6 Dec 2009 version Developments in Air Transport Industry, and Implications for the proposed LCC- Focused Airport in SE Korea. Prof.

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1 6 Dec 2009 version Developments in Air Transport Industry, and Implications for the proposed LCC- Focused Airport in SE Korea Prof. Tae Hoon Oum The Air Transport Research Society (ATRS) and The University of British Columbia

2 Recent Developments in Air Transport, and Implications for the LCC-Focus Airport in SouthEast Korea Outline Developments in Airline Industry, and Why Korea should develop LCC-focus hub airport Tri-polar Global Economic System (China, US and Europe), and Air Traffic Growth in Asia Pacific; Explosive growth of Low Fare Air traffic in East Asia Open Skies is Imperative in Northeast Asia LCC focus airport as a New Engine of Economic Growth LCCs in North America, Europe, Southeast Asia LCC focus airport as A new engine of economic growth Why should the Proposed Airport in SE Korea be LCC-focused How LCC-Focus airport should be built, and route network development proposal for the proposed SE Korea airport What LCCs want from an Airport? Functional Airport, Efficient, Low Price Airport, not grandiose luxury buildings

3 World moves towards 3-Polar Economic Power Structure: 2020 GDP Forecasts (EU, US and China) Source: World Economic Prospects, 2009

4 Boeing and Airbus 20-year Forecasts: World Air Passenger Traffic to grow at 5% per year, Doubling traffic in 15 years World Passenger (billion RPK) Boeing Airbus ICAO IATA

5 Asia Pacific will soon become the largest air transport market in the world 5

6 Huge Air Traffic growth expected with LCCs China Korea Japan South East Asia Traffic Flow Volume 1998 Traffic Flow Volume 2007 Traffic Flow Volume 2020 (Forecast with LCCs) 6

7 Open Skies Age has come: Major Liberalization Events United States Open Skies agreements with 94 nations including US-Canada Open Skies EU has formed Single Aviation Market since 1997 (EU Continental Open Aviation Area) Australia-New Zealand also formed Single Aviation Market EU-US Open Skies began in March, 2008; and negotiation is underway to form Open Aviation Area including cabotage rights (each other s domestic operational rights) 7

8 Single Aviation Market in Europe since 1997 increased competition, reduced airfares, and improved convenience of travel (higher frequency and more routes), and is reshaping airline networks; Most importantly, Entry and growth of low-cost carriers (LCCs): Ryan Air, EasyJet, Air Berlin, etc. Stimulated huge traffic growth 8

9 NE Asian Bilateral Open Skies is imperative and can be achieved in the next 5 years Most likely, Korea can successfully negotiate for bilateral trans-border open skies with Japan and China within the next 5 years, and possibly with ASEAN within 10 years China: Open Skies with Korea, Japan and ASEAN will greatly help their Western regional development ; Korea- Sandong Province open skies were helpful to China China promised to negotiate Open Skies with US from 2010; also made similar promise to Korea Open Skies are needed to support China s growing trade and economic integration with Asian neigbors including Korea and Japan 9

10 NE Asian Bilateral Open Skies is imperative and can be achieved in the next 5 years cont d Japan: Under the Asian Gateway Initiative adopted in 2007, Japan has already opened up 23 regional airports to int l traffic (limited open skies except Tokyo area airports) Japan is now almost ready to negotiate open skies with Asian countries; Govt announced their intention to conclude Open Skies with USA before the end of 2010 ASEAN: ASEAN is also pushing to form open skies bloc in the near future, and to link up with China 10

11 Recent Developments in Air Transport, and Implications for the LCC-Focus Airport in SouthEast Korea Outline Developments in Airline Industry, and Why Korea should develop LCC-focus hub airport Tri-polar Global Economic System (China, US and Europe), and Air Traffic Growth in Asia Pacific; Explosive growth of Low Fare Air traffic in East Asia Open Skies is Imperative in Northeast Asia LCC focus airport as a New Engine of Economic Growth for Korea LCCs in North America, Europe, Southeast Asia LCC focus airport as A new engine of economic growth Why should the Proposed Airport in SE Korea be LCC-focused How LCC-Focus airport should be built, and route network development proposal for the proposed SE Korea airport What LCCs want from an Airport? Functional Airport, Efficient, Low Price Airport, not grandiose luxury buildings

12 Dynamic LCCs Operating in most regions: except NE Asia and Africa North America Flights/week: 37,025 Miles/flight: 738 Europe Flights/week: 22,136 Miles/flight: 629 SE Asia Flights/week: 4,593 Miles/flight: 564 South America Flights/week: 2,820 Miles/flight: 479 Middle East & Africa Flights/week: 426 Miles/flight: 1,046 Oceania Flights/week: 3,162 Miles/flight: 735 Source: OAG 12

13 LCCs are profitable: Red (premium carrier); Grey (Network carriers) 13

14 Ryan Air 37.5% lower unit cost than the Top 3 European flag carriers (BA, LH, AF) General Administration 12.0 (CASM) Overhead Distribution Direct Sales only Lower Administration Costs No Fees for 3rd party CRS No Commission on Ticket Sales No Catering No In-flight Amenities Sales, Marketing & Distribution Passenger Services Crew Costs Passenger Services Crew Costs Lower Compensation Costs Higher Crew Productivity Reduced Cabin Crew Secondary Airports Airport Charges, Ground Handling Outsourcing Maintenance Fuel Seat Density More Seating 4.5 Ground Handling Ryan Air s Cost Advantage Airport Charges & Air Traffic Control Aircraft Ownership Top 3 European Flag Carriers Source: O Connell Ryan Air 14

15 Enplanements Southwest (SWA) became the first airline in the world to exceed 100 million passenger in , ,000 80,000 60,000 40,000 20,000 0 Southwest American Delta United Northwest Continental Air Canada Air Tran JetBlue WestJet Source: DOT, Airline Financial Reports 15

16 Southwest Airlines Route Network a number of Focus cities, different from multiple hub network 16 Source: American Airlines

17 Huge increase in Passenger Volumes at Top 10 Philadelphia Mkts: Before and After SW Entry in May

18 Status of Major LCCs Southwest: largest airline in the world in terms of number of passengers carried (exceeded 100 million passengers in 2007) Ryanair: largest intra-european carrier; will exceed 60 million passengers in 2009 Air Asia group (Air Asia, Air Asia-X, AirAsia- Thai, AirAsia-Indonesia, AirAsia-Philippines, etc) will carry 25 million pax in

19 Tiger Airways Air Do Skymark Airlines Skynet Asia Airways StarFlyer Air Next Jeju Air Spring Airlines Juneyao Airlines East Star Air Shenzhen Airlines Air Asia Air-India Express IndiGo Airlines Southwest Airlines AirTran Airways Jet Blue RyanAir EasyJet Air Berlin Infant Industry Size of NE Asian LCCs as compared to US and European LCCs (2007) No. of aircraft Singapore Japan South Korea China Malaysia India USA Europe 19

20 LCC market shares: Asia has huge room for LCC growth 20

21 Explosive Growth of LCC Traffic is Certain in East Asia Within 5-10 years, blue color workers in East Asia will be the majority of air travelers; Air Travel in will become commodity, not just for privileged class; LCC air travel in US and Europe has become cheaper than Greyhound bus. LCC air travel will grow explosively in East Asia including China; For example, China s tourist traffic increased 500% in the last 10 years; with LCC starting to develop in China, there will be much faster growth of China s tourist traffic 21

22 Recent Developments in Air Transport, and Implications for the LCC-Focused Airport in SE Korea Outline Tri-polar Global Economic System (China, US and Europe); Air Traffic Growth in Asia-Pacific Region Why is Open Skies Imperative in Northeast Asia Low Cost Carrier Developments North America, Europe, Southeast Asia Opportunities for a new engine of economic growth Proposal to make the proposed SE Airport to be LCC-focused What LCCs want from the Airport LCC s airport selection criteria What type of airport should be built

23 Korea Should make LCC business as a New Engine of Economic Growth To take advantage of high growth of LCC traffic, Korea should take first mover advantage by making the proposed SE Korea Airport LCC-Focused; Capacity shortages at major airports like Beijing and Tokyo allows Korea to create Win-Win solution by inducing air travelers to/from smaller cities in China, Japan, SE Asia, India to travel via the proposed SE Korea airport This would bring high economic growth opportunity to Korea as LCC-focus airport would bring much greater economic benefits to the country than regular airports. Also, it cost less to build LCC-focus airport

24 Traffic Growth at London-Stansted airport (STD): Ryan Air and Easy Jet base Total Passenger in Stansted Airport Source: Civil Aviation Authority(UK Airport Statistics) 24

25 Huge Traffic Growth at European LCC-focused Airports Airport 1995 passengers 2007 passengers Growth % over 12 years Stansted 3,918,873 23,779, % Liverpool 504,686 5,468, % Luton 1,825,378 9,927, % Prestwick 330,619 2,422, % 25

26 Passengers come long distance to use LCC service: e.g. Ryan Air Catchment Area at Charleroi Airport (S. Belgium) Region Proportion of Traffic Brussels Area 25% Northern Belgium 19% Southern Belgium 18% The Netherlands 17% Luxembourg 8% France 7% Germany 6% Source: Dennis (2004) 26

27 Why LCC-Focus Airport in Southeast Korea? An LCC hub in Seoul-Incheon area would be difficult because LCCs either fail (or tolerated as long as they do not harm major carriers as is in Japan) or inflict major damages to Asian and KAL Help for Balanced Regional Economic Growth between Seoul-Incheon Metropolitan region and Southern part of Korea Proximity of Airport and Successful Seaport certainly help attracting foreign firms Logistics and Distribution centers (Oum and Park, 2004)

28 1 st Phase: SE Korea LCC connections to Major Cities in Asia China Population No. of City > 1 million 20 >2 million 16 >3 million 9 >5 million 7 South East Asia Population No. of City Japan Population No. of City > 1 million 10 >2 million 2 >3 million 1 >5 million 1 > 1 million 10 >2 million 1 >3 million 5 >5 million 3 28

29 2 nd Phase: Targeting Network Carrier Services To write more Attract network carriers by taking advantage of cheap, efficient and high frequency LCC linkages to numerous Asian cities (in Internet age, passengers choose their carrier-travel routing) India, China, SE Asian market can be good target countries because a high percentage of these countries travel market to/from N. America is highly price sensitive. e.g., Currently the majority of N. American Indians travel to India via London, Frankfurt, Narita, or Incheon primarily based on price. Network carriers can take advantage of LCC connection opportunities, and cheaper airport user charges at the LCC-focus airport

30 What LCCs want from an Airport? Lower airport charges to support no-frills operation Support and airport design for efficient operation; LCCs prefers NOT use Grandiose monuments and terminals at airports LCCs need far fewer number of gates because they handle 2.5 times of traffic per gate (de Neufville, 2006) LCCs need fewer gates for processing same traffic volume Financial support Long term commitment on lower ATC and airport fees Start up support (usually help on marketing and training) Flexible Terminal Design for rapid capacity expansion (modular terminal buildings)

31 Final Words Open Skies will happen in NE Asia in the next 5-10 years; and Dynamic LCCs will enter the market lured by huge expect growth of no-frills traffic LCC-focused airport is underserved market. SE Korea is a better location for LCC-focus airport than Seoul-Incheon area LCC-focus airport as a New Engine of Economic Growth for Korea: Successful LCC bring much higher economic benefits than Network carriers; LCCs do not need grandiose luxury building; they prefer functional and efficient and cheaper facilities.

32 Thank You cordially invite you to participate in 2009 ATRS world conference (7-10 July, 2010, Porto, Portugal) The ATRS Global Airport Performance Benchmarking Reports 8 th Year

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