Can hubs lose their centrality? Lessons from the Malpensa case
Stefano Paleari
Airneth Fellow Column
March 2009
By Stefano Paleari
The history so far
After years devoted to “saving Alitalia” a significant repositioning of the north Italian hub of Milan – Malpensa was the result. On July 2007, after the failure of the call for the privatization of Alitalia, the new CEO Maurizio Prato announced a new plan for the survival of the airline company. The cornerstone of the plan was the fall of Malpensa as a hub, reducing in summer 2008 intercontinental destinations from 26 to 9 and cancelling 20 intra European and 6 domestic routes. At the end of 2008, a group of Italian entrepreneurs set up a new company (named CAI) that took over Alitalia and Air One, the second domestic player. Meanwhile, Air France-KLM took over 25% of CAI, opening to a potential future takeover of Alitalia that nowadays runs from Malpensa only 11 destinations (4 intercontinental, Paris CDG, Amsterdam Schiphol and 5 domestic). As a result, the passenger numbers at Malpensa dropped in 2008 by 19.5% compared to -1.8% of Italian market as a whole.
The case of Malpensa has been on the fore of the political debate. This discussion can be extended to the main reasons for the decentralization of hubs in Europe under the perspective of three different players: airlines, airport and consumer.
Reasons for decentralization in Europe and the fall of Malpensa
Recently, traditional European airlines have been consolidating: Lufthansa took over Swissair, SN, Austrian (and will probably take over SAS); Air France merged with KLM. This led to a European multi-hub system for each alliance. However, we wonder whether this is efficient. Theoretically, scale and scope economies are better achieved with a single mega-hub. However, there are conditions that can help “local” hubs in maintaining their traditional centrality.
Traditionally, one reason for developing a secondary hub has been the capacity constraint at main hubs (British Airways out of Heathrow). Skyteam’s main hub still has sufficient spare capacity, other top airports (eg. Frankfurt, Heathrow) are preparing for a huge increase in capacity. Moreover, on the short run capacity constraint issue may not favour local hubs, as the recession may reduce traffic at these hubs (with less dense service) at a faster rate.
The presence of premium demand is an important feature. Hubs serving local areas with strong demand for direct flights can find it profitable to maintain direct services. To this extent, Malpensa is located in one of the richest regions in Europe but the catchment area is contested by several other airports and Malpensa needs to strengthen its landside accessibility to be more attractive. An analysis of ICCSAI showed that Malpensa is the closest airport by car for only 2 million inhabitants, compared to 8 million of habitants living within about one hour and half (by car- off peak-time estimation).
Without a strong premium demand, at least a strong intercontinental focus is helpful. If the local demand is strongly orientated towards specific geographical destinations the airport can also serve “secondary” intercontinental destinations. By doing so, airlines have incentives to build up an ad hoc feeding structure at the local hub. This is the case of Madrid, with flights to South America. But this is neither the case of Malpensa nor Fiumicino.
Hub carriers may also benefit from a “natural” feeding structure. A local hub may maintain good levels of intercontinental service when airlines achieve scope economies between feeding and point to point demand. This is one of the problems of Malpensa. Point to point demand to Milan is better served by Linate and under competition from low cost carriers.
Last but not least, the level of airport infrastructure. Efficient operations and good airport infrastructure, together with flexibility in charges can help airport operators in maintaining their attractiveness. In case of Italy and Malpensa, a stalling airport regulation has hindered the investment capacity.
Consequences for Airlines, Consumers and Airports
For CAI-Air France the de-hubbing of Malpensa means losing direct premium passengers from north Italy. At the moment, frequency to Paris and Rome is almost the same as in the past (7-8 daily departures), high enough for a good feeding service. However, availability could spark interest from competitors, as testified by the new Lufthansa Italia. The main issue remains the carrier designation according to bilateral air service agreements; indeed only Alitalia is entitled to serve certain intercontinental routes from Malpensa. A quick review of bilateral air service agreements might reveal whether a community clause enables the re-hubbing of Malpensa by other European airlines. For the time being, low cost carriers may take advantage of the availability of slots, at least in the short run.
With reference to the Consumer perspective, the current panorama is characterized by low competition on Milan –Rome, due to the merger of Alitalia with Air One, and low direct connectivity toward intercontinental destinations. Analysis of travel times pre and post de-hubbing showed an average increase of travel time of about an hour. For Italian remote regions, like Sicily and Sardinia, but also for airports like Genoa, Aosta and Cuneo, the risk is to lose intercontinental connectivity (thereby requiring at least two stops).
With regard to the consequence for the Malpensa Operator, SEA, on one side the need for a re-hubbing of Malpensa clashes with the request of reducing service at Linate by potential hub airlines (CAI poses the Linate service reduction as a condition for investing in Malpensa). Without improvements in capacity and accessibility of Malpensa, it would be difficult for SEA to close Linate, since it is their main source of revenues.
On the other side, if Malpensa want to play a role in a multihub system (Skyteam or Lufthansa/Star system), a broad strategic plan need to be spelled out. Partnership and shareholding exchanges with the other key players may be helpful. An example is the recent long-term industrial cooperation and 8% cross-shareholding agreement between Amsterdam Schiphol and AdP designed to improve competitiveness through the develop of a dual-hub concept offering harmonised procedures and the advantages of the integrated catchments area.
A further recovery strategy may imply the developments of a new business model based on self help hubbing. In such a case, no airlines set a hub structure at the airport but connectivity is generated by different and uncoordinated airlines. It can support intercontinental flight especially for routes provided by non European airlines from their home hubs. To be feasible, specific facilities need to be developed.
