More airports are making the argument to segregate their traffic by building low-cost terminals, but can they be profitable and what is the effect on network carriers?
For an increasing band of airports, the introduction of a low-cost terminal is seen as the most positive strategy to capture low-fare carrier business. However, it is a strategy that has its detractors. Some airport operators have been criticised by their incumbent mainline carriers - such as Air France at Geneva - for cross-subsidising the development of these new terminals with revenue from the existing ones. Others allege that an airport may be in danger of undermining its core network by encouraging low-fare airlines to develop at the risk of losing some full-service flights.
But for airports that are taking this route the motivation is simple. They want to offer a lower-cost product that attracts new customers as market conditions change. "We don't see any reason why airports should be the unique actor not to adapt," says Philippe Wilmart, marketing director of Marseille airport in the south of France. He argues that many players in the value chain have reinvented their business and that airports should be no different.
Marseille, along with Berlin Schoenefeld, Budapest and Geneva in Europe and Singapore Changi in Asia Pacific, are among those with low-cost terminal projects under way. Others are watching their efforts closely.
Service segregation
For an airport like Geneva, where 25% of its traffic is currently with low-cost carriers, the growth of the sector is hard to ignore. This is particularly true of an airport that has lost significant traffic as Swiss downsized. "Our airport has got to give both conventional and low-cost traffic the best opportunity to develop," says Jean-Pierre Jobin, Geneva's general director. "We will segregate our services to give the choice."
Geneva's plan has not been opposition free. Air France has taken the airport to court over the plans, arguing that all carriers will pay for the SFr20 million ($16.9 million) cost of the new second terminal. "Through this project, Geneva will be cutting its revenues, undermining its long-standing partners and boosting the margins of a player whose attitude demonstrates its scant reliability," says Air France, speaking of easyJet, which it says threatened to pull out of the airport if it did not obtain lower passenger charges. EasyJet carried nearly a quarter of the airport's 8 million passengers last year.
Jobin is undeterred. He was buoyed in late October following a positive decision by the Swiss Competition Commission over its plans, and a ruling that they were compatible with European Union state aid rules. "The cost of renewing the old terminal will be paid for by passengers using that terminal," he asserts. But the court case will delay the opening of the new building, which it calls a simplified terminal, from November 2005 to some time in 2006, says Jobin.
Changi is easily the largest airport building a low-cost terminal. "The airport is fighting on market share in this region and in that case it makes sense to grow in the low-cost carrier space," believes Dr Daniel Stelter, a transport specialist at Boston Consulting Group's Berlin office. "Both low-cost and full service carriers fit into Singapore's overall hub strategy," says Yam Kum Weng, Civil Aviation Authority of Singapore (CAAS) director of air transport. "CAAS treats all its airlines partners fairly - there is no special treatment. Carriers will pay for the facilities and services they use."
Changi's 2.7 million capacity terminal, costing around $26 million, will enter service in early 2006, says Kum Weng. Tiger Airways, the Singapore Airlines low-cost affiliate, is the first to sign up to use it.
Kum Weng admits there is a "very delicate balance" to strike between the needs of low-cost and network carriers. "We are in new territory," he says. "We think our approach is the best way to accommodate this change without upsetting the full-service carriers." With no escalators, travelators, airbridges or lounges the terminal will be "very functional" and cheap to operate. Passenger charges will be 20% lower than the main terminals, he says.
Marseille has a target to cut its passenger service charge at its new terminal to just €1 ($1.3), says Wilmart. The current charges of €2.75 for domestic and €5.96 for intra-European flights will remain the same in the current terminal. Network carriers already operating at Marseille have not reacted badly to the proposal so far, he says. In fact, the airport was surprised to get an expression of interest in the new terminal from Air France. "We'll see if they not only want to get access to the project, but whether their real intention is to see how they can reduce costs for some of their products," says Wilmart.
Easyjet and Ryanair also replied positively to the airport's request. The "impressive proposals" from Europe's largest low-cost players in terms of volume and activity have given Marseille comfort about its plan to convert a disused cargo terminal for just $14.5 million. It expects the go-ahead from the French civil aviation authority soon with the terminal opening in mid-2006.
Realistic prices
Building this terminal is "probably the only way for us to have a realistic price for low-cost carriers", says Wilmart. "The target is to attract 1-2 million additional passengers. It creates a huge new income for the airport and it will definitely be more profitable than the current terminal." He puts this down to a combination of a smaller initial investment and much lower running costs.
With easyJet and Virgin Express declaring their interest and with another 20 carriers coming forward privately, Geneva too predicts a successful project. "The return on investment is much shorter compared with our main terminal building," says Jobin. He puts it at just over three years. An advantage of working with low-cost carriers is that they are ready to sign for 10- or 20-year contracts, he adds.
Having a basic terminal does not necessarily equal fewer shops and therefore less retail revenue. Marseille, for instance, is designing a large shopping area with the emphasis on good food outlets to enable travellers to eat well at the terminal as their onboard options may be limited. Both Marseille and Geneva expect expenditure per passenger at their low-cost terminals to be at least equal to that at their existing facilities.
As airports examine the low-cost terminal concept, the developments so far tend to be reactions to local market conditions or opportunities. "It depends on the situation," says Stelter of Boston Consulting. "If an airport needs to grow and it can develop cheap infrastructure it can make sense. But overall airports tend to over invest and the main emphasis should be on sweating the assets they already have." Niels Boserup, chief executive of Copenhagen airport, sums up what some larger airports feel: "It doesn't make sense to build a terminal in a remote corner of the airport when you have capacity."
As many airports demonstrate, it is possible to see all airline types in a single terminal. "BAA does not think it is necessarily contradictory to handle all the different models under one roof - look at London Gatwick for example," says Duncan Garrood, BAA divisional managing director. EasyJet and other low-cost carriers are expanding rapidly at Gatwick with no discount deals from BAA.
BAA will not develop terminals specifically for low-cost carriers, but does design in flexibility if market needs change. At London Stansted, for instance, a satellite has been configured without airbridges and with convenient taxiways to help speed turnarounds for Ryanair. "The net result is a terminal more fit-for-purpose for airline needs," says Garrood.
BAA is beginning to plan for another terminal at Stansted, which would open alongside the airport's potential new runway after 2012. This terminal would be designed with low-cost carriers in mind, and would clearly not have the sophistication of, for example, London Heathrow's Terminal 5, says Garrood. He adds, however, that "we wouldn't want to build a shed giving an entirely different experience at the same airport".
"BAA is often accused of producing golden terminals - at Stansted that is not appropriate," says Garrood. "We will build terminal capacity to cater for potential airlines, but primarily around current low-cost models."
Whether new terminals are coined low-cost or not, airlines of all classes just want them to be cheaper. "Where's the difference between a low-cost terminal and another one?" says Joachim Hunold, managing partner at Air Berlin. "I never expect a golden terminal."
REPORT BY MARK PILLING IN LONDON
Source: Airline Business
