Europe state of art report
IV.2 Reassessing market power
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- V. AIRPORT DEVELOPMENT
IV.2 Reassessing market powerThese above described phenomena demonstrate the increased flexibility of today’s airline business models. That flexibility is particularly apparent among point-to-point carriers but the growing trend towards consolidation of hub carriers is giving them more choice than in the past as to where to base their capacity. These findings of the mentioned study are also consistent with the publicly declared policies of many airlines. Perfectly understandably, they seek to optimise the profitability of their networks and are prepared to move their aircraft to do so. This proven willingness to switch means that the threat of switching has a credibility which gives such airlines a degree of buyer power relative to airports which is emphasised where they account for a high proportion of an airport’s overall traffic. At 8 out of 10 of Europe’s top 250 airports the largest resident carrier delivers more than 40% of capacity. Nowadays passengers have more choice than in the past. With the rapid development in new routes, a large proportion of today’s passengers have a choice between two or more airports. It can be demonstrated that the degree of choice now available to passengers and how it has increased over recent years. This choice is apparently certified in the following phenomenon:
The combination of these factors suggests that passengers have both a significant and increasing degree of choice over which airport to fly from; and informed by easily accessible information on the internet represents a competitive constraint on European airports which increasingly have to make themselves attractive to passengers. Challenging the old presumption about market power In the mentioned study five indicators were applied to assess the strength of identified competitive constraints, namely:
Applying these indicators to the data for 2011 across the 250 largest airports in Europe the study shows that a majority of airports in all size categories are affected by at least one of these constraints, and in many cases by several competitive constraints with a cumulative impact on market power. The researchers found that these constraints were increasing, and market power therefore weakening across the board. This applies to all categories of airport, with many of the largest airports subject to significant competition for transfer passengers as well as to airline buyer power deriving from choice of hub by multi-hub carriers. Amongst smaller airports, constraints emanate more from passenger departure choice and airline buyer power, as well as, in some cases, destination switching. It was also stated that airports of all sizes and categories are therefore subject to many competitive constraints, increasing over time; and the cumulative impact these competitive constraints is likely to be significant in many cases. While this cannot amount to a determinative view on the market power possessed by European airports the researcher stated that there is sufficient evidence to challenge the old presumption of airports having significant market power. Rather, the starting point as elsewhere in the economy should be that the existence of market power needs to be proved rather than assumed. On the basis of the analysis the researcher have concluded the following two recommendations:
New business models on the airport market as answers to new challenges In the last ten years from the enlarging process of the Union, the European citizens have enjoyed the benefits of the growing trade and tourism connections between all the regions of the continent. These benefits were also the results of the liberalisation processes of the EU air-traffic market. But this process has a result the changing business model in the air transport as well. Governments are not willing to finance the airports’ infrastructure anymore and the airline companies can get unrestricted to the Europe-wide airport network. So the airports have evolved from being mere infrastructure providers – solely or mostly dependent on public subsidies – to self financing, diversified and competitive business enterprises. On the other hand the crisis, which started in 2008 and with more or less intensity still remains today, had a result that there were fewer and more dominant airline groups on the market which could take decisions very quickly on launching or closing a new airline service in a certain airport. This position is further supported by the fact, that two-third of the European population have 2 or more airports at disposal within 2 hour driving distance from their residential neighbourhood. This competition will increase also because the European airports aim to attract a growing share of the passengers from the fast developing countries of the world too. These competitive pressures mean that the business transformation of airports will continue in the near future and therefore new business models will emerge. Each airport is striving to leverage its unique market position and increase its economic and operational efficiency. Airports have become business in their own right and this fact has allowed them to act as competitive driver for local and regional economic growth. The airport operators employ 156 thousand people directly but in total 1.200 thousand employees work on the airport sites. And for every 1.000 airport onsite jobs there are around 2.100 indirect jobs supported nationally. It means that these airport-related jobs contribute €59 billion to the European GDP17. As airport charges paid by airlines and passengers do not cover the cost of the infrastructure they use, other revenue sources had to be found and developed. European airports have thus become extremely efficient in generating revenues from an array of non-aeronautical activities such as retail, restaurants and bars, parking, conference centres, real estate, consulting, etc. These activities play an increasing role in financing the modernisation and expansion of airport facilities. They currently account for almost 50% of airport revenues, rising above 70% in some cases. This development means that the airport business in Europe operates just in the same way as other competitive concerns – winning customers and delivering a return for shareholders, be they private or public, through operational and economic efficiency although more than ¾ part of the European airports are publicly owned but the society needs to invest the public sources also in a more profitable way. Within Europe the crisis has accelerated the airline consolidation for network airlines, but also for low cost carriers (LCC). This is likely to result in significant route network concentration around 5 major airline groups, with the low cost segment becoming dominant for intra-European traffic – and more prone than ever to move aircraft and crews in search of the best market location. Overall, much fewer airlines for the existing 500 European airports mean that like any other business, there will be winners and losers at the end. Against this background, new airport business models are emerging in Europe, away from the traditional ones:
While they are not mutually exclusive, these new models involve tailor-made approaches to leverage each airport’s unique market position and strengths. This increasing specialisation reflects the need for each airport to secure their competitive advantage over others through diversification and innovation. The ACI classifies the different business models for airports18 by their level between of established and emerging as follows:
Other important fact is that today airports are not only instrumental in boosting tourism but they act as a magnet for the establishment of new business. The immediate proximity of a well-connected airport remains one of the top criteria for company location. It also helps attracting skilled labour and facilitates economic transformation. Moreover, for the islands and outermost regions of Europe airports are the lifeline. It is therefore no surprise that airports have developed into economic communities in their own right. Around large hub airports these economic communities are now called Airport Cities, reflecting the fact that these airports are economic engines comparable to the metropolitan area they serve. Airport Cities have become a destination for business, shopping and leisure, based on multi-faceted development. They are the new global transportation and business centres of the 21th century. Similarly, smaller airports have developed into dynamic micro-economies. Reflecting their specialisation and niche market positioning in segments such as cargo, business aviation or low cost point-to-point services, they have attracted warehouses, business complexes, leisure activities and hotels to service and complement their core business. In time many of these niche airports will evolve into larger ones, with even broader activity and income bases. The new models represent a changing role of airports in the employment too. The airport offers the possibility to create now business and new jobs multiplying the number of business, services and employees. In the European airports are 156 thousand people employed as direct operators of the airports (e.g.: in airport management, maintenance, security etc.) while around 748 thousand people work for airlines or handling agents at airports (e.g.: flight crew, check-in staff, maintenance crew etc.). But other 308 thousand people work on-site at airports in retail shops, restaurants, hotels and nearly 314 thousand people are employed in the civil aerospace sector (manufacture of aircraft systems, frames and engines etc.) Only some examples:
Not only big hubs offer a lot of indirect and inferred employment but airports of all sizes, even smaller regional airports like Birmingham International Airport, or Gothenburg Airport. On the other hand: not only airports but carriers are changing. In the liberalised aviation market airlines have complete freedom to base an aircraft in any country or fly between any two airports in EU. As a result new airlines business models have emerged, fully reaping the benefits of a single aviation market. These so-called “Point-to-Point Carriers” offer direct connections between two cities, whereas traditional “network carriers” primarily operate in a hub-and-spoke system. One key feature of Point-to-Point Carriers, such as Ryanair, easyJet or Sky-Europe is their flexibility to open and close new routes. If the conditions at one airport are not satisfactory to the airline or if the route is unprofitable, it may flexibly redeploy their aircraft (often at short notice) to another airport with a better offer. Route openings and closings (i.e. airline switching) respectively account for cca. 20% and 15% of the market. In 2011 alone, cca. 2500 new routes were opened, while cca. 2000 routes were closed. Is should be noted that also network carriers such as Lufthansa or Air France increasingly offer point-to-point operations from secondary airports, such as Marseille, Lyon, Nantes, Hamburg, Düsseldorf and others. As a result of this market development, Point-to-Point operations represent a very substantial share of the traffic at European airports. At airports with traffic of less than 10 million passengers a year, these carriers even represent the majority of traffic. 84% of those airports which have more than 1 million passengers in a year cater for an airline which comprises more than 40% of the airport’s capacity. In total 74% of intra-European routes are served by single carriers. On average, after the closure of a unique route (i.e. a route served by 1 airline) only 47% of the original capacity returns after 3 years. More than 90% of closed unique routes are not operated in the year following the closure. This has important repercussions on the competitive constraints on the airports – the ability (or the threat) to close a route or to switch to another airport puts the airline in a dominant position in its relationship with the airport. In the case of network carriers, the threat of de-hubbing (i.e. to close a hub or to shift capacity to another hub of the same airline group) constitutes an equally strong competitive constraint for hub airports. It is considerable that since 2000 have occurred 5 cases of de-hubbing in Europe. Not only airports and airline carriers but passengers are changing too. In addition to more footloose airlines, passenger switching exerts considerable competitive constraints on airports. In today’s market, passengers have easy access to travel options and pricing and an increased choice when planning a flight journey. There are more airports available to travellers and there is significant overlap of routes serviced by neighbouring airports. The fact that these competing airports are serving the same destinations means even more choice for passengers. In addition, there are also more travel options available for transfer passengers. They can also pick and choose their transfer hub. With this choice, passengers are now more price sensitive than before. And last but not least, high-speed rail often represents a good alternative to the plans on short distance. The railway stations are in, or close to the CBD, there are no time using security controls or check-in procedures, on the train is more space to move, etc. So rail typically captures 50% of the market when air routes compete with rail journeys of less than 4 hours. The passenger has the choice
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