IATA: The Competitive Reality in the Aviation Industry

A newly produced study by IATA's Economics team (pdf) reminded me that not all sectors of the aviation value chain face a similar competitive reality. This study is part of our preparations to discuss with the European Commission the need for stronger regulation of Europe's airports.

Over the last decade air fares in real terms have fallen significantly. Surviving cut-throat competition meant a relentless search for efficiencies. But over the same period, airport charges increased. The clearest example is in passenger charges at European airports. In 2006 the average was EUR 16 per passenger. By 2016 they had risen to EUR 33. Even through the global financial crisis, airport charges rose unabated-a clear sign of very strong market power.

In my experience, many smaller airports are hungry for business. But Europe's larger airports know the powerful combination of an attractive home market and connection traffic. They are "must-serve" destinations for many airlines. The experience at the airports in-between in size is mixed. They may have a solid home market to back them up, but without significant transfer traffic they may not be a part of the "must-serve" club.

I have also seen how the airport relationship with its airline customers can evolve. Airports of all sizes know that their airline customers are not footloose and fancy-free once they have invested in a destination.

There is a lot of inertia preventing an airport switch. To start, the costs are high. Developing a profitable route takes time, particularly if it is part of a global network. And passengers will likely not switch with you. If, for example, an airline wanted to move operations from Rome-Fiumicino to Rome-Ciampino it would be basically starting from scratch. And in many cases the discussion is only theoretical as finding a slot and terminal capacity at most European airports itself a big challenge.

You might be asking yourself, why should anybody care about this? Airlines just need to sort out their relationship with their airport partners. True. But the discussion is not on equal terms. And European travelers are paying the bill. The rise in airport passenger charges over the last decade cost people who flew in Europe a collective EUR 50 billion. That also impacts the competitiveness of national economies. That's why governments need to pay attention and play a much stronger role.

We are not advocating a one-size fits all solution. Recognizing the airports are critical infrastructure the International Civil Aviation Organization (ICAO) developed some common-sense principles for airport charges. Charges should be related to costs. They should be transparent and non-discriminatory. And both investments and charges should be agreed through meaningful consultation between airports and their airline customers.

All airports should be guided by these principles. Many smaller airports seeking to attract traffic follow ICAO principles as a means to building their business successfully. But the more market power airports have, the more the principles need a watchful eye and the support of regulation.

It is not a conclusion that we come to easily. Living in a competitive world, we have seen the power of market forces drive cheaper and more efficient air travel. But Europe's largest airports are marching to their own tune. And consumers and national interests need to be protected by regulation that will act as a proxy for competition that promotes cost-efficiency.

Of course, regulation needs to be applied proportionately. For many middle-sized airports the pragmatic solution is to support the ICAO principles with requirements for improved transparency in consultations. And to balance the market-power advantage that airports have airlines need a body to appeal their case when consultation does not produce a mutually agreeable result.

Of course, the study goes into these arguments in great detail. And, in reviewing the Airport Charges Directive, regulators will have the difficult task of balancing a passionate discussion on what is revenue for airports but costs for airlines and their passengers. There is, however, a killer fact. In real terms, airport passenger charges increased 120% in the last decade. And the real cost of travel dropped by 8%. Something needs re-balancing.

Source: IATA Blog

Author: Alexandre de Juniac