Ballooning market shares of LCCs in Europe – and irreversible for network airlines
Published: 08 Aug 2008
Association of European Airlines' (AEA) traffic results for the month of June offer a basic picture, while not as bad as many indications might suggest, of a market slowing or going backwards.
According to Centre for Asia Pacific Aviation, for intra-Europe routes, the AEA carriers are reaping the results of capacity cutbacks or reduced expansion rates, as traffic growth grinds to a halt. However, taking the past six months' figures, it is immediately apparent that the same is not true of European LCCs. Ryanair, easyJet and Air Berlin have all expanded capacity by more than 15 percent, moving rapidly up the market share scale.
AEA traffic growth slows in June, although not as badly as expected; LCCs have grown much faster in the first six months of 2008, encroaching on network airline market shares; Capacity reductions tend to be irreversible, as other airlines take up the slack, according to US GAO; This implies the possibility of a more relaxed approach to mergers.
The AEA results are accompanied by the note that preliminary results for the following month, July, "indicate a growth figure perhaps a percentage point better than in June". Traffic numbers on the North Atlantic and the Far East are also showing a "slight recovery" in July.
Who's big and who's getting bigger? As the end of the peak season approaches and crunch time comes, Europe's major LCCs have entrenched themselves much better across the region, as the following graph shows. (Airlines which carry the largest numbers of passengers are nearer to the top of the scale and those growing more rapidly are further to the right. Those in the shaded area have contracted since Jan-08).
This LCC incursion phenomenon was also referred to in last week's US' Government Accountability Office (GAO) report, the "Airline Industry", suggesting that the role of LCCs is becoming more substantial as the network airlines are forced, through their higher cost base, to reduce capacity.
The GAO also noted however that "the cost characteristics of the industry appear to make it difficult for firms to rapidly contract in the face of declining demand," which can "lead to considerable excess capacity in the face of declining demand."
More ominously in this vein, the GAO's historical review of the US domestic market showed that "although one airline may reduce capacity and leave the market, capacity returns relatively quickly. Likewise, while past mergers and acquisitions have, at least in part, sought to reduce capacity, any resulting declines in industry capacity have been short-lived, as existing airlines have expanded or new airlines have expanded." In other words, reductions in capacity by the network airlines have tended to become irreversible for them, as any vacuum is quickly filled.
If US precedents apply, and recent events suggest they might, the major European airlines will continue to expand on longer haul routes, where premium traffic is not so challenged by lower cost competition, increasingly leaving the short-haul market for the LCCs.
But those airlines seeking merger and cooperation authorisation can at least find some solace in the GAO's findings: if capacity and competition reduction does occur as a result of their mergers, those setbacks tend to be quickly redressed by the market – implying the possibility of a more relaxed approach to approvals.
(This article is from Centre for Asia Pacific Aviation)
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tromba said on 9 Aug 08:
Very interesting, and no doubt an accurate assessment. Last week, OAG made an announcement that in some ways supports the findings above, and in other ways is contradictory.
According to OAG, there will be 59.7 million fewer seats offered by the world’s airlines in the last quarter of 2008 compared to last year. Flights and seat capacity will drop 7 percent this year in October, November and December, with the US domestic market accounting for nearly 20 million or 33 percent of global decline in capacity.
In the same quarter last year, OAG found that the seat supply in intra-Asia markets for the first time surpassed the US. But for this year’s fourth quarter, there has been a 13 percent decrease in capacity in Asia which is equivalent to a 3-year setback in growth.
In one of the clearest statements by a high level traffic executive about the negative impact of the economy on travel, Steve Casley, Chief Operating Officer of OAG said that commercial aviation was in line with the global economy, reflecting growth and decline dependent on worldwide impacts and events.
"The data speaks for itself," Casley said. "It took a good three years for the industry to recover from the downturn in 2001 when it had a 5% drop in capacity and a 7% drop in flights. Steady annual growth since 2002 looks set to plummet in the fourth quarter this year with an unprecedented global decline of 7%."
Casley added, "It looks quite possible that we may be facing a far more severe global downturn than we have experienced before. The industry's resilience will be pushed to its limits in the coming months, with carriers, airports and passengers alike all waiting and watching for a glimmer of light at the end of the tunnel."
The OAG statistics also show that 275 airports worldwide will discontinue air service completely, 32 of which are located in the US and 116 in the Asia Pacific.