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February 2014 – The Airline’s View towards Airports : a discussion

NEWSLETTER FEBRUARY 2014 – NEWSLETTER FLO – AVIATION

Arthur Flieger, Attorney at law Flieger Law Office bvba with the cooperation of Stijn Brusseleers, Attorney at law Flieger Law office bvba

AIRPORT COMPETITION: AN OUTLINE

The relationship between airlines an airport is critical to delivering a seamless high-quality experience to passengers and air cargo shippers. Airports continue to enjoy market power over both airlines and their customers, leading to prices that are higher than they should be and service standards that are lower than they should be.

Policy makers and regulators should be careful not to confuse corporatisation and commercialisation with competition . Robust, but proportionate, economic regulation is required to force airports to operate efficiently, fulfill core service obligations and moderate their charges. Lower charges not only benefit the passengers and air cargo shippers that use the airports of course, but encouraging greater connectivity also helps aviation act as a stimulus for economic activity, supporting trade, investment and jobs.

The aviation market in many world regions is undergoing, or has undergone, a period of significant structural change, with the intention of making it more dynamic and responsive to market needs and passenger preferences.

It is also clear that the competitive environment is not the same in all markets and for all airports. This has important implications for policy-makers and regulators. On routes serving smaller airports and markets, and where both consumers and airlines enjoy a wide range of choices, effective airline competition will be sufficient to ensure the best outcomes for consumers and the benefits of economic regulation are unlikely to outweigh the costs.

However, this is not the case for most larger airports, and for airports serving major population centres or serving a specific niche.

Airport competition
The ‘footloose passengers’ narrative argues that passengers are becoming more price sensitive, partly as a result of greater awareness of and familiarity with low-cost airlines as well as the ease of searching and booking over the internet. This is used to suggest that passengers are becoming ‘footloose’ in terms of the destinations they visit, and that, as with the catchment area argument, this acts as a constraint on airport pricing behaviour.

Similarly, it has been argued that airlines operating in liberalised markets such as Europe have also become ‘footloose’, that is both able and willing to switch away from airport if the price is not right.

Finally, it is argued that the change in the ownership and governance structure of a number of European airports to become more commercial entities along with more active marketing of their services to airlines has also reduced the need for regulation. It is also claimed that entry of new airports, often former military or recreational airfields has spurred competition.

The airline behaviour:
An airline did it become footloose?

Route switching is not costless. This is especially true for network carriers but also for pan-regional point-to-point airlines. It’s also show that, in most markets, the extent of route switching is limited to that which would be expected as part of a normal process of network optimisation in a highly competitive industry.

Airline switching can take a number of forms, but generally any way in which an airline can reduce its use of an airport can be considered as switching.

– On routes where the origin or destination (or both ends of the route) are served by more than one airport, an airline may reduce the frequency of flights at one airport and increase it at another, or it may switch the route entirely form one airport to another – this is perhaps closest to the case envisaged by the discussion of catchment areas;
– However, airlines may also switch between airports in different cities or regions, for example taking capacity out of Spain an moving it, for example, to Belgium or the Netherlands. It is this type of switching that is argued to be the behaviour of ‘footloose airlines’;
– Finally, airlines can vary the size of aircraft on a route and/or switch future growth plans from one airport to another. This form of switching may be less drastic and is certainly less obvious, but may be considered to have an impact on airport behaviour.

The airline sector is a highly competitive industry, with airlines subject to multiple sources of competitive pressure such as competition between airlines, the threat of entry and bargaining power of key suppliers, including airports. Liberalisation, deregulation and technological improvements have driven down until costs, and effective competition has ensured that these gains have been passed on to consumers in the form of lower fares. In many ways, the airline industry could be seen as a ‘poster-child’ for the consumer benefits of competition.

As with airports, airlines are highly capital-intensive businesses and aircraft are very expensive assets. Airlines need to deploy their fleets on routes that maximise revenue earning potential. Airlines therefore face very strong incentives to optimise their rote networks in terms of ability to generate yield. This may translate into variations of how capacity is deployed, for example in response to demand changes or economic conditions. However, it also means that in markets where airlines are able to generate significant business, they are likely to stay.

Effects related to airport switching
For an airline to switch airports, it must be commercially viable to do so. The ability to generate profitable levels of revenue at alternative airports may represent the most significant barrier to switching.

Airlines may also expect to obtain lower yields when routes are launched as passenger familiarisation develops. While these effects are transitory, the start-up period may last for a considerable period of time, potentially as long as 2 or 3 years.

Moreover, there may also be a more permanent loss of yield due to switching to a less attractive location, for airlines operating at hub airports, network effects may also arise. Any airline switching away from the hub will lose access loss to the pool of potential transfer passengers.

One should distinguish airport and airline competition
Where airports continue to enjoy significant market power and generate monopoly profits by imposing excessive airport charges on airlines, consumers will suffer. Even though the airlines operating at that airport may be highly competitive and complete effectively between them, air fares will still be higher than they need be. For this reason, it is therefore important to distinguish between the extent of airline and airport competition.

It is also clear that the competitive environment is not the same for all airports. While some airports are subject to some degree of competition from neighbouring airports, there is no evidence that this competition is sufficient to prevent many, especially large hub airports, form abusing market power through excessive airport charges or poor service.

Regulators need to be careful not to rely on airport competition delivering a good outcome for passengers and other airport users in terms of price and service quality. Effective and proportionate economic regulation is required in order to ensure a fair deal for consumers.

For further information and comment, please contact Arthur Flieger at Flieger@fliegerlaw.com, Website: www.fliegerlaw.com, telephone: +32 3 238 77 66

Copyright A. Flieger
This publication is defined to provide accurate and authoritative information in regard to the subject matter covered. It is transmitted with the understanding that the publisher is not engaged in rendering legal, or any other professional services. If legal advice or other expert assistance is required, professional services should be sought. You can always contact A. Flieger at flieger@fliegerlaw.com.