RAPPORT 1205 Svein Bråthen, Nigel Halpern and George Williams THE NORWEGIAN AIR TRANSPORT MARKET IN THE FUTURE Some possible trends and scenarios Svein Bråthen, Nigel Halpern and George Williams The Norwegian Air Transport Market in the Future Some possible trends and scenarios Rapport 1205 ISSN: 0806‐0789 ISBN: 978‐82‐7830‐169‐2 Møreforsking Molde AS 11. april 2012 Tittel The Norwegian Air Transport Market in the Future Forfatter(e) Svein Bråthen, Nigel Halpern and George Williams Rapport nr 1205 Prosjektnr. 2379 Prosjektnavn: Luftfartsmarkedet Prosjektleder Svein Bråthen Finansieringskilde Samferdselsdepartementet Rapporten kan bestilles fra: Høgskolen i Molde, biblioteket, Boks 2110, 6402 MOLDE: Tlf.: 71 21 41 61, Faks: 71 21 41 60, epost: [email protected] – www.himolde.no Sider: 82 Pris: Kr 100,‐ ISSN 0806‐0789 ISBN 978‐82‐7830‐169‐2 Short Summary The purpose of this report has been to address the Norwegian air transport market today and in which direction it is likely to develop in the future. The main objective is to address the following questions: Is the long run sustainability of today’s well‐functioning network dependent on that existing airlines maintain their position in the Norwegian market? How can other airlines be expected to enter the Norwegian market if one or more of the incumbents reduces their level of service, be it from financial or other reasons? Will the structure of airlines or airline ownership have an influence on the level of service that is offered to the market? How will policy framework conditions and the current economic situation (influencing e.g. air transport demand and the level of competition in the airline industry) affect the supply of air transport services? The findings indicate that there are challenges in Norwegian air transport, connected to the weak financial state of affairs for SAS, Norwegian’s expansion plans with a unit fleet of larger aircraft and a network of 800 metre local airports with a limited number of competitors for the PSO routes and scarce aircraft availability. For the two first factors, possible market‐driven solutions can be seen without any serious barriers to entry, whereas the situation for the 800 metre airports remains as a challenge with ageing aircraft in cases where more than 19 seats aircraft are demanded, no known plans for developing new aircraft types replacing the Dash‐8 100/200, operations with demands for specialized training of crew and short time span for preparation of operations after a tender is awarded. The report gives reason to expect that perhaps the largest volatility will be on the thinner domestic commercial routes where SAS and Norwegian are competing today. Preface This document addresses how the Norwegian air transport market may develop in the future. The work is commissioned by the Norwegian Ministry of Transport and Communications. The authors want to thank the following persons for sharing their views: Alf Reidar Fjeld (Sandefjord Lufthavn, Torp) Thorbjørn Lothe (NHO Luftfart) Knut Stabæk and Torolf Holte (Oslo Lufthavn, Gardermoen) Representatives from the Ministry of Trade and Industry and the Ministry of Transport and Communications have given valuable viewpoints. Trond Kråkenes has been the principal’s representative. The authors are solely responsible for all viewpoints, analyses and conclusions. Molde, 11 April 2012 The Authors TABLE OF CONTENTS A Summary and conclusive comments .................................................................. 7 1 Introduction ....................................................................................................... 13 1.1 Background ................................................................................................ 13 1.2 Main objectives .......................................................................................... 13 1.3 Research approach ..................................................................................... 14 1.4 The report .................................................................................................. 14 2 The Norwegian air transport market ................................................................. 15 3 Factors affecting the Norwegian air transport market ...................................... 29 3.1 Macro‐environmental factors .................................................................... 29 3.2 Key airline issues ........................................................................................ 33 3.2.1 Ownership ............................................................................................ 33 3.2.2 Operations ............................................................................................ 36 3.2.3 Strategy ................................................................................................ 40 3.2.4 Financial performance ......................................................................... 43 3.2.5 Future prospects .................................................................................. 45 3.3 Barriers to market entry ............................................................................ 51 3.3.1 Air service agreements (ASA’s) ............................................................ 51 3.3.2 Global airline alliances ......................................................................... 52 3.3.3 Frequent Flyer Programmes (FFP’s) ..................................................... 53 3.3.4 Pricing and state aid ............................................................................. 54 3.3.5 Sunk costs and operational challenges ................................................ 55 3.3.6 Airport slots and competition .............................................................. 56 3.3.7 Ground Handling Services (GHS’s) ....................................................... 56 3.3.8 Computer Reservation Systems (CRS’s) ............................................... 57 4 Airline business models serving the Norwegian Market ................................... 59 5 Possible scenarios .............................................................................................. 77 References .................................................................................................................. 81 A SUMMARY AND CONCLUSIVE COMMENTS A.1 Main objective of the study The purpose of this report is to address the Norwegian air transport market today and in which direction it is likely to develop in the future. The main objective of the study is to address the following questions, where the answers are summarized in sections A.3‐A.6 below: 1. Is the long run sustainability of today’s well‐functioning network dependent on that existing airlines maintain their position in the Norwegian market? 2. How can other airlines be expected to enter the Norwegian market if one or more of the incumbents reduces their level of service, be it from financial or other reasons? 3. Will the structure of airlines or airline ownership have an influence on the level of service that is offered to the market? 4. How will policy framework conditions and the current economic situation (influencing e.g. air transport demand and the level of competition in the airline industry) affect the supply of air transport services? There are a lot of underlying uncertainties affecting the air transport market worldwide, as chapter 3.1 in particular illustrates. Therefore, we have made no attempts to conclude with certainty about the future development in the Norwegian air transport market. However, in our opinion the report outlines some realistic development paths. A.2 Today’s situation in Norwegian air transport Two independent airlines (previously SAS and Braathens but more recently SAS and Norwegian) have served the domestic routes at the main and medium‐sized airports over the years. Moreover, the Norwegian airline market has also had smaller carriers operating at the regional airports but with one dominant market player, Widerøe. Another smaller carrier, Danish Air Transport (DAT) is now serving domestic routes from Oslo, Moss/Rygge, Stavanger, Bergen, Florø and Trondheim. From April 2012, DAT will serve the routes from Bodø to Røst, Leknes, Svolvær, Stokmarknes and Narvik, whereas Widerøe will take over DATs routes from Oslo to Florø and Bergen. SAS and Norwegian are competing on the three main trunk routes between Oslo and Stavanger, Bergen and Trondheim. In addition, these airlines are also competing on thinner routes. The three main routes will be allowed to reintroduce the Frequent Flyer Programmes (FFPs) that were banned in 2002 and 2007 for a period of 5 years. The main claimed reason for this is that the volumes on these 8 A Summary and conclusive comments three routes are considered as robust. The competitive situation is considered as too fragile on the thinner routes. One concern at present is that SAS is struggling with higher costs and lower productivity than its competitors, and with rather weak financial results and future liabilities. Norwegian is apparently in a much stronger position, with lower costs, higher productivity and an extensive fleet renewal program. Therefore, one main challenge in this study has been to address the situation in the event of SAS having to reduce or cease their operations. A.3 What are the likely development paths? No airlines are immune from financial turmoil so any of the airlines operating in the Norwegian air transport market could experience financial crisis that leads to them ceasing operations.