Term Paper: Deregulation in the European Airline

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[. . .] Since the earnings per passenger is quite low, these airlines depend heavily on passenger traffic and frequency of services on profitable routes. There is also a compulsive need to keep costs down to as low as possible to protect the companies' bottom-line figures. It is evident that large airline companies can be more competitive on these critical factors and hence edge out the smaller ones and new entrants. According to a study reported in 2003, only two or three airlines, may survive in the long run in the low cost airline market. (Riley, 2003).

Hub and Spoke system:

Another major transformation in the logistics of airline transport after de-regulation was the development of hub and spoke system. This model offered many advantages to the passengers as well as the airlines. A hub port is a central airport, which is strategically located to serve several airports, called the spokes. The hub would serve as consolidation and transfer point for passengers, from where they could proceed to their final destinations by another plane. The typical hub flight would transport passengers traveling in the return direction to the location from where it came from. Hub and spoke systems are popular for their convenience, higher frequencies and lower cost per kilometer for the passenger. European Union has quite a few hub ports where large airlines dominate the flight schedules and operate long haul services on a regular basis - KLM at Amsterdam, Lufthansa at Frankfurt and British Airways at Heathrow. For instance, passengers flying from the south Asian countries to Sweden could travel on a Lufthansa flight to Frankfurt, from where they can go to Sweden by an Air Sweden plane. Almost all the major airlines today are depending on this system to maximize revenues and lower costs.

However, the hub and spoke system has some drawbacks. It often happens that the traveler has to fly extra miles to reach the hub port and then reach her destination. This means more flying time and perhaps, waiting time at the hub port to get into the connecting flight. The reduction and in some cases, the elimination in point-to-point services may inconvenience some section of the travelers, who have other priorities rather than just costs. For example, it may be irksome for businessmen to waste precious time at a hub port and would be better off attending to business by traveling fewer hours.

The hub airports require infrastructure of very large scale, which calls for investment and high operating costs, which would have to be passed on to the travelers and tax payers in some form. There are contrasting views as to whether the hub and spoke system or the traditional point-to-point structure would grow in future. The hub and spoke system usually requires a larger aircraft that can carry up to 1000 passengers, thus burning lower quantity of fuel per passenger kilometer. However, the advocates of point-to-point system highlight the fact that while the airplane capacity may be lower at 200-300 seats, it could move faster and result in reduced flying times. A case in point is the Boeing sonic cruiser, which can notch up speeds up to Mach 0.95 and shave off as much as four hours on a transatlantic two-way journey. (Norris, 2001)

Airlines consolidation:

The global trend in airline industry is consolidation and relegation of marginal players. Typically larger airlines take over the smaller operators or forge some form of relationship in the form of commercial alliances, franchise agreements or code sharing. An indicator of the trend can be seen from the fact that, in the U.S., only two of the top fifty regional carriers were independent three years later, none were. Many of the large European airlines have formed some sort of alliances in recent years after deregulation. Major alliances were Star Alliance (13 airlines including Lufthansa, SAS and Singapore Airlines), Oneworld (8, including British Airways and Cathay Pacific) and SkyTeam (4, including Air France). There were two smaller alliances - Qualifier (11 European Airlines led by Swissair, Sabena) and Wings (KLM and Northwest). In 2000, the top three alliances accounted for 48.5% of the world revenue passenger kilometres and 61% of all revenue passengers were carried by one of the top five alliances. (Jasper, 2000 and Lewis, 2000).

It has been reported that, in general, alliances have resulted in positive impact on the performance of the airlines in terms of passengers and revenues (Doganis, 2001) and profits have increased at a faster rate than market share. (Button et al., 1998). But, it is to be noted that the grand alliances can at times be quite unstable and short-lived. As market conditions change, airline companies have shown tendency to change alliances rather quickly, thus upsetting the equations. In the subsequent round of alliances, Lufthansa and British Airways forged a deal. In late 2003, Air France, KLM of The Netherlands and Italian flagship carrier, Alitalia were making efforts to form an alliance, that will make it the third largest in the world. KLM Chief Leo van Wijk expressed confidence that the new partnership would result in viable future prospects for the financially troubled Dutch Airline. (European airlines joins forces: BBC News, 2003). The risk of alliances falling apart has led to serious concerns such as lack of development of infrastructure at hub ports and lower efficiencies, which can have spiraling effects in overall quality and service.

Privatization of airports:

One of the fall-outs of deregulation has been the privatization of airports which were traditionally operated by the government. The United Kingdom set the tone for this trend as early as 1987, when it allowed full privatization of seven airports of the British Airways Alliance and commercialized 16 local authority owned ports (Ashford, 1999). Heathrow, Gatwick and Stansted in the United Kingdom are some examples of airports totally under private management. Vienna and Copenhagen ports are jointly owned and managed by the government and the private sector. In Munich, there is a joint venture model in existence which provides for development of new terminals in the airport. Another model of growing interest is the Build, Operate and Transfer arrangement, in which private sector builds and operates the port for an agreed period and then transfers the assets to the government.

The initiative to entrust airport development and operations with the private sector had reaped rich benefits in certain countries. Private investment has resulted in quicker development of infrastructure, better customer service, competitive rates and better revenues. On the downside, if it can be called so, the private sector players are creating more and more commercial features at the airport such as huge shopping malls, cinema halls and other entertainment options with the objective of earning more revenue from activities other than flying passengers.

This has raised a concern that private developers may channel investments into developing the non-core activities at the airport rather than expanding aircraft handling facilities. In 1986, 40% of the privatized ports in the UK had incomes of over 30% from commercial activities and the balance 70 from airplane handling activities. In 1999, this figure rose to 100% - all the ports reported one-third revenues from commercial sources (Humphreys et al., 2001). At the London airports, income from non-aeronautical sources rose from 49.5% in 1984-85 to a high of 71.5% in 1998-99, thanks to hotels, business parks, duty free outlets etc. (Francis and Humphreys, 2001). Finally, privatization means that the government effectively loses operational control of airports, which can raise social, economic, security and environmental concerns.

Sustainable aviation:

Air transport may be good for the passenger and the airline companies, but it does have environmental consequences. Since aircrafts burn aviation turbine fuel, a refined form of kerosene, every flight leaves behind emissions of carbon, nitrogen, sulphur and their oxides and other particulate matter. Pollution also results from road traffic associated with airport operations. These emissions are regarded as potential health threats to residents living around the airports, since the local air quality, especially around major and hub airports can show signs of deterioration. There is growing tendency of airport managements addressing the risk of air pollution as one of the key issues in the airports' environment impact statement. (Aziz et al., 2000).

On a global level, airplane movement causes emission of unburned hydrocarbons, sulphur, nitrogen oxides and carbon monoxide. Continuous emissions lead to greenhouse effect, depletion of the ozone layer in the stratosphere and permanent change in climatic conditions over vast regions. A study has projected that the emission of nitrogen oxides will almost double by the year 2015 and the emissions are expected occur at altitudes of 10-12 kilometers. (Hendersen et al., 1999). Greenhouse gases from UK airlines cost UK Pounds 1.4 billion in 2000 and this figure is estimated to reach UK Pounds 4.8 billion in 2030. It is estimated that UK airlines contributed 30 million tones or 5% of the entire country's carbon dioxide emissions in 2000 and this is set to increase to 55 million tones, or 10-12%, by 2020. (Riley, 2003).

Aircraft… [END OF PREVIEW]

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