Industries in Depth

Low-cost airlines have democratized travel. It’s time airports did their part

AirAsia planes are seen on the runway at Kuala Lumpur International Airport August 19, 2014.

Image: REUTERS/Olivia Harris

Anthony F. Fernandes
Chief Executive Officer, Capital A Berhad
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Mobility – the movement of people and goods – is both a fundamental right and a linchpin of the global economy. But without air travel, it can’t happen. Making air travel accessible to all is therefore crucial, and airlines, airports, regulators, governments and relevant stakeholders have a duty to work together to make this a reality.

How do we do that? Simple: by making it affordable. Airlines have led the way in this, reducing the price of air fares by close to 40% since 2000 by being more efficient. This is due largely to improvements in aircraft technology as well as the rise of low-cost carriers (LCCs), especially in Asia-Pacific. In fact, within ASEAN, budget airlines now account for more than half of total capacity, allowing many people to fly for the first time.

Image: IATA

Not everyone is playing their part, though. Airports remain islands of resistance in a sea of change. While airlines and aircraft manufacturers worked hard over the past decade to get air fares down, airport cost per passenger rose by more than 30% in the same period. Too many airports have also failed to realize that LCCs have different requirements from full-service carriers (FSCs). No-frills airlines need no-frills terminals for simple, fast and low-cost operations.

Image: IATA

Yet operators approach airport design with a “one size fits all” mentality. They fail to understand that not every hotel is the Ritz and not every car is a Rolls-Royce. There’s room for brands built on a volume proposition, such as Wal-Mart, Carrefour, and indeed LCCs. ​Designing for volume not only lowers cost but can also stimulate growth, increasing throughput for airports and allowing them to secure higher returns on capital.

Monopolies kill

There is, however, little to no pressure on airports to change their views or to charge competitive rates. Many airports are monopolies, which leads to higher charges and taxes that burden airlines with undue costs, pushing up the price of tickets.

For example, countries like Malaysia have a single airport operator that controls all but one of the major airports in the country. This lack of competition creates an environment where the airport operator can dictate charges for airlines and influence how much airport tax travellers have to pay.

This “take it or leave it” mentality makes air travel less accessible for most people, especially those that depend on LCCs. This in turn negatively impacts passenger traffic at monopoly airports, potentially lowering total airport tax and commercial revenues. It also hurts tourism and the aviation industry, which has an enormous knock-on effect on the economy more broadly.

A less obvious but equally significant outcome is reduced connectivity. Competitive airports attract airlines​and encourage additional capacity and routes, while those that are not​ ​deter airlines.​ Better connectivity is good for attracting global companies, and countries with monopolistic airports stand to lose out to those with market-driven ones that can offer more destinations and higher frequencies.

Monopoly in air travel does not just stop with airport operators but also includes airport system providers. Why make it compulsory for airlines to use one system when there are other cheaper, more superior alternatives out there? There also needs to be greater pricing transparency to ensure airports and airport system providers do not collude to set artificially high tariffs for airlines.

Some have argued that monopolies are necessary for airport operators to better leverage economies of scale and allocate resources. In practice, th​e opposite is usually the case. ​The net effect of this is to hobble the economy, especially for trading nations that​ ​rely heavily on air linkages for tourism and trade.​

Rethink aviation, revise policies

​Governments have two options: dismantle monopolies and promote competition among airport operators or pursue policies that incentivize airport monopolies to operate more efficiently according to the needs of their clients, the airlines.

London is a great example of how places can benefit from increased competition. Since the BAA airport monopoly ended, airlines have been spoilt for choice in London, which has six airports, each managed by a different operator. The right incentives play an important role, too. Ryanair and Stansted Airport have a 10-year deal that guarantees lower airport costs, more efficient facilities and relevant incentives, while EasyJet has long-standing, mutually beneficial partnerships with Gatwick and Luton.

Monopolistic airlines do not work, neither do monopolistic airports. It’s time we stopped pretending that a lack of competition delivers anything but monopoly profit, let alone any sort of real cost reduction. Only competition has the power to reduce inefficiencies and deliver what the market needs at the right price. If governments and other aviation stakeholders are serious about safeguarding mobility, it’s time we kill monopolies – before monopolies kill us.

Read the Travel & Tourism Competitiveness Report 2017 here.

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