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The “No Frills” Strategy of Low-Cost Carriers

And their Impact on the Regional Economical Importance of Frankfurt Hahn Airport

Magisterarbeit 2009 89 Seiten

BWL - Unternehmensführung, Management, Organisation

Leseprobe

Table of Contents

List of Acronyms

List of Figures

List of Tables

1. Introduction

2. Developments in the International Airline Industry
2.1. Historical Developments
2.2. Deregulation and Liberalization of the Airline Industry
2.3. First and Second Memorandum of the European Commission
2.4. The Liberalization Packages of the Europe
2.5. Outcomes of the Liberalization and Deregulation Process

3. The phenomenon of Lo-Cost-Carriers (LCC)
3.1. Introduction to LCC’s
3.2. Development of LCC’s in Europe
3.3. LCC market in Germany

4. Low-Cost-Carrier Marketing Strategy
4.1. LCC Operation
4.2. LCC Network
4.3. LCC Fleet
4.4. Target Market and Customers
4.5. LCC Sales and Pricing
4.6. LCC SWOT Analysis

5. Low Cost Carrier and Effects of Regional Airports
5.1. Introduction
5.2. Effects of Secondary Airports / Definition

6. Airport Frankfurt Hahn and Regional Infrastructure
6.1. Development of the Airport
6.2. Development of the Airport Passenger Terminal’s
6.3. Development of Runway
6.4. Catchment Area of Frankfurt Hahn
6.5. Infrastructure in the Region of Frankfurt Hahn
6.6. Passenger and Cargo Development
6.7. SWOT Analysis of Frankfurt Hahn Airport

7. Regional Effects of Airport Frankfurt Hahn
7.1. Regional Social and Economical Structure
7.2. Impact of Frankfurt Hahn Airport on Employment
7.3. Enterprises at Frankfurt Hahn
7.4. Employment at Frankfurt Hahn and its Region
7.5. Frankfurt Hahn Impact on the Tourism Industry

8. Estimation of the Frankfurt Hahn Airport Economical Effect

9. Conclusion

References

List of Acronyms

illustration not visible in this excerpt

List of Figures

Figure 1: Air Freedom Rights

Figure 2: passenger-km travelled since 1970

Figure 3: Market share development of European Airline Industry

Figure 4: Low-Cost-Carries Bases in Europe

Figure 5: LCC routes from Germany

Figure 6: LCC Market Share in Germany

Figure 7: LCC growth in Germany

Figure 8: Hub-and-Spoke Network

Figure 9: Point-to-Point Network

Figure 10: Economical Effects of Regional Airports

Figure 11: Business Structure, Airport Frankfurt Hahn GmbH in 2009

Figure 12: Airport Frankfurt Hahn Runway Extension

Figure 13: Frankfurt Hahn Region

Figure 14: The distance of the population from Frankfurt Hahn Airport

Figure 15: Airport Frankfurt Hahn Road Infrastructure

Figure 16: Development of the federal road A50

Figure 17: Bus Infrastructure at Frankfurt Hahn Airport

Figure 18: “Hunsrückbahn” to Frankfurt Hahn Airport

Figure 19: Development of Aircraft Movement

Figure 20: Development of Passenger Numbers

Figure 21: Development of Aircraft Movement

Figure 22: Development of Aircraft Movement

Figure 23: Number of Companies at Frankfurt Hahn

Figure 24: Company Characteristics at Frankfurt Hahn in 2008

Figure 25: Job Creation Characteristics

Figure 26: Development of Employment at Frankfurt Hahn

Figure 27: Employment in the Private and Public Sectors

Figure 28: Employment Types (Male-Female)

Figure 29: Age Groups of Employees

Figure 30: Employment Numbers by Industry

Figure 31: Residence of Employees

Figure 32: Visitors and Overnight Stays in MILLION (Rhineland-Palatinate)

Figure 33: Development of Visitors and Overnight Stays in Rhein/Hunsrück

Figure 34: Visitors and Overnight Stays compared to previous year

Figure 35: Development of Visitors and Overnight Stays in Cochem-Zell

Figure 36: Visitors and Overnight Stays compared to previous year

Figure 37: Development of Visitors and Overnight Stays in Bernkastel-Wittlich

Figure 38: Visitors and Overnight Stays compared to previous year

Figure 39: Development of Visitors and Overnight Stays in Birkenfeld

Figure 40: Visitors and Overnight Stays compared to previous year

List of Tables

Table 1: The European aviation liberalization packages

Table 2: Number of Enterprises and Types of Industry 2005 vs. 2008

Table 3: Economical Key Data of Frankfurt Hahn (comparison 2003 and 2005)

1. Introduction

The aviation market in Europe has changed drastically over the recent years. This change can be traced back to the liberalization of the aviation market, which made it possible for new airlines to enter the market easily. These days, not only tradition airlines operate on the European market, also the new comers LCC’s. These airlines have changed the tradition approach of running an airline totally, and have developed a new marketing strategy which has favoured many regions in Europe positively over the past years. This paper will focus on the impact such LCC’s have on airports in Germany, in our case the LCA Frankfurt Hahn. Here the aim is to find out how much impact the LCC marketing strategy has on the development of the Airport Frankfurt Han, and resulting out of that the region of the airport.

Therefore the FIRST chapter in this paper is going to have a look at the developments of the international airline industry in Europe. Here we are going to have a look at the historical development. It is going to be described in detail how the deregulation and liberalization in Europe happened, and what changes have been put in place. The liberalization packages are going to be described in detail, and the outcomes of the liberalisation and deregulation are going to be stated.

In chapter THREE, the LCC’s are going to be introduced. Here we are going to have a quick introduction on what ‘NO-Frill’ means in the context of air travel. Further the development of LCC’s in Europe is going to be shown. After that there is going to be a focus on the development of LCC’s in Germany. Here the airlines which operate in Germany are going to be stated, and how they have developed over the years.

Chapter FOUR is going to focus on the marketing strategy of LCC’s in Europe, and how they operate. This chapter focuses on how they operate, how they choose their network and fleet. Also important is to find out what their target market is, and how they manage their sales and pricing strategy. This chapter gives a detailed explanation on how such airlines function.

After having had a look at the LCC’s strategy, Chapter FIVE focuses on the effects such airlines have on secondary airports. Also this chapter describes what regional effects such an airport has on its surrounding.

In Chapter SIX the Airport Frankfurt Hahn stands in the centre of discussion. This chapter describes the several development stages of Frankfurt Hahn in terms of terminal or runway extension, and passenger development. Also this chapter analyses the catchment area of Frankfurt Hahn, and its infrastructure.

After having introduced the Airport Frankfurt Hahn in detail, Chapter SEVEN focuses on the regional effects of the airport. Here the development of the industry based at Frankfurt Hahn is going to be in the centre of discussion, and how they impact the development of employment. Also the region around the airport is going to be introduced, and how they are favoured positively by the airport. Finally in the chapter the impact on the tourism industry of the area is going to be discussed.

Chapter EIGHT will show the results of Chapter SEVEN in numbers. Here it is going to be shown how the region is affected financially by the development of the airport Frankfurt Hahn.

Chapter NINE will combine all the findings, and will show the conclusions of the paper.

This paper includes a high amount of graphical illustration and tables, to make it easier for the reader to understand all the facts. This is because of the high amount of statistical data which is required to illustrate all findings.

2. Developments in the International Airline Industry

2.1. Historical Developments

Already at the beginning of the 20th Century numerous bilateral intergovernmental agreements excised to regulate the European airline industry. Also such agreements existed between airlines itself, which was the base for the international airline industry. In addition to that three agreements between several states were in place to regulate the airline industry as consistent as possible. On the European site the Paris convention in 1919 was the most important. In this convention all the states agreed to sovereignty over their airspace. All partners that took place in this convention obtained the right to fly through the other contract partner’s airspace. States that failed to take part in this convention were not granted the right of transit.1

In the course of the 2nd World War, most of the civil air transport stopped. In order to arrange a new peace agreement, the US government invited allies and all neutral states to the conference in Chicago in 1944. This convention was not successful in terms of creating new universal multilateral regulations for the civil air transport, but here the Air Freedom Rights were put in place.2 Five Freedoms were designed, but the multilateral agreement went only as far as the first two rights. (The right to fly over and to make a technical stop). The five freedoms are shown in figure 1. These five freedoms are regularly exchanged between countries in Air Service Agreements. These freedoms have to be negotiated as they are seen as privileges, and are not automatically granted to airlines. In advance to these five freedoms another three exist which are becoming more important these days. With the aim to increase technical standards and regulate competition, international governmental organisations like the ICAO and IATA were formed. The Air Freedoms were since under the foundation of reciprocity exchanged or sold for cash. Because of that a very complex network of bilateral contracts existed for a long period time.3

Figure 1: Air Freedom Rights

illustration not visible in this excerpt

One of the most popular agreements is the one which took place between the USA and Great Britain in 1946. Here it was decided to have the possibility to designate the 5 Air Freedom Rights more than once.4 Therefore one can say that these decisions have been the foundation of many bilateral agreements that have followed.

Now the foundations to use air travel as a mass transportation were set. Since then this market has been growing very fast which has been favoured through the phenomenon globalization as well. Even wars and tragic events have not stopped this development in the past.

According to Pompl the following statements are the reason for the ongoing growth of the aviation industry. First of all the increase in productivity because of the technological advancement is important to mention as this triggered the decreases in costs for air travel. Another reason is the more and more global network, which increased the demand for business travel and cargo. The private income of workers has increased considerably in the past with the result that people afforded private travel. Finally the political liberalization of the aviation industry resulted in a better connectivity and offer, which again resulted in competitive prices for air travel.5

2.2. Deregulation and Liberalization of the Airline Industry

Before the deregulation and liberalization process of the air transportation industry started, it was operating in a heavily regulated market. Because of this regulation important area like fares, routes and schedules were heavily influenced. Hence the possibility to create a market oriented product was not possible.6

The aim off the regulations that the airlines had to face before the deregulation process was to secure the market of competition that might affect the economic forthcoming of the industry. On top of that were many airlines in governmental property (Nation Flag carriers), hence regulations secured profits. Therefore a deregulation of the airline industry favoured only cheaper and more innovative newcomers. This resulted in a negative effect for the consumers as they only had a limited choice, fares were far too high, and only a limited choice of connection flights existed. There was no security against ineffective airlines.7

At the beginning of 1970 the liberalizing and deregulation started because of the criticism brought along. Major criticism came from consumers, scientists, and also the industry. Scientists have proven at that time in several investigations that fares would be only half as high in a deregulated airline industry, and also the present inefficiency would be cut considerably. It was believed that a deregulation would create more competition, which again would result in lower fares and a better service offered.8

Since the deregulation and liberalization of the airline industry, considerable changes have taken place. New airlines became the possibility to enter the market and create a competitive business model. Without this change the low cost carrier model would not have been a thinkable business model. The best example for the incredible change is the increase in passengers transported since 1970 which can be seen in the graph below.

Figure 2: passenger-km travelled since 1970

illustration not visible in this excerpt

Source: Own creation, data from Pompl. (2002). Luftverkehr. Eine ökonomische Einführung. 5. Auflage. Berlin: Springer. P. 2

2.3. First and Second Memorandum of the European Commission

The liberalization process which was going on in the USA triggered the first steps towards the liberalization and deregulation process in Europe. This development overseas initiated the commission to create a common regulative system for the European aviation market. The proposals of the commission for such a system were mainly put together in the memorandum of 1979 and 1984. The aim of this action was to create a functioning competitive market which would favour the consumers and efficient airlines.9

The aim of the first memorandum in 1979, which was introduced by the commission, was to start a debate for possible common aviation policies. According to the commission a result from this should have been an effective and cost-efficient aviation network.10 The commission planned with this memorandum to reduce entry barriers, to introduce lower tariffs, common technical standards and the use of competition regulations. According to the commission a competitive and well functioning European aviation industry should develop after the introduction of these actions. These actions should also bring forward efficient airlines. At the same time interests of the airline employees should be taken into account and an increase in awareness for the environment.11 In the years after the first memorandum, some proposals of the commission were brought forward to the ministers and were accepted, which increased the cooperation between the states. After all, this memorandum was not as successful as expected and most new regulations were of limited use.12

In 1984 a second memorandum was published by the commission as more important steps were required to bring forward the liberalization process. Here it was important to eliminate existing competition restrictions. Part of this was to allow a multiple designation of airlines, a generous distribution of capacities and unregulated pricing policies. Also the commission demanded a more intense control of state assistance to airlines.13 The monopolistic status of the European airline industry created only a high pricing situation. On the other side triggered the US deregulation in 1978 lower prices for air travel on the US-market. The fact that the deregulation in the USA resulted in lower prices created distrust and need for explanation by the European consumers. Through this the Europe was pressured to take actions.14

2.4. The Liberalization Packages of the Europe

The three liberalization packages, which were put in place over a 10 years period, were the most important steps towards a deregulated aviation industry. The judgement of the European Court (EC) eliminated the existing legal uncertainties in terms of applicability of the competition regulations put in place by the European Economic Community (EEC) contract. This was the foundation for the liberalization packages, which would transform the European aviation industry from bilateral regulations towards a common European aviation regulation system.15

Finally in 1993, the liberalization packages were put in place, and EC-domestic market became reality. From now on all airlines had free access to markets inside the EC, but states were left with the right to restrict access for the reason of common welfare. Airlines had from now on the right to create their own pricing policy, which can be seen as the birth of Low-Cost Carriers (LCC). From now on healthy competition became possible and inefficient airlines had to restructure. The right of domestic cabotage was introduced in 1997 for all EU Airlines.16

In the following Table all important characteristics of the Liberalization packages are included.

Table 1: The European aviation liberalization packages

illustration not visible in this excerpt

Source: Own creation, data from Arndt, Andreas. Die Liberalisierung des grenzüberschreitenden Luftverkehrs in der EU: Eine quantitative Analyse der Wohlfahrtswirkungen und des Anbieterverhaltens. Lang, 2004, P. 28.

2.5. Outcomes of the Liberalization and Deregulation Process

The Liberalization of the aviation industry in Europe triggered many changes in the services offered, the structure of the market, and in the pricing policy of airlines. i) The market structure has changed considerably as the entry barriers to the market have been lowered. This has encouraged innovation and entrepreneurship in the industry. The liberalization has encouraged and allowed the creation of new airlines with innovative marketing strategies which has increased the competition on European routes. Nevertheless, only half of the original 144 start-ups were still operating in 2000. Still, 13 Flag Carries are still operating today, most of them in global alliances. Such national airlines still have exclusive rights, as their backbones are bilateral agreements outside the EC. This helped them to survive the developments in the market since the deregulation. One of the most important developments since the liberalization has been the low-cost airlines, which hold 24% market share today. This market has been rapidly expanding over the recent years.17
ii) As result of the liberalization of the industry, pricing policy changes could be registered. Since then there has been the development of special fares by low-cost carriers, which has to be distinguished from normal fares. Such special fares usually have to be booked weeks before travelling, as seats are limited. As result of the liberalization, the total amount of ticket sales has increased from 60% in 1986 to 72% in 1996. The tickets have become continually cheaper, which had the result that the profits from tickets decreased from 60 to 46 % between 1986 and 1996.18 This was also a result of the strong competition at that time.
iii) The marketing strategy of routes was mainly designed for business travel and business needs. Since the liberalization there has been a drastic increase in private air travel, e.g. in form of tourism. Airlines offer different stages of quality, which according to complexity and quality become more expensive. Airlines have tried to create a very complex route system according to the Hub-and-Spoke-System, which allows the connection of many destinations to make travel more convenient. Especially low cost carriers (Ryan air) offer a well advanced network. In the case of Ryan air the high capacity allows a low cost structure.

The liberalization has defenetely triggered many developements which would not have happened without all the deregulations. The new environment has certainly stimulated innovation and entrepreneurship. This resulted in more routes offered all over europe and all that at lower prices. The no-frills strategy was impossible before the liberalisation, and would probably not have appeared if these changes would not have happened.

3. The phenomenon of Lo-Cost-Carriers (LCC)

3.1. Introduction to LCC’s

The “No-Frills” concept has been around for quite a while, even if one might think that this has been a development of the resent years. First airlines started operating with this concept in 1970 in the USA. Years after this development in the USA airlines adopted this strategy in Europe, South America and Asia Pacific.19 Even though one would consider that this LCC market as only a successful market, many airlines failed to withstand the hard competition and market demands.

What is No-Frills? No-Frills is defined as an action of cooperation to lower costs. The aim of this strategy is to deliver the core-product, in this case airline travel to get from A to B, and not to have major focus on for example comfortable seats or a delicious breakfast. The aim of these actions is to deliver a well-priced product to the customer, and to create a competitive advantage over other airlines. Everyone knows this concept from Discounter’s like Aldi and Lidle, which was one of the first segments to apply this strategy. This strategy has become very popular in Europe in the Airline Industry, under brand names like Ryanair and Easyjet.20

Such “No-Frills” can be found mainly on the continental level. Intercontinental concepts have not been as successful as continental ones we know from the USA or Europe. Very successful contenental airlines in this segment are for example Southwest Airlines, or JetBlue in the USA and Ryanair or Easyjet in Europe. These airlines operate only on the continental level, and have become very successful with their concept. The services offered by “No-Frills” airlines are usually very comparable, and focus only on the core product of transportation from A to B.

LCC could successfully increase their market share over the recent years in the European market because of their competitive advantage. In 1998 the market share of LCC was only 2% of the whole industry, which increased further up to 7% in 2001.

In 2004 they already reached 16%, an 2007 and incredible 20% were reached. In the following graph the development of market share of the whole industry can be seen.

Figure 3: Market share development of European Airline Industry

illustration not visible in this excerpt

Source: Own Creation, data from http://www.rotary1830.org/Esslingen-Filder/vortraege/061030Low CostAirlinesCarstenNimbler.pdf (accessed May 20, 2009)

3.2. Development of LCC’s in Europe

Compared to the US development of LCC’s, the European market developed much later successfully in this segment. Till the mid 1990’s only a few entrepreneurial activities took place in order to introduce the LCC concept. Aero Lloyd and Germanair for example failed already after one year offering low fares beside their usual activities. Also German Wings failed 1989 with their concept of low fares and high service.21

First Ryanair offered a double class system between Ireland and Great Britain with little success. Their breakthrough was in 1993, when CEO Micheal O’Leary adopted the “No-Frills” strategy. Ryanair was the first Airline to adopt the strategy that made Southwest Airlines in the USA so successful. After the deregulation process which finally came to an end in 1993, Ryanair encountered a tremendous growth in the years to follow. At the beginning Ryanair was just serving routes between Britain and Ireland, which than started to expand to other European destinations.22 Short after Ryanair has become so successful with this business model, low-cost-carries started to appear everywhere. In 1995 easyJet was founded, and short after in 1996 Debonair, which started to operate from London Luton to a variety of European destinations. The Belgium Airline Virgin Express was founded in 1997, offering services from their hub in Brussels. Also Flag Carries took part in this recent development like British Airways and KLM. In 1998 British Airways started the operation of Go which served destinations from London Stansted. The KLM low-cost version turned out to be named buzz, which also operated from London Stansted. In 1999 Color Air was launched in Norway, Air One in Italy, and Air Europa in Spain.23 This development in such a little time frame was very extensive, and much greater than the development in the USA. Between 1993 and 2000 seven low-cost-airlines were launched serving European destinations. The development in this area became faster in the years to come, so that already by 2004, 54 Low-Cost Airlines were registered in Europe. But we have to consider that the Low-Cost-Carrier model does not guarantee success on the market by just offering low fares. Especially in hard times like the increasing oil prices, weaker airlines faced problems. Especially here many of the start-ups failed very quickly. Ryanair and EasyJet hold more than half of the LCC market in Europe, which gives them a mentionable advantage. These Airlines have the “First-Move” advantage, which makes them less fragile against unforeseen events, and gives them a competitive advantage over other airlines.24

In Figure 5 the map shows all European LCC airlines, and from which country they operate.

[...]


1 See: Arnt, A. (2001). Der innereuropäische Linienluftverkehr. Stylized Facts und ordnungspolitischer Rahmen. Bremen: Berichte aus dem Weltwirtschaftlichen Colloquium der Universität Bremen, P. 14.

2 See: Arnt, A. (2001). Der innereuropäische Linienluftverkehr. Stylized Facts und ordnungspolitischer Rahmen. Bremen: Berichte aus dem Weltwirtschaftlichen Colloquium der Universität Bremen, P. 15.

3 See: http://people.hofstra.edu/geotrans/eng/ch3en/conc3en/airfreedom.html 11.04.2009

4 See: http://people.hofstra.edu/geotrans/eng/ch3en/conc3en/airfreedom.html 11.04.2009

5 See: Pompl. (2002). Luftverkehr. Eine ökonomische Einführung. 5. Auflage. Berlin: Springer, P. 1.

6 See: http://www.centennialofflight.gov/essay/Commercial Aviation/Dereg/Tran8.htm 12.4.2009

7 See: http://www.centennialofflight.gov/essay/Commercial Aviation/Dereg/Tran8.htm 12.4.2009

8 See: Bailey, Elizabeth E. AIR TRANSPORTATION DEREGULATION. Philadelphia.

9 See: Kark, Andreas. Die Liberalisierung der europäischen Zivilluftfahrt und das Wettbewerbsrecht der europäischen Gemeinschaft. Lang, 1989, P. 113.

10See: Fritzsche, Steffen. Das europäische Luftverkehrsrecht und die Liberalisierung des transatlantischen Luftverkehrsmarktes. BWV Verlag, 2008, P. 66.

11 See: Arndt, Andreas. Die Liberalisierung des grenzüberschreitenden Luftverkehrs in der EU: Eine quantitative Analyse der Wohlfahrtswirkungen und des Anbieterverhaltens. Lang, 2004, P. 53.

12 See: Upham, Paul. Towards sustainable aviation. Earthscan, 2003, P. 23.

13 See: Fritzsche, Steffen. Das europäische Luftverkehrsrecht und die Liberalisierung des transatlantischen Luftverkehrsmarktes. BWV Verlag, 2008, P. 68.

14See: Fritzsche, Steffen. Das europäische Luftverkehrsrecht und die Liberalisierung des transatlantischen Luftverkehrsmarktes. BWV Verlag, 2008, P. 69.

15 See:Arndt, Andreas. Die Liberalisierung des grenzüberschreitenden Luftverkehrs in der EU: Eine quantitative Analyse der Wohlfahrtswirkungen und des Anbieterverhaltens. Lang, 2004, P. 55.

16 See: Arndt, Andreas. Die Liberalisierung des grenzüberschreitenden Luftverkehrs in der EU: Eine quantitative Analyse der Wohlfahrtswirkungen und des Anbieterverhaltens. Lang, 2004, P. 58.

17 See: EUROPEAN EXPERIENCE OF AIR TRANSPORT LIBERALIZATION. February 2003. http://www.icao.int/icao/en/atb/ecp/CaseStudies/EuropeLiberalization_En.pdf (accessed May 14, 2009), P. 6.

18See: Grundmann, Silvia. Marktöffnung im Luftverkehr: Hoheitliche Eintrittsbarrierenin den USA und in der EG. Baden-Baden, 1999, PP. 152-153.

19 See: Doganis, Rigias. The Airline Business in the 21st Century. London and New York: Routledge, 2001, P.128

20 See: Onpulso - Wissen für Ihren Erfolg. http://www.onpulson.de/lexikon/no-frills-konzept.htm (accessed May 20, 2009).

21 See: Pompl. (2002). Luftverkehr. Eine ökonomische Einführung. 5. Auflage. Berlin: Springer, P. 117.

22See: Doganis, Rigias. The Airline Business in the 21st Century. London and New York: Routledge, 2001, P.135.

23See: Doganis, Rigias. The Airline Business in the 21st Century. London and New York: Routledge, 2001, P.136.

24 See: Deraëd, Pierre. Inovations Report. 14 December 2004. http://www.innovations-report.de/html /berichte/studien/bericht-37740.html (accessed May 20, 2009).

Details

Seiten
89
Jahr
2009
ISBN (eBook)
9783640467303
ISBN (Buch)
9783640467648
Dateigröße
1.6 MB
Sprache
Englisch
Katalognummer
v138755
Institution / Hochschule
Hochschule Schmalkalden, ehem. Fachhochschule Schmalkalden
Note
1,3
Schlagworte
No-Frills LCC Low Cost Carrier Airport Airline Low Cost Airline LCA Low Cost Airport Ryanair Easyjet Economics Regional Economics liberalization deregulation eu european union

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Titel: The “No Frills” Strategy of Low-Cost Carriers