Do dedicated low-cost terminals create competitive
advantages for the airports?
Eric Tchouamou Njoya and Hans-Martin Niemeier
University of Applied Sciences Bremen
Presentation prepared for: Research in Air Transport and other
Network Industries
Bremen
May 2011
1
Agenda
1. Introduction
2. Resource-based view of Competitive Analysis – VRIO
Framework
3. VRIO application to LCTs
4. Case studies
5. Conclusion
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Introduction
• Trend towards airport commercialisation and
privatisation.
• New business models of airports (e.g. Product
differentiation).
• In recent years increased investments in Low cost
terminals (LCTs) at main airports
• The impact of LCTs on airport performance has not yet
been sufficiently answered.
3
Resource-based view of Competitive
Analysis
• The possession of valuable, rare, non-imitable and
properly organised resources as source of competitive
advantage at the firm level: Barney, 1991; Grant, 1991;
Peteraf, 1993.
• Resources and capabilities may include tangible assets,
intangible assets and skills.
• Dedicated terminals can be viewed as a differentiating
and distinctive capability that provides customers with
superior value.
4
VRIO Framework of Competitive Analysis
Is a resource or capability:
Valuable? Rare? Costly to Organized
Imitate? Properly?
No
No
No
No
Yes
No
No
No
Yes
Yes
No
No
Yes
Yes
Yes
Yes
Competitive
Implications
Firm Performance
Competitive
disadvantage
Competitive parity
Below average
Temporary
competitive
Advantage
Above average
Sustained
competitive
advantage
Average
(at least for some amount
of time)
Persistently above average
Source: Adapted from Barney and Hesterly (2006, p. 95)
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Applying the VRIO Analysis to LCTs
• Value creation depends on the strength of the different
factors:
1. By how much costs can be reduced
•
Reduction in operating and construction costs make 30-40 per cent of
main terminal costs (O’Connell, 2007).
2. By how much the charges must be lowered to attract LCCs
•
The overall charges for the use of LCTs vary between around 65 per
cent and 76 per cent of the equivalent charges in main terminals
(Jacobs Consultancy, 2007))
3. By how much non-aeronautical revenues are generated
• Given adequate facilities, LCCs passengers are willing to spend money at
airports (Dennis & Graham, 2006).
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Applying the VRIO Analysis to LCTs
• The question of Rareness
– Only nine LCTs have been developed throughout Europe to
date
Airports
LCT Cost (Mio)
# of LCCs (2008)
Pax capacity (Mio) LCT
Tampere-Pirkhala Airport
(Finland)
Warsaw Frederick Chopin Airport
Na
1
Na
Na
6
Na
Budapest Airport Zrt.
35
6 (Sep-2009)
2
Amsterdam Airport Schiphol
32
9
8
Marseille Provence Airport
16.4
5
3.5 p.a.
Bremen Airport
10.4
1
Na
Lyon Saint-Exupery Airport
Na
Na
1.8 p. a. (by 2010)
Copenhagen airport
26.8
Na
6 p.a.
Bordeaux-Mérignac Airport
5.5
2 (2010)
1.5
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Applying the VRIO Analysis to LCTs
• The question of Imitability
– LCTs facilities are not subject to unique historical
conditions, causal ambiguity, social complexity and
patents and thus easy to imitate.
– They are likely to pose fewer problems for investment
since they can be built in smaller stages and they
pose less environmental problems.
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Applying the VRIO Analysis to LCTs
• The question of Organisation
– Implementation of management structures able to
reflect the varied needs of not only LCCs, but also NCs,
passengers, employees, businesses, governments and
the community at large.
– LCTs will pose fewer problems to airport operators
since they have always had this role in their
management of terminals.
– Balancing aeronautical revenue shortfall by nonaeronautical revenue is key to success.
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External – Porter’s environmental threat
analysis
Threat of new
Entrants
Potential barriers:
capital, land,
government approval
Power of
Suppliers
Ground handling
is quite
Competitive;
little
specialised
investment
Rivalry amongst
existing firms
Overlapping catchment
areas: capacity,
location, accessibility
Threat of
Substitutes
Low cost airports within
the catchment area,
high speed-rail
Power of
Buyers
Strong bargaining
power of large
LCCs. Reliance on
one LCC. Small vs.
main airports
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Applying the VRIO Analysis to LCTs
Are tailored low-cost terminals:
Valuable?
Rare? Costly to
Imitate?
Yes
Yes
No
Organized
Properly?
Yes
Competitive
Implications
Temporary
competitive
Advantage
Firm Performance
Above average
(at least for some
amount of time)
Dedicated LCTs are likely to be valuable.
They enable the airport to reduce operational costs, capital
investment, airport charges and increase market share.
The impacts of LCTs on non-aeronautical activities are not
clear.
The provision of appropriate facilities, the presence of good
organisation (among other things) are identified as crucial to
maximising non-aeronautical revenue.
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Case studies
• Bordeaux-Mérignac Airport – Bordeaux illico
– The airport is handling approximately 3.5 million passengers
annually.
– Responding to strong rail competition, Bordeaux airport
opened in May 2010 a new LCT.
– As a result easyJet and Ryanair increased their flights with two
and three new routes respectively.
– Operating costs have been reduced by approximately 30 per
cent and turnaround flights by less than 25 minutes.
– Total traffic growth is expected to rise to about 6 per cent in
2010.
– Bordeaux illico is a potential source of short-term product
uniqueness and temporary competitive advantage.
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Case studies
• Bremen Airport – LCT ownership by an airline
– The airport handles 2.5 million passengers annually with direct
flights to 50 destinations.
– Catchment area of Bremen airport overlaps with those of
Hannover and Hamburg.
– The low cost terminal was initiated to attract LCCs in Bremen.
– As a result passenger growth has been dramatic.
– The low cost base covers the costs for the airport and more
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important delivers additional benefits for the region
Case studies
• Copenhagen Airport – LCC Pier GO
– The Airport counted 19.7 million passengers in 2009
– The LCT is an extension of existing facilities
– Airline charges are about 50 per cent lower
– The LCT has enabled the airport to:
•
•
•
•
increase customer loyalty;
increase revenue and reduce operating costs;
increase passenger volume.
have a strong return on capital
– It is a source of temporary competitive advantage
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Conclusion
• The traditional full service airport model is
inconsistent with the business model of LCCs.
• LCTs enable airports to take advantage of the
environment created by LCCs.
• LCTs are valuable resulting from possible cost
savings and additional traffic and revenue from
commercial activities. They are rare, but easy to
manage and imitate.
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Conclusion
• Investing in a dedicated tailored LCT can be a risky venture,
because of the volatile character of LCCs.
• The risk may be mitigated if airlines are actively involved in
terminal facilities investment.
• LCTs impact on incumbent operators , passengers, and
other users need careful evaluation.
• More case studies as well as analyses using quantitative
methods may provide more insights into the impact of LCTs
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on airport profitability.
Thank you very much!
Eric.Tchouamou-Njoya@hs-bremen.de
Hans-Martin.Niemeier@hs-bremen.de
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