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Ready Takeoff? for DIRECTIONS IN DEVELOPMENT Infrastructure Schlumberger Schlumberger and Weisskopf Ready for Takeoff? The Potential for Low-Cost Carriers in Developing Countries Charles E. Schlumberger and Nora Weisskopf WORLD BANK GROUP BANK WORLD Ready for Takeoff? DIRECTIONS IN DEVELOPMENT Infrastructure Ready for Takeoff? The Potential for Low-Cost Carriers in Developing Countries Charles E. Schlumberger and Nora Weisskopf © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 17 16 15 14 This work is a product of the staff of The World Bank with external contributions. The findings, interpreta- tions, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Ready for Takeoff? • http://dx.doi.org/10.1596/978-1-4648-0282-9 Contents Foreword xi Acknowledgments xiii About the Authors xv Executive Summary xvii Abbreviations xxiii Introduction 1 Chapter 1 The Low-Cost Carrier Business Model 3 Definition 3 Key Elements of the LCC Business Model 3 Are Low-Cost Carriers Really Low Cost? 15 Conclusion 17 Notes 18 References 19 Chapter 2 The Impact of Low-Cost Airlines 23 Empirical Evidence for the Impact of Air Transport 23 The Impact of Low-Cost Airlines 25 Conclusion 31 References 32 Chapter 3 Two Case Studies: Mexico and South Africa 35 The Mexican Wave: Growth and Innovation 35 Now Anyone Can Fly—The Impact of Low-Cost Carriers in South Africa 44 Conclusion 52 Notes 53 References 54 Chapter 4 Transferability of the LCC Model to Developing Countries—A Framework 59 Demand Conditions 61 Air Transport Infrastructure 63 Ready for Takeoff? • http://dx.doi.org/10.1596/978-1-4648-0282-9 v vi Contents Air Transport Liberalization 67 Labor 70 Safety and Security 73 Distribution 76 Aircraft Financing 76 Fuel 80 Governance 81 What Matters Most? 82 To Enter or Not to Enter? A Market Entry Model for an LCC in Egypt 83 Conclusion 87 Notes 87 References 88 Chapter 5 Opportunities and Challenges for LCC Development: The Case of East Africa 95 Introduction 95 East African Community (EAC) 95 Demand 97 Air Transport Infrastructure 123 Air Transport Liberalization 138 Safety and Security 143 Labor 146 Aircraft Financing 148 Fuel Cost and Access 149 Distribution 152 Governance 156 Conclusion 156 Notes 159 References 159 Chapter 6 Development Framework for Sustainable Air Transport 169 Access to Markets 169 Infrastructure and Physical Capacity 171 Financing of Aircraft and Airport Infrastructure 173 Safety and Security 174 Regulation of Taxes and Fees 175 Conclusions for Development of the LCC Sector and Role of Development Partners 177 Notes 178 References 179 Appendix A Carrier Evaluation Methodology 181 Appendix B Database of Low-Cost Airlines Classification 183 Ready for Takeoff? • http://dx.doi.org/10.1596/978-1-4648-0282-9 Contents vii Appendix C Selected Impact Studies 187 Appendix D Freedoms of the Air 191 Appendix E Major Airlines in EAC 193 Appendix F Fare Comparison Methodology 197 Appendix G Airports in EAC 199 Appendix H Runway Capacity Estimation Methodology 205 Appendix I Infrastructure Charges Methodology and Detailed Assessment 207 Appendix J Accidents (2004–13) 217 Appendix K Doing Business Report: Labor Regulations (2012) 223 Boxes 2.1 Demand Stimulation—The Case of VivaAerobus 29 3.1 From Bus to Plane—LCC VivaAerobus Partnership with Grupo IAMSA Bus Operator 39 Figures 1.1 Average Daily Aircraft Utilization by LCCs, 2011–12 8 1.2 LCC Average Stage Length, 2013 9 1.3 Online Distribution as Percentage of Total Distribution, 2011–12 12 1.4 Labor Productivity Comparison, 2011–12 13 1.5 Adherence to Low-Cost Model, 2011–12 14 1.6 Comparison of U.S. CASM, Network Carriers, and LCCs, 2005–11 16 1.7 Comparison of Network and LCC Fuel CASM 17 2.1 Flowchart of LCC Impact 27 B2.1 Traffic Evolution Pre- and Post-LCC Entrance, Monterrey–Verracruz 29 3.1 Domestic Passengers, Mexico, 2000–12 40 3.2 Domestic Total, Trunk, and Regional Passengers, 2004–08 41 3.3 Fare Comparison Mexico City–Cancun, April 2012 42 3.4 South African Airways International and Domestic Departures, 1990–94 45 3.5 Trends in Passenger Transport on Major Domestic Routes, 1986–96 47 3.6 Trends in Economy Class Fares on the Johannesburg–Cape Town Route, 1989–96 48 Ready for Takeoff? • http://dx.doi.org/10.1596/978-1-4648-0282-9 viii Contents 4.1 Flight Intensity, 2012 62 4.2 Air Transport Infrastructure Quality, 2012 64 4.3 Selected Lowest Economy Fare for African Routes, August 2012 67 4.4 Percentage of Firms Identifying Labor Regulation as a Major Constraint 73 4.5 Aircraft Financing: 2011 versus 2012 77 4.6 Cost Advantage by Element, 2011 83 5.1 Intra-EAC Traffic, 2004–13 98 5.2 Domestic Traffic Kenya and Tanzania, 2004–13 99 5.3 Domestic Traffic Uganda and Rwanda, 2004–13 99 5.4 Number of Carriers per Top Intra-EAC Routes, July 2013 101 5.5 Market Share per Carrier on Top Intra-EAC Routes, July 2013 102 5.6 Number of Flights per Aircraft Size, July 2013 (Intra-Regional and Domestic) 104 5.7 Comparison of Lowest Available Return Fare between Intra-EAC and Other International Routes (Including Taxes and Charges) 107 5.8 Distribution Fare Basis versus Taxation and Charges, 2013 108 5.9 Comparison of Lowest Available Domestic Fare (Including Taxes and Charges) 109 5.10 Distribution Fare Basis versus Taxation and Charges 110 5.11 GDP Growth in EAC Countries, 2008–12 111 5.12 Flight Intensity in EAC Countries, 2012 112 5.13 Poverty Headcount Ratio at $2 (PPP) 113 5.14 GINI Index for EAC 113 5.15 Wealth Distribution in EAC Countries 114 5.16 Forecasted GDP Per Capita Growth Rate in EAC Countries 115 5.17 Population Growth in EAC, 2007–12 116 5.18 Urban Population, 2007–12 116 5.19 Number of International Arrivals, 2006–10 117 5.20 International Tourism Receipts, 2010 119 5.21 Arrival by Mode of Transport 120 5.22 Air Transport Infrastructure Quality, 2012/13 124 5.23 Total Turnaround Charges for Domestic Daytime Flight 130 5.24 Total Turnaround Charges for Regional/International Daytime Flight 131 5.25 Total Turnaround Cost for Domestic Daytime Flight—Passengers versus Airlines 132 5.26 Total Turnaround Cost for Regional/International Daytime Flight—Passengers versus Airlines 132 5.27 Comparison of Airline Charges for Domestic Daytime Flight 133 5.28 Comparison of Passenger Charges for Domestic Daytime Flight 134 5.29 Comparison of Airline Charges for Regional/International Daytime