Newly released International Onboard traffic data demonstrates how much the most competitive airline market in the world, the North Atlantic, is changing in response to different airline strategies. The data, reported to the US government by all carriers which touch US soil and now available publicly after only six months, provides a comprehensive picture of the hubs, gateways, markets and alliances that make up one of the most competitive and dynamic regions in the commercial airline business.
Transatlantic growth hubs like Detroit are succeeding through being a focal point for a major alliance, while fast-growing city-pairs like Birmingham-Chicago are benefiting from being targeted by a prosperous carrier. Some carriers like Austrian, LOT, and CSA are doing well by serving new growth markets; others like Swissair and British Airways have capitalised on the extensive global network created by their alliances; still others like Virgin Atlantic and Icelandair have developed a uniquely attractive niche identity. So far, only one alliance - KLM-Northwest - has benefited all parties involved. It has gained by being an alliance between equals, by linking strong hubs, and by being the first alliance to achieve the deep level of cooperation made possible by having antitrust immunity.
The ultimate key to all trends across the Atlantic is carrier positioning. The dynamic points in the market are where carriers are exploiting their resources effectively by creating growth opportunities out of their best resources. They do so by network fit (KLM at Amsterdam and Northwest at Detroit); image fit (Virgin at Orlando); or traditional service fit (Alitalia to Rome or LOT to Chicago).
Passenger traffic between the US and Europe has grown by 25 per cent in the last five years. In Europe, most transatlantic traffic has remained concentrated at a few airports, whereas in the US it has spread out from New York/JFK to the domestic hubs of the major carriers. While JFK remains the number one US transatlantic gateway, its 9.5 per cent traffic growth over the last five years pales in comparison to London/Heathrow's cumulative growth of 47.1 per cent.
JFK still handles a higher percentage of transatlantic traffic than Heathrow, but its share has fallen from 32.3 per cent five years ago to 28.3 per cent, while Heathrow's share has jumped from 18.5 to 21.8 per cent. No other US hubs can claim double-digit shares of transatlantic traffic, but both Frankfurt and Gatwick can. Heathrow and Gatwick together handle one-third of all Europe-US passengers.
Heathrow is surging ahead as the top European gateway (Chart 1). It now handles over 7.5 million transatlantic passengers a year - nearly 22 per cent of the market - as opposed to Frankfurt's 4.8 million and Gatwick's 3.9 million. Heathrow's five-year growth rate of nearly 50 per cent is twice that of the market. British Airways carries nearly half of the transatlantic traffic at Heathrow, having given up no market share to US competitors over the last five years (Chart 2).
Amsterdam is the other big European airport success story, with a 68 per cent increase in US traffic over the past five years. Schiphol overtook Paris/CDG to become the fourth largest gateway to the US in 1993, and its share of transatlantic travel has jumped from 6.5 to 8.7 per cent since 1992.
Reflecting the power of the Northwest-KLM alliance, Northwest has become a major transatlantic player at Schiphol, with 25.1 per cent of the market as opposed to 6.5 per cent in 1992. United too has fared well there, introducing new service to Washington/Dulles that has more than tripled in volume over the past three years.
Zurich has risen from ninth to seventh place, with Delta and United the biggest beneficiaries, not Swissair. Delta's new service out of Cincinnati has taken off over the past five years, with beyond connections at both ends important factors. United's Dulles service has given it a 10 per cent share while American's service to Chicago and JFK has stagnated.
Several smaller gateways have performed well. Athens' traffic has nearly doubled over the past five years. Keflavik has increased traffic by over 60 per cent over the same period, thanks to Icelandair's successful offerings to budget-conscious travellers to and from Baltimore-Washington and JFK. Dublin has become a transatlantic hub for over 250,000 transatlantic passengers a year. Moscow, Warsaw, Budapest, and Prague have been important growth markets since the end of the Cold War.
However, the major European hubs other than Amsterdam, Heathrow and Zurich have lost slight market share, with Frankfurt, Paris, Madrid, Milan and Gatwick growing at less than the industry average.
Gatwick has lost two and a half percentage points of market share despite expansion by BA and American and the lack of access to Heathrow. However, it has arrested its decline and its transatlantic traffic grew by 8.3 per cent last year. Gatwick is clearly an airport in transition, as the host to fast-growing markets like Detroit and Orlando, and sluggish ones like Boston and JFK (Chart 5).
Copenhagen, Stockholm, Oslo, Lisbon and Glasgow have all lost significant transatlantic traffic over the past five years, suggesting that SAS and TAP Air Portugal have major problems in this market. SAS' strategy of emphasising Copenhagen as its major transatlantic hub appears to have backfired; Copenhagen has dropped from being the 13th busiest transatlantic gateway to 16th place, while Stockholm's transatlantic traffic has dropped over 25 per cent and Oslo's nearly 23 per cent. Glasgow's has dropped 54.1 per cent as Northwest withdrew from its Boston route and American dropped its Chicago service.
While JFK still handles almost three times as much transatlantic traffic as its nearest US rival, US transatlantic gateways are becoming more distributed (Chart 3). Boosted by their United hub operations, O'Hare and Dulles have taken significant traffic away from JFK, with transatlantic passenger volumes rising by 38 per cent and 51 per cent, respectively. Dulles' ranking as a transatlantic hub has risen from eighth to fifth. Newark, in third place, was struggling, but appears poised to take off after reporting strong growth last year.
San Francisco provides the west coast growth story, with traffic doubling over the past five years, but credit for this goes to Virgin, Air France, KLM and Lufthansa rather than United (Chart 4).
Three of the four fastest growing gateways - Memphis, Detroit and Minneapolis - reflect the success of the Northwest-KLM alliance. Los Angeles shows little promise as a transatlantic hub, and Boston, Dallas-Fort Worth, BWI, St. Louis and Charlotte have lost ground.
JFK's carrier mix has shifted significantly, with Delta displacing TWA as the number one transatlantic operator, followed closely by British Airways. Air France has leapt from eighth to fifth place at JFK. Aer Lingus' new status as the seventh ranked carrier is an indication of the popularity of Dublin and proves the logic of eliminating the Shannon stopover.
With no hub operator, Boston's transatlantic traffic has stagnated. Northwest and TWA have lost significant ground, but American has added 78 per cent to its passenger volume over the past five years. Carriers that appeal to established ethnic markets like Olympic, Aer Lingus, Lufthansa, and Alitalia have performed best at Boston.
Detroit has tripled its transatlantic traffic volume over the past five years. Aside from developing codeshare traffic to Amsterdam, Northwest has created a new market to Gatwick and has had substantial success increasing its passenger volumes to Frankfurt.
Philadelphia's rise reflects US Airways' strong domestic feed linking into its former British Airways alliance, as well as its own services to Paris and Frankfurt.
Orlando's 66 per cent growth reflects its increasing attraction as a vacation destination. Boosted by its reputation as a 'fun' carrier, Virgin Atlantic is ticketing far more passengers than either British Airways or Virgin's former codeshare partner, Delta.
Heathrow-JFK remains the largest transatlantic route, with about 6 per cent of the market. But JFK is involved in seven of the 12 major city-pair markets which have shrunk during the past five years (Chart 5). Paris/CDG-JFK is the biggest struggler in the top 10 markets, having lost 11 per cent of its passenger volume and fallen from third place to ninth.
Among the top 10 markets, the routes from Heathrow to San Francisco, Dulles and Newark are the best performers. Heathrow-San Francisco has moved up from 12th to third, with passenger traffic up by nearly 90 per cent.
Amsterdam hosts many of the hottest growth markets, reflecting Schiphol's status as a hub for Northwest and KLM. The Delta-Swissair alliance has helped to boost Zurich-Cincinnati, while US Airways' Philadelphia hub has proved itself with three fast-growing transatlantic routes. The strength of American's network is evident in its nearly instant development of Chicago-Birmingham into a market with over 90,000 passengers per year.
The power of hubs is illustrated by the transformation of the Gatwick-Detroit route since Northwest took it over from Delta. Delta carried less than 54,000 passengers on the route in 1992, whereas Northwest carried over 230,000 last year. This quadrupling in volume means that Gatwick-Detroit has jumped from 121st to 45th in the market rankings.
Boosted by its Continental alliance, Alitalia has had great success with its Rome-Newark service. This has developed from scratch to over 130,000 passengers a year while having little impact on Alitalia's share of the JFK-Rome market.
In the Manchester-New York market, Continental has made great strides with its Newark service, helped again by its hub, but American has failed to develop into a serious competitor to British Airways at JFK, which is significant in light of the proposed alliance.
Continental's success on Orly-Houston has pushed the market up into the top 100 transatlantic city pairs, as has Delta's increased Madrid-Atlanta service.
Gatwick-Newark has shrunk significantly, having been an unsuccessful city-pair for both Virgin Atlantic and Continental. It has dropped from ninth to 57th position in five years partly because of transfers to Heathrow by Virgin and BA. However Continental, the only big player left in the market, has recently achieved positive growth.
Paris-New York has suffered a 6.6 per cent drop in traffic and has changed character significantly. Air France has taken substantial market share away from TWA and now carries 41.8 per cent of the traffic between the two cities. It has transferred its Newark flights from Orly to CDG with good results, and alliance partner Continental has recently followed suit. Tower Air has captured almost 10 per cent of the market and overtaken Delta's service from Orly to JFK.
Europeans take the lead
Of the established large carriers, British Airways and Air France have exceeded average market growth rates in three out of four years (Chart 6). Both increased their market shares, BA by over 2 percentage points, and Air France by one point. Air France had the edge on traffic growth, with a 57.1 per cent increase to BA's 45.4 per cent. BA benefited from its prime position in London, while Air France picked up substantial traffic volumes from TWA.
Virgin Atlantic is the biggest mover of the large transatlantic carriers, with cumulative growth of 67.7 per cent over the past five years. It has gone from the tenth to the sixth largest transatlantic carrier, overtaking the likes of Air France and KLM in traffic volume, boosted by its strong public image and strong routes.
United and Northwest are the only US carriers that have managed above-average growth on the Atlantic. Delta, American, US Airways, and especially Continental have all fallen short of the market's overall growth rate of 25 per cent over the past five years. Chart 8 shows that US carriers have been losing significant market share over the Atlantic, moving from a 49 per cent share in 1992 to 43 per cent in 1996. The share of the non-US carriers, including fifth freedom operators, reached 57 per cent last year.
In terms of growth, the most outstanding carriers over the entire period were Lauda Air, Austrian, Tarom and Aeroflot, all of which doubled their traffic. In a fast growing market, SAS has only been able to manage a dismal 1.0 per cent growth, while TAP lost 38 per cent of its transatlantic traffic. TWA's dramatic fall from the fourth to tenth largest transatlantic carrier is due to a loss of 40 per cent of its passenger volume.
If the BA-American alliance takes off, it will begin from a strong starting point, accounting for nearly 26 per cent of the US-Europe market or 8.9 million passengers a year, including American's existing partner LOT (Chart 7). This share is significantly more than that of the next three alliance groupings, the Delta group, the Continental group, and the Star Alliance.
With less than 3.2 million US-Europe passengers, the KLM-Northwest alliance is much smaller. However, it is clearly having some effect, as the two carriers' combined share went from 7.1 per cent in 1992 to 9.3 per cent last year. Northwest appears to have benefited more, accounting for more than half of the carriers' combined increase in market share and enjoying greater growth at Detroit than KLM has at Amsterdam.
United and Lufthansa have increased their combined market share over the Atlantic from 13.3 to 13.8 per cent over the past five years, though their alliance has only been in effect for the last year. United is growing faster at Chicago (37.9 per cent) and Dulles (51.1 per cent) than Lufthansa is at Frankfurt (20.1 per cent).
The European members of the Delta-Swissair-Sabena-Austrian alliance have been stronger transatlantic performers than Delta. When Delta's other partners are included, the group carries 17.8 per cent of transatlantic traffic, the same as five years ago. Austrian and Swissair have increased traffic at their Vienna and Zurich hubs more than Sabena and Delta have at Brussels and Atlanta.
The combined market share of British Airways and US Airways shot up by more than any other alliance. BA benefited more, largely because of the attractiveness of Heathrow as a gateway; US Airways' successful hubs did not offer access to as many desirable points.
With a more expansive route structure, American should take more advantage of an alliance with BA, although at a higher cost to other carriers. However, the lack of room for expansion at Heathrow and DFW's traditionally weak performance as a transatlantic hub will be impediments.
Market share shifts
This new data provides the first tangible evidence that alliances do shift market shares significantly and are often critical to the growth of airports and individual markets, particularly when they allow strong hubs to be connected to each other. However, they do not always benefit all parties equally.
European carriers are surging, often overcoming the strength of US hubs by tapping into them through alliances. The transatlantic market has clearly become more segmented and more sophisticated. The marketplace is no longer attracted to a 'chosen instrument' like Pan Am. Now US originating travellers find appeal in the lively approach of Virgin Atlantic challenging the dominance of its own country's flag carrier. Travellers from both continents are likely to choose a carrier that meets their specific requirements and individual tastes. US carriers will run the risk of continuing to lose market share until they develop differentiated identities.
Hubbing is opening up the US end of the market, with an increase in the number of significant gateways, but gateway airports are not on the increase in Europe. Future open skies agreements and alliances are likely to produce more service at those same European gateways, while new gateways should emerge in the US.
Source: Airline Business