Exploring new opportunities

Despite modest economic growth, Europe has experienced solid air traffic growth for the last decade, with 65% more capacity being offered in the intra-regional market than in 1997. Most of this growth has come from European Low-Cost Carriers (LCCs), who are now offering more seats per day than their counterparts in the United States (US). Today, 30% of global capacity is connected to Europe. On international operations, growth will remain strong on flows to the Far East and Latin America with average Revenue Passenger Kilometres (RPKs) expected to grow by more than 6% per year, over the next ten years. However, the North Atlantic will remain the top flow in terms of volume added, helped by the recently signed Open Skies deal between the US and the European Union (EU).

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Low-Cost Carriers

LCCs now account for almost a third of the scheduled capacity within Europe (30% when including charter operations). This is a five-percentage point increase in market share compared to last year. As in the past, most of the growth has come from route openings, with 83% as a result of network development (i.e. total number of new minus the number of dropped routes). With LCCs operating 2,000 city pairs across Europe, the potential for growth through new markets is decreasing. Setting up new bases generates new opportunities for network development, but the current trend is to investigate the potential of more distant markets. For example, in 2007, less than 15% of the growth was on routes of less than 500 kilometres (km)/270 nautical miles (nm), with the majority being on routes of over 1,000km/ 540nm. In fact, 70% of the seats on new city pairs to be opened by the LCCs in the next 20 years will be on routes over 1,000 km (1,323 km on average). However, some opportunities still remain for shorter-range operations, including within Spain or Italy.

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Most LCC traffic is intra-European, with many of the largest markets dominated by low-cost routes. Growth rates to Central Europe are much lower in 2007 than in 2005 and 2006, but the figures are similar in terms of the volume of seats added. Some additional countries, like Bulgaria, are opening up to LCCs. In the future, almost a quarter of the new LCC routes will be to Central European countries.
LCC markets are also developing even further to the East, with new operations to Russia and the Commonwealth of Independent States (CIS). Significant growth to North Africa and the Middle East is also expected.
Overall, LCCs are anticipated to open almost 900 routes in Europe in the next 20 years, both by entering already served city pairs and by opening completely new ones. With the European market growing at 4.2% per year for the next 20 years, in terms of RPKs, the opening of new low-cost routes will continue to absorb a significant part of this growth.

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Long-haul LCCs

For the last ten years, European LCCs have been quick to respond to new opportunities, such as EU expansion, and are constantly looking for new ways to extend their network and feed growth. The new Open Skies deal between the US and the EU potentially provides opportunities for new entrants, with some LCCs operations already on trans-Atlantic routes. Today, 45 LCC routes are operating worldwide on routes longer than London - New York and they have even captured significant shares on some flows like Australia - Japan.
One asset is the LCC bases, many of which offer more flights and destinations than a lot of traditional international hubs. To reduce costs, passengers may be asked to practice �self-hubbing� through connecting operations, which would not be optimal. However, these bases are located near large catchment areas such as London, where less connecting traffic is required and, more importantly, where most high yield demand originates. How much of that demand would consider a change from current to new operators, will depend on many parameters, with fares likely to be one of the more significant. While there appears to be a consensus that LCC long-haul operations could result in the ability to offer lower fares, incumbent carriers on these routes are likely to be better positioned to respond than was the case on domestic or intra-European flows.

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Network carriers in Europe

Despite the challenges faced from LCCs and other modes of transport, other European carriers have also experienced significant growth, particularly on cross border operations in Europe. Capacity on these markets as a whole grew by 7% between 2005 and 2006, with some markets growing even more quickly. For example, capacity within Central European countries is still booming, with growth excess of 15%, helped by EU enlargement and a more mobile workforce.

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International flows

With 185,000 seats offered between Europe and the US every day, the North Atlantic is by far the busiest long-haul flow in the world. Following the recent �Open Skies� agreement between the US and EU member states, which comes into effect in March 2008, airlines are preparing themselves
for significant changes.

Under this agreement, carriers will be able to fly from any EU city to any US city. If a surge of new non-stop routes is expected, it should be noted that the majority of EU member states already had an open sky or bi-lateral agreement with the US. The existing 200 non-stop city pairs make it possible for 60% of today�s passengers to fly point-to-point between Europe and the US. However, this Global market Forecast (GMF) predicts that deregulation and growth will drive the opening of 80 additional city pairs, with traffic forecast to increase by about 50% in the next ten years. The vast majority of these new routes will be operated from a main airline hub or base to a secondary city and, therefore, will be smaller routes. In 2016, despite 40% more city pairs, 90% of the passengers will still be flying between city pairs already served directly today.

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If Europe-US remains by far the largest long-haul direct flow from Europe, its relative importance has decreased for scheduled European carriers, as new or growing markets
to Asia become attractive propositions. Trans-Atlantic capacity share fell from 37.5% of the Available Seat Kilometres (ASKs) in 1996 down to 30% in 2007. This said, the actual number of ASKs on this flow, increased by nearly 44% over this period. China is now fast becoming the largest flow between Asia and Europe, propelling this country to the number one Asian destination from many European countries.
By 2026 the fleet of aircraft with over 100 seats operated by European airlines will have more than doubled to 7,110. Likewise, today�s dedicated freighter fleet will grow significantly from 264 aircraft, to more than 600 in 20 years time.

By 2026, nearly a third of the European fleet will be operated by large global airlines, of which there are currently nine. LCCs are set to become the next most significant group of airlines in terms of their fleet size, which will increase through expansion on existing services, new more distant opportunities and, possibly, some long-haul operations.

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