low cost terminals and competitive advantage
DESCRIPTION
Low Cost Terminals and Competitive AdvantageTRANSCRIPT
Do dedicated low-cost terminals create competitive advantages for the airports?
Eric Tchouamou Njoya and Hans-Martin NiemeierUniversity of Applied Sciences Bremen
Presentation prepared for: Research in Air Transport and other Network IndustriesBremenMay 2011
1
Agenda1. Introduction
2. Resource-based view of Competitive Analysis – VRIO Framework
3. VRIO application to LCTs
4. Case studies
5. Conclusion 2
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
5Source: Adapted from Barney and Hesterly (2006, p. 95)
Is a resource or capability:Valuable? Rare? Costly to
Imitate?Organized Properly?
Competitive Implications
Firm Performance
No No No No Competitive disadvantage
Below average
Yes No No No Competitive parity Average
Yes Yes No No Temporary competitive Advantage
Above average
(at least for some amount of time)
Yes Yes Yes Yes Sustained competitive advantage
Persistently above average
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). 6
Applying the VRIO Analysis to LCTs• The question of Rareness
– Only nine LCTs have been developed throughout Europe to date
7
Airports LCT Cost (Mio) # of LCCs (2008) Pax capacity (Mio) LCT
Tampere-Pirkhala Airport (Finland)
Na 1 Na
Warsaw Frederick Chopin Airport 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
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.
8
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 non-aeronautical revenue is key to success. 9
External – Porter’s environmental threat analysis
10
Threat of newEntrants
Potential barriers: capital, land,
government approval
Threat ofSubstitutes
Low cost airports within the catchment area,
high speed-rail
Power of Suppliers
Ground handlingis quite
Competitive; little
specialised investment
Power of Buyers
Strong bargaining power of large
LCCs. Reliance on one LCC. Small vs.
main airports
Rivalry amongstexisting firms
Overlapping catchment areas: capacity,
location, accessibility
Applying the VRIO Analysis to LCTsAre tailored low-cost terminals:
Valuable? Rare? Costly to Imitate?
Organized Properly?
Competitive Implications
Firm Performance
Yes Yes No Yes Temporary competitive Advantage
Above average(at least for some amount of time)
11
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.
Case studies
12
• 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.
Case studies
13
• 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 important delivers additional benefits for the region
Case studies
14
• 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
Conclusion
15
• 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.
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 on airport profitability. 16
