What happens when a network carrier disappears? Case of Malev bankruptcy
Volodymyr Bilotkach
Network carriers, by routing transfer passengers via their hub airports, enable frequent services to multiple destinations, which supposedly facilitate development of businesses in the respective metropolitan areas (this indeed was demonstrated by Germa Bel and Xavier Fageda in their research). On the other hand, an airport that loses its hub status via either bankruptcy of or network restructuring by the hub operator risks losing a significant share of its traffic and revenue. Indeed, Redondi and colleagues have demonstrated that former hub airports rarely recover to their pre-dehubbing levels of traffic. Reduction in flight frequency and the number of destinations served may have further detrimental effects for the businesses in the area, as the city loses its connectivity with the rest of the world.
The recent case of Malev bankruptcy, with the corresponding loss of hub status by Budapest airport, is a very interesting one to analyze. Indeed, we are likely to see several more such events occurring in Europe over the next decade or so, as the airline industry consolidates further. Some commentators have indicated that the Europe’s low-cost airlines (Ryanair and Wizzair) have stepped in quickly to “replace” Malev at Budapest. Indeed, only about a dozen airports which have been served by Malev prior to bankruptcy have lost non-stop scheduled flights to Budapest (comparing Summer schedules of 2011 and 2012). At the same time, low-cost carriers, relying on point-to-point services, can be expected to offer lower frequency of service as compared to Malev. Our data analysis (performed at the city level to take into account the fact that LCCs often do not use area’s main airports) indicated that, other things equal, Ryanair on average tends to offer about half of the frequency that Malev offered prior to bankruptcy. The corresponding figure for Wizzair is one third. Overall, Budapest lost about a quarter of its scheduled passenger flights, but the number of seats offered decreased by only eight percent.
A passenger traveling to or from Budapest thus faces a trade-off between lower frequency of service and lower price. Economists tend to think about the total cost of trip for a passenger as consisting of not only the airfare, but also the schedule delay (the difference between the time you would like to arrive to your destination and the time you actually get there), the latter being inversely related to the flight frequency. This trade-off is especially relevant for the business travelers – a careful examination will be required to understand which effect prevails, and whether business travelers are actually better off with Ryanair or the network carrier operating most of the services out of their home airport.
Additional results from the Malev bankruptcy event relate to the routes Ryanair and Wizzair chose to enter. Our data analysis demonstrated that both carriers were more likely to enter shorter haul routes to higher income and more populated area – hardly a surprise, giving the carriers’ reliance on point-to-point services. At the same time, the two LCCs did not pursue exactly the same entry strategies: while Ryanair appeared to target higher-income cities that have been generally underserved prior to Malev’s bankruptcy; Wizzair’s strategy focused more on replacing Malev’s services to higher-income destinations.
The main lessons of the Budapest case for airports planning for eventuality of losing the hub operator are hardly surprising. First, prepare for a loss in the number of aircraft movements. Second, low-costs are likely to come, and business travelers may or may not like it. Third, the LCCs will likely target high-income high-population markets.
