Old conflicts, new rivals? Airline competition in the European market

Christoph Franz of Lufthansa recently identified Ryanair, easyJet, Air Berlin and Emirates as the company’s main competitors – gone are the days when it could benchmark itself against BA or Air France-KLM! This paper probes behind the headlines to assess the extent to which different airlines are in competition, using evidence from the UK and mainland European markets. The issue of route versus network competition is addressed. Many regulators have put an emphasis on the former whereas the latter, although less obvious, can be more relevant. For example, BA and American will cease to compete between London and Dallas Fort Worth if their alliance obtains anti-trust immunity but 80% of the passengers on this route are connecting at one or both ends and hence arguably belong to different markets (e.g. London-San Francisco, Zurich-Dallas, Edinburgh-New Orleans) which may be highly contested. The remaining 20% of local traffic is actually insufficient to support a single point to point service in its own right. Estimates are made of the seat capacity major airlines are offering to the local market as distinct from feeding other routes. On a sector such as Manchester–Amsterdam, 60% of KLM’s passengers are transferring at Schiphol as against only 1% of bmibaby’s. Thus although KLM operates 5 flights and 630 seats per day against bmibaby’s 2 flights and 298 seats, in the point to point market bmibaby offers more seats than KLM. The growth of the Low Cost Carriers (LCCs) means that competition increasingly needs to be viewed on city pair markets (e.g. London-Rome) rather than airport pair markets (e.g. Heathrow-Fiumicino). As the stronger LCCs drive out weaker rivals and mainline carriers retrench to their major hubs, some markets now have fewer direct options than existed prior to the low cost boom. Timings and frequencies are considered, in particular the extent to which services are a true alternative especially for business travellers. LCCs typically offer lower frequencies and more unsociable timings (e.g. late evening arrivals at remote airports) as they are more focused on providing the cheapest service rather than the most convenient schedule. Interesting findings on ‘monopoly’ services are presented (including alliances) - certain airlines have many more of these than others. Lufthansa has a significant number of sectors to itself whereas at the other extreme British Airways has direct competition on almost every route in its network. Ryanair and flybe have a higher proportion of monopoly routes than easyJet or Air Berlin. In the domestic US market it has become apparent since deregulation that better financial returns can come from dominating a large number of smaller markets rather than being heavily exposed in the major markets - which are hotly fought over. Regional niches that appear too thin for Ryanair to serve (with its all 189 seat 737-800 fleet) are identified. Fare comparisons in contrasting markets provide some insights to marketing and pricing strategies. Data sources used include OAG (schedules and capacity), AEA (traditional European airlines traffic by region), the UK CAA (airport, airline and route traffic plus survey information of passenger types) and ICAO (international route traffic and capacity by carrier). It is concluded that airlines often have different competitors depending on the context but in surprisingly many cases there are actually few or no direct substitutes. The competitive process set in train by deregulation of European air services in the 1990s is leading back to one of natural monopolies and oblique alternatives. It is the names of the main participants that have changed however!

The paradox of competition for airline passengers with reduced mobility (PRM)

Airline competition with customer service as product differentiator has forced down costs, air fares and investor returns. Two passenger markets operate in aviation: (a) able-bodied passengers for whom airlines compete and (b) passengers with reduced mobility (PRMs) – disabled by age, obesity or medical problems – for whom airlines do not compete. Government interference in the market intended to protect a minority of narrowly-defined PRMs has had unintended consequences of enabling increasing numbers of more widely-defined PRMs to access complimentary airline provisions. With growing ageing and overweight populations and long-haul travelling medical tourists such regulation could lead to even lower investors’ returns. The International Air Transport Association (IATA) (2013) examined the air transport value chain for competitiveness using Porter’s (2008) five forces but did not distinguish between able-bodied passengers and PRMs. Findings during an investigation of these two markets concurred with IATA-Porter that the markets for the bargaining powers of PRM buyers and PRM suppliers were highly competitive. However, in contrast to the IATA conclusions, intensity of competition, and threats from new entrants and substitute products for PRM travel were low. The conclusion is that airlines are strategically PRM defensive by omission. Paradoxically, the airline which delivers the best PRM customer service could become the least profitable.

The paradox of competition for airline passengers with reduced mobility (PRM)

Airline competition with customer service as product differentiator has forced down costs, air fares and investor returns. Two passenger markets operate in aviation: (1) able-bodied passengers for whom airlines openly compete and (2) passengers with reduced mobility (PRMs) – disabled by age, obesity or medical problems – for whom airlines do not compete. Government interference in the market intended to protect a minority of narrowly-defined PRMs has had unintended consequences of enabling increasing numbers of more widely-defined PRMs to access complimentary airline provisions. With growing ageing and overweight populations and long-haul travelling medical tourists such regulation could lead to even lower investors’ returns. The International Air Transport Association (IATA) (2013) examined the air transport value chain for competitiveness using Porter’s (2008) five forces but did not distinguish between able-bodied passengers and PRMs. Findings during an investigation of these two markets concurred with IATA-Porter that the markets for the bargaining powers of PRM customers and PRM suppliers were ‘highly competitive’. However, in contrast to the IATA conclusions the threats posed by new entrants, substitute products and intensity of competition for PRM passengers were all ‘low’. The conclusion is that airlines are strategically PRM defensive by omission. Paradoxically, the airline which delivers the best PRM customer service could become the least profitable.

Exploring Auditors’ Perceptions of the Usage and Importance of Audit Information Technology

This study provides novel evidence on the extent to which auditors perceive the usage and importance of audit technology in an emerging market. It explores the types of audit technology tools used and factors influencing the use of these; it tests the association between the perceived use and importance of the tools and firm-specific/ auditor-specific characteristics. Using interviews and questionnaires from auditors at Big 4 and international non-Big 4 audit firms, the findings reflect the highly perceived importance of using audit technology in technical and administrative procedures, specifically to assess risk. We find that the perceived use and importance of audit technology is relatively higher for those in Big 4 firms, with less years of auditor experience and higher auditor technology expertise, and those in management positions. The results provide policy makers with guidance on the opportunities and challenges of using information technology in the audit process.

As assessment of the Competition Commission Report and subsequent outcomes

Following the Office of Fair Trading's review of the British deregulated bus market as a whole in 2009, the issues raised were referred to the Competition Commission. Its final report was published in December 2011. Subsequently, the House of Commons Transport Committee carried out an enquiry into the Commission's report, and reactions to it by the operating industry, user groups, and other bodies, which was published in September 2012. A number of major issues have been raised, including the extent to which price competition may be effective, the appropriate rate of return on capital that would be expected within the industry (and appropriate actions where this is excessive in practice), and industry structure. The importance of competition per se, as distinct from attributes of direct concern to users (such as reliability, frequency, and fares) has also been debated. This paper reviews the issues raised, and outcomes to date, in the light of further evidence on the industry's performance. It is demonstrated similar rates of return could be attained through very different operating strategies, which in turn have very different implications for changes in consumer surplus. The alternative uses made of such profits (for example through reinvestment) may also have markedly different impacts effects on users. Rather than focussing on the dangers of excessive rates of return on capital, the outcomes for service users should be the main issue.