Greater range aircraft will increase point-to-point services and change the relative importance of current hubs, writes Chris Tarry of CTAIRA, with analyses from Fabrice Tacoun

The value-destroying characteristics of the airline industry have been well documented, and even if IATA’s latest optimistic forecast is right (it expects the industry to report an aggregate net result of $7.2 billion in 2007), the returns are hardly compelling.

Even the most casual observer has noticed the debate aroused by Emirates on traffic flows between Europe and Australasia in one direction and Asia and North America in the other. At the same time, Airbus and Boeing are still trying to suggest that demand aggregation and point-to-point travel are mutually exclusive when they are clearly not.

An examination of market fares where a one-stop competes with a non-stop, and where travellers cannot reach their final destination without a stop but have options regarding where they transit through or change aircraft, is very revealing. This is not only because it reinforces the fact that airlines are effectively operating in a perfect market regarding the availability of price information, which enables consumers to make better-informed decisions, but also it enables an examination of the value to the airline of point-to-point compared with transfer traffic.

Given the focus on Emirates it is reasonable to use this carrier as the benchmark and compare its fares with those offered by Singapore Airlines (SIA) both to Singapore and onwards to Sydney. To add another dimension we have considered fares offered by British Airways to New York – a similar length sector to London-Dubai. We have stripped out any overt taxes and compare the fare revenue the airline accrues on a per-kilometre basis.

On London-Dubai the cheapest fare available from Emirates translated into 3.49p ($) per kilometre in economy class; 18.80p per kilometre in business class and 24.28p in first class.On a similar sector length for BA to New York the corresponding figures were: 1.70p in economy; 33.80p in business (37.44p if fully flexible) and 59.44p in first.This gives an interesting perspective on the competitive dynamics on the Atlantic and some of the risks.

Our focus however is on competitive hubs. An examination of the fares offered on the non-stop service from London to Singapore and the one-stop over Dubai shows that for SIA and the non-stop the revenues per kilometre are: economy 2.09p, business 12.71p and first 17.61p, which compares with 2.04p, 11.76p and 15.57p for the corresponding classes on Emirates; again an interesting perspective on the revenues as well as the focus of competition.

Looking at the London-Sydney route the picture changes again – albeit only slightly: from the economy cabin each passenger generates 2.21p per kilometre for Emirates compared with 1.44p per kilometre for SIA; in business class it is 8.29p per kilometre for Emirates compared with 10.22p for SIA; and in first it is 12.40p compared with 12.71p.

While this is illustrative rather than being statistically significant, the analysis raises some issues – the importance of local traffic and no matter the route, the need for low costs. The strategy to develop Dubai as a tourist destination and increase the number of point-to-point passengers is clearly important, although the consequences for airline yields are uncertain.

Transfer traffic, by its nature, is competed and here the issue is perhaps the extent to which greater-range aircraft both reduce transfer traffic by increasing the number of point-to-point services but also change the relative importance of current hubs. We have already seen the use of the Airbus A340-500 by Emirates begin to change traffic flows at European hubs.

A key question is whether or not the replacement of one-stops with non-stops results in higher fares. The answer is no stronger than “maybe”, but then only if there is no sufficiently close substitute given by a one-stop service.

The reality is that all airlines deemed to be directly competing will not make an instant and costly transition to an aircraft that offers a non-stop service where a one-stop was the only option. The question is then what premium a customer (not necessarily the passenger) will be prepared to pay for a non-stop and perhaps a saving of two to three hours. This is will ultimately determine how much airlines are able to pay for aircraft with greater range. It may be unreasonable to expect either higher ticket prices or higher real aircraft prices in a market where there are competing alternatives and where value for money and price remain inversely correlated. ■

Source: Airline Business