Airlines in transition: Hybrid and low-cost carriers push for better airline-airport relationships

See related article: Vueling grows its low cost Barcelona hub role as Iberia Express focusses on Madrid premium traffic

Airlines and airports share collective goals

Mr Cruz stated, "We like to sit down with airports and discuss how we can work together on revenue generation. We know what they want; it's the same (as) we want. We have a good knowledge of our customers that would be valuable to airports. We know what they are willing to pay for, and not, and when. What their mindset is throughout the whole travel process and how they want to use new technologies."

Airports should test new initiatives

He went on to say that airports need to be more flexible. "We need to share and cross-reference data in order to define new products and services passengers are willing to pay for but very few airports have developed product or service flexibility and time to market into their business plans," he said. "From parking to check-in to security to boarding to arrivals, airports must improve service whilst generating additional revenue. In order to do that they must be ready to test new initiatives, and be very quick to implement the successful ones."

One such example that Vueling is pushing for is the use of dedicated gates at airports. "The holy grail for an airline is to have a permanent gate at an airport where we can look at maximising revenue generation and enhance customer service to the travelling public," said Mr Cruz. "We could share new ideas for generating revenues with airports in relation to the boarding process," he added.

This is a refreshing contribution from Mr Cruz and may come as a surprise to those that automatically perceive the 'Ryanair process' (or Spirit in the US) as being typical of budget airline operators; a process that hurries passengers on board for maximum exposure to ancillary sales before they have even sat down while (in the case of Ryanair) inviting them to pass through a hawk-eyed human portal prior to boarding that analyses carry-on baggage in great detail in the expectation it will generate considerable additional revenue at the gate (more than the cost of the human employee involved) from overweight and/or sized bags. Though, to be fair to Ryanair, the airline does encourage passengers to arrive at the airport two hours prior to departure, during which time they can at least spend some money on food and beverage.

Malpensa and Helsinki airports singled out as good examples

Mr Cruz also makes the observation that Milan's Malpensa Airport is notable for the work it is doing about connecting passengers from point-to-point airlines (not necessarily LCCs in this case) while identifying Helsinki as, in his opinion, the premiere connecting airport in Europe: "Smaller but totally built (new terminal extensions) about fulfilling this particular need. Facilities, lounges, spas, short or long connecting time, it's a pleasure to do it via HEL". (Presumably not intended as a pun - it used to be a standing joke that Americans en route to heaven after dying would have to go via Atlanta, such was the hub role of that airport).

Accordingly, it could be argued that the airports that are really pressured to be innovative are those that either have no clear home airline (e.g. Malpensa) or have one that is under severe competition (e.g. Finnair at Helsinki).

KLM set the "buzzword" on airport/LCC co-operation

One of the earliest carriers to work earnestly with airports was an early British LCC, named buzz, a subsidiary of KLM. Buzz used the wrong kind of aircraft and was eventually bought by Ryanair for the princely sum of GBP1 and effectively disbanded.

But one thing buzz did was to define, early in the day (c.1998), a 'fair deal' for working with airports. Buzz was respected by airport operators and tourism authorities alike for offering fair and reasonable terms of trade during a period of very rapid growth by LCCs when they were beginning to realise their own strength (and occasionally abuse it, even then).

Buzz merely sought from its airports:

• Good operational capability (all-weather operation; quick and simple passenger processing; no unnecessary expensive infrastructure; functional efficiency);
• Good passenger services (e.g. buses and trains to local towns);
• A commercial and entrepreneurial outlook and willingness to 'think outside of the box'; an innovative approach to revenue generation; an entrepreneurial approach to market prospecting and a partnership approach, sharing risk and development ideas.

That was pretty much it but it was interesting to note that buzz had already identified the need to share efforts to maximise revenues. With the demise of buzz and its 'reasonable approach', it could be argued that a new philosophy quickly took root, becoming 'everyone for himself' especially where the LCCs were concerned.

Airports have increasing scope for merchandising opportunities

The range of non-aeronautical revenue generators that are open to airports is of course of much greater scope than the ancillary revenue generators that are open to airlines during the duration of a flight but LCCs, led by Ryanair, soon learned how to maximise sales through their websites. It is amusing to note that Ryanair admits that when it revamped its very basic website for online bookings and ancillary sales in 2000 it did not do so with any specific strategic plan in mind; it was testing the waters and did not necessarily expect a positive result. 11 years later the (revamped again) website contains dozens of methods of opening passengers' wallets, some of them having no relation whatsoever to the business of air transport.

Typical airport non-aeronautical revenue generators beyond the ubiquitous fixed retail concession unit and car parking can now include the following examples, among many:

• 'Floating' concession, e.g. 'barrow boy' retailers (including business gadgets on sale near gates of business-oriented flights);
• Online Duty Free shopping, collect at airport;
• 'Personal shopper' while passenger relaxes in full service catered unit;
• Paid entry executive lounges;
• Internet kiosks/Wi-Fi with log-in fees;
• Retail promotion and product placement, e.g. luxury motor vehicle (fixed or floating);
• Static exhibition sites;
• Public viewing gallery with turnstile paid access;
• Television advertising screen concessions;
• Radio station concession;
• Toilet and washroom advertising;
• Toilet and washroom paid entry (deluxe product);
• Creche facilities.

At some airports choices are facilitated (driven?) by walls of TV screens that drive product penetration according to flight destination.

There are other smaller disparate revenue streams such as security services, data, trademark licensing, merchandising and naming rights, meetings and conferences, transport concessions, fast check-in and drop-off charges.

Taking matters a stage further, some airports have come to specialise in more advanced ancillary revenue generation, such as in real estate utilisation and in the somewhat nebulous, grey arena of 'market making', which can encompass such activities as more sophisticated concession, baggage handling and security arrangements. In one notable case at a European airport the management was rumoured to have come to a deal with an airline that agreed not to provide catering on its routes there but instead to receive commission on sales made in the airport's new fast food restaurant - thus providing a stream of revenue from customer to concessionaire to airport to airline - in return for advertising the restaurant facilities onboard and in its relevant advertising.

Grab and Go food and beverage is popular in Latin America

It is clear that there is - for the time being at least - little overlap here between what airports and airlines can provide that would result in overt competition. The main category in which that does occur is catering, now an essential item in most LCCs' revenue mix but one that is increasingly offered by even the most remote and basic airport and which has been the major driver behind the increase in per-passenger airport spend. Concessionaires have even tailored that product to the ultimate low-cost passenger, the one who wishes to spend only on arrival at the destination airport. In parts of North and Latin America for example the 'grab and go' bag is popular, providing a snack meal and a drink for flights with limited or no catering. Often it is the airport itself, rather than a concessionaire, that provides the service. The concept has not yet really caught on in Europe (or Asia), which is perhaps fortuitous for airline-airport relations.

(As an aside it is interesting to note that one of these 'grab and go' airports in Latin America - Lima - also initiated a scheme that brought together the demand for last-minute tickets with those flights that had low loads through dedicated in-airport counters so that both could be satisfied within a two-hour window. This required Lima to co-ordinate fast, efficient service by many different providers at the airport to avoid delays. In many ways the continent leads the field - even if the methods are not always very high-tech.)

As airport retailing become more sophisticated, using high street methods, airlines look to share the proceeds

What have caught on are advances in retailing brought about by the increasing employment of retail industry professionals at airports. High Street methods have been employed that include attractive sight lines, friendly and sales-focused staff, and more mobile displays. Airports have become the new High Street and the target market is receptive because security arrangements require it to arrive earlier at the airport.

Under these circumstances it is perhaps not surprising that Vueling's Mr Cruz should plead for at least a dedicated gate where it can sell products and services that are related directly to it: perhaps surface transport tickets, accommodation and car rental on arrival, rather than fighting against the clock to provide those services on board.

New airport initiatives to support low cost operations and connectivity. Keeping pace with airline changes is complex

CAPA's Airport Investor Monthly looked at a small sample of airport operators to see what had been learned in the arena of budget airline-airport operator relations since buzz laid down its simple principles almost 15 years ago.

The most recent example of a low cost terminal in Europe (and possibly the last?) is 'CPH GO' at Copenhagen. Initially a project arising from an investor group of former airport employees, it was taken over by the Copenhagen Airport management and given the name of CPH SWIFT (later CPH GO) at a cost of DKK200 million (USD26 million). The terminal has a design capacity of six million ppa through six gates. Airlines were expected to manage 30-minute turnarounds and 90% of check-in must be online, through cell phones or at a self-service kiosk.

According to Copenhagen Airport, when, in 2008, the management decided to move forward with its plans to build the dedicated LCC pier, it contacted several low cost carriers in order to get their input on how a LCC pier should be built, which features to include and/or omit. Some of the inputs were:

• Simple processes;
• No jet bridges;
• Lounge boarding;
• Flexible, modular design tailored for type C aircraft;
• Value for money instead of luxury etc.;
• And of course lower charges.

The similarity to buzz's proposals is evident.

So CPH GO was tailored to accommodate the wishes of the LCC, and in return for the simple processes, the omission of jet bridges and general lower building costs the management was able to get a special LCC passenger charge approved by the Danish CAA. The CPH GO charge is approximately EUR3 lower than the regular international charges in the other terminals. There is also a set of "terms of use" for CPH GO. The T.O.U. can be found here. The "no transfer" rule (see below) is being terminated within the next six months.

For the time being the only airline customer at CPH GO is easyJet, but even with only one customer the management regards CPH GO as an immediate success. easyJet has grown significantly at CPH since CPH GO was announced: In 2009 easyJet grew by approximately 60% at CPH, in 2010 the growth was approximately 30% and in 2011 approximately 20%. Exactly 13 months after inauguration the terminal surpassed one million passengers. In a longer perspective the management acknowledges it needs more passengers at CPH GO, but that if, for example, it can get easyJet to build a base at CPH GO in the next 2-4 years it would consider CPH GO a success in the long run.

Copenhagen Airport seat capacity by carrier: 02-Jan-2012 to 08-Jan-2012

Source: CAPA - Centre for Aviation & Innovata

In Dec-2011 Denmark's Competition Council ordered Copenhagen Airport to open CPH GO to transfer activity following representations by some carriers concerning its restrictive terms of use. The management argues that the no transfers rule was introduced to enhance operational efficiency, taking advantage of new EU regulations on differentiated service, and that they had not envisaged it would fall foul of EU competition law. However, perhaps it is more pertinent to suggest that the management perhaps had not fully appreciated the transitional nature of the LCCs that are increasingly adopting the traits of their full service peers.

Cologne arranges budget airline connectivity

Another airport with a track record of catering to airline preferences and especially those of the LCCs, is Cologne-Bonn (CGN) in Germany.

Geographically, Cologne is situated at the centre of one of the most densely populated regions of Europe with 15.5 million people living and working within a 100 km radius. This fact, together with a 24-hour operating licence, motorway and rail connections, two terminals and three runways partly accounts for the substantial growth it has enjoyed. The airport has the largest reserve of take-off and landing slots in Germany, enabling airlines to have a 'free choice'.

The track record dates back to 2002 when Germanwings and TUIfly chose to base their operations there, although TUI has since shrunk its presence. Cologne chose to adapt to the growing demand for budget airline interlining very early on, something of a contrast to Copenhagen.

Thereafter passenger traffic doubled in just five years but it was not just O&D traffic that sustained it. Cologne is also a hub for European connecting flights, with over 100,000 passengers transiting annually. A unique selling point was developed that facilitated interlining between carriers such as Germanwings, TUIfly, easyJet and Wizz Air. (Note that Ryanair does not operate at Cologne and would probably not attach itself to such procedures). It was backed up by a proprietary online flight search facility, a more high-tech version of Lima's desks.

9,850,000 passengers used the airport in 2010, up 1%, but it has been adversely affected by the German Tourist Tax in 2011, to a greater degree than some of its competitors and registered a small decline in passenger numbers each month right through to Nov-2011.

Cologne-Bonn Airport seat capacity by carrier: 02-Jan-2012 to 08-Jan-2012

Source: CAPA - Centre for Aviation & Innovata

Thus for a decade Cologne has been facilitating low cost connectivity, effectively creating a low cost mini hub.

However, that is where it appears to have stopped. According to Cologne's Communications Directorate there is "no current development" concerning cooperation with LCCs. The transit facility still exists but there has been no extension to it. And in any case Germanwings has moved on to full connectivity.

There has always been a high level of retail activity at Cologne, especially in the FBO segment, and at both terminals. After 2002 the contribution from parking, gastronomy and shopping increased by 70% to over EUR70 million. Retail space in the terminals almost doubled. In 2008 the first stages commenced of the conversion of T1 into what Cologne called "a true shopping mall with airport flair" with over 50 shops since 2009. This may partly explain why Cologne was co-opted as a consultant for the development of Sochaczew Airport near Warsaw, Poland - a project that was short-lived following the failure of Meinl Airports.

Bordeaux Airport, Billi's 'simplified services'

Bordeaux Merignac Airport (BOD) in France is the sixth busiest airport in France in terms of passengers. In 2010, the airport served 3.6 million passengers and 4.1 million in 2011. Bordeaux has two terminals, with three halls: A, B, and 'Billi'

Billi is the low cost hall, catering now to easyJet, Ryanair, Vueling and Jet4You, and opened in 2010, situated between Hall B and the cargo terminal. It is promoted as a facility offering "simplified services" and which "has been designed to offer speedy access to aircraft. There are special manual procedures whereby you deposit your hold baggage at the security control point, then access the aircraft via a pedestrian walkway."

One of Bordeaux's biggest attractions was the almost hourly air service to Paris - and the airport remains dominated today by Air France with 60% of seat capacity - but this was threatened in 2008 by the prospect of a two-hourly rail service by TGV high speed train by 2016, which prompted a change of direction by the management in favour of LCCs. But knowing that they would seek simple and inexpensive facilities the management initiated France's first ab initio budget terminal.

Bordeaux handled 4.1 million passengers in 2011, a 12.4% year-on-year increase. Growth was driven by the development of international traffic, which increased by 15.2%. International connecting flights to the major European hubs rather than LCC services showed strong progress - Paris CDG +7%, Amsterdam Schiphol +6.6%, London Heathrow +22%, and Madrid Barajas +65%.

Bordeaux Airport (all Halls) seat capacity by carrier: 02-Jan-2012 to 08-Jan-2012

Source: CAPA - Centre for Aviation & Innovata

Billi means 'Bordeaux Illico' or 'Bordeaux Straight Away'. Initially the system provided was skeletal, but this has now been expanded considerably, as shown in the following video.

KLIA2 promises easier journeys but AirAsia/MAHB relations are strained as AirAsia outgrows forecasts

In Asia there was a flurry of construction of low cost terminals in the mid-2000s, notably at Singapore and Kuala Lumpur as the two battled it out for regional supremacy. At Kuala Lumpur the biggest hurdle to accommodating airline needs has paradoxically been the enormous success of AirAsia. The initial LCCT was constructed effectively for AirAsia, which at that stage was still relatively small and had no pretensions towards connectivity. It was built at some distance from the main terminal building: transferring between the two involved a 20-30 minute landside journey. As AirAsia's model evolved and AIrAsia X emerged, that separation made ad-hoc interlining very difficult. (Singapore's LCCT was also located separately from the main terminals, but is much closer.)

In Mar-2009, as AirAsia's needs were expanding exponentially and low cost activity overall grew rapidly, a decision was taken to build a new LCCT, KLIA2, and the Government allocated over USD540 million to build it as part of a wider USD16 billion economic stimulus package. Those figures quickly became outdated.

Kuala Lumpur International Airport seat capacity by carrier: 02-Jan-2012 to 08-Jan-2012

Source: CAPA - Centre for Aviation & Innovata

Given its critical growth role, AirAsia has inevitably been very prominent in the capacity design of KLIA2 and Malaysia Airports Holding Berhad (MAHB) increased the passenger capacity from 30 million to 45 million per annum at the request of the airline. AirAsia CEO Tony Fernandes believes this would likely inflate the cost of the terminal further from the current USD1.2 billion (MYR3.9 billion), itself an increase from the revised USD631 million (MYR2 billion) estimate in 2009.

Mr Fernandes attacked MAHB on Twitter, where he writes regularly and candidly, condemning the fact that construction costs would double and the terminal's opening would be delayed by more than a year, to Apr-2013. MAHB released letters on its website on 05-Dec-2011 which appeared to show AirAsia had pushed for a fully automated baggage-handling system, said to be the cause of the delay to the new terminal. AirAsia, in turn, denied any request for such a system.

Whatever the facts, this does serve to highlight how far - and how fast - the simple low cost model is evolving and the extent to which airports must jointly play a guessing game with their customers on how the new phenomena can be provided for.

AirAsia's original strategy was to "connect your own bag", i.e. pick it up and check it back in again, but this strategy becomes a moving target, guided both by IT evolution, as for example airlines' reservations platforms become more sophisticated to allow transfer passengers and as the state of the art of terminal design can provide for new opportunities for transfer.

Separately, and in the spirit of Ryanair and its frequent disagreements with airport operators in Europe (e.g. Alicante), Mr Fernandes insists the carrier will not use aerobridges at KLIA2, even though MAHB will construct them at the new LCCT. Mr Fernandes stated, "We are confused why they want to spend so much when the client does not want them. What kind of control is there when there is a global economic outlook issue?" From the airport's side, and given the changing face of the industry, this may be a prudent precaution, as adding them later would be much more costly; but for an airline whose current needs do not embrace bridges, paying for them now is understandably unwelcome. Such are the ingredients of airport-airline co-operation.

Melbourne Airport's Tiger's den

Utilising resources to the maximum became an issue for Melbourne Tullamarine in Jul-2011 during the grounding of Tiger Airways, which established its base at Tullamarine in 2008 in exchange for the airport heavily modifying an old office building to a small LCCT for the Australian division of the Singapore-based group.

Rival Jetstar, wholly-owned by Qantas, is also based at Tullamarine but operates out of the main terminal. Tiger's grounding in Jul-2011, due to safety concerns, ended in Aug-2011 but the carrier is still operating a partial schedule. Nonetheless, Tullamarine is pressing ahead for a new and larger domestic terminal complex, including a purpose-built LCCT.

A fallout from Tiger's grounding is that it has not resumed services from alternative airport Melbourne Avalon and is unlikely to do so in the near future. Avalon, a purely low cost facility owned by a separate company from Tullamarine, is positioned in Melbourne's southwest, further from the CBD and relying on a significantly smaller and almost exclusively leisure catchment. Jetstar is the main operator there, with only a handful of flights, but even before its grounding Tiger had flagged its intention to move some flights from Avalon to Tullamarine.

Jetstar has since followed suit. The only other LCCT example in Australia is at the highly successful Gold Coast Airport, where once again a facility was dedicated to Tiger, although Tiger in Jun-2011 moved to the common terminal, itself resembling a LCCT, given the leisure nature of traffic there.

Plotting a future for airline-airport coordination and connectivity

In summary, is Mr Cruz's wish a hopeless one, or is evidence emerging of 'deep and long lasting relationships between airlines and airports' in the common good? Based on these few examples the answer appears to be - slowly, at best. There is clear room for improvement.

While airports such as Malpensa and Helsinki have already done enough to impress him, many others have failed to balance their needs with those of the airlines, or have started off well then taken their foot off the pedal. Copenhagen does at least seem to have discussed features with the airlines, while Cologne Bonn certainly did - but then appeared to let such cooperation slide, failing to capitalise on the early work done on professionalising the mainly budget airline transit facilities and failing to come to grips with the non-aero revenue conundrum, where cooperation is in very short supply.

A similar path appears to have been taken at Bordeaux where a very limited non-aero revenue generation offer at first was subsequently replaced by a very comprehensive one.

KLIA is meanwhile an excellent case study of the dynamics of a fast evolving airline industry and of the complexity for an airport in balancing cost effectiveness and risk with the need to accommodate its fastest growing customers. And, as AirAsia acquires a share in Malaysia Airlines - and the flag carrier in turn becomes welcomed into oneworld, along with probably a much closer relationship with British Airways/IAG, which could lead to a greater full service hub role for the airport - the complexity will not evaporate. Understandably in these conditions there is ample room for discord.

Perhaps Mr Cruz is instinctively right. A softener in the process of change is to concentrate more on the potential synergies in mutual areas of interest such as retail and other merchandising. That may well allow both sides to focus more on the upside and less on the differences.

On both sides of the equation there is still plenty of work to be done to achieve Mr Cruz's Karma goal.

Mr Cruz will be among 30+ CEOs speaking at the Airlines in Transition Summit in Istanbul on 19/20 April 2012. It will be the biggest ever joint gathering of low-cost and full service airline CEOs, held in the spectacular setting of Turkey's premier venue, the Ciragan Palace Kempinski, right on the shore of the Bosphorus. We are inviting leading CEOs to discuss the issues of convergence of the different airline models and how they can work together, as well as with airports. Click here for more information.