- Email: [email protected]
Airport competition: Reality or myth?
Journal of Air Transport Management xxx (2017) 1e8
Contents lists available at ScienceDirect
Journal of Air Transport Management journal homepage: www.elsevier.com/locate/jairtraman
Airport competition: Reality or myth? James Wiltshire International Air Transport Association IATA, Route de l’Aeroport 33, 1215 Geneva Airport, Geneva, Switzerland
a r t i c l e i n f o
a b s t r a c t
Article history: Available online xxx
This paper examines the extent to which the trend towards increasing corporatization and privatization of the airports sector has altered the dynamic between airports, airlines and most importantly the endcustomer, the air passenger or the cargo-shipper. Observed passenger behaviour shows that in spite of increasing use of secondary airports, in particular by low cost carriers, passengers' preference to use their local airport is stronger than is predicted by isochrones analysis. The paper finds no evidence of an increasing rate of route openings or closures; passengers face significant switching costs in terms of surface access time and money while for airlines switching costs take the form of investment in facilities, staff recruitment and foregone revenue. Where airlines’ do exit a market, the paper finds that they will be replaced if there is sufficient demand, but not if there is an insufficient consumer base to support viable commercial operations. In conclusion, the paper finds limited evidence of secondary airports being able to compete effectively with their larger neighbours. The recent trend for airlines, including low-cost carriers, to migrate services from secondary to primary airports supports this conclusion, implying an ongoing need for robust economic regulation at primary airports across Europe. © 2017 Published by Elsevier Ltd.
Keywords: Airline Airport Competition Privatization Economic regulation
1. Introduction
1.1. Why regulate?
Airports are a key link in the air transport journey chain. On short-haul journeys in particular, passengers may spend as much, or even more, time at the airport as they do in the air. And on arrival at their destination, the airport contributes to their first impression of a city or country. Airports can therefore play a critical role for economic development on local, national and regional levels. As Morrell (2010) notes, the potential for airports to bring considerable benefits to their surrounding areas is one reason why many airports in Europe remain in public ownership. However, there is an increasing trend towards full or partial privatization of airports, and even where airports remain in public ownership they have often been corporatized, with financial targets akin to a fully-private, profit-maximising entity. As with utilities such as telecommunications and energy provision, one would expect the privatization or corporatization of airports, with at least some characteristics of natural monopolies, to be accompanied with appropriate, independent economic regulation.
The rationale for economic regulation is to counterbalance the existence and use of airport market power resulting from airports not being subject to competitive forces. As Forsyth et al. (2010) note the two primary reasons why airports may not be subject to market forces are: locational reasons and natural monopoly reasons. The locational explanation argues that for most airports there are no close substitutes as attractive locations are limited. The natural monopoly argument relies on economies of scale in airport provision. Thus, a monopoly is efficient as two or more airports would lead to higher average costs.
E-mail address: [email protected].
1.2. Economic regulation of airports in Europe The 2009 Airport Charges Directive applies to all airports handling more than 5 million passengers per annum. Around 70 EU airports fall within the scope of the Directive; representing just under 80% of EU passenger traffic. The Directive sets out minimum transparency requirements around how charges are calculated and mandating airports to consult airlines. However, a 2014 review of the Directive by the European Commission (2014) found that while there have been some positive results, implementation of even such a light-touch framework has been inconsistent.
http://dx.doi.org/10.1016/j.jairtraman.2017.03.006 0969-6997/© 2017 Published by Elsevier Ltd.
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
2
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
At a national level, there is also considerable variability, ranging from sophisticated financial analysis at one end of the spectrum through simple, inflation-linked changes in charges to full deregulation at the other. Unsurprisingly, the airports themselves favour deregulation, arguing that as a result of liberalisation in both airline and airport markets, the flexibility and choices available to airlines and passengers now constrain the commercial behaviour of airports. The airports consider that airports now have to compete with one another on price and service quality in order to retain and attract the traffic they need as both passengers and airlines are now ‘footloose’, rendering economic regulation unnecessary at many airports. On the other hand, as noted by Müller-Rostin et al. (2010), there is little empirical evidence on the intensity of competition among airports leading them to conclude that despite changes in both airport and airline sector “competition [between airports] is still minimal and not sufficient to prevent airports from abusing their market power”. The purpose of this paper is to examine a number of the indicators which might signal either the existence of competition between airports or the ability of airlines to constrain airport behaviour or alternatively the presence of airport market power. 2. Airport charges Perhaps the most obvious indicator of the extent to which a business is or is not subject to competitive pressure comes from its pricing behaviour, in this case airport charges. For example, evidence of airports lowering charges might suggest that their pricing power is constrained by competitive pressure. However, as Fig. 1 shows the opposite has been true in recent years. While airlines’ controllable operational costs declined significantly between 2001 and 2011 (and separate evidence shows that inflation-adjusted air fares fell by even more), airport infrastructure costs increased by over 70% in the same period. Fig. 2 shows the evolution in the level of airport charges levied at airports in Europe between 2009 and 2012. As can be seen, in 2009 half of airports did indeed reduce their charges as the global economic crisis hit Europe. However, only two years later, with the European economy as a whole still struggling and many major economies in recession, three-quarters of airports
increased their charges. There appears to be very limited evidence of a strong constraint on airports’ power, even in a very challenging macroeconomic environment. 2.1. Countervailing power For the largest airports in Europe, Leigh Fisher (2012) report that 21 of the 24 largest airports increased their charges in 2010 and in 2011, 23 out of 24 put their charges up. These airports include the home hubs of many Europe's major network carriers, many of whom account for over 50% of traffic at their hubs. Some authors (see, for example, Haskel et al. (2011)) and many airports have argued that airlines at some airports are able to exercise buyer market power in order to constrain airport pricing. The Leigh Fisher data do not support this hypothesis. 2.2. Airport entry and threat of entry The entry or even the threat of entry of new airports into a market might be expected to have some effect in constraining the pricing behaviour of incumbent airports. Müller-Rostin et al. (2010) found that during the period 1995e2005 only 22 airports entered the market entries occurring during this period. The study concluded that entry and exit in the airport industry is not so much driven by commercial opportunity, but rather by the desire of public airports to increase economic activity for the surrounding region. Most of the new entries were reported to only serve only airline, generally a low-cost carrier. 3. Passenger behaviour e competition between neighbouring airports As observed by Forsyth et al. (2010), ‘traveller and shipper choice lies at the heart of the airport competition issue e the strength of this competition depends on how good as substitutes travellers regard different airports to be’. This section examines passenger behaviour with regard to airports choice, and reviews a range of approaches in considering whether there is evidence of increased willingness to travel to alternative airports which might be indicative of airports being subjected to increased competitive pressure by their neighbours.
Fig. 1. Airport infrastructure unit costs vs other non-fuel unit costs per ASK. Sources: ICAO, IATA and ACI. Note: figures are USD exchange rate adjusted
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
3
Fig. 2. Changes in level of charges at European airports, 2009e2012. Source: ACI Europe, Economics report, 2010 and 2011
3.1. Isochrones A common method for mapping geographical overlaps between airport catchment areas is to generate isochrones maps. Isochrones map the area that is within a fixed distance or travel time from an airport. Based on this approach, it has been claimed that over 60% of the European population can access at least two airports within two hours’ drive time.1 Fig. 3 gives an example of 120-min isochrones for a number of airports in the United Kingdom. The implication is that the overlapping isochrones are evidence of effective competition between airports. However, while isochrones are a simple and powerful visual tool, they are of limited use in understanding the choices that passengers actually make. Isochrones are constructed by drawing a ‘frontier’ around the airport, with all points on that frontier equidistant from the airport in terms of driving time. Where two isochrones overlap, all points within the overlap are treated equally, potentially giving the result that a passenger who lives 2 h from an airport is assumed to be as likely to use that airport as another passenger who lives just 15 min from the airport perimeter. Or conversely, that a passenger who lives 15 min from the airport is as likely to switch to another airport as one who lives 2 h travel time away. Passenger behaviour is clearly more complex than this. The proximity of an alternative airport can only represent a relevant choice if it offers a substitutable service, for instance a comparable itinerary. Isochrone maps do not reflect the availability of services at comparator airports and are therefore likely to overstate the extent of effective competition.
3.2. Observed passenger behaviour Hess and Polak (2010) found that passengers place a high value on convenient surface access and have a strong preference for their local airport, requiring large fare reductions in order to switch to more remote airports. This section considers a number of other studies, all of which reinforce this conclusion.
1
See, for example, Copenhagen Economics (2012).
Frontier Economics (2007) carried out an empirical assessment to investigate: how likely passengers are to choose A over B; and the role that relative prices play in influencing that decision. The model used actual booking data including post-code level data about passengers’ residence. The analysis found that travellers have a very strong preference for using their local airport reporting that for every 1% increase in distance the likelihood of them flying from that airport declines on average by 4%. In terms of price, the research found that, on average, for every 1% increase in distance, a 1% change in relative prices would be needed to persuade passengers to travel to the more distant airport. Fig. 4 below demonstrates the Frontier approach applied to the likelihood of passengers using Stansted as opposed to the alternative London airports of Gatwick or Luton, for a range of popular destinations. The graphical representation highlights that as drive time to the alternative airport approaches 120 min the probability of passengers using these airports falls close to zero. In contrast, isochrones would present these airports as equally valid competitors. The CAA (2011a,b) used stated preference2 data from the CAA Passenger Survey3 to understand passengers’ airport preferences. Respondents to the survey were asked to state the primary reason why they chose to fly from a particular airport. The findings, set out in Fig. 5 below, show that in the case of each airport ease of surface access is the single most common driver of airport choice. This is particularly the case for the non-London airports included in the sample. 3.3. Price responsiveness Another commonly used approach in market power assessments is the SSNIP4 test which is used to assess whether or not it would be profitable for an airport to increase its charges by a small but significant amount, say 10%. In a competitive market, an airport that raised prices in this way would be expected to lose a large
2 Revealed preference models, such as the Frontier model, infer consumers' preferences based on patterns of observed behaviour. In contrast, stated preference data are generated by directly asking consumers about the reasons for their choices, as in the case of the CAA Passenger Survey. 3 The CAA Passenger Survey is a survey of passengers departing UK airports. 4 Small but Significant Non-transitory Increase in Price.
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
4
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
Fig. 3. Chains of geographical overlap with 120-min isochrones, selected UK airports. Source: UK CAA
Fig. 4. Probability of using alternative airports based on travel time. Source: Frontier Economics
amount of traffic. Therefore, where an airport would be able to increase profits in this way, this is seen as an indication that the airport possesses market power. The UK CAA applied this approach in the context of its regulatory review of major airports in the South East of England in the
United Kingdom. The CAA assessment controlled for both physical constraints (the lack of capacity at airports in the South-East of England, which limit airlines’ scope to switch to an alternative airport) and airline switching costs (which in the short term may be greater than the increases in charges).
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
5
Fig. 5. Reasons for airport preference at selected UK airports.
Even when these factors were taken into account, the CAA found that a hypothetical increase in charges would be significantly profitable for both of the major airports assessed, in this case Heathrow and Gatwick. The decrease in passenger volumes, resulting from passengers being discouraged from using the airports, would not be sufficient to counter the profitability of the charge increase. On the basis of this analysis, the CAA therefore concluded that both airports have significant market power, especially Heathrow as the airport with a greater degree of capacity constraint (Frontier Economics, 2007). This evidence indicates that even in an operating environment where there consumers may have several major airports to choose to fly from, airports can still maintain significant market power. 4. The footloose passenger argument: understanding passenger behaviour The internet has made searching for travel and accommodation and comparing between options easier than ever. The role traditionally played by travel agents has become much less relevant, as travellers have access to much or all of the information they require to plan their journeys independently. However, the key question for assessing whether passengers have become more footloose is not whether search costs have reduced, but whether travellers have access to a greater choice of destinations i.e. airports. Leisure travellers might be expected to be the most footloose group of travellers, as they should be willing to substitute between holiday destinations that offer a relatively similar set of attributes for example alternative seaside resort. In fact, the existence of destination choice is not new. Since the dawn of the jet age and the emergence of a mass package holiday market, holiday makers have enjoyed convenient and cost-effective flights to a wide variety of holiday resorts. In contrast to holiday-makers, the destination choices of business travelers are largely fixed. For business travelers the destination is determined by the location of clients or the venue of business. Not only does this limit the ability of business passengers to choose between both origin and destination airports but also constrains the ability of the airlines that serve these passengers to switch between airports. Air passengers who are travelling to visit friends and relatives
also have much more limited destination choices than holidaymakers. While some people may have a network of friends and family spanning different cities or countries, to visit any particular set of friends or relatives they are obviously restricted to the home city or airport. Trips to visit friends or relatives (VFR) make up an important share of journeys. The UNWTO reports that VFR trips account for to 27% of all inbound travel.5 In the UK, VFR accounts for a greater share of international travel than business trips and grew rapidly between 2000 and 2010.6 Even at the UK's major hub airport Heathrow VFR trips account for 35% of all journeys.7 Hess and Polak (2010) single VFR traffic out within their analysis. As would be expected, they find that the greater surface access cost and/or time, the less likely passengers are to fly from a given airport. A further interesting observation is that inbound travellers (i.e. visitors) are even more sensitive to surface access time than residents.
5. The footloose airlines argument: understanding airline behaviour Along with the question of whether passengers have greater choice is the question of whether airlines have become more footloose and able to switch airports more easily. If airlines were able to easily switch capacity between airports, for example in response to a proposed increase in charges, this could represents an effective constraint on airports’ ability to exercise market power. Airline switching can take a number of forms, but generally any way in which an airline can reduce its use of an airport can be considered as switching. On routes where the origin or destination cities (or both ends of the route) are served by more than one airport, an airline might reduce the frequency of flights at one airport and increase it at another, or it may switch the route entirely from one airport to
5 UN World Tourism Highlights, 2015. The VFR category also includes religious pilgrimages and trips for health treatments. However, as with VFR travel the destination for these categories is also largely fixed. 6 UK Health Protection Agency, Global and UK Travel Trends, 2010. 7 UK CAA Passenger Survey, 2012
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
6
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
another e this is perhaps closest to the case envisaged by the discussion of catchment areas. However, an airline could also switch between airports in different cities or regions, for example taking capacity out of Spain and moving it, for example, to Belgium or the Netherlands. Finally, airlines could vary the size of aircraft on a route and/or switch future growth plans from one airport to another. Airlines’ ability to switch between airports will depend on two factors: the costs involved in switching and the existence of appropriate alternative airports. 5.1. Switching costs Switching costs are any costs involved in switching all or part of a customer's demand from one supplier to another that would not be incurred by remaining with the current supplier. Applied to airlines, this would include both the costs involved in the physical switch of airport, such as relocating equipment or staff, as well as the costs involved in marketing a new route or an increase in capacity on an existing route. Airlines may experience switching costs due to: relocation of assets at a new airport, including sunk investments such as airline specific terminal facilities (check-in desks, airport lounges etc) and maintenance facilities; staff costs including relocation, recruitment or redundancy; breaking long-term commitments; or loss of economies of scale, for example, if splitting operations across more than one airport. Airlines starting a new route will also need to incur significant marketing costs in promoting the routes to potential passengers in that catchment area and to generate consumer awareness. Airports often offer marketing support for new routes and so these costs may be at least partially covered by the new airport. 5.2. Revenue impacts: availability of alternative airports The standard analysis of switching costs entails a firm moving some or all of its business between competing suppliers of a substitutable product, where all suppliers produce a similar, or even identical, product. However, in an aviation context, switching may involve moving routes between airports that are poor substitutes in terms of the local market or catchment area that they serve. For an airline to switch airports, it must be commercially viable to do so. In other words, the alternative airport must be able to sustain a level of yield that it is equal to or greater than that which the airline is earning at present. The question arises of why a profit-
maximising airline would not already be serving such a destination. Therefore it follows that alternative airports are likely to be less commercially attractive and that the ability to generate profitable levels of revenue at alternative airports may represent the most significant barrier to switching. For airlines operating at hub airports, network effects may also arise. Any airline switching away from the hub will lose access to the pool of potential transfer passengers. In addition to the permanent loss of yield, there might be transitory impacts on revenue. Airlines may also expect to obtain lower yields when routes are launched as passenger familiarisation develops. While these effects are transitory, the start-up period may last for a considerable period of time, potentially as long as 2 or 3 years. Starkie (2012) has argued that the strategy adopted by many low-cost carriers of operating from multiple bases, makes it easier for these airlines to redeploy capacity. This may hold at the margin but, given the costs outlined above, is unlikely to be true for full entry and exit from an airport. Also, the discussion of revenue impacts highlights that route switching will only be attractive to an airline if they can earn similar or greater revenue at the alternate airport. And if that is the case, it raises the question of why the airline was not operating the route in the first place. 6. Evidence of route switching This section considers the evidence of route switching, using schedules data to highlight trends in the European market over recent years. As discussed in the previous section, evidence of highlevels of route switching might provide an indication of airlines being able to constrain airports’ market power. Airlines switch capacity between routes for a variety of reasons including underlying economic conditions, route profitability and broader network, or even alliance, strategy. Route switching could therefore be a consequence of a normal process of network optimisation as airlines attempt to maximise profitability in a competitive operating environment. Therefore, the discussion also considers the causes and drivers of the observed trends. Copenhagen Economics (2012) analysed schedules data and found that between 2002 and 2011, 54% of route closures involved routes that had been operated for less than 2 years, suggesting that route optimisation is at least partially a process of trial and error. Fig. 6 shows the trend in route openings and closures between 2003 and 2011. The first conclusion is that significantly more routes
Fig. 6. Number of intra-European routes opened and closed, 2002e2012. Source: Copenhagen Economics and SEO Economic Research based on OAG data
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
7
Fig. 7. Share of intra-European routes opened and closed, 2002e2012. Source: Copenhagen Economics and SEO Economic Research based on OAG data
are opened than closed per year, with this pattern holding in all years with the exception of 2009 as the global economic recession affected European demand. Indeed, even in 2010 and 2011 as the economic crisis deepened, route openings outpaced closures. The data do not support the hypothesis that there is an increasing trend in route switching that would be consistent with the existence of a growing competitive dynamic between airports. The absolute increase in the openings and closures of routes shown in Fig. 4 took place in the context of a market that was growing overall with 54% more routes and 41% more seat capacity in 2011 compared with 2002. Fig. 7 presents route openings and closures as a share of total routes operated; no increasing trend can be observed, indeed the average rate of both openings and closures was lower in 2011 than in 2002. In other words, the data do not support the argument that route switching is evidence of a generalised trend towards European airports being subject to increased competitive pressures. Moreover, at Europe's 25 largest airports, the rates of route switching, measured by seat capacity, are much lower; on average 7.9% and 5.7% for opening and closing routes respectively compared with 20% at airports with 5 million passengers or less (Copenhagen Economics, 2012). As with the market as a whole, new routes outstripped closures at most of the large airports during the period. The comparison between airports of different size provides limited support for the argument proposed by Starkie that smaller airports may have limited ability to exercise market power. However, it should be remembered that these airports are also much less likely to be subject to tight economic regulation. For example, airports handling less than 5 million passengers per year are not subject to the Airport Charges Directive. A final observation is that only 20e25% of route switching is by European network carriers, despite these airlines accounting for 59% of intra-EU traffic (Idem.). 75e80% of route switching is by “pointto-point” carriers, comprising low-cost carriers and full-service carriers that do not conduct significant connecting operations.
6.1. Airline exit A special case of route switching occurs where an airline exits a market entirely or ceases operations altogether. Such market adjustment is likely have a significant negative and short-term impact on both network scope and throughput at affected airports. However, this may not be the case in the medium and longterm.
Where market exit from an otherwise attractive airport serving a sustainable level of demand is driven by lack of competitiveness of the exiting airline one would expect other airlines to enter the market in a rapid timeframe and that throughput should recover to, or even exceed, the pre-adjustment levels. Copenhagen Economics (2012) found that on 65% of routes operated by more than one carrier, within 3 years of the exit of one airline from the route, capacity was at or greater than 80% of the pre-closure level and that in 40% of cases capacity was greater than it was before the airline exit. In contrast, where airline exit from an airport market is driven by a fundamental lack of sustainable demand at a given airport, then one would expect the drop in throughput to be permanent with limited recovery in the years following the initial airline exit. Again, the evidence supports this hypothesis; more than 70% of routes on which the exiting carrier was the sole operator continue to be unserved even after 3 years. In these cases, the fundamental issue is not competition with other airports but the lack of sufficient demand to sustain profitable airline services. Moreover, such airports do not have the ability to act as a long-term brake on the market power that may be enjoyed by larger, more successful neighbouring airports.
7. Conclusions: assess competition on a case-by-case basis The question of whether competition between airports can and will develop continues to generate interest and debate among policy-makers and researchers. This paper has attempted to address a number of indicators that could potentially signal the existence of competition constraining airport behaviour. The overall conclusion is that there remains a lack of compelling evidence that the European sector is subject to competitive pressures, reaffirming the findings of Müller-Rostin et al. (2010). In terms of pricing, the data examined showed that a majority of airports increased charges in at least one year during the height of the global economic crisis and Eurozone recession. For the largest airports there is even less of evidence of constraint of pricing power, in spite of the challenging operating environment. All the evidence of passenger behaviour shows a strong preference on the part of passengers to fly from their local airport. While a number of LCCs used low headline fares, supported by deep discounts, to encourage passengers to use less well-located airports, recent years have seen a trend for LCCs to serve primary airports. Moreover, for business and VFR passengers, the
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
8
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
destination is also fixed. For the airlines, this passenger preference translates into a potentially significant revenue impact from switching to an alternative airport, in addition to the transition costs that must be incurred. Analysis of route schedules does not support the hypothesis that airlines are becoming increasingly footloose, with route openings and closures broadly stable (indeed decreasing slightly) over the study period, suggesting that such route switching as occurs is part of a process of network optimisation in an industry characterised by notoriously thin margins. The route switching data did however highlight a distinction between Europe's largest airports, with relatively stable networks, and smaller airport. The special case of airline failure highlighted this distinction and also raised the question of whether the relevant consideration is airline or airport competition. The example of the failure of Malev and the subsequent expansion of Ryanair and Wizz in Budapest showed that where there is a viable market to be served exiting airlines will be replaced. However, where the driver for airline exit is the lack of sufficient demand to support profitable operations airline exit tends to have a long-term impact. The recent trend for so-called low cost carriers to migrate from secondary to primary airports in order to serve a larger customer base supports this argument and suggests that the ability of secondary airports to act as a brake on the dominant position of primary airports is strictly limited, particularly in the absence of deep and ongoing discounts. However, the distinction between primary and secondary or large and small leaves a considerable grey area in the middle. At what point does a small airport become large? Is it at five million passengers, the point at which the Airport Charges Directive applies, or should policy makers think in terms of a continuum? These
are all interesting avenues for future research. In the meantime, the absence of clear decision rules points towards regulators and policymakers adopting a case-by-case approach.
References Copenhagen Economics, 2012. Airport Competition in Europe (Copenhagen). Civil Aviation Authority, 2011a. Empirical Methods for Assessing Geographic Markets, in Particular Competitive Constraints between Neighbouring Airports (London). Civil Aviation Authority, 2011b. Passengers' Airport Preferences: Results from the CAA Passenger Survey (London). European Commission, 2014. Report from the Commission to the European Parliament and the Council on the Application of the Airport Charges Directive (Brussels). Forsyth, P., Gillen, D., Müller, J., Niemeier, H.-M., 2010. Introduction and overview. In: Forsyth, P., Gillen, D., Muller, J., Niemeier, H.-M. (Eds.), Airport Competition: the European Experience. Ashgate, Aldershot, pp. 1e9. Frontier Economics, 2007. De-designation of Stansted Airport: a Report Prepared for EasyJet. Frontier Economics Ltd, London. Haskel, J., Iozzi, A., Valletti, T., 2011. Market Structure, Countervailing Power and Price Discrimination: the Case of Airport (Imperial College Business School Discussion Paper). Hess, S., Polak, J., 2010. Airport choice behaviour: finding from three separate studies. In: Forsyth, P., Gillen, D., Muller, J., Niemeier, H.-M. (Eds.), Airport Competition: the European Experience. Ashgate, Aldershot, pp. 177e196. Leigh Fisher, 2012. 2012 Review of Airport Charges. London. Morrell, P., 2010. Airport competition and network access: a european perspective. In: Forsyth, P., Gillen, D., Muller, J., Niemeier, H.-M. (Eds.), Airport Competition: the European Experience. Ashgate, Aldershot, pp. 11e26. Müller-Rostin, C., Ehmer, H., Hannak, I., Ivanova, P., Niemeier, H.-M., Müller, J., 2010. Airport entry and exit: a european analysis. In: Forsyth, P., Gillen, D., Muller, J., Niemeier, H.-M. (Eds.), Airport Competition: the European Experience. Ashgate, Aldershot, pp. 27e46. Starkie, D., 2012. European airports and airlines: evolving relationships and the regulatory implications. J. Air Transp. Manag. 8, 63e72. UNWTO, 2015. Tourism Highlights: 2015 Edition (Madrid).
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
Contents lists available at ScienceDirect
Journal of Air Transport Management journal homepage: www.elsevier.com/locate/jairtraman
Airport competition: Reality or myth? James Wiltshire International Air Transport Association IATA, Route de l’Aeroport 33, 1215 Geneva Airport, Geneva, Switzerland
a r t i c l e i n f o
a b s t r a c t
Article history: Available online xxx
This paper examines the extent to which the trend towards increasing corporatization and privatization of the airports sector has altered the dynamic between airports, airlines and most importantly the endcustomer, the air passenger or the cargo-shipper. Observed passenger behaviour shows that in spite of increasing use of secondary airports, in particular by low cost carriers, passengers' preference to use their local airport is stronger than is predicted by isochrones analysis. The paper finds no evidence of an increasing rate of route openings or closures; passengers face significant switching costs in terms of surface access time and money while for airlines switching costs take the form of investment in facilities, staff recruitment and foregone revenue. Where airlines’ do exit a market, the paper finds that they will be replaced if there is sufficient demand, but not if there is an insufficient consumer base to support viable commercial operations. In conclusion, the paper finds limited evidence of secondary airports being able to compete effectively with their larger neighbours. The recent trend for airlines, including low-cost carriers, to migrate services from secondary to primary airports supports this conclusion, implying an ongoing need for robust economic regulation at primary airports across Europe. © 2017 Published by Elsevier Ltd.
Keywords: Airline Airport Competition Privatization Economic regulation
1. Introduction
1.1. Why regulate?
Airports are a key link in the air transport journey chain. On short-haul journeys in particular, passengers may spend as much, or even more, time at the airport as they do in the air. And on arrival at their destination, the airport contributes to their first impression of a city or country. Airports can therefore play a critical role for economic development on local, national and regional levels. As Morrell (2010) notes, the potential for airports to bring considerable benefits to their surrounding areas is one reason why many airports in Europe remain in public ownership. However, there is an increasing trend towards full or partial privatization of airports, and even where airports remain in public ownership they have often been corporatized, with financial targets akin to a fully-private, profit-maximising entity. As with utilities such as telecommunications and energy provision, one would expect the privatization or corporatization of airports, with at least some characteristics of natural monopolies, to be accompanied with appropriate, independent economic regulation.
The rationale for economic regulation is to counterbalance the existence and use of airport market power resulting from airports not being subject to competitive forces. As Forsyth et al. (2010) note the two primary reasons why airports may not be subject to market forces are: locational reasons and natural monopoly reasons. The locational explanation argues that for most airports there are no close substitutes as attractive locations are limited. The natural monopoly argument relies on economies of scale in airport provision. Thus, a monopoly is efficient as two or more airports would lead to higher average costs.
E-mail address: [email protected].
1.2. Economic regulation of airports in Europe The 2009 Airport Charges Directive applies to all airports handling more than 5 million passengers per annum. Around 70 EU airports fall within the scope of the Directive; representing just under 80% of EU passenger traffic. The Directive sets out minimum transparency requirements around how charges are calculated and mandating airports to consult airlines. However, a 2014 review of the Directive by the European Commission (2014) found that while there have been some positive results, implementation of even such a light-touch framework has been inconsistent.
http://dx.doi.org/10.1016/j.jairtraman.2017.03.006 0969-6997/© 2017 Published by Elsevier Ltd.
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
2
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
At a national level, there is also considerable variability, ranging from sophisticated financial analysis at one end of the spectrum through simple, inflation-linked changes in charges to full deregulation at the other. Unsurprisingly, the airports themselves favour deregulation, arguing that as a result of liberalisation in both airline and airport markets, the flexibility and choices available to airlines and passengers now constrain the commercial behaviour of airports. The airports consider that airports now have to compete with one another on price and service quality in order to retain and attract the traffic they need as both passengers and airlines are now ‘footloose’, rendering economic regulation unnecessary at many airports. On the other hand, as noted by Müller-Rostin et al. (2010), there is little empirical evidence on the intensity of competition among airports leading them to conclude that despite changes in both airport and airline sector “competition [between airports] is still minimal and not sufficient to prevent airports from abusing their market power”. The purpose of this paper is to examine a number of the indicators which might signal either the existence of competition between airports or the ability of airlines to constrain airport behaviour or alternatively the presence of airport market power. 2. Airport charges Perhaps the most obvious indicator of the extent to which a business is or is not subject to competitive pressure comes from its pricing behaviour, in this case airport charges. For example, evidence of airports lowering charges might suggest that their pricing power is constrained by competitive pressure. However, as Fig. 1 shows the opposite has been true in recent years. While airlines’ controllable operational costs declined significantly between 2001 and 2011 (and separate evidence shows that inflation-adjusted air fares fell by even more), airport infrastructure costs increased by over 70% in the same period. Fig. 2 shows the evolution in the level of airport charges levied at airports in Europe between 2009 and 2012. As can be seen, in 2009 half of airports did indeed reduce their charges as the global economic crisis hit Europe. However, only two years later, with the European economy as a whole still struggling and many major economies in recession, three-quarters of airports
increased their charges. There appears to be very limited evidence of a strong constraint on airports’ power, even in a very challenging macroeconomic environment. 2.1. Countervailing power For the largest airports in Europe, Leigh Fisher (2012) report that 21 of the 24 largest airports increased their charges in 2010 and in 2011, 23 out of 24 put their charges up. These airports include the home hubs of many Europe's major network carriers, many of whom account for over 50% of traffic at their hubs. Some authors (see, for example, Haskel et al. (2011)) and many airports have argued that airlines at some airports are able to exercise buyer market power in order to constrain airport pricing. The Leigh Fisher data do not support this hypothesis. 2.2. Airport entry and threat of entry The entry or even the threat of entry of new airports into a market might be expected to have some effect in constraining the pricing behaviour of incumbent airports. Müller-Rostin et al. (2010) found that during the period 1995e2005 only 22 airports entered the market entries occurring during this period. The study concluded that entry and exit in the airport industry is not so much driven by commercial opportunity, but rather by the desire of public airports to increase economic activity for the surrounding region. Most of the new entries were reported to only serve only airline, generally a low-cost carrier. 3. Passenger behaviour e competition between neighbouring airports As observed by Forsyth et al. (2010), ‘traveller and shipper choice lies at the heart of the airport competition issue e the strength of this competition depends on how good as substitutes travellers regard different airports to be’. This section examines passenger behaviour with regard to airports choice, and reviews a range of approaches in considering whether there is evidence of increased willingness to travel to alternative airports which might be indicative of airports being subjected to increased competitive pressure by their neighbours.
Fig. 1. Airport infrastructure unit costs vs other non-fuel unit costs per ASK. Sources: ICAO, IATA and ACI. Note: figures are USD exchange rate adjusted
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
3
Fig. 2. Changes in level of charges at European airports, 2009e2012. Source: ACI Europe, Economics report, 2010 and 2011
3.1. Isochrones A common method for mapping geographical overlaps between airport catchment areas is to generate isochrones maps. Isochrones map the area that is within a fixed distance or travel time from an airport. Based on this approach, it has been claimed that over 60% of the European population can access at least two airports within two hours’ drive time.1 Fig. 3 gives an example of 120-min isochrones for a number of airports in the United Kingdom. The implication is that the overlapping isochrones are evidence of effective competition between airports. However, while isochrones are a simple and powerful visual tool, they are of limited use in understanding the choices that passengers actually make. Isochrones are constructed by drawing a ‘frontier’ around the airport, with all points on that frontier equidistant from the airport in terms of driving time. Where two isochrones overlap, all points within the overlap are treated equally, potentially giving the result that a passenger who lives 2 h from an airport is assumed to be as likely to use that airport as another passenger who lives just 15 min from the airport perimeter. Or conversely, that a passenger who lives 15 min from the airport is as likely to switch to another airport as one who lives 2 h travel time away. Passenger behaviour is clearly more complex than this. The proximity of an alternative airport can only represent a relevant choice if it offers a substitutable service, for instance a comparable itinerary. Isochrone maps do not reflect the availability of services at comparator airports and are therefore likely to overstate the extent of effective competition.
3.2. Observed passenger behaviour Hess and Polak (2010) found that passengers place a high value on convenient surface access and have a strong preference for their local airport, requiring large fare reductions in order to switch to more remote airports. This section considers a number of other studies, all of which reinforce this conclusion.
1
See, for example, Copenhagen Economics (2012).
Frontier Economics (2007) carried out an empirical assessment to investigate: how likely passengers are to choose A over B; and the role that relative prices play in influencing that decision. The model used actual booking data including post-code level data about passengers’ residence. The analysis found that travellers have a very strong preference for using their local airport reporting that for every 1% increase in distance the likelihood of them flying from that airport declines on average by 4%. In terms of price, the research found that, on average, for every 1% increase in distance, a 1% change in relative prices would be needed to persuade passengers to travel to the more distant airport. Fig. 4 below demonstrates the Frontier approach applied to the likelihood of passengers using Stansted as opposed to the alternative London airports of Gatwick or Luton, for a range of popular destinations. The graphical representation highlights that as drive time to the alternative airport approaches 120 min the probability of passengers using these airports falls close to zero. In contrast, isochrones would present these airports as equally valid competitors. The CAA (2011a,b) used stated preference2 data from the CAA Passenger Survey3 to understand passengers’ airport preferences. Respondents to the survey were asked to state the primary reason why they chose to fly from a particular airport. The findings, set out in Fig. 5 below, show that in the case of each airport ease of surface access is the single most common driver of airport choice. This is particularly the case for the non-London airports included in the sample. 3.3. Price responsiveness Another commonly used approach in market power assessments is the SSNIP4 test which is used to assess whether or not it would be profitable for an airport to increase its charges by a small but significant amount, say 10%. In a competitive market, an airport that raised prices in this way would be expected to lose a large
2 Revealed preference models, such as the Frontier model, infer consumers' preferences based on patterns of observed behaviour. In contrast, stated preference data are generated by directly asking consumers about the reasons for their choices, as in the case of the CAA Passenger Survey. 3 The CAA Passenger Survey is a survey of passengers departing UK airports. 4 Small but Significant Non-transitory Increase in Price.
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
4
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
Fig. 3. Chains of geographical overlap with 120-min isochrones, selected UK airports. Source: UK CAA
Fig. 4. Probability of using alternative airports based on travel time. Source: Frontier Economics
amount of traffic. Therefore, where an airport would be able to increase profits in this way, this is seen as an indication that the airport possesses market power. The UK CAA applied this approach in the context of its regulatory review of major airports in the South East of England in the
United Kingdom. The CAA assessment controlled for both physical constraints (the lack of capacity at airports in the South-East of England, which limit airlines’ scope to switch to an alternative airport) and airline switching costs (which in the short term may be greater than the increases in charges).
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
5
Fig. 5. Reasons for airport preference at selected UK airports.
Even when these factors were taken into account, the CAA found that a hypothetical increase in charges would be significantly profitable for both of the major airports assessed, in this case Heathrow and Gatwick. The decrease in passenger volumes, resulting from passengers being discouraged from using the airports, would not be sufficient to counter the profitability of the charge increase. On the basis of this analysis, the CAA therefore concluded that both airports have significant market power, especially Heathrow as the airport with a greater degree of capacity constraint (Frontier Economics, 2007). This evidence indicates that even in an operating environment where there consumers may have several major airports to choose to fly from, airports can still maintain significant market power. 4. The footloose passenger argument: understanding passenger behaviour The internet has made searching for travel and accommodation and comparing between options easier than ever. The role traditionally played by travel agents has become much less relevant, as travellers have access to much or all of the information they require to plan their journeys independently. However, the key question for assessing whether passengers have become more footloose is not whether search costs have reduced, but whether travellers have access to a greater choice of destinations i.e. airports. Leisure travellers might be expected to be the most footloose group of travellers, as they should be willing to substitute between holiday destinations that offer a relatively similar set of attributes for example alternative seaside resort. In fact, the existence of destination choice is not new. Since the dawn of the jet age and the emergence of a mass package holiday market, holiday makers have enjoyed convenient and cost-effective flights to a wide variety of holiday resorts. In contrast to holiday-makers, the destination choices of business travelers are largely fixed. For business travelers the destination is determined by the location of clients or the venue of business. Not only does this limit the ability of business passengers to choose between both origin and destination airports but also constrains the ability of the airlines that serve these passengers to switch between airports. Air passengers who are travelling to visit friends and relatives
also have much more limited destination choices than holidaymakers. While some people may have a network of friends and family spanning different cities or countries, to visit any particular set of friends or relatives they are obviously restricted to the home city or airport. Trips to visit friends or relatives (VFR) make up an important share of journeys. The UNWTO reports that VFR trips account for to 27% of all inbound travel.5 In the UK, VFR accounts for a greater share of international travel than business trips and grew rapidly between 2000 and 2010.6 Even at the UK's major hub airport Heathrow VFR trips account for 35% of all journeys.7 Hess and Polak (2010) single VFR traffic out within their analysis. As would be expected, they find that the greater surface access cost and/or time, the less likely passengers are to fly from a given airport. A further interesting observation is that inbound travellers (i.e. visitors) are even more sensitive to surface access time than residents.
5. The footloose airlines argument: understanding airline behaviour Along with the question of whether passengers have greater choice is the question of whether airlines have become more footloose and able to switch airports more easily. If airlines were able to easily switch capacity between airports, for example in response to a proposed increase in charges, this could represents an effective constraint on airports’ ability to exercise market power. Airline switching can take a number of forms, but generally any way in which an airline can reduce its use of an airport can be considered as switching. On routes where the origin or destination cities (or both ends of the route) are served by more than one airport, an airline might reduce the frequency of flights at one airport and increase it at another, or it may switch the route entirely from one airport to
5 UN World Tourism Highlights, 2015. The VFR category also includes religious pilgrimages and trips for health treatments. However, as with VFR travel the destination for these categories is also largely fixed. 6 UK Health Protection Agency, Global and UK Travel Trends, 2010. 7 UK CAA Passenger Survey, 2012
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
6
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
another e this is perhaps closest to the case envisaged by the discussion of catchment areas. However, an airline could also switch between airports in different cities or regions, for example taking capacity out of Spain and moving it, for example, to Belgium or the Netherlands. Finally, airlines could vary the size of aircraft on a route and/or switch future growth plans from one airport to another. Airlines’ ability to switch between airports will depend on two factors: the costs involved in switching and the existence of appropriate alternative airports. 5.1. Switching costs Switching costs are any costs involved in switching all or part of a customer's demand from one supplier to another that would not be incurred by remaining with the current supplier. Applied to airlines, this would include both the costs involved in the physical switch of airport, such as relocating equipment or staff, as well as the costs involved in marketing a new route or an increase in capacity on an existing route. Airlines may experience switching costs due to: relocation of assets at a new airport, including sunk investments such as airline specific terminal facilities (check-in desks, airport lounges etc) and maintenance facilities; staff costs including relocation, recruitment or redundancy; breaking long-term commitments; or loss of economies of scale, for example, if splitting operations across more than one airport. Airlines starting a new route will also need to incur significant marketing costs in promoting the routes to potential passengers in that catchment area and to generate consumer awareness. Airports often offer marketing support for new routes and so these costs may be at least partially covered by the new airport. 5.2. Revenue impacts: availability of alternative airports The standard analysis of switching costs entails a firm moving some or all of its business between competing suppliers of a substitutable product, where all suppliers produce a similar, or even identical, product. However, in an aviation context, switching may involve moving routes between airports that are poor substitutes in terms of the local market or catchment area that they serve. For an airline to switch airports, it must be commercially viable to do so. In other words, the alternative airport must be able to sustain a level of yield that it is equal to or greater than that which the airline is earning at present. The question arises of why a profit-
maximising airline would not already be serving such a destination. Therefore it follows that alternative airports are likely to be less commercially attractive and that the ability to generate profitable levels of revenue at alternative airports may represent the most significant barrier to switching. For airlines operating at hub airports, network effects may also arise. Any airline switching away from the hub will lose access to the pool of potential transfer passengers. In addition to the permanent loss of yield, there might be transitory impacts on revenue. Airlines may also expect to obtain lower yields when routes are launched as passenger familiarisation develops. While these effects are transitory, the start-up period may last for a considerable period of time, potentially as long as 2 or 3 years. Starkie (2012) has argued that the strategy adopted by many low-cost carriers of operating from multiple bases, makes it easier for these airlines to redeploy capacity. This may hold at the margin but, given the costs outlined above, is unlikely to be true for full entry and exit from an airport. Also, the discussion of revenue impacts highlights that route switching will only be attractive to an airline if they can earn similar or greater revenue at the alternate airport. And if that is the case, it raises the question of why the airline was not operating the route in the first place. 6. Evidence of route switching This section considers the evidence of route switching, using schedules data to highlight trends in the European market over recent years. As discussed in the previous section, evidence of highlevels of route switching might provide an indication of airlines being able to constrain airports’ market power. Airlines switch capacity between routes for a variety of reasons including underlying economic conditions, route profitability and broader network, or even alliance, strategy. Route switching could therefore be a consequence of a normal process of network optimisation as airlines attempt to maximise profitability in a competitive operating environment. Therefore, the discussion also considers the causes and drivers of the observed trends. Copenhagen Economics (2012) analysed schedules data and found that between 2002 and 2011, 54% of route closures involved routes that had been operated for less than 2 years, suggesting that route optimisation is at least partially a process of trial and error. Fig. 6 shows the trend in route openings and closures between 2003 and 2011. The first conclusion is that significantly more routes
Fig. 6. Number of intra-European routes opened and closed, 2002e2012. Source: Copenhagen Economics and SEO Economic Research based on OAG data
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
7
Fig. 7. Share of intra-European routes opened and closed, 2002e2012. Source: Copenhagen Economics and SEO Economic Research based on OAG data
are opened than closed per year, with this pattern holding in all years with the exception of 2009 as the global economic recession affected European demand. Indeed, even in 2010 and 2011 as the economic crisis deepened, route openings outpaced closures. The data do not support the hypothesis that there is an increasing trend in route switching that would be consistent with the existence of a growing competitive dynamic between airports. The absolute increase in the openings and closures of routes shown in Fig. 4 took place in the context of a market that was growing overall with 54% more routes and 41% more seat capacity in 2011 compared with 2002. Fig. 7 presents route openings and closures as a share of total routes operated; no increasing trend can be observed, indeed the average rate of both openings and closures was lower in 2011 than in 2002. In other words, the data do not support the argument that route switching is evidence of a generalised trend towards European airports being subject to increased competitive pressures. Moreover, at Europe's 25 largest airports, the rates of route switching, measured by seat capacity, are much lower; on average 7.9% and 5.7% for opening and closing routes respectively compared with 20% at airports with 5 million passengers or less (Copenhagen Economics, 2012). As with the market as a whole, new routes outstripped closures at most of the large airports during the period. The comparison between airports of different size provides limited support for the argument proposed by Starkie that smaller airports may have limited ability to exercise market power. However, it should be remembered that these airports are also much less likely to be subject to tight economic regulation. For example, airports handling less than 5 million passengers per year are not subject to the Airport Charges Directive. A final observation is that only 20e25% of route switching is by European network carriers, despite these airlines accounting for 59% of intra-EU traffic (Idem.). 75e80% of route switching is by “pointto-point” carriers, comprising low-cost carriers and full-service carriers that do not conduct significant connecting operations.
6.1. Airline exit A special case of route switching occurs where an airline exits a market entirely or ceases operations altogether. Such market adjustment is likely have a significant negative and short-term impact on both network scope and throughput at affected airports. However, this may not be the case in the medium and longterm.
Where market exit from an otherwise attractive airport serving a sustainable level of demand is driven by lack of competitiveness of the exiting airline one would expect other airlines to enter the market in a rapid timeframe and that throughput should recover to, or even exceed, the pre-adjustment levels. Copenhagen Economics (2012) found that on 65% of routes operated by more than one carrier, within 3 years of the exit of one airline from the route, capacity was at or greater than 80% of the pre-closure level and that in 40% of cases capacity was greater than it was before the airline exit. In contrast, where airline exit from an airport market is driven by a fundamental lack of sustainable demand at a given airport, then one would expect the drop in throughput to be permanent with limited recovery in the years following the initial airline exit. Again, the evidence supports this hypothesis; more than 70% of routes on which the exiting carrier was the sole operator continue to be unserved even after 3 years. In these cases, the fundamental issue is not competition with other airports but the lack of sufficient demand to sustain profitable airline services. Moreover, such airports do not have the ability to act as a long-term brake on the market power that may be enjoyed by larger, more successful neighbouring airports.
7. Conclusions: assess competition on a case-by-case basis The question of whether competition between airports can and will develop continues to generate interest and debate among policy-makers and researchers. This paper has attempted to address a number of indicators that could potentially signal the existence of competition constraining airport behaviour. The overall conclusion is that there remains a lack of compelling evidence that the European sector is subject to competitive pressures, reaffirming the findings of Müller-Rostin et al. (2010). In terms of pricing, the data examined showed that a majority of airports increased charges in at least one year during the height of the global economic crisis and Eurozone recession. For the largest airports there is even less of evidence of constraint of pricing power, in spite of the challenging operating environment. All the evidence of passenger behaviour shows a strong preference on the part of passengers to fly from their local airport. While a number of LCCs used low headline fares, supported by deep discounts, to encourage passengers to use less well-located airports, recent years have seen a trend for LCCs to serve primary airports. Moreover, for business and VFR passengers, the
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006
8
J. Wiltshire / Journal of Air Transport Management xxx (2017) 1e8
destination is also fixed. For the airlines, this passenger preference translates into a potentially significant revenue impact from switching to an alternative airport, in addition to the transition costs that must be incurred. Analysis of route schedules does not support the hypothesis that airlines are becoming increasingly footloose, with route openings and closures broadly stable (indeed decreasing slightly) over the study period, suggesting that such route switching as occurs is part of a process of network optimisation in an industry characterised by notoriously thin margins. The route switching data did however highlight a distinction between Europe's largest airports, with relatively stable networks, and smaller airport. The special case of airline failure highlighted this distinction and also raised the question of whether the relevant consideration is airline or airport competition. The example of the failure of Malev and the subsequent expansion of Ryanair and Wizz in Budapest showed that where there is a viable market to be served exiting airlines will be replaced. However, where the driver for airline exit is the lack of sufficient demand to support profitable operations airline exit tends to have a long-term impact. The recent trend for so-called low cost carriers to migrate from secondary to primary airports in order to serve a larger customer base supports this argument and suggests that the ability of secondary airports to act as a brake on the dominant position of primary airports is strictly limited, particularly in the absence of deep and ongoing discounts. However, the distinction between primary and secondary or large and small leaves a considerable grey area in the middle. At what point does a small airport become large? Is it at five million passengers, the point at which the Airport Charges Directive applies, or should policy makers think in terms of a continuum? These
are all interesting avenues for future research. In the meantime, the absence of clear decision rules points towards regulators and policymakers adopting a case-by-case approach.
References Copenhagen Economics, 2012. Airport Competition in Europe (Copenhagen). Civil Aviation Authority, 2011a. Empirical Methods for Assessing Geographic Markets, in Particular Competitive Constraints between Neighbouring Airports (London). Civil Aviation Authority, 2011b. Passengers' Airport Preferences: Results from the CAA Passenger Survey (London). European Commission, 2014. Report from the Commission to the European Parliament and the Council on the Application of the Airport Charges Directive (Brussels). Forsyth, P., Gillen, D., Müller, J., Niemeier, H.-M., 2010. Introduction and overview. In: Forsyth, P., Gillen, D., Muller, J., Niemeier, H.-M. (Eds.), Airport Competition: the European Experience. Ashgate, Aldershot, pp. 1e9. Frontier Economics, 2007. De-designation of Stansted Airport: a Report Prepared for EasyJet. Frontier Economics Ltd, London. Haskel, J., Iozzi, A., Valletti, T., 2011. Market Structure, Countervailing Power and Price Discrimination: the Case of Airport (Imperial College Business School Discussion Paper). Hess, S., Polak, J., 2010. Airport choice behaviour: finding from three separate studies. In: Forsyth, P., Gillen, D., Muller, J., Niemeier, H.-M. (Eds.), Airport Competition: the European Experience. Ashgate, Aldershot, pp. 177e196. Leigh Fisher, 2012. 2012 Review of Airport Charges. London. Morrell, P., 2010. Airport competition and network access: a european perspective. In: Forsyth, P., Gillen, D., Muller, J., Niemeier, H.-M. (Eds.), Airport Competition: the European Experience. Ashgate, Aldershot, pp. 11e26. Müller-Rostin, C., Ehmer, H., Hannak, I., Ivanova, P., Niemeier, H.-M., Müller, J., 2010. Airport entry and exit: a european analysis. In: Forsyth, P., Gillen, D., Muller, J., Niemeier, H.-M. (Eds.), Airport Competition: the European Experience. Ashgate, Aldershot, pp. 27e46. Starkie, D., 2012. European airports and airlines: evolving relationships and the regulatory implications. J. Air Transp. Manag. 8, 63e72. UNWTO, 2015. Tourism Highlights: 2015 Edition (Madrid).
Please cite this article in press as: Wiltshire, J., Airport competition: Reality or myth?, Journal of Air Transport Management (2017), http:// dx.doi.org/10.1016/j.jairtraman.2017.03.006