On May 1, 2004, the European Union (EU) underwent its largest
expansion to date. Ten new nations officially entered the economic and political
partnership bringing the total membership to 27 European countries. The socalled
EU-8 included the Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, Slovakia, and Slovenia. Two other Eastern European nations, Romania
and Bulgaria, later officially joined in 2007 (European Union, 2011a). As a result
of admittance to the Union, citizens of the new member states were afforded free
access to travel or relocate to and from any other member state. This caused a
significant migration of workers from Eastern Europe to the more prosperous
countries in the west, notably the United Kingdom (UK) and Ireland. Since many
other EU members placed varying levels of restrictions on movement from the
new member states, the British Isles were an attractive destination as they did not
enact these restrictions, had high standards of living, and provided numerous
economic opportunities (Drinkwater, Eade, & Garapich, 2009).
During this same time period, the low-cost airline component of the air
transport industry in Europe continued rapid growth. The market share for
discount airlines rose from 2% of intra-EU passenger traffic in 1998 to 9% in
2002 (Graham & Shaw, 2008). As of 2005, low-cost carriers (LCCs) accounted
for about 20% of all European air traffic. An even greater figure was reported for
flights between the British Isles and continental Europe, with low-cost airlines
holding a market share of 50%. The two largest, Ryanair and easyJet, transported
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42.5 million and 28.0 million customers, respectively, in 2006, ranking them both
among the top 20 airlines in the world by total passengers.
One commonality of these LCCs was a business model based on operating
principles developed by Southwest Airlines, the carrier credited as the originator
of the LCC concept. The impact of Southwest’s entrance into new markets has
been so significant that its impact has been described as a phenomenon called the
“Southwest Effect.” This is characterized by average airfares dramatically
declining as well as a large increase in the overall number of passengers flown
once the airline begins service. For example, the Transportation Research Board
analyzed new Southwest routes between 1990 and 1998 and found that passenger
trips increased 174% while average fares fell 54% (Boguslaski, Ito, & Lee, 2004).
Overall, the US Department of Transportation has estimated that the existence of
Southwest and the impact it has had on pricing has resulted in annual fare savings
of $12.9 billion. Despite the low fares, the airline has been the only US airline in
history to be profitable every year since its inception. As of 2004, its market
capitalization exceeded that of all its competitors combined.
The enactment of a European Open Skies policy in April 1997 facilitated
the rapid development of this business model outside of the domestic United
States (Skurla, Radacic, & Curepic, 2003). Open Skies provided freedom of
movement for airlines in Europe to transport passengers between countries
without governmental route or pricing approval. It also opened up the opportunity
for carriers based in one country to fly between two other nations. By taking
advantage of this market liberalization, airlines were able to establish
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international point-to-point service. Following the Southwest model of low fares
and market expansion, new European LCCs were able to begin operations across
the continent. For example, Ryanair has successfully followed this business
strategy to grow into the largest low-cost carrier in Europe with over 75 million
passengers carried in 2010. The airline carried these customers via more than
1,300 routes, flying out of 44 different bases located in both the UK and
continental Europe (Ryanair, 2011a).
The intersection of the EU expansion with the introduction of LCC service
was the issue examined through this study. Through a time series regression
analysis, the impact of accession into the EU by new central and eastern European
member states was measured. This was cross-referenced with data on the service
start dates of routes between the UK and those countries by LCCs. By
comparison, Southwest Airlines has produced remarkable increases in market size
in the contiguous United States. However, this investigation expanded upon
existing research on LCC growth in western and southern Europe (Pitfield, 2007;
2008b) to discover if signs of expansion following the Southwest model could be
seen in new LCC service to the eastern parts of Europe. Given further expansion
of the EU on the horizon, the outcomes of this study are potentially significant for
future air travel projections.
Chapter One introduces the problem and establishes the parameters of this
study. Chapter Two, the literature review, provides background into several
aspects of the EU and LCCs. A brief history of the EU is presented along with
information on the leading LCCs linking the UK and eastern portions of Europe,
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as well as an overview on Southwest Airlines and its business model. Discussion
is also provided on previous research on the effect airlines, notably Ryanair,
created on markets it entered in Western and Southern Europe. Chapter Three
discusses the methodology used to plan, design, and execute the project and
analyze the data. Chapter Four details the results. Chapter Five discusses the
statistical results and presents conclusions on European passenger levels in the
regions examined, as well as opportunities for future study.
Statement of Purpose
The purpose of this investigation was to determine the impact LCC air
transportation had on passenger volumes between the UK and 2004/2007 EU new
member states in Central and Eastern Europe. In order to accomplish this task,
this investigation:
1. Reviewed previous literature on the impact of LCC service in Europe.
2. Determined passenger volumes from 1990 through 2010 between the
UK and ten central and eastern European nations admitted to the EU
since 2004.
3. Identified service entry dates for air travel by LCCs on routes between
the UK and new EU nations.
4. Analyzed traffic levels pre-2004 to formulate a passenger volume
trend line.
5. Determined the statistical significance of variance from this trend line
for passenger volumes post-2004 up to 2010.
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Scope
The scope of this study was to measure passenger volumes between the
years 1990 to 2010. Annual statistics were obtained from the United Kingdom
Civil Aviation Authority (CAA). This organization serves as the UK’s specialist
aviation regulator. The CAA publishes an annual report on international air
passenger counts for flights to and from the UK. Data was extrapolated from these
figures to isolate routes operating between the UK and the ten countries studied:
Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania,
Slovakia, and Slovenia. Particular note was then made of any changes to the data
after EU enlargement or entrance of LCC service to that nation from the UK.
Assumptions
The need for air travel can be due to many reasons. Customers fly for
business, vacation, and to visit family and friends. Traffic flows are thereby
influenced by many variables. These include economic stability, fuel prices,
political climate, and natural disasters, amongst others. For the purposes of this
investigation, two primary criteria have been selected as determinants of
passenger volumes above all others: (1) membership in the EU and (2) availability
of LCC service. Other factors are assumed to be secondary to these two primary
influences. Also, when looking for signs of the Southwest Effect, two factors are
considered: lower airfares and increased passenger volumes. However, due to the
lack of complete historical information on airfares across the European continent,
only passenger volumes were researched in this study.
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Limitations
A few limitations of the data source exist. For one, the CAA only records
passenger volumes for non-stop service. Therefore, any connecting service was
not able to be included in the statistics. As LCCs typically fly point-to-point
without a change of planes, this omission was not deemed significant. Data
spanning the entire length of the study period was only available on an annual
basis. In the year 1998, reports began being published monthly. However, in order
to provide consistency, figures were only tracked using the annual numbers that
were accessible throughout the 20-year period researched. Due to this, the direct
impact of new air service may have been less discernable during the initial years
of this study than if monthly statistics were used. An additional limitation of the
data was that the directionality of movement was not indicated. Passenger
volumes were not broken down by the CAA to specify whether traffic originated
from or was arriving to the UK. Furthermore, as noted by the CAA, this data
compilation was validated but no warranties were made to its accuracy, integrity,
or reliability. However, the CAA’s data on international passenger statistics have
proven to be a reliable source to determine traffic trends, as evidenced in its usage
as the basis for studies of low-cost traffic such as the one by Pitfield (2007)
mentioned in Chapter 2.
Hypothesis
The results of this study were expected to show that passenger volumes
significantly increased between the United Kingdom and the ten new EU member
states. Several factors were predicted to be shown as influencing this growth. One
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