Trends of the European Aviation Market: Seven Themes from the CONNECT 2016 Conference

Ryanair’s plans for 2016, why Ryanair’s is not interested in the Ukrainian market, how low-cost carriers are edging out charter carriers, and why network airlines are merging with budget airlines. These were the main themes of the CONNECT 2016 international aviation conference.
Oleksandr Laneckij 08 April 2016 13:50

The CONNECT 2016 international aviation conference was held in in the format of an airline and airport fair in in Vilnius from 13 to 15 March. The main guests included the commercial directors of major European airlines such as Ryanair, easyJet, airBaltic, Pegasus Airlines, BMI Regional, and Vueling. In total, over 200 representatives of various air carriers and airports and about 50 service providers (from consultants to sellers of airport security weapons) attended the event. Unfortunately, there were practically no representatives of companies from the CIS countries among the guests.

The three main topics discussed at the conference were the aggressive expansion of low-cost carriers in Europe, particularly at the expense of charter carriers; relations between airports and airlines; regulation of these relations by European law. Aviation expert Oleksandr Lanetskyi wrote about the main themes discussed at the conference for the CFTS portal.

Ryanair’s Ambition

The main star of the event was David O'Brien, the commercial director of Ryanair, which is the largest low-cost carrier in Europe. The airline’s passenger transport volume grew by 20% last year. It became the largest airline in Europe for the first time in its history during the first two months of this year, when its consolidated indicators were 6% higher than those of the Lufthansa Group, which dropped into second place. The Irish carrier plans to double its fleet in the next 10 years from 308 aircraft at the beginning of this year to 546 in 2024, when its transport capacity will exceed 103,000 seats.

The commercial director of Ryanair spoke about components of the airline company’s new "Always Getting Better" strategy: to increase its presence in major airports by 50% while maintaining its focus on flights to secondary airports; feeder services for other airlines (it is currently negotiating with Norwegian, TAP, and other carriers).

According to O'Brien, Ryanair has serious plans for 2016:

• Focus on Germany as a key market for development (it currently has a 4% share of the market). It also plans active expansion at the Cologne/Bonn airport and open new bases at the Berlin-Brandenburg, Nuremberg, and Hamburg airports (the key carriers at these airports are currently AirBerlin and Eurowings, which are members of the Lufthansa group).

• Develop on the markets where it is poorly represented, such as France (it currently has a 7% share of the market), where the airline closed all its bases a few years ago. In particular, Ryanair expects to significantly increase the number of its flights to the Toulouse airport this season.

• Continue to open new bases. The number of its bases will reach 81 during this summer season. The 82nd base will open in Vilnius in autumn.

• Continue its expansion to the domestic markets of Central and Eastern European countries, which began last year. Romania and Greece will be added to Poland in the summer.

Asked which markets were of interest to the airline in the near future, O'Brien said that the company was interested in those markets in which it was already present. The carrier has no plans to enter new markets unless there are particular shocks. By “shocks,” I think he meant events similar to the bankruptcy of the Hungarian airline company Malev in February 2012, when Ryanair opened a new base in Budapest within one week and launched flights to 31 destinations from there.

O'Brien politely rejected an invitation by the director of the Dalamant airport (Turkey) to open a base at his airport and launch flights to Europe from there. The guest from Turkey noted the subsidies that the government pays to airlines for every flight that arrives and for the launch of flights to new destinations that are attractive to tourists. However, this did not persuade O'Brien, who said that his company current saw no opportunities for development in the Turkish market. Regarding the Dalamant airport, O'Brien expressed doubt about its appeal to Europeans. In addition, the Irish low-cost carrier has no nearby bases from which to operate flights to Turkey. "We simply have nowhere from which to fly to you," said O'Brien.

Ryanair and Ukraine

For now, the Irish airline is absolutely uninterested in Ukraine. According to O'Brien, there are at least three reasons for this: the lack of effective demand in Ukraine, the lack of demand from the European cities in which the airline has bases, and the absence of the right to fly from the EU to Ukraine, apart from Ireland. In a private conversation, it became clear that, unfortunately, the airline’s commercial director is unaware of the simplified procedures for operating flights between Ukraine and many EU countries (Britain, Germany, Lithuania, etc.) and the "open skies" regimes at the Odesa and Lviv airports. Either Ukrainian representatives have not reached out to him or his subordinates did not consider it necessary to inform their boss.

When I cited the example of the Hungarian airline Wizz Air, which flies to Ukraine from airports in London and Germany, O'Brien replied curtly, “Hungarians should continue to fly and develop the market.” It is quite probable that Ryanair sees Wizz Air as a kind of "ice breaker." The Hungarian airline was the first to enter many markets in Central and Eastern Europe, preparing local passengers, accustoming them to flying, teaching airports to work under new requirements, and local authorities to pay for it. Then, Ryanair entered these markets and "subjugated" them to itself. This was originally the case in Poland and it is currently the case in Romania and Bulgaria. It seems that Moldova, Georgia, and Ukraine also come under this scenario. By the way, Ryanair has still not launched flights to Moldova, which has had a common aviation area with the European Union for more than two years, a visa visa-free travel regime with the Schengen area for one and a half years, and a 0.5-million labor diaspora in the European Union.

The Western priorities of easyJet

EasyJet, Europe’s second largest low-cost airline in terms of passenger volume and fleet size, is not yet very interested in the Central and Eastern European market. On the markets of most new members of the European Union, the airline either does not operate (Romania, Latvia, Lithuania, Slovakia, and Finland) or has a small share (up to 3% share in Poland). Although easyJet operated flights from London to Moscow until recently, it announced on the eve of the CONNECT conference that it would stop flying on this route on 21 March this year "in response to the significant and sustained reduction in demand for travel" on the route.

EasyJet is aiming for further growth in Western Europe. The main market for the airline will remain France, where it has bases at 18 airports. In addition, the airline plans to change significantly in 2017. That is when the carrier will begin taking delivery of the new-generation Airbus A320Neo aircraft with 186 seats, which will completely replace almost 150 Airbus A319 aircraft with 156 seats. As a result, the airline expects the cost of per passenger seat to reduce by 13-14%. Over a period of nine years, easyJet’s fleet will increase 1.5-fold (to 350 aircraft) and the number of seats offered on its aircraft by almost 70% (almost 60,000 seats).

Wizz Air to triple its fleet

The Hungarian airline Wizz Air will focus on increasing its fleet. This year, the carrier began taking delivery of larger aircraft (Airbus A321 aircraft with 230 seats), which will complement its Airbus A320 aircraft (with 180 seats). The latter will be replaced when the airline takes delivery of 110 Airbus A321neo aircraft (239 seats) in 2019. Thus, the airline plans to triple its aircraft fleet from 55 to 152 and increase its capacity 3.5-fold to nearly 35,000 seats by 2022.

Low-cost airlines vs charter airlines

Special attention was paid to the French aviation market during the conference. The general directors of the French charter airlines XL Airways and ASL Airlines complained that low-cost airlines had simply "trampled" on the market and driven them to the brink of survival. In particular, they complained not so much about the traditional "troublemakers" (easyJet and Ryanair) as about budget subsidiaries of major carriers like Transavia (a subsidiary of Air France–KLM) and Eurowings (a subsidiary of the Lufthansa Group). "Transavia is shamelessly stealing our customers," said the director of an independent French charter carrier, which was the market leader only two years ago. In reality, these two low-cost carriers, in contrast to Wizz Air, for example, practically do not specialize in the so-called "Gastarbeiter" (guest worker) routes but focus fully on transportation of tourists to resorts on the Mediterranean and Atlantic coasts of Europe and the Alps.

A similar situation exists on the Spanish market, where two subsidiaries of the IAG concern – Vueling and Air Nostrum – have pushed out charter companies. Other major European low-cost carriers (Ryanair, easyJet, Norwegian, and Wizz Air) are greatly helping them in this.

On the contrary, the general director of the Polish-based Enter Air (which earned a net revenue of EUR 10 million in 2015, according to preliminary data) and the commercial director of the Lithuanian-based Small Planet Group (which also operates in Poland and made a net profit of EUR 19 million in 2015) are pinning great hopes on the French tourist market, where these carriers began operating actively this season.

Enter Air’s General Director Grzegorz Polaniecki expressed the view that the airline’s typical client is actually not a low-cost passenger. "Imagine that the father of a family comes to you with his wife, mother-in-law, and two children plus five suitcases. How can they board within a few minutes? How can they take up their seats? What about the suitcases? Additional charges have to be paid for everything! It is much easier to buy a ticket and fly with a normal charter airline," Polaniecki said.

Low-cost airlines merging with major network airlines

Major European network airlines are facing two threats – aggressive competition for passengers on long-haul routes from the "Middle Eastern Quartet" (Turkish Airlines, Emirates, Etihad Airways, and Qatar Airways) and a no less aggressive expansion by European low-cost carriers in the battle for tourists and, more importantly, business passengers. The latter is caused by, among other things, the fact that low-cost carriers have encountered dramatically tightening market regulation by European bureaucratic entities during their accelerated growth. Antitrust authorities in the European Union have apparently set themselves the goal of completely depriving low-cost carriers of any government grants and subsidies. According to unofficial data, grants make up a quarter of low-cost carriers’ revenues.

Major European network carriers are also dissatisfied with the European regulator because they believe that it does not protect their interests from unfair competition from the "Middle Eastern Quartet." As a result, the five major airlines in the European Union (Air France–KLM, IAG, Lufthansa, Ryanair, and easyJet) created a new association called A4E (Airlines for Europe) last year to lobby for their interests. Norwegian and Finnair are currently in the process of joining the association.

This new lobbyist is not hiding the fact that one of its main aims is to fight the monopoly of the largest airports. Costs at the 10 largest European airports have increased by 90% over the past 10 years while airline fares have fallen by 20% over the same period. The new association is actively calling on the European Union to adopt legislation for effective regulation of monopoly airports.

Last year, Finnair gave network airlines an example of how to find an acceptable format for cooperation with low-cost carriers. Finnair and the British low-cost airline Flybe jointly established a regional airline, to which Finnair transferred its entire fleet of regional aircraft and all of its feeder routes. Finnair now focuses on long-haul flights to the Far East and North America.

The Turkish paradox

Various speakers raised the issue of Turkey several times at the conference. Passenger transportation by air in the country can be described as paradoxical. On the one hand, its national airline, Turkish Airlines, has been increasing its passenger transport volume by an average of 20% annually for 12 consecutive years. The carrier now flies from its hub to the largest number of countries and cities in the world. At the same time, passenger traffic through its base airport – the Ataturk Airport in Istanbul – is increasing.

On the other hand, Turkish holiday resorts are experiencing a crisis this season. Russians have stopped flying to Turkish resorts because of the political crisis between the two countries. The number of Ukrainians flying to Turkish resorts is reducing because of economic problems. Demand from Western Europeans (Germans, French, and Italians) has fallen sharply because of the Syrian war, refugees, and the threat of terrorist attacks. Practically all airlines and tour operators are emphasizing the fact that representatives of Turkish airports and host tour operators have become more accommodating than ever.

At the same time, Turkey remains the largest domestic aviation market in Europe, twice the size of the Russian market in terms of the offered transport capacity.

Tags: avia, lowcost, EU