AIRLINE BUSINESS MODELS AND LEISURE TRAVEL IN EUROPE

Firoiu Daniela
Universitatea Romno-American, B-dul Expoziiei nr. 1B, Sector 1, Bucureti, Tel. +40-722-953-514,
mail: dana.firoiu@rau.ro

E-

Gheorghe Camelia Monica

Universitatea Romno-American, Sos Olteniei nr. 20, bl 3E, Ap 17, Sector 4, Bucureti, Tel. +40-722-512455, E-mail: camelia.gheorghe@rau.ro
Abstract:
Tourism and air transport are explicitly linked especially in the context of leisure traffic. This paper aims at
highlighting this relation by focusing on the impact of the three main airline business models (traditional
scheduled, charter and low cost) on regional airports. The panel data econometric results show that despite the
current perception, low cost carriers are not the only ones to contribute significantly to airport aeronautical
and non-aeronautical revenue. This observation has important policy implications and calls for transparency in
airport subsidies as argued in the conclusion.
Keywords: tourism, regional airports, airline business models.
Tourism is a global phenomenon of major economic importance. It comprises the activities of persons
travelling to and staying in places outside their usual environment for not more than one consecutive year for
leisure, business and other purposes (WTO). The latter include activities such as visiting friends and relatives
(VFR), health treatment and pilgrimage. The World Tourism Organization estimates that international tourism
arrivals reached 760 million in 2007, an increase of about 10% compared to 2005 (WTO, 2006). This is a very
encouraging sign given the stagnation that prevailed over the previous years due to the 9/11 terrorist attacks, the
war in Iraq and SARS.
International tourism receipts were about 460 billion in 2006 (WTO) and are expected to exhibit significant
growth in the following years especially as China is gradually becoming a dominant player in terms of both
inbound and outbound tourism. The Asian tsunami disaster is likely to have a negative impact in the short-run
but the longer-term still looks very promising especially when domestic tourism is also taken into consideration.
Air travel is intrinsically related to tourism mainly in terms of international flows but also for domestic
movements in larger countries. The tourism ratio (which shows the percentage of demand attributed to tourism
over total industrial supply) of air transportation can exceed 90%. Even if we consider only leisure and VFR
traffic, many destinations in the Mediterranean and the Caribbean region are still highly dependent on air
transport. Leisure travellers have been traditionally regarded as timerich, highly price sensitive people with
preferences exhibiting a strong seasonal pattern peaking during holidays and festive periods of the year. Trips
may last for one or two weeks usually with the family and involve both short and long-haul destinations with
inflight service considered more important on the latter. The gradual emergence of the short-break trend,
however, has created new peaks during weekends and is essentially associated with people who are better-off
but time-constrained. Singles and people belonging to the DINK (Double Income No Kids) family category are
the typical representatives in this case. VFR tourists have similar attitudes to leisure travellers but are more
likely to make last minute travel arrangements with limited flexibility, especially in urgency (e.g. attendance of
a funeral). Expatriate communities established as a result of previous (South to North in the 1950s and 60s) and
current (East to West) immigration waves in Europe have enhanced VFR traffic; foreign students provide a
further boost to such travelling.
Charter carriers were the primary air service provider of leisure travel in Europe until the early 1990s. The
seasonal and/or occasional character of such flights matched well the pattern of leisure travellers. These airlines
acted as the original low cost ones by emphasising cost reduction: dense seat configuration and high passenger
load factors allowed economies of density and low unit costs; irregular and sometimes inconvenient schedules
plus the choice of somewhat secondary airports reduced airport fees; basic inflight servicing cut operation
expenses; and the explicit linkage with the travel distribution system in the context of an integrated tourist
package led to very low publicity and distribution outlays. As a result of these low costs, charter carriers were
able to offer low prices and satisfy the conscious leisure travellers. On the other hand, VFR traffic was a more
active user of traditional scheduled carriers, as these fly throughout the year directly to major cities, where
immigrants and students are likely to be based. Still, the relatively high cost of such air services discouraged
frequent VFR travelling; in this context, charter carriers could offer a seasonal alternative.
The completion of the European air transport liberalisation and the creation of a Single Aviation Market had
major implications for leisure and VFR travel (Papatheodorou, 2002). The abolition of any legal distinction
between scheduled and charter carriers and the gradual emergence of low cost carriers (LCC) as a third, robust
player in the market were among the most important developments. Within a short period of time, LCC became
leaders in cost reduction: they provided a basic quality service in a single class cabin of dense configuration;
they flew to secondary airports and outsourced many activities to lower staff; and they instigated
disintermediation by favouring the direct contact between the airline and the customer over the Internet. LCC
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also innovated by offering one-way tickets priced according to efficient yield management techniques based on
simplicity and very restricted conditions.
By the late 1990s, the differences in the airline business models have become clear: traditional scheduled
carriers focused on service delivery offering a network-based product, which could serve well the business
passenger and the affluent leisure and VFR clientele; LCC provided point-to-point flights of basic quality but
priced so low that attracted many leisure and VFR travellers; whereas, charter carriers were sitting somewhere
in-between with a rather uncertain future. This product differentiation framework, however, did not last for long
as the dynamics of competition gave rise to osmotic phenomena: currently, it is becoming increasingly difficult
to distinguish between the three types of carriers. For example, many European traditional scheduled airlines
such as British Airways, Lufthansa, SAS, Iberia and Aer Lingus engaged in a drastic cost-cutting exercise
aiming to replicate many of the features of the LCC model at least in short-haul flights. On the other hand, some
LCC started upgrading their services; EasyJet, for example, serves also primary airports (e.g. Paris Orly) and
offers flexible tickets, while JetBlue in the USA provides leather seats and a live satellite television programme.
Charter carriers decided to radicalise their product according to the LCC prototype albeit in occasionally longerhaul destinations. In some cases, charter carriers setup their own LCC affiliates as shown by the examples of My
Travel Airways and My Travel Lite in Britain and Hapag Lloyd and Hapag Lloyd Express in Germany. As a
result of this osmotic process and the acquisition of a new air travel culture based on knowledge and bargaining,
a clear-cut customer segmentation is also difficult: illustratively, the results of the latest Barclaycard Business
Travel Survey reveal that 70% of business travellers used LCC with satisfaction rates over 95% (Davies, 2005).
Conversely, a recent report by the British Air Transport Users Council stressed the importance of considering
the time of booking a flight as well as the hidden monetary and time transfer costs associated with secondary
airports: interestingly, traditional scheduled carriers can occasionally offer a better-value-for-money than their
low-cost counterparts (AUC, 2003).
Still, the various airline business models retain some differences regarding network structure and airport choice.
In particular, the traditional scheduled airlines aim at adding value to the passenger by offering an extensive
network based on own hub-andspoke services and interlining agreements; its appeal is enhanced by airline
participation in one of the three major strategic alliances (Oneworld, Star Alliance and Sky Team) and the
existence of sophisticated frequent flyer programmes. To deliver these network services, traditional carriers use
primary airports with all necessary facilities. Regional airports play only a minor role in their business model as
the majority of related services act as feeders to major hubs. On the other hand, low cost carriers focus
exclusively on basic point-to-point flights. This does not mean that LCC abstain completely from connecting
traffic: the latter amounts to 30% of Southwests market, while in London Stansted Airport 14% of passengers
engaged in do-it-yourself connections in 2004 (Mosner, 2005). However, LCC are not prepared to offer these
extra services themselves to avoid complication and an increase in their cost base. They choose primarily
secondary regional airports (Orly is one of the few exceptions) and benefit substantially from low airport
charges and station costs. For example, Frankfurt Hahn costs Ryanair 4.25 per departing passenger and there is
no landing fee; in contrast a B737 operator at Frankfurt Main pays 13 per departing passenger and a landing
fee of about 1.75 (Button et al., 2004). In other words, the sustainable competitive advantage of LCC is mainly
derived from the adoption of point-to-point services operating from regional airports. Charter carriers have
always offered point-to-point services and they increasingly fly also from secondary airports.
These different airport choices have important implications for the airline-airport relationship. Traditionally, this
has been characterised as love-and-hate; despite their common future and the complementarity of their
operations, airlines have often accused airports of abusing their market power, while the latter justified any
charge increase on the need to improve and expand a risky and sunk piece of infrastructure. The Ryanair
experience has revealed that secondary airports are prepared not only to charge less but even to offer subsidies
to attract traffic in the context of wider regional economic development. Demand for air transport services is
essentially derived from tourism activities. When all potential destinations are considered, tourism choice is
discrete, i.e. go to place X and not to Y; lower airport charges and direct airline services signify a substantial
improvement in accessibility if the destination is finally chosen, profits from consumption of local hospitality
and other tourism services may more than compensate any losses at the airport level. Similar results hold when
an airport acts as an origin rather than a destination gateway. Enhanced tourism consumption in this case is
substituted by new employment opportunities at the airport and the wider local economy and the subsequent
generation of additional expenditure and income through a multiplier-accelerator process.
As expected, this subsidisation strategy raised adverse reaction from the part of various airlines such as Air
France, which accused Ryanair of benefiting from unfair competition. The issue has reached the European
Commission which, in its recent verdict on Charleroi Airport, espoused partly the rationale behind crosssubsidisation stressing, however, the need for transparency and fair trade: an airport should not offer secret
concessions to specific airlines but adopt a tender-like procedure open to all carriers. The private investor
principle should also be met; in other words, the longer-term financial sustainability and profitability of an
airport as a stand-alone investment should be guaranteed (European Commission, 2004). In this context, it is
essential for an airport to know what type of airlines and passengers are likely to be more beneficial. This is
admittedly a very difficult exercise as the benefits or losses of the airport as such should be compared with the
impact on the business turnover of the wider local tourism activities. Nonetheless, exploring differences in
consumption patterns according to a market segmentation based solely on the choice of airline may be
somewhat bizarre; what matters primarily is demographic and vacation habit criteria (Holloway, 2004).
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Moreover, the private investor principle necessitates focusing on the airport side by providing a break-down in
terms of aeronautical and non-aeronautical revenue.
The emergence of low-cost carriers as a viable business model has revolutionised the airline industry since the
early 1990s. Leisure and VFR passengers in Europe have now a wider choice and are able to discover the
European regions at lower fares than in the past. No matter whether a regional airport operates as an origin or
destination gateway, notable improvements in accessibility can play a significant role in economic and/or
tourism development. Full service carriers and charter airlines can also have a significant if not higher
contribution to both aeronautical and non-aeronautical airport revenue.
Despite the existence victims, LCC are undoubtedly the major fashion in the contemporary airline industry; no
means, however, does this mean that the evolved full service and charter carrier models are necessarily dead!...

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