Multi-airport Systems
5.4 Market Dynamics
grew gradually for a decade and then at over 50 percent a year for the next 2 years as a Southwest Airlines moved in. Between 1995 and 1997 Orlando/Sanford grew from 50,000 to over 1 million total passengers. On the other hand, its traffic fell by a one-third between 2009 and 2010, from 1.7 million to under 1.2 million.
Statistically, the traffic at the individual airports in a multi-airport system is much more volatile than it is for the region. Moreover, airline traffic worldwide has become more changeable due to deregulation of air transport industry, as Chap. 4 explains. These facts mean that it is more difficult to plan and manage a multi-airport system than a single air-port for a city. The traffic varies more; planning has to respond more quickly to these rapid changes, and investments are more risky and difficult to justify.
Overall Perspective
Premature ambition to create a major new airport is the cause of many of the difficulties with the development of a second airport. Airport operators worldwide have built facilities at second airports that proved to be too large for many years. They counted on being able to move traffic from the crowded primary airports to the new facilities and were not able to do so. The volatility of the traffic at second airports worsens their difficulties by complicating planning and hurting investments. The next section explains why the difficulties are inev-itable. AsSec. 5.5indicates, airport planners and operators should develop second airports flexibly and incrementally, so that they can avoid these premature, unwise investments.
theory (Weber, 1929). It is widely applicable to many situations in which transport costs are most important. However, it does not apply to companies such as airlines, for whom sales and profits depend on their locations. As a leading later researcher pointed out, “We-ber’s solution for the problem of location proves to be incorrect as soon as not only cost, but sales possibilities are considered” (Lösch, 1973). The important point is that the “catch-ment area” notion does not apply to airports. The focus must be on concentration effects.
Airlines concentrate their activities to avoid giving their competitors a decisive advant-age in the marketplace. Airlines make investments and deploy aircraft as strategically as they can. Their goal is to get the largest and most profitable shares of the market. Mean-while, their competitors do their best to counter these moves. The dynamics of this compet-ition leads to concentration. The parable of the ice cream sellers on the beach illustrates this kind of behavior between economic entities; seeExample 5.1. The situation for the airlines is similar in concept, although the motivation for the concentration is different.
Example 5.1 The parable of two ice cream sellers on the beach illustrates how sales possibilities can override cost considerations and impel the concentration of economic activities. Suppose that sellers A and B serve a 1000-m-long beach with potential customers spread equally a1000-m-long the shore. If we consider only the cost of travel, the optimal location for the sellers is 250 m and 750 m from the end of the beach. This placement minimizes both the maximum and average distance customers might have to go (250 and 125 m). Thus
In this situation, seller A can increase his market by moving to the center. He will then be closer not only to all the people on the left-hand side but also to some who would otherwise be closer to B. If seller B does not move, A will be more convenient for 625 m or five-eighths of the market. Thus
Seller B’s logical response is to move to the center. She can recapture the potential customers lost to A. When both sellers are at the center, neither can gain any competitive advantage by moving and both will have equal ac-cess to the market. Thus
Concentration at the center is a stable solution, in contrast to the original location that allows either seller to gain a competitive advantage by moving toward the center. From the customers’ perspective, however, this is an inferi-or solution—their maximum and average distances (500 and 250 m) are twice those associated with the inferi-original solution.
The moral of this story is that geographic concentration occurs in a market because participants recognize the importance of sales possibilities.
Airlines Concentrate on Routes
The primary factor that impels the concentration of traffic for airlines is the S-shaped re-lationship between an airline’s share of the market on a route and the frequency of service it offers. It applies to the extent that all other factors—such as fares—are equal.Figure 5.2
sketches the curve for two airlines operating in a market. Three points anchor the function.
First, if the airlines offer identical frequency and service, they will each have half the mar-ket, as indicated by the mark in the middle of the sketch. Second, if one of the two airlines withdraws, it has no frequency and no market share. Complementarily, the competing air-line will be offering all the frequency of service and have all the market. The latter two points are marked at the end of the dashed line diagonally across the sketch. The crucial factor is the S-shape between these extreme situations.
FIGURE5.2 S-shaped relationship between frequency share and market share for two air-lines operating in a market.
Empirical studies have shown that when two airlines compete on a route, the airline with the greater frequency of service gets more than its share of the market—all else such as fares and size of aircraft being equal (Fruhan, 1972). This means, for example, that if one of two airlines offers 60 percent of the flights along a route, it may get 65 or 70 percent of the traffic. Correspondingly, the airline with the 40 percent frequency share might only get 30 to 35 percent of the traffic. The reason for this is simply that passengers will go to the airline that has the most departures for a destination, is therefore more likely to provide service when desired, and has more backup in case delays or other setbacks occur. This simple fact has tremendous implications for the profitability of the airlines, and thus for their behavior, asExample 5.2shows. (See discussion inChap. 2.)
The S-shaped nonlinear relationship between frequency share and market share motiv-ates airlines to match frequencies in a market unless they have some particular competit-ive advantage. If they cannot match frequency, they may only serve a route occasionally for special reasons—for example, as part of a large route or an extension of a continuing
flight—or they may exit a route altogether. In 2001 for example, Delta Air Lines abandoned the shuttle service it had been operating from Washington to Boston. Its competitor, US Airways, had many more flights and was the airline travelers flocked to when they wanted convenient departures.
Airlines Concentrate at Primary Airports
The matching behavior on routes has important implications for airline and passenger traffic at airports in a multi-airport system. In this case, there are two S-shaped relationships at work. One concerns the airlines. The other concerns the airports. Just as the airline with the greater service in a market attracts passengers who appreciate the convenience of more departures and return flights, so the airport with the greater frequency attracts more passen-gers in a market—all else being equal.
Example 5.2 Consider a route that has two airlines operating 100-passenger aircraft. Suppose that there is enough traffic to fill 70 percent of the seats on 20 daily flights, that is, 1400 passengers. Suppose further that the breakeven load factor for the shuttle service is 65 percent. If either airline has a lower load factor, it loses money. If it has a greater load factor, it makes a profit.
If both airlines offer the same frequency of service and split the market evenly, they each offer 10 daily flights and carry 700 passengers. Each then has a profitable load factor of 70 percent and makes money.
Now assume that one airline manages to offer 60 percent of the frequency, that is, 12 flights out of the 20. As-sume further that, according toFig. 5.2, it then gets 65 percent of the market or (0.65)(1400) = 910 passengers. Its load factor is then:
Meanwhile, the situation for the competitor is disastrous. With 40 percent of the frequency, it offers 800 seats a day yet carries only 35 percent of the traffic, that is, 490 passengers. Its load factor is ruinous:
Airlines cannot afford to fall behind on the S-curve. They avoid this situation by matching frequency of service on a route. This effort is conceptually identical to the behavior of the hypothetical ice cream sellers on the beach (seeExample 5.1).
The dynamics of the competition between the airlines serving a multi-airport system leads them not only to match their flights but also to place them preferentially into the airports with the greater traffic. Any extra flight that they can allocate to the airport with the most traffic helps their sales. It will either match a flight of their competitors and pro-tect their share of the larger market, or give them an advantage in this larger market (de Neufville and Gelerman, 1973, demonstrated how this works in detail). Although the air-lines might provide more convenient service overall at less trouble to themselves if they
split their flights proportionally between the airports in a multi-airport system, they do not do this in a competitive economy.
The competitors’ attempts to gain an edge lead them to a competitively stable position.
They tend to concentrate flights at the primary airport in any multi-airport system. This ex-plains the observed pattern of concentration of traffic at primary airports (seeTable 5.4).
Factors Favoring Multi-airport Systems
The analysis based on frequency share has limits. These define the principal conditions that enable secondary airports to develop. They are that
• The assumption that the airlines and airports operating in the same “market” does not always hold—they may serve distinct markets defined by quality or fare differ-ences
• It is often not true that “all else is equal,”—the airports in the multi-airport system may offer different prices, destinations, or quality of service
• There are limits to the value of increased frequency of service in terms of attracting passengers, which appears to define the threshold for the meaningful operation of secondary airports
• Airports in the system do have geographic advantages
• Technical and other necessities
Secondary airports typically develop around specialized airlines that operate in markets different from those of the airlines at the primary airports (Table 5.5). Most frequently, low-cost airlines appeal to a different range of passengers (and thus a different market) than the legacy airlines that operate at the primary airports. In their case, the assumption that
“all else is equal” does not hold, and the arguments concerning frequency are not decisive.
As of 2012, Ryanair in Europe is a prime example of a low-cost airline with the explicit strategy of implanting itself at small or secondary airports that are neither congested nor expensive, such as London/Stansted, Brussels/Charleroi, Frankfurt/Hahn, Paris/Beauvais, and Rome/Ciampino. Southwest in its early years followed a similar strategy in developing service at Dallas/Love Field, Miami/Fort Lauderdale, San Francisco/Oakland, and Boston/
Providence.
TABLE5.5 Examples of Secondary Airports Developed around Specialized Markets
Low-cost airlines have often dominated and been responsible for the success of second-ary airports in large metropolitan areas. Southwest’s development of Boston/Providence in the late 1990s illustrates this phenomenon. Its cheap fares attracted passengers, and traffic tripled to around 6.5 million in just 3 years. Thanks to Southwest, this regional airport, of little consequence for decades, grew to be a major second airport for the Boston metropol-itan region.8
Integrated cargo airlines such as FedEx and UPS have also been responsible for the de-velopment of secondary airports. These carriers offer door-to-door handling of individual shipments and do not compete in the same market as the passenger airlines that carry belly cargo. Some secondary airports serve special destinations or regions. For example, Tokyo/
Narita is almost exclusively is international, Osaka/Itami is a domestic airport, and Paris/
Orly has traditionally served Africa and the Caribbean. None of these services competes directly with those at the primary airport. These airports serve their own markets and mar-ket dynamics do not concentrate their traffic at the primary airport.
The analysis of the dynamics of competition between the airlines based on frequency presumes that greater frequency is more attractive to their potential customers. At some point, however, additional frequency is no longer valuable. Hourly flights on a shuttle ser-vice may be enough, for example. This implies that when the traffic is high enough, airlines will lose interest in further concentration and will be willing to place additional flights in the secondary airports. Indeed, this seems to be what happens.
Thus, the examination of metropolitan regions with the largest number of originating passengers has consistently shown that, beyond a threshold of traffic, all these areas had a viable multi-airport system. As of 2012, the traffic threshold that seems to justify an ef-fective multi-airport system is around 15 million annual originating passengers for the met-ropolitan region, asSec. 5.2indicates. This threshold has been steadily increasing. In the
early 1970s, it was at around 8 million annual originating passengers. In the intervening years, aircraft became larger and airlines could handle more passengers with the same fre-quency. The interpretation of this evolution is that frequency becomes less important above some level, at which point a second airport can develop more easily. This level translates into a rising number of passengers, as the size of the aircraft increases.
Geographic considerations become more important when the importance of frequency diminishes. At some point, secondary airports receive substantial traffic because they are in fact more convenient. This effect is particularly significant when travel throughout the metropolitan region is inherently difficult. Hong Kong is a prime example of this situation.
Although both Hong Kong/Shenzhen and Hong Kong/Macao are geographically close to the primary airport at Hong Kong/Chek Lap Kok, they are actually quite distant in time because of inadequate roads for one and a long water crossing for the other.
Finally, runway limitations may impel the development of a multi-airport system. For example, the short runways at Dallas/Love Field (< 9000 ft or 2700 m) led to the develop-ment of Dallas/Fort Worth. Likewise, Buenos Aires/Ezeiza has significant traffic because the more convenient downtown airport, Buenos Aires/Aeroparque, simply does not have runways adequate to serve intercontinental aircraft. Similar situations apply to Taipei/Taoy-uan, Rio de Janeiro/Galeão, and São Paulo/Guarulhos.
5.5 Planning and Developing Multi-airport Systems