Airlines hold court – new analysis reveals intensifying competition between airports in Europe

Competition between airports for airlines and passengers is an indisputable part of the European air transport system, but latest research by Oxera reveals that both the nature and intensity of that competition have significantly changed since 2010, fuelled by the cumulative impact of disruptive market developments – including the relentless expansion of both Low Cost Carriers (LCCs) and Gulf airlines and the convergence of airlines’ business models.

In its study ‘The Continuing Development of Airport Competition’, Oxera argues that the changing dynamics within the European market has changed the nature of airport competition – giving it a truly Pan-European dimension. “The result is that today for any airport in Europe – whatever its size and location – LCCs are now the ones calling the tune.

The Oxera study says the global financial crisis and the unstoppable rise of digitalisation has irreversibly changed consumer behaviour – with a strong focus on frugality and value for money. This proved to be a boon for LCCs as the key criterion – price – became a decisive factor for the majority of air travellers.

The period of 2010 to 2016 was “tumultuous, even by aviation’s usual standards,” says Oxera. The impact of the global financial crisis lingered on and was followed by severe spikes in oil prices in both 2009 and 2011. The rise of the smartphone, ongoing momentum of social media and other digital advances all had implications during this time, in parallel to some very specific aviation industry developments – which all combined to create disruptions and significantly increase competitive pressures on airports.

While airline may have become more cautious in expanding capacity and more focused on unit revenue growth (yields), delivering a much more selective growth strategy, the European market still grew by +25% in terms of passenger traffic during 2010 and 2016 – with that growth predominantly driven by new services and additional capacity from European Low Cost Carriers (LCCs), mainly on intra-European routes.

In fact, during that time, 76% of all growth at European airports came from LCCs,” says Oxera in its study. “These airlines operate flexibly on a pan-European basis, moving their assets in search of the best market conditions. This means that they are able to exercise considerable pressure over airports as they are prepared and able to switch their aircraft between different locations.”

The convergence of business models has now blurred this divide between LCCs and the traditional Full Service Carriers (FSCs) further intensifying competition between airports. As business travellers acquired the habit of flying LCCs as well they sought to move upmarket improving their quality of service and expanding into the primary and larger airport homes of the FSCs. Likewise, the FSCs have sought to replicate the success of the LCCs expanding their presence in airports other than their traditional hubs and in the process develop multi-hub strategies which allow these groups to exert credible control over airport negotiations.

“All these recent developments in the aviation market end up creating a situation where more than 500 airports across Europe are now competing for airline capacity, with a few dominant LCCs and airline groups benefiting from ever-increasing negotiating power,” says Oxera’s report.

Source: ‘The Continuing Development of Airport Competition’ study from Oxera

The economic consulting service says this all means that today airport competition is now primarily driven by competition for airline services on a pan-European basis. Hub competition has also escalated and hub airports see challenges from many sources, it believes, and local competition for passengers with airports serving the same catchment areas has continued to rise, with more airports offering competing routes. Together this means that while competitive pressures were already high for smaller airports prior to 2010, since then they have since significantly increased for medium sized and larger airports (over 10 million passengers) – including for major hubs.

This now means in practical terms, that Cluj Napoca in Romania ends up competing with Cork in Ireland, or Cagliari in Italy and Kaunas in Lithuania to attract new air services or retain existing ones. Similarly, Barcelona airport must show what it can do for the airline compared to London-Gatwick, Copenhagen, Munich or Warsaw, highlights the Oxera study.

The Pan-European dimension of airport competition and its increase in particular for medium sized and larger airports (over 10 mppa) – including hubs, is also obvious from the level of route churn. In this regard, the Oxera study points to the following:

  • The total number of routes between European airports now stands at 18,000 with over 3,000 routes opened and 2,500 routes closed every year – reflecting the freedom airlines have in shifting routes and allocating new capacity.
  • The rates of route churn (which indicates the extent to which airlines are able to switch between airports and thus reflects competitive pressure) have remained high and roughly stable for airports with less than 10mppa while they have increased substantially for medium and large airports with over 10mppa – with this being particularly pronounced for airports with between 10mppa and 25mppa.

Overall route churn rates are progressively converging across the airport industry – pointing to an upward convergence in competitive pressures. In addition, Oxera also notes that beyond actual switching by airlines, the mere threat of an airline moving just some of its aircraft can compel an airport to lower its charges.

CHART – The rate of route churn has have increased substantially for medium and large airports with over 10mppa – with this being particularly pronounced for airports with between 10mppa and 25mppaSource: Oxera and OAG

The strong power of airlines in terms of network development and the increasing pan-European competition for air services is even more obvious in the fact that LCCs now routinely run ‘beauty contests’ among airports to get the best deals, says Oxera. This is not just happening with domiciled LCCs but also from the three big Gulf carriers Emirates Airline, Etihad Airways and Qatar Airways, plus Turkish Airlines as European airports of all sizes compete to gain ‘spokes’ into their fast growing hubs.

Overall, the Oxera study reveals that competitive pressures are progressively converging across the industry – while these competitors pressure initially developed and focused on smaller airports, they are now also at play at large and very large and hub airports. The strength and cumulative impact of these competitive pressures is now such that they are framing the behaviour of airports. “What is at play here at industry level is an unprecedented shift in the balance of the airport-airline relationship – with airlines now increasingly able to exert dominance,” says the study.

Looking ahead the Oxera study believes that airline consolidation will only reinforce airline dominance, posing greater challenges for airports. Ultimately, the ‘new normal’ of the airport-airline relationship evidenced by the Oxera study will need to be reflected in the way airports are regulated. This should actually question the need for any ex-ante regulation of airports – or at the very least result in less, more focused and proportionate regulatory intervention.

The Oxera report was released as the International Air Transport Association (IATA) called on the European Union to significantly strengthen economic regulation of major European airport monopolies by focusing on the interests of passengers. Enforcing greater cost-efficiency at Europe’s airports will feed through into cheaper air fares, stimulate travel and enhance European competitiveness. In turn, this will support jobs and grow the economy, it says.

The Blue Swan Daily reported (see ‘ IATA calls for tighter control over European airport monopolies as airport charges double’) that passengers have been denied the full benefits of cheaper air travel with the case for stronger airport charges regulation is clearly visible in the IATA study. This shows that airport charges and passenger taxes doubled across the Continent between 2006 and 2016, the airline revenue portion of tickets slipped from 90% to 79% all while average fares fell just EUR4 (around 2%).

DOWNLOAD the full Oxera report: Oxera Study The Continuing Development of Airport Competition in Europe

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