Benefits and obstacles to be expected from a liberalisation process of the aviation market

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Benefits and obstacles to be expected from a
liberalisation process of the aviation market
by Frankie OConnell
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What is Deregulation?
3
Airlines disappointed in system prior to
deregulation
Airlines wanted the freedom to set their own
fares
Had to be cost competitive
On-time Frequency Baggage Comfort IFE/email Lounge
s Food Schedules
1st class Business class Economy class
Limited freedom of product differentiation
4
The Effects of US Deregulation on Airlines

• The number of airlines rose from 36 in 1978 to
  over 120 by 1985
• (230 increase in just 7 years)
• The top five airlines had accounted for 69 of
  the US domestic traffic in 1978
• But by 2005 it had fallen considerably to 57
  (Competition was Intense)

• Then there was a period of consolidation as the
  major airlines fought back
• to regain market. By 1993, the top five
  carriers accounted for 70 of the
• industry output
• The intense competition continued and many
  airlines failed.
• From 19791999, 176 received operating
  certificate and only 37 (21) of
• those airlines are still operating today
• Created hub and spoke networks. The entry and
  exit of a competitor is heavily
• influenced by the network of the home airline

• After 2001, The US airline industry went into
  meltdown. The cumulative
• losses from 2001 2004 were 32.3 billion

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The Effects of US Deregulation on Passengers

• Fares in the US domestic market fell by 40 from
  1980 2005
• 60 of this fall was due to because of
  deregulation (Morrison Winston, 1995)
• The US Department of Transportation estimates
  that passengers save
• 19.4 billion per year, in lower fares because
  of deregulation.

Morrison, S. and Winston, C. (1995). The
Evolution of the Airline Industry, Washington
D.C. The Brookings Institution.
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Why Europe wanted deregulation

• Access to the market was severely restricted
  (Single designation)
• The capacity offered by each airline was
  restricted generally 5050

• As late as 1997, out of 988 routes within the EU
  only 48 had multiple designation
• Of the 988 routes, only 88 allowed 5th Freedom
  traffic rights
• The regulatory bodies of bilateral partners
  approved fares and there was NO
• competition on price
• The airlines designated by a country had to be
  substantially owned and
• controlled by it or by its nationals
• Many of Europes airlines received state aid
  e.g. Air France 3.8 billion in 1994
• (equivalent to 60 percent of the value of all of
  BA stock or the entire annual revenue of
  Singapore Airlines

This freedom is also sometimes referred to as
'beyond rights. It is the right of an airline
from one country to land in a second country, to
then pick up passengers and fly on to a third
country where the passengers then deplane. 
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European Airline Deregulation (3 phases)
The three packages agreed by the European council
of ministers
1st Package (1987-1989) - It abandoned
the equal sharing of capacity on routes served by
airlines of the two states. - It
facilitated the entry new airlines by opening up
new market access - Allowed agreements
between community airlines relating to capacity,
tariffs co-ordination, revenue pooling,
runway slot allocation, CRS and pax handling
2nd package (1990-1992) - Further loosened
constraints on pricing, capacity restrictions and
market access - The end of immigration
and customs controls between the 12 states

Source Council Directive of 14 December 1987 on
fares for scheduled air services between Member
States (87/601/EEC) and Council
Decision of 14 December 1987 on the sharing of
passenger capacity on scheduled air services
between member states
(87/602/EEC) Brussels Commission of the
European Communities
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3rd Package 1993 - Onwards (Full European
Deregulation)

• - Creation of an effective Open Skies policy
  within Europe such that the European
• Community would become a single domestic
  market
• - Airlines from member states can operate with
  full traffic rights on any route within
• the EU without capacity restrictions
• - Governments may impose restrictions only on
  issues such as the environment
• - There are no price controls Airlines can set
  their own fares and cargo tariffs (EU
• regulations 2409/92).This is why Ryanair
  can offer free flights
• The airline must be majority owned and
  controlled by any of the member states
• or their nationals.

Deutsche BA
Source CEC (1992) Council Regulation No.
2407/92 on licensing of air carriers Council
Regulation No. 2408/92 on access Community air
carriers to intra community air routes, and
Concil Regulation No 2409/92 on fares and rates
for air servives. Official Journal 24 August,
Brussels Commission of the European Communities
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The growth of Europes low cost carriers 2000 -
2006
European Low Cost Routes 2006
European Low Cost Routes 2000
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Scheduled annual passenger traffic between London
and Venice
1986 - 2006 (Trendline extrapolated from 1997 to
2006)
1,000,000
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
2003
2004
2005
2006
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source UK CAA, 2007
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Deregulation has created many opportunities
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Change in traffic between the UK and Europe
1996 - 2005
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(No Transcript)
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This environment created many opportunities
The LCCs had a very positive impact on the local
economic community
Source http//www.elfaa.com/documents/ELFAABenefi
tsofLFAs2004.pdf
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Intense competition as a result of deregulation

• According to the European Commission, the number
  of scheduled airlines in Europe increased
  dramatically from 1992 to 2006
• Many new entrants types-
• Low cost carriers
• Low cost carrier subsidiaries of Full service
  airline (e.g. Germanwings, BMI baby)
• Traditional airlines rebranded as low cost
  carriers (e.g. Aer Lingus )
• All business class airlines such as Eos,
  Silverjet and MaxJet
• Regional airlines such as Lagun Air in Spain
• Regional airlines which have been converted to
  low cost carriers, such as FlyBe
• Independent charter airlines such as Air Finland

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Yield decline of EU and US markets
(1993 - 2007)
100
)



)



95


90



85

80

Index
75

70



65
60
0
1
2
3
4
5
6
93
94
95
96
97
98
99
7E
0
0
0
0
0
0
0
0
Source IATA
EU Short-haul
US domestic

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(No Transcript)
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Multilateral Air Service Agreements and
Arrangements
Name of agreement Started Current
participants
European Union 3rd Package 1993 29 states
of EU plus Iceland, Liechtenstein

Norway and Sweden Caribbean Community ASA
1996 Granada, Jamaica, Trinidad, Barbados,
etc Fortaleza Agreement 1997 4
principle members Argentina Brazil, Paraguay
Uruguay
5 Associates Bolivia, Chile,
Columbia, Ecuador, Peru CLMV Agreement
1997 Cambodia. Laos, Myanmar and
Vietnam COMESA Air Transport 1999 20
states of the Common Market for Eastern
and Liberalisation Program
Southern Africa Yamoussoukro II
1999 52 African states (was aimed at
inaugurating an Open Skies policy which would
remove bilateral constraints boost
intra-regional traffic) Asias (MALIAT)
agreement 2001 Setting the framework to
develop open skies in Asia European-Mediterranean
ASA 2005 EU and Morocco EU and Western
Balkans 2006 EU and 6 states (i.e.
Crotia, Serbia, etc)
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Moroccan Airport Traffic 1995 - 2006
10
Domestic
International
56 growth in 3 years
8
6
Passengers (Millions)
4
2
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source ONDA

• EU Open skies policy signed in December 2006
• 10 Million passengers planned to fly to Morocco
  by 2010
• Ryanair has sealed a deal with the Moroccan
  government to open
• 20 routes and carry one million passengers a
  year in five years time.

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Egyptian Airport traffic 1997 - 2006
30
25
20
Millions of passengers
15
10
5
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Cairo Airport
Source EHCAAN

• Traffic at Egyptian airports will have doubled
  from 13.5 million passengers in 1997
• to an estimated 27 million by 2007

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Deregulation of the Middle East market
The Middle East air transport system remains
heavily regulated, with substantial limitations
on the allocation of traffic rights Negotiation
of traffic rights is conducted within a bilateral
system Constraints in the allocation of traffic
rights have posed a substantial barrier to the
entry and growth of new carriers operating
intra-regional routes Air Arabia being
compelled to operate a less than daily service on
the majority of its routes.
However, Jordan, Bahrain, Morocco, Oman, Qatar,
Kuwait and UAE have An Open Skies policy with the
US. Also open sky policies in UAE Lebanon Open
skies could be critical to Jordan as Tourism has
the potential to produce up to 10 of Jordans
GDP (Currently only around 4)
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Liberalisation in the Saudi domestic market

• Saudi Arabias civil aviation administration
  stated that
• 13 companies were pursuing licences to operate
  as
• national air carriers
• Only 2 licences were granted Nas Air (Riyadh)
  and Sama (Dammam).
• Both started operations in 2007

Route Traffic (2006)
Sama Frequency Riyadh Jeddah
2,418,000 3 Jeddah Damman
793,000 2 Riyadh Abha
779,000 2 Riyadh
Dammam 683,000
2 Riyadh Gizan 350,000
1 Riyadh Madinah 341,000
1 Damman Abha
139,000 2 Damman Gizan
32,000 1
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Deregulation of the Middle East market
the Intra-Arab Freedoms of the Air Programme
amongst 16 member States of the Arab Civil
Aviation Commission (ACAC) (the Agreement on the
Liberalization of Air Transport between the Arab
States was signed in 2004) Its very similar to
the EUs 3rd package

• Establishing a vast Arab free trade zone -
  fosters regional and
• international economic development
• Frees the intra-regional movement of goods,
  individuals and capital
• Forms the justification for a regional
  deregulation of air services.

Source AACO
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Provisions of the Arab Civil Aviation Commission
agreement (similarity to EU 3rd package)
Concerning ACAC Agreement
EU Council Regulation
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Danger, Danger, Danger Widebody capacity on
order (August 2007)
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Airports in the Gulf and Development Plans

Cost Passenger
Passenger
throughput
capacity
(US Billions) (Millions)
(Millions)
Dubai (Expansion) 4.1 billion
24.7 70
Dubai1 (New) 8.2
billion ---
120 Doha (Expansion)
0.15 billion 7.4
12 Doha (New)
5.5 billion ---
50 Abu Dhabi
(Expansion) 6.8 billion
5.4 20
Jeddah (Expansion) 1.5 billion
13.3 25
Source Airports Council International,
AACO, ATI
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The region must level the playing field. Is it
too late?
Government support for Emirates, Qatar Airways,
Etihad, etc Massive aircraft orders and airport
development Aircraft loans backed by oil
reserves Qantas accused Emirates of basking in
the support of the Government of Dubai
Yemenias chief stated at the AACO AGM in 2005 in
Sanaa There are some governments in this region
who want to be all over the world map There are
heavily-subsidised airlines against which we
cannot compete This assistance threatens
carriers which are trying to operate
commercially.
Action needed If airlines become affiliated to
the AACA treaty then the major carriers should
NOT be allowed to setup bases outside of their
sovereign state Consolidation of the market..
Could two airlines from different states merge?
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More problems for the region Number of
destinations served by Air Arabia and Jazeera
(2003 2007)

• 58 of Air Arabia traffic is to Middle east
  countries Wants more access
• Air Arabia will have 34 aircraft based at
  Sharjah by 2010
• Jazeera has 35 aircraft on order

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Air Arabias break-even load factor and actual
load factor 2005 - 2007
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Conclusion

• Reduce Fares
• Exponentially grow traffic

Deregulation has tremendous benefits for
passengers

• Deregulation is coming quicker than you think.
  Will you be ready?
• Wise not to deregulate until the resources (i.e.
  Fleet, Management, Staff, IT,
• Marketing, etc) is adequate enough to take on
  the competition. (Need Govt help)
• Wise to join an alliance as soon as possible or
  you will be left without any partner

• Big Question that you must now decide. Do you
  form a MEDA multi-agreement
• pact or join the upcoming ACAC pact or stay
  independent?

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Thank you very much, it was a pleasure