preliminary study of air connectivity and competition air trasnport diagnostic project ... ·...

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PRELIMINARY STUDY OF

AIR CONNECTIVITY AND COMPETITION

AIR TRASNPORT DIAGNOSTIC PROJECT

OF

INTERNATIONAL CIVIL AVIATION ORGANIZATION (ICAO)

AND

INTERDISCIPLINARY CENTER FOR MATHEMATICAL AND COMPUTATIONAL MODELLING

(ICM)

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1. BACKGROUND

1.1 Airline competition has evolved from an era of economic regulation and intervention to

an increasing trend towards liberalization. This in turn has resulted in the global air transport network

transiting from simple networks structures with limited competition and connectivity options of the past

to complex structures of today responding dynamically to the changes in regulations and the business

opportunities offered by liberalization.

1.2 The global air transport network is characterized by more connectivity options to

customers with a variety of competitive network strategies pursued by the major aviation stakeholders.

Some of these strategies include decisions related to a) point to point versus hub and spoke systems b)

yield management to respond effectively to demand through pricing and product differentiation and c)

alliances and mergers. These strategies are invariably a trade-off between the most economically efficient

path to transport passengers through the various nodes available in the network constrained by real time

factors that prevent the network from being the most optimized or efficient.

1.3 The factors that impact the route network flow i.e. the true origin destination demand

flow path on a network from the most efficient path to a sub-optimized path are –

1) Size of the market (existing demand) and pricing strategies of existing competitors.

2) Policy factors –air carrier ownership and control, liberalization and regulation of

traffic rights to fly (market access), cross ownerships of aviation verticals, taxation

and charging policies.

3) Slot availability and other restrictions like lack of infrastructure, night and noise

curfews.

4) Presence of alternative models on a route i.e. low cost carriers versus legacy carriers

2. AIR TRANSPORT DIAGNOSTICS PROJECT

2.1 ICAO and the Interdisciplinary Centre for Mathematical and Computational Modelling

(ICM) of the University of Warsaw have initiated a joint air transport diagnostics project. The project

aims to better understand the complex dynamics and interlinkages between the various policy factors and

market realities that influence the competitive strategies of the aviation stakeholders and the optimization

of the global air transport network.

2.2 This project does not aim at facilitating optimization of the air transport network through

static network models. The Project rather considers the existing market realities in its mathematical

optimization models. The models can theoretically as well as empirically explain and relate current and

forecasted demand on a route to evolving policies, competitive strategies, increasing connectivity and the

optimization of the global air transport network.

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3. DECISION SUPPORT SYSTEMS FOR INFORMED

POLICY MAKING

3.1 Over the next triennium the results of the project will be made available as a visual

interactive decision support system (DSS) to ICAO Member States and other stakeholders. The system

will indicate areas where the market forces provide potential opportunities to States to further increase

connectivity and optimization of the air transport network though appropriate policy initiatives and

addressal of constraining factors.

3.2 The application leverages nearly four decades of ICAO data in its Enterprise Wide Data

Management (EDM) repository supplemented with external data sources. The Big Data so available is

being processed by ICAO and ICM using contemporary ICT applications and sophisticated statistical

models. The DSS will be a single platform where States have the information to better gauge the

valuation of their granting of traffic rights to fly and the opportunity costs associated with their policy

initiatives.

4. RESULTS OF THE PRELIMINARY ANALYSIS

4.1 ICAO and ICM have initially analysed as a prerequisite for this project, the two major

existing factors namely demand and price that influence competitive strategies of the aviation

stakeholders and the optimization of the global air transport network.

4.2 The analysis that covers of millions of data sets and data points is too detailed to be

provided in this reference document. A segment of the preliminary analysis based on most recently

available international trips data for the year 2015 is presented in the Appendix and includes the following

–

1) Global passenger flows to true origin-destination going direct and indirect (via

connecting nodes).

2) Direct and indirect passenger flows by region of departure and by route groups.

3) Direct and indirect connectivity ratios for route group pairs along with average fare in

US dollars. The fare used is average of discount economy fare and excludes taxes and

charges not retained by the air carrier.

The direct and indirect connectivity for the purposes of this analysis includes domestic legs as part of an

international trip. The exclusions of domestic legs in an international trip significantly changes the

composition of direct and indirect traffic average fares.

ICAO will be making available the DSS to States and major stakeholders soon where each of the above

elements can be further customized by them to meet their specific requirements for data driven policy

making.

4.3 The results of the preliminary analysis encompassing the entire big data set leads to the

following overarching observations–

1) With the inclusion of domestic legs on international trips 69% of the passengers in

2015 flew direct to their destination and 31% flew though connecting nodes in the air

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transport network. Around half of indirect passengers include domestic connections on

the international trip.

2) There exists differences in the direct and indirect connectivity at the country pair level

which when summarized is reflected at the region pair or route group pair level.

3) Inclusion of domestic legs on the international trip results in higher average indirect

fares compared to average direct fares.

4.4 The preliminary conclusions from these observations are –

1) Market forces primarily the presence of demand or otherwise on a route determines

the competitive strategies and economic efficiencies of providing direct or indirect

routes in the global air transport network.

2) Poor Demand translates to poor connectivity and optimization is achieved through

indirect flights. Lack of policy initiatives in many cases act as a constraint in achieving

an optimized indirect route flow network.

3) Fare levels are deeply influenced by the competition between carriers on a route.

Average direct fares appear to have a premium over indirect fares on long haul routes.

On the rest of the routes, the spread between average direct and indirect fares reflects

a degree of competitive advantage of hubs on routes in the air transport network.

4) Significant demand on some long haul routes and forecasted strong growth rates along

with new aircraft technologies has resulted in traditional hubs that have been existing

over several decades competing with more recent hubs leading to increasing

connectivity and more nodes being introduced in the air transport network.

5) Demand exists on some high density long haul routes that could make it more efficient

for air carriers to fly direct routes or integrate it with their existing network or

alliances. A trend in this direction could suggest the potential of further optimizing the

global air transport network impacting infrastructure development in the different

regions as well as capacity available through traditional and new hubs.

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APPENDIX A

Figure 1 - Global International Passenger Flow

Figure 2 – Regional International Passenger Flow

880.2 (69%)

391.8 (31%)

Global International Passenger Flow 2015 (In millions)

Direct Flights Passengers Connecting Flights Passengers

Total Passengers : 1271.9

0 50 100 150 200 250 300 350 400 450

North America

Latin America/Caribbean

Africa

Middle East

Asia/Pacific

Europe

Passengers (millions)

International Passengers Flow by Region of Departure 2015

Direct Flights Passengers Connecting Flights Passengers

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Figure 3 - Asia/Pacific International Passenger Flow

Figure 4 - Africa International Passenger Flow

0 5 10 15 20 25 30 35 40 45 50

Latin America/Caribbean > Asia/Pacific

Asia/Pacific > Latin America/Caribbean

Asia/Pacific > Africa

Africa > Asia/Pacific

Asia/Pacific > Middle East

Asia/Pacific > North America

Asia/Pacific > Europe

North America > Asia/Pacific

Europe > Asia/Pacific

Middle East > Asia/Pacific

Asia/Pacific > Asia/Pacific


Region Pair Passenger Flow (Asia/Pacific)

Direct Flights Indirect Flights

0 2 4 6 8 10 12 14 16 18 20

Latin America/Caribbean > Africa

Africa > Latin America/Caribbean

Africa > North America

Asia/Pacific > Africa

Africa > Middle East

North America > Africa

Africa > Asia/Pacific

Africa > Africa

Middle East > Africa

Africa > Europe


Region Pair Passenger Flow (Africa)


239

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Figure 5 - Europe International Passenger Flow

Figure 6 - Middle East International Passenger Flow

0 5 10 15 20 25 30 35 40 45 50

Latin America/Caribbean > Europe

Europe > North America

Middle East > Europe

Europe > Middle East

Europe > Latin America/Caribbean

Africa > Europe

Europe > Africa

Asia/Pacific > Europe

Europe > Asia/Pacific

North America > Europe

Europe > Europe


Region Pair Passenger Flow (Europe)


0 5 10 15 20 25 30 35 40

Latin America/Caribbean > Middle East

Middle East > Latin America/Caribbean

Middle East > North America

Africa > Middle East

Asia/Pacific > Middle East

North America > Middle East

Middle East > Europe

Middle East > Africa

Europe > Middle East

Middle East > Middle East

Middle East > Asia/Pacific


Region Pair Passenger Flow (Middle East)


394

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Figure 7 - Latin America/Caribbean International Passenger Flow

Figure 8 - North America International Passenger Flow

0 10 20 30 40 50 60 70 80

Latin America/Caribbean > Middle East

Latin America/Caribbean > Africa

Middle East > Latin America/Caribbean

Africa > Latin America/Caribbean

Latin America/Caribbean > Asia/Pacific

Asia/Pacific > Latin America/Caribbean

Latin America/Caribbean > Europe

Latin America/Caribbean > North America

Europe > Latin America/Caribbean

Latin America/Caribbean > Latin America/Caribbean

North America > Latin America/Caribbean


Region Pair Passenger Flow (Latin America/Caribbean)


0 10 20 30 40 50 60 70 80

Africa > North America

Middle East > North America

North America > Africa

North America > Middle East

Asia/Pacific > North America

Europe > North America

Latin America/Caribbean > North America

North America > North America

North America > Asia/Pacific

North America > Europe

North America > Latin America/Caribbean


Region Pair Passenger Flow (North America)


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Figure 9 - Route Group International Passenger Flow

0 10 20 30 40 50 60 70 80

Intra Africa

Central South West Asia - Europe

Europe - Sub Saharan Africa

North America - South America

Africa - Middle East

Europe - South West Asia

Europe - Pacific South East Asia

Intra North America

Intra Middle East

Europe - North Africa

North Asia - Pacific South East Asia

Europe - Middle East

Middle East - South West Asia

Intra Central South West Asia

Central South West Asia - North Asia

Intra Pacific South East Asia

Europe - North America

Central South West Asia - Pacific South East Asia

Central America/Caribbean - North America

Intra Europe


Route Group Passenger Flow


0 2 4 6 8 10 12

Latin America/Southwest Asia

Africa & Middle East - Central America/Caribbean

Latin America/Caribbean - Central South West Asia

Africa & Middle East - South America

Latin America/Caribbean - North Asia & Pacific South East Asia

Central South West Asia - Middle East

Africa - North America

Middle East - North America

Africa - Asia/Pacific

North America - South West Asia

Intra Central America/Caribbean

Central America/Caribbean - South America

Intra North Asia

Europe - North Asia

North America - North Asia

Middle East - North Asia & Pacific South East Asia

North America - Pacific South East Asia

Europe - South America

Central America/Caribbean - Europe

Central South West Asia - North America

Intra South America


Route Group Passenger Flow


364

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Figure 10a - Route Group Connectivity and Average Fares (Inclusive of Domestic Connections in International Trips)

0% 20% 40% 60% 80% 100%

Central America/Caribbean - Europe

Central South West Asia - NorthAmerica

Central South West Asia - MiddleEast

Middle East - North Asia & PacificSouth East Asia

Intra North America

Central America/Caribbean - NorthAmerica


Intra South America



Intra Africa

Intra Central America/Caribbean

Central South West Asia - PacificSouth East Asia

North Asia - Pacific South East Asia




Intra Europe


Central South West Asia - North Asia

Intra Middle East

Intra North Asia

% of Total Passengers

Connectivity

% Direct Passengers % Indirect Passengers

0 200 400 600 800

Average Fare (USD)

Average Fares (Discount Economy)

Average All Flights Fare Average Direct Fare

Average Indirect Fare

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Figure 10b - Route Group Connectivity and Average Fares (Inclusive of Domestic Connections in International Trips)

0% 20% 40% 60% 80% 100%


Africa & Middle East - CentralAmerica/Caribbean

Latin America/Caribbean - CentralSouth West Asia

Latin America/Caribbean - NorthAsia & Pacific South East Asia

North America - South West Asia



North America - Pacific South EastAsia


Africa & Middle East - South America






Europe - North Asia

Central South West Asia - Europe

Central America/Caribbean - SouthAmerica


% of Total Passenger

Connectivity


0 200 400 600 800 1000

Average Fare (USD)

Average Fare (Discount Economy)



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Figure 11a - Route Group Connectivity and Average Fares (Exclusive of Domestic Connections in International Trips)

0% 20% 40% 60% 80% 100%





Central South West Asia - NorthAmerica

Intra CentralAmerica/Caribbean


Intra Africa

Central South West Asia - PacificSouth East Asia

North Asia - Pacific South EastAsia

Intra South America


Intra Europe




Intra Middle East

Central South West Asia - NorthAsia

Central America/Caribbean -North America

Intra North Asia

Intra North America


Connectivity


0 200 400 600 800

Average Fare (USD)




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Figure 11b - Route Group Connectivity and Average Fares (Exclusive of Domestic Connections in International Trips)

0% 20% 40% 60% 80% 100%


Africa & Middle East - CentralAmerica/Caribbean

Latin America/Caribbean -Central South West Asia

Latin America/Caribbean -North Asia & Pacific South…

North America - South WestAsia




Africa & Middle East - SouthAmerica


North America - Pacific SouthEast Asia



Europe - North Asia


China - Europe

Central America/Caribbean -South America

Central America/Caribbean -Europe

Central South West Asia -Middle East

Middle East - North Asia &Pacific South East Asia


Connectivity


0 500 1000 1500 2000

Average Fare (USD)




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