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Super Connectors: Traffic Stimulation or Diversion?

I feel it is time to weigh in on the discussion regarding the role and impact of the three relatively new full service airlines based in the Gulf – Emirates Airline, Etihad Airways and Qatar Airways – and the older Turkish Airlines: the so called ‘super connectors’. A few incumbent airlines, initially those based in Europe and more recently a few based in North America (first in Canada and then in the US), have voiced strong opinions about unfair competition, particularly relating to the rapid expansion of the three Gulf-based carriers.

After reviewing some historical data for the past dozen years on passenger traffic and airline services (destination, frequency and average fares), it seems that the increase in competition has benefitted the consumer by providing access to more and diversified services (more destinations and higher frequencies, for example) and in some cases at lower fares, not to mention the often reported contribution to ‘innovation, product quality, and service standards’.

First, to put in some perspective, let us see how big the super connectors are on a worldwide basis. Although they have grown at a rapid rate during the past dozen years, on a worldwide basis their share of the global passenger traffic was still only about 7% in 2014. On the other hand, while their market share on a global basis is still pretty small, in some regions their market shares have become more significant. For example, during this period, between Europe and the Indian subcontinent and between North America and the Indian subcontinent, the super connectors doubled their market share from about 20% to 40%.  However, not only did consumers have more destinations and more frequent services, the average directional fare charged by incumbent airlines decreased by about 25% between Europe and the Indian subcontinent and about 15% between North America and the Indian subcontinent between 2003 and 2014.

Was the traffic carried by the super connectors in these regional markets stimulated or diverted?  In the Europe to the Indian subcontinent region, the super connectors transported almost twice as many passengers in 2014 compared to the incumbent carriers.  However, both groups transported more traffic than they did in 2003, presumably, as a result of lower fares and more services.  Similarly, in the North America to the Indian subcontinent market, the super connectors transported a few more passengers than the incumbent carriers, but both groups increased the amount of traffic they transported between 2003 and 2014. Therefore, new competition stimulated the total market, producing more passengers for both groups in each region, showing stimulation rather than diversion.

Let us look at a more specific market within Europe and the Indian subcontinent region, travel between various gateways in the UK and various gateways in India.  In 2002, British Airways provided non-stop service from London Heathrow Airport to four destinations in India (Chennai, Delhi, Kolkata, and Mumbai) and connecting service in 24 markets, for example, between Newcastle and Kolkata and between Manchester and Chennai.  In the same year, Emirates served 16 markets with connecting service through Dubai (Birmingham, London’s Gatwick and Heathrow, and Manchester in the UK and Chennai, Delhi, Hyderabad, Mumbai, in India). 

In 2014, British Airways served five markets with non-stop service from London Heathrow to Bengaluru, Chennai, Delhi, Hyderabad, and Mumbai and provided connecting service in 35 markets. Emirates, on the other hand served 60 markets with connecting service through Dubai. So, passengers travelling from various gateways in the UK to various gateways in India had access to 44 markets in 2002 and 100 markets in 2014.  As for frequency, it increased from about 60 per week to about 160 per week!

Fare levels have been made more competitive too. In 2002, Emirates introduced considerably lower fares, based on the average, between the four airports served in the UK and the four airports served in India and continued the lower fare strategy through 2014 when it served six airports in the UK and nine in India.

This delivers enormous benefits for passengers in low density markets. Passengers can now fly from Newcastle in the UK, to cities such as Cochin in India, with a single connection in Dubai. See the network chart drawn from OAG data for services offered during the first week of Oct-2015.  It is true that the super connectors may have only reduced their fares for connecting services when competing in markets with non-stop service and kept the fares the same or even increased the fares in markets where both type of carriers provided connecting service, but there is now more service and passengers have options. 

From this limited analysis it appears that the entry of full service airlines based in the Gulf, and the expansion of Turkish Airlines has had a positive impact on consumers – more services, more options, and lower fares, in general.  These new competitors have also changed the landscape in other regions. The breadth of service provided by Emirates, for example, between Africa and the Asia Pacific region is truly impressive.  See the chart, also drawn from OAG data for the first week of Oct-2015. 

In the first week of Oct-2005, Emirates connected 10 airports in Africa with 23 airports in the Asia Pacific region. By the first week of Oct-2015, Emirates provided connecting services from 20 markets in Africa to 40 markets in the Asia Pacific region. Again, people can now fly conveniently between, say, Brisbane in Australia and Luanda in Angola. Looking at the schedules on 09-Oct-2015 for travel on 19-Oct-2015, itineraries vary from service on three airlines involving three connections (in Singapore, Bangkok, and Addis Ababa) taking 45 hours and 45 minutes to service involving one carrier (Emirates) with one connection (in Dubai) taking 26 hours and 50 minutes.

From this limited analysis it appears that the entry of full service airlines based in the Gulf, and the expansion of Turkish Airlines has had a positive impact on consumers – more services, more options, and lower fares, in general.  These new competitors have also changed the landscape in other regions. The breadth of service provided by Emirates, for example, between Africa and the Asia Pacific region is truly impressive.  See the chart, also drawn from OAG data for the first week of Oct-2015. 

In the first week of Oct-2005, Emirates connected 10 airports in Africa with 23 airports in the Asia Pacific region. By the first week of Oct-2015, Emirates provided connecting services from 20 markets in Africa to 40 markets in the Asia Pacific region. Again, people can now fly conveniently between, say, Brisbane in Australia and Luanda in Angola. Looking at the schedules on 09-Oct-2015 for travel on 19-Oct-2015, itineraries vary from service on three airlines involving three connections (in Singapore, Bangkok, and Addis Ababa) taking 45 hours and 45 minutes to service involving one carrier (Emirates) with one connection (in Dubai) taking 26 hours and 50 minutes.

Based on this brief analysis, there does not seem to be any evidence of diversion on a regional basis. It is true that the traffic gained by the super connectors has been higher than the traffic gained by incumbent carriers in most markets.  However, competitive carriers have been able to maintain, and in some cases even increase, their market share. Take a look at British Airways.

Deploying innovative strategies and leveraging its global hub strength, it increased its non-stop service from London Heathrow from four destinations in India in 2002 to five destinations in 2014 while charging a premium fare relative to the super connectors and benefitting from the overall growth in the market. 

The intriguing possibility is that whether an incumbent loses or gains market share may depend on whether it is reactive or proactive in its strategies to leverage its network, on its own or with partners, in the face of new competition.

The super connectors will continue to expand based on the growth in emerging markets (leveraging their geographic location and the enormous catchment area) as well as their new initiatives – for example, Emirates’ potential to acquire lower capacity widebody aircraft and move to the new Dubai World Al Maktoum facility – the world’s biggest international airport.