04-Mar-2016 6:00 PM

Aviation connectivity in Europe: the EU and airlines could learn lessons from the Gulf and Turkey

Analysis

Aviation connectivity is a qualitative assessment and a function of many things. Broadly, and over the longer term, connectivity at a point grows as air traffic grows. This means that connectivity is closely related to economic wealth; each drives the other. But connectivity is also subject to other factors that can both constrain and stimulate it.

In the fragile economic world of airlines economics these include aviation infrastructure, taxation, regulations on market access and airport charges, all of which are influenced by governments. Geography and geopolitical issues also play a part. Related to all of these factors, but also having a separate existence, are airline network strategies.

According to a 2015 ACI report, total airport connectivity in Europe increased by 39% from 2005 to 2015, but this relied more on indirect connectivity (up 51%) than on direct connectivity (up 18%). Indirect connectivity through the Gulf and Turkey has been responsible for much of this growth. Authorities and airlines in the EU have much to learn from the supportive aviation policies and ambitious strategies of airlines in those countries. Instead, there is often a reflex that seeks restraint of more effective models.

Summary

Aviation connectivity is closely related to economic wealth and is driven by air traffic growth.
Factors such as aviation infrastructure, taxation, regulations, and airport charges can constrain or stimulate connectivity.
Total airport connectivity in Europe increased by 39% from 2005 to 2015, with indirect connectivity playing a significant role.
Growing demand for air travel requires sufficient infrastructure capacity, both on the ground and in the air.
Liberal market access and the removal of aviation taxes can boost connectivity.
Geographical factors, government policies, and airline strategies also influence connectivity.

Airport connectivity is correlated with GDP, with two way causality

The ACI Europe Airport Industry Connectivity Report 2015 report defines the connectivity of an airport as the weighted number of weekly flights to non-stop destinations and to one-stop destinations involving flights of the same airline or of two airlines in an alliance or codeshare. Direct jet connections have a weighting of one, while indirect connections are weighted from one down to zero depending on total journey time. Turboprop flights are weighted less than one, even if direct, since they take more time. These are necessarily arbitrary allocations, but there is an element of logic involved.

There is a correlation between the size of a country's economy, measured by gross domestic product (GDP) and its airport connectivity level (see chart below). This highlights the economic importance of having air connections to other countries, since the causality is two way.

Having a wide range of connections facilitates trade and business, in addition to leisure travel opportunities, and this brings economic growth. At the same time, economic expansion increases the demand for air travel and widens the range of destinations that can be profitably connected to a country.

Airport connectivity (2015*) versus GDP (2013)

Aviation infrastructure constraints impede connectivity - and cost half a million jobs

Growing demand for air travel must be met by sufficient infrastructure capacity, both on the ground and in the air. On the ground means not only airport capacity - terminals, runways and aprons - but also surface access to bring passengers and freight to and from the airport (by road and rail). Airport infrastructure constraints in Europe are growing (in contrast with the Gulf and Turkey, for example, where they are being addressed and progressively reduced, despite very high growth levels).

Such constraints reduce the number of possible flights, with a consequent impact on connectivity. According to Eurocontrol, two million flights will be lost to European airport capacity shortages by 2035. More than 20 airports will be capacity constrained for six or more hours a day, compared with three such airports in 2012, adding an average delay of 5-6 minutes per flight. This could cost 434,000 to 818,000 jobs and EUR28 billion to EUR52 billion in EU GDP by 2035, according to the European Commission's Dec-2015 Aviation Strategy document.

Capacity constraints at some of Europe's larger airports have increased their reliance on indirect connectivity. At London Heathrow, for example, total connectivity rose by 51% from 2005 to 2015, but direct connectivity fell by 1% and indirect connectivity was up 72%.

Much of the growth in indirect connectivity at Europe's big hubs comes from one stop connections through hubs in the Gulf and Turkey. This is generally in the public interest, but reliance on the indirect places connectivity in the hands of someone else.

Aviation infrastructure also includes the management of air space. The additional costs related to the fragmented nature of Europe's air traffic control system are estimated at EUR5 billion annually, but the Single European Sky project has dragged on for more than a decade without reaching its goal of implementing a truly unified ATM system.

The European Commission says that the project would triple the effective airspace capacity, allowing significantly higher growth in traffic and connectivity over time. The single sky would also improve safety tenfold, reduce ATM costs by 50% and reduce CO2 emissions by 10%.

Connectivity is boosted by more liberal market access

Restrictions on market access also restrict connectivity. Outside the liberalised European Common Aviation Area, market access is subject to a complex web of bilateral agreements between governments. The new EU Aviation Strategy seeks to increase the number of countries and regions with which it has EU-level air transport agreements that allow more liberalised market access. It also recommends new aviation dialogues with important aviation partners such as India.

These proposed new agreements are generally where growth in air travel is rapid: China, ASEAN (Association of Southeast Asian Nations), Turkey, Saudi Arabia, Bahrain, UAE (United Arab Emirates), Kuwait, Qatar, Oman, Mexico and Armenia.

Relaxing restrictions on traffic rights would provide EU airlines with increased growth opportunities and open up new connections. The markets targeted include all the nations that are home to the super-connector airlines (Turkey, UAE and Qatar).

The removal of aviation taxes stimulates demand

Taxation aimed at aviation, typically in the form of passenger levies, has long been a bone of contention across Europe. There have been some reductions in the UK's air passenger duty, but the continent's airlines are calling for its complete removal. Moreover, they are dismayed by a recent increase in passenger taxes at Italian airports.

The issue has received renewed attention following the launch of Europe's newest airline trade body, Airlines for Europe.

A4E justifiably points to the positive impact on traffic from the removal of similar taxes in the Netherlands in 2009 and in Ireland in 2014. Such taxes add to the cost of air travel and reduce demand in a price sensitive market. This can only have a negative impact on connectivity. Despite widespread awareness of this among Europe's governments, several remain prepared to impose the taxes, well knowing the negative impact on national receipts overall.

Airport charges are part of the cost of travel and affect demand

A4E has also highlighted another contentious issue, namely airport charges, calling for more effective EU regulation of monopoly airports. It cited an Aviation Economics study showing that charges at Europe's 21 largest airports have increased by 80% since 2005, while its airlines have lowered air fares by 20%.

ACI Europe countered that airlines pay below-cost prices for airport facilities, arguing that there was nothing for the consumer or for Europe's connectivity in A4E's agenda.

Whichever side of this debate is adopted, airport charges are an input into the cost of air travel and can influence demand.

Many airlines attempt to absorb increased charges, but may suffer lower load factors or be provoked to make route decisions to cut capacity on less profitable routes - thereby reducing connectivity.

A stark example of this came when Ryanair cut its seat capacity at London Stansted by 21% from summer 2007 to summer 2013 after airport charges more than doubled. When Stansted, under new owner MAG, subsequently lowered its charges, passenger numbers at Stansted jumped by 20% in two years. Ryanair offers 133 destinations from Stansted in 2016, up from 102 in 2012.

London Stansted Airport aeronautical income per passenger (GBP) and passenger numbers (million) 2006 to 2012

Geographical factors can stimulate higher connectivity

Geography can also have a major bearing on connectivity. Island nations such as Cyprus, Malta and Iceland rely on air travel for their links with the rest of the world and this has given rise to a much more developed aviation market than would otherwise be expected for countries with an equivalently sized economy. The earlier chart showing connectivity versus GDP clearly shows that these three countries are above the trend line.

In addition, geographical factors can also influence a country's appeal to tourists, typically because of its climate (Europe's Mediterranean nations benefit relative to its northern nations in this respect), but also due to factors such as natural beauty and other attractions, such as cultural and historical sites.

A third geographical factor is where an airport's location can give it advantages as a hub attracting global traffic flows.The resulting sixth freedom possibilities are an essential ingredient.

Historically, a combination of factors typically accumulated on the back of geography to the establishment of international hubs. Where bilateral market access constraints were severe, larger more powerful countries were able to drive harder bargains on market access, allowing their home airlines much greater leverage than others. These countries too naturally had more substantial third and fourth freedom traffic flows, synergistically helping to reinforce the emerging sixth freedom flows and building the early hubs. At the same time, controls on airline entry reserved most of these benefits to a single national airline, usually government owned (and subsidised).

Yet it was not these major countries that drove the change in the 1970s. Prompted by their flag carriers, they in fact resisted it actively, insisting that all traffic flows should be built exclusively on third and fourth freedom flows. It was only when Amsterdam/KLM and Singapore/Singapore Airlines - each holistically supported by their governments - developed sixth freedom operations into such an art that the larger European airlines were forced to adopt similar network models. It was the "Singapore Inc" model that Dubai first used to formulate its strategy. The expansion of liberalisation helped accelerate this process.

The most obvious modern day European example is Istanbul Ataturk (Turkey sits above the trend line on the earlier chart). Geography has also been vital in the development of the other non-European hubs, Abu Dhabi and Doha. Unlike the UAE and Qatar, Turkey had the advantage of a substantial home market as well.

The ACI Europe report highlights the growth in hub connectivity (the indirect connectivity which is channelled through hub airports) of the Gulf hubs and Istanbul versus the major EU hubs over the past decade.

At London Heathrow, it was up 28%; at Frankfurt, it was up 26%; and at Paris CDG, hub connectivity rose 26% from 2005 to 2015. Contrast these figures with those for the global super connector hubs: Dubai up 418%, Abu Dhabi up 3,249%, Doha up 1,088% and Istanbul up 1,039%.

The top three EU airports still have a much higher absolute level of connectivity than the three Gulf airports (3.3 times in aggregate), but Istanbul now has almost the same level as London Heathrow.

Government and regulatory policy is crucial to connectivity

Many of the factors discussed are influenced by government and regulatory action. Geopolitical events, although not always controlled by governments, can significantly affect demand for air travel (typically adversely). This helps to explain why countries such as Israel, Ukraine and Russia sit below the trend line on the earlier chart showing connectivity versus GDP.

Certainly, economic growth and issues such as infrastructure, market access, taxation and airport charges can be shaped by governments.

The UAE, Qatar and Turkey have been blessed with a natural geographic advantage in developing global air connectivity. But, beyond this, their national authorities have been more proactive in designing policies that stimulate growth in air traffic than most of their EU counterparts.

It is enlightened aviation policies, rather than any alleged direct financial support, that have facilitated the success of the four global super connectors Turkish Airlines, Emirates, Qatar Airways and Etihad.

See related reports:

Turkish Airlines' targets for 2016 display its confidence in spite of unit revenue risks

Emirates Airline: The strategy reshapes in 2016 - partnerships, China growth, smaller widebodies

Etihad raises its Europe profile with codeshares and equity, expanding indirect connections

More locally, EU member states may subsidise routes deemed vital to regional economies, but not commercially viable without government support, subject to competitive tender open to all EU airlines. Most Public Service Obligation routes are domestic and none extends beyond the European Common Aviation Area. In long haul markets, the concept is rare and not EU approved, but may be a possible tool to increase connectivity in critical cases, provided consistent and transparent rules could be agreed with destination countries.

Airline strategy also plays its part

Even when geography or government policy create conditions conducive to connectivity growth, airlines need a strategy to seize the resulting opportunity. Emirates, Qatar Airways and Etihad have done so with notable success, leaving more established airlines in the same region with some of the same advantages, such as Gulf Air, trailing in their wake.

A stark example of the effects of airline strategy exists very close to home. The intra EU liberalisation of the 1990s gave equal market access to all EU airlines, but only the upstart LCCs took advantage of this. Seizing the opportunity means ensuring a competitive cost base, in addition to tapping market demand. As a consequence, Ireland sits above the trend line in the connectivity versus GDP chart almost entirely because of Ryanair.

However, intra EU liberalisation did not open up opportunities in long haul markets, where (particularly to the east) EU airlines were wrong footed by the super connectors. This has been compounded by government and regulatory vacillation.

The interests of EU long haul airlines, and the cause of EU connectivity, would be served by the creation of a more level playing field. This does not mean raising protectionist barriers, which serve no one in the long run (certainly not the consumer or wider national economies), rather the adoption of more supportive aviation policies by the EU and its member states.