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Low-fare airlines are on their way to make a major breakthrough in the Swedish market
ARTICLE IN PRESS
Journal of Air Transport Management 10 (2004) 293–294
Opinion piece
Low-fare airlines are on their way to make a major breakthrough in the Swedish market H. Littorin* Airline Analyst, Forsprang, Sweden
If we take a look at the domestic Swedish market last autumn none of more than 50 routes were operated by more than one airline. One might think that this is a direct effect of the overall decrease in Swedish air traffic during the last years. But if we look at the statistics 4 years ago we see exactly the same thing. No routes had any competition. During the last months there has been a significant change in the domestic market and there is now a number of interesting routes operated by at least two airlines. This has also put pressure on Swedish railway operators, which have lowered their prices during the beginning of 2004. It is the routes between Sweden’s major airports that have seen an increase in competition this year. Between Stockholm/Arlanda and Gothenburg/Landvetter, Sweden’s biggest cities and airports, there are now three competing airlines with a lot of available fares around h40 for a single ticket. Sweden’s major operator, the partly state-owned SAS, has faced the new situation with a considerable decrease in its lowest fares. Other routes that have faced new competition are the . Stockholm and ones between Stockholm and Malmo, Lulea( and Stockholm and Umea( . All of them are among the most frequent routes in Northern Europe and all of the new competitors are airlines in the low-fare segment. One of the new competitors are unique since it is the first foreign carrier operating the domestic market in Sweden. This was allowed 5 years ago but has not been exercised until now. Still, the Swedish market is probably too small to attract more than one or two foreign carriers to perform scheduled domestic flights. If we look at the international flights to and from Sweden the progress has been somewhat different. During the last years around 40% of the scheduled *Fax: +46-31-136911. E-mail address: [email protected] (H. Littorin). 0969-6997/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.jairtraman.2004.03.003
international routes from Stockholm/Arlanda Airport have had at least two competitors. In the beginning of 2004 more than 45% of the routes are now operated by more than one airline. The impact is even more evident since the total number of scheduled international destinations decreased with 13% during the second half of 2003. If we take a closer look at the Swedish market we can see a break in the beginning of 2004. From Swedish airports there are more than 20 new international routes starting up this spring. They will make it cheaper and a lot quicker to reach both business regions and popular tourist destinations. Hopefully, the increasing competition will make the low-fare airlines more eager to promote correct prices to gain customer satisfaction. So far, customers to and from Sweden have suffered from a lot of incorrect information regarding price levels and hidden costs. The actual fares have consistently been higher than the prices advertised. If we look further ahead we can see SAS continuously cutting its costs and trying to compete with the low-fare airlines. The last two years SAS average ticket price has decreased more than 30%. Until now, SAS has been able to earn money on its domestic and Scandinavian routes. It seems as if that possibility is beginning to disappear, as there are now low-fare competition from Stockholm/Arlanda to Sweden’s major cities and the Scandinavian capitals. A few analysts mean that some of the low-fare carriers operating Swedish airports will go bankrupt in the years to come. It is impossible to say that these persons are wrong but we must put this new market condition in a broader perspective to be able to analyze the future. First, we must remember that the European air market was deregulated less than ten years ago and it is only 5 years since the air market in Europe was totally deregulated. In the complex surroundings of air transports this is a very short time-span. The demand and
ARTICLE IN PRESS 294
H. Littorin / Journal of Air Transport Management 10 (2004) 293–294
supply in the market for air transports in Sweden and the rest of Scandinavia have not found their state of equilibrium. The air carriers are in the middle of a transformation. This transformation will make carriers both appear and disappear and the price level will probably continue to diverge in the years to come. If we look at the policy reactions facing the new market situation in Sweden and Scandinavia we will probably not see any extensive interference. The Swedish authorities have made it clear that they support competition according to the deregulated European air market. Still, environmental policy in the European Union might be a threat to the air carriers in the years to come and Sweden is known to be one of the leading countries when it comes to proposing and implementing stronger environmental policies. One of the problems Sweden is facing is long distances between different regions but too few passengers to constitute a market for more than one carrier. In southern Europe we will, in a couple of years, see fast trains competing with the air carriers in distances up to approximately 400 miles. Fast trains might very well be major competitors to Swedish air carriers in a longer perspective, but it is doubtful if they will be able to compete with the price level of lowfare air carriers without receiving some kind of environmental subsidies.
That leads us to another issue, which some analysts see as a threat to the low-fare market in northern Europe. It is the debate about state-subsidies to the lowfare carriers. The background is that some low-fare carriers have received state-subsidies to operate certain airports. This is, however, limited to only a few airports. As long as partly state-owned carriers dominate the air market in northern Europe it is not likely that the European Commission (Executive body in the European Union) will oppose the private low-fare carriers and thereby decrease competition. Beginning in 2004, the European Commission will start to evaluate the deregulation of the air market in Europe. Depending on the results there may be some slight intervention in 3–4 years’ time, but that is very uncertain. It seems that this spring will probably mark a new course for the Swedish air market and really making it part of the low-fare air market in Europe. When the market for air transports in Sweden has decreased more than 15% in the last three years, the low-fare market has gained a large market share. This shows that the lowfare market, contradictory to the traditional air carriers, is able to grow in a market characterized by economic decline. But in the complex surroundings affecting air transports it will need to be closely followed to see how the different operators cope with the new market conditions.
Journal of Air Transport Management 10 (2004) 293–294
Opinion piece
Low-fare airlines are on their way to make a major breakthrough in the Swedish market H. Littorin* Airline Analyst, Forsprang, Sweden
If we take a look at the domestic Swedish market last autumn none of more than 50 routes were operated by more than one airline. One might think that this is a direct effect of the overall decrease in Swedish air traffic during the last years. But if we look at the statistics 4 years ago we see exactly the same thing. No routes had any competition. During the last months there has been a significant change in the domestic market and there is now a number of interesting routes operated by at least two airlines. This has also put pressure on Swedish railway operators, which have lowered their prices during the beginning of 2004. It is the routes between Sweden’s major airports that have seen an increase in competition this year. Between Stockholm/Arlanda and Gothenburg/Landvetter, Sweden’s biggest cities and airports, there are now three competing airlines with a lot of available fares around h40 for a single ticket. Sweden’s major operator, the partly state-owned SAS, has faced the new situation with a considerable decrease in its lowest fares. Other routes that have faced new competition are the . Stockholm and ones between Stockholm and Malmo, Lulea( and Stockholm and Umea( . All of them are among the most frequent routes in Northern Europe and all of the new competitors are airlines in the low-fare segment. One of the new competitors are unique since it is the first foreign carrier operating the domestic market in Sweden. This was allowed 5 years ago but has not been exercised until now. Still, the Swedish market is probably too small to attract more than one or two foreign carriers to perform scheduled domestic flights. If we look at the international flights to and from Sweden the progress has been somewhat different. During the last years around 40% of the scheduled *Fax: +46-31-136911. E-mail address: [email protected] (H. Littorin). 0969-6997/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.jairtraman.2004.03.003
international routes from Stockholm/Arlanda Airport have had at least two competitors. In the beginning of 2004 more than 45% of the routes are now operated by more than one airline. The impact is even more evident since the total number of scheduled international destinations decreased with 13% during the second half of 2003. If we take a closer look at the Swedish market we can see a break in the beginning of 2004. From Swedish airports there are more than 20 new international routes starting up this spring. They will make it cheaper and a lot quicker to reach both business regions and popular tourist destinations. Hopefully, the increasing competition will make the low-fare airlines more eager to promote correct prices to gain customer satisfaction. So far, customers to and from Sweden have suffered from a lot of incorrect information regarding price levels and hidden costs. The actual fares have consistently been higher than the prices advertised. If we look further ahead we can see SAS continuously cutting its costs and trying to compete with the low-fare airlines. The last two years SAS average ticket price has decreased more than 30%. Until now, SAS has been able to earn money on its domestic and Scandinavian routes. It seems as if that possibility is beginning to disappear, as there are now low-fare competition from Stockholm/Arlanda to Sweden’s major cities and the Scandinavian capitals. A few analysts mean that some of the low-fare carriers operating Swedish airports will go bankrupt in the years to come. It is impossible to say that these persons are wrong but we must put this new market condition in a broader perspective to be able to analyze the future. First, we must remember that the European air market was deregulated less than ten years ago and it is only 5 years since the air market in Europe was totally deregulated. In the complex surroundings of air transports this is a very short time-span. The demand and
ARTICLE IN PRESS 294
H. Littorin / Journal of Air Transport Management 10 (2004) 293–294
supply in the market for air transports in Sweden and the rest of Scandinavia have not found their state of equilibrium. The air carriers are in the middle of a transformation. This transformation will make carriers both appear and disappear and the price level will probably continue to diverge in the years to come. If we look at the policy reactions facing the new market situation in Sweden and Scandinavia we will probably not see any extensive interference. The Swedish authorities have made it clear that they support competition according to the deregulated European air market. Still, environmental policy in the European Union might be a threat to the air carriers in the years to come and Sweden is known to be one of the leading countries when it comes to proposing and implementing stronger environmental policies. One of the problems Sweden is facing is long distances between different regions but too few passengers to constitute a market for more than one carrier. In southern Europe we will, in a couple of years, see fast trains competing with the air carriers in distances up to approximately 400 miles. Fast trains might very well be major competitors to Swedish air carriers in a longer perspective, but it is doubtful if they will be able to compete with the price level of lowfare air carriers without receiving some kind of environmental subsidies.
That leads us to another issue, which some analysts see as a threat to the low-fare market in northern Europe. It is the debate about state-subsidies to the lowfare carriers. The background is that some low-fare carriers have received state-subsidies to operate certain airports. This is, however, limited to only a few airports. As long as partly state-owned carriers dominate the air market in northern Europe it is not likely that the European Commission (Executive body in the European Union) will oppose the private low-fare carriers and thereby decrease competition. Beginning in 2004, the European Commission will start to evaluate the deregulation of the air market in Europe. Depending on the results there may be some slight intervention in 3–4 years’ time, but that is very uncertain. It seems that this spring will probably mark a new course for the Swedish air market and really making it part of the low-fare air market in Europe. When the market for air transports in Sweden has decreased more than 15% in the last three years, the low-fare market has gained a large market share. This shows that the lowfare market, contradictory to the traditional air carriers, is able to grow in a market characterized by economic decline. But in the complex surroundings affecting air transports it will need to be closely followed to see how the different operators cope with the new market conditions.