Chapter 8

Other issues affecting LCATs

The final chapter of this report examines some of the many industry developments through the
prism of the LCA/T operator, or potential future operator. As the aviation industry changes,
all its stakeholders are affected and must adapt. Some of the recent changes make the case
for constructing or operating a LCA/T less solid, while some make it potentially more
lucrative.
Overview

A variety of external factors and developments affect the feasibility both positively and
negatively of LCA/Ts

Cargo operations are a possible new source of revenue, but are probably logistically unviable
for the LCA/T

Profiling of passengers by defined groupings is a valuable tool for maximising the returns on
retail and F&B activities

Merging

of

LCC

business

towards

more

full-service

model

will

be

logistical/infrastructural challenge for LCA/Ts, but also a potential source of new revenue

Not all LCA/T investments represent the best use of facility funds and resources. In some
cases, a less expensive, stop-gap solution will be a better business decision

Developments in passenger rail services especially high-speed trains pose a threat to some
LCC services. Airports should fully understand this situation before making LCA/T
investments based on current traffic levels

The chapter first looks at developments in the cargo sector with an eye towards possible
LCA/T participation. Encouragingly, it finds that LCCs are experimenting with freight
services as a possible revenue centre and have begun charging for checked bags (which will
free up belly hold space for cargo). However, final analysis of the sector finds that low cost
airport participation in this line of business is impractical for numerous logistical reasons, as
well as those related to incompatibilities arising from the conduct of the cargo business.

The potential of route development funds, first cited in Chapter 6, is elaborated upon here.
The chapter investigates several cases in the UK, including the programme implemented by
Scotland. There, the government believes that a GBP13 million investment will contribute
more than GBP300 million to the Scottish economy. The impact of the bought services will
also create more than 700 jobs in the tourism sector alone, while also stimulating more
passenger throughput for the recipient airports.
Another growing market area is the use of profiling to determine likely travel and spending
patterns. The chapter explains how in-depth surveys and study can aid in the process of
offering passengers what they want, a practice airlines have used to inform their destination
selection process, and which LCA/Ts have adopted to ensure that they operate the most
attractive and therefore lucrative retail and F&B outlets.
The manner in which the LCC business model is undergoing selective adaptation, as some
carriers hunt for high-yield traffic, represents a logistical challenge for their airport service
providers, but also an opportunity. One example of this phenomenon is found in the provision
of passenger lounges, which are often offered on a user-pay basis and which present a
revenue opportunity to both the LCC and the airport.
The chapter also stresses the need for aspiring airport operators to fully understand the cost
and revenue implications of constructing or converting an LCA/T, which in some instances
could be accommodated as a ring-fenced semi-facility within existing terminals for a fraction
of the price and with minimal diminution in the attractiveness of the offer.
Lastly, the chapter examines rail developments around the world. With the preponderance of
LCC operations occurring on a short-haul basis, these are the types of air services most
susceptible to a loss of traffic due to competitive rail operations.
Examining plans and recent train installations around the world, the chapter finds that highspeed rail programmes in North Asia and Continental Europe will pose a threat to the
attractiveness of LCC services in those areas. The corresponding loss of traffic is something
that actual and potential LCA/T operators must consider when debating construction,
conversion or expansion projects.

8.1 Opportunities for low cost cargo airports

Could the low cost airport concept be transferable to airports whose main business is freight?
It is an important question. Most industry forecasts have airfreight growth on par with
passenger growth.
In many countries, cargo facilities are generally lacking, as airports prefer to invest into
passenger terminals. Cargo facilities are not sexy and do not attract kudos, which is all the
more reason to keep costs down to minimum levels (bearing in mind that some produce is
perishable). They are aided in one sense, in that, without the need for convenience that marks
the passenger sector, a chiefly cargo airport may be located well away from centres of
population as long as it satisfies certain other criteria:

It should preferably be situated close to important, high-standard highways, including transnational ones;

There must also be a definable market for the goods within an easy distance;

Location close to a seaport is also preferable though not essential. Air and sea trading centres
have often worked well together, e.g. Hamburg, Rotterdam/Amsterdam, Singapore. Now
more important in the Middle East and Asia Pacific than in Europe an North America; There
should be adequate warehousing or the room to build it; and

There should be an adequate workforce, appropriately skilled.

It is certainly the case that LCCs are taking steps, albeit tentative ones, into the airfreight
business, one that has been ignored, but which offers up an important additional revenue
stream. The cargo industry has not been quick to adopt them, believing that LCCs do not
operate to the right locations, the same criticism that was made of their passengers services
10 or more years ago. Also that the logistics industry is too complex for the basic models
preferred by LCCs, and would require more intricate (and expensive) ground handling
platforms.
Another difficulty is the lengthy security screening requirements that mean ground handlers
could have difficulty processing the cargo quickly enough to meet very tight turnaround
schedules. Runway restrictions and limitations on aircraft movements often affect cargo
services more than passenger operations. Also, some of the financial settlement arrangements
peculiar to airfreight do not tally with low cost operations, such as payment upfront for

minimum loads. On the other hand, the propensity for LCCs is increasingly to charge for
checked baggage as part of their campaign to promote carry on baggage, a movement that
both generates incremental revenue and aids quicker turnarounds. This development will also
serve to free up belly hold space and obviate the existing restrictions on capacity utilisation.
Helping the sector enter this line of business are operations like LTUs Leisure Cargo, which
helps manage the logistics of LCCs trying to poach high-value and express trade from
network carriers. Leisure Cargo handles the entire cargo business of 18 airlines at present,
including AirAsia, which has entrusted its cargo management to Leisure Cargo in order to
generate additional revenues from the carriage of airfreight on all of its routes.
AirAsias cargo division is expected to deliver MYR12 million in revenue per annum for the
carrier through this tie-up. Leisure Cargo will serve as the air cargo provider for AirAsias
regional routes from its Kuala Lumpur hub at the Low Cost Carrier Terminal, and will secure
MYR1 million in cargo value for the airline every month. The option remains to do a similar
deal with AirAsia X, the long-haul LCC. These new carriers will dump a large extra amount
of heretofore under-utilised belly space in the market.
As for the airports and terminals to support these LCC cargo operations, quite often the type
of military airfield conversion mentioned extensively in this report would be appropriate
many basic facilities are already available. A case study airport, Frankfurt Hahn, is a good
example as it already handles large volumes of freight. Some of the potential passenger
airport conversions from military airfields might be better employed mainly or even wholly
as cargo ones. While their passenger development potential may in some cases be hopeful,
the military chooses its bases carefully from a logistical viewpoint and the facilities have
often to be appropriate to a heavy lift capability.
Other examples include Templin Airport near Berlin, and Plattsburgh in New York State,
USA (and close to Montreal). Both are redundant facilities that serviced heavy bombers: in
Plattsburghs case it was the US Strategic Air Command and in Templins the Soviet air
forces heavy bombers and transports. Both have the sort of infrastructure required to survive
a nuclear attack and both are favoured by their governments for support, having fallen into
ruin and being unsuitable for just about any other purpose.

Templin, the worlds first major purpose-built cargo-courier airport was to be converted
with the backing of the State of Brandenburg and other local governments and the firm set up
to do it listed on the Alternative Investment Market (AIM) in London to raise the necessary
cash (GBP14 million) to purchase the owner of the airport and to commence preliminary
works. The site has one of the longest runways in Europe and a host of large bunker style
buildings.
At Plattsburgh, the FAA funded USD20 million towards an upgrade project through its
Military Airport Programme. Although Plattsburgh is being developed in the first instance as
a passenger airport since opening in Jun07, as a major logistical hub on the Quebec-New
York corridor cargo movement and distribution is expected to figure increasingly in its
portfolio.
There are already 80 tenants on the estate.
A passenger case study airport, Liverpool (UK) also has development potential as a low cost
cargo airport. In fact, it was overnight parcels operations by a division of the British postal
service, which kept Liverpool Airport in business when its passenger services reduced almost
to zero before the arrival of easyJet. Liverpool Airport is situated close to a river estuary, has
several nearby trading estates and much improved road access that connects to the national
motorway system. Crucially, it is owned by a company, Peel Holdings, which also owns the
Manchester Ship Canal, a 56 km inland waterway linking Liverpool and Manchester. This
company launched a successful offer for the Mersey Docks and Harbour Board, which
operates the port of Liverpool Freeport and several others in the UK.
It is not yet known if this indicates a strategy of building Liverpool into a sea/air cargo
facility. If it does, it would make sense. Liverpool was once the most significant transAtlantic port in Europe and after years of industrial disputes its fortunes are changing for the
better. The 100-mile corridor between Liverpool in the east and Hull in the west is a
designated critical European Union transport zone that links the Irish Sea and Atlantic Ocean
with the North Sea, and also the route of one of the countrys busiest motorways, the M62. It
is also recognised within UK planning legislation as a future Super City, encompassing the
existing metropolitan regions based on the lead cities of Manchester and Leeds. In short,
irrespective of its achievements as a passenger airport there is much potential for this low cost
airport in the distribution of air cargo, in and out.

There is one important caveat. The airfreight business has always been subject more to the
consolidation proposal than has the passenger side. Most airfreight still travels as belly hold
cargo on passenger flights. The majority of the UKs export air cargo for example, still
departs from London Heathrow airport, irrespective of the levels of congestion there, and is
trucked there from all over the country.
The reason is that such is the mass of flight departures, whether on short-, mid- or long-haul
services, that it is unlikely a package will not get on to a flight on any one day, no matter how
busy it is. In contrast, a start-up low cost airport like the military airfield conversion at
Finningley (Robin Hood Doncaster Sheffield Airport) has to attain a critical mass of services
first, before a freight-forwarder would consider it. Even if the destination was Dublin, if there
is only one daily flight and no other airline operating the route a cancellation could
conceivably double the total despatch time. Such a scenario would be even worse for a
parcels integrator (high-speed service), which might be required to transfer the parcel
physically to another airport.
The opportunity for a low cost operation is tempered by the fact that there is no alternative
non-aeronautical revenue generating possibility to take the place of revenues earned from
landing and other handling fees. Also that a number of regulatory functions concerned with
the safe and secure handling of cargo must be maintained at all times. Apart from the
employee health and safety issues, there is always concern that a cargo aircraft might be used
in a terrorist attack. There are also more pronounced directional traffic variations to contend
with at many cargo airports, which make the introduction of pricing/cost policies difficult.
The value of the goods handled means that much greater care often has to be exercised in
their surface carriage than would be applied to passengers luggage. This requires expensive
warehouse systems and, of course, a parcel cannot be asked to walk anywhere, as a passenger
can; it has to be carried.

The main benefits to airlines might come from:

The ability to offer 24/7 operations, to spread unit costs. Sometimes this will be possible
when a competing airport nearby cannot, for reasons of capacity and/or environmental

concerns. Cargo aircraft are not limited to passenger scheduling limitations and can optimise
utilisation as long as airports can receive them; and

The ability of aircraft to park close to the terminal to ensure fast turnaround. This seems selfevident, the cargo equivalent of the demand by many LCCs that they forego air bridge access
and egress and use both front and rear steps. It is more pronounced in the cargo sector where
slow handling of pallets and containers can affect schedules detrimentally, especially if there
is perishable produce on board. The optimum ability is to nose-in to 50 metres or less of the
terminal
Some airports have produced an all-in-one package to airlines wherein they are the handling
agent, effectively removing the middle man from the equation, as low cost airlines have with
the travel agent. This can involve them operating their own transit sheds. One example is at
Glasgow Prestwick International Airport (GPIA), the LCA in Scotland. The philosophy of
multi-functionalism inherent at this airport was put into practice by the company Stagecoach
Holdings when it owned and operated GPIA, partly to attract Ryanair. It began to behave like
a low cost airline itself, providing its own ground and handling services and it developed a
model, known as STAG, which also included a sophisticated management information system
and tight financial controls.
GPIA was prepared to share the risk of new routes by taking on marketing functions for the
airlines (long in advance of the dispute surrounding Ryanair and Charleroi/Brussels South
airport). Applying the same principles to freight, tonnage increased from 15,000 to 70,000
between 1992 and 1999. GPIA has since changed hands, twice, but the same principles are in
place. GPIA has been a major manufacturing base for BAe Systems (previously British
Aerospace) and has a 3,000m runway and the physical capability to handle up to five B747
aircraft at once, a good (coastal) weather record and no night-time curfews. It is in fact quite
close to the town of Ayr, but the economic and employment benefits it creates has brought
about a positive level of appreciation in the community, as has the fact that most aircraft
approaches are over the sea or farmland.
It is perfectly feasible that long-haul LCCs like Oasis and AirAsia X will drive the occasional
development of low cost cargo terminals if they are committed to airfreight. Oasis has started
off using the services of an established cargo operator to sell space, which should result in a
larger network and support from agents. Similarly, evolution in logistics technologies may

provide a platform for low cost express parcel integrators to challenge the likes of FedEx,
UPS, DHL and TNT.
In summary, for the reasons above there are presently few options to extend the low cost
airports principle into the field of cargo, unless an airports operator is prepared (and permitted
by industry regulation) to take over the whole freight operation, which will then permit it to
exercise the degree of cost control required. While the cargo sector is so dependent on the
agency system, which remains in place to a much greater degree than is the passenger sector,
cost reduction measures that can be passed on to airlines are limited.

8.2 Economic impact and route development funding assistance to LCCs/LCAs

Much is made of direct and indirect economic impacts of airline route development at airports
direct impacts concerning airport and related company employment opportunities and
indirect ones related to wider issues such as job creation in the tourism industry and
commerce in the wider community.
It is an inexact, often subjective science, which has its detractors. Who can say for sure if the
increase in business gained by a travel agent or hotel in Geelong, Australia is a direct result of
new low cost services at Avalon Airport, or by how much? The increase in journeys can be
measured, but there is no certainty they would not have been made if low cost air services did
not exist. Often, claims made by operators of low cost airports in particular are not matched
by the facts, or there is no commitment when they are asked to confirm that earlier
predictions, on which they may have received funding, have been achieved.
One successful instigator of economic impact is the route development fund (RDF): the
vehicle by which routes may be attracted to an airport by the application of public funds.
RDFs are a version of Public Service Obligation (PSO) route instigators without the same
degree of social necessity. PSOs have been commonplace in thinly populated regions of
Europe, such as Scandinavia and the North of Scotland, the Greek islands and the Portuguese
Azores for many years. PSOs are specific to areas where the lack of an air service would be
detrimental to the wellbeing of communities and provide assistance so that outlying towns
remain part of the national network.
RDFs are not so esoteric and where they have been applied they have proved successful in
encouraging specific routes that are critical for regional economic development, as opposed
to community support. By inference they are often useful in the case of low cost airports,
which may have based their business case on their ability to aid economic development. The
success of Route Development Funds in Scotland and Northern Ireland, for example,
prompted the Government in the UK to adopt the principle in its national Air Transport
Policy. These principles can be applied equally well to any region in Europe or beyond. The
UK

National

Protocol

for

Route

Development

Funds

can

be

viewed

http://www.dft.gov.uk/pgr/aviation/domestic/ukrdf/anationalprotocolforukrouted2873.

at:

The dynamics of the aviation market in Europe have changed. Full service airlines reduced
their networks from some regional airports - often reducing access to traditional hub airports
while no-frills and niche regional carriers increased the range of primarily point-to-point
services. But, many of these services are to leisure destinations, which, in the case of airports
in Northern Europe, means airlines are carrying mostly outbound flows, which do not usually
contribute to the overall economic growth of the region from which services operate. The
challenge for most regions is to promote and develop those services that make a positive net
contribution to its economy. It might also be argued that the trend towards airport
privatisation, which places profit motivation at the head of the list of priorities, has further
diluted the role of airports as promoters of those services that deliver economic benefit to the
regions they serve.
Many regional airports offer a degree of incentive to airlines to commence new routes, via the
media of marketing support or discounts. This is usually legally permissible as long as it is
offered equally to all airlines. (In the well documented case of Ryanair at Charleroi Airport in
Belgium, the allegation was that it exclusively favoured Ryanair). Often, however, these
initiatives are offered for all routes, irrespective of how a particular route benefits a region.
Airports generate more revenue from a full 180-seat vacation charter flight than they do from
a half full 50-seat turboprop service to a business destination of key economic importance to
the region, but the local economy enjoys greater benefit from the latter service.
The 2005 EC Guidelines on financing of airports and start-up aid to airlines departing from
regional airports provided clarity on allowable public sector intervention.
The benefits of a new air service do stretch beyond the revenues accruing to the airport, so
public sector funding can play an important role in motivating carriers to consider new routes
that contribute to the regional economic development. There are certain criteria that should be
applied to all public sector funding of route support. It should be determined by:

Transparency. The route should only be funded if it delivers economic benefits to the region
in a non-discriminatory fashion and where funding criteria are known and understood;

Compliance. The arrangement should be well structured in accordance with fiduciary and
governmental legislation;

Cost effective. The support will preferably be applied where needed during the start-up phase
of a new route, which is when an airlines commercial risk is highest.

Incrementally applied. Support should be linked to route incentive arrangements already in

place; and

Time constraints. Support should have a fixed timeframe, with termination of support
scheduled according to a realistic assessment of when a route should be sustainable without
further support.

UK examples
Regional route development agreements in the UK have been conducted through the
establishment of partnerships between the public sector, airlines and airports and aimed at
encouraging new air services that promote business links and stimulate inbound tourism. The
public sector only invests in those routes that meet the economic development objectives of
the region, in conjunction with the other stakeholders.
Hence, for the first time, these funds combine key public sector economic development
stakeholders regional administrations, economic development agencies and tourism
authorities into a single unit with analogous objectives. This unified approach enables
analysis of the forecast economic benefits from each new service, allowing a rapid decision
on public sector investment for a qualifying route.
There have been four such funds in the UK.

Scottish RDF
The Scottish RDF was established in Nov-02 by the Scottish government through its
economic development agency, Scottish Enterprise. Scotland is now a semi-autonomous part
of the UK with its own revenue raising and dispersal capability. Viewing the lack of key
transport links to the US and some European destinations as a serious barrier to economic
growth, the local government dedicated GBP6 million, spread over three years, to attract new
services. It has since increased the amount to GBP13 million. It is estimated that the total
economic benefit, over ten years, will be worth more than GBP300million and create around
700 tourism jobs.

In the 14 years between Jan-89 and Jan-03, the total number of scheduled international
destinations served from Scotland on a year-round basis remained constant, at 17. Following
the inception of the Fund, a further 15 new international scheduled destinations were quickly
added and the total now is 50. The Fund has brought in prestigious full service long-haul
airlines such as Continental to Newark from Edinburgh Airport and Emirates to Dubai at
Glasgow International Airport, but it has also helped set up a variety of LCC routes, including
those from Scotlands main low cost airport, Glasgow Prestwick, all by Ryanair, an airline
that was already in situ. Other LCCs whose start-up routes benefited are easyJet,
Flyglobespan, Germanwings, Centralwings, SkyEurope and Wizz Air.
RDF International year-round services in Scotland, (northern) summer 2007

There was little immediate benefit to Aberdeen airport, which supports the North Sea oil and
gas business, a labour intensive operation that attracts manual workers from large
metropolitan conurbations and could benefit from LCC operations. Several new routes started
there, but all by full service airlines. In the last two years however the airport has begun to
make a breakthrough and now hosts the main British LCCs Ryanair and easyJet, as well as
bmibaby, Monarch Scheduled and local airline Flyglobespan. It was the fastest growing
Scottish airport in 2006 (+11%).
Strict criteria need to be met before RDF funding is allocated to Scottish airports. Essentially,
a new external direct route must be of economic benefit to Scotland and predominantly of
long-term benefit to business travellers, although it also allows for strong inbound tourism

routes. It must operate five days a week, all-year round and not compete with an existing
service. A full economic appraisal is carried out for each prospective route, scored on factors
including destination, creation of jobs, number of inbound tourists and journey time saving.
The Scottish RDF is now coming to the end of its useful life but may be replaced by a new
marketing fund.
Northern Ireland RDF
The province of Northern Ireland also a semi-autonomous region of the UK has
historically been poorly served by direct scheduled international air services. The devolved
administration identified route development as a key component of industrial and (inward)
tourism competitiveness. Following Scotlands lead, it established a Fund in Nov-03, worth
GBP4 million, spread over three years, with a possible extension. It was managed by a
company, Air Route Development (NI) Ltd., set up by Invest NI, the local development
agency. Prior to the launch of the Fund, Northern Ireland had a single daily international
service from Belfast to Amsterdam.
Since then, over twenty new scheduled routes have been launched, of which nine routes
received direct investment from the fund. (In other words the existence of the Fund alone can
be a stimulator to airlines to commence a route even if not supported, as the formerly
moribund local travel market is stimulated by the advent of new non-stop services.) The
Leedsbased LCC Jet2 set up a new base at Belfast International Airport but was not supported
by the Fund because of the nature of its routes they are all outbound vacation routes that
would not significantly aid local business. In a similar fashion, two new vacation routes by
easyJet did not receive support. In addition a new daily Belfast-New York was launched in
summer 2005 as a result of the Fund. The routes supported are:

Belfast International - Paris (easyJet) (LCC);

Belfast International - Nice (easyJet) (LCC);

City of Derry - Birmingham (Aer Arann) (Regional airline);

City of Derry - Manchester (Aer Arann) (Regional airline);

Belfast International - Newark, USA (Continental Airlines);

Belfast City - Norwich (FlyBe) (LCC);

Belfast International Geneva (easyJet) (LCC);

Belfast International Berlin (easyJet) (LCC); and

Belfast International Rome (easyJet) (LCC).

Northern Ireland RDF international routes only

The funds duration has come to an end and can be regarded as a success, especially in the
arena of LCC route development, where much greater efforts were needed to get carriers to
look past Dublin Airport. Traffic increases have levelled out at Belfast International, and
traffic actually decreased at Belfast City in 2006, but the City of Derry airport, the one most
isolated by Dublins magnetism, increased its passengers by 70% in the period.
The economic impact of these routes on job creation, and wider economic benefit, is currently
being appraised.
Northwest England RDF
Another RDF was mooted for the northwest of England, home to Manchester, Liverpool and
Blackpool airports. The Fund, the first in England, was launched in Nov-04 under the
guidance of the Northwest Development Agency (NWDA), and was to run for three years.
The objectives were to:

Support key business opportunities in terms of both inward investment and export initiatives;

Promote route development and related initiatives that support identified tourism priorities
and projects; Increase connectivity to the region;

Improve the competitiveness of the regions businesses by allowing European business travel
to and from regional airports to be conducted within a day; and

Improve the regions connectivity to strategic long-haul destinations and European hubs.
The Agency's robust investment application process included an initial market and
commercial viability test taking into account financial, economic and environmental aspects
and adhering to relevant state aid guidelines.
With a strict objective of attracting new air services that would support inward investment,
inward tourism and export activities and the competitiveness of the regions businesses, the
NWDA would only invest in routes that offered a measurable net economic benefit to
Englands Northwest.
Northwest England is different from Scotland and Northern Ireland, which have their own
governments. The region is the second largest in terms of both population (7 million) and
GDP in the UK, after London and the Southeast, but has fallen behind Scotland and Northern
Ireland in terms of inward investment support as government focus fell on those places.
On the other hand and again unlike the other two regions, its multiple airports are at
completely different stages of development. On the one hand, it is home to Manchester
Airport, which hosts 22 million annual passengers and is the worlds 30th busiest
international airport. Then there is Liverpool John Lennon Airport, which has grown
dramatically to five million passengers courtesy of the LCCs on which it has become highly
dependent. Finally, there is Blackpool Airport, which has striven hard to attract any realistic
commercial route from a very small base and which did succeed in attracting new routes by
Ryanair and Monarch Scheduled, although their future at the airport is hardly assured,
especially in light of the central governments decision not to allow the community to open a
much-desired large casino.
The indication was that any funding in respect of Manchester would be on strategic long-haul
routes, quite different from the requirement at Liverpool and Blackpool airports, where it
would support low cost carriers, provided they were not merely taking locals away from the
region on holiday.

In this particular instance the whole scheme fell through when its instigators left the Agency
and the new management opted instead for an infrastructure fund that succeeded in funding
an apron at Blackpool for the airline Jet2. This decision somewhat goes against the grain of
the RDF philosophy as Jet2 was denied funding in Northern Ireland (see above) on the
grounds it would bring in few business or leisure visitors.
Consequently, the NWDA RDF never became fully operational and never funded any route.
Wales RDF
The most recent RDF is in the Principality of Wales, which is heavily populated in the south
in the Cardiff-Swansea belt but thinly populated in other areas. (Cardiff is the capital). The
Welsh Assembly introduced an air route development fund in the summer of 2006. The
Transport (Wales) Act 2006 provides the Assembly with the powers to give financial
assistance for air transport services in Wales.
The RDF was designed to work with the market to support new air services between
European Cities by sharing risk during the start-up period. The Fund supported new routes by
offering discounts on airport aeronautical charges and assistance in marketing the route for up
to three years. Under the guidelines, offers were made of up to 50% off the cumulative
aeronautical and marketing costs, providing an incentive to start up routes from Cardiff
International Airport.
Some felt the decision to restrict the RDF to Cardiff may have been deficient, as there are
several other Welsh airports that might benefit from new LCC routes, including a proposed
military airfield conversion (RAF Valley) on the Isle of Anglesey. Intra-Wales air routes have
been conspicable by their absence and, in fact, the twice-daily route between Cardiff and
Anglesey that commenced on 08-May-07 is supported by a PSO, not by the RDF; the first
such PSO in Wales. PSOs typically have tougher criteria such as aircraft capacity, frequency
and flight timings as governments often underwrite the minimum air fare to make the service
viable, in a more open-ended agreement.
The RDF Protocol ended on 31-May-07. The European Commission had published its
guidelines on financing of start-up aid to airlines departing from regional airports in Dec-05,

with one of the main proposed alterations being a reduction in aid that could be offered, from
50% to 30 percent. The conditions and restrictions contained in the new RDF Protocol made
the scheme unattractive for all parties and resulted in the Welsh Route Development Fund
closing to new services that commence after 31-May-07.
Two new LCC routes were established and continue. Cardiff to Barcelona (Thomsonfly/TUI)
and Cardiff-Paris (Flybe). Both routes were expected to provide an important stimulus to
inbound tourism, as well as improving business, cultural and educational links, and inward
investment opportunities.
Support was offered to Cardiff-Brussels and Cardiff-Manchester but the operator, Air Wales,
failed. A new operator could be awarded the support.
Cardiff-Aberdeen has also been authorised but no service has started.
Alternative mechanisms are now being considered to support new routes from targeted
markets. The Welsh Assembly Government is looking into the feasibility of establishing a
tourism-based and business investment marketing scheme to attract new air routes to and
from Wales.

Conclusion
This is merely a localised view of the possibilities arising from the application of supporting
funds by governments. The examples are from the UK but the concept is portable; similar
schemes have been applied in Italy and Germany, for example. In Germany the European
Commission went a stage further and announced in Jan-05 that an aid scheme for the
construction and development of regional airports in structurally weak regions was
considered compatible with European legislation. The public aid measure was part of a joint
Federal Government-Laender (regions) scheme for improving regional economic
infrastructure in Germany and applied for 2005-2006.
In the UK, the Funds have been successful because they arose out of a government policy to
encourage the growth of regional airports that has been in existence since the 1980s and
which was further enhanced by the White Paper (policy document) of Nov-03. That policy
has been further supported by the ability of the various stakeholders municipalities, airport

operators, tourism authorities, chambers of commerce and so on to cooperate to their

mutual benefit. Regrettably, that is not always the case in other countries (and in some cases,
the UK, too), because of the disparate objectives of the stakeholders or because there is
simply no platform to cooperate.
One of the real benefits of such a Fund is that it affords the public sector real influence in the
type of air services being attracted to their region. Closer cooperation and communication
with airports and carriers fosters a better understanding of the respective objectives, issues
and concerns for each of the parties. Where RDFs are in place the winners can be low cost
airlines, the airports that support them and regional economies. In that respect they are a more
tangible way of both sponsoring and measuring economic impact.
It is regrettable that the imposition of EC rules on public sector support to airports rendered
these schemes inoperable. The EC has since become more flexible in its interpretation of its
own rules so the mechanisms of RDFs may return.
Outside of this framework there is of course no reason why any airport should not set up its
own independent air service development forum, bringing into play stakeholders from the
local community. There are a number of these in existence in Europe right now. They are
mainly geared up towards inwards tourism development, but stakeholders from the business
community often become involved as they stand to benefit from any increase in air service,
which most often emanates from the LCC segment.
A good example is Bergen in Norway, whose Development Forum, Fly Bergen, offers a
marketing support mechanism to airlines that open a new route to Bergen Flesland Airport or
increase frequency under a three-year programme. NOK62 million per annum is allocated to
a series of categories (Ski, Tour, Cruise, Meet etc), the Fly component (support of airline
operations), being aligned with EC State Aid guidelines.

8.3 Who are the passengers?

It is only fairly recently that budget airlines have begun to consider the make up of their
passenger base. Because the airlines and their representative bodies, such as the European
Low Fare Airlines Association, are quick to deny that LCC flights have taken business from
full service airlines (rather, they contend, they have created a new market of impulse

travellers, many of whom might not otherwise fly at all), there is a tendency to believe that
they are fundamentally leisure travellers from low socioeconomic groups.
It is perhaps surprising that budget airlines and airports should only now being giving serious
consideration to this issue considering that the practice of identifying passenger types by
employing a whole range of criteria, criteria that has long been used by the FSC and network
segments. There are critical decisions to be made from these statistics. For example the UK
CAA established in 1987 that only 15% of business air travellers were women, but that was
up from 10%, ten years previously.
In the USA the trend was reversed, with fewer female business travellers in 1991 (20%) than
in 1987 (27%) but the change since then has been so dramatic that one now-defunct US LCC
affiliate, Deltas Song, built much of its marketing proposal around the demands of the
female business traveller. Another identifiable trend has been the growing proportion of
younger, junior businesspeople amongst business travellers. Research indicates that, despite
these passengers usually being on lower incomes, they are more likely to spend money on
impulse while travelling.
As the business of market research grew, other socio-economic features began to be taken
into account in addition to sex, age and household income. They included size of family,
social class, the number of people travelling together, type of profession; all with the
objective of aiding the planning of advertising, promotion and sale activities, and even in
forecasting and product planning activities.
Out of this grew market segmentation. The simple expedient of dividing passengers into
business and non-business types was expanded initially into a four-way variant of business,
leisure, visiting friends and relatives (VFR) and Other. It was found that the segments
demonstrated differing growth rates and responded in different ways to variables such as fare
changes and macroeconomic factors such as recession and exchange rate changeability.
As time went on, it was realised that too much emphasis could be placed on age, sex and
social standing and that it was perhaps more important to take into account human factors
such as what fare a passenger will pay. Also that trips could have a multi-purpose function,
for example the husband attends a conference while the wife goes shopping (or vice versa).
Critically, that market segmentation simplifies motivational factors the independent

traveller and the package holidaymaker are two distinct animals, as are the senior company
executive and the salesman or the junior engineer with his toolbox.
Out of this grew another measure by psychological make up or profiling of passengers. One
airline identified eight groupings, including: self reliant, nave, demanding and fussy
planner. Another categorised business passengers as attention seekers and comfort cravers
and leisure travellers as service seekers and even nervous nellies.
Clearly passenger profiling is an inexact science, especially when psychology is involved, but
it cannot be ignored. There is a suggestion gaining credibility momentarily that airlines in the
future could start regularly offering uniquely niche products, with flights targeted to specific
demographics, and ticket pricing simplified in such a way that passengers know exactly what
they are getting for what they pay. The author of that proposal was thinking in terms of the
US legacy carriers on the basis it is now impossible for them to follow the path of being all
things to all passengers and still turn a profit. But there is no reason why low cost airlines and
airports should not continue to do the same in their own unique way, targeting a specific
audience in the same way as, for example, cable TV channels do. (Ryanairs oft stated goal,
for example, being the No-charge flight, whereby all revenues are generated from sources
other than tickets).
The increase in Business Class only flights, fractional jet ownership and business travel
clubs mentioned variously in this report, are at one end of this scale, the opposite of the
pared-down utilitarian service of Southwest Airlines and its imitators. It is perhaps no
surprise that many airlines have hired senior executives from outside the industry, with
experience of consumer segmentation, to see them through their particular challenge.
What research has been undertaken to identify the demographics of the LCC/LCA customer?
One interesting study is from Thomsonfly, the major operator at, and one-time owner of
(through parent company TUI) Coventry Airport (see Chapter 4) in the UK and major
operator at many other airports in Europe.
Thomsonfly surveyed its passengers in Aug-04, a peak travel month and six months after it
started operations at Coventry, during which time 7,000 questionnaires were completed. The
short report is given here verbatim:

Repeat booking - 21% of passengers surveyed in that month had flown with the airline
previously - with a quarter of these having flown four times or more during the airlines first
six months of operation. Booking information demonstrated that Thomsonfly.com has already
established a loyal passenger base. The data revealed that the most frequent flyer has flown
16 times with the airline. Business travellers were most likely to be repeat bookers - almost
half had flown with the airline before.
Reason for travel - Over three quarters of customers were travelling for leisure; the
remainder were visiting friends and family or travelling on business. Jersey (British Channel
islands) had the highest proportion of passengers visiting friends and family. Coventry and
Jersey were linked by passenger flights for numerous years, starting in the 1960s - which has
contributed to a migratory flow between the two.
Incoming tourism - Thomsonfly.com had carried over 35,000 inbound passenger sectors the top five destinations for inbound travellers (in descending order are) Jersey, Valencia,
Malaga, Marseille and Rome. These travellers benefit the economy of the region.
Convenience and value - Value for money and the convenience of flying from Coventry
were significant factors in the decision making process for Thomsonfly.com customers, with
these being scored as excellent. Over 91% of bookings were made online, contributing to
Thomsonfly.com keeping its overheads low and therefore continuing to offer low fares to
customers into the future.
Travel companions - For the most part, passengers departing the airport were travelling in
pairs with another adult (44%), with one in ten people travelling alone. More than half of all
passengers were aged between 35 and 45, which fits with the national trend as the most likely
to book their travel independently on the Internet.
Duration of stay - Customer feedback showed that people were not just using the flights for
short breaks but also for longer holidays. Booking data showed that on average Naples (Italy)
was the destination with the longest durational stay.
Accommodation - 25 % of customers who had flown with Thomsonfly.com previously were
visiting their own apartment, which reflects the continuing trend towards overseas property

ownership.

The most popular accommodation choice, for a third of Thomsonfly.com

customers, was a hotel stay.

Business travellers - The most popular routes for business trips were
Jersey, Marseille and Naples. Many business people on the Coventry to Jersey route had
taken advantage of the opportunity to depart on the morning flight, returning on the evening
flight - taking advantage of the double daily frequency. Business travellers were most likely
to book late, with almost half booking within seven days of departure. The most popular
booking time across all passengers was three to six months before departure undoubtedly
motivated by the low fares offered to early bookers.
Assuming that Thomsonfly (an already experienced charter flight operator) and Coventry
Airport are typical of the new breed of low cost airline/airport teams we will increasingly see
more, and allowing for cultural variations elsewhere, these observations can be made:

There is a surprisingly high level of repeat travel, even on services barely established;

Business travellers are using the flights in much the same way as they do full service carriers,
especially when services are timed to suit their schedule (morning/evening), permitting day
trips;

Leisure remains the major reason for travel (75%)

Inbound passengers arising from LCC operations from the home base country can exceed
expectations, and airports need to cater for them. In this case, the West Midlands region of
the UK has something to attract visitors in Coventrys proximity to Stratford upon Avon
(Shakespeares birthplace) but not a great deal more;

Nine in ten people are not travelling alone. 50% are in a particular age bracket 35 to 45;

The short-break market (the theoretical mainstay of LCC business) is being matched by
longer vacation holidays, at the continuing expense of the package charter (note again that
Thomson is one of Europes leading vacation packagers); and

There is also a growing trend towards regular use of these flights to gain access to second
(vacation) homes abroad, and also by passengers who are hiring them from their owners. This
is a peculiarly European trend on an international level (though not in the US, where it is a
domestic travel matter, e.g. eastern seaboard or Midwest to Florida).
8.4 Provision and use of lounges at LCAs

The fact that low cost lounges is increasingly a competition issue amongst LCCs and,
therefore, at low cost airports, is a sign of the times. Airport lounges were until recently
considered to be the exclusive domain of full service and network carriers. They are
increasingly to be found in the portfolio of LCCs, where they are provided on a user-fee
basis. EasyJet was one of the first to offer them. Together with aviation services provider,
Penauille Servisair, it announced a new initiative, easyJetLounges, to be rolled out at 33
airports across Europe, starting with Nottingham East Midlands Airport from Jun-05. As at
Aug-07, 22 are in operation. Passengers are able to book access online starting from
GBP13.50 each.
easyJet lounge

The Lounges offer:

Complimentary beers, wines and spirits;

Soft drinks, beverages and snacks;

Newspapers and quality magazines; and

Access to business facilities, including telephones and facsimile machines, email/internet

access and writing desks.
Flybe has included use of executive lounges part of its frequent flyer programme, launched in
Jul-07 and called Rewards4all. Although Southwests loyalty scheme in the US has been in
operation for many years, Flybe is the first carrier to introduce one in the UK. Points awarded
for trips made can be used for free flights or one years free lounge access, which requires ten
economy returns.
In Australia, VirginBlue has made lounges part of its evolution to a New World Airline.

These moves are part of the broader efforts by low cost carriers worldwide to generate
additional ancillary revenues and/or to induce loyalty amongst business travellers. The
growth and maturity of LCCs and their supporting airports offers suppliers like Servisair new
opportunities to boost their revenues too.
Airport operators should expect that competition in the LCC segment would lead to more
airlines introducing lounges as part of their customer offer. The pioneers of the genre
however seem unmoved presently, with Southwest devoting its Rapid Rewards frequent flyer
points to free trips and Ryanair still refusing to have any association with innovations that
might slow down passenger flow.
8.5 Implications for ground handling companies
The trend towards low cost airports and terminals also raises questions about the competition
between ground handling agents at airports. Although it would not be reasonable to describe
ground handling as a closed shop (and particularly not in Europe where strict competition
rules apply), neither has it been the most openly competitive area of airport operations.
EasyJet, for example, declares that airports and their ground handling costs cumulatively
account for 32% of its total cost base; a higher figure than that experienced by most airlines.
Consequently, in order to reduce costs, easyJet negotiates specifically to obtain the right
infrastructure, services and charges appropriate to its modus operandi, which includes the
critical domain of ground handling. Where it has experienced cost-plus pricing models,
charging for inbuilt services that are not required, the airline has in some cases withdrawn
services entirely and in other cases threatened to do so. As such, the airline continues to
search for airports that are willing to restructure, and want passenger growth.
At Singapore Changi Airport a third ground-handling agent was permitted to commence
operations at the beginning of Mar-05, four months ahead of schedule. The ten-year contract
covers passenger, baggage and cargo handling and the adoption of more competitive
circumstances and seemed to be linked directly to the airports new LCT. The authority
declared that it wished to change the mindset of workers to accept multi-tasking of jobs
(inter-changeability of job roles) in services such as ground handling and the more

competitive environment might aid the application of a lower airport tax than at the existing
terminals; the authoritys aim.
All user airlines at Singapore Changi were paying the same landing fees, the same rentals and
charges for terminal space and facilities and were equally eligible for incentives under an
existing SGD210 million air development fund, so the differentiation that would be attractive
to an LCC would be in the form of other airport operating savings as they can be made over
those offered by rival airports, such as at Kuala Lumpur and Bangkok, and for their
passengers the difference would be in lower passenger service charges. Changi claimed
already to have the second lowest aeronautical charges in the Asia Pacific region, a position it
hoped to enhance by keeping ground handling charges competitive.
In line with its objectives, CAAS had previously announced that it had restructured the
franchise fees for the total ground handling business at Changi Airport, which would result in
about SGD10 million in annual savings for the ground-handlers.
Another reason for the decision is the spin-off effect of the strategic decision by the CAAS
that all airline users would have the choice of whether or not to use the low cost terminal or
the existing terminals one and two irrespective of if they were low cost or full service
airlines. FSCs choosing to downgrade to this level of basic functionality would expect the
option to pay less for ground handling services there, and to pay additionally for extra
services and facilities as they require them.
In another example, Stagecoach Holdings took much the same multi-tasking line at
Scotlands Prestwick Airport by starting up its own ground handling service and integrating it
into its total offer, ensuring that staff could work in any area of operations.
Opening up ground handling to competition helps justify the application of different tax rates
at different terminals, the problem that has beset Geneva Airports attempts to convert an old
charter terminal to one for LCCs. The target for cost savings is considerable at Geneva it is
40 percent. This might entail passengers having to do much more for themselves than they
are used to, especially in respect of their own baggage handling through the terminal. They
might even find that certain services that have historically been provided free of charge
become chargeable items.

There is a debate in Europe as to whether airlines or airports should, for example, have
responsibility for the transport within the airport of disabled passengers care for whom is
most often passed on to ground handling agencies. The debate arose out of a test case in 2004
and as a result of EU deliberations the responsibility for persons with reduced mobility
(PRMs) will now rest with airports, which must take care of them from the time they enter
the airport until the moment they board the aircraft. A central system will control the service
on behalf of all airlines, which must pay for it by adding a maximum of EUR0.40 to every
ticket (i.e. not just to disabled passengers tickets). Member states were required to set up an
enforcement body controlled by airport operators and PRMs to ensure the standard of service
and to set the charges airlines must pay. Airlines would only have a consultative role.
In the view of the ground handler concerned at Singapore, Swissport (now owned by
Ferrovial), the opportunities and problems presented by low cost ground handling were not so
much a trend as a reality and one that it decided to tackle aggressively. Swissport is at an
advantage as it has global experience of handling LCCs in different locations, for example
Ryanair in Europe, Air Arabia in the Middle East and Gol in Brazil. It does not regard low
cost handling as being anything other than the normal case now, but admits there is still a
learning curve to be negotiated in achieving equilibrium between the type of service
requirement, service levels and price at individual locations where individual airlines have
their own agenda. What is clear is that, while FSCs still need to exhibit branding, which
brings into play external agencies, LCCs are increasingly doing more of their own thing,
which minimises the contribution of those agencies.
So, if an airline specifies, for example, no ticket office or minimal counter space, no lost and
found desk, few or many check-in desks, Swissport will provide the flexibility to meet the
need accordingly, rather than dictate previously normal working standards.
As Changi Airport does not require users of its low cost terminal to be LCCs, and as this
arrangement may find favour elsewhere, a possible development is that a whole new set of
low cost ground handling standards will arise, standards that will be transferable to all
airlines for which brand image does not come before cost minimisation. While this will not
include many long-haul airlines, many short-haul regional airlines and flag carrier franchises
could fall within the remit.

8.6 Benchmarking and differentiating the costs and benefits of a separate low cost
airlines terminal versus a mixed-use one
One needs to be careful when reaching conclusions about low cost passengers. Increasingly
the people using low cost airlines are those that once travelled on full service carriers but are
now using their business or personal travel budget more effectively. Their expectations of
airport facilities will therefore be varied, and those expectations will be reflected in the
measures airlines use to assess costs and benefits of using a low cost terminal as opposed to a
mixed-use one. The redbrick British airports (in key provincial cities) have mainly chosen
to retain high-level facilities, so that critical full service carriers are not inclined to move
elsewhere, and then try to accommodate LCCs within that strategy as far as possible.
There is also the possibility, indeed the likelihood in some countries, that an airport will
already have its costs under control, so that on the surface there is little apparent benefit in
having a separate LCC facility constructed anyway, especially if the capital expenditure so
incurred detracts from other, more pressing matters. This happened in the case of Manchester,
where there is a surplus of terminal space because the authoritys traffic forecasts failed to
consider the diversionary effects on service levels of other LCAs and of rival airports that
have reduced airline costs to compete.
It could be argued that Singapore Changi airport falls into such a category. With only a
handfull of LCCs operating there, Changis cost per passenger for an LCC turnaround is said
to be SGD5.40 per passenger, based on an Airbus A320 with 75% load factor; the second
lowest in the whole of the Asia Pacific region. The financial rationale for building such a
terminal is therefore nullified and the reasons given for having it appear to gravitate more
towards the unnecessary sophistication of the existing and planned full service terminals and
the rather nebulous desire to offer different models for different customers.
The Civil Aviation Authority of Singapore says the simplified systems and basic facilities at
the low cost terminal were intended to minimise operational and capital cost, although it
declined to quantify the benefits airlines would receive. It further points out that airlines are
also benefiting through the application of a wide-ranging air route development fund, which
rewards new routes through marketing support and rebates on charges. The winners in the
short term will be the LCCs that are expanding their Singapore services.

The investment, while not onerous, came at a time when the Authority was already making
major plant increases at Changi, including a third full service terminal, due for completion in
2008, which will cost SGD1.5 billion.
The new terminal will add additional capacity of 20 million, bringing annual throughput to 64
million. There are presently around 35 million passengers annually, leaving a theoretical gap
of nine million extra passengers to fill existing facilities between now and then. Allowing for
the fact that Terminal 3 is arriving late in the day, as dynamic LCC growth is now, not in a
future that is uncertain, it does beg the question as to whether a conversion of part of terminal
one for low cost operations might have been more appropriate.
The existing Terminal 2 and new Terminal 3 will be close together and T1 is already
segregated, with two separate piers of its own. It is not difficult to anticipate another airport
with uniformly low turnaround costs like this employing a semi-terminal plus pier
allocation/conversion to tackle the budget airline demand, thus allowing itself the option of
reverting to the previous norm if the anticipated LCC explosion did not happen. Such a plan
would, if nothing else, remove the necessity of SGD45 million in capital investment.
A similar argument might be made about the low cost terminal at Kuala Lumpur, where the
second main terminal that was planned to be operational in 2004 was delayed by a succession
of factors - the 1997-98 Asian financial crisis, the 11-Sep-01 terrorism attacks and the SARS
outbreak. It could have been designed to cater adequately for low cost airlines within the
development plan. As such, the LCC terminal began to look like a stopgap measure (albeit on
a larger scale than that at Singapore) and it now appears it will be replaced.
Clearly there are many factors to take into account in assessing cost versus benefits of low
cost terminals, to both the operators and the airlines, but little academic work has been done
on the subject to date. What is not at issue is that the profitability gap between airports and
airlines has not narrowed.
Collated global results suggest that the top 100 airport groups by revenues (which include
some where LCCs play a big part, such as London Stansted) posted an operating margin of
22.7% in 2005, up from 21.9% the year before. In contrast, most of the leading 150 airline
groups managed a margin of 1% or less in the same period. An important caveat here of
course is that despite the increase in privatisation activity, the airport sector is still largely run

as a public utility while most airlines have at least a modicum of private interests. Also the
airport operator must make sizeable long-term investments that need to be budgeted for,
while the carriers have a much more portable and disposable asset base, especially since
operating lessors grabbed hold of the aircraft market.
Nevertheless, while the more successful LCCs are constantly striving to lower their costs, it is
no surprise they expect airport operators to match them, even when those same airports are
the ones that have helped break the monopoly held by some operators and which the airline
companies universally regard contemptuously.
There is some progress towards benchmarking of airport charges, with IATA and Airports
Council International working together on IATAs Simplify the Business initiative, where
they have examined examples of best practice around the world. IATA wants to see some sort
of global benchmarking system for airport charges, similar to that undertaken by the
Performance Review unit of Europes air navigation management organisation, Eurocontrol.
Although there is at present no equivalent system for airport charges, IATA has been working
to try to establish one.
The Association of European Airlines also called for new mechanisms to determine airport
charges so that airports are motivated to reduce cost platforms. The Air Transport Research
Society made a start to lay down such independent benchmarks with a Global Airport
Performance Measurement and Benchmark study. Some of the most productive airports are
not necessarily the ones that would spring to mind, for example Atlanta Hartsfield in North
America, Copenhagen Airport in Europe and Sydney Airport in Asia Pacific. All these
airports have a mix of full service and budget airlines and only Sydney has anything like a
designated low cost terminal.
IATA has waged a campaign against what it regards as offenders to its best practice
principles while a formal benchmarking methodology is being devised. One of the airports it
has targeted is Bangkok, where it attempted to induce Airports of Thailand (AoT) to reduce
its charges long before the new Suvarnabhumi International Airport opened to replace Don
Mueang airport, which could have been designated an LCT (see Chapter 6). AoT raised
charges by 20% in Jan-05, despite the fact it recorded a profit margin of 60% in 2004, and
planned another 15% increase in Oct-05 in addition to a 40% increase in charges to departing
international passengers at the same time. These increases were implemented in Apr-07 but

AoT continued to lose money as it tried to juggle the failings of Suvarnabhumi with the
closure of Don Mueang.
A previous IATA target has been Torontos Pearson International Airport, which was accused
of building an extravagant new terminal (IATAs Secretary General described it as [The
Palace of] Versailles with boarding bridges), with facilities that even most full service
carriers neither needed nor wanted, let alone were prepared to pay for. In this instance
Hamilton Airport, 60 miles away (see Chapter 5) has been developing low cost services and
decided in 2003 that its future focus would be on the sector, and that its operational and cost
strategy would reflect that decision, seemingly on the basis that the Toronto management was
unlikely to adopt such a policy in the foreseeable future.
Irrespective of whether Toronto was right or wrong (and not everyone subscribes to the IATA
viewpoint), Hamilton demonstrated how LCAs could help determine their own future by
introducing their own price benchmarking, quite separate from that of their more expensive
neighbours, and to good effect.
Another aspect of the funding paradox is demonstrated at London. Despite what the British
media says, capital expenditure by BAA plc before it was taken over by Ferrovial was
enormous in 2004 it was twice that of the Aeroports de Paris, Schiphol Group (Amsterdam)
and Unique (Zurich Airport) groups put together. The UK CAA had agreed a generous regime
on airline charging there set at 6.5 percentage points above the level of inflation (retail price
index) from 2004-2009. This increase supported the investment programme of USD18 billion
to 2014, one that ensured BAA accounted for over 40% of debt at rated European airports at
the time.
Much of the investment went to Heathrow, where the 30-million p.p.a. capacity Terminal 5
should open in Mar-08. The unfortunate element here is that little other expenditure was
incurred on Heathrows ailing terminals 1-4, the most recent of which was built in the 1980s,
on the basis that T5 would solve all the airports problems. But it took so long to get through
planning stages, and then was delayed by a year by strikes, that the other terminals have
deteriorated to the point they are regarded as a shameful introduction to the country.
As things stand, there are no plans for T5, or indeed any of the other four, to be occupied by
budget airlines it is earmarked for British Airways and its oneworld alliance partners.

However, there is also the prospect of major investment at the LCA, Stansted Airport, partly
on a terminal extension but mainly on a second runway. The Nov-03 government White
Paper gave the go ahead for the GBP2-billion runway by 2012 but it is being contested by
environmental pressure groups.
What is at issue is the funding. The White Paper indicated that future funding of major BAA
capacity projects at Londons three main airports ought to come from the users (airlines),
more than from the debt markets (which are often used by BAA). In other words, they must
be self-funding and cross subsidisation of one project by raising charges at another is not
allowed. This has raised questions as to whether the funding of the new runway at Stansted is
feasible without cross-subsidisation from higher fees paid by other airlines at Heathrow (full
service scheduled) and Gatwick (scheduled/charter/ low cost) airports, respectively. That is
certainly what the user airlines at those airports seem to think, and that thereby raises
questions also about the ability of user charges to fund necessary infrastructure developments
at Stansted, the worlds premier low cost airport.
So there is a perennial quandary facing airport management that is evident in this example:
how to balance the requirement for lower user charges with the need to provide necessary
infrastructure. This conundrum must be taken into account also in any exercise to
differentiate the costs and benefits of low cost terminals, as well as full-blown lost cost
airports like Stansted.
The cross-subsidy issue was also raised in Chapter 4, in respect of Geneva Airport.
On the other side of the fence, there is no doubt that some airlines have not been shy in
driving very hard bargains with airports. The leaders in Europe have been easyJet and
Ryanair, both of which have pulled out of airports or cut back on services if they have failed
to obtain or renegotiate satisfactory airport agreements.
While Ryanair is noted for its tough attitude to secondary airports easyJet, is no respecter of
airport status, having pulled all but one flight (to London Luton) out of Zurich Airport. It
threatened to do the same at Geneva until it got the package it desired, and it has reduced
services at Amsterdam.

Adding a further complication is the movement of some mainstream airlines towards a lower
cost base, one that is sometimes not substantially different from that of a typical LCC, and
which requires (according to IATA) the airport charging differential for the two sectors to
narrow. This, critically, is not the same as having two charges for the same service, a famous
pet peeve of IATA.
This has caused some low cost airport operators to take the view that if the lowest price to the
user airlines is expected, then the benchmark to be employed in assessing the value of the
terminal will be one of revenue generation by alternative means. Brussels South/Charleroi is
one such example. The management there has decided to develop as much as possible the
non-aeronautical revenues: travel retail, Food & Beverage, parking and regular bus shuttles to
Brussels which are operated in conjunction with Ryanair, for all passengers. Those revenues
are judged to be vitally important and the airport management tries to be creative in
establishing new businesses at the airport. By so doing, in less than 3 years, the revenue by
departing passenger was multiplied by a factor of four, irrespective of how this contrasts with
the demands of the budget airlines.
If there is good news for low cost airports and terminal operators in the short and medium
term it is that they are unlikely to see their margins coming under the sort of pressure that is
being experienced by LCCs as their internal competition intensifies. In the longer term they
might of course, if the sector experiences the collapse that some anticipate and airports are
left nothing with which to fill the gap.

8.7 The costs and benefits to an LCC

What are the costs and benefits to an LCC, and how are they measured? This is dealt with in
Chapter 2, by way of an historic reference to the airline buzz. A useful contemporary case is
Flybe, the UK traditional full service carrier-cum-LCC that is mentioned widely in the text.
Flybe was, of its own admission, facing the real prospect of going out of business in 2002; its
cost base was high and revenues were not matching them. It was a question of: adapt or die.
Several tactical cost areas were tackled. For example, onboard food and drink was sold rather
than distributed and behind-the-scenes operations were combined. Captains began to
calculate their own load sheets. Strategically, five aircraft types were reduced to two and
Flybe chose to concentrate its route network, apart from its home base of Exeter, on UK and
some European regional cities such as Southampton, Birmingham, Liverpool and Belfast.
London Stansted was axed altogether, although a significant presence remains at Gatwick and
Luton.
Long an operator of fuel inefficient BAE146 aircraft, the airline decided to reequip with the
Bombardier (Dash) Q400, a 70-seat turbo-prop aircraft with only marginally reduced cruising
speed and one that is claimed to have the same operating economics as a new generation
Boeing jet, but with a breakeven load of only 29 passengers.
Having established these operating economics, Flybe then turned its attention to the airports.
An important area has been minimising the cost and time-cost of processing passengers
through the terminal, but by using of the infrastructure that is already in place. Common user
self-service check-in has been high on the agenda at all the airports at which Flybe has begun
to operate, but only as a stop-gap measure.
Ideally, Flybe wanted to introduce Internet-based check-in at the earliest opportunity on the
principle that the greatest cost savings can be made by getting passengers through the
procedure quickly, preferably without interacting with a human being on route. Eventually it
enacted Q-Buster, an on-line procedure using domestic computers and peripherals. Flybe
estimates 30% of its costs were front of house like this, as against 70% for behind the
scenes operations (e.g., ramp, towing and terminal costs).

As for the 70% part of the equation - the terminal facilities (or lack of them) that are or will
be evident at Warsaws Etudia, Geneva, Singapore and Kuala Lumpur terminals they too
are important to Flybe, but not, yet, to the same degree.
One aspect that has emerged from the airlines deliberations is the need for the airport
security function to be improved. Flybe has experienced several examples of how reduced
direct security costs (through fewer staff and equipment) can translate into higher indirect
ones where the removal of check in queues is achieved by the methods mentioned above,
only for passengers to stall at a single security channel, thus bringing about delays.
Southampton and Liverpool are two airports where the problem has been most acute;
Southampton being a BAA-owned and -operated regional airport shows that the issue is not
limited to LCAs like Liverpool. Flybe estimates that 45% of its passengers travel without
bags and clearly any LCA that makes provision in its costings to facilitate the quick passage
of such passengers through the system will win its approval.

8.8 What happens when FSCs and LCCs start to merge?

The fact that Flybe is regarded as a some frills airline in some quarters, in that it may wish
eventually to take on more full service features, such as the ability to interline with long-haul
carriers, raises the question of how airports need to plan for the indeterminate future when the
two kinds of carrier FSC and LCC start to merge.
Factors that are bringing this about are, for example, the narrowing of the performance gap by
the two groups as FSCs improve their aircraft utilisation and employee performance rates,
and LCCs offer higher quality service.
Another example of the narrowing of the differences between the types was the tie-up
between easyJet and the British travel management company, BTI. The deal permitted BTI to
obtain access to easyJets booking inventory and some back-office systems, to aid easyJets
penetration of the lucrative corporate travel market. It was the first agreement of its kind
involving a low cost airline.
From 2005, BTIs corporate customers, which range in size from SMEs to large financial
corporations, were for the first time able to view and buy easyJets inventory through their

own systems and alongside the inventory of other airlines in other words they were no
longer reliant on a unique website, with the restricted reach it offers, or a telephone call to a
call centre.
In addition to seat purchasing capabilities, the function automatically fulfils administrative
procedures such as billing, providing management information and notification in the event
of flight disruptions. BTI was the driving force, having pointed out that whilst keeping costs
down for the carriers themselves, easyJets systems were not appropriate for the corporate
client and that their inflexibility and prescriptive booking methods did not sit well within the
total travel management process.
There was no change to either easyJet's business model or its pricing structure. EasyJet
expressed the intention that identical deals would be struck with other travel management
companies. The function is an extension of easyJet.com/b2b - a simplified version of its
internet site for use by corporations, launched in 2003. EasyJet was also the first European
airline to allow customers to view and change their booking details online, a frequent demand
of business passengers.
Although there are no special deals for BTIs customers over and above what any other client
would receive it is clear that the business model is shifting towards the needs of the business
traveller rather than that of the leisure traveller and not without good reason. The fare
charged to a business passenger travelling for example on a Monday morning and returning
on a Wednesday evening can be ten times or more that charged to a leisure passenger who
books six months in advance, travelling Saturday to Saturday, even without taking into
account special promotional offers.
These developments must translate into greater demand by business users for the support
facilities they expect from airlines at primary airports and full service terminals and it is the
assessment of the nature of that demand and the timeframe in which it will materialise that
poses the immediate challenge to low cost airports. Those support facilities include:

Rapid access/egress to/from personal transport, to/from gate, including security

clearance;

Ticketless travel (an IATA target, but few LCCs are IATA members);

Fastrack channels; and Business facilities/lounges.

None of the above are conducive to the development of low cost terminals.

8.9 Can rail seriously challenge LCCs/LCATs?

In many parts of the world rail services have begun seriously to challenge air services as they
have become faster and more reliable. The main differentiating factor has been the prices that
LCCs have been able to offer. Rail companies have rarely been able to operate sophisticated
pricing, inventory and yield management systems and often fail to cooperate with each other
adequately to offer through ticketing in the IATA air style either. Their pricing mechanisms
still often resemble those of the airlines prior to the advent of the LCCs in the 1990s.
Now there are new developments in pricing also, threatening the LCCs on key short-haul
routes and the airports that support them.
Is rail-air cooperation the way forward?
Some believe it is this sort of cooperation that holds the best future for airlines, airports and
rail operators, to the extent that there is an international pressure group, IARO
(www.iaro.org) that exists to promote the concept of joining railways joining airports and
specifically to encourage integrated air-rail inter-modality. There are over 300 airports
globally with a planned or existing rail link to them.
Broadly, the types of air-rail service that exist presently can be broken down into the
following categories, with examples:

High-speed networks that connect the airport to the main centres of population and industry
(TGV, ICE in France, Germany);

Dedicated airport links, operating in isolation from the network as a stand-alone function
(London Heathrow, Stockholm Arlanda, Oslo Gardermoen, Moscow Sheremetyevo, Vienna,
Hong Kong, Kuala Lumpur, Osaka Kansai, plus those planed for, inter alia, Bangkok,
Glasgow, Hyderabad and Jakarta). Hong Kongs Airport Express line carries 51% of the
airports passengers;

Rail services that combine high-speed connections with local and regional services, to
varying degrees (London Gatwick and Stansted, Manchester, Birmingham, Amsterdam). The
Stansted Express, inadequate as it is, carries 25% of the airports 24 million passengers;

Suburban rail metropolitan services that connect directly or indirectly with one or more
airports (Paris RER, New York Subway, London Underground). Londons Piccadilly Line
Underground service carries 20% of the airports 67.5 million passengers, making it possibly
the worlds largest volume carrier, despite being in direct competition with the Heathrow
Express heavy rail service; and

Light rail transit including tram (Salt Lake City, Portland Oregon, London City, Bremen,
Hamburg).
Fundamentally, these air-rail services exist to lessen the impact of motor vehicle congestion
around an airport, but may be extended to incorporate rail services that remove the need for
some air routes, as for example at Paris and Frankfurt.
The existence of a rail terminal at an airport will not reduce the value of the airport estate,
and in many cases will enhance it considerably. Cooperation between air and rail modes,
rather than competition, will be the name of the game in the future. So far there are few
examples of such links to LCAs, Stansted being the most notable exception. It will be
interesting to see how Bremens light rail system develops since Ryanair made it a base. The
relatively low passenger volumes of LCAs usually make it difficult to agree who should fund
these rail projects.