The challenge of assimilating the needs of low-cost and network carriers under one roof has seen some airports choosing to segment their offerings
Marseille Provence Airport has shown considerable perseverance in its efforts to attract low-cost carriers. Having presented three business cases to the DGAC, France's Civil Aviation Authority, the airport was finally granted approval for its plan to convert a former cargo facility into a dedicated terminal for the low-cost sector - complete with a much reduced passenger service charge.
It was a significant ruling, not least for Marseille, as by sanctioning the plan, the DGAC effectively adapted French law to allow airports to levy different passenger service charges at separate terminals provided they could prove those facilities offered a sufficiently different level of service with no cross-subsidisation between the two.
And Marseille has not looked back since. The airport's paired down "mp²" terminal, which opened in October 2006, is now a base for Ryanair and is also served by easyJet, Myair, bmibaby and Jet4You. The airport is not alone in a belief that the sector is of sufficient long-term importance to warrant dedicated infrastructure. The rationale is simple enough: if network carriers are not keen on growing their traffic at an airport, it makes sense to reach out to a customer base that is.
To date, similar facilities have been developed at Basle-Mulhouse and Bremen - the latter with Ryanair investing €3 million ($4.3 million) of its own cash - while Lyon-Saint Exupéry will open a terminal in April. Meanwhile, in Asia, Kuala Lumpur and Singapore Changi have proved that such facilities are not just for regional airports.
"Airports are entitled to diversify and segment just like any other part of the business," says Andreas Schimm, director of economics at ACI. He also points to segmentation at the premium end of the spectrum. "It is an idea that airports have been wrestling with for some time, particularly as low-cost carriers move into different types of airport as they expand," adds John Strickland, director of JLS Consulting.
The needs of low-cost carriers were certainly made crystal clear to Philippe Wilmart, marketing director at Marseille. Having initially consulted with easyJet, Wilmart was told that while the carrier was confident about growing its business at the airport, it would need a dedicated facility to meet its requirements going forward.
With aviation heavily taxed in France, Wilmart knew Marseille had to create a very low cost base to be attractive - something that was difficult with an existing terminal designed with network carriers in mind. Ultimately, the revamping of an old facility into a bare bones terminal with capacity for up to 3.5 million passengers per year proved much the better bet, particularly given an investment of just €16.5 million.
Although open to all carriers, the terminal is clearly designed for no-frills, point-to-point airlines. There are no airbridges, escalators or lounges, and passengers carry their own hold baggage to a bag drop. At €1.22 ($1.78) per passenger, the passenger service charge at mp² is considerably lower than at the main terminal where charges vary according to domestic passengers (€2.82), European Union passengers (€6.12) and non-EU passengers (€6.66). The result is a terminal that has delivered healthy profits for the airport - non-aeronautical revenue is up 50% on initial estimates, according to Wilmart - while also providing the necessary cost base for its intended customers (although it was ultimately Ryanair and not easyJet that created a base).
"Financially, it has allowed Marseille to compete and that's why we have a base there," says Ryanair. "It is also a great airport operationally." One year on and low-cost traffic has grown from 5% of total activity to an expected 15% by the end of this year. Total traffic has risen from 6.1 million to an anticipated 7 million for 2007 - with the extra million or so passengers effectively all new low-cost business, says Wilmart.
Elsewhere in France, the DGAC's ruling has allowed Lyon-Saint Exupéry to press on with plans to revamp an old charter terminal into a "simplified" facility scheduled to open in April. Lyon is one of two new French bases for easyJet and the carrier will move an expanded operation into the terminal once it opens. Lyon Airport's managing director Philippe Bernand hopes some of the airport's other existing low-cost carriers will also make the move, although any such commitment will only come once the DGAC has approved the airport's proposed tariff structure.
"We will offer a reasonable, cost-related discount for the simplified terminal, but it will not be as low as at some airports," explains Bernand, no doubt mindful of the presence of Air France's regional hub at the airport. He has set a medium-term goal of increasing low-cost traffic from the current 6% to 20-25% of total activity.
Meanwhile, major Asian hubs have demonstrated a similar willingness to segment their business. Singapore Changi opened its Budget Terminal in March 2006, offering a passenger service charge of S$7.00 ($4.80) - less than half that of the S$15.00 charged at its two main terminals. The different value proposition has proved a hit with current users Tiger Airways and Cebu Pacific, although the terminal is open to all carriers if it meets their operational needs.
The Civil Aviation Authority of Singapore (CAAS) says: "The Budget Terminal allows CAAS to keep charges down and pass on savings to the airlines. It also enhances Changi's competitiveness as a hub by offering a choice of terminals." With the number of flights at the Budget Terminal rising from 124 per week in April 2006 to 254 in September this year, and low-cost traffic now accounting for 13% of all aircraft movements at Changi, plans are afoot to expand capacity.
Near neighbour Kuala Lumpur International Airport is another gateway that has courted low-cost traffic - driven by home-grown tyro, AirAsia. KLIA's Low Cost Carrier (LCC) Terminal, which also opened in March 2006, has demonstrably enabled AirAsia to achieve its critical 25-minute turnaround time for narrowbody aircraft and supported the improvement of on-time performance, according to Azran Osman-Rani, chief executive of AirAsia's new long-haul sister operation, AirAsia X. "The terminal has enabled us to effectively handle fast-growing passenger volumes while providing a pleasant travel experience for our guests - which all contributes to the bottom line," says Osman-Rani.
Such has been the success of the terminal that KLIA now plans to build a bigger, replacement facility with capacity for 30 million passengers and an express rail link providing access to and from downtown Kuala Lumpur. However, KLIA's plans have not been universally welcomed. In August, IATA wrote to Malaysia's Prime Minister to express alarm at the government's decision to further reduce charges at the LCC terminal. IATA argues that the charges discriminate against network carriers, while there is also concern about possible cross-subsidisation from the main terminal.
IATA's dismay reflects its wider concern about the charging mechanisms associated with the development of such facilities. "In theory it is okay to have different charges, but in practice our worry is that the financial cost allocation at some airports can result in market pricing," explains Jeff Poole, IATA's director of industry charges and taxation.
Poole accepts that airports face a "tricky tightrope" when meeting the needs of two different categories of user, but remains concerned about the potential for abuse. It is a view shared by some network airlines, which have little interest in seeing the development of low-cost carriers. As Ryanair notes dryly: "Turkeys don't vote for Christmas."
In several cases, such antipathy has sparked legal battles. Geneva, for example, had planned to turn its original main terminal into a basic facility targeting a sector that now accounts for more than 50% of its traffic. However, Air France took the airport to court, claiming that it would hand low-cost carriers a competitive advantage because of the planned lower departure tax.
The Swiss Federal Court has since rejected the Air France appeal. Meanwhile, the airport has "frozen" its plans and decided instead on a compromise solution that will extend the current main terminal with no separation between full-service and low-cost carriers. Elsewhere, Marseille is currently embroiled in a similar legal challenge, again from Air France. In this case, the carrier is questioning what it sees as an unreasonable charge differential between the airport's main terminal and mp². Wilmart, however, is dismissive. "The passenger service charge at the main terminal is €2.82 for domestic and €6.12 for EU. Air France activity [at Marseille] is 95% domestic, so the difference is not that great," he says. In addition, the DGAC has already agreed to move for a single charge in 2008 with a price of €3.54 for all flights at the main terminal, he adds. "This is much closer to the €1.22 charged at mp²."
Schimm does not understand the fuss and sees no reason why competition should be "impaired artificially" as long as the market is there and that no charging rules are broken. "Given the regulatory environment, particularly here in Europe, there is no real danger of cross-subsidisation," he contends. "And any question of access to low-cost terminals is actually a non-argument as traditional carriers don't want to operate from them anyway."
Wilmart points out that Air France had previously complained that mp² did not suit its needs, but was the recent beneficiary of a new terminal at Lyon-Saint Exupery designed specifically for its hub activity. "So, the carrier cannot argue that we are offering a product for low-cost carriers at Marseille when it is benefiting from just such a segmented product in Lyon," he says. And there are plenty of examples of low-cost carriers falling foul of charging that favours network carriers. Nigel Fanning, airport development manager at easyJet, points to London Gatwick, where the carrier operates from Pier A in the South Terminal. "It is pretty dilapidated but is fine for our needs if the cost differential is there," he says. The problem is that easyJet pays the same price as British Airways, which operates from the far more glamorous North Terminal.
Given the difficulty of pleasing two masters, perhaps it is inevitable that more airports will look to segment their products. Fanning is convinced that airports will become increasingly willing to create facilities that fit, particularly in Europe. "If 30% of passengers are flying on low-cost carriers and they are the carriers that are growing, then airports will have to respond," he argues. Wilmart adds that it is a question of marketing: "If you are good at marketing, you create different products for different customers," he says. "Not everyone is like Frankfurt, where they have a second airport at Hahn."
Another answer is for airlines to step up to the plate themselves, like in the USA. "Hopefully, in time, airlines will look for more control rather than leaving it to an airport to decide what is best for them," says Fanning. "We have spent a lot of time and effort talking to airports about this and would be happy to invest when the business case is right."
Austin powers low-cost solution
Austin-Bergstrom Airport in Texas has turned to private finance to increase its appeal to low-cost carriers. Final contracts have yet to be formally signed, but the city council has agreed in principle to lease up to 40 acres (16.2ha) of land to leasing giant GECAS. The company will build and manage a terminal designed specifically for low-cost carriers, with all revenues shared with the city.
The project follows interest from VivaAeroBus - a Mexican carrier that was keen to launch cross-border services from Austin, but which needed a facility that complemented its ultra-low cost model.
VivaAeroBus has now applied to the authorities to begin non-stop services to six cities in Mexico - Cancun, Guadalajara, Leon, Monterrey, Puebla and Queretaro - and is bullish about the prospects of building cross-border traffic from Austin when the terminal opens in March.
"There is a growing market for air travel between Mexico and the USA, but the current prices on offer remain prohibitively high for many consumers, in particular the price-sensitive Mexicans," explains VivaAeroBus chief executive Mike Szucs.
Szucs believes the new facility will deliver the required cost base and allow the carrier to deliver more low-cost fares into the market. "Airport costs are key to delivering low fares," he says. "Recent history has shown that unlocking airport costs with streamlined and efficient facilities is instrumental in creating overall growth in air travel."
Meanwhile, GECAS clearly senses an opportunity to step in at airports that appeal to low-cost carriers, but which are unable to invest in specific facilities themselves. Better known for its aircraft financing expertise, the company is now exploring airport property opportunities, in part following a recent partnership with the Lynxs Group, an Austin-based developer of air cargo and port facilities.
The lead on its passenger airport solutions is being taken by AviatSolutions, a GECAS affiliate. "Post-9/11, the majority of growth worldwide has been with low-cost carriers," says AviatSolutions director Seamus Kealey. "As such, our plan is to dedicate ourselves to looking at low-cost terminal products, particularly in developing markets."
For Kealey, it is about deconstructing the whole notion of terminal design and developing a low-cost concept from the ground up. "We aim to come in with a model that reflects exactly what the carriers want, not just an airport's perception of what they might need," he says.