middle classes and fast
growing airlines, Russia is not really suitable for low cost airports just yet, its
airlines having only just adjusted to external competition and the
subsequent demand for lower prices.
There is something of a dichotomy here. There are perhaps a dozen foreign
LCCs operating into Russia, mainly to Moscow and St Petersburg, but until
recently only one homegrown airline – S7 (previously Sibir or Siberia
Airlines) – seriously trialled a low cost service per se, and that was a peculiar
arrangement, on just one route and in only one part of the cabin. S7 is
based at Novosibirsk, Russia’s fourth largest city and is Russia’s secondlargest airline after Aeroflot. It maintains secondary bases at Domodedovo,
Moscow’s upcoming second airport, and Irkutsk.
The Russian airline sector is dominated still by Aeroflot, whose newfound
confidence is registered in the fact that it made a bid for the ailing Italian
flag carrier Alitalia together with the Italian bank Unicredit. The third largest
airline is Pulkovo Aviation, based at St Petersburg, where it also runs the
airport. Air Union, a merged airline out of five smaller ones, will cooperate
with Austrian Airlines as it re-engages its focus on East Europe, the Baltic,
West Asia and the CIS states.
Russia Locator Map
Most Russian airlines are investing in aircraft types that are highly suitable
for LCC applications such as B737-800 and A319/320, plus the B787, which
both Aeroflot and S7 have ordered; an aircraft suited to the nation’s longdistance flights. Most Russian airlines are disposing quickly of old fuel
guzzling Tupolev, Antonov, Ilyushin and Yakovlev aircraft types, as it is
increasingly practical for them to buy or lease new Western built aircraft, as
tax implications are gradually reduced. In addition, the United Aircraft
Building Corporation is introducing its own 100-seat Sukhoi Regional Jet.
Equipment choices notwithstanding, the LCC movement has not caught on,
however. In 2002, the airline Tsentravia made a failed attempt to convince
train passengers to fly similar distances with a no-frills air service between
Moscow and Belgorod operated by a YAK 42 and which was partly supported
(30%) by the Belgorod regional administration. it was unable to attract
enough passengers, and when the Belgorod administration cut off subsidies
after three months, the carrier was forced to discontinue the service. In S7’s
case, the Domodedovo Airport management had helped it to reduce unit
costs, part of its strategy as a privately operated airport, run by the East
Line Group to attract full service airline traffic from the state-run
Sheremetyevo Airport. This helped S7 reduce turnaround times and improve
utilisation.
S7 benefited from the fact that it already had lower operating costs than
most European LCCs, having rid itself of the burden of overstaffing, unlike
many of its contemporaries. Moreover, the better-managed airports, like
Domodedovo, were increasingly willing to make performance guarantees on
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turnarounds. Most Russian aviation analysts believed that if S7 could not
succeed, then no other airline could.
S7’s trial was limited, as a forerunner to establishing an LCC within S7 or
setting up a new one altogether, and the two-class concept was not
appropriate for a short journey. The Tu-154, in common with most aircraft
available to Russian airlines at the time, is too expensive to operate on a nofrills route. Aeroflot’s view was that passenger numbers on domestic routes
remained too low to make low-cost service feasible with the exception of one
route - Moscow to St. Petersburg - where 650,000 make the trip every year
by air but five million more go by rail. If low-cost services were well
organised and the western model could be introduced fully and maintained,
many of those five million passengers might switch to air, but no airlines
were considering offering no-frills service on this trunk route.
There are similar circumstances preventing low cost carriers from getting
going in Russia as there are in the Middle East and South Africa. For
instance, Internet and credit card usage is on the increase but hardly
widespread. Discussions took place on the experience of other countries
where credit card payments by Internet are not widely used and the
possibility of the customer making bookings by Internet and then having a
period of time to go to an office, or a partner bank or post office to make the
payment. No-one was sure how the Russian aviation authorities would
view any move away from the traditional air ticket to ticket-less e-travel –
that would be a quantum step: the authorities remained resistant to change.
Within the last year a start-up LCC, SkyExpress, seems to have
circumvented the restrictions. It is possible to make a booking and pay for a
ticket by debit or credit card on the corporate site or via a call centre. Even
so, both the order and purchase procedures remain long and complex and a
reservation is only possible for one person or one adult plus child at once.
SkyExpress’ website home page carries an advisory to the effect that its eticket technology “complies with the Ministry of Transport’s Order #134 of
Nov-06.” It appears that e-tickets were refused at one airport.
SkyExpress boasts fleet commonality, operating B737s out of Vnukovo, the
closest airport to Moscow city centre. It serves only snacks and beverages
on board, which must be paid for. In-flight service includes newspapers and
magazines, audio and DVD, and prepaid mobile phone cards, bank debit
cards and travel insurance are for sale. Cabin crew will make hotel and
restaurant reservations and even order a taxi at the arrival airport.
SkyExpress certainly has taken on many of the facets of a European LCC and
particularly Ryanair’s emphasis on in-flight sales.
With airfares falling across the airline sector, Russian airports are thus under
renewed pressure to cut their costs. At the same time, in Jul-05, Russian
Government officials announced they intended to reduce the number of
international airports in the country from 70 to eight hub airports and 20
major domestic airports, as part of the reorganisation of the airport system
being undertaken by the Transport Ministry. The airports would follow the
ICAO international benchmark of spacing international airports 500 km from
one another.
Moscow’s Domodedovo Airport already being managed privately, it is now
locked in a battle with Sheremetyevo, which is being improved rapidly, with
a new terminal and refurbishment of others part of the programme.
Domodedovo is finally taking account of the low cost boom of foreign LCCs
into Moscow, and of the potential for home grown versions, by planning a
low cost terminal space within its own new developments. Just what form it
will take is unclear as both Sheremetyevo and Domodedovo are basically
vying for the same hub-based intercontinental traffic.
On the fringes are the secondary/tertiary Moscow airports - Vnukovo,
Bykovo and Myachkovo. Vnukovo in particular has been left behind by the
rapid development of Domodedovo and the attempts by Sheremetyevo to
catch up. Moscow City Council sought to assist these smaller airports by
inviting investors for a system of air taxi operations at the secondary
airports, offering to make a 50% contribution towards the anticipated overall
cost of USD1.4 billion for the improvement of infrastructure.
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The Moscow government remains the main shareholder at the largely
forgotten Vnukovo Airport (28 km southwest of Moscow, closer than
Domodedovo), which has become the base for SkyExpress and which now
plans a new passenger terminal of its own, within ‘low cost’ parameters.
Construction of the new terminal commenced on 16-Sep-06 and it will
ultimately have the capacity to handle 18 million passengers per annum. In
2006, passenger traffic at Vnukovo rose 41.4% to 5.1 million. Vnukovo has
four terminals presently but only one is designated for commercial domestic
and international passenger traffic, the others being allocated to heads of
state and official delegations, general aviation and cargo.
At St Petersburg, the City authorities will issue a tender for the operation of
Pulkovo Airport, the main facility, which is presently managed by Pulkovo
Aviation. The winning bidder would reportedly be required to invest USD1.2
billion in airport infrastructure developments. Officials hope to expand the
airport’s annual passenger capacity from 4.4 million to 12 million within four
to six years. With the airline taking a back seat, the opportunity arises for an
increased LCC presence there. There is a secondary airport at St Petersburg
(Rzhevka) hosting general aviation that might be used for budget
commercial flights and the intention is to privatise it.
External interest in airport development has materialised from several
sources. Paramount amongst them being Singapore’s Changi Airport
International (CAI), which has a four-pronged strategy to expand in China,
India, the Middle East and Russia. In Jul-06 CAI announced a joint venture
with Sheremetyevo International Airport Joint Stock Co (SIAJS) to manage
and operate terminals at Sheremetyevo, the latest of which will be the new
Terminal 3.
CAI has also established itself in the field of consultancy in Russia, for
example in the reconstruction of St Petersburg’s Pulkovo Airport, and it may
be invited to manage up to 10 Russian airports in a joint venture with
Sheremetyevo Airport. These include a group of southern airports controlled
by a holding company, Basic Element. CAI’s usp, as in India and the Middle
East, is the experience gained from the construction, operation and
management of the budget terminal at Singapore since Mar-06, which it
could be invited to replicate at any of a dozen or so Russian cities.
Those same 12 cities, each with a catchment area of three to four million but
with scarcely developed airports, are also attractive to Meinl Airports, the
subsidiary of Austria’s Meinl Bank and which is headed up by executives
previously at Flughafen Wien (Vienna Airport). Although Vienna Airport
would hardly qualify as an LCA, given Austrian Airlines’ hub power there,
Flughafen Wien did attempt to acquire Bratislava Airport in nearby Slovakia
for use as a complementary LCA to Vienna. It has a share in the regional
Friedrichshafen Airport on the borders of Germany, Austria and
Liechtenstein, and has been heavily involved in the assimilation of LCCs at
Malta International Airport. In other words there is plenty of portable
experience.
In summary, the Russian LCC/LCAT business is really only on the verge of
coming to life, but if the airline side begins to succeed there will be a need
for equivalent airport facilities. The remainder of the country will probably be
led by what happens in Moscow. If Russia cannot provide them then other
countries at its borders will try to do so, as in the case of Lappeenranta
(q.v.), the Finnish airport that seeks to become St Petersburg’s low cost
gateway.
Russia – Key Data
Area Total
Population
Median age
Literacy
GDP per capita
Railways
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17,075,200 sq km
141,377,752 (July 2007 est.)
38.2 years
-0.484% (2007 est.)
99.4%
USD12,200 (2006 est.)
87,157 km
Anapa, Kaliningrad, Murmansk, Nakhodka,
Novorossiysk, Rostov-na-Donu, Saint Petersburg,
Taganrog, Vanino, Vostochnyy
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Chapter 8
Airlines, airports and
communities:
A European perspective
This chapter, written by route development expert André Morral, provides a
backdrop for the birth of the low cost airport and terminal in Europe and
explains how the EU’s rules governing airport support of low cost carriers
has changed the airport’s marketing function.
Overview
•
•
•
•
The new era has seen a fundamental alteration of the airline-airport
relationship, with LCCs demanding both user charge vacations and
in some cases inducements to serve an airport
With the Charleroi-Ryanair decision, Brussels limited the ability of
the airport to “buy” service
Other tools to secure service are still legal, such as route
development funds, but if used injudiciously, they can be an
unproductive use of public monies
With a proper framework, airport and community investments in
new service can be a sound investment with good returns for all
stakeholders
The analysis explains that, although constraining the airport’s ability to
innovate in securing new service from the low cost breed of airline, the new
regulations do not cripple the airport marketer. Airport development forums
and route development funds are both tools that the airport and surrounding
community can use to entice carriers to provide new service. However, both
must be used cautiously, as the wrong type of route can result in a
community subsidising an airline to provide service that results in the
community’s citizens travelling elsewhere.
Finally, the chapter shows how the costs and benefits of a potential service –
to the airport as well as to the community and economy it serves – must be
accurately measured to make a determination of which funded services
represent an investment worth making and which should be passed over.
The skies across Europe over the last ten years have never been so busy.
More airlines are moving more people to more destinations than ever before.
The growth in aviation across Europe, particularly over the last five years,
has been nothing short of phenomenal.
But passenger growth, and the economic benefits that the aviation industry
indisputably delivers to the European economy, ultimately comes at a price.
When the European Community (EC) Commissioners liberalised the skies of
Europe in 1997, did they fully appreciate exactly what the consequences of
liberalisation would actually mean on the ground and within the communities
where the interplay between airports and airlines is acted out?
Of course the post-1997 liberalization could only lead to change in the
European aviation industry. EasyJet, the European pioneer of Internet airline
ticket booking, was among the first to be prepared for full liberalization – it
had started up its operations in 1995 with a base at lower cost, charterdominated, London Luton airport.
EasyJet, in anticipation of a free and open European market, was desperate
to test its low cost product head to head with traditional airlines. Meanwhile
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Ryanair was transforming itself as Europe’s version of Southwest Airlines,
British Airways was busy setting up Go, KLM put its foot in the market with
Buzz and many other aspiring airline entrepreneurs were setting up low cost
airlines in a flurry of airline activity the like of which Europe had never seen
before.
On the ground, airports were also changing, and new ones were developing.
Former military bases were being transformed into commercial airports and
a number of previously sleepy airports suddenly awoke to the low cost
revolution.
Frankfurt Hahn suddenly appeared on the radar and some facilities started
to wear the label of “secondary airport”, not quite in a major city but near
enough to win an audience if the flights and services on offer were cheap
enough.
So the future was bright; Boeing and Airbus certainly thought so. Orders for
new aircraft were coming in thick and fast, Europe was the place where
aircraft salesman wanted to be and business looked good. In the US, the
situation would be very different, 11-Sep-01 came and the aviation market
began to fall apart. But while some traditional airlines never recovered from
the tragedy, Ryanair just kept on growing. Michael O’Leary, Ryanair’s
colourful CEO, launched an industry fight back using World War II Prime
Minister Winston Churchill’s image in a advertising campaign to offer free
tickets to “Get the nation flying again”
And so Europe’s aviation industry, whilst bruised by the events of that day,
steadily recovered.
The next phase of development of the low cost industry would be less
positive. Deals between airports, regions and airlines would come under
scrutiny and the murky world of marketing support would come under the
microscope of regulators at the European Commission.
Ryanair would be the first high-profile casualty, when the discounts it
received at Charleroi came under scrutiny, with the EC deciding that the
incentives amounted to an illegal subsidy from the Walloon authorities and
decreeing that Ryanair would have to repay the “reasonable” sum of EUR4
million.
But Michael O'Leary, chief executive, stated: “We consider this decision to be
a disaster for consumers, and for low-cost air fares all over Europe. And it is
a disaster for publicly-owned airports which can no longer compete with
[private] airports all over Europe.” He said the decision interfered with the
free market, and that the subsidies were “not illegal”. The EU was not
convinced.
Some of the rebates for Ryanair were permissible as part of regional
development support for the airport. But some of the subsidies had to be
returned, the Commission said, because it was “incompatible with the proper
functioning of the internal market.”
All of a sudden, the relationship between an airport, region and airline would
be thrust into the regulators’ spotlight.
Following the Charleroi ruling, the European Commission published in 2005 a
set of specific guidelines on the financing of airports and start-up aid to
airlines departing from regional airports in an attempt to clear up what could
and could not be done with public money in transactions between publicly
owned airports, regions and airlines.
The relationship between airlines, regions and airports operating in the
‘Open Skies Market’ would all of a sudden be subject to regulation once
again, which leads into the main point of this article.
What should the relationship actually be between airports, regions and
airlines? Who should decide what route is needed and to where? And finally,
what about the so-called successful airports, the ones that are making
“enormous contributions to the regional economy” but not actually making
any money themselves?
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Some new thinking concerning the airport, region and airline relationship
business is playing out at places like Aberdeen in Scotland, Bergen, Norway
and Grenoble in France.
All of the above locations have set up their own ‘Development Forums’
bringing key stakeholders together under a structure that is designed to
ensure that the airport operates in the best interests of the community it
serves, in full recognition of the local political mandate that it has been given
to operate as an airport in the first place.
But consultation between airports, airlines and regions is nothing new. The
UK has had a guideline governing such relationships in place since 1982.
However, although the UK already has a mechanism that provides a legal
platform for ‘Airport Development Forums’, consultative committees are
often concerned with environmental, ground transportation or noise issues
rather than what the pure business of airports which is actually
about...Transport Routes!
Across Europe, similar legislation is either non-existent or is sadly lacking in
substance and so the arena for joined-up thinking in this field is even worse
than in the UK.
Essentially a properly structured Airport Development Forum should be the
arena where key strategies concerning route development and marketing
support should be played out. For instance, it often occurs that an airport is
privately owned, but receives some form of marketing support from the
region to grow passenger volume, However, if the support merely enables
the airport to work with airlines that primarily cater to the local population,
i.e., enables it to fly and spend its money in another country (directly
benefiting another economy) ...is that money really well spent?
The arrival of Route Development Funds in Scotland, Ireland and Wales are
a case in point. These Funds allow airports, regions and airlines to work
within the spirit of EU guidelines while at the same time helping airlines to
risk-share, with the support of public money, the start up and risky phase of
new airline routes. These interventions are potentially useful, but they must
be analysed more closely from an economical perspective, particularly where
routes appear to be more suited to assisting the outbound ‘sunshine seeker’
market.
Take for
originally
authority
Chamber
instance the approach in Grenoble, France. The airport was
built for the 1968 Winter Olympics. It was managed by the local
until Dec-03, when its management was entrusted to the Lyon
of Commerce and Industry.
Then in Jan-04 the Isère Departmental Council awarded a contract for the
management and development of the airport to a privately owned joint
venture set up specifically for the task of improving the prospects of the
airport. The Société d’Exploitation de l’Aéroport de Grenoble (SEAG) was the
first contract of its type for a regional airport in France. SEAG is a 50/50
joint venture held by two internationally known private partners, Kéolis
and Vinci Airports.
SEAG immediately established a marketing department, which set to work
by contacting airlines to attract additional regular and charter flights,
working with local tourism agencies. The well-governed emphasis of the
entity was specifically to bring passengers into the region.
The same situation is playing out in the Norwegian Fjords at Bergen, where
Avinor, the state-owned operator of the airport, has entrusted the local
community and tourism leaders to head up a development forum geared
around developing new airline routes with a greater emphasis on the
inbound market. Financial support is never extended to the airlines.
The European ‘Open Skies’ aviation policy is certainly welcome, however,
where regions have a poor tourism offer and play host to airports that are
heavily geared around satisfying primarily an outbound market. But even in
these cases, careful consideration must be made of exactly how and where
money is spent to support airlines and indeed the airport itself.
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An ideal constitution for such a development forum should consist of
representatives that gain most from inbound passenger traffic, ideally the
forum should include a steering committee made up from the:
•
•
•
•
•
•
•
•
Director of Tourism;
Director of Economic Development;
Leader of the Chamber of Commerce;
Leader of the local Hotel Association;
Local tour operator;
Bus, coach, taxi or ground transport company;
Airport marketing manager; and
Ground handling agent.
Concerning the budget for the forum. This should be simply calculated on
how many new routes the forum decides that it needs. The decision should
be based on any obvious gaps the airport’s present network has, or demand
from business to open up new destinations they believe are needed to serve
the local business community or legacy routes that were once operated
profitably, but for some reason are no longer served.
To calculate the budget, one must look at both the demands the airline has
in terms of marketing a new route and exactly where the money is spent.
What an airline needs and what is actually required are two different
matters. The forum should expect to receive from the airline on application
for funds, which should include a properly structured marketing, advertising
and media plan for each route.
Careful examination of this plan must be made by the forum so as to ensure
that the media plan properly covers the correct media mix across both ends
of the route and that the message content does all it can to appeal to the
inbound market. After all, that is rationale behind the forum’s provision of
marketing resources.
Careful consideration must also be made where use of public money is
concerned. However, if the forum is funded more than 50% from the private
sector and operates within, say, a tourism marketing group constitution that
is commercially and privately operated, then it should have the flexibility to
work without the hindrance of state aid legislation. If any element of public
money is used in the structure of the forum, the steering committee has to
make sure that it operates within the spirit of the EC guidelines and that it
also operates in a manner that is transparent, proportionate and nondiscriminatory. The publication of an annual report of the forum’s activities is
a good idea.
A flexible forum can work to support not just airlines with new routes but
also to work with tour operators and assist airlines in refreshing the
marketing message of existing but flagging routes. The whole idea is to
foster a sustainable, well-managed, micro-economic approach to route
marketing.
Finally, the tripartite airport, airline and regional economy relationship must
be carefully managed – a lack of coordinated thinking in the area of route
development will only lead to scarce tourism budget resources being wasted.
In conclusion, development forums, if properly conceived and managed,
could represent an answer to the increasingly vital question of how to
mutually satisfy the disparate aims of airports, airlines and communities.
This chapter was written by André Morral. Mr Morral serves as Project
Director of Brand Aviation, publishers of airport route development
documents and promotional prospectuses (www.brandconsult.co.uk).
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Chapter 9
227
Chapter 9
Low cost airports and
non-aeronautical revenues
This chapter focuses on the necessity for airports to optimise their nonaeronautical revenue. The author, airport solutions provider Ian Lowden,
explains that while the need for non-aeronautical income generation is
understood, its overall importance to the airport’s financial performance and
the way in which it can be maximised is not.
Overview
•
•
•
Highlights the importance for low cost airports of maximising retail
and food-and-beverage revenues, especially in face of falling
aeronautical incomes
Although low cost airports may face lower per-passenger retail
spend patterns, their food-and-beverage potential is potentially
superior
Constant monitoring and willingness to make changes to retail
presentation and outlets, as well as thinking outside the box,
necessary for success
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9.1 Introduction
It is not always appreciated to what degree airports dealing with low cost
airlines have experienced significant drops in aeronautical revenues and
passenger charges, with most not having made it back in enhanced retail
and food-and-beverage sales. This situation, if not corrected, can see the
loss of shareholder/community value continuing indefinitely. However, there
are possible avenue to overcome the situation.
With security screening considerations bringing passengers to the airside
earlier and budget carrier thrift eliminating onboard meals, food and
beverage sales are an especially big opportunity for smaller airports to make
up the short-fall.
On the retail side, the chapter explains how the airport authority must stay
vigilant in monitoring the performance of its on-site outlets, expeditiously
making changes where necessary. Some areas where alteration of the total
package can be effected include the selection of concessionaires for
passenger-suitability and the placement of outlets relative to the gates.
The analysis allows that low cost airports may operate at a handicap to big
hub airports, where the purchasing profile of the average passenger may be
higher, but that there are certain untapped areas where the LCA can
undertake a “guerrilla” retail campaign (e.g., by offering for-pay washroom
facilities of a higher standard or by installing per-pay internet kiosks).
The low cost airports are leading the way in developing non-aeronautical
revenues. This is a necessity because the aeronautical revenues are being
driven down by aggressive airline customers who see the airline’s prime
motivation being to increase volume, not create value in their business.
Passenger traffic is still booming and airports have ever-increasing
expectations to generate profit, often for new, private shareholders. Yet at
the same time their revenues are being driven down by low cost airlines that
want zero landing fees and huge discounts on passenger charges. The
solution is for airports to make more money from their non-aeronautical
business streams. However, this is easier said than done.
According to an Airports Council International (ACI) global airport survey,
airports now derive 50% of their income from non-aeronautical services,
with some larger airports earning up to 60%. In the financial year 2005/6, a
sample of UK regional airports made an average of GBP4.30 per passenger
in non-aeronautical revenue. However, some airports greatly exceeded the
average, such as at Cardiff-Wales, which made a creditable GBP5.40 per
passenger.
We have made a quick examination of why airports differ so much and what
they could do to make more money from each passenger. The answers are,
in the first instance, intuitive and immediately apparent.
Airports with new terminals, especially those built or extended in the last
five years, have generally been built with maximising retail revenue in mind.
According to data provided by CRI of the UK, there has been considerable
change in the profile of aeronautical and non-aeronautical revenues over the
last five years.
The table below, shows the aeronautical revenues of a selection of low cost
focused airports from 2001 to 2006. It can be seen that their average
aeronautical revenue has moved from GBP7.06 in 2000/1 to GBP4.91 in
2005/6, a reduction of some 30% per passenger.
There has been
considerable variance between airports in terms of reduction in fees.
Predictably, the airports offering the largest decrease have seen the greatest
passenger traffic growth: Blackpool, Bristol and Liverpool for example.
However, there is also Leeds-Bradford and Belfast airports that have seen
their aeronautical revenues per passenger broadly halve but without the
compensatory increase of traffic required to make up the shortfall. For
these airports the need to perform very well in non-aeronautical is greatest.
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Aeronautical revenue of a sample of UK airports
Birmingham
Int’l
Newcastle (4)
Belfast Int’l
Cardiff Int’l
London
Luton
Leeds
East Midlands
Blackpool
Bristol
Liverpool
Teesside
Total
Source: CRI
Pax
(000)
2000/01
7,619
Airport Charges
GBP
62,090
GBP
8.15
Pax
(000)
2005/6
9386
3,287
3,156
1,526
6,331
23,202
20,270
14,806
29,420
7.06
6.42
9.70
4.65
1,603
2,229
78
2,172
2,069
750
30,820
12,508
21,836
966
19,054
8,943
4,450
217,545
7.80
9.80
12.36
8.77
4.32
5.93
7.06
Airport Charges
Pac
inc %
Rev dec
%
GBP
62,863
GBP
6.70
1.23
0.82
5,233
4,822
1,772
9,149
27,700
14,725
12,484
31,679
5.29
3.05
7.05
3.46
1.59
1.53
1.16
1.45
0.75
0.48
0.73
0.75
2,600
4,155
452
5,157
4,653
899
48,278
10,538
29,551
3086
24,258
13,432
6,715
237,031
4.05
7.11
6.83
4.70
2.89
7.47
4.91
1.62
1.86
5.79
2.37
2.25
1.20
1.57
0.52
0.73
0.55
0.54
0.67
1.26
0.70
Understanding the way passengers move is essential for non-aeronautical
revenue generation. By focusing on the route taken by airport customers,
airports can employ a ‘value chain’ approach to explore revenue-earning
opportunities at every point. If this is well understood, airports can maximise
income from concessions by ensuring that they are located in areas of the
airport where most people spend their time.
Non-aeronautical revenue of a sample of UK airports
Birmingham Int’l
Newcastle
Belfast Int’l
Cardiff Int’l
London Luton
Leeds
East Midlands
Blackpool
Bristol
Liverpool
Teesside
Total
Nonaeronautical
(GBP000)
2001
35,061
11,439
10,991
7,325
33,571
6,079
9,990
2,413
22,209
4,767
3,399
149,245
GBP pax
GBP
4.60
3.48
3.48
4.80
5.30
3.79
4.48
------2.30
4.53
4.84
Nonaeronautical
(GBP000)
2006
48,100
23,660
16,481
9,619
45,342
10,485
21,003
5,415
25,361
15,366
4,119
226,957
GBP pax
GBP
5.12
4.52
3.42
5.43
4.96
4.03
5.05
11.98
4.92
3.30
4.58
4.70
Source: CRI
Most of the sample airports have increased their non-aeronautical revenues
but not by the same degree as they have reduced the aeronautical ones.
The message is clear: much needs to be done to capitalise on the substantial
traffic growth brought by the low cost airlines.
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9.2 The way forward
Airport management has recognised the threat and the opportunity of the
new traffic regime and is attacking this area vigorously. To some extent
international events are playing into their hands. Tightened security and a
faster pace of life mean that airline passengers want to check in quickly,
avoid queues as much as possible and travel through the security process as
fast as they can. This often means they have more time to spend airside and
less landside.
If the trend is for airline passengers to spend more time airside then
maximising retail concession income there has to be a core commercial
strategy for an airport. The key areas are food and beverages, and retail.
Catering concessions are a major growth area, especially for the regional
airports. Over the last five years a ‘typical’ small or low cost airport would
have seen total commercial revenue grow by 66% but food and beverage
would have grown by 116%. At large airports and major hubs, general
commercial revenue has remained more or less static but food and
beverages revenue has grown by over 20%.
Lars Crone, VP International Development for SSP, one of the world’s major
catering concessionaires, attributes this largely, but not entirely, to the
development of low cost airlines, “Low cost passengers” says Crone “may
pay EUR30 for a ticket but then think nothing of paying EUR50 at the airport
on a meal. Passengers are also coming to the airport earlier because they
are worried about security delays, this often leaves them with time to eat
and drink before they fly.”
In a ratchet-up in terms of professionalism, airports are investing heavily in
research and sophisticated analytical processes to understand their
customers and tailor their retail product offering. For example, Aeroporti de
Roma conducted passenger research that revealed that sales potential could
be limited by a number of factors including a narrow and unbalanced
offering, negative price perceptions and an inefficient layout, leading to 64%
of their passengers sitting next to a departure gate rather than visiting the
shops. The answer was an improvement programme that altered the airport
layout, substituted poor performing concessions and strengthened the core
product shops.
Geneva Airport has, like the other Swiss airports, already seen the benefits
of a high standard of commercial marketing activities and commercial
revenue have outstripped passenger traffic growth. Unique Zurich’s Head of
Marketing Retail, Patrick Graf, attributes this to a ‘trendy and customer
focused assortment in retail and food and beverages with competitive prices
as well as a pleasurable and inviting atmosphere due to the amplified
atmosphere.’ Because low cost passengers have, in the case of Switzerland,
broadly the same demographic as ‘full service’ they are attracted by the
same attributes.
However, there are still differences between the major hubs and the low cost
airports. For example, the ‘atmosphere’ that is reflected in the massive
terminal developments at Heathrow and Paris, amongst others. Paris has
designed CDG S3 with long narrow stores to ensure product exposure and
allow quick and easy shopping. The clearly defined product zones ease
circulation and create a commercial ambiance.
The smaller airports, especially those without major terminal developments
underway, will have to be more ‘guerrilla-like’ in their revenue enhancement
and use a large number of smaller initiatives. These could include:
•
•
•
•
•
•
•
•
•
•
Paid entry executive lounges;
Floating concessions i.e. ‘Barrow Boy Retailers’;
Internet kiosks, WIFI log in fees;
Retail promotion and product placement;
Static exhibition sites;
Public viewing gallery with turnstile paid access;
Television advertising screen concessions;
Radio station concession;
Toilet and washroom advertising;
Toilet and washroom paid entry – deluxe product.
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There are also other major considerations that are reflected in the low cost
product. By far the most important is the lack of ‘very high income level’
passengers. There are far fewer examples of high-end products such as
watches and jewellery and high fashion. This is exacerbated by the lack of
connecting passengers who make serious impulse purchases of high-end
items when routing through the major hubs such as Dubai or Singapore.
Whether it is through design, choice of concessions, or best understanding
passenger segmentation, the trend is clear.
Revenue generation is
becoming a key driver of airport development and the professional stakes
have been raised.
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9.3 Assessment of the key revenue streams
Non-aeronautical income streams comprise retail concessions, duty free,
auto parking, rental car concessions, property income from leasing of airport
land and offices, advertising concession income and transport concessions.
There are also smaller, disparate revenue streams including security
services, data, trademark licensing, merchandising and naming rights,
conferences, meetings, transport concessions and drop-off charges.
Our analysis of the low cost airports’ concession offerings, shown here as
Appendices 1 and 2, shows the massive extent and range of consumer
choice. Whereas even ten years ago an airport such as Marseille would have
had a relatively limited range of concessions, now they typically offer 5-10
different retail outlets and a similar number of food and beverage outlets.
What is also apparent is the extent of the lead Europe has over the nonEuropean airports in this field. The European have adapted many very
attractive practices such as the use of promotional offers and luxury catering
outlets. However, there are still opportunities to improve and offer greater
diversity; many offer ‘single source’ coffee outlets, for example.
Data provided by the UK allows the analysis of the non-aeronautical streams
at the key low cost airports of Liverpool, Prestwick, Blackpool, Durham Tees
Valley, and London Luton. What comes out of the analysis is that there have
been significant strides in the development of all the key areas.
There is considerable variance in the growth of the revenues and the
comparable levels between airports. Some airports such as Liverpool tend
to ‘under perform’ to an extent, creating only just over GBP3 per passenger
whereas airports such as Blackpool achieve closer to GBP5 23 . What is clear
is the performance of the airports is not pre-determined by traffic levels or
even the size of the terminal, although clearly this is very important.
Concessionaires are also tailoring their product to meet the demands of the
low cost airport. In Latin America, especially in cities such as Lima, the
‘grab and go’ bag is very popular. The airport provides a snack meal and a
drink for passengers on flights without catering; some airlines even remind
their passengers to buy them before boarding. This idea has yet to catch on
in Europe, indeed it is easy to imagine the low cost airlines being horrified at
the prospect because so much of their revenue comes from on-board sales.
However, the European airports have taken High Street methods to drive up
their revenues. Best practice concessions are characterised by attractive
sight lines, friendly and sales-focused staff, numerous mobile displays and
promotional staff and liquor agents. Their airports have become a High
Street.
The target market is, by and large, very receptive to this,
particularly because the security arrangements make it necessary to arrive
at the airport earlier.
Even very small low cost airports such as Durham Tees Valley have made
clear and attractive changes to their departures hall to reflect the demand
for shopping from their passengers.
One of the main growth areas is car parking. Even if they optimise retail
concession revenue, airports still have to work hard to develop income from
car parking. This represents one of the most important commercial income
streams available to any airport. How that car parking income is managed is
critical. Our analysis of the offering of the individual airports shows that
they have begun to capitalise on their car park offering.
Whilst it is not a low cost airport group as such, apart from Stansted, it is
indicative that some 25% of BAA’s non-aeronautical revenue comes from car
parking. A recent UK Airport Operator’s Association report quoted the MD of
BCP, Britain’s largest private car park operator. Stephen Moss, MD of BCP
and also chairman of the Independent Airport Park & Ride Association,
representing off-airport operators as a group, confirmed the vital role played
by parking revenues: “Airport parking is hugely important to airport
23
Our understanding is that the CRI data severely underestimates some airports’
revenues. In the case of Blackpool we believe that the figure may be close to GBP10,
although this is an unofficial figure subject to confirmation.
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233
authorities, especially in the post-duty free era and with the advent of low
cost carriers that are able to negotiate very low landing fees. Parking can
represent 50% of non-aeronautical revenue for regional airports.” It can be
seen that this is now a key revenue source, and for some airports, such
as George Best Belfast City Airport that make a loss on 'aircraft business',
the profit of GBP2.4m profit on car parking and other trading income is
absolutely vital. The techniques that can be used to optimise income include
web sales, pre-booking, valet parking and block sales.
Managing and collecting income directly is a preferred option of many
airports, often hand-in-hand with a technology partner. Frankfurt Hahn
(Fraport) use Ski Data technology, Leeds-Bradford has just installed
Chauntry Systems’ management software. This type of technology provides
smaller airports with the ability to manage their own facility and generate
much-needed revenues. Key factors affecting growth include the annual
number of cars parked, length of stay, use of premium parking, advance
booking, percentage occupation, and seasonality. This information can be
used to segment the market, differentiate the product and offer a better
service to passengers whilst increasing revenue.
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9.4 The relationship with concessionaires
Low cost airport management now has to make several key decisions:
•
•
•
‘Make or Buy’. Is it cost effective to keep activity in-house or to
bring in a specialist third party supplier? This complex decision is
informed by the likely turnover, investment required and whether
the concessionaire will stretch its commission far enough
Terminal extensions? Many airports are now considering extending
their terminal area just to accommodate concessions. Clearly there
is a major capital expenditure requirement that has to be supported
by the management’s belief in their market
Profile of the business. Management may have competing claims on
floor space and have to make the call between, for example, food
and beverages or retail, or between high-end or ‘value’ goods.
The analysis of all the above factors requires excellent understanding of the
existing and future traffic profiles and growth. It also requires increasingly
detailed knowledge of passenger demographics and spending patterns. To
answer these questions management are now, as with the High Street
shops, starting to use consumer data.
Managing Change
The requirement to increase revenues has created new pressure on airport
management. From being principally an operational task, managing an
airport has now become a marketing one, almost akin to running a
hypermarket. Whilst there used to be two main customers, the airlines and
the passengers, there are now these plus a host of ‘business partners’. The
airport’s management must know a bit about each of these businesses in
order to maximise the returns for his increasingly uncompromising
shareholders.
The new generation of airport managers have to be equally comfortable with
charts of sales statistics and demographic profiles as they are with
operational data. As discussed, the attached data shows the extent of the
non-aeronautical activity across a range of low cost airports. In order to
optimise the value from this highly complex range of businesses airports the
‘new generation’ airport director has to be a retailer, an ad agency, and
estate agent, a car park expert and, in addition, must know a thing or two
about airports.
This chapter was contributed by Ian Lowden, Managing Director,
RDG Solutions, Manchester UK. [email protected]
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Chapter 10
236
Chapter 10
Other issues affecting LCATs
The final chapter of this report examines some of the many industry
developments through the prism of the LCA/T operator, or potential future
operator. As the aviation industry changes, all its stakeholders are affected
and must adapt. Some of the recent changes make the case for constructing
or operating a LCA/T less solid, while some make it potentially more
lucrative.
Overview
•
•
•
•
•
•
A variety of external factors and developments affect the
feasibility – both positively and negatively – of LCA/Ts
Cargo operations are a possible new source of revenue, but are
probably logistically unviable for the LCA/T
Profiling of passengers by defined groupings is a valuable tool
for maximising the returns on retail and F&B activities
Merging of LCC business towards a more full-service model will
be a logistical/infrastructural challenge for LCA/Ts, but also a
potential source of new revenue
Not all LCA/T investments represent the best use of facility
funds and resources. In some cases, a less expensive, stop-gap
solution will be a better business decision
Developments in passenger rail services – especially highspeed trains – pose a threat to some LCC services. Airports
should fully understand this situation before making LCA/T
investments based on current traffic levels
The chapter first looks at developments in the cargo sector with an eye
towards possible LCA/T participation. Encouragingly, it finds that LCCs are
experimenting with freight services as a possible revenue centre and have
begun charging for checked bags (which will free up bellyhold space for
cargo). However, final analysis of the sector finds that low cost airport
participation in this line of business is impractical for numerous logistical
reasons, as well as those related to incompatibilities arising from the
conduct of the cargo business.
The potential of route development funds, first cited in Chapter 8, is
elaborated upon here. The chapter investigates several cases in the UK,
including the programme implemented by Scotland. There, the government
believes that a GBP13 million investment will contribute more than GBP300
million to the Scottish economy. The impact of the “bought” services will
also create more than 700 jobs in the tourism sector alone, while also
stimulating more passenger throughput for the recipient airports.
Another growing market area is the use of profiling to determine likely travel
and spending patterns. The chapter explains how in-depth surveys and
study can aid in the process of offering passengers what they want, a
practice airlines have used to inform their destination selection process, and
which LCA/Ts have adopted to ensure that they operate the most attractive
– and therefore lucrative – retail and F&B outlets.
The manner in which the LCC business model is undergoing selective
adaptation, as some carriers hunt for high-yield traffic, represents a
logistical challenge for their airport service providers, but also an
opportunity. One example of this phenomenon is found in the provision of
passenger lounges, which are often offered on a user-pay basis and which
present a revenue opportunity to both the LCC and the airport.
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The chapter also stresses the need for aspiring airport operators to fully
understand the cost and revenue implications of constructing or converting
an LCA/T, which in some instances could be accommodated as a ring-fenced
semi-facility within existing terminals for a fraction of the price and with
minimal diminution in the attractiveness of the offer.
Lastly, the chapter examines rail developments around the world. With the
preponderance of LCC operations occurring on a short-haul basis, these are
the types of air services most susceptible to a loss of traffic due to
competitive rail operations.
Examining plans and recent train installations around the world, the chapter
finds that high-speed rail programmes in North Asia and Continental Europe
will pose a threat to the attractiveness of LCC services in those areas. The
corresponding loss of traffic is something that actual and potential LCA/T
operators must consider when debating construction, conversion or
expansion projects.
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10.1 Opportunities for low cost cargo airports
Could the low cost airport concept be transferable to airports whose main
business is freight? It is an important question. Most industry forecasts have
airfreight growth on par with passenger growth.
In many countries, cargo facilities are generally lacking, as airports prefer to
invest into passenger terminals. Cargo facilities are not sexy and do not
attract kudos, which is all the more reason to keep costs down to minimum
levels (bearing in mind that some produce is perishable). They are aided in
one sense, in that, without the need for convenience that marks the
passenger sector, a chiefly cargo airport may be located well away from
centres of population as long as it satisfies certain other criteria:
•
•
•
•
•
It should preferably be situated close to important, high-standard
highways, including trans-national ones;
There must also be a definable market for the goods within an easy
distance;
Location close to a seaport is also preferable though not essential.
Air and sea trading centres have often worked well together, e.g.
Hamburg, Rotterdam/Amsterdam, Singapore. Now more important
in the Middle East and Asia Pacific than in Europe an North America;
There should be adequate warehousing or the room to build it; and
There should be an adequate workforce, appropriately skilled.
It is certainly the case that LCCs are taking steps, albeit tentative ones, into
the airfreight business, one that has been ignored, but which offers up an
important additional revenue stream. The cargo industry has not been quick
to adopt them, believing that LCCs do not operate to the right locations, the
same criticism that was made of their passengers services 10 or more years
ago. Also that the logistics industry is too complex for the basic models
preferred by LCCs, and would require more intricate (and expensive) ground
handling platforms.
Another difficulty is the lengthy security screening requirements that mean
ground handlers could have difficulty processing the cargo quickly enough to
meet very tight turnaround schedules. Runway restrictions and limitations
on aircraft movements often affect cargo services more than passenger
operations. Also, some of the financial settlement arrangements peculiar to
airfreight do not tally with low cost operations, such as payment ‘upfront’ for
minimum loads. On the other hand, the propensity for LCCs is increasingly
to charge for checked baggage as part of their campaign to promote carry
on baggage, a movement that both generates incremental revenue and aids
quicker turnarounds. This development will also serve to free up belly hold
space and obviate the existing restrictions on capacity utilisation.
Helping the sector enter this line of business are operations like LTU’s
Leisure Cargo, which helps manage the logistics of LCCs trying to poach
high-value and express trade from network carriers. Leisure Cargo handles
the entire cargo business of 18 airlines at present, including AirAsia, which
has entrusted its cargo management to Leisure Cargo in order to generate
additional revenues from the carriage of airfreight on all of its routes.
AirAsia’s cargo division is expected to deliver MYR12 million in revenue per
annum for the carrier through this tie-up. Leisure Cargo will serve as the air
cargo provider for AirAsia’s regional routes from its Kuala Lumpur hub at the
Low Cost Carrier Terminal, and will secure MYR1 million in cargo value for
the airline every month. The option remains to do a similar deal with AirAsia
X, the long-haul LCC. These new carriers will dump a large extra amount of
– heretofore under-utilised – belly space in the market.
As for the airports and terminals to support these LCC cargo operations,
quite often the type of military airfield conversion mentioned extensively in
this report would be appropriate – many basic facilities are already available.
A case study airport, Frankfurt Hahn, is a good example as it already
handles large volumes of freight. Some of the potential passenger airport
conversions from military airfields might be better employed mainly or even
wholly as cargo ones. While their passenger development potential may in
some cases be hopeful, the military chooses its bases carefully from a
logistical viewpoint and the facilities have often to be appropriate to a heavy
lift capability.
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Other examples include Templin Airport near Berlin, and Plattsburgh in New
York State, USA (and close to Montreal). Both are redundant facilities that
serviced heavy bombers: in Plattsburgh’s case it was the US Strategic Air
Command and in Templin’s the Soviet air force’s heavy bombers and
transports. Both have the sort of infrastructure required to survive a nuclear
attack and both are favoured by their governments for support, having fallen
into ruin and being unsuitable for just about any other purpose.
Templin, the ‘world’s first major purpose-built cargo-courier airport’ was to
be converted with the backing of the State of Brandenburg and other local
governments and the firm set up to do it listed on the Alternative
Investment Market (AIM) in London to raise the necessary cash (GBP14
million) to purchase the owner of the airport and to commence preliminary
works. The site has one of the longest runways in Europe and a host of large
bunker style buildings.
At Plattsburgh, the FAA funded USD20 million towards an upgrade project
through its Military Airport Programme. Although Plattsburgh is being
developed in the first instance as a passenger airport since opening in Jun07, as a major logistical hub on the Quebec-New York corridor cargo
movement and distribution is expected to figure increasingly in its portfolio.
There are already 80 tenants on the estate.
A passenger case study airport, Liverpool (UK) also has development
potential as a low cost cargo airport. In fact it was overnight parcels
operations by a division of the British postal service, which kept Liverpool
Airport in business when its passenger services reduced almost to zero
before the arrival of easyJet. Liverpool Airport is situated close to a river
estuary, has several nearby trading estates and much improved road access
that connects to the national motorway system. Crucially, it is owned by a
company, Peel Holdings, which also owns the Manchester Ship Canal, a 56
km inland waterway linking Liverpool and Manchester. This company
launched a successful offer for the Mersey Docks and Harbour Board, which
operates the port of Liverpool Freeport and several others in the UK.
It is not yet known if this indicates a strategy of building Liverpool into a
sea/air cargo facility. If it does, it would make sense. Liverpool was once the
most significant trans-Atlantic port in Europe and after years of industrial
disputes its fortunes are changing for the better. The 100-mile corridor
between Liverpool in the east and Hull in the west is a designated critical
European Union transport zone that links the Irish Sea and Atlantic Ocean
with the North Sea, and also the route of one of the country’s busiest
motorways, the M62. It is also recognised within UK planning legislation as a
future ‘Super City,’ encompassing the existing metropolitan regions based on
the lead cities of Manchester and Leeds. In short, irrespective of its
achievements as a passenger airport there is much potential for this low cost
airport in the distribution of air cargo, in and out.
There is one important caveat. The airfreight business has always been
subject more to the consolidation proposal than has the passenger side.
Most airfreight still travels as belly hold cargo on passenger flights. The
majority of the UK’s export air cargo for example, still departs from London
Heathrow airport, irrespective of the levels of congestion there, and is
trucked there from all over the country.
The reason is that such is the mass of flight departures, whether on short-,
mid- or long-haul services, that it is unlikely a package will not get on to a
flight on any one day, no matter how busy it is. In contrast, a start-up low
cost airport like the military airfield conversion at Finningley (Robin Hood
Doncaster Sheffield Airport) has to attain a critical mass of services first,
before a freight-forwarder would consider it. Even if the destination was
Dublin, if there is only one daily flight and no other airline operating the
route a cancellation could conceivably double the total despatch time. Such a
scenario would be even worse for a parcels integrator (high-speed service),
which might be required to transfer the parcel physically to another airport.
The opportunity for a low cost operation is tempered by the fact that there is
no alternative non-aeronautical revenue generating possibility to take the
place of revenues earned from landing and other handling fees. Also that a
number of regulatory functions concerned with the safe and secure handling
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240
of cargo must be maintained at all times. Apart from the employee health
and safety issues, there is always concern that a cargo aircraft might be
used in a terrorist attack. There are also more pronounced directional traffic
variations to contend with at many cargo airports, which make the
introduction of pricing/cost policies difficult. The value of the goods handled
means that much greater care often has to be exercised in their surface
carriage than would be applied to passengers’ luggage. This requires
expensive warehouse systems and, of course, a parcel cannot be asked to
walk anywhere, as a passenger can; it has to be carried.
The main benefits to airlines might come from:
•
•
The ability to offer 24/7 operations, to spread unit costs.
Sometimes this will be possible when a competing airport nearby
cannot, for reasons of capacity and/or environmental concerns.
Cargo aircraft are not limited to passenger scheduling limitations
and can optimise utilisation as long as airports can receive them;
and
The ability of aircraft to park close to the terminal to ensure fast
turnaround. This seems self-evident, the cargo equivalent of the
demand by many LCCs that they forego air bridge access and
egress and use both front and rear steps. It is more pronounced in
the cargo sector where slow handling of pallets and containers can
affect schedules detrimentally, especially if there is perishable
produce on board. The optimum ability is to nose-in to 50 metres or
less of the terminal
Some airports have produced an ‘all-in-one’ package to airlines wherein they
are the handling agent, effectively removing the middle man from the
equation, as low cost airlines have with the travel agent. This can involve
them operating their own transit sheds. One example is at Glasgow
Prestwick International Airport (GPIA), the LCA in Scotland that features in
Chapter 4. The philosophy of multi-functionalism 24 inherent at this airport
was put into practice by the company Stagecoach Holdings when it owned
and operated GPIA, partly to attract Ryanair. It began to behave like a low
cost airline itself, providing its own ground and handling services and it
developed a model, known as STAG, which also included a sophisticated
management information system and tight financial controls.
GPIA was prepared to share the risk of new routes by taking on marketing
functions for the airlines (long in advance of the dispute surrounding Ryanair
and Charleroi/Brussels South airport). Applying the same principles to
freight, tonnage increased from 15,000 to 70,000 between 1992 and 1999.
GPIA has since changed hands, twice, but the same principles are in place.
GPIA has been a major manufacturing base for BAe Systems (previously
British Aerospace) and has a 3,000m runway and the physical capability to
handle up to five B747 aircraft at once, a good (coastal) weather record and
no night-time curfews. It is in fact quite close to the town of Ayr, but the
economic and employment benefits it creates has brought about a positive
level of appreciation in the community, as has the fact that most aircraft
approaches are over the sea or farmland.
It is perfectly feasible that long-haul LCCs like Oasis and AirAsia X will drive
the occasional development of low cost cargo terminals if they are
committed to airfreight. Oasis has started off using the services of an
established cargo operator to sell space, which should result in a larger
network and support from agents. Similarly, evolution in logistics
technologies may provide a platform for low cost ‘express parcel integrators’
to challenge the likes of FedEx, UPS, DHL and TNT.
In summary, for the reasons above there are presently few options to
extend the low cost airports principle into the field of cargo, unless an
airports operator is prepared (and permitted by industry regulation) to take
over the whole freight operation, which will then permit it to exercise the
degree of cost control required. While the cargo sector is so dependent on
the agency system, which remains in place to a much greater degree than is
the passenger sector, cost reduction measures that can be passed on to
airlines are limited.
24
Multi-skilling of the workforce to ensure adequate operation of all airport services at
the lowest possible cost
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10.2 Economic impact and route development funding assistance
to LCCs/LCAs
Much is made of direct and indirect economic impacts of airline route
development at airports – direct impacts concerning airport and relatedcompany employment opportunities and indirect ones related to wider issues
such as job creation in the tourism industry and commerce in the wider
community.
It is an inexact, often subjective science, which has its detractors. Who can
say for sure if the increase in business gained by a travel agent or hotel in
Geelong, Australia is a direct result of new low cost services at Avalon
Airport, or by how much? The increase in journeys can be measured, but
there is no certainty they would not have been made if low cost air services
did not exist. Often, claims made by operators of low cost airports in
particular are not matched by the facts, or there is no commitment when
they are asked to confirm that earlier predictions, on which they may have
received funding, have been achieved.
One successful instigator of economic impact is the route development fund
(RDF): the vehicle by which routes may be attracted to an airport by the
application of public funds. RDFs are a version of Public Service Obligation
(PSO) route instigators without the same degree of social necessity. PSOs
have been commonplace in thinly populated regions of Europe, such as
Scandinavia and the North of Scotland, the Greek islands and the
Portuguese Azores for many years. PSOs are specific to areas where the lack
of an air service would be detrimental to the wellbeing of communities and
provide assistance so that outlying towns remain part of the national
network.
RDFs are not so esoteric and where they have been applied they have
proved successful in encouraging specific routes that are critical for regional
economic development, as opposed to community support. By inference
they are often useful in the case of low cost airports, which may have based
their business case on their ability to aid economic development. The
success of Route Development Funds in Scotland and Northern Ireland, for
example, prompted the Government in the UK to adopt the principle in its
national Air Transport Policy. These principles can be applied equally well to
any region in Europe or beyond. The UK National Protocol for Route
Development Funds can be viewed at:
http://www.dft.gov.uk/pgr/aviation/domestic/ukrdf/anationalprotocolforukrouted2873.
The dynamics of the aviation market in Europe have changed. Full service
airlines reduced their networks from some regional airports - often reducing
access to traditional hub airports – while no-frills and niche regional carriers
increased the range of primarily point-to-point services. But, many of these
services are to leisure destinations, which, in the case of airports in Northern
Europe, means airlines are carrying mostly outbound flows, which do not
usually contribute to the overall economic growth of the region from which
services operate. The challenge for most regions is to promote and develop
those services that make a positive net contribution to its economy. It might
also be argued that the trend towards airport privatisation, which places
profit motivation at the head of the list of priorities, has further diluted the
role of airports as promoters of those services that deliver economic benefit
to the regions they serve.
Many regional airports offer a degree of incentive to airlines to commence
new routes, via the media of marketing support or discounts. This is usually
legally permissible as long as it is offered equally to all airlines. (In the welldocumented case of Ryanair at Charleroi Airport in Belgium, the allegation
was that it exclusively favoured Ryanair). Often, however, these initiatives
are offered for all routes, irrespective of how a particular route benefits a
region. Airports generate more revenue from a full 180-seat vacation charter
flight than they do from a half full 50-seat turboprop service to a business
destination of key economic importance to the region, but the local economy
enjoys greater benefit from the latter service.
The 2005 EC Guidelines on financing of airports and start-up aid to airlines
departing from regional airports provided clarity on allowable public sector
intervention.
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The benefits of a new air service do stretch beyond the revenues accruing to
the airport, so public sector funding can play an important role in motivating
carriers to consider new routes that contribute to the regional economic
development. There are certain criteria that should be applied to all public
sector funding of route support. It should be determined by:
•
•
•
•
•
Transparency. The route should only be funded if it delivers
economic benefits to the region in a non-discriminatory fashion and
where funding criteria are known and understood;
Compliance. The arrangement should be well structured in
accordance with fiduciary and governmental legislation;
Cost effective. The support will preferably be applied where needed
during the start-up phase of a new route, which is when an airline’s
commercial risk is highest.
Incrementally applied. Support should be linked to route incentive
arrangements already in place; and
Time constraints. Support should have a fixed timeframe, with
termination of support scheduled according to a realistic
assessment of when a route should be sustainable without further
support.
UK examples
Regional route development agreements in the UK have been conducted
through the establishment of partnerships between the public sector, airlines
and airports and aimed at encouraging new air services that promote
business links and stimulate inbound tourism. The public sector only invests
in those routes that meet the economic development objectives of the
region, in conjunction with the other stakeholders.
Hence, for the first time, these funds combine key public sector economic
development
stakeholders
–
regional
administrations,
economic
development agencies and tourism authorities – into a single unit with
analogous objectives. This unified approach enables analysis of the forecast
economic benefits from each new service, allowing a rapid decision on public
sector investment for a qualifying route.
There have been four such funds in the UK.
Scottish RDF
The Scottish RDF was established in Nov-02 by the Scottish government
through its economic development agency, Scottish Enterprise. Scotland is
now a semi-autonomous part of the UK with its own revenue raising and
dispersal capability. Viewing the lack of key transport links to the US and
some European destinations as a serious barrier to economic growth, the
local government dedicated GBP6 million, spread over three years, to attract
new services. It has since increased the amount to GBP13 million. It is
estimated that the total economic benefit, over ten years, will be worth more
than GBP300million and create around 700 tourism jobs.
In the 14 years between Jan-89 and Jan-03, the total number of scheduled
international destinations served from Scotland on a year-round basis
remained constant, at 17. Following the inception of the Fund, a further 15
new international scheduled destinations were quickly added and the total
now is 50. The Fund has brought in prestigious full service long-haul airlines
such as Continental to Newark from Edinburgh Airport and Emirates to Dubai
at Glasgow International Airport, but it has also helped set up a variety of
LCC routes, including those from Scotland’s main low cost airport, Glasgow
Prestwick, all by Ryanair, an airline that was already in situ. Other LCCs
whose start-up routes benefited are easyJet, Flyglobespan, Germanwings,
Centralwings, SkyEurope and Wizz Air.
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RDF International year-round services in Scotland, (northern) summer
2007
There was little immediate benefit to Aberdeen airport, which supports the
North Sea oil and gas business, a labour intensive operation that attracts
manual workers from large metropolitan conurbations and could benefit from
LCC operations. Several new routes started there, but all by full service
airlines. In the last two years however the airport has begun to make a
breakthrough and now hosts the main British LCCs Ryanair and easyJet, as
well as bmibaby, Monarch Scheduled and local airline Flyglobespan. It was
the fastest growing Scottish airport in 2006 (+11%).
Strict criteria need to be met before RDF funding is allocated to Scottish
airports. Essentially, a new external direct route must be of economic benefit
to Scotland and predominantly of long-term benefit to business travellers,
although it also allows for strong inbound tourism routes. It must operate
five days a week, all-year round and not compete with an existing service. A
full economic appraisal is carried out for each prospective route, scored on
factors including destination, creation of jobs, number of inbound tourists
and journey time saving.
The Scottish RDF is now coming to the end of its useful life but may be
replaced by a new marketing fund.
Northern Ireland RDF
The province of Northern Ireland – also a semi-autonomous region of the UK
– has historically been poorly served by direct scheduled international air
services. The devolved administration identified route development as a key
component of industrial and (inward) tourism competitiveness. Following
Scotland’s lead, it established a Fund in Nov-03, worth GBP4 million, spread
over three years, with a possible extension. It was managed by a company,
Air Route Development (NI) Ltd., set up by Invest NI, the local development
agency. Prior to the launch of the Fund, Northern Ireland had a single daily
international service from Belfast to Amsterdam 25 .
Since then, over twenty new scheduled routes have been launched, of which
nine routes received direct investment from the fund. (In other words the
existence of the Fund alone can be a stimulator to airlines to commence a
route even if not supported, as the – formerly moribund – local travel
25
Dublin Airport (see Chapter 4), 100 miles to the south in the Republic of Ireland,
exercises a strong pull on Northern Ireland air passengers. 33% of the population of
the whole of Ireland lives in Northern Ireland or the border counties but far fewer fly
from the two Belfast airports or Londonderry, preferring Dublin where there is a wide
range of low cost flights. Surface links between the two cities have been improved by
completion of a new motorway and the railway line is no longer bombed.
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market is stimulated by the advent of new non-stop services.) The Leedsbased LCC Jet2 set up a new base at Belfast International Airport but was
not supported by the Fund because of the nature of its routes – they are all
outbound vacation routes that would not significantly aid local business. In a
similar fashion, two new vacation routes by easyJet did not receive support.
In addition a new daily Belfast-New York was launched in summer 2005 as a
result of the Fund. The routes supported are:
•
•
•
•
•
•
•
•
•
Belfast International - Paris (easyJet) (LCC);
Belfast International - Nice (easyJet) (LCC);
City of Derry - Birmingham (Aer Arann) (Regional airline);
City of Derry - Manchester (Aer Arann) (Regional airline);
Belfast International - Newark, USA (Continental Airlines);
Belfast City - Norwich (FlyBe) (LCC);
Belfast International – Geneva (easyJet) (LCC);
Belfast International – Berlin (easyJet) (LCC); and
Belfast International – Rome (easyJet) (LCC).
Northern Ireland RDF – international routes only
The fund’s duration has come to an end and can be regarded as a success,
especially in the arena of LCC route development, where much greater
efforts were needed to get carriers to look past Dublin Airport. Traffic
increases have levelled out at Belfast International, and traffic actually
decreased at Belfast City in 2006, but the City of Derry airport, the one most
isolated by Dublin’s magnetism, increased its passengers by 70% in the
period.
The economic impact of these routes on job creation, and wider economic
benefit, is currently being appraised.
Northwest England RDF
Another RDF was mooted for the northwest of England, home to Manchester,
Liverpool and Blackpool airports. The Fund, the first in England, was
launched in Nov-04 under the guidance of the Northwest Development
Agency (NWDA), and was to run for three years.
The objectives were to:
•
•
•
Support key business opportunities in terms of both inward
investment and export initiatives;
Promote route development and related initiatives that support
identified tourism priorities and projects;
Increase connectivity to the region;
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•
•
Improve the competitiveness of the region’s businesses by allowing
European business travel to and from regional airports to be
conducted within a day; and
Improve the region’s connectivity to strategic long-haul destinations
and European hubs.
The Agency's ‘robust’ investment application process included an initial
market and commercial viability test taking into account financial, economic
and environmental aspects and adhering to relevant state aid guidelines.
With a strict objective of attracting new air services that would support
inward investment, inward tourism and export activities and the
competitiveness of the region’s businesses, the NWDA would only invest in
routes that offered a measurable net economic benefit to England’s
Northwest.
Northwest England is different from Scotland and Northern Ireland, which
have their own governments. The region is the second largest in terms of
both population (7 million) and GDP in the UK, after London and the
Southeast, but has fallen behind Scotland and Northern Ireland in terms of
inward investment support as government focus fell on those places.
On the other hand and again unlike the other two regions, its multiple
airports are at completely different stages of development. On the one hand,
it is home to Manchester Airport, which hosts 22 million annual passengers
and is the world’s 30th busiest international airport. Then there is Liverpool
John Lennon Airport, which has grown dramatically to five million passengers
courtesy of the LCCs on which it has become highly dependent. Finally, there
is Blackpool Airport, which has striven hard to attract any realistic
commercial route from a very small base and which did succeed in attracting
new routes by Ryanair and Monarch Scheduled, although there future at the
airport is hardly assured, especially in light of the central government’s
decision not to allow the community to open a much-desired large casino.
The indication was that any funding in respect of Manchester would be on
strategic long-haul routes, quite different from the requirement at Liverpool
and Blackpool airports, where it would support low cost carriers, provided
they were not merely taking locals away from the region on holiday.
In this particular instance the whole scheme fell through when its instigators
left the Agency and the new management opted instead for an infrastructure
fund that succeeded in funding an apron at Blackpool for the airline Jet2.
This decision somewhat goes against the grain of the RDF philosophy as Jet2
was denied funding in Northern Ireland (see above) on the grounds it would
bring in few business or leisure visitors.
Consequently, the NWDA RDF never became fully operational and never
funded any route.
Wales RDF
The most recent RDF is in the Principality of Wales, which is heavily
populated in the south in the Cardiff-Swansea belt but thinly populated in
other areas. (Cardiff is the capital). The Welsh Assembly introduced an air
route development fund in the summer of 2006. The Transport (Wales) Act
2006 provides the Assembly with the powers to give financial assistance for
air transport services in Wales.
The RDF was designed to work with the market to support new air services
between European Cities by sharing risk during the start-up period. The
Fund supported new routes by offering discounts on airport aeronautical
charges and assistance in marketing the route for up to three years. Under
the guidelines, offers were made of up to 50% off the cumulative
aeronautical and marketing costs, providing an incentive to start up routes
from Cardiff International Airport.
Some felt the decision to restrict the RDF to Cardiff may have been deficient,
as there are several other Welsh airports that might benefit from new LCC
routes, including a proposed military airfield conversion (RAF Valley) on the
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Isle of Anglesey. Intra-Wales air routes have been conspicable by their
absence and, in fact, the twice-daily route between Cardiff and Anglesey
that commenced on 08-May-07 is supported by a PSO, not by the RDF; the
first such PSO in Wales. PSO’s typically have tougher criteria such as aircraft
capacity, frequency and flight timings as governments often underwrite the
minimum air fare to make the service viable, in a more open-ended
agreement.
The RDF Protocol ended on 31-May-07. The European Commission had
published its guidelines on financing of start-up aid to airlines departing from
regional airports in Dec-05, with one of the main proposed alterations being
a reduction in aid that could be offered, from 50% to 30 percent. The
conditions and restrictions contained in the new RDF Protocol made the
scheme unattractive for all parties and resulted in the Welsh Route
Development Fund closing to new services that commence after 31-May-07.
Two new LCC routes were established and continue. Cardiff to Barcelona
(Thomsonfly/TUI) and Cardiff-Paris (Flybe). Both routes were expected to
provide an important stimulus to inbound tourism, as well as improving
business, cultural and educational links, and inward investment
opportunities.
Support was offered to Cardiff-Brussels and Cardiff-Manchester but the
operator, Air Wales, failed. A new operator could be awarded the support.
Cardiff-Aberdeen has also been authorised but no service has started.
Alternative mechanisms are now being considered to support new routes
from targeted markets. The Welsh Assembly Government is looking into the
feasibility of establishing a tourism-based and business investment
marketing scheme to attract new air routes to and from Wales.
Conclusion
This is merely a localised view of the possibilities arising from the application
of supporting funds by governments. The examples are from the UK but the
concept is portable; similar schemes have been applied in Italy and
Germany, for example. In Germany the European Commission went a stage
further and announced in Jan-05 that an aid scheme for the construction and
development of regional airports in structurally weak regions was considered
compatible with European legislation. The public aid measure was part of a
joint Federal Government-Laender (regions) scheme for improving regional
economic infrastructure in Germany and applied for 2005-2006.
In the UK, the Funds have been successful because they arose out of a
government policy to encourage the growth of regional airports that has
been in existence since the 1980s and which was further enhanced by the
White Paper (policy document) of Nov-03. That policy has been further
supported by the ability of the various stakeholders – municipalities, airport
operators, tourism authorities, chambers of commerce and so on – to cooperate to their mutual benefit. Regrettably, that is not always the case in
other countries (and in some cases, the UK, too), because of the disparate
objectives of the stakeholders or because there is simply no platform to cooperate.
One of the real benefits of such a Fund is that it affords the public sector real
influence in the type of air services being attracted to their region. Closer
cooperation and communication with airports and carriers fosters a better
understanding of the respective objectives, issues and concerns for each of
the parties. Where RDFs are in place the winners can be low cost airlines,
the airports that support them and regional economies. In that respect they
are a more tangible way of both sponsoring and measuring economic
impact.
It is regrettable that the imposition of EC rules on public sector support to
airports rendered these schemes inoperable. The EC has since become more
flexible in its interpretation of its own rules so the mechanisms of RDFs may
return.
Outside of this framework there is of course no reason why any airport
should not set up its own independent air service development forum,
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bringing into play stakeholders from the local community. There are a
number of these in existence in Europe right now. They are mainly geared
up towards inwards tourism development, but stakeholders from the
business community often become involved as they stand to benefit from
any increase in air service, which most often emanates from the LCC
segment.
A good example is Bergen in Norway, whose Development Forum, Fly
Bergen, offers a marketing support mechanism to airlines that open a new
route to Bergen Flesland Airport or increase frequency under a three-year
programme. NOK62 million per annum is allocated to a series of categories
(Ski, Tour, Cruise, Meet etc), the “Fly” component (support of airline
operations), being aligned with EC State Aid guidelines.
A further, independent, perspective on RDFs is provided in Chapter 8.
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10.3 Who are the passengers?
It is only fairly recently that budget airlines have begun to consider the
make up of their passenger base. Because the airlines and their
representative bodies, such as the European Low Fare Airlines Association,
are quick to deny that LCC flights have taken business from full service
airlines (rather, they contend, they have created a new market of impulse
travellers, many of whom might not otherwise fly at all), there is a tendency
to believe that they are fundamentally leisure travellers from low socioeconomic groups.
It is perhaps surprising that budget airlines and airports should only now
being giving serious consideration to this issue considering that the practice
of identifying passenger types by employing a whole range of criteria,
criteria that has long been used by the FSC and network segments. There
are critical decisions to be made from these statistics. For example the UK
CAA established in 1987 that only 15% of business air travellers were
women, but that was up from 10%, ten years previously.
In the USA the trend was reversed, with fewer female business travellers in
1991 (20%) than in 1987 (27%) but the change since then has been so
dramatic that one now-defunct US LCC affiliate, Delta’s “Song”, built much
of its marketing proposal around the demands of the female business
traveller. Another identifiable trend has been the growing proportion of
younger, junior businesspeople amongst business travellers. Research
indicates that, despite these passengers usually being on lower incomes,
they are more likely to spend money on impulse while travelling.
As the business of market research grew, other socio-economic features
began to be taken into account in addition to sex, age and household
income. They included size of family, social class, the number of people
travelling together, type of profession; all with the objective of aiding the
planning of advertising, promotion and sale activities, and even in
forecasting and product planning activities.
Out of this grew market segmentation. The simple expedient of dividing
passengers into business and non-business types was expanded initially into
a four-way variant of business, leisure, visiting friends and relatives (VFR)
and ‘Other.’ It was found that the segments demonstrated differing growth
rates and responded in different ways to variables such as fare changes and
macroeconomic factors such as recession and exchange rate changeability.
As time went on, it was realised that too much emphasis could be placed on
age, sex and social standing and that it was perhaps more important to take
into account human factors such as what fare a passenger will pay. Also that
trips could have a multi-purpose function, for example the husband attends
a conference while the wife goes shopping (or vice versa). Critically, that
market segmentation simplifies motivational factors – the independent
traveller and the package holidaymaker are two distinct animals, as are the
senior company executive and the salesman or the junior engineer with his
toolbox.
Out of this grew another measure – by psychological make up or profiling of
passengers. One airline identified eight groupings, including: ‘self reliant,’
‘naïve,’ ‘demanding’ and ‘fussy planner.’ Another categorised business
passengers as ‘attention seekers’ and ‘comfort cravers’ and leisure travellers
as ‘service seekers’ and even ‘nervous nellies.’
Clearly passenger profiling is an inexact science, especially when psychology
is involved, but it cannot be ignored. There is a suggestion gaining credibility
momentarily that airlines in the future could start regularly offering uniquely
niche products, with flights targeted to specific demographics, and ticket
pricing simplified in such a way that passengers know exactly what they are
getting for what they pay. The author of that proposal was thinking in terms
of the US legacy carriers on the basis it is now impossible for them to follow
the path of being all things to all passengers and still turn a profit. But there
is no reason why low cost airlines and airports should not continue to do the
same in their own unique way, targeting a specific audience in the same way
as, for example, cable TV channels do. (Ryanair’s oft stated goal, for
example, being the ‘No-charge’ flight, whereby all revenues are generated
from sources other than tickets).
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The increase in Business Class only flights, ‘fractional’ jet ownership and
business travel clubs mentioned variously in this report, are at one end of
this scale, the opposite of the pared-down utilitarian service of Southwest
Airlines and its imitators. It is perhaps no surprise that many airlines have
hired senior executives from outside the industry, with experience of
consumer segmentation, to see them through their particular challenge.
What research has been undertaken to identify the demographics of the
LCC/LCA customer? One interesting study is from Thomsonfly, the major
operator at, and one-time owner of (through parent company TUI) Coventry
Airport (see Chapter 4) in the UK and major operator at many other airports
in Europe.
Thomsonfly surveyed its passengers in Aug-04, a peak travel month and six
months after it started operations at Coventry, during which time 7,000
questionnaires were completed. The short report is given here verbatim:
Repeat booking - 21% of passengers surveyed in that month had flown
with the airline previously - with a quarter of these having flown four times
or more during the airline’s first six months of operation. Booking
information demonstrated that Thomsonfly.com has already established a
loyal passenger base. The data revealed that the most frequent flyer has
flown 16 times with the airline. Business travellers were most likely to be
repeat bookers - almost half had flown with the airline before.
Reason for travel - Over three quarters of customers were travelling for
leisure; the remainder were visiting friends and family or travelling on
business. Jersey (British Channel islands) had the highest proportion of
passengers visiting friends and family. Coventry and Jersey were linked by
passenger flights for numerous years, starting in the 1960s - which has
contributed to a migratory flow between the two.
Incoming tourism - Thomsonfly.com had carried over 35,000 inbound
passenger sectors - the top five destinations for inbound travellers (in
descending order are) Jersey, Valencia, Malaga, Marseille and Rome. These
travellers benefit the economy of the region.
Convenience and value - Value for money and the convenience of flying
from Coventry were significant factors in the decision making process for
Thomsonfly.com customers, with these being scored as excellent. Over 91%
of bookings were made online, contributing to Thomsonfly.com keeping its
overheads low and therefore continuing to offer low fares to customers into
the future.
Travel companions - For the most part, passengers departing the airport
were travelling in pairs with another adult (44%), with one in ten people
travelling alone. More than half of all passengers were aged between 35 and
45, which fits with the national trend as the most likely to book their travel
independently on the Internet.
Duration of stay - Customer feedback showed that people were not just
using the flights for short breaks but also for longer holidays. Booking data
showed that on average Naples (Italy) was the destination with the longest
durational stay.
Accommodation - 25 % of customers who had flown with Thomsonfly.com
previously were visiting their own apartment, which reflects the continuing
trend towards overseas property ownership.
The most popular
accommodation choice, for a third of Thomsonfly.com customers, was a
hotel stay.
Business travellers - The most popular routes for business trips were
Jersey, Marseille and Naples. Many business people on the Coventry to
Jersey route had taken advantage of the opportunity to depart on the
morning flight, returning on the evening flight - taking advantage of the
double daily frequency. Business travellers were most likely to book late,
with almost half booking within seven days of departure. The most popular
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booking time across all passengers was three to six months before departure
– undoubtedly motivated by the low fares offered to early bookers.
Assuming that Thomsonfly (an already experienced charter flight operator)
and Coventry Airport are typical of the new breed of low cost airline/airport
teams we will increasingly see more, and allowing for cultural variations
elsewhere, these observations can be made:
•
•
•
•
•
•
•
There is a surprisingly high level of repeat travel, even on services
barely established;
Business travellers are using the flights in much the same way as
they do full service carriers, especially when services are timed to
suit their schedule (morning/evening), permitting day trips;
Leisure remains the major reason for travel (75%)
Inbound passengers arising from LCC operations from the home
base country can exceed expectations, and airports need to cater
for them. In this case, the West Midlands region of the UK has
something to attract visitors in Coventry’s proximity to Stratford
upon Avon (Shakespeare’s birthplace) but not a great deal more;
Nine in ten people are not travelling alone. 50% are in a particular
age bracket – 35 to 45;
The short-break market (the theoretical mainstay of LCC business)
is being matched by longer vacation holidays, at the continuing
expense of the package charter (note again that Thomson is one of
Europe’s leading vacation packagers); and
There is also a growing trend towards regular use of these flights to
gain access to second (vacation) homes abroad, and also by
passengers who are hiring them from their owners. This is a
peculiarly European trend on an international level (though not in
the US, where it is a domestic travel matter, e.g. eastern seaboard
or Midwest to Florida).
(Refer to Chapter 8 for how these demographics impact on airport and
airline retailing opportunities).
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10.4 Provision and use of lounges at LCAs
The fact that ‘low cost lounges’ is increasingly a competition issue amongst
LCCs and, therefore, at low cost airports, is a sign of the times. Airport
lounges were until recently considered to be the exclusive domain of full
service and network carriers. They are increasingly to be found in the
portfolio of LCCs, where they are provided on a user-fee basis. EasyJet was
one of the first to offer them. Together with aviation services provider,
Penauille Servisair, it announced a new initiative, easyJetLounges, to be
rolled out at 33 airports across Europe, starting with Nottingham East
Midlands Airport from Jun-05. As at Aug-07, 22 are in operation. Passengers
are able to book access online starting from GBP13.50 each.
easyJet lounge
The Lounges offer:
•
Complimentary beers, wines and spirits;
•
Soft drinks, beverages and snacks;
•
Newspapers and quality magazines; and
•
Access to business facilities, including telephones and facsimile
machines, email/internet access and writing desks.
Flybe has included use of executive lounges part of its frequent flyer
programme, launched in Jul-07 and called Rewards4all. Although
Southwest’s loyalty scheme in the US has been in operation for many years,
Flybe is the first carrier to introduce one in the UK. Points awarded for trips
made can be used for free flights or one year’s free lounge access, which
requires ten economy returns.
In Australia, VirginBlue has made lounges part of its evolution to a ‘New
World Airline’.
These moves are part of the broader efforts by low cost carriers worldwide
to generate additional ancillary revenues and/or to induce loyalty amongst
business travellers. The growth and maturity of LCCs and their supporting
airports offers suppliers like Servisair new opportunities to boost their
revenues too.
Airport operators should expect that competition in the LCC segment would
lead to more airlines introducing lounges as part of their customer offer. The
pioneers of the genre however seem unmoved presently, with Southwest
devoting its Rapid Rewards frequent flyer points to free trips and Ryanair
still refusing to have any association with innovations that might slow down
passenger flow.
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10.5 Implications for ground handling companies
The trend towards low cost airports and terminals also raises questions
about the competition between ground handling agents at airports. Although
it would not be reasonable to describe ground handling as a closed shop
(and particularly not in Europe where strict competition rules apply), neither
has it been the most openly competitive area of airport operations.
EasyJet, for example, declares that airports and their ground handling costs
cumulatively account for 32% of its total cost base; a higher figure than that
experienced by most airlines. Consequently, in order to reduce costs,
easyJet negotiates specifically to obtain the right infrastructure, services and
charges appropriate to its modus operandi, which includes the critical
domain of ground handling. Where it has experienced cost-plus pricing
models, charging for inbuilt services that are not required, the airline has in
some cases withdrawn services entirely and in other cases threatened to do
so. As such, the airline continues to search for airports that are ‘willing to
restructure, and want passenger growth.’
At Singapore Changi Airport a third ground-handling agent was permitted to
commence operations at the beginning of Mar-05, four months ahead of
schedule. The ten-year contract covers passenger, baggage and cargo
handling and the adoption of more competitive circumstances and seemed to
be linked directly to the airport’s new LCT. The authority declared that it
wished to ‘change the mindset’ of workers to accept multi-tasking of jobs
(inter-changeability of job roles) in services such as ground handling and the
more competitive environment might aid the application of a lower airport
tax than at the existing terminals; the authority’s aim.
All user airlines at Singapore Changi were paying the same landing fees, the
same rentals and charges for terminal space and facilities and were equally
eligible for incentives under an existing SGD210 million air development
fund, so the differentiation that would be attractive to an LCC would be in
the form of other airport operating savings as they can be made over those
offered by rival airports, such as at Kuala Lumpur and Bangkok, and for their
passengers the difference would be in lower passenger service charges.
Changi claimed already to have the second lowest aeronautical charges in
the Asia Pacific region, a position it hoped to enhance by keeping ground
handling charges competitive.
In line with its objectives, CAAS had previously announced that it had
restructured the franchise fees for the total ground handling business at
Changi Airport, which would result in about SGD10 million in annual savings
for the ground-handlers.
Another reason for the decision is the spin-off effect of the strategic decision
by the CAAS that all airline users would have the choice of whether or not to
use the low cost terminal or the existing terminals one and two –
irrespective of if they were low cost or full service airlines. FSCs choosing to
downgrade to this level of basic functionality would expect the option to pay
less for ground handling services there, and to pay additionally for extra
services and facilities as they require them.
In another example, Stagecoach Holdings took much the same multi-tasking
line at Scotland’s Prestwick Airport by starting up its own ground handling
service and integrating it into its total offer, ensuring that staff could work in
any area of operations.
Opening up ground handling to competition helps justify the application of
different tax rates at different terminals, the problem that has beset Geneva
Airport’s attempts to convert an old charter terminal to one for LCCs. The
target for cost savings is considerable – at Geneva it is 40 percent. This
might entail passengers having to do much more for themselves than they
are used to, especially in respect of their own baggage handling through the
terminal. They might even find that certain services that have historically
been provided free of charge become chargeable items.
There is a debate in Europe as to whether airlines or airports should, for
example, have responsibility for the transport within the airport of disabled
passengers – care for whom is most often passed on to ground handling
agencies. The debate arose out of a test case in 2004 and as a result of EU
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deliberations the responsibility for persons with reduced mobility (PRMs) will
now rest with airports, which must take care of them from the time they
enter the airport until the moment they board the aircraft. A central system
will control the service on behalf of all airlines, which must pay for it by
adding a maximum of EUR0.40 to every ticket (i.e. not just to disabled
passengers’ tickets). Member states were required to set up an enforcement
body controlled by airport operators and PRMs to ensure the standard of
service and to set the charges airlines must pay. Airlines would only have a
consultative role.
In the view of the ground handler concerned at Singapore, Swissport (now
owned by Ferrovial), the opportunities and problems presented by low cost
ground handling were not so much a trend as a reality and one that it
decided to tackle aggressively. Swissport is at an advantage as it has global
experience of handling LCCs in different locations, for example Ryanair in
Europe, Air Arabia in the Middle East and Gol in Brazil. It does not regard
low cost handling as being anything other than the normal case now, but
admits there is still a learning curve to be negotiated in achieving
equilibrium between the type of service requirement, service levels and price
at individual locations where individual airlines have their own agenda. What
is clear is that, while FSCs still need to exhibit branding, which brings into
play external agencies, LCCs are increasingly doing more of their own thing,
which minimises the contribution of those agencies.
So, if an airline specifies, for example, no ticket office or minimal counter
space, no lost and found desk, few or many check-in desks, Swissport will
provide the flexibility to meet the need accordingly, rather than dictate
previously normal working standards.
As Changi Airport does not require users of its low cost terminal to be LCCs,
and as this arrangement may find favour elsewhere, a possible development
is that a whole new set of low cost ground handling standards will arise,
standards that will be transferable to all airlines for which brand image does
not come before cost minimisation. While this will not include many longhaul airlines, many short-haul regional airlines and flag carrier franchises
could fall within the remit.
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10.6 Benchmarking and differentiating the costs and benefits of a
separate low cost airlines terminal versus a mixed-use one
One needs to be careful when reaching conclusions about ‘low cost
passengers.’ Increasingly the people using low cost airlines are those that
once travelled on full service carriers but are now using their business or
personal travel budget more effectively. Their expectations of airport
facilities will therefore be varied, and those expectations will be reflected in
the measures airlines use to assess costs and benefits of using a low cost
terminal as opposed to a mixed-use one. The ‘redbrick’ 26 British airports (in
key provincial cities) have mainly chosen to retain high-level facilities, so
that critical full service carriers are not inclined to move elsewhere, and then
try to accommodate LCCs within that strategy as far as possible.
There is also the possibility, indeed the likelihood in some countries, that an
airport will already have its costs under control, so that on the surface there
is little apparent benefit in having a separate LCC facility constructed
anyway, especially if the capital expenditure so incurred detracts from other,
more pressing matters. This happened in the case of Manchester, where
there is a surplus of terminal space because the authority’s traffic forecasts
failed to consider the diversionary effects on service levels of other LCAs and
of rival airports that have reduced airline costs to compete.
It could be argued that Singapore Changi airport falls into such a category.
With only a handfull of LCCs operating there, Changi’s cost per passenger for
an LCC turnaround is said to be SGD5.40 per passenger, based on an Airbus
A320 with 75% load factor; the second lowest in the whole of the Asia
Pacific region 27 . The financial rationale for building such a terminal is
therefore nullified and the reasons given for having it appear to gravitate
more towards the unnecessary sophistication of the existing and planned full
service terminals and the rather nebulous desire to offer different models for
different customers.
The Civil Aviation Authority of Singapore says the simplified systems and
basic facilities at the low cost terminal were intended to minimise
operational and capital cost, although it declined to quantify the benefits
airlines would receive. It further points out that airlines are also benefiting
through the application of a wide-ranging air route development fund, which
rewards new routes through marketing support and rebates on charges. The
winners in the short term will be the LCCs that are expanding their
Singapore services.
The investment, while not onerous, came at a time when the Authority was
already making major plant increases at Changi, including a third full service
terminal, due for completion in 2008, which will cost SGD1.5 billion.
The new terminal will add additional capacity of 20 million, bringing annual
throughput to 64 million. There are presently around 35 million passengers
annually, leaving a theoretical gap of nine million extra passengers to fill
existing facilities between now and then. Allowing for the fact that Terminal
3 is arriving late in the day, as dynamic LCC growth is now, not in a future
that is uncertain, it does beg the question as to whether a conversion of part
of terminal one for low cost operations might have been more appropriate.
The existing Terminal 2 and new Terminal 3 will be close together and T1 is
already segregated, with two separate piers of its own. It is not difficult to
anticipate another airport with uniformly low turnaround costs like this
employing a semi-terminal plus pier allocation/conversion to tackle the
budget airline demand, thus allowing itself the option of reverting to the
previous norm if the anticipated LCC explosion did not happen. Such a plan
would, if nothing else, remove the necessity of SGD45 million in capital
investment.
A similar argument might be made about the low cost terminal at Kuala
Lumpur, where the second main terminal that was planned to be operational
26
A term often used to describe traditional regional British universities from the
Victorian era (19th century) such as Manchester, Liverpool, Leeds and Newcastle
and which were usually built of red bricks.
27
Source: CAAS, Singapore
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in 2004 was delayed by a succession of factors - the 1997-98 Asian financial
crisis, the 11-Sep-01 terrorism attacks and the SARS outbreak. It could have
been designed to cater adequately for low cost airlines within the
development plan. As such, the LCC terminal began to look like a stopgap
measure (albeit on a larger scale than that at Singapore) and it now appears
it will be replaced.
Clearly there are many factors to take into account in assessing cost versus
benefits of low cost terminals, to both the operators and the airlines, but
little academic work has been done on the subject to date. What is not at
issue is that the ‘profitability’ gap between airports and airlines has not
narrowed.
Collated global results suggest that the top 100 airport groups by revenues
(which include some where LCCs play a big part, such as London Stansted)
posted an operating margin of 22.7% in 2005 28 , up from 21.9% the year
before. In contrast, most of the leading 150 airline groups managed a
margin of 1% or less in the same period. An important caveat here of course
is that despite the increase in privatisation activity, the airport sector is still
largely run as a public utility while most airlines have at least a modicum of
private interests. Also the airport operator must make sizeable long-term
investments that need to be budgeted for, while the carriers have a much
more portable and disposable asset base, especially since operating lessors
grabbed hold of the aircraft market.
Nevertheless, while the more successful LCCs are constantly striving to
lower their costs, it is no surprise they expect airport operators to match
them, even when those same airports are the ones that have helped break
the monopoly held by some operators and which the airline companies
universally regard contemptuously.
There is some progress towards benchmarking of airport charges, with IATA
and Airports Council International working together on IATA’s ‘Simplify the
Business’ initiative, where they have examined examples of best practice
around the world. IATA wants to see some sort of global benchmarking
system for airport charges, similar to that undertaken by the Performance
Review unit of Europe’s air navigation management organisation,
Eurocontrol. Although there is at present no equivalent system for airport
charges, IATA has been working to try to establish one.
The Association of European Airlines also called for new mechanisms to
determine airport charges ‘so that airports are motivated to reduce cost
platforms.’ The Air Transport Research Society made a start to lay down
such independent benchmarks with a Global Airport Performance
Measurement and Benchmark study. Some of the most productive airports
are not necessarily the ones that would spring to mind, for example Atlanta
Hartsfield in North America, Copenhagen Airport in Europe and Sydney
Airport in Asia Pacific. All these airports have a mix of full service and budget
airlines and only Sydney has anything like a designated low cost terminal.
IATA has waged a campaign against what it regards as ‘offenders’ to its best
practice principles while a formal benchmarking methodology is being
devised. One of the airports it has targeted is Bangkok, where it attempted
to induce Airports of Thailand (AoT) to reduce its charges long before the
new Suvarnabhumi International Airport opened to replace Don Mueang
airport, which could have been designated an LCT (see Chapter 6). AoT
raised charges by 20% in Jan-05, despite the fact it recorded a profit margin
of 60% in 2004, and planned another 15% increase in Oct-05 in addition to
a 40% increase in charges to departing international passengers at the same
time. These increases were implemented in Apr-07 but AoT continued to lose
money as it tried to juggle the failings of Suvarnabhumi with the closure of
Don Mueang.
A previous IATA target has been Toronto’s Pearson International Airport,
which was accused of building an extravagant new terminal (IATA’s
Secretary General described it as “[The Palace of…] Versailles with boarding
bridges”), with facilities that even most full service carriers neither needed
nor wanted, let alone were prepared to pay for. In this instance Hamilton
Airport, 60 miles away (see Chapter 5) has been developing low cost
28
The latest year for which figures are available
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services and decided in 2003 that its future focus would be on the sector,
and that its operational and cost strategy would reflect that decision,
seemingly on the basis that the Toronto management was unlikely to adopt
such a policy in the foreseeable future.
Irrespective of whether Toronto was right or wrong (and not everyone
subscribes to the IATA viewpoint), Hamilton demonstrated how LCAs could
help determine their own future by introducing their own price
benchmarking, quite separate from that of their more expensive neighbours,
and to good effect.
Another aspect of the funding paradox is demonstrated at London. Despite
what the British media says, capital expenditure by BAA plc before it was
taken over by Ferrovial was enormous – in 2004 it was twice that of the
Aeroports de Paris, Schiphol Group (Amsterdam) and Unique (Zurich Airport)
groups put together. The UK CAA had agreed a generous regime on airline
charging there set at 6.5 percentage points above the level of inflation
(retail price index) from 2004-2009. This increase supported the investment
programme of USD18 billion to 2014, one that ensured BAA accounted for
over 40% of debt at rated European airports at the time.
Much of the investment went to Heathrow, where the 30-million p.p.a.
capacity Terminal 5 should open in Mar-08. The unfortunate element here is
that little other expenditure was incurred on Heathrow’s ailing terminals 1-4,
the most recent of which was built in the 1980s, on the basis that T5 would
solve all the airport’s problems. But it took so long to get through planning
stages, and then was delayed by a year by strikes, that the other terminals
have deteriorated to the point they are regarded as a shameful introduction
to the country.
As things stand, there are no plans for T5, or indeed any of the other four,
to be occupied by budget airlines – it is earmarked for British Airways and its
oneworld alliance partners. However, there is also the prospect of major
investment at the LCA, Stansted Airport, partly on a terminal extension but
mainly on a second runway. The Nov-03 government White Paper gave the
go ahead for the GBP2-billion runway by 2012 but it is being contested by
environmental pressure groups.
What is at issue is the funding. The White Paper indicated that future
funding of major BAA capacity projects at London’s three main airports
ought to come from the users (airlines), more than from the debt markets
(which are often used by BAA). In other words, they must be self-funding
and cross subsidisation of one project by raising charges at another is not
allowed 29 . This has raised questions as to whether the funding of the new
runway at Stansted is feasible without cross-subsidisation from higher fees
paid by other airlines at Heathrow (full service scheduled) and Gatwick
(scheduled/charter/ low cost) airports, respectively. That is certainly what
the user airlines at those airports seem to think, and that thereby raises
questions also about the ability of user charges to fund necessary
infrastructure developments at Stansted, the world’s premier low cost
airport.
So there is a perennial quandary facing airport management that is evident
in this example: how to balance the requirement for lower user charges with
the need to provide necessary infrastructure. This conundrum must be taken
into account also in any exercise to differentiate the costs and benefits of
low cost terminals, as well as full-blown lost cost airports like Stansted.
The cross-subsidy issue was also raised in Chapter 4, in respect of Geneva
Airport.
On the other side of the fence, there is no doubt that some airlines have not
been shy in driving very hard bargains with airports. The leaders in Europe
have been easyJet and Ryanair, both of which have pulled out of airports or
29
The CAA has indicated that it would be prepared to depart from this formula if
this would satisfy three criteria: that it would be beneficial to airport users; not
discriminate against any users; and that it would not have any negative impact on
the airport system across southeast England.
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cut back on services if they have failed to obtain or renegotiate satisfactory
airport agreements.
While Ryanair is noted for its tough attitude to secondary airports easyJet, is
no respecter of airport ‘status,’ having pulled all but one flight (to London
Luton) out of Zurich Airport. It threatened to do the same at Geneva until it
got the package it desired, and it has reduced services at Amsterdam.
Adding a further complication is the movement of some mainstream airlines
towards a lower cost base, one that is sometimes not substantially different
from that of a typical LCC, and which requires (according to IATA) the
airport charging differential for the two sectors to narrow. This, critically, is
not the same as having two charges for the same service, a famous pet
peeve of IATA.
This has caused some low cost airport operators to take the view that if the
lowest price to the user airlines is expected, then the benchmark to be
employed in assessing the value of the terminal will be one of revenue
generation by alternative means. Brussels South/Charleroi is one such
example. The management there has decided to develop as much as
possible the non-aeronautical revenues: travel retail, Food & Beverage,
parking and regular bus shuttles to Brussels which are operated in
conjunction with Ryanair, for all passengers. Those revenues are judged to
be vitally important and the airport management tries to be creative in
establishing new businesses at the airport. By so doing, in less than 3 years,
the revenue by departing passenger was multiplied by a factor of four,
irrespective of how this contrasts with the demands of the budget airlines.
If there is good news for low cost airports and terminal operators in the
short and medium term it is that they are unlikely to see their margins
coming under the sort of pressure that is being experienced by LCCs as their
internal competition intensifies. In the longer term they might of course, if
the sector experiences the collapse that some anticipate and airports are left
nothing with which to fill the gap.
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10.7 The costs and benefits to an LCC
What are the costs and benefits to an LCC, and how are they measured?
This is dealt with in Chapter 2, by way of an historic reference to the airline
buzz. A useful contemporary case is Flybe, the UK traditional full service
carrier-cum-LCC that is mentioned widely in the text. Flybe was, of its own
admission, facing the real prospect of going out of business in 2002; its cost
base was high and revenues were not matching them. It was a question of:
adapt or die.
Several tactical cost areas were tackled. For example, onboard food and
drink was sold rather than distributed and behind-the-scenes operations
were combined. Captains began to calculate their own load sheets.
Strategically, five aircraft types were reduced to two and Flybe chose to
concentrate its route network, apart from its home base of Exeter, on UK
and some European regional cities such as Southampton, Birmingham,
Liverpool and Belfast 30 . London Stansted was axed altogether, although a
significant presence remains at Gatwick and Luton.
Long an operator of fuel inefficient BAE146 aircraft, the airline decided to reequip with the Bombardier (Dash) Q400, a 70-seat turbo-prop aircraft with
only marginally reduced cruising speed and one that is claimed to have the
same operating economics as a new generation Boeing jet, but with a
breakeven load of only 29 passengers.
Having established these operating economics, Flybe then turned its
attention to the airports. An important area has been minimising the cost
and time-cost of processing passengers through the terminal, but by using
of the infrastructure that is already in place. Common user self service
check-in has been high on the agenda at all the airports at which Flybe has
begun to operate, but only as a stop-gap measure.
Ideally, Flybe wanted to introduce Internet-based check-in at the earliest
opportunity on the principle that the greatest cost savings can be made by
getting passengers through the procedure quickly, preferably without
interacting with a human being on route. Eventually it enacted “Q-Buster”,
an on-line procedure using domestic computers and peripherals. Flybe
estimates 30% of its costs were ‘front of house’ like this, as against 70% for
‘behind the scenes’ operations (e.g., ramp, towing and terminal costs).
As for the 70% part of the equation - the terminal facilities (or lack of them)
that are or will be evident at Warsaw’s Etudia, Geneva, Singapore and Kuala
Lumpur terminals – they too are important to Flybe, but not, yet, to the
same degree.
One aspect that has emerged from the airline’s deliberations is the need for
the airport security function to be improved. Flybe has experienced several
examples of how reduced direct security costs (through fewer staff and
equipment) can translate into higher indirect ones where the removal of
check in queues is achieved by the methods mentioned above, only for
passengers to stall at a single security channel, thus bringing about delays.
Southampton and Liverpool are two airports where the problem has been
most acute; Southampton being a BAA-owned and -operated regional airport
shows that the issue is not limited to LCAs like Liverpool. Flybe estimates
that 45% of its passengers travel without bags and clearly any LCA that
makes provision in its costings to facilitate the quick passage of such
passengers through the system will win its approval.
30
Of these only Liverpool can be classed as a low cost airport but all the others
have substantial budget airline traffic, of which Flybe itself forms a major part.
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10.8 What happens when FSCs and LCCs start to merge?
The fact that Flybe is regarded as a ‘some frills’ airline in some quarters, in
that it may wish eventually to take on more full service features, such as the
ability to interline with long-haul carriers, raises the question of how airports
need to plan for the indeterminate future when the two kinds of carrier –
FSC and LCC – start to merge.
Factors that are bringing this about are, for example, the narrowing of the
performance gap by the two groups as FSCs improve their aircraft utilisation
and employee performance rates, and LCCs offer higher quality service.
Another example of the narrowing of the differences between the types was
the tie-up between easyJet and the British travel management company,
BTI. The deal permitted BTI to obtain access to easyJet’s booking inventory
and some back-office systems, to aid easyJet’s penetration of the lucrative
corporate travel market. It was the first agreement of its kind involving a
low cost airline.
From 2005, BTI’s corporate customers, which range in size from SMEs to
large financial corporations, were for the first time able to view and buy
easyJet’s inventory through their own systems and alongside the inventory
of other airlines – in other words they were no longer reliant on a unique
website, with the restricted reach it offers, or a telephone call to a call
centre.
In addition to seat purchasing capabilities, the function automatically fulfils
administrative procedures such as billing, providing management
information and notification in the event of flight disruptions. BTI was the
driving force, having pointed out that whilst keeping costs down for the
carriers themselves, easyJet’s systems were not appropriate for the
corporate client and that their inflexibility and prescriptive booking methods
did not sit well within the total travel management process.
There was no change to either easyJet's business model or its pricing
structure. EasyJet expressed the intention that identical deals would be
struck with other travel management companies. The function is an
extension of easyJet.com/b2b - a simplified version of its internet site for
use by corporations, launched in 2003. EasyJet was also the first European
airline to allow customers to view and change their booking details online, a
frequent demand of business passengers.
Although there are no special deals for BTI’s customers over and above what
any other client would receive it is clear that the business model is shifting
towards the needs of the business traveller rather than that of the leisure
traveller – and not without good reason. The fare charged to a business
passenger travelling for example on a Monday morning and returning on a
Wednesday evening can be ten times or more that charged to a leisure
passenger who books six months in advance, travelling Saturday to
Saturday, even without taking into account special promotional offers.
These developments must translate into greater demand by business users
for the support facilities they expect from airlines at primary airports and full
service terminals and it is the assessment of the nature of that demand and
the timeframe in which it will materialise that poses the immediate challenge
to low cost airports. Those support facilities include:
•
•
•
•
Rapid access/egress to/from personal transport, to/from gate,
including security clearance;
Ticketless travel (an IATA target, but few LCCs are IATA members);
Fastrack channels; and
Business facilities/lounges.
None of the above are conducive to the development of low cost terminals.
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10.9 Can rail seriously challenge LCCs/LCATs?
In many parts of the world rail services have begun seriously to challenge air
services as they have become faster and more reliable. The main
differentiating factor has been the prices that LCCs have been able to offer.
Rail companies have rarely been able to operate sophisticated pricing,
inventory and yield management systems and often fail to cooperate with
each other adequately to offer through ticketing in the ‘IATA’ air style either.
Their pricing mechanisms still often resemble those of the airlines prior to
the advent of the LCCs in the 1990s.
Now there are new developments in pricing also, threatening the LCCs on
key short-haul routes and the airports that support them.
UK
In the UK, during the 1960s, when the concept of ‘marketing’ had barely
arrived in Europe from the USA, British Rail, the state-owned UK rail
network, made several strategic decisions, including the closure of hundreds
of smaller branch lines. Critics accused the operator of failing to appreciate
which market it was in – BR considered it was in the business of running a
(depleted) railway rather than in the broader one of transport and it thus
lost out on the opportunity to compete in the burgeoning bus market on the
newly opened motorway network. Subsequently the lack of rail lines,
capacity and the high prices charged on the railways opened the door to the
LCCs to compete head on.
But times change. British Rail was privatised, the infrastructure hived off and
separate privately operated train companies invited to tender for regional
and national franchises. There has been huge investment in the
infrastructure, especially the east and west coast trunk networks that
connect the major cities and the final section of the high speed LondonParis/Brussels Channel Tunnel line is now complete. The ageing rolling stock
on long distance routes has been replaced with modern equipment and
passenger rail traffic nationwide is at its highest for 50 years. The principle
trunk route, London-Manchester, is operated every 30 minutes and takes 2
hours 15 minutes. The operator, Virgin Rail, has invested by dumping the
old slam-door, smoke-riddled trains that personified the route and replaced
them with airline style ‘Pendolino’ carriages with flat tables that host laptops.
Standard Class is of much higher standard than a typical LCC environment
but First Class really sets it apart, offering tables pre-laid with cloth and
metal cutlery, comfortable seats, high quality food and lots of frills.
The infrastructure operator, Network Rail, reported the first profit in its
history, and is required under its constitution to plow the whole amount
(GBP750 million) back into further improvements.
There is even talk now of reopening old branch lines and employing longer
trains or ‘double-decker’ carriages on the busiest routes, threatening the
business of regional airlines. In the international arena, the most prestigious
rail project in the country, the Folkestone to London Channel Tunnel rail link,
will cut 20 minutes off the current London-Paris running time of 2 hours 35
minutes. Running parallel to this will be the opening in Nov-07 of a new
international rail terminal at London’s St Pancras rail station.
The new London St Pancras rail hub
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This facility will be the largest rail hub in Europe and consist of international
gateway hub airport-standard facilities that open up the possibility of rail
connections from much of the rest of the UK via St Pancras to Europe. New
stations will also open in Stratford, east London, close to the site of the 2012
Olympic Games site, and at Ebbsfleet, in the far south east of the
conurbation.
Channel tunnel rail link
Source: Courtesy of BBC
It is certainly true that even the ‘half-speed’ existing Eurostar rail line within
the UK has been detrimental to airlines operating routes between London
and Paris/Brussels. Indeed, there has been no air service linking London
Gatwick airport (about 25 miles west of Ashford rail station, see map above)
with any Paris airport for five years. Nor is there one from London Stansted,
the capital’s premier LCC airport, leaving just London Heathrow (three
airlines), London Luton (easyJet) and London City (Air France to CDG and
Orly) to offer air services. London-Paris was once one of the world’s busiest
air routes.
The UK government’s ‘Future of Air Transport’ White Paper (Nov-03) pointed
out that Eurostar has provided an attractive alternative to short-haul air
services to the European mainland, having already then secured some 60%
of the market on the London-Paris route, and 50% on the London-Brussels
route. There are several million fewer air passengers a year on these routes
since the introduction of Eurostar and Shuttle rail services.
Completion of the Channel Tunnel Rail Link will make rail an even more
attractive choice for these routes. On the other hand, the link has been
poorly financed and bedevilled from the outset by inaccurate forecasting of
the number of passengers likely to use Eurostar and the amount of revenue
this would generate. Questions have been raised about whether the line
provides value for money. Under the government's own cost-benefit
analysis, it will fall short purely as a transport endeavour unless the number
of cross-Channel passengers unexpectedly rockets.
London & Continental Railways, a consortium including Bechtel, Halcrow,
National Express and SNCF, won a contract to build the line in 1996. At the
time, consultants forecast that Eurostar’s passenger numbers would reach
21.4 million by 2004 but despite creaming off the air travellers they only
reached 7.3 million. The shortfall in revenue forced the government to lend
more money to keep the project afloat and the costs of construction of the
final stage have accelerated well ahead of inflation in the southeast of
England. One of the reasons for the shortfall is that no connecting (via
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London) services were ever initiated, much less direct services from regional
cities, leaving UK regional airports to develop French and Belgian air
services.
As for the impact of enhanced rail services on UK domestic air transport, the
White Paper assessed the need for additional airport capacity by considering
the scope for substitution by alternative modes, and in particular rail.
It concluded that passengers on internal flights accounted for some 13% of
total traffic at UK airports, most of them on flights between the London
airports and other parts of the UK. These services were important for pointto-point traffic, especially to and from Scotland, Northern Ireland, the North
of England and parts of the South West, but also for passengers wishing to
connect with onward flights or reach destinations in the South East outside
central London.
Studies suggested that rail competes well with air on point-to-point journeys
of two to three hours. So rail is, for example, the preferred option for interurban travel between London and the English Midlands (e.g. Birmingham,
Leicester). But for longer journeys, air travel remained the mode of choice –
and the longer the distance the greater the preference for air. For example,
comparing business trips by rail or by air from Scotland to London and the
South East, the overwhelming majority - some 93% - are by air.
Investments to improve inter-urban rail network would, over time, increase
the attractiveness of rail as an alternative, as would more attractive pricing
packages from rail operators. Work in hand on up-grading the West Coast
Main Line would, for example, cut journey times between Manchester and
Central London by half an hour, and between Glasgow and London by 45
minutes, and enable more frequent and reliable services. Looking further
ahead, there were plans for improvements to the East Coast Main Line, and
the Strategic Rail Authority was considering the feasibility of proposals for a
new high-speed North-South rail line.
New investment in rail capacity would see more long-distance journeys by
rail. But the majority of this increase was expected to come through
switching from car travel or as a result of new demand. Work undertaken by
the Strategic Rail Authority, a regulatory body that existed at the time,
suggested that the number of passengers switching from air to rail as a
result of planned improvements to the West and East Coast Main Lines
would be around 25% from Manchester, 10% to 15% from the North East,
and less than 5% from Scotland. These switches were not expected to affect
future passenger demand at the most crowded airports by more than a few
percentage points.
On specific UK routes (particularly for city-centre-to-city-centre journeys),
enhanced rail might cause some reduction in service frequency or aircraft
size. But for other long-distance journeys, including interlining, rail was
considered unlikely to be the most attractive choice. And for some parts of
the UK, travel by air would remain the only realistic option such as cross
country routes and to/from isolated reasons like the English West Country
and the Scottish Highlands & Islands.
In conclusion, in bringing forward proposals for new airport capacity, UK
operators will need to keep an eye on the potential impact of new rail
investment on demand for air travel, even if that impact may not be quite
what was envisaged a few years ago.
What Britain will not get, according to a Jul-07 White Paper, is a new, central
spine high-speed rail link running north/south that would compete with air
routes, for example, between London and Scotland, many of which are LCC.
The Department for Transport maintains that what it needs is ‘immediate
quick wins’ to increase capacity (1,300 new carriages have been authorised)
and not a high-speed line ‘whose benefits are uncertain.’
Continental Europe
For years, mainland European rail networks – notably those of France and
Germany – have poured billions of Euros into their systems to come up with
some of the earth’s sleekest train operations. Europe is evolving to compete
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with the airlines, particularly on routes of up to 600km and with the advent
of ever-faster trains from SNCF, Deutsche Bahn and Thalys in particular; rail
travel has never looked more attractive. Some international routes, for
example Paris-to-Brussels, are particularly fast while others between major
cities dawdle along by comparison.
In-train service is variable but overall is perceived to be of a much higher
standard that found on any air LCC or LCC Hybrid. Eurostar offers at-seat
dining experience, deep, wide armchairs and a frequent traveller scheme.
Pan-European operator, Thalys also provides a high level of at-seat service.
The exception is Deutsche Bahn, which has focused on highly competitive
business class fares at the expense of luxury.
France
A good example of rail services challenging air services is France, where the
introduction of high-speed rail lines has had a dramatic effect on domestic
air services on individual short routes, although it has had a relatively
modest effect on air traffic overall. The 1.5-hour journey, joint venture line
(Thalys) between Paris and Brussels quickly claimed 95% of the route,
prompting Air France to consider discontinuation of the air route in favour of
leased and branded coaches on the train.
The French government has long subsidised what it considered to be the
transport backbone of the country and built 1500 km of high-speed (TGV)
rail link between Paris and the major regional cities. SNCF French Railways
operates a direct Paris-Marseilles service – distance 661 km – that takes just
3 hours 15minutes compared to a direct GNER (private operator) service in
the UK from London to Aberdeen – distance 857 km – that takes a minute
under 9 hours.
The French government also built a TGV station at Charles de Gaulle airport
thus removing the need for domestic air transfers to and from many cities.
Consequently, SNCF has been able to present itself as an alternative to air
travel when it has wanted to, or as an adjunct to it. This co-operation has
been simpler in France while both the SNCF and the airports have been
government owned but airport privatisation is creeping into France 31 and the
cosy relationships of the past may soon draw to a close.
Germany
The German rail system is also highly developed and has been privatised.
Domestic air traffic delays are commonplace, with many of Germany’s major
city-regions in fairly close proximity with Frankfurt at the centre (and which
has caused Fraport to promote Hahn, the Chapter 3 case study airport as a
budget airline alternative). Development of the air infrastructure did not
keep pace with demand until the last few years and Deutsche Bahn was able
to establish a competitive advantage over Lufthansa until Germany’s
fledgling LCC airlines began to make their mark, especially on the shorter
runs up to three hours in length, aided again, as with France, by having a
rail station in situ at Frankfurt International airport. Comparative prices are
not dissimilar between air and rail and Second Class travel on Germany’s
ICE trains is perfectly acceptable to most business people. Many domestic air
routes, such as those between Frankfurt and Stuttgart, Cologne and
Dusseldorf, have effectively been replaced by rail services.
Spain
In Spain, the national rail operator, Renfe, turned around what was a belowpar operation and now runs one of Europe’s most punctual and high
standard rail networks. On its high-speed inter-city AVE services, Renfe
actually offers a customer charter that refunds passengers if the train is
more than a minute late at its destination. The last two or three years has
31
Aeroports de Paris was partly privatised by public listing in 2006, three small
regional airports are privately managed and larger regional ones may be
privatised.
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witnessed the much needed arrival of low cost air transport between Spain’s
major and well-separated cities and better infrastructure, financed by state
operator AENA, to cater for it. But it is interesting to note that a large part of
the business plan for the privately financed Don Quijote airport near Ciudad
Real, south of Madrid (see Chapter 4), is based upon rapid access and
egress from a wide area by the AVE line running between the capital (pop.
2.8 million) and Seville (pop. 0.7 million), Spain’s fourth largest city, and
directly through the airport.
New ticketing procedures
Overall, in Europe, the best advantage of rail travel goes to those whose
travel times are between one hour and five hours from city centre to city
centre. By air, the equivalent journey (allowing for check-in and airport
transit times) would take roughly three hours if there are no delays and
everything works perfectly, as it rarely does.
If there is a flaw in the ambitions of Europe’s rail operators, it lies in the fact
that European rail travel across borders is expensive. Despite the advent of
promotional ‘pass’ schemes for protracted vacation travel, the concept of low
cost train travel as one might find in India’s overloaded but astounding
network or in mainland China or even in Amtrak’s deep discount offers in the
USA, has never taken root in Europe. There were just too many borders and
too many government decrees for cost effective round-trip inter-city rail
travel across Europe. On the positive side, the stations are in the city,
thereby saving time to and from airports to the city centre and luggage is
not spirited away so dependence on the system for retrieval is greatly
reduced. If Europe’s rail authorities can make progress on lower fares, rail
can seriously challenge the dominance of air travel, apart from on specific
domestic runs.
The first indications of a real will to do that are becoming evident. The
missing link in the European rail operators’ offer has always been the lack of
common ticketing throughout the region. For many years the Inter-Rail pass
offered first young people, then anyone, up to one month’s rail travel around
Europe at a fixed rate and more recently a variety of Euro Domino single
country or limited regional tickets have also been available. But there was
no ticket tailored to, say, the demands of a businessman who wished to
travel from Birmingham via London to Paris, Lyon and Marseille, returning
via Zurich, Strasbourg and Brussels. He would have needed to purchase
separate tickets for much of the journey at a total price that was unrealistic.
In contrast, the IATA ticketing system has enabled him to do that sort of
journey by air on one ticket in his own currency and with certain guarantees
built in, for over half a century.
Now a group of European high-speed rail operators have formed (Jul-07) an
alliance, called Railteam, to increase the competitiveness and convenience of
Europe’s international rail system, in relation to air travel. Railteam will
include Eurostar, Germany’s Deutsche Bahn and France’s SNCF, in addition
to Dutch, Austrian, Swiss and Belgian rail operators and high-speed
subsidiaries Thalys, Alleo and Lyria.
From 2009, Railteam will offer international travel on a single ticket and
introduce a single online reservation system that enables passengers to book
international rail travel in the one location. There are caveats, such as that
at least part of the journey must be on a high-speed train. Five main hubs
will be set up at Brussels, Lille, Cologne, Stuttgart and Frankfurt. Existing
frequent traveller benefits will be extended across all partners and 36
business lounges provided. Tickets may be exchanged or modified at any
part of the journey. Unlike an LCC air journey, if a connection is missed,
passengers can simply take the next service without charge.
The system will enable timetables to be sent via text message and will
include all information on prices and timetabling options for all trains in
France, Britain, Germany, Belgium, the Netherlands, Austria and
Switzerland, enabling the direct comparison of fares and improved
accessibility of rail fare information. This significant change in rail ticket
distribution systems will cost EUR30 million to implement.
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Projected Evolution of the high-speed rail network in Europe by 2020
Source: Railteam
As Railteam is only being phased in during 2007/8 it is not possible to say
yet exactly what effect it will have on low cost air travel. If Railteam can
integrate this much wider network (the current service offers 5000 km of
line, set to rise to 7600 km by 2010 and 15000 km by 2020 with a
multiplication of cross-border interconnections) with the lower prices already
on offer in individual countries via Euro Domino, then it could pose a serious
threat. Especially so if it can integrate frequent traveller miles that can be
earned on one part of the network (e.g. France) and used in another (e.g.
Germany).
The above map gives some indication of the scope of rail connections in
territory where European LCCs are strong. All of them will offer many further
local connections on non high-speed lines, making ‘door-to-door’ travel
feasible. Railteam is already promoting a ‘clean and green’, few carbon
emissions message.
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United States
In the US, Amtrak, created as a quasi-government agency in 1971 to
coordinate and manage the private rail networks operating at the time, still
requires hefty government subsidies but has recently required less support
than it has in the past. Still Amtrak presidents have historically been clear in
stating that rail service in the US is unlikely to achieve self-sufficiency and
will require indefinite government subsidy.
Amtrak received approximately USD1.4 billion for fiscal year 2006, but with
the condition that the outfit reduce (if not eliminate totally) food and sleeper
service losses. The food service cuts were done through the introduction of a
more simplified dining service, mimicking low cost airlines. There remain
regular calls for Amtrak to be wound up altogether, it having slipped out of
the public consciousness following its post 11-Sep-01 revival and it is
presently only covering 67% of its operating costs through revenues. Its
annual subsidy should be compared with the USD15 billion the airlines
received following the terrorist attacks.
However, in FY 2005-6, the network did carry a record 24.3 million
passengers and fights on. If included with domestic airlines it would rank
eighth largest with a 5% market share. Like its British counterparts it does
not own all of the track, but it does own some. 70% of the miles travelled by
Amtrak trains are on ‘host’ railroad tracks, i.e. those owned by other
railroads.
The 21,000 mile inter-city network encompasses 46 states, 500 destinations
and 29 branded routes in specific corridors such as the California Zephyr
(Chicago-San Francisco), The Crescent (New York – New Orleans via
Washington and Atlanta) and The Sunset Limited (Los Angeles – Orlando).
There are few coast-to-coast cross-country services and scheduled transit is
mainly through the main rail hub of Chicago, which together with O’Hare
airport and the converging highway system make Chicago the world’s
premier transport hub.
High-speed rail services (Acela Express) have been launched between
Washington and Boston via New York, alongside the country’s busiest air
routes and are breaking even. ‘High-speed’ here cannot be compared with
Asia or Europe. Several major cities, like Phoenix, Arizona (the fifth largest
by population) and Las Vegas are not directly served. There is some limited
code sharing with Continental Airlines at Newark Liberty airport and Amtrak
serves airport stations at Baltimore-Washington and Milwaukee. There is a
frequent flyer/loyalty program similar to that operated by many airlines.
Elsewhere in the US, the California High Speed Rail Authority is studying a
San Francisco Bay Area/Sacramento to Los Angeles and San Diego line
(another high volume air route). ‘Bullet trains’ would operate at up to 220
miles per hour, covering Los Angeles to San Francisco in 2.5 hours and
connecting with existing lines. The Authority’s logo is ‘Fly California –
without ever leaving the ground’. The Texas High Speed Rail and
Transportation Corporation wants to bring an innovative high-speed rail and
multimodal transportation corridor to the Lone Star state. The Florida High
Speed Rail Authority proposes a track between Tampa and Orlando but
progress is very slow.
Is Amtrak, or any of these actual or proposed high-speed lines, a serious
competitor to the US domestic airlines? Probably not, except on specific city
pairs. Amtrak’s strength is in the densely populated Northeast, East,
Midwest, California and Pacific Northwest. Nationally, it accounts for only
0.1% of US intercity passenger miles. While it carries 25 million passengers
annually, the airlines carry over 700 million and many more journeys are
made by private car despite rising fuel prices.
However, the key benefit Amtrak offers communities is that it serves many,
mainly through local subsidiaries and its Thruway Motorcoach route
extension service, which have no air service or other public transportation
and thus undertakes a ‘public service’ obligation, removing much of that
concern from the airlines.
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Australia
The development of high-speed trains to compete with air transport in
Australia has been hampered by the country’s low population density, the
large distances between cities, the poor state of track and the relatively light
tax applied to motor vehicle fuel. With nothing that could presently be called
high-speed rail service, the airlines have for the most part enjoyed
uncontested dominance of the inter-city transport arena.
There have, however, been discussions of a high-speed railway between
Sydney and Canberra, which could ultimately expand into a corridor
extended from Sydney to and from Canberra to Melbourne and Adelaide,
and east to Brisbane and the Gold Coast on an 800 mile track. The
Canberra-Sydney service would use a renewable energy source and be
extended to Sydney Airport. The philosophy behind these developments has
always been – airport link or no – that the high speed rail services would
compete with air services rather than cooperate with them.
The ‘Speedrail’ network plan was formally abandoned in Dec-00 but has
never been totally ruled out. There is also a proposed project to build a high
speed line from Melbourne to Darwin, an unprecedented 2,800 miles across
unwelcoming terrain. Trains would travel at up to 186 mph. Such lines are
usually no longer than 400 miles as after that distance the competitive
advantage over air is lost.
North Asia
Two countries in North Asia – Taiwan and South Korea - emphasise the
threat high-speed rail service presents to air services and supporting
airports. (See Chapter 6).
Taiwan’s long awaited high-speed rail link opened in Dec-06, connecting
Taipei and the southern city of Kaohsiung. Based on the Japanese
Shinkansen ‘Bullet Train’ technology, it carries nearly 1,000 passengers and
takes 90 minutes to cover the 345 km distance. This compares with 30-45
minutes for the actual flight part of the air service.
Japan’s long established Shinkansen has been but one factor in the failure of
low cost airlines to make a real impact there, together with high airport
charges and the lack of a substantial secondary airport network.
The cities are currently connected by a slow train service and by five airlines
providing high frequency connections - some 40 services a day - from
Taipei’s small downtown Songshan Airport, with a mix of small aircraft.
And the opening of a sophisticated high-speed domestic rail system in South
Korea struck a serious blow to the viability of regional airports and domestic
air services in that country.
Korea has a nascent low cost airline business, led by Hansung Airlines and
Jeju Air, and Both KAL and Asiana have been considering setting up their
own low cost subsidiaries to compete, but they are all in tough competition
with fast and efficient rail services. Therefore low cost airlines are unlikely to
influence airport development positively until cross-border operations win
regulatory approval. This fact is reflected in the decision of the Ministry of
Construction and Transportation to delay the construction of airports in
provincial cities, owing to a sharp reduction in demand brought about by the
introduction of a new high-speed rail service.
Advantages of rail over air
The Korea and Taiwan experience underlines the advantages rail can have
over air. Both are relatively small countries in which distances of 650 km or
less connect the largest population centres. These trips, taking four hours or
less, fall into the time zone in which train service is competitive with – if not
preferable to – travel by air. Rail lines can also permit greater capacity and
frequency of service than what is possible with aircraft, and rail schedules
find fewer weather-related interruptions than do airline schedules, a vital
distinction in some regions.
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From the operator’s point of view, a single train can call in at multiple stops,
something that is rarely done with aircraft journeys and for the train, each
station-to-station journey can be a ‘point-to-point’ itinerary with attractive
pricing. Consequently, one train’s stopping pattern can allow a multitude of
possible journeys, increasing the potential market.
There are nine countries in Europe and four in Asia with such services, and
20 countries are planning to implement them. The countries soon to host rail
services include such seemingly unlikely candidates as Argentina, Iran,
Saudi Arabia and Vietnam.
It is not known whether rail will usurp air in any of these countries. The two
key factors that appear to give rail the edge are governments that place
greater environmental emphasis on rail over air (as they often and
increasingly do in Europe, for example) and where governments are content
to finance the huge infrastructure costs of long high-speed lines from the
public purse. It is no surprise that the greatest long-term success of rail in
competition with air has been in France, where successive governments
have espoused such principles and where government control over airport
infrastructure has until recently not opened them up to the privatisation that
sponsors real competition.
The other notable feature in France is the cooperation between SNCF and
the aviation industry that has permitted not only a reduction in short-haul
service point-to-point passengers and those transiting at CDG, but also the
air-rail codeshare agreements that have been signed with the likes of not
only Air France, but also Lufthansa and American Airlines.
Is rail-air cooperation the way forward?
Some believe it is this sort of cooperation that holds the best future for
airlines, airports and rail operators, to the extent that there is an
international pressure group, IARO (www.iaro.org) that exists to promote
the concept of ‘joining railways joining airports’ and specifically to encourage
integrated air-rail inter-modality. There are over 300 airports globally with a
planned or existing rail link to them.
Broadly, the types of air-rail service that exist presently can be broken down
into the following categories, with examples:
•
•
•
•
•
High-speed networks that connect the airport to the main centres of
population and industry (TGV, ICE in France, Germany);
Dedicated airport links, operating in isolation from the network as a
stand-alone function (London Heathrow, Stockholm Arlanda, Oslo
Gardermoen, Moscow Sheremetyevo, Vienna, Hong Kong, Kuala
Lumpur, Osaka Kansai, plus those planed for, inter alia, Bangkok,
Glasgow, Hyderabad and Jakarta). Hong Kong’s Airport Express line
carries 51% of the airport’s passengers;
Rail services that combine high-speed connections with local and
regional services, to varying degrees (London Gatwick and
Stansted, Manchester, Birmingham, Amsterdam). The ‘Stansted
Express’, inadequate as it is, carries 25% of the airport’s 24 million
passengers;
Suburban rail metropolitan services that connect directly or
indirectly with one or more airports (Paris RER, New York Subway,
London Underground). London’s Piccadilly Line Underground service
carries 20% of the airport’s 67.5 million passengers, making it
possibly the world’s largest volume carrier, despite being in direct
competition with the Heathrow Express heavy rail service; and
Light rail transit including tram (Salt Lake City, Portland Oregon,
London City, Bremen, Hamburg).
Fundamentally, these air-rail services exist to lessen the impact of motor
vehicle congestion around an airport, but may be extended to incorporate
rail services that remove the need for some air routes, as for example at
Paris and Frankfurt.
The existence of a rail terminal at an airport will not reduce the value of the
airport estate, and in many cases will enhance it considerably. Cooperation
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between air and rail modes, rather than competition, will be the name of the
game in the future. So far there are few examples of such links to LCAs,
Stansted being the most notable exception. It will be interesting to see how
Bremen’s light rail system develops since Ryanair made it a base. The
relatively low passenger volumes of LCAs usually make it difficult to agree
who should fund these rail projects.
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