Highlights of the annual Airneth conference (& V): low cost carriers ultimate frontier, long haul and connectivity

What is going to happen once low cost carriers become the dominant force in the European short haul market. What's next?

This is precisely the question that two separate presentations by speakers Wolfgang Grimme, of the University of Giessen, and Peter Morris, of Ascend Worldwide addressed.

Mr.Morris covered the topic of low cost long-haul carriers, a product that has not yet succeed in Europe, despite some attempts like that of the bankrupt Hong Kong-based airline Oasis. However, innovation in this area is coming from the Asia-Pacific region, with a number of successful airlines making inroads in long haul low cost aviation, despite the challenges and constraints of this type of operation. Jetstar, from Australia, might be an airline to keep an eye on as it successfully deploys its business model.

Mr.Grimme's presentation focused on different models to operate connection flights within low cost networks. Airlines and airports in Germany (particularly German Wings and Cologne-bonn and Berlin airports) have attempted to develop this concept, with mixed results so far. It seems the two most promising ways for low cost carriers to successfully operate connection flights are

• Operate under feeder agreements for long-haul airlines (such as JetBlue is doing already and Vueling is planning to do with Iberia)

• Facilitate connections when there are multiple low cost inter-hub frequencies.

German Wings tried it...

One of the main challenges when trying to connect between low cost carriers is that many destinations have very limited frequencies and uncoordinated schedules. If there is a network of low cost bases with very dense connections between them, potential connections might arise spontaneously. Once this point is reached, low cost carriers can facilitate these connections: this is what Southwest already does at some of its main bases. In Europe Ryanair has the type of dense network that would allow them to do it too, if they wanted (although I do not think this is going to happen anytime soon!).


...and some Dutch humor to close the conference...!

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.

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...

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.

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!