Tuesday, 26 April 2011

Highlights of the annual Airneth conference (IV): de-hubbing, re-hubbing and Amsterdam Schiphol

One expected consequence of any futher consolidation in the airline industry is that some airports are going to experience de-hubbing. This is actually one of the worst things that can happen to an airport (from a business point of view, of course).

Renato Redondi, from the University of Brescia (Italy), presented some very interesting results from his investigation in the area of de-hubbing and re-hubbing, something that airports with hub aspirations should take note of (thinking about Barcelona airport here!): only three cases of re-hubbing were identified by the research (and all of three were re-hubbed by the same airline that had previously decamped, so no known cases of an airport being re-hubbed by a different airline!)

If your flag carrier de-hubs, why not add some low-cost colour to your airport?

Low cost carriers play an ambiguous role in de-hubbing processes, since their entry into a market can pressure network carriers into abandoning secondary hubs, but at the same time, once de-hubbing has happened, low cost carriers offer one of the fastest ways to recover traffic volumes!

This last point was very present in the minds of both the attendees and the speakers, since, given the conference was taking place in The Netherlands, the case of Amsterdam Schiphol, was the focus of particular attention. The importance of Schiphol for the Dutch economy is difficult to overestimate, and the fact that the flag carrier, KLM, is now part of a larger group, that keeps and even larger hub as close as Paris, makes this a very sensitive topic. There was some debate over whether the entry of more low cost carriers was a good thing for Amsterdam or it would end up putting too much pressure on the home carrier KLM.

Schiphol airport and KLM are key for the Dutch economy

The idea that more competition from low cost carriers would be beneficial over the long-run, as it would keep KLM competitive, seemed to carry the day...moreover, the KLM representative in the panel, Pieter Cornelisse, expressed a lot more concern about the strengthening of Lufthansa's hub at Frankfurt after the completion of a new parallel runway (extra capacity will allow the German airline to open new routes to the UK and Scandinavia, traditional feeder markets for KLM) and the increased capacity the Gulf carriers are deploying in their European routes.

Monday, 25 April 2011

Highlights of the annual Airneth conference (III): "the airline industry is structurally unstable"

The title of this post refers to the words of Rigas Doganis, author of Flying Off Course, possibly the most-read book on the airline industry to date (a revised and updated fourth edition that has just been released!)

Flying Off Course is the reference book about the airline industry

Mr.Doganis was one of the speakers at the Airneth conference and there he outlined his vision of the future of the airline industry. A future that passes necessarily through further consolidation, something that will have serious implications for several European hubs.
  • The largest network airlines (all 9 largest airlines by capacity all had losses last year!) will focus on long-haul operations at large hubs and contract out the feeder services
  • Smaller regional airlines will focus on their niche business-oriented traffic
  • Mid-sized traditional network carriers have a bleak future ahead!
  • Low cost carriers will increase their dominance of short haul European routes and will see some additional consolidation until only 3 or 4 will be left (Michael O'Leary has also been anticipating such an scenario, although he does not spare any fellow low cost carrier!).
  • Charter airlines will have to concentrate on long-haul leisure destinations as the LCCs take more of the short-haul holiday market.
Next, it was the turn of Nigel Dennis, of the University of Westminster Transport Studies Group, that presented a fascinating analysis of the different levels of competition each major airline alliance is facing at its own hub and presented some evidence of how this is affecting pricing on key routes (Easyjet competing on a given route could result in flag-carrier prices up to three times higher!). When comparing the competitive position of the three main airline alliances, it turned out that Oneworld, and in particular, IAG (that includes both British Airways and Iberia) is under much stronger pressure from low cost carrier at its own hubs (London and Madrid) than its counterparts at Star Alliance and SkyTeam.

This is something that was also noted by Jan Veldhuis, of The Netherlands Institute for Policy Analysis (KiM), in his presentation, as he remarked that, whereas Skyteam has increased its dominance at both CDG and AMS, Oneworld is loosening its grip on LHR.

And low cost carriers have often been mentioned throughout the conference...but, how do you define a low cost carrier?

Richard Klophaus presented a method to evaluate how "low cost" a carrier is, based on a set of 14 criteria, such as fleet homogeneity or use of major airports. Although he admitted the algorithm might need some refinement it provided an objective way to classify different airlines and the results were not always coincident with popular perception or even the airline's own marketing message. for example in a scale of 0 (no low cost) to 1 (pure low cost airline), Ryanair scored 1, whereas airlines traditionally that market themselves as "low cost", such as Vueling or Aer Lingus got 0.53, which means that they are, in reality half-way between a low cost airline and a network carrier.

Aer Lingus: not as low cost as it pretends...

Saturday, 23 April 2011

KLM retro and SkyTeam liveries

Here are some interesting KLM liveries that I have seen on a recent trip to Schiphol:

KLM retro livery, spotted @AMS . This Boeing 737 was painted this way in order to celebrate the Dutch airline's 90th birthday, but I am not sure to what historical period does this livery correspond. Comments and suggestions welcome!

A KLM Boeing 737 in SkyTeam livery, alliance-themed liveries are becoming more and more common!

Thursday, 21 April 2011

Highlights of the annual Airneth conference (II): analyzing the Delta-Norwest merger

As I anticipated in my previous post, the annual Airneth conference was a very interesting opportunity to listen to major airline industry experts and learn first-hand how they envisage the future of the airline business. The following is not an exhaustive account of the conference, but only some highlights I picked up that I hope will be of interest to readers of this blog, that I assume share with me their interest and passion for the commercial aviation industry.

Shortly after the usual introductory words, the conference kicked-off with Perry Cantarutti, senior VP at Delta airlines, explaining his experience of the recent merger between Delta (DAL) and Northwest Airlines (NWA).

He highlighted how DAL and NWA could extract significant value out of their very complementary networks and fleets: Delta had a strong network in the South and East of the US as well as a large transatlantic presence, whereas Northwest was strong in the upper-Midwest and the Pacific. Similarly, NWA had a fleet with lots of small (and I would add quite old too!) aircraft, such as DC-9s and also very large ones (B747s), whereas DAL had many mid-sized aircraft (B737s and B767s). So, the merger allowed them to rationalize fleet use and frequencies, for example deploying A320s at SLC to fly routes to the East coast, whereas shorter-range MD-90s are used at MSP to fly shorter sectors.

The resulting airline is now #1 (in average seat miles capacity) domestically in the US and in the US to Europe, Africa and Asia and #2 in the US to Latin America market. Although, when analyzing the competitive situation on transatlantic routes, it might be more accurate to consider capacity by alliances rather than individual airlines, and here DAL-NWA benefit from an increasing cooperation with AF-KLM and Alitalia, to the point that Skyteam now has a share of 27% of transatlantic capacity, just 1% below the largest alliance (Star Alliance).

Skyteam partners have already achieved a significant amount of integration in areas such as joint revenue management on transatlantic routes and we can deduct, from Mr.Cantarutti's words, that we are going to see increasing integration within Skyteam, for example, by looking for more commonalities in aircraft cabins.

Monday, 18 April 2011

Highlights of the annual Airneth Conference in The Hague (I): Consolidation and new business models in the air transport industry

The Hague: an excellent choice to host the annual Airneth conference

Last week I had the opportunity to attend what is possibly one of the most interesting aviation-related events in Europe right now: the annual Airneth conference in The Hague, The Netherlands.

The line-up of speakers sounded impressive beforehand, it included professionals of the caliber of Rigas Doganis, of "Flying-off Course" fame, but after attending most of the sessions I can just say that the conference totally exceeded my expectations. In addition to the quality of the debate that went on in the conference room, I must congratulate the organizers for the perfect set up (as well as the choice of city!).

Given that the conference was being held in The Netherlands, the case of Schiphol airport deserved some special attention, with its symbiotic relationship with KLM, of outmost importance for the Dutch economy. I could detect some concern among the attendees about the survival of Schiphol as a major hub in the constantly-changing airline industry scene, something of particular relevance now, with KLM as a junior member of the Air France group, the industry's centre of gravity shifting eastwards and a growing market share for low cost carriers...

In coming blog posts I will try to summarize my impressions of the conference and outline some of the major topics that centered the discussion, some of which are much in line with what I have usually been writing about in this blog: the future of competition between network airlines and low cost carriers, evolving business models in the airline industry, airport de-hubbing and re-hubbing, airline alliances and route development.

Watch this space!

Friday, 15 April 2011

Vueling and Spanair: two different strategies to develop Barcelona into an airline hub

A few weeks ago I presented my vision of Barcelona airport as at potential Mediterranean hub. But are there any airlines able to turn this idea into a reality?

Actually, the chances of this happening, although small, have never been better, as there are currently two airlines aiming to develop a hub-style operation at BCN: Vueling and Spanair, however each of them has its particularities.

Spanair MD-83 EC-GVO with the city of Barcelona in the background

On one hand, Vueling started as a pure low cost play, although its model has been going through an hybridisation process that has seen it progressively adding more of the features of a network airline. On the other hand, Spanair's troubled existence as a conventional full-service airline, took a radical turn when a group of investors supported by the Catalan government purchased it with the mandate to develop an international hub out of Barcelona.

Spanair is actively marketing itself as "Barcelona's carrier", the only one able to take Barcelona to the first division of European airports. Spanair's latest marketing campaign, Jo Crec en Barcelona (which means "I believe in Barcelona" in Catalan language) goes in this direction. But how does this translate in terms of network development?

Until now most of Spanair's growth, which has been constrained by the carrier's delicate financial situation, has been aimed at leveraging its Star Alliance links, new routes and frequencies between Barcelona and Germany and code-sharing with Singapore Airlines, as well as developing some niche markets out of Barcelona with routes to North Africa and the Sahel (Algiers, Nador, Banjul, Bamako and the, now abandoned, Tripoli). This niche market strategy would fit well with the concept of a Star Alliance South-Western European hub, by offering a diversified and unique route network and channeling traffic through Barcelona, however, given Spanair's weak European network outside Germany, it remains unclear to me what traffic is going to feed these specialty routes other than a limited domestic Spanish demand and some spillovers from Star Alliance's main hubs in Central Europe.

In my post about the Mediterranean strategy I pointed at the need to achieve some critical mass by linking those cities that are within easy reach from Barcelona and are somehow underserved buy their own flag carriers. And this is what Vueling seems to be doing. This airline, partly owned by Iberia, is strengthening its network by opening routes from Barcelona to a number of airports in Southern France (Bordeaux, Toulouse) and Italy (Genoa, Pisa) in addition to a very strong Spanish and European network, at the same time it is enabling connections between different flights and feeding Iberia's new transatlantic services at Barcelona (to Miami and Sao Paulo). Does this mean the hub status for Barcelona is getting closer? yes and no, in a way the seeds of a potential Mediterranean hub are being planted, but at the same time, Barcelona is still far from enjoying the sort of coordinated waves of arrivals and departures, network reach and feeder frequencies that even secondary hubs have.

Vueling A320-200, EC-ICS, landing at BCN

Another question is whether is there enough space at BCN for two airlines aiming to make it its hub, particularly when factoring in the increasing competition from Ryanair...maybe developing a hub would require combining Vueling's European reach with Spanair's niche network...but this is another story!

Saturday, 2 April 2011

A brand new airport opens in Spain, no flights expected in the near future...

I had no plans to continue writing about Spanish airports and overcapacity this week, when I learned about the opening of the latest Spanish airport: Castelló-Costa de Azahar (CDT), on Spain's Eastern coast, filling the gap between Valencia (VAL) and Reus (REU) airports. Well, I said "open" because it has been actually been "inaugurated", but it will take some time until an airplane is seen taking off or landing at this facility. In reality the timing of the official inauguration has more to do with the Spanish political calendar than with the readiness of the facility (the run-up towards the upcoming local and regional elections).

This is the third airport in Spain to be built and managed outside Aena's network. It is going to be managed by a private consortium, although much of the investment so far has come from the regional and provincial governments, and presumably public money will also be needed to fund the facilities for quite a while, since the airport management company will get €6 per passenger unless the 600,000 passenger/year threshold is reached during the. This figure looks like a distant goal at a time when only Air Nostrum, Iberia's regional franchise has shown some interest in operating from the new airport.

Unlike other Spanish ghost airports, Castelló is located in an area with considerable economic potential, including many export industries (for example, ceramics) and a tourism industry that, until the crisis arrived, had put its sights on massive development schemes to rival those of neighbouring Costa Blanca and Costa Daurada...and here lies the problem: it seems to be that the airport's business plan, its capacity and its management contracts were elaborated under the assumption all these massive development plans were going to be a reality by the time the airport was ready. They aren't. In fact, construction activity in the area has all but collapsed..and it looks like there is going to be another empty airport in Spain, at least for some time...

In the meantime, the Castelló airport has become a sponsor of Villarreal Football Club, that is conducting an excellent campaign. It might not have scheduled flights, but Castelló Airport might well be at the Champions League next year!