The Air Transportation Industry: Economic Conflict and Competition

By Rosario Macario and Eddy Van de Voorde

The aviation sector consists of various actors such as airlines, ground handling companies, and others all with conflicting priorities. In order to understand how these actors position themselves in an increasingly competitive market, The Air Transportation Industry: Economic Conflict and Competition analyzes all the market segments in detail, examining such issues as which industrial economic structure drives decisions, the main economic problems, the consequences for negotiations between different actors, impacts on the global aviation market, and much more.

This book covers the entire aviation sector including strategies, regulation, resilience, privatization, airport slot management, and more. It examines how economic and strategic struggles underlie the current market structure, both for aviation as a whole and for the constituent actors as carriers, authorities, and handlers. It examines the ways market and nonmarket approaches impact the competitiveness of the air transport industry, offering a complete mapping of the economic actions between actors of the air transport industry. This volume will help readers gain insight into the possible strategic choices and the mutual competitive strength within the future aviation market.

• Contains contributions from well-known aviation scholars
• Includes numerous cases studies throughout that explore a wide range of topics
• Focuses on applied knowledge, with clearly structured chapters examining topics from a global perspective
• Addresses the ongoing consequences of COVID-19 on the air transportation industry, examining potential strategic responses in the event of subsequent pandemics

• Language: English
• Publisher: Elsevier Science
• Release date: Nov 16, 2021
• ISBN: 9780323915236

Book preview

The Air Transportation Industry

Economic Conflict and Competition

Editors

Rosário Macário

Eddy Van de Voorde

Table of Contents

Cover image

Title page

Contemporary Issues in Air Transport

Copyright

List of contributors

Preface

Chapter 1. Economic structure of the air transport business

1. Introduction

2. The market structure: highly competitive and heterogeneous

3. Evolution toward new business models

4. Possible conflict situations within and between actors

5. Conclusions

Chapter 2. The burden of a ton CO2! Emission trading systems and the air transport business

1. Introduction

2. The global challenge of climate change and CO2 emissions

3. Overview of global policies to address climate change

4. Air transport industry traffic and CO2 emissions

5. Policies to address CO2 emissions from international air transport

6. Measures available to reduce air transport CO2 emissions

7. Carbon Offsetting and Reduction Scheme for International Civil Aviation (CORSIA)

8. Analysis of the supply and demand for carbon offsets for CORSIA

9. The impact of CORSIA on air traffic and airline financial results

10. Conclusion

Chapter 3. Labor in the aviation industry: wages, disputes, and shocks

1. Introduction

2. Employment in the aviation industry

3. Wage determination

4. Monopsony (the power of the employers)

5. Monopoly (the power of the unions)

6. Bargaining power

7. Industrial action

8. Economic shocks

9. Conclusions

Chapter 4. The air transportation vertical channel, the global value added, and the role played by private versus public control

1. Introduction

2. The air transportation vertical channel

3. The aircraft manufacturers

4. The engine manufacturers

5. The leasing companies

6. The handlers

7. The distribution: GDS and others

8. Airports

9. Airlines

10. Conclusions

Chapter 5. Exogenous shocks on the air transport business: the effects of a global emergency

1. Introduction

2. Impact of COVID-19 on the airline business—the worst crisis since ever

3. A new era of nationalization?

4. How the industry is going to face the crisis

5. Conclusions

Chapter 6. The impact of regulation on the airport industry: the Italian case

1. Introduction

2. Airport regulation: a literature review

3. Airport regulation in Italy

4. The empirical analysis

5. Data

6. Empirical results

7. Conclusions

Appendix

Chapter 7. Airline pricing, incumbents, and new entrants

1. Introduction

2. Pricing principles: theory and literature

3. Deviant behavior: pricing as a barrier to entry

4. A possible generalization and alternative strategies

5. Conclusions

Chapter 8. The fight for airport slots: the case of Amsterdam Airport Schiphol

1. Introduction

2. The EU Slot Regulation

3. The changing context for slot allocation: COVID-19 and the airport capacity crunch

4. The implications for growing excess demand for slots: theory and research findings

5. The implications for growing excess demand for slots: the case of Amsterdam Airport Schiphol

6. Conclusions

Chapter 9. Different approaches to airport slots. Same results, same winners?

1. Introduction

2. Airport slot allocation approaches in the world and the problems emerging

3. Discussion of the solution alternatives to the problems emerged from allocation approaches

4. Proposal of a new and untraditional auction mechanism for airport slot allocation

5. Analysis of airline agents' bidding behavior in ASAM

6. Case study: application of ASAM to a synthetic auction market of Heathrow Airport

7. Discussion of the proposed model ASAM and results

8. Conclusions

Chapter 10. Black swans or gray rhinos on the runway? The role of uncertainty in airport strategic planning

1. Introduction and research questions

2. Increasing year-to-year traffic volatility at airports

3. High-impact shock events and deep uncertainty

4. Absorbing rare, high-impact shock events in airport strategic planning

5. Final observations and conclusions

Chapter 11. Making sense of airport security in small and medium-sized airports

1. Introduction

2. A brief history of air transportation security

3. Regulatory framework

4. Air transport security costs

5. Proportionality of security in airports

6. A new approach for security in a network of airports

7. Conclusion

Chapter 12. How can airports influence airline behavior to reduce carbon footprints?

1. Introduction

2. Evolution in air transport traffic and impacts worldwide

3. Airports environmental practice and carbon reduction initiatives

4. Challenges in environmental sustainability practice at airports and ways forward

5. Negotiation

6. Good practice recommendations and opportunities

7. Conclusions

Chapter 13. The measurement of accessibility and connectivity in air transport networks

1. Introduction

2. An overview of air transport accessibility

3. Air transport accessibility and related concepts

4. A tentative future research agenda

5. Conclusions

Chapter 14. Fighting for market power: the case of Norwegian Airlines

1. Introduction

2. Why did EU deregulation initially not affect the Norwegian domestic airline market?

3. Phases in airline strategic behavior following the deregulation

4. Airport competition

5. The low-cost carrier Norwegian's continued growth strategy

6. Concluding remarks

Chapter 15. Is privatization of ATC an economic game-changer? Who gains and who loses?

1. Introduction

2. Definitions

3. Literature review

4. The emergence of the ANSP business model and its impact on ATM/CNS profits

5. Conclusions

Chapter 16. The forwarders' power play effect on competition in the air cargo industry

1. Introduction

2. Freight forwarders in a literature review

3. The business model of the air freight forwarder

4. Concentration in the air freight forwarding industry

5. Freight forwarders at major European cargo airports

6. Conclusions

Chapter 17. Fuel hedging: how many games can we play?

1. Fuel costs' relevance in aviation

2. Fuel hedging fundamentals

3. Hedging in reality

4. Recent developments

5. Conclusions and future outlook

Chapter 18. The effect of accidents on aircraft manufacturers' competition

1. Introduction

2. Aircraft accidents, aircraft safety, and airline stock prices: a literature review

3. The aircraft manufacturers market: the story of a continuous consolidation

4. Aircraft accidents: a historic overview of air travel from safe to safest way of travel

5. The impact of accidents on aircraft manufacturers' competition

6. Why are airlines so faithful to their chosen aircraft manufacturer?

7. Conclusion

Chapter 19. How strategy can influence the market: recommendations and conclusions

1. Introduction

2. Market structures

3. Current market structure

4. What will the future bring?

5. Conclusions

Index

Contemporary Issues in Air Transport

Series Editors

Stephen Ison

Lucy Budd

Copyright

Elsevier

Radarweg 29, PO Box 211, 1000 AE Amsterdam, Netherlands

The Boulevard, Langford Lane, Kidlington, Oxford OX5 1GB, United Kingdom

50 Hampshire Street, 5th Floor, Cambridge, MA 02139, United States

Copyright © 2022 Elsevier Inc. All rights reserved.

No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Details on how to seek permission, further information about the Publisher’s permissions policies and our arrangements with organizations such as the Copyright Clearance Center and the Copyright Licensing Agency, can be found at our website: www.elsevier.com/permissions.

This book and the individual contributions contained in it are protected under copyright by the Publisher (other than as may be noted herein).

Notices

Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary.

Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility.

To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein.

Library of Congress Cataloging-in-Publication Data

A catalog record for this book is available from the Library of Congress

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

ISBN: 978-0-323-91522-9

For information on all Elsevier publications visit our website at https://www.elsevier.com/books-and-journals

Publisher: Joseph Hayton

Acquisitions Editor: Brian Romer

Editorial Project Manager: Michelle Fisher

Production Project Manager: Maria Bernard

Cover Designer: Matthew Limbert

Typeset by TNQ Technologies

List of contributors

Guillaume Burghouwt,     Royal Schiphol Group, Schiphol, Netherlands

Sven Buyle,     Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium

Carlo Cambini,     Department of Management, Politecnico di Torino, Turin, Italy

S. Sera Cavusoglu,     CERIS, Instituto Superior Técnico, DECivil, Transportation Systems, Lisboa, Portugal

Raffaele Congiu,     Department of Management, Politecnico di Torino, Turin, Italy

Duarte Cunha,     CERIS, Instituto Superior Técnico - Universidade de Lisboa, Lisbon, Portugal

Jaap de Wit,     Emeritus Professor, University of Amsterdam, Amsterdam, The Netherlands

Wouter Dewulf,     Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium

Colm Fearon,     Business School, University of Birmingham, Birmingham, England

Silke Forbes,     Department of Economics, Tufts University, Medford, MA, United States

Laura Khammash,     CERIS, Instituto Superior Técnico, Lisbon, Portugal

Yufei Li,     Department of Economics, Tufts University, Medford, MA, United States

Rosário Macário

CERIS, Instituto Superior Técnico, Universidade de Lisboa, Lisbon, Portugal

Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium

Carlos Filipe Marques,     Faculty of Business and Economics, Antwerp, Belgium

Gianmaria Martini,     Università degli studi di Bergamo, Department of Economics, Bergamo, Italy

Juan Carlos Martín,     Institute of Tourism and Sustainable Economic Development, University of Las Palmas de Gran Canaria, Las Palmas de Gran Canaria, Spain

Heather McLaughlin,     De Montfort University, Leicester, England

Antonio Musso,     DICEA, Department of Civil, Building, and Environmental Engineering, Sapienza University of Rome, Rome, Italy

Chaouki Mustapha,     Air Transport, ICAO, Montreal, QC, Canada

Cristiana Piccioni,     DICEA, Department of Civil, Building, and Environmental Engineering, Sapienza University of Rome, Rome, Italy

Vasco Reis,     CERIS, Instituto Superior Técnico, Lisbon, Portugal

Andrea Stolfa,     DICEA, Department of Civil, Building, and Environmental Engineering, Sapienza University of Rome, Rome, Italy

Siri P. Strandenes,     Department of Economics, Norwegian School of Economics, Bergen, Norway

Thomas Van Asch,     Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium

Eddy Van de Voorde,     Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium

Lisanne van Houten,     Royal Schiphol Group, Schiphol, Netherlands

Augusto Voltes-Dorta,     The University of Edinburgh Business School, Edinburgh, United Kingdom

Preface

If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. ¹

The year is 2021 and the aviation industry is in trouble. The COVID-19 pandemic has created tremendous stress in the industry, with aviation traffic slashed due to border closures and lockdown orders. Governments have pumped billions of dollars into aviation to save airlines from bankruptcy, protect jobs, and help airports survive a cash-flow crunch. But the current pandemic is far from the first time the aviation industry has been saved through government action. Previous rescues, although, perhaps, not quite as widespread as the current initiatives, have occurred with regularity over the past hundred years.

Recessions, pandemics, wars, and terrorist incidents have all broadsided the aviation industry leading to requests for regulatory fixes and government bailouts. Aviation liberalization, the open skies movement, and the privatization of industry players were supposed to have led to a market-based industry, where efficient, well-run firms survived and other, less efficient firms, exited the industry. Yet, the pro-cyclical nature of aviation, booming during good times and busting during bad, along with the fixed capital expenditures for aircraft and airports, the highly cyclical price for fuel, and the seemingly reckless capacity expansions by new and existing airlines, make the industry vulnerable to cash flow crunches.

Government subsidies have been a feature of the aviation industry since the beginning, with inflated airmail contracts providing funds to keep the early airlines afloat. When governments chose not to subsidize private sector operators, they, instead, invested public money to take ownership of airlines, airports, and air navigation providers. While governments have been willing to let other industries die (not much apparel manufactured in the United States anymore), the aviation industry has been deemed too vital to fail. Every country, seemingly, must have a flag carrier. Airports require new terminals, additional runways, and the latest in passenger amenities. If the private sector is unwilling to invest capital to fund aviation, governments step in to provide funds. Aviation investments are deemed so important that they take priority over expenditures for education and poverty reduction. Why are aviation markets so fragile? Why have governments been so willing to intervene in these markets?

The air transportation industry: Economic conflict and competition attempts to help us understand the functioning of markets in the aviation industry. How do airline pricing strategies impact competition? What is the impact of government regulatory policies on airlines? How do aviation labor markets function? How should scarce slots at airports be efficiently allocated? How should risks be considered in implementing airport security? What is the value of connecting cities to aviation networks? Is there value to privatizing air traffic control? Does fuel hedging pay off for airlines? How do aviation accidents impact aircraft sales? These are all questions addressed in this interesting look at aviation-related markets.

Take the recent example of two fatal crashes of Boeing 737 Max aircraft. A casual observer might have thought that these tragic accidents would have dealt a death blow to Boeing's 737 Max. But this does not seem to have been the case. Although there were some order cancellations for the aircraft, other airlines doubled down on their purchases, reconfirming orders or placing new orders. Airlines and leasing companies placed these orders even after investigations showed major flaws in the processes Boeing employed leading to the regulatory approval of the aircraft.

The Boeing 737 Max was not the first aircraft for which Boeing's development processes have been shown to be less than adequate. For example, the Boeing 787 was grounded in 2013 shortly after its service was inaugurated. In their interesting analysis of The effect of accidents on aircraft manufacturers competition, Dewulf, Forbes, and Li (Chapter 18) show that, over the years, accidents have appeared to have had little impact on aircraft manufacturer sales.

Does this finding indicate a market imperfection? Perhaps, yes. Given the duopoly structure of the industry, buyers may see little choice in continuing to buy Boeing aircraft, despite the potential problems with the purchased aircraft. Moreover, many airlines are heavily invested in Boeing products, especially low-cost carriers with standardized Boeing fleets. So, switching to another manufacturer will require significant investments in aircraft and training. Finally, is Airbus any better? What good would there be cutting ties with Boeing if an Airbus fleet is similarly vulnerable?

It is not clear how to best fix the imperfections in the market for aircraft. Fixed costs and other barriers to entering the industry are high. Perhaps, government investments may be needed. This is, perhaps, why the Chinese government has invested heavily in the development of aircraft through COMAC. But the Chinese could take heed from Canada's failed experiment with Bombardier, sinking hundreds of millions of dollars into an unsuccessful bid to maintain a locally owned and controlled commercial aircraft manufacturer.

Other chapters in the book provide equally interesting examinations of the functioning of aviation markets. How privatization might affect the operations of industry participants has been analyzed extensively over the years. Researchers have compared the efficiency of privatized airlines to the efficiency of publicly owned airlines and the operations of privatized airports to the operations of publicly managed airports.

Buyle (Chapter 15) examines the impact of privatization or commercialization on the operations of air navigation service providers. Until the COVID-19-related decline in air traffic, the air transport network had become increasingly crowded, contributing to flight delays, excess flight costs, and additional carbon emissions as aircraft circled, waiting for permission to land. Does the privatization of air navigation service providers increase the efficiency of our aviation networks leading to lower costs for system users? Unfortunately, Buyle's analysis does not provide a positive indication that privatization contributes to lower user costs, even if efficiency improves. He concludes his chapter with the following statement:

Overall the privatization and commercialization of [air traffic control] have not been the economic game-changer that governments hoped for … The winners are the shareholders, who achieve better returns and generate enough cashflows to make the necessary investments in new technologies and infrastructure. Airspace users who had hoped for lower air navigation charges often find themselves disappointed. The total user cost did not significantly decrease, as reductions in charges (if they exist) go hand in hand with higher delay costs.

Unfortunately, the conclusions are hardly a ringing endorsement of the air navigation privatization effort.

Cambini and Congiu (Chapter 7) provide us with more positive news. The authors examine the impact of a change in Italian regulatory policy on the costs of airport operations. In 2014, following a European Union directive, a newly formulated dual-till, price-cap regulatory policy was instituted, but only for some of Italy's airports. The new approach allowed airports to share in profits generated by productivity improvements, thus encouraging the airports operating under the new regulatory formula to increase efficiency.

The implementation of the regulatory measure for select airports afforded the researchers the opportunity to examine the impact of the regulatory change using a different-in-difference methodological approach. Analyzing data from twenty-two Italian airports over the period, 2008–18, the authors find that the imposition of the regulatory approach did lead to lower costs at the airports. Given the goals of regulation to keep costs down and improve efficiency, Cambini and Congiu have been able to uncover a successful regulatory intervention.

In addition to examining how government initiatives, such as privatization and regulation, impact markets, chapters in the book also examine how strategic behavior can impact market outcomes. The book's editors, Macário and Van de Voorde, contribute a chapter (Chapter 7) on how airline incumbents use strategic pricing behavior as a barrier to new entry. While reading this chapter, I was reminded of an article published in the Wall Street Journal about 30   years ago describing how airlines use coded information in computer reservation systems to strongly discourage rivals from competing too strongly in important markets. ² I was also reminded of the demise of Laker Airways, a pioneer low-cost carrier, driven from the North Atlantic market by fierce competition from entrenched rivals.

Macário and Van de Voorde describe a case study of an incumbent network airline using a combination of low prices and increased capacity to fend off the entry by two low-cost airlines in their major market. The incumbent carrier is Brussels Airline. Vueling, a Spanish-based carrier, was the first of the low-cost carriers to enter multiple routes from Brussels. Its larger rival, Ryanair, joined the competitive onslaught with several new services from the same airport. The decision to provide services from Brussels represented a departure from Ryanair's traditional strategy of flying routes from secondary airports, with a direct attack on the incumbent network carrier and the smaller low-cost rival at a first-tier airport. As a result of the expansion of services at Brussels airport, a price war ensued involving the two low-cost carriers and Brussels Airline. It was only after both Vueling and Ryanair retreated from their Brussels airport services that the price war ended. Brussels Airline had been able to use its pricing and capacity strategy to successfully compete with the low-cost carriers, although at a severe cost to its finances.

van Houten and Burghouwt (Chapter 8) also describe how airlines use strategic behavior to gain competitive advantage. In this case, the strategic behavior is concerned with gaining access to scarce slots at congested airports. Slot rules generally allow airlines to maintain slots (grandfather rules) if they are being actively used (use it or lose it rules). With limited capacity and growing demand at busy airports, one would expect airlines to increasingly use larger aircraft at these airports. Moreover, load factors at congested airports should rise as demand increases. However, in their study of congested Schipol Airport in Amsterdam, the authors find that, in fact, both aircraft size and load factors may be falling. Although some of these changes may be due to airport policy changes (e.g., restrictions on wide-bodied aircraft during certain operating periods), airline operating changes may also be partially due to strategic behaviors.

van Houten and Burghouwt note that current grandfather rules provide strong incentives for airlines to deter entry by rivals by hoarding slots. In addition, airlines may downsize their aircraft and spread passenger traffic over greater frequencies to maintain control over scarce slots. However, new entrants can also use strategic behavior when competing for slots. European Union rules allow new entrants special access to slots at airports. These new entrants are defined as airlines that hold fewer than 5% of the slots at a particular airport or 4% of the slots at the airport system level. Airlines can evade these restrictions by flying under multiple operating authorities. Using this loophole, airlines can appear as new entrants even if they have already established operations at an airport, thus gaining access to airport slots. Perhaps, the European Union should consider adopting a fairer and more rationale system for slot allocation, along the lines outlined by Cavusoglu (Chapter 9).

Although standard Econ 101 still teaches the functioning of perfectly competitive markets along the lines espoused by Adam Smith, we know from experience that most markets are imperfect. Competition is not perfectly competitive and is subject to manipulation by strategic behavior of market participants. Governments attempt to regulate this behavior with mixed success. The air transportation industry: Economic conflict and competition very intelligently describes the workings of the many aviation-related markets. The chapter authors assess the efficiency of the markets and offer proscriptions for ways to improve efficiency.

The pause in the growth of air transport due to the COVID-19 pandemic has resulted in a rare opportunity to reassess the functioning of aviation markets. Hopefully, our policymakers and regulators will make good use of the analyses presented in this book.

Martin Dresner

R.H. Smith School of Business

University of Maryland

College Park, MD, USA

---

¹  

Quote attributed to billionaire investor, Warren Buffett, https://nymag.com/intelligencer/2020/05/warren-buffett-should-have-listened-to-himself-on-airlines.html, accessed April 25, 2021.

²  

The most famous of these was the FU fare code.

Chapter 1: Economic structure of the air transport business

Rosário Macário ¹ , ² , and Eddy Van de Voorde ²       ¹CERIS, Instituto Superior Técnico, Universidade de Lisboa, Lisbon, Portugal      ²Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium

Abstract

A dynamic aviation sector is characterized as extremely capital-intensive, coupled with a continuous process of rapid technological and organizational developments. This generates a unique industrial-economic structure, with quite a few new market entries, mergers, acquisitions, and bankruptcies. The result is a heterogeneous market, with a variety of major market actors (e.g., airports, carriers, handlers) of different sizes, and with different levels of market power. This introductory chapter concerns the economic structure of the air transport business. It begins by charting the underlying relationships between the various actors in order to identify points at which specific relationships between market actors could potentially generate problems. The analysis proceeds from the current market situation in the aviation business and the various existing business models.

Keywords

Business models; Developments; Economic structure; Marketactors

1. Introduction

In recent decades, the aviation sector has proven extremely sensitive to the economic situation and the related cyclical economic movements. Periods of strong economic growth gave rise to the market entry of new carriers, expanding business and, for several consecutive years, generating significant profit. In contrast, economic crises automatically translate into aviation crises, which subsequently translate into waves of takeovers and mergers of companies, bankruptcies, and market exits. At the same time, the aviation sector appears to be a proactive indicator: developments in the aviation sector are often at the forefront of evolutions in the rest of the economy. The sector thus provides an economic laboratory in which new developments and trends become indicators of what will happen later in the global economy.

Actors in the aviation sector approach their industry from the perspective of air transport chains. Potential travelers and shippers of goods do not select carriers and airports solely on their own characteristics and merits, but because they belong to specific aviation chains that optimally meet their own preferences and correspond to their willingness to pay and the attractiveness of the destinations. The ultimate success of airlines and airports is therefore largely dependent on whether they are or are not part of successful chains.

Along with developments in the economy and industry, however, the market structure and market forces have evolved as well (Gillen and Niemeier, 2008). At one time, carriers at an airport controlled all operations, extending even to tourism (e.g., hotels, travel agencies). At one point, a trend developed in which all non-core activities (e.g., catering, baggage handling) were shifted toward other companies. A similar shift occurred in the field of freight transport. While freight was long considered a by-product of passenger transport, the freight market is currently the exclusive focus of a number of carriers.

The aviation market is thus situated within an environment of constant evolution combined with permanent uncertainty. The dynamics of economic interaction have made the aviation sector exceptionally resilient, as was particularly evident during the period from 1970 to 2015 (ICAO, 2015). Nevertheless, many questions remain with regard to the future. How will aviation recover from the COVID-19 crisis of 2020? Will this crisis challenge the air transport industry's capacity for resilience? Which existing aviation activities will be willing/able to expand, and which will disappear in the short to medium term? Where are new market opportunities emerging? Which exogenous and endogenous factors drive change? The answers to these questions have consequences that transcend the aviation sector as such. Any decision made by any actor has direct and indirect consequences for a variety of aspects, including employment, investments, the added value to be realized and the prevailing funding requirements. From another perspective, increasing uncertainty caused by pandemics is likely to increase the risk associated with investments, thereby affecting the expansion and management of airports.

As demonstrated by these developments described, there is a need to identify any new developments in the aviation sector as quickly as possible and to be able to estimate their consequences. Only then will the various actors involved be able to take the proper action. In addition, the actors within the system compete, negotiate, and even come into conflict with each other. The relative power relations between aviation actors are discussed in this chapter, as well as throughout the book. In this chapter, the discussion of power relation is followed by further details on the evolution toward new business models and possible conflicts between aviation actors.

2. The market structure: highly competitive and heterogeneous

Over the years, the aviation sector has undergone a relatively rapid evolution toward new market forms. The sector initially faced pressure to shift from highly regulated markets toward liberalized, deregulated markets (Odoni, 2016a; Gudmundsson, 2019). One consequence of this shift was that it made it relatively easy for newcomers to enter the market, while increasing competition for the traditional flag carriers. This has given rise to strong, rapid development within the aviation market, characterized by continuous entries and exits (see, e.g., Green, 2016).

Airlines have also increasingly moved away from the notion that they must control the entire aviation product. One prominent new trend has involved focusing on the core business—actual flight operations—and phasing out all non-core activities. This trend has resulted in changes to the composition of the aviation product (i.e., movement from origin to destination) and its specific characteristics (e.g., price, comfort, frequency, timing). The field has increasingly come to involve a combination of several different market actors, from carriers and airport managers to all kinds of service providers, and the changes apply to both passenger and freight transport. The interaction between the strategies of the various actors is abundantly clear. The advance of chain thinking means acknowledging that every decision that an individual actor makes will have both direct and indirect consequences for the other actors within the chain, with implications for the competitive positions of all actors involved (Starkie, 2008).

2.1. The market structure

Although the structure of a market may evolve over time, the basic economic rules remain the same. For example, the aviation industry continues to be driven mainly by the global economy. This world economy is subject to rapid changes in international trade, the international redistribution of labor and capital, and the far-reaching integration and globalization of markets (see, e.g., Kupfer et al., 2017).

The core of an aviation chain initially consisted of airlines and airports (Merkert et al., 2017), and it would seem obvious to regard airlines as the largest and strategically most important airport customers. Over time, airlines have undergone a significant increase in scale, largely due to horizontal cooperation (cf. the three major alliances) and/or mergers and acquisitions (cf. Lufthansa's control over other airlines, including Swiss International Airlines, Austrian Airlines, and Brussels Airlines).

One important question concerns whether the trend toward scale increases among the carriers can also be expected among airport operators and the providers of various services, including handling, catering, cleaning, and hinterland transport (Morrison et al., 2008). The constant changes taking place within the airport sector have continued in recent decades. The field of airport management and operations has undergone an evolution from government-led management toward the increasing contribution of private capital, in some cases accompanied by interests in other transport modes (e.g., capital investments by VINCI Airports in the airports of Portugal). Traditional ground handling companies are shifting into more complex handling holdings, with a process of mergers and acquisitions initiated under pressure from the need for capital, combined with externally funded expansion projects.

As chain thinking has increased, transport services from origin to destination have come to be considered in terms of complex logistics chains, with each link expected to contribute to a process of continuous optimization throughout the chain as a whole. In response to the detection of potential bottlenecks, carriers are likely to move toward vertical acquisitions and vertical integration. Such shifts affect the competitive balance, with specific carriers acquiring greater market power as the largest and most actively growing actors at specific airports.

Estimating the future market structure requires insight into a number of possible future developments (Belobaba, 2016) Perhaps the most important questions concern future economic growth. Any economic growth that might take place will almost automatically translate into a growing demand for airport services across the chain. Before the COVID-19 pandemic, the only question in aviation circles concerned the extent to which long-term economic growth would continue and whether and to what extent potential short-term crises were likely to cause structural shifts. The pandemic will inevitably result in changes to several processes in our society. For example, teleworking will undoubtedly be much more common, potentially resulting in a significant reduction of business trips. This raises several important questions. In the future, will the demand for air transport follow a path of growth that depends on services rather than on industrial output? Will growth in passenger/freight transport continue to be related to GDP? Will the trend toward scaling-up carriers and service providers through horizontal and vertical forms of integration continue? Given the apparent end to the trend toward ever-larger devices (cf. the A380 story), which devices are likely to be used in the future?

Even more important than estimating the future structure of the market is the analysis of the strategic steps of the carriers, as they are the initiators of connections and the frequency and capacity on offer (Kupfer et al., 2016). Important questions arise in this regard as well. Which time frames will those carriers follow in their search for new partnerships? How will the non-carriers within that transport chain respond to this? To what extent will the carriers become so powerful that they are able to impose their will on other actors (e.g., airport authorities and ground handling companies)? Will the aviation sector enter into new partnerships with other modes of transport (cf. political pressure to abolish short aviation connections)?

Each of the crucial questions presented above is surrounded by uncertainty. This is partly due to the fact that the aviation market is a highly dynamic environment. It is thus reasonable to assume that the various actors try to anticipate each other's strategic decisions. This is competition in its purest form.

Prior to the COVID-19 pandemic, the most likely future scenarios deserving of in-depth scientific investigation were largely known. Only the concrete timeline remained uncertain. Although the pandemic clearly changed this situation, it is not the only factor involved. The speed with which the various market actors within the aviation chain will implement their adapted strategies will also depend on a wide range of exogenous and endogenous variables (see e.g., Bringman et al., 2018).

2.2. Size order of market parties: turnover, money, and power

To provide an idea of the relative market power of the various aviation actors, we initially limit our focus to an analysis of aggregated figures for carriers and airports. In a subsequent section, we examine the mutual ties between actors.

Table 1.1 provides an overview of the order of magnitude of the scheduled passenger and cargo traffic for the world as a whole, which involved 4.5 billion passengers and 60.9 million tons in 2019. It is interesting to note that 58.6% of all passenger transport was domestic, with 41.4% international. Airlines thus introduced 4.5 billion customers into the aviation system. These figures can be used to derive the effects for airports and airport-dependent actors.

Table 1.1

Source: Reproduced from IATA, 2000–2020. World Air Transport Statistics (WATS), Montreal.

The number of passengers carried is an important variable, but the actual transport performance is also a function of the distances flown (see, e.g., Balliauw et al., 2018). It is derived from the number of passenger-kilometres flown (an indicator of demand) and the available seat-kilometres (an indicator of supply). These two figures can be combined to yield a passenger load factor of 82.5% for system-wide transport. For freight transport, the freight load factor is equal to 46.7%, largely due to the low freight load factor for domestic transport (only 27.8%).

Despite the fact that 2019 was a relatively good year for the aviation sector, this did not automatically translate into brilliant performance. As shown in Table 1.2, the total industry achieved a net profit of US$25.9 billion. The figures reveal several important geographic differences, with profits in North America, Europe, and Asia-Pacific, and with negative results in the Middle East, Latin America, and Africa.

The analysis of specific negotiating positions among the various actors also calls for looking at the individual carriers. Table 1.3 provides an overview of the top 15 airlines in terms of scheduled passengers carried for 2019.

Note that the first and fourth places are occupied by low-cost carriers (Southwest Airlines and Ryanair, respectively). Each of these carriers reach their markets primarily on their own continents. Furthermore, the three major American legacy carriers are ranked in the top five positions. These three carriers are core partners within their respective strategic alliances. The absence of large European carriers (e.g., Air France and British Airways) in the top 15 positions is remarkable.

The number of passengers transported indicates the number of people who are brought to an airport anywhere in the world, although it does not provide a complete view of the total transport performance delivered by the carriers.

Table 1.2

Source: IATA, 2000–2020. World Air Transport Statistics (WATS), Montreal.

Table 1.3

Source: IATA, 2000–2020. World Air Transport Statistics (WATS), Montreal.

The top 15 carriers based on the number of scheduled passenger-kilometres flown are presented in Table 1.4. These rankings are headed by the three major American legacy carriers, followed by Emirates. Low-cost carriers (e.g., Southwest Airlines and Ryanair) fly on their own continents, with shorter average distances per flight, relative to other carriers. The three largest European legacy carriers are represented in the top 15 positions in this ranking.

The analysis of the order of magnitude of carriers, as presented above, is important in the sense that a company's purchasing and/or bargaining power with regard to its suppliers is linked to the strength and/or size of that company. For carriers, this power can be increased by working with strategic alliances. ¹ In this sense, it is important to know how strong the position of possible opponents is. In the following paragraphs, we provide a more detailed view of the airport operators.

Table 1.4

Source: IATA, 2000–2020. World Air Transport Statistics (WATS), Montreal.

A carrier initially negotiates with a set of potential airports to which it will fly. A possible agreement depends on the potential demand that can be served through a specific airport, as well as on a number of other conditions, including landing rights, available slots and available free capacity, as well as the way in which slots are allocated and the quality of the service providers present at that airport.

The ultimate choice of a carrier for a specific airport is obviously the result of negotiations, and relative market power plays a major role in this process. At airports with little or no free capacity (e.g., London Heathrow), the airport operator's market power is extremely high, insofar as the regulation allow it to use that market power effectively. Airports that are almost completely dependent on a single carrier as a customer have little leeway. This translates into lower landing fees, amongst other conditions. Consider the following illustrative example. In 2012, the cost per departing passenger in Brussels Zaventem, the national airport, was €31.36. At Charleroi airport, also known as Brussels South, and with Ryanair as the dominant carrier, the same costs amounted to a mere €2.39 (Flemish Airport Commission, 2012).

To provide an idea of the order of magnitude of a number of airports, Table 1.5 presents an overview of the top 15, based on enplaning and deplaning passengers in 2019.

Table 1.5

a  passengers in transit counted once.

Source: Airport Council International (ACI), Passenger Traffic 2019.

A large volume of passengers is involved for each of these airports. Airports with an excellent geographic location and great market potential attract many carriers. In addition, a number of those airports are also used as hubs by certain carriers. ² Each passenger generates significant non-aeronautical revenue streams as well. The aggregate revenues for Gatwick Airport (London), both aeronautical and non-aeronautical, are presented in Table 1.6. For the accounting year ending March 31, 2019, total revenues amounted to more than £810 million. Taking into account total operating costs of £539.4 million, the operating profit amounted to £271.4 million. With the addition of £170.0 million in depreciation and amortization, this results in EBITDA ³ of £441.4 million.

The measurement of airport financial performance and the interpretation of the economic indicators derived from them should always take into account the institutional contexts within which specific airports operate (Odoni, 2016b). In addition, explicit attention should be directed to ownership structures. Due to differences between these environments, some airports aim to maximize returns for investors and shareholders, while others strive merely to recoup the costs incurred in providing airport services and infrastructure.

Table 1.6

Source: IVY HOLDCO LIMITED, Annual report (2019).

Airport operators and other aviation stakeholders use various forms of equity and debt financing. An airport's ownership model has a direct impact on its capital structure. It is precisely the diversity of capital structures that makes the process of benchmarking the financial performance of airport managers so complex (Mahoney et al., 2012).

No analysis of airport revenues and profitability can be complete without considering the role played by economic regulation. The possibilities that airports have to generate traffic and income depend in part on actual traffic volumes and market characteristics, as well as on the jurisdiction and regulations within which they operate. For this reason, caution is required when interpreting the various profitability indicators and benchmarks.

Thus far, we have limited our focus to the two largest players: carriers and airport managers. Due to their size, these two actors often have significant bargaining power. Extensive concentration has been observed among carriers, including through the formation of alliances (Fageda et al., 2019). At the same time, however, two interesting developments have taken place with regard to airport operators. The first involves capital diversification, including with regard to pension funds and investment funds. One illustration is provided by the consortium that controlled the shareholding of Gatwick Airport on March 31, 2019. ⁴ In the course of 2019, the VINCI Airports group also entered the capital. The addition of VINCI is an example of an increase in scale on the part of the airport operators. ⁵

Based on the aforementioned developments, we can conclude that, similar to the container business in shipping, aviation is evolving toward a situation in which large contracts are negotiated by a limited number of large groups. Negotiations for specific carriers and/or their alliances may thus involve approaching multiple airports. The extent to which such scaling-up will continue for the two actors and the consequences of this process in terms of negotiations remain unclear. One relevant question concerns whether this evolution is occurring at the top of the market toward negotiations within the framework of a bilateral oligopoly.

The other actors in the aviation sector are of a smaller scale. They include handlers, parking facilities and other service providers. Some of these actors (e.g., fuel suppliers, caterers, and maintenance services) have direct contact and contracts with carriers. Others (e.g., shop operators) have agreements only with the airport manager. Even though some of these service providers are active at multiple airports and even on different continents, they have less turnover and, correspondingly, less bargaining power. This is despite an increase in scale among handlers (e.g., Menzies Aviation, Aviapartner Holding, and Dnata). Another striking development in recent years is that a number of handlers have experienced financial difficulties, with some even going bankrupt.

The shops at airports form a separate category. This has to do with the fact that, in the field of regulations, the profits linked to non-aeronautical revenues and other aspects tend to be the subject of sharp discussions. A typical example concerns the discussion of single-till versus dual-till regimes.

2.3. The interdependence and market power

Large numbers of actors of various sizes are active at an airport, each with a unique commercial approach and set of objectives (Templin, 2010). This in itself results in considerable heterogeneity within the aviation landscape (Meersman et al., 2011). Fig. 1.1 provides an overview of these actors in their mutual relationship, based on pricing and invoices. The airport manager plays a central role, while carriers bring in the main clientele, with passengers and cargo. These carriers do not necessarily have a great deal of relative market power, however, given the limited capacity assigned through slot allocation at airports with many competing carriers. In most cases, the government is responsible for regulations. Licences for handling aircraft are awarded through auction by the airport operator and/or the regulator. Some service providers are licensed according to agreements with specific airport providers and conclude contracts directly with carriers. Shops and parking operators conclude agreements with airport operators.

In the ideal situation, we would be able to quantify the interrelationships between the various actors, thereby identifying who pays which amount to which actor, and at which time. Although such figures could provide valuable input for bilateral or multilateral negotiations, they are unfortunately not available at this time. It is therefore interesting to consider a study by the National Bank of Belgium with regard to the economic importance of aviation and aviation activities in Belgium. ⁶ For the period under consideration (2013–2015), the aggregate passenger traffic kept pace with the growth at world level.

Figure 1.1 Pricing and payment of airport bills. 

Source: Own composition.

Table 1.7

Source: Vennix, S., 2017. Economic Importance of Air Transport and Airport Activities in Belgium, Working Paper 324. National Bank