Integration and Concentration Of

Mantecchini L. et al. Integration and Concentration of European Air Transport Market UDC: 656.7:339.43(4) DOI: http://dx.doi.org/10.7708/ijtte.2013.3(2).08 INTEGRATION AND CONCENTRATION OF EUROPEAN AIR TRANSPORT MARKET

Luca Mantecchini1, Nicola Gualandi2, Filippo Paganelli3 1, 2, 3 DICAM – Transportation, Faculty of Engineering, University of Bologna, Italy Received 12 November 2012; accepted 22 March 2013

Abstract: During the last years air transport stakeholder’s behaviors have witnessed deep modifications. Airlines competition has been exacerbated by economic downturns, while airport competition emerged as a result of the less governmental intervention in airport investments. The first result of this process is a mix-model adopted by EU airlines in the domestic market, which implies that network airlines have adopted few of the strategies that have guaranteed the establishment of the low fares carriers, while low cost carriers have been continuously increasing the number of major airport served. The volatility of the air transport deregulated market has been analysed in the scientific literature and these aspects can be perceived as further evidences of the increased volatility. In order to limit the negative effects of volatility in the EU market, air transport players have been sought manners to enhance stability. Airlines mergers or acquisitions, buyout of airport operator’s shares by airlines, airport-airline partnership for ad-hoc infrastructure development or buyout of airport’s shares by other airport operators are examples of this will for a greater stability of the system. This paper analyses all these aspects highlighting the pursuing of greater stability by the fragile EU air transport system.

Keywords: air transport, deregulation, market concentration, volatility.

1. Introduction and Evolution of Air the oil crises in the 1970s and 1980s and of Carrier’s Strategies the terroristic attack of Al Qaeda in New York on 11th September 2001. The demand for air traffic has always been growing very fast if compared with the demand It has been demonstrated that air traffic for other transportation systems. Airline demand concentration and airports accessibility are depends strongly on both endogenous an simple indicators to analyse the main trends exogenous factors like wars, terrorism, fuel in the air traffic industry. In this paper, prices and economic scenarios. A growth in the attention is focused on the number of GWP results in more attitude towards economic movements (i.e. take-offs or landings) and exchanges and business travels; moreover the on the number of destinations attainable from improved economic conditions have a favourable a sample of airports in five EU countries to impact on the number of leisure trips. analyse the level of congestion at these airports. It is not necessarily true that a high number of From the analysis of Fig. 1, it is possible to passenger handled results in high number of detect the impacts on air traffic demand of movements and, therefore, in airport congestion

1 Corresponding author: [email protected]

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Fig. 1. European Air Traffic Trend Source: EUROCONTROL

(Grebenšek and Magister, 2012), indeed it is In this environment, the deregulation of the necessary to take into account variables such market and the privatisation of airlines have as airplane capacity, frequencies of flights and led to the rise of a more commercial airline airlines’ fleet mix. behaviour due to the increased competition brought by new players entering the market. Generally speaking, up to the second part Low-cost airline companies emerged in of the 1990s there was a single scheduled Europe during the 1990s with the specific aim airline for each European country operating of operating short-haul services in a point-to- international flights both intra-European point network with a lower cost structure in and inter-continental. These carriers, which order to pursue lower fares (Doganis, 2010). have been defined as flag carriers, operated Greater efficiency has been achieved through a in a limited competitive environment and wide number of factors: for example increased operated hub-and-spoke networks with the aircraft and crew utilisation and the use of operative base, or rather the hub, located in single kind of single-class aircraft with higher the capitals of each State. Full-service carriers seat density. Cost savings have also been use sophisticated hub-and-spoke networks in achieved through selling tickets electronically which each route (maybe unprofitable as such) to customers, new business strategies and contributes in feeding traffic to the network. direct negotiation with airport managers to The individual flights are interdependent obtain reductions in airport charges. LCCs feeder services and crew and aircraft are usually often fly from uncongested, secondary or deployed according to complex rotation plans. regional airport due to their lower fares and

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the possibility to have shorter turn-around concerns. Many authors have studied the times. LCC place different demands on economic implication of airline consolidation; airport facilities than traditional carriers: the findings show that total costs increase They don’t need business lounges or high 20% slower than the total traffic generated levels of service of terminal facilities (check- by the merged airlines. Airline alliances take in, baggage services and security checks); many forms and not only generate various moreover they would like to obtain parking benefits and risks to the members but also stands adjacent to the terminal to avoid the to other stakeholders such as passengers, use of air bridges or fingers. The development communities and travel agencies. The alliances of low-cost carriers during the last decade could result in new route options, extension of had a dramatic effect on the European airline frequent flyers program (Fan et al., 2001) and market. Low-cost carriers are expected to common reservation systems and creation of grow their market share in short-haul services new market shares. On the other hand, there up to 25-35% (Francis et al., 2004). Low- could be a potential tendency for reduced cost carriers maintain relationship with their both competition and level of services and base airport, stationing there planes in night higher fares. Historically alliances have been stop, personnel and supporting services; thus most evident in international aviation where establishing a connection lightly similar to the governments offered the airlines antitrust that existing between hub and dominant immunity for transoceanic alliances – for scheduled airline. example the open skies agreements between US and European countries – that allows Recently a convergence of the two business the partners to discuss schedules, fares and model has been observed. Ex flag carriers have frequency of flights (Ash, 2002). undergone deeply reorganization processes in order to reduce the cost base, to be more Direct acquisition can be both in the form of competitive on the market and to offer a 100% ownership or in the form of a major lower fares in the liberalized market, while shareholding (> 50%). Direct acquisition low cost carriers have increased the service is less viable nowadays both for the huge quality standards or tend to adopt simple amount of money implied and for legal hubbing models (i.e. Aer Lingus, Air Berlin restriction to foreign ownership posed by or Germanwings). some countries (U.S. legislation provides a ceiling to foreign carriers owning a stake in Ex flag carriers, in order to increase their US carriers). market share, have enhanced the practice of airline alliances, because they are intent Airline demand depends strongly on both on increasing the number of passengers endogenous and exogenous factors like wars, (Iatrou and Alamdari, 2005). Two definitive terrorism, fuel prices and economic scenarios. characteristics of strategic alliances are A growth in GWP results in more attitude exclusive memberships and a joint marketing towards economic exchanges and business entity (IATA). Airline alliances should be travels; moreover the improved economic fostered by different factors, such as increased conditions have a favourable impact on the globalisation in air transport, increasing number of leisure trips. Some example of interaction, economic incentives for airline merging and alliances between scheduled consolidation, liberalisation and anti-trust carriers at European level are:

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• Air France-KLM (May 2004); 18% of Buzz in February 2003 and tried twice to shares are owned by French government, do the same with Aer Lingus (Francis et al., the rest has been privatized. After the 2004) but in both the cases the acquisition has merging, AF-KL registered a +10% in been thwarted because judged as potentially revenues, +5.5% in passengers carried restrictive of the concurrence. Other possible and +1% in load factor (Air France-KLM, forms of cooperation between airlines exist full year results 2005-06), in addition to the merging, the acquisitions • Lufthansa; totally privatized. It owns and alliances, but they are characterised by a now Swiss Airlines, Austrian Airlines, more operative connotation. These forms of Germanwings and Brussels Airlines, cooperation are the code-sharing agreements • British Airways is due to merge with and the franchising. Iberia in a new entity named International Airlines Group. “The merged company will Code sharing is an aviation agreement provide customers with a larger combined between two or more airlines; a seat can be network. It will also have greater potential purchased on one airline as if actually operated for further growth by optimizing the dual by a cooperating airline under a different hubs of London Heathrow and Madrid” flight number or code. It allows greater access (W. Walsh, BA CEO). Both airlines to cities through a given airline’s network will retain their current operations and without having to offer extra flights, and individual brands. The combined fleet makes connections simpler by allowing single will total 408 aircraft operating to 200 bookings across multiple planes. Under a code destinations and carrying more than sharing agreement, the airline that actually 58 million passengers per year. The operates the flight is called the operating definitive agreement is conditional on carrier. The company or companies that regulatory approval from the relevant sell tickets for that flight but do not actually competition authorities including the operate it are called validating carriers. A European Commission and approval by further advantage to passengers is shared both BA and IB shareholders. BA and IB responsibility between the carriers. If the added that they have received regulatory flights are not code shared, then the second confirmation from UK and Spanish civil airline has no responsibility if the passenger aviation authorities to ensure that the or luggage misses the second flight due to ownership and governance structure of a delay with the first. Criticism has been both companies would permit retention levelled against code sharing by consumer of existing national route licenses and organizations and national departments of traffic rights. trade since it is claimed it is confusing and • Merging between Alitalia and Airone not transparent to passengers. and selling of 25% of shares fo Air France – KLM. Franchising consists of an airline flying with the colours of another airline, maintaining Currently there are four main global alliances: independence apart from the obligation to Wings, Star Alliance, Oneworld and SkyTeam. provide the franchiser’s level of standards. Consolidation seems to have started also in The advantage for franchisees is that they the low-cost market: Easyjet purchased his are given access to logo, products and service competitor airline GO and Ryanair took over standards of the franchiser. Franchiser’s

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advantage lays in the possibility to quickly as concessions, rents, catering, car parking. expand its network without devoting too many The improved financial performance could resources. Franchising is especially used in allow airport operators to reduce aviation user smaller markets, for example the domestic charges to airlines and passengers (Oum and market to provide feeder services to a scheduled Fu, 2008), further gaining in attractiveness. carrier’s hub. It also includes taking franchiser’s Nowadays, non-aeronautical revenues represent flight code, ground handling, selling, revenue approximately 50% of all income of European accounts, computer systems and services, airports (Graham, 2008). Examples of and the frequent flyer package. For example, competition between airports consist in shared British Airways has franchising agreements with markets between close airports, connecting Gatwick based City Flyer Express and Scottish traffic and non-aeronautical services. Growing carrier Loganair, which operate as British attention should be given to the project and use Airways Express and Maersk, which operates of terminal infrastructures, passenger facilities, from Birmingham as British Airways and Manx incentive pricing and service provision. For Airlines. A form of franchising technically called example, many airports decided to focus “wet lease” consists in franchisee’s aircraft and their attention on passenger facilities by crew with franchisers’ liveries and uniforms. increasing the number and the mix of retail The last tendency in airline market is forward operators and caterers, expanding the space integration, namely the airline gains control on allocated to commercial also dealing with the distributors (tour operator, travel agencies the expectations of the passengers and of and car rental services). the other stakeholders (discounts, loyalty cards, duty free sales, economic support to 2. Evolution of Airport’s Strategies the improvements to achieve better surface access to the airport, developing shopping or The traditional view of most airports leisure facilities also for nearby residents such acting as natural monopolies is increasingly as conference halls, offices, etc.). Privatization being questioned because of the improved also enabled airports to buy other airports: that forces of competition which have occurred is horizontal integration. BAA-Ferrovial in UK, after the airline liberalization and airport Fraport in Germany, Schipol in Netherlands commercialization (Graham, 2004). Airports nowadays are operating more than one single have traditionally considered the airlines airport; doing so they introduce their brand and as their main customers as they have legal know-how in new market areas. For example, agreements and pay the aeronautical charges BAA-Ferrovial owns four English airports, (landing fees, charge per passenger / ton. of Cerro Moreno Antofagasta Airport in Chile freight, use of air bridges, air-traffic control, and 65% of Naples’s airport. There are issues, aircraft parking, etc.). The deregulation of the however, whether different close airport should aviation industry led to more aggressive market be operated as individual entities or as a group. strategies adopted by airports (Tretheway Cooperation and coordination may improve and Kincaid, 2005). In fact, until mid-1990s, customer services and the operational efficiency little had been done by airport operators to of the airports, but it is also likely to reduce draw revenues from airline passengers. From competition between both airports and airlines. the introduction of this new commercial Another method of strategic development business model onwards, airports placed more which doesn’t imply the transfer of control emphasis on non-aeronautical revenues such and ownership is alliances, meaning shared

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knowledge, market support, quicker exchange airlines that can almost dictate the conditions of information, joint actions for international towards regional airports. The majority of projects (Graham, 2004). relationships involve hub airports and its hub carrier, but alternative combinations are also Airport managers need to reconsider their reliable (for example, hub carrier and regional business strategies to deal with low-cost airlines airport). In the aviation context there are that propose a reduction in the amount they various forms of specific investments on both pay to use airport facilities as a prerequisite to sides: airports may adapt their infrastructure start operations. At medium sized airports, for to carriers’ needs and, on the other hand, example, low-cost airlines could be attracted to airlines can consider their airport choice when use the spare capacity at under-utilized existing making strategic decisions. The longer the infrastructure but there is the danger that duration of the relationship, the more likely it they would act as substitute for the scheduled become that each party will show each other airlines resulting in an economic loss to the commitment through long-term contracts, airport operator. A feasible strategy should shared performance measure indexes and be providing unbundled services and offering trust (Goetsch and Albers, 2007). In fact, a differentiated product (e.g. converting old there are benefits for both airports and airlines structures into low-cost terminal facilities with from entering into long-term relationships: lower fares per passenger carried) to different airports can obtain financial support and airline types as it has been done in some cases secure business volume, on the other and (Marseille, Geneva, etc.). airlines can secure key airport facilities on favorable terms; this provides incentives for 3. Vertical Integration Airport-Airline the airport and the dominant carrier to strike exclusive deals (Oum and Fu, 2008). The characteristics of airport’s development strategies strongly depend on airlines’ decision Vertical relationship between airport and airline to operate services; for example low-cost may happen in these scenarios: privatization of airlines have forced airport revenues down hub airport (Lufthansa now holds 9% of shares thanks to their bargaining position during in Frankfurt airport, thus being able to influence the negotiation with airport managers: LCC strategic and investment’s decisions and to can decide to fly elsewhere unless discounts have control on airport’s cost development in charges or commercial incentives are policy), terminal expansion at hub airport not granted by the airport (Doganis, 2010; (terminal 2 at Munich airport was built and Graham, 2008). It has become clear that operated by a joint company of Lufthansa economic advantages may be obtained if and Munich airport; Lh wanted a feasible airports and airlines work together jointing terminal layout to support his double-hub and the forces: “...closer cooperation will be increasingly spoke operations and T2 was also intended necessary for the simple reason that if customers to become a premium facility for Star alliance don’t have a good perception of the situation, it will members’ passengers) or terminal expansion obviously impact on the image of both partners...” at a base airport (the low cost carrier commits (J.C. Spinetta, CEO Air France, 2005). Large itself to grant the airport a certain amount of airports are in a better negotiating position passengers versus lease or rearrangement of than smaller airports, as size indicates a large airport’s structures). The weak point of vertical catchment area. The same happens for large integration consists in the potential rise to

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anticompetitive practices aimed at displacing air traffic is equally distributed between competing airlines such as diminution of airports while the opposite suggests that the quality of service, potential discrimination, air traffic is gathered at a few airports. The increasing charges, cross-subsidies between former situation is typical of point to point airport and airline. This could happen if the network while the latter, in association with airport operator is allowed to control somehow temporal coordination, is typical of a hub and at least one airline. Therefore international spoke network. experience suggests that airport concessions should impose vertical separation between In this paper, the attention is focused on the the airport and the airline (Serebrisky, 2003). concentration at some European airports, evaluated with the help of the Gini coefficient. Airport management have to evaluate both the Given n observations of the variable X, if: volatility of low-cost market and the growth ≤ ∀ = expectations before concluding airport- X i−1 X i i 1,..., n. airline agreements: long term agreements and i = ∀ = investments in infrastructure to accommodate Ci ∑ X j i 1,...n low-cost airlines must be assessed regarding the j=1 degree of risk that services may be withdrawn n C µ = 1 = n (Francis et al., 2004). Airport management ∑ X i should be also aware of the necessity of equity n i=1 n issues between traditional and low cost carriers i as the social and economic status of a region pi = ∀i = 1,..., n may be harmed if scheduled services are n withdrawn. The volatility of traffic at an airport is defined as a percentage change around the Ci long term, according to the following formula qi = ∀i = 1,..., n (Eq. (1)): Cn

actual −trend Volatility =100⋅ tra c tra c (1) trend tra c The Gini Coefficient (R) is given by the following formula (Eq. (2)): Traffic is much more volatile both at secondary airports and in a deregulated environment n−1 − than under strict regulation; the regulation ∑( pi qi ) = i=1 cap prevents airlines from rapidly changing R n−1 (2) their routes, fares or frequency of service. ∑ pi i=1 4. Analysis of Airport Concentration and Accessibility The Gini concentration index ranges between 0 and 1. If all takeoffs and landings were The value of a national air network concentrated on a single airport, R would be concentration gives information on the air equal to 1; if they were equally distributed traffic distribution among the different airports: between the airports, R would be equal to a low value of concentration means that the 0. A useful graphic representation of the

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Gini coefficient is the Lorenz curve (Fig. 2), • in each country the ten airports with the where x axe is the cumulative percentage of highest number of passenger carried were airport movements and y axe is the cumulative considered significant; percentage of airports at a given country. As • it’s possible to include further airports the distance between the straight line R = 1 if they handle more than 4 million and the curve grow, then, the Gini coefficient passengers in a year. (R) grows too. The airports considered significant for the In this analysis airport data ranging from 2005 analysis are summarized in Table 1. to 2009 in the five most significant European countries in terms of passengers carried and The data were taken from the Airports Council movements (France, Germany, Italy, UK and International (ACI) Report and from airports’ Spain) are taken into consideration. Smaller or aviation-authorities’ websites (AENA for countries like Netherlands, Belgium, and Spain, CAA for UK and Enac and Assaeroporti Switzerland were discarded because they often for Italy). Table 2 shows the values of the Gini have only one major airport, thus limiting coefficient during the period analysed. the passengers’ possibility to choice the departure airport. Two main criteria were Any point of the Lorenz curve is the cumulative used for analysing the traffic: percentage of the total movements at a given

Fig. 2. Example of Lorenz Curve

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Table 1 Sample of Airports Considered in this Study France Germany Italy UK Spain Belfast Bordeaux Berlin Schoenefeld Bologna Alicante International Lyon Berlin Tegel Catania Birmingham Barcelona Marseille Cologne/Bonn Milan Linate Bristol Bilbao Bergamo/Orio al Nantes Düsseldorf Edinburgh Fuerteventura Serio Nice Frankfurt Milan-Malpensa Glasgow Girona Paris Beauvais Hahn Naples Liverpool Gran Canaria Paris Orly Hamburg Palermo London Gatwick Ibiza Paris Roissy Hanover Rome-Ciampino London Heathrow Lanzarote Strasbourg Munich Rome-Fiumicino London Luton Madrid Toulouse Nuremberg Venice London Stansted Malaga Stuttgart Manchester Palma de Mallorca Newcastle Sevilla Nottingham East Tenerife North Midlands Tenerife South Valencia

Table 2 Gini Coefficient (2005-2009) for Each Country 2005 2006 2007 2008 2009 France 0,506 0,511 0,506 0,511 - Germany 0,407 0,403 0,403 0,407 0,409 Italy 0,404 0,401 0,394 0,398 0,384 UK 0,399 0,392 0,399 0,397 - Spain 0,456 0,455 0,454 0,440 0,452 number of airports considered. As could be shows the Lorenz curve for France in 2008: it derived from Table 2, France is the European shows that the 80% of the total movements is country with the highest value of the Gini handled by the 40% of the French airports, coefficient. The Lorenz curve may have a while the remaining 20% of airports (notably dualistic interpretation: when the variable X the two biggest French airports, Paris Roissy grows, it is possible to get the percentage of and Orly) handles the 60% of movements. This movements handled by small-medium sized is why the concentration value is quite elevated. airports; a reduction in the X variable gives information on the movements’ percentage Spain has the second highest value of the Gini handled by the biggest country airports. Fig. 3 coefficient. The three biggest airports in the

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1 0,9 0,8 0,7 0,6 0,5 0,4 0,3