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What do LCCs want of airports? How airport-airline cooperation can accelerate regional growth

Asia’s low cost airlines have had to fit into existing – and often irrelevant – infrastructure to prove themselves. In the early 2000s, low cost airlines in Asia were regarded on a scale between foolish and bankrupt-inducing.

In the early days of LCC growth Singapore Airlines confidently predicted the early demise of the genre. Today LCCs account for 60% of all seats in Southeast Asia. Now SIA even has two LCCs in its group, including a long haul operation, Scoot, that is in the vanguard of widebody LCC flying. Scoot is also now taking over routes from full service sister Silk Air.

LCCs are here to stay. And they have specific needs from airports that typically were constructed to fulfil the requirements of full service airlines. That is inhibiting growth and the accompanying regional economic development. A CAPA conference in Sep-2015 attracted major LCC and airport CEOs to review common goals.

A version of this report appeared in CAPA's Airline Leader #A32; please visit AirlineLeader.com

There can be no question not just of LCCs' right to exist, but of their core role in today’s industry

LCCs account for 60% of intra-ASEAN flights and have opened city pairs not flown by full service airlines. They have not replaced the opportunity of full service counterparts but have grown beyond what FSCs could achieve; LCC growth rates can be higher than that of FSCs.

Instead of squeezing into the parameters set for others, LCCs want the sector to adapt to them – rather than accepting the standards that were developed over decades around full service operators with very different needs. LCCs now command the size and scale to justify it, and offer proof of how they can jump start growth for a cooperative airport. This is not just a case of airports changing to benefit airlines but changing to ultimately benefit themselves and their region.

LCCs that can reduce costs can stimulate growth, increasing throughput for an airport. Smart terminal design means airports secure a higher return on capital. In case there are doubts of the benefits being two sided, airlines and airports can form agreements whereby an airport’s change in facilities or fees will be met with higher volume.

The equation seems easy enough. Airline-airport partnerships are rampant in Europe and elsewhere, but in Asia are only just beginning to take up. For the region’s largest international LCC operation, AirAsia, spearheading low-cost airports and terminals has become a calling.

AirAsia Group CEO and founder Tony Fernandes addressed CAPA’s LCC Airports Congress in Bangkok in Sep-2015 to explore the topic. Shy of his usual jokes, Mr Fernandes said he was giving one of his most important presentations as he sought to elaborate the ideal conditions for LCC operations. Infrastructure that matches an airline’s needs, argues Mr Fernandes, will fuel growth.

AirAsia may be the largest and most vocal, but it is not alone. A number of Asia’s other LCC executives – HK Express’ Andrew Cowen, Jetstar Asia’s Barathan Pasupathiand, Thai AirAsia’s Tassapon Bijleveld and Tigerair Taiwan’s Kwan Yue – were also on hand to state what they need.

Their wants are similar but not always identical. Where they are united is in needing airports to listen to them. So, what do airlines want?

Addressing the needs of LCCs requires first acknowledging their differences

Not every hotel is a Shangri-La; not every car is a Rolls-Royce. Limiting those two sectors to those costly brands would sharply reduce output. Carrefour and Wal-Mart are like LCCs, built on a volume proposition.

There is a scale of airline types from full service to low cost but airports tend to follow what they think is the full service approach, even if it does not meet the needs of full service airlines, let alone LCCs.

The biggest offender according to AirAsia is ironically its home base, KLIA2. This “low-cost” terminal at Kuala Lumpur features jetways and a complex baggage system that AirAsia maintains it did not want, even though it would have to use. What KLIA2 owner MAHB achieved is difficult to say: the project was greatly over budget and delayed. Mr Fernandes did not shy away from addressing his fractured relationship with MAHB, or extolling a number of airports – not KLIA2 – that have partnered with AirAsia, to varying degrees.

In an appendix to his presentation, there was even a slide about “Hong Kong’s Initiatives to Support Aviation Growth”. Some of that city’s operators may find that title oxymoronic, but it shows the point Mr Fernandes has about the opportunity MAHB lost.

Airports need to avoid falling victim to the "edifice complex"

There is always a struggle between the iconic wishes of governments and the basic practical needs of airlines and passengers. This is occurring in what will be Asia’s – and the world’s – largest airline and LCC market: China. The rate of new terminal and new airport construction is actually beyond comprehension for most. Yet the facilities tend to follow the same approach of sweeping, airy and high volume designs that render nicely on politicians’ mock ups.

Airlines are becoming frustrated. Even for full service airlines the facilities are often excessive and costly. But with each province in China competing with the others and attention at the central government level, they want to show a gleaming terminal – not a “cheap” facility.

There are signs of change. Shanghai is considering a third airport for the city which could be low cost focused, but what exactly this means is some time away. More immediately, Spring Airlines – China’s largest LCC – is fighting many small fires for its renovated Shanghai facilities. These will be basic compared to other LCC infrastructure examples, but relatively revolutionary for China.

Part of the challenge is also the limited exposure of key decision makers to global standards, with only top level management having international travel and experience, but this is still limited. It is naturally the high cost suppliers that can market themselves best. Creating low cost infrastructure requires more fundamental acceptance of the needs and the ability to assert what is needed.

Mr Fernandes made clear what AirAsia wants. There are few surprises. Jetway-free operations mean faster turnaround times for AirAsia, which benefits the airport if the airline can reduce unit costs and thereby push through higher passenger volumes. There is an immediate benefit to the airport: more aircraft can be parked on an apron without jetways, thereby increasing return on capital.

A centralised waiting area reduces space at boarding areas that go empty in between flights. For airports, it means being able to cluster shops – an efficient design – and then keep passengers in that area. (Hence some full service airports have done as such and announce the gate only about an hour before departure.

LCCs can produce passengers that spend more at an airport than FSC passengers: limited onboard options mean more food and retailing is conducted at the airport. Early check-in cut-off times mean passengers spend more time at the airport. Mr Fernandes says the McDonald’s at KLIA2 is the highest grossing one in Southeast Asia.

Self-service takes costs out of the airline and reduces space an airport needs to allocate for procedures like check-in

LCCs have driven much of the technical innovations of recent years. Allowing home printing of boarding passes – and even bag tags – is on Mr Fernandes’ wish list.

Whereas Ryanair introduced bag fees to dissuade passengers from having checked luggage, for AirAsia bag fees are a typical ancillary, not behaviour-changing tactic. Markets are different. Bag fees are AirAsia’s single largest source of ancillary revenue, accounting for 56% of ancillary revenue in 1Q2015. So checked baggage will be a matter for AirAsia and its airports to contend with for the foreseeable future.

To handle checked luggage, AirAsia wants simple and manual baggage systems. Its old low cost terminal had check-in counters along an exterior wall. The counters were grouped by departure city. Bags travelled a few metres before reaching the airside area and destination-specific trolleys waited outside. Once check-in closed, the trolleys would be brought out to the aircraft – or rather, the stand where the aircraft would be: the bags would arrive before the aircraft. There was no complex maze of conveyor belts where late bags risk arriving after an aircraft, as is now the case at KLIA2.

Self-service check-in, AirAsia argues, is good not just for the airline and airport but makes today’s modern and hyperactive traveller happier; it is a faster and more efficient process. Security should take on the same approach, facilitating e-passports and facial recognition. Speedier security makes for a more pleasant experience – contributing to passengers being more willing to increase their travel propensity if journeys are pleasant and painless, not the subject of rants. Faster security also means passengers are in shops for longer.

These are the initiatives that airlines control most directly. But airports need to work together with them

Ideally airports should become parts of teams that work with airlines and government agencies to make travel easier.

AirAsia is a strong advocate of ASEAN, the grouping of Southeast Asian countries that is probably little known outside the region. ASEAN is moving towards an open skies regime among its members.

A borderless, Schengen-style community may be some time away from replicating in Asia, but Mr Fernandes wants to see an ASEAN visa. A visitor from China and India – two countries with nearly 2.5 billion people and growing trips per capita – may need multiple visas to hop around ASEAN. This is strong disincentive to multiple country visits.

ASEAN in general needs promoting in Mr Fernandes’ view. He has even painted an aircraft in an ASEAN livery; no European airline has a Schengen livery! Instead of focussing on the fragmentation of Asian nations, the ASEAN identity can focus on what is common, building links. That increases reasons to travel and breakdowns barriers not to.

Low cost terminal or airport success may be found in surprising places

On one hand, AirAsia’s home airport has – in the LCC’s view – failed. There are pleasing projects emerging from what many would describe as the antithesis of low cost: Japan, where service is legendary and even the train cushions – and other objects that can be sat on – are heated.

Ibaraki Airport, some distance outside Tokyo, is a low cost airport. Its bigger peers are matching their long running full service terminals with low cost offerings. Osaka Kansai and Naha Okinawa lead the way, mostly at the direction of Peach, the first of Japan’s new LCCs.

Tokyo Narita in 2015 opened its own low cost terminal. It may be the nicest low cost terminal ever, and nicer than some full service facilities too. More costs could have been taken out (free standing air conditioners are covered up by short screens with faux foliage) but it was relatively revolutionary for Japan. A wayfinding design based on a racetrack system gained the terminal international attention.

The majority of Narita’s low cost capacity uses the LCCT. But in terms of operators, Narita got the big LCCs to move over while the smaller ones stayed elsewhere; there are more LCCs operating out of the traditional terminals than from the LCCT. They have yet to be convinced of the cost-benefit.

CAPA will hold a North Asia LCC Summit in Tokyo on 6/7-Jun-2016.
For details, please contact events@centreforaviation.com

In addition to supporting the local operations of Peach and Jetstar Japan, Osaka Kansai has made an arrangement with Spring Airlines to establish a hub at Kansai for flights from China. Kansai was quick to realise and act on the rapidly changing dynamics of Chinese outbound tourism. For Chinese flights, the landing fees are almost irrelevant; the airport relies on Chinese passengers who need no prodding to visit duty free. But this raises another issue.

While an LCC – say Spring or Ryanair – may benefit from reduced charges because the airport is banking on duty free spend, such goods need to be brought onboard. Ryanair has made commercial arrangements with airports so passengers can bring duty free purchases onboard without violating carryon regulations. The current issue with Chinese flights takes on larger scale: for Chinese flyers the big selling items are rice cookers.

The airline-airport relationship cannot be viewed only between those two players. There are numerous other parties in the mix

Airlines and airports may have aligned or varied interests with them. Such parties can become leverage for one side negotiating with the other (an airline and ground handler asking for more buses), or an annoyance (air traffic control) for both airline and airport.

An issue can be that there are too few parties involved: for HK Express CEO Andrew Cowen, a bigger concern than having a low cost airport or low cost terminal is monopoly or duopoly service providers that limit cost savings and differentiated service offerings.

Ground handlers may have their own shortages. Labour across Asia is not as plentiful as it might seem. Hong Kong airport has trouble attracting workers who could take a job driving trucks to mainland China, or engineers who could work elsewhere instead of the relatively remote airport where work hours are unsociable. 

Tigerair CEO Kwan Yue said he has a route where there are slots and traffic rights to support frequency growth, but its ground handler does not have enough staff to support the flight. There is a shortage of immigration officers, and this can become a protectionist ploy with an airport permitting a flight to land but not have the passengers processed until “normal” immigration hours.

Thai AirAsia CEO Tassapon Bijleveld remarked how when he adds flights, some airports treat it as an inconvenience; they have forgotten their core objective. But this lack of alignment between regional, economic and social needs with an airport which may be municipally run is an all too common feature. The AirAsia Group is rolling out connecting flights at select airports. Being a hub is the objective for many airports, yet some airports cannot necessarily be bothered with supporting the airline to bring in more passengers.

Airports like Taipei Taoyuan and Hong Kong may have very little, if any, differentiation in service charges for jetway or remote stand use. This gives an airline little incentive to relieve an airport of not using a jetway.

Governments come into the mixture. Air traffic under-performance is a universal complaint; in some parts (China) its inefficiency is blocking what would otherwise be explosive growth. More basically, ATC delays reduce on-time performance, hurting airlines but also passenger perception of air travel. Aeropolitics is a factor, not just for traffic rights but third country codeshares.

Singapore’s openness has allowed Emirates to partner with Jetstar Asia at Changi (Jetstar has 31 other codeshare/interline partners).

It is perhaps telling there was little debate at the conference about whether to have a low cost airport, a low cost terminal or mixed facilities to accommodate all types of airlines

It is probably an unfortunate testament to how nascent this sector is. While the Asian LCC sector may have been coming late to the party, it has the benefit of examining the longer history of LCCs in other markets. The push from easyJet and more recently Ryanair to attract the corporate segment has airlines asking if they should commit to low cost facilities if their passenger mix will change considerably in the future.

Few airlines are willing – or have the volumes – to act on a ground proposition the way AirAsia has. Initial steps for smaller carriers seem concentrated on making use of existing facilities but doing so in a more efficient manner. HK Express wants to see differentiated charges based on the time of the day, which will help airports use off-peak slots.

Tigerair Taiwan talked of an experience at one airport where night services would be more expensive since the airport had few services running at that time; the airport missed the opportunity to swallow initial overhead costs to lure in other operators. 

Acknowledging LCCs is the first step to realising an airport has not a problem, but a solution

Airports and LCCs are aligned in each wanting passenger volumes. On a like-for-like basis, an LCC aircraft will have more seats and a higher load factor than on a full service airline.

Funding airports, however, is a controversial area and airport managers do not always see eye-to-eye with airlines. Airports may have concession contracts stretching out years or decades; airlines want to know charges this year and next. There are different horizons for investors to fetch a return. Suggestions are it is not simply low cost or full service passengers that whet their appetite, but rather what the catchment area and potential to grow is.

As LCCs are showing, the right partnerships can quickly change that. Few expected Japanese airports to boom suddenly because of Chinese tourists. Yet, even in relatively mature markets, growth can be stimulated: easyJet and Ryanair have done deals around the London airports to boost throughput in exchange for lower charges. The mantra is: today’s price stimulates tomorrow’s growth.

Airlines see Asia’s airports starting to become more savvy at marketing. Airports have to switch from relying on their city to sell airlines to, instead marketing why they are different and what the larger area – government, tourism bodies – offers. In Europe, airports are partnering with each other to develop new routes for airlines. In Asia, where one organisation may own numerous airports, a partnership with a similar organisation could create significant new traffic flows.

One example of a lost opportunity for partnership is where airlines and airports replicate duty free services

An ASEAN visa would make a massive difference to intra-ASEAN travel

AirAsia is a strong advocate of ASEAN, the grouping of Southeast Asian countries that is probably little known outside the region. ASEAN is moving towards an open skies regime among its members.

A borderless, Schengen-style community may be some time away from replicating in Asia, but Mr Fernandes wants to see an ASEAN visa. A visitor from China and India – two countries with nearly 2.5 billion people and growing trips per capita – may need multiple visas to hop around ASEAN. This is strong disincentive to multiple country visits.

ASEAN in general needs promoting in Mr Fernandes’ view. He has even painted an aircraft in an ASEAN livery; no European airline has a Schengen livery! Instead of focussing on the fragmentation of Asian nations, the ASEAN identity can focus on what is common, building links. That increases reasons to travel and breaks down barriers inhibiting it.

A focus on cooperation and common objectives will lead to mutual benefits

Combining goals and objectives  between airports and airlines is made difficult thanks to their often limited – or fractured – relationships. Cooperation may be a long term outcome of better education and understanding and approaches towards LCCs.

For airports, winning airline hearts means winning seats. That is, provided the airport wants more throughput. Sadly in many cases, airport operators are not always focussed on that goal. Now however, the economic benefits to regional development are increasingly influential, even on formerly passive municipally operated airports.

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