Low cost carriers and airports: a productive relationship? September 2002
The relationship between airports and airlines is often challenging. Airports are often portrayed by the stock market as monopoly businesses and "regulated utilities", this contrasts sharply to analysts portrayal of the airline business. Airports are long–term stock market plays, personified by strong margins, steady growth and reliable dividends. Airlines are at best trading stocks, low margin and not for the faint–hearted investor.
Airline managers often accuse airport managers of being unresponsive and slow to react to their needs. The airline industry’s current problems have heightened the tension between airlines and airports, for example, British Airways has accused BAA that, in its spending plans submitted to the UK CAA (which regulates the airports' pricing), it has exaggerated future capital expenditure requirements by more than a £1bn.
If the traditional relationship between airports and airlines wasn’t already strained enough, the emergence of low cost carriers (LCCs) has added a new dimension. Some airports have embraced LCCs, while others have shown no interest.
Following American Airlines announcement that it is to effectively "de–hub" its airport operation, and as other carriers adopt a downsizing approach, airports have been forced to spend more time evaluating the LCC option.
Airports and airlines that have retained some level of government ownership, have, in general, been the least welcoming to the LCCs. After all, for the incumbent airline the LCC is obviously a threat and the airport can justify not encouraging their entry on the basis that their contribution to the airports' bottom line will be negligible. The fact that Ryanair has not entered either the Spanish or Portuguese markets is recognition that it has been unable to negotiate special deals from their airports.
The LCC business model requires airports to change their product offering. There are several elements to this, both operational and in a change of business approach. Operationally, LCCs require the following of airports:
- Fast turnarounds, usually with a target of 20 minutes or under.
- Short walking distances from the terminal to the aircraft, LCCs dont like to use airbridges, but board passengers using the aircraft’s own internal steps. Thus, there is no requirement for the airport to build airbridges or provide bussing.
- Flexible pre–boarding zones.
- Efficient operations which minimise delays (ATC, taxi time and holding), and
- To positively encourage passengers to proceed airside thereby minimising passenger induced delays.
The change in airport business mind set needed by the LCC requires airports to offer:
- A movement away from the historical fixed rate card system of airport charges to a more flexible à $1 approach. This requires the airport to provide a menu of charges and the airline only pays for services chosen. To keep charges down by offering more functional passenger terminals.
- Commit to understanding how the LCC business model is achieved, primarily through the simplification of functions.
- Offer long–term or even lifetime contracts.
- Encourage airlines to conduct their own ground handling.
Some airport groups, with multiple airport ownership, have been able to adopt an encouraging approach to LCC operation at some airports whilst keeping other airports LCC free. For example, Fraport has been able to develop Frankfurt–Hahn into a highly successful LCC base, with Ryanair currently serving 11 destinations from the airport.
What a LCC does bring is growth. In 1997, Frankfurt–Hahn handled 20,000 passengers. In 2002, Dr. Wilhelm Bender, CEO of Fraport AG, estimates that Hahn will handle 1.2m passengers and that this number will double in 2003.
The table on page 19 shows a number of European airports that thanks mainly to LCCs were able to report above average passenger traffic growth rates in the year 2000. The average growth rate for all ACI Europe airports in the year 2000 was 7.9%.
In the UK, BAA positively encouraged LCCUnder–utilised in the mid–90s, Stansted has, thanks to Ryanair, go and Buzz become the UK’s fastest growing airport with annual growth of 15% in the year to March 31st 2002, which compares to a fall of 2.2% in passenger numbers for the seven airports in the BAA portfolio. By 2012, BAA is forecasting that Stansted will be handling 35 million passengers, up from the 14 million passengers handled in the last financial year.
The UK has led the way in Europe in the LCC sector. Over 100 destinations are now served by LCCs from UK airports, and BAA has now embraced the LCC sector wholeheartedly.
Satellite 3 at Stansted will be built for Ryanair, and with no airbridges will cost 60% less than the original design with airbridges. Further savings can be made, as LCCs provide no interlining or connecting flights, so airports do not need to provide costly interconnecting baggage systems.
Are LCCs bad news for airports? Arguably not, and the way that the publicly quoted and financially astute BAA has encouraged their growth not just at Stansted, but increasingly at London Gatwick as well, would seem to suggest that there is a place for LCCs. easyJet has been a godsend for BAA at Gatwick, given British Airways decision to place less emphasis on the airport.
One argument is that LCCs are efficient users of airports. LCCs aim to achieve high all year round passenger load factors. easyJet check–in times for passengers without baggage average eight seconds. At London Luton, there are 60 check–in desks and easyJet uses 20 of them, yet accounts for 60% of the passengers at the airport.
Airports unwilling to entertain the idea of LCCs argue that although LCCs may bring growth it is, in effect, unprofitable growth. An argument put forward recently by Mike Hodgkinson, Chief Executive of BAA, was in favour of LCCs. He acknowledged that at Stansted, LCCs benefit from discounts and rebates on new routes and on meeting growth targets.
However, in time these discounts and rebates are expected to be recovered.
Hodgkinson also said that on a like–for–like basis, passengers travelling on LCCs had a greater spend per head on food at Stansted (no free food is of course available on LCCs) than at either Gatwick or Heathrow. Also, because many passengers travelling on LCCs are on three/four day city breaks, they are more likely to arrive at the airport by car and therefore use the airport car parks.
JP Morgan analyst, Andrew Lobbenberg, estimates that in revenue terms, one full service passenger is worth about two LCC passengers. He cites Fraport as an example where at Hahn, Ryanair pays 4.25 per departing passenger and no landing fee. At Frankfurt/Main a 737 operator would be expected to pay 13 per departing passenger plus a landing fee of approximately 1.75 per departing passenger.
Some airports have been so keen to secure LCC operations that they have linked their landing charges to fare levels. If only able to sell a ticket at the lowest available fare, the LCC pays less to the airport in terms of a passenger handling charge than for a passenger in a higher fare bracket.
A danger for airports that believe that they will be able to increase charges to LCCs in time, as introductory fees unwind, is that airlines can always move elsewhere. This is typified by Ryanair, which given its business model of flying to secondary and tertiary airports has more scope to move in and out of certain markets. Ryanair, for example, has ceased operations to Kristenstad, Lamezia and Rimini following arguments with airport management about fees.
Home to the pioneer of LCCs in Europe, Ryanair, Dublin Airport has benefited very little from Ryanairs recent 25% a year growth rates.Ryanair has taken its growth elsewhere, initially at London Stansted and more recently to Brussels Charleroi, Frankfurt Hahn and Glasgow Prestwick. Dublin has been too slow to reap the early LCC rewards — airports have noticed.
|Passengers handled (000)
|Increase over 1999