Why Europe’s airport hubs are under threat and why its major airlines are worried too
Industry change will influence the nature of economic regulatory oversight of airports in Europe. Asian traffic growth and Middle East airline expansion will exceed European airports’ capacity to retain their hub roles. If they are to avoid becoming marginalised, Europe’s airlines may have to reconsider their attitudes towards aeronautical charges.
In opening this debate I want to set some high-level parameters which can perhaps be used as touchpoints for discussion. I would also like to add an Asia Pacific dimension to the debate, because I believe the impact of that region and the Middle East will have a much more substantial impact on long-term planning than most believe.
I won’t try to resolve any of the fundamental regulatory issues, but I want to try at least to set out some of the key points that need to be addressed.
The underlying issue is: What is airport competition? Does it exist? It used to be assumed that airports were largely immune to being challenged by others. But if you need any evidence that things have changed, look no further than the huge success of the “Routes” and similar conferences. Airports flock to those aviation bazaars to sell their product to any airline that will listen. If there wasn’t any competition, why would they bother?
The fact is three major changes have occurred and fairly rapidly:
- new airline models,
- new long-haul aircraft types and
- market liberalisation.
Each delivers competition a much wider scope. Previously, regulated access to international markets protected airlines but, in doing so, also protected hub airports, while at the same time preventing or limiting access to other airports. That meant the whole aviation industry was gridlocked as far as competition was concerned.
Today, airlines have plenty of route options. Translated into airport language, that means competition. Most, especially second and third-tier airport operators, now really have to fight for a living. That means capturing and retaining airlines. The tools at their disposal are limited. If they are not immediately attractive, the only cosmetics they can use to improve their appeal are concessions on charges and marketing support. Of course, this also means that opportunities are there that weren’t before, all part of making up a new risk profile.
One size does not fit all
So my first premise is: just as the airline industry is changing and creating different – and sometimes extreme – pressures, so the regulatory process must also adapt. I argue it should also recognise that those pressures are different for each airport, that it needs to differentiate; no one-size regulation fits all.
The next step is the process. For example, who is responsible for regulating and how? This can be a can of worms, as numerous bodies can influence the financial wellbeing of an airport, from local planning authorities, generic competition bodies and more specific airport regulators. Then there is, for EU states, the frequent disjunction between Brussels and local/national administrations.
The starting point should really be: What is the overriding reason for regulating?
That simple question should, by definition, indicate which force has the most important influence over the nature of the regulatory framework. The answer is not so straightforward.
In some recent advice we provided to a major Asian government we suggested that the airport regulatory model should address the following main objectives:
- Protect the interests of the consumer;
- Support efficient use of existing airport assets;
- Encourage investment in new and appropriate infrastructure to support the growth of the sector;
- Provide transparency and certainty to stakeholders;
- Be relatively straightforward and inexpensive to manage.
With that introduction I would like to address two quite different regulatory priorities: those for (1) local/regional airports and (2) hub airports.
Regulating at airports where local traffic dominates
For Europe, and others, the importance of wider issues such as local regional development are surely important factors – the supra-consumer needs. As soon as that becomes a consideration, it often brings into play conflicting priorities. These can include stimulating local employment and tourism and business interests. Once you introduce those elements the equation becomes much more complex.
I have emphasised – as if it were not obvious – the rapid changes to the airline industry. These convert immediately into an elevated risk profile for all airports, large and small alike.
The UK’s original approach, with its three levels of regulatory intervention, recognised to some extent the different forces facing smaller airports, by applying a more relaxed regulatory attitude in those cases. This is relatively uncontroversial now, at least where increases to charges are concerned. The issue of pricing discrimination is much more controversial but arguably a more relaxed regulatory approach should be adopted here as well.
Hub airport regulation, the need for a long-term vision
Very different considerations come into play at Europe’s major hubs. Competition here becomes a global matter.
As pointed out in ACI-Europe’s recent report, “Meeting the Capacity Challenge”, EUROCONTROL forecasts suggest a shortfall of 11%-25% of European airports’ capacity to meet air service demand by 2030. This converts, says ACI, to somewhere between 19-39 airports becoming “fully saturated”.
The shortfall will almost certainly be felt most painfully at hub airports.
In brief, there is a temporal issue evolving. By definition, a producer of goods or services has market power when barriers to entry effectively prevent or severely limit the ability of other producers to enter a market. This therefore indisputably places airports in an extremely powerful position vis-à-vis airlines. Nowhere is this more accurate than at these large airports.
But that is a here and now situation. Looked at over a period of 20-25 years, the time horizon for airport capex planning, the risk of competition grows markedly, a feature which any national planner should be aware of.
Europe’s Scylla and Charybdis
Europe’s main hub airports are becoming caught in a pincer movement – between the inability, on one side, either to be permitted to invest in or to be able to afford new capacity and, on the other, the rising power of the Middle East airport hubs, where capacity over the next two decades – at least - will match, or exceed, capacity. That is an issue not of economic analysis, but of previewing a likely future scenario. Accounting for aircraft orders and accumulated air travel forecasts point to a greatly changed aviation system 10 years from now.
Last year, 2009, Asia Pacific markets generated higher passenger numbers than North America for the first time. Those markets are expected to grow at near-double-digit rates annually for the next decade. Europe’s are currently stagnant and projected to expand at around 3-4% annually, off last year’s reduced base.
In other words, the largest growth points will be out of Asia. China alone is expected to generate 100 million tourists by 2020. The world is about to change dramatically and I really don’t think many have realised it yet. Emirates Airline has for sure - and that is why its CEO is saying that 90 A380s will not be enough to accommodate its needs, not to mention the dozens of other aircraft orders it has outstanding.
My final point is that this is not just an issue for airports. It puts airlines in a difficult position too. If the necessary capex is not injected into the major hubs in Europe and many secondary airports, that same capacity shortage will become a major problem for the airlines too, as their hub capacity shrinks. This is not today’s regulatory problem but it is certainly tomorrow’s.