Merge or Perish: Irish Aviation in a Rapidly Changing Global Market

Merge or Perish: Irish Aviation in a Rapidly Changing Global Market Professor Aisling Reynolds-Feighan UCD School of Economics UL Kemmy Business School Third Annual Tourism Policy Workshop, November 2-4, 2012

Presentation Overview Global trends in air transport Airline networks Competition Industry Consolidation & Spatial Concentration European mergers Aer Lingus & Ryanair Prospects for the Irish Market Funding provided by UCD Centre for Regulation & Governance & UCD School of Economics

Global trends in air transport Air Traffic Growth key drivers Economic Growth Rapid urbanisation of global population (67% by 2050) Concentration of population and of economic activities in space has driven economic growth and development Acted as the focal points for the developing global air transport network Industry forecasts average case: long run growth rate of 4-5% to 2030

Air Traffic Growth in 2000s Rapid Growth in European and Asian Markets Focused on intra-continental traffic Still relatively small inter-continental traffic

Arrival Region Millions Global Distribution of Departure Passenger Air Traffic Movements, 2010 9 8 7 6 5 4 3 2 2010 - SW 2010 - NA 1 2010 - ME 2010 - LA 0 2010 - EU AF AS EU LA ME NA SW 2010 - AS 2010 - AF Departure Region 2010 - AF 2010 - AS 2010 - EU 2010 - LA 2010 - ME 2010 - NA 2010 - SW

How important is air transport to Ireland?

PASSENGER-KILOMETRES PERFORMED (millions), 2011 1400000 1200000 1000000 Very Important! 800000 600000 400000 200000 0 Passenger-kilometres performed (millions) Total Operations (Dom & Int'l) Rank ICAO Annual Report of the Council, 2011

PASSENGER-KILOMETRES PERFORMED (millions), 2011 1400000 1200000 1000000 Very Important! 800000 600000 400000 Ranking based on traffic from carrier s country of registration 200000 0 Passenger-kilometres performed (millions) Total Operations (Dom & Int'l) Rank ICAO Annual Report of the Council, 2011

ICAO Annual Report of the Council, 2011 PASSENGER-KILOMETRES PERFORMED (millions) Total Operations (international and domestic) Country or group Rank 2011 2010 % Change 2010-2011 International Operations Only Rank 2011 2010 % Change 2010-2011 Pop Rank United States 1 1310556 1284300 2 1 403468 394593 2 3 China 2 451162 400609 13 9 85758 73488 17 1 United Kingdom 3 243003 226419 7 2 234840 218714 7 22 Germany 4 222977 201567 11 3 212813 191435 11 16 United Arab Emirates 5 206384 190156 9 4 206384 190156 9 94 France 6 145340 137283 6 5 134280 126786 6 21 Russian Federation 7 126837 109435 16 14 63452 52616 21 9 Canada 8 123664 115793 7 11 75110 68 10 35 Japan 9 121754 137927-12 13 64369 72060-11 10 Ireland 10 109824 97834 12 6 109789 97779 12 119 India 11 108922 99269 10 20 50472 49885 1 2 Singapore 12 108048 98966 9 7 108048 98966 9 116 Brazil 13 105641 90474 17 24 25728 22763 13 5

ICAO Annual Report of the Council, 2011 Total Operations (international and domestic) Country or group Rank 2011 2010 % Change 2010-2011 PASSENGER-KILOMETRES PERFORMED (millions) International Operations Only Rank 2011 2010 % Change 2010-2011 Pop Rank United States 1 1310556 1284300 2 1 403468 394593 2 3 China 2 451162 400609 13 9 85758 73488 17 1 United Kingdom 3 243003 226419 7 2 234840 218714 7 22 Germany 4 222977 201567 11 3 212813 191435 11 16 United Arab Emirates 5 206384 190156 9 4 206384 190156 9 94 France 6 145340 137283 6 5 134280 126786 6 21 Russian Federation 7 126837 109435 16 14 63452 52616 21 9 Canada 8 123664 115793 7 11 75110 68 10 35 Japan 9 121754 137927-12 13 64369 72060-11 10 Ireland 10 109824 97834 12 6 109789 97779 12 119 India 11 108922 99269 10 20 50472 49885 1 2 Singapore 12 108048 98966 9 7 108048 98966 9 116 Brazil 13 105641 90474 17 24 25728 22763 13 5 Australia 14 103345 99859 3 17 58918 56264 5 52 Republic of Korea 15 93858 87457 7 8 89089 82651 8 25 Spain 16 90435 86931 4 12 71512 66710 7 28 Netherlands 17 82047 76066 8 10 82047 76066 8 61 Turkey 18 78939 65202 21 16 61076 50043 22 18 Indonesia 19 77224 64781 19 29 20485 16117 27 4 Thailand 21 65783 64556 2 18 57950 57743 0 20 Qatar 22 61600 52733 17 15 61600 52733 17 149

BRICs: Rapidly growing air transport markets domestic & intra-regional focus

Seats Available Number of Routes Millions 100 90 80 Top 10 European Carriers, 2010 Low Cost Carriers 3000 2500 70 60 50 40 30 20 10 2000 1500 1000 500 0 Ryanair Lufthansa Air France Easyjet British Airways Turkish Airlines Air Berlin Iberia SAS Airlines KLM 0 Total Seats Available Number of Routes

30000 25000 Number of Non-Stop Routes by Major Region, 1999-2010 Growth in European Routes Driven by LCCs 20000 15000 10000 5000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 AF AS EU LA ME NA SW

600 Number of Airports with Jet Services by Major Global Regions, 1996-2010 500 400 300 200 100 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 AF AS EU LA ME NA SW

Large number of routes from European airports

Dominance of Many of Largest Airports by Single Carrier

Thousands 2000 1800 1600 Departure Movements for Top 10 Carriers in Each Major Region, 2010 Huge scale of US Carriers 1400 1200 1000 800 Ryanair 600 400 200 0 Airline Code Carrier Region: AF AS EU LA ME NA SW

Total Available Seats Number of Carriers Millions US & EU27 Number of Carriers and Seating Capacity 1996-2010 1600 1400 US Market: Rationalisation of capacity 160 140 1200 120 1000 100 800 600 400 200 45 Merger activity 36 80 60 40 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 Total Available EU27 Seats Total Available US Seats Number of EU Carriers Number of US Carriers 23

Total Available Seats Number of Carriers Millions US & EU27 Number of Carriers and Seating Capacity 1996-2010 1600 1400 European Market consolidating 137 160 140 1200 120 1000 113 100 800 80 600 400 45 60 40 200 36 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 Total Available EU27 Seats Total Available US Seats Number of EU Carriers Number of US Carriers 24

Airline networks Academic literature dominated by US view: Huband-Spoke networks with transferring passengers Airline networks: production plan and products Easily change networks by adding or cutting links and nodes Airport fortunes dependent on decisions of carriers investments riskier in liberalised market environments Dramatic increases or decreases in air traffic because of carrier decisions

Ratio of All Route Offerings to Non-Stop Segments Operated Year AF AS EU LA ME NA SW 1999 1.50 1.34 1.25 1.84 1.47 3.26 1.67 2000 1.47 1.32 1.25 1.86 1.44 3.13 1.64 2001 1.45 1.32 1.25 1.92 1.43 3.02 1.54 2002 1.42 1.31 1.25 1.92 1.43 2.96 1.42 2003 1.42 1.32 1.24 1.85 1.43 2.87 1.35 2004 1.42 1.28 1.20 1.83 1.38 2.98 1.31 2005 1.42 1.28 1.16 1.83 1.36 2.89 1.28 2006 1.41 1.26 1.14 1.76 1.33 2.89 1.29 2007 1.36 1.25 1.11 1.74 1.29 3.16 1.27 2008 1.40 1.23 1.11 1.61 1.25 3.03 1.23 2009 1.34 1.24 1.11 1.56 1.23 3.28 1.20 2010 1.35 1.25 1.11 1.48 1.21 3.62 1.19 26

Ratio of All Route Offerings to Non-Stop Segments Operated Year AF AS EU LA ME NA SW 1999 1.50 1.34 1.25 1.84 1.47 3.26 1.67 2000 1.47 1.32 1.25 1.86 1.44 3.13 1.64 2001 1.45 1.32 1.25 1.92 1.43 3.02 1.54 2002 1.42 1.31 1.25 1.92 1.43 2.96 1.42 2003 1.42 1.32 1.24 1.85 1.43 2.87 1.35 2004 1.42 1.28 1.20 1.83 1.38 2.98 1.31 2005 1.42 1.28 1.16 1.83 1.36 2.89 1.28 2006 1.41 1.26 1.14 1.76 1.33 2.89 1.29 2007 1.36 1.25 1.11 1.74 1.29 3.16 1.27 2008 1.40 1.23 1.11 European carriers 1.61 1.25 offering largely 3.03 1.23 2009 1.34 1.24 1.11 1.56 direct routings 1.23 3.28 1.20 2010 1.35 1.25 1.11 1.48 1.21 3.62 1.19 27

Middle Eastern Carrier Networks Emirates Ethihad Dubai Abu Dhabi Saudi Arabian Doha Qatar

Asian Carrier Networks Air China China Southern China Eastern Japan Airlines

North American Carriers Delta Air Lines Southwest American Airlines JetBlue

European Carrier Networks Air France Lufthansa BA Ryanair Turkish Airlines

European carriers nationally focused: small distance between top airports

Top 5 airports served by selected European Carriers North American Regional Science Association Meetings, San Francisco, Nov 18-21, 2009 33

Top 5 airports served by selected European Carriers North American Regional Science Association Meetings, San Francisco, Nov 18-21, 2009 34

Competition Liberalisation rapid expansion of services; Rationalisation and merger activity: reducing capacity and number of carriers in markets Europe: further consolidation expected; ownership issues & external traffic rights prevented consolidation in 1990s Reality is that most airline routes have one carrier

Competition on European & North American Air Routes, 2010 Number of Carriers* Operating on Routes Region 1 2 3 4 5 6 7 8 EU27 70.9 17.0 7.6 2.8 1.2 0.4 0.0 0.0 EU15 69.0 17.2 8.6 3.1 1.4 0.5 0.0 0.0 NA 60.3 22.6 9.1 4.6 1.9 1.0 0.3 0.2 USA 60.1 22.2 9.5 4.7 2.0 1.0 0.3 0.2 * Includes all international carriers 36

Mergers: the big trend

Merger Candidates Merger Completed Resulting Entity Southwest Airlines / AirTran Airways 2/5/2011 Southwest Airlines SkyWest / Atlantic Southeast Airlines / ExpressJet Airlines 11/15/2010 SkyWest / ASA United Airlines / Continental Airlines 1/10/2010 United Airlines Pinnacle Airlines / Mesaba Airlines 1/7/2010 Pinnacle Airlines / Mesaba Airlines Delta Air Lines / Northwest Airlines 12/31/2009 Delta Air Lines Republic Airways / Frontier Airlines 1/10/2009 Republic Airways Republic Airways / Midwest Airlines 7/31/2009 Republic Airways Pinnacle Airlines / Colgan Air 1/18/2007 Pinnacle Airlines / Colgan Air US Airways / America West Airlines 9/27/2005 US Airways SkyWest / Atlantic Southeast Airlines 8/9/2005 SkyWest / ASA Republic Airways / Shuttle America 9/5/2005 Republic Airways American Airlines / TWA 9/4/2001 American Airlines Delta Air Lines / Comair 10/22/1999 Delta Air Lines Delta Air Lines / Atlantic Southeast Airlines 3/22/1999 Delta Air Lines American Airlines / Reno Air 1/2/1999 American Airlines AirTran Airways / Valujet 11/17/1997 AirTran Airways 38

European Mergers Cross-border mergers permitted among the largest carriers Only 2 blocked: Irish & Greek carriers: concerns about dominance in the market

Date Merger Event 26 January 2011 Commission blocks proposed merger between Aegean Airlines and Olympic Air 27 July 2010 Commission approves merger between United Air Lines and Continental Airlines 14 July 2010 Commission approves merger between British Airways and Iberia 28 August 2009 Commission clears proposed takeover of Austrian Airlines by Lufthansa, subject to conditions 22 June 2009 Commission clears proposed takeover of SN Brussels Airlines by Lufthansa, subject to conditions 14 May 2009 Commission approves acquisition of British Midland by Lufthansa 09 January 2009 Commission clears Iberia's proposed acquisition of Vueling and Clickair, subject to conditions 17 December 2008 Commission clears proposed take-over of Martinair by KLM 06 August 2008 Commission approves acquisition of Northwest Airlines by Delta Airlines 27 June 2007 Commission prohibits Ryanair s proposed takeover of Aer Lingus 22 December 2005 Commission clears planned acquisition of control over Eurowings by Lufthansa, subject to conditions 05 July 2005 Commission clears planned acquisition of Swiss by Lufthansa, subject to conditions 11 February 2004 Commission clears merger between Air France and KLM subject to conditions 40

Dublin Airport: All European Routes by One carrier 2 Carriers 3 Carriers 3% 20% Number of Competitors 2008 77% 2% 8% 12% One carrier 2 Carriers 3 Carriers 4 Carriers 5 Carriers 6 Carriers 0% 5% 2010 73%

% Routes with One Carrier 100 90 Cork Paris-Orly 80 70 60 Dublin Amsterdam Paris-CDG 50 40 Madrid 30 0 50,000 100,000 150,000 200,000 2010 European Departure Movements European Airports DUB ORK SNN

Number of Routes 120 Number of Routes at European Airports by Number of Carriers, 2010 100 80 60 40 20 0 AMS CDG DUB FRA MAD LHR ORK One carrier 2 Carriers 3 Carriers 4 Carriers 5 Carriers 6 Carriers

Aer Lingus 2010, European Routes 13% 3% 2% 1% 50% 31% Aer Lingus 2010 Dublin Routes One carrier 2 Carriers 3 Carriers 4 Carriers 5 Carriers 6 Carriers 15% 2% 46% 37% One carrier 2 Carriers 3 Carriers 4 Carriers

Ryanair 2010, European Routes 11% 6% 2% 1% 0% 80% One carrier 2 Carriers 3 Carriers 4 Carriers 5 Carriers 6 Carriers 68% 23% Ryanair 2010 Dublin Routes 9% One carrier 2 Carriers 3 Carriers

Lufthansa Air France 12% 6% 1% 1% 10% 6% 1% 1% 54% 24% 58% 26% One carrier 2 Carriers 3 Carriers 4 Carriers 5 Carriers 6 Carriers Iberia One carrier 2 Carriers 3 Carriers 4 Carriers 5 Carriers 6 Carriers BA 5% 3% 2% 9% 3% 2% 27% 16% 21% 52% 22% One carrier 2 Carriers 3 Carriers 4 Carriers 5 Carriers 6 Carriers 38% One carrier 2 Carriers 3 Carriers 4 Carriers 5 Carriers 6 Carriers

Ryanair-Aer Lingus Merger Cons Merged company dominant carrier at Dublin Airport Competition eliminated from 30-40 routes

Ryanair-Aer Lingus Merger Pros Strong Irish Carrier Major player in European Market vital for accessibility Access to secondary airports but also capital city primary airports network for long haul route development Management, fleet ownership & expertise likely to continue to be based in Ireland ME or EU Carrier takeover of Aer Lingus could result in downgrading to feeder services to another European hub - End up with just one Irish carrier anyway, but with reduced access to primary EU airports

Prospects for the Irish Market Difficult economic circumstances will affect air traffic prospects Completion of the IUM network has changed the geography of Ireland Regional airports played an important role in 1990s & 2000s: difficult to survive without subvention hard to justify now Shannon, Cork & Kerry: significantly overlapping hinterland & now closer to Dublin

Conclusion Air accessibility is vital for an export-oriented Island economy Demonstrated advantages to having a strong European-focused Irish airline European consolidation will continue & give rise to further spatial concentration of air traffic Ireland must think of long term strategic needs!