LCC IMPACT ON THE US AIRPORT S BUSINESS Nadezda Volkova German Airport Performance (GAP) Project GARS Workshop New Issues in Aviation Economics Hamburg, 9 February 2011
Motivation for the research LCCs account for around 30% of the aviation market both in the US and in Europe But LCCs push airports to reduce charges! LCCs promise to bring additional traffic to the airport How much more non aeronautical revenue from additional LCC traffic???
Why US??? US was the first deregulated airline market and remains the largest in the world (accounts for approx. 40% of all commercial aviation activity in the world) LCCs have the longest history in the US (since 1971 in the US and only since 1986 in Europe) but the most important reason was the large data availability for US market
Data LCC: Southwest, AirTran and JetBlue, which comprise 22,5% of the total 2008 US domestic traffic market share 89 airports: sample covers all Large Hubs, almost all Medium Hubs and 35% of all Small Hubs in the US (the smallest airport in the sample has less than 300k departure passengers per year) Time period: 2004 2008 Data sources: U.S. Bureau of Transportation Statistics and American Federal Aviation Administration (FAA)
Descriptive analysis (1) US LCC (Southwest, AirTran, JetBlue) market share dynamics at different size Hubs groups
Descriptive analysis (2) Aeronautical revenue The two main components of aeronautical revenue are Landing Fees and Terminal Charges They accounted for 35% and 43% of aeronautical revenue in 2008 2008 Landing Fees per enplaning passenger Terminal charges per enplaning passenger When total share of LCCs in the airport is equal or lower than 15% 4.55$ 5.46$ When total share of LCCs in the airport is higher than 15% 3.17$ 4.07$
Descriptive analysis (3) Non aeronautical revenue shares
Descriptive analysis (4) Non-aeronautical revenue per passenger by source and by different levels of LCC share in airport s traffic (in 2008) Retail stores Car Rental Parking F&B revenue revenue per revenue per revenue per per pax (in $) pax (in $) pax (in $) pax (in $) Average 0.64 0.56 2.62 5.13 Large Hubs with share of LCC 15% 0.88 0.92 1.52 3.59 Large Hubs with share of LCC >15% 0.82 0.68 2.26 4.02 Medium Hubs with share of LCC 15% 0.51 0.42 2.06 4.45 Medium Hubs with share of LCC > 15% 0.57 0.56 2.97 5.70 Small Hubs with share of LCC 15% 0.43 0.30 3.50 6.49 Small Hubs with share of LCC >15% 0.59 0.31 3.04 6.07
Empirical evidence: Aeronautical revenue Dependent variables: Landing Fees and Terminal charges per passenger Control for: passengers volumes (LCC pax and FSA pax), Hub size (dummy), total share of all three LCCs and for the share of each LCC separately Fixed effects models were chosen based on the results of Hausman test
Empirical evidence: Aeronautical revenue: First results Large and Medium Hubs have lower Landing Fees and Terminal Charges in comparison with Small Hubs (all else equal) Once an individual LCC gains 15% of the traffic at an airport, Landing Fees per passenger are lower at this airport compared to the sample average, while Terminal Charges stay the same In airports where the share of any LCC is 15% or greater, Landing Fees per passenger are 18% lower (all else equal)
Empirical evidence: Non aeronautical revenue (F&B and Retail) Dependent variables: F&B and Retail revenue per passenger Control for: passengers volumes (LCC pax and FSA pax), Hub size (dummy), LCCs share Based on the results of Hausman test Random effect model was chosen for F&B model and Fixed effect model was chosen for Retail revenue model
Empirical evidence: Non aeronautical revenue (F&B and Retail) First results With increase in LCC passengers F&B revenue per passenger increase (all else equal) LCC passengers spending on F&B was the highest in Small Hubs. On the other hand, non LCC passengers spend less money on F&B in Small Hubs than in Large and Medium Hubs With an increase in LCC passengers in Large and Medium Hubs, Retail revenue per passenger decreases With an increase in non LCC passengers, the Retail revenue per passenger increases in Large and Medium Hubs Retail revenue per passenger in Small Hubs was not significant in the model
Empirical evidence: Non aeronautical revenue (Car Rental and Parking ) Car Rental and Parking on average account for more than 65% of an airport s nonaeronautical revenue Dependent variables: Car Rental and Parking revenue per passenger Control for: passengers volumes (LCC pax and FSA pax), Hub size (dummy), LCCs share Fixed effects models were chosen based on the results of Hausman test
Empirical evidence: Non aeronautical revenue (Car Rental and Parking ): First results For Both Car Rental and Parking, an increase in number of LCC passengers enlarges revenue per passenger Increase in non LCC passengers decreases Car Rental and Parking revenue per passenger This difference between LCC and non LCC passengers is amplified in Medium Hubs Airports where LCC share exceeds 15% have higher Parking revenue per passenger on average. Airports where LCC share is greater than 25% have higher Car rental revenue per passenger on average, all else equal
Additional remarks: airport as a twosided platform The results of the empirical analysis support the two sided market view of airports An airport is a platform between passengers and airlines where airports add value to both sides. Airports can generate revenue from two sides; from airlines (charges) and from passengers (non aviation revenue)
Additional remarks: cross country differences Lei and Papatheodorou (2010) conducted an empirical research on British regional airports and found out that LCC passengers on average contribute less to non aeronautical revenue than other carrier passenger Why results are different??? Difference between LCCs business models Difference in non aeronautical revenue composition Difference in passengers preferences
Summary results LCCs in the US will have enough bargaining power to negotiate a decrease in Landing Fees when they comprise at least 15% of an airport s traffic A decrease in LCC Landing Fees per passenger by a US airport is not fully compensated by the additional traffic (and therefore heightens the importance non aeronautical revenue) through LCCs On average, LCC passengers contribute more to all the main components of airports non aeronautical revenue (F&B, Parking and Car Rental) than non LCC passengers (Full Service Airline passengers), except for Retail activities which is not very important The effects of different size Hub groups on non aeronautical revenue in the US were analyzed. The contribution of LCC passengers to F&B revenue is higher in Small Hub airports. Car rental and Parking revenue contribution from LCC passengers is higher in Medium Hubs
Summary results The findings of the research give a basis for concluding that US airports can remain financial sustainable with a growing LCC presence, even if landing and terminal charges have to be lowered Other benefits of LCC presence in the region are an additional benefit, which we don t consider here
THANK YOU FOR YOUR ATTENTION! see www.gap projekt.de for further details. Volkova.Nadezda@googlemail.com