Civil Aviation in Scandinavia ? Economic Value and Importance
C Brems, M Bøgelund, COWI, DK
The economic value and importance of SAS to the Scandinavian societies is evaluated through a socio-economic analysis using scenarios. The conclusions cover e.g. importance of network, level of competition and fares, and apply wider than Scandinavia.
Civil aviation in Europe has undergone significant changes over the last few decades. Increased competition due to deregulation has caused traditional network (flag) carriers to become more efficient. In addition passengers have sought to decrease their travel costs. The introduction of point-to-point carriers, offering low fares on selected routes, has put further pressure on network carriers.
The aim of the study was to evaluate the economic value and importance of Scandinavia Airline System (SAS) to the Scandinavian societies. The evaluation was carried out as a socio-economic analysis of SAS with formulation of different scenarios. The socio-economic analysis is based on examinations of some of the important effects of aviation including importance of network especially to areas with low population densities, level of competition in Scandinavia and Europe and finally relationships between competition and fares. So, even though the analysis was focused on SAS and Scandinavia many of the conclusions apply to other airlines and countries as well.
SAS as a network carrier creates benefits to the all the Scandinavian societies. With the main hub in Copenhagen, SAS contributes to the fact that Copenhagen Airport has more than 100 non-stop destinations even though the population density in the area is relatively low. This is a large benefit to the Danish passengers. Although Sweden and Norway have fewer non-stop destinations, the presence of network carriers provide Swedish and Norwegian passengers with almost the same mobility as the Danish passengers. Consequently, Swedish and Norwegian passengers benefit from the network as well. Here, mobility is measured by possible destinations for a one-day trip defined as one outgoing flight in the morning, a stay of at least 4 hours, and a return flight in the evening.
However, the network carriers are under pressure both from point-to-point carriers and other network carriers. The point-to-point carriers compete on the large European routes, where point-to-point carriers can keep higher cabin factors and, typically, lower fares. The network carriers compete against each other on the transfer traffic, where the carriers try to attract traffic the transfer traffic to their own hubs. An example of this competition is the entrance of KLM in to Norway. KLM has opened routes from the six largest airports in southern Norway to the hub in Amsterdam.
To extend of competition is measured by the Hirchman-Herfindahl Index (HHI), which is based on number of competitors and their market shares for specified markets. In the study the present extend of competition has been evaluated for national and international traffic for most European countries. The evaluation showed that the competition for the Scandinavian countries is on the same level as for other European countries. Furthermore, the evaluation showed that there is less competition on domestic markets and most on intercontinental routes. However, on domestic routes aviation is competing against other modes of transport.
In general, competition influences fares. For aviation in Europe a literature study as well as estimations within the study indicate that duopoly markets will most likely have fares that are 10-15% lower than a monopoly. A third competitor means a further decrease of fares of 5-10%.
All these results go into the socio-economic analysis of SAS. The analysis is carried out formulating a number of scenarios. The scenarios include the following alternatives to the present form of SAS: Three separate national carriers, a merger with another network carrier, a bankruptcy of SAS (in line with Sabena) and changes in the fare level due to increased effectiveness. These scenarios can either be regarded separately or in combination.
Each of the first three scenarios represents losses to the passengers compared with the present situation. However, the extent losses (and benefits) of the scenarios varies in the three scenarios. For instance, the first scenario is a benefit to Swedish and Norwegian passengers compared to the present network, as they get more non-stop destinations out of Stockholm and Oslo. Whether the network is taken over by another network carrier or disappears makes no significant difference to the Scandinavian passengers. All passengers will meet with losses due to reduced competition and longer travel times. Finally, the forth scenario with fare reductions represents benefits to all passengers. Depending on the extent of fare reductions the benefits may outweigh some of the losses of the first three scenarios, if they are combined.
Association for European Transport