Building an emerging hub in Europe: Riga International Airport
Europe is one of the most lucrative aviation markets in the world: while it is definitely not the most populous one, such segments as transatlantic flights have become cash cows for airlines. The Asia-Europe segment has also allowed comparatively smaller airlines like Finnair to establish itself firmly and find a niche where the airline could strive. At the same time, the lucrativeness of Europe’s main airports has created a problem – a problem of overcapacity.
Such cities and their main airports like Amsterdam Schiphol (AMS), Frankfurt Airport (FRA), London-Heathrow (LHR), Paris-Charles De Gaulle (CDG) are becoming very limited in welcoming new airlines or allowing current operators to expand their presence at the respective airports.
And, as airlines from other continents, especially Asia are looking to inaugurate flights to Europe, their choices become limited. For example, Juneyao Air, a Shanghai, China-based airline announced its plans to launch a service between Shanghai and Manchester Airport, United Kingdom (MAN) in November 2019. The flight, operated via Helsinki (HEL), is the carrier’s first service to the United Kingdom. Previously, in February 2019, it applied to launch flights from Shanghai Pudong (PVG) to one of London‘s airports. However, the route never materialized as the airline was denied the rights to do so.
Helsinki (HEL), the main hub of the aforementioned Finnair, is becoming the gateway for flights between Asia and Europe, and not only for the Finnish flag carrier. Several Asian airlines have opened their routes to HEL in over the past few years, including codeshare agreements with Finnair. The Helsinki-based carrier can provide competitive connection times from Helsinki to other European destinations, while Asia-based airlines, especially those that are new entrants into Europe, can offer their passengers a more seamless experience when flying to the continent.
However, while Helsinki has become the king of Asia-Europe traffic in Northern Europe, one airport is coming to take the throne: Riga International Airport (RIX).
Its main competition is, of course, Helsinki Airport: the airport, serving the Finnish capital, welcomed 21.8 million passengers in 2019, an increase of 4.9%. Riga, on the other hand, grew by 10.5% to 7.7 million. So, these are two emerging hubs in Northern Europe: both Arlanda Airport (ARN), serving Sweden’s capital Stockholm, and the Danish counterpart, Copenhagen (CPH), finished 2019 with decreased passenger numbers. Arlanda welcomed 25.6 million (-4%), while Copenhagen welcomed 30.2 million (-0.1%).
King of Baltics and the upcoming King of the Nordics?
Riga International Airport, serving the Latvian capital, is essentially the hub of the Baltic States. Out of the total 7.79 million passengers that landed or departed from the airport in 2019, 30% of those were transfer passengers. The top two transfer cities were Tallinn, Estonia, and Vilnius, Lithuania, respectively, the two other Baltic capitals.
But 2019, seemingly, was the defining year for RIX to work towards its next goal.
When discussing the airport’s performance throughout the year, the chairperson of the board, Ilona Līce, stated that the company’s figures for the year showcased “steady and undisputed leadership of Riga International Airport in the Baltics.”
“They also prove that the Baltic market is becoming too narrow for Riga International Airport and that the Airport has chosen the right direction for its development – to compete in a wider international arena, aiming to become an emerging aviation hub in Northern Europe,” added Līce.
Meanwhile, board member Artūrs Saveļjevs revealed exclusively to AeroTime that Riga aims to become a direct competitor to Helsinki and also offer Asian airlines an easy entrance to the European markets, combined with airBaltic and other carrier’s already established network to key hubs and cities in Europe:
However, the established route network of airBaltic is not enough to attract long-haul flights, of which Riga currently has zero: a six-hour hop to Abu Dhabi on the Latvian flag carrier’s Airbus A220-300 is the longest direct connection from the airport. The airport started a number of other initiatives to build up an attractive business case for airlines that operate long-haul flights.
After all, airBaltic, while it is the airport’s biggest asset, so to speak, is also RIX’s biggest hurdle in development. The A220-only strategy helped the Latvian airline to strengthen its positions in the region, but only in the region. The A220 has its operational limits, as Saveļjevs highlighted. While the airport is happy that the former-CSeries can make it to such destinations as Abu Dhabi International Airport (AUH), the jet, unfortunately, cannot reach such markets as the United States, which would have made the board of the airport “so happy.”
Attracting the long-haul carriers
Thus, if the airport wants to become an established hub in Northern Europe, it has to attract those carriers that want to increase their capacity to Europe.
“Our strategy is that we want to attract those long-haul carriers that have limited possibility to enter the big hubs in Europe, where you have a system of slots,” Saveļjevs said. The slot system limits new entrants into an airport – something that Riga is trying hard to stay away from. Instead of introducing slots, the airport is expanding its current terminal that would be able to handle up to 12 million passengers per year after the completion of the expansion in 2024. While theoretically, it could still handle more passengers than its current annual traffic flow, the problem, as Saveļjevs highlighted, is the fact that Riga International Airport has limited peak-time capacity due to a shortage of certain elements of the terminal's landside infrastructure. A limited number of check-in desks, security checkpoints and a manual baggage handling system create bottlenecks, which in turn limit the amount of peak-hour traffic the airport can handle.
And the peak-time capacity is one of the main selling points of Riga International. If the airport welcomes traffic from Asia, passengers would be able to seamlessly transfer between flights due to its relatively smaller size compared to the big hubs in Europe.
“When you choose to fly somewhere, the number one factor is the price, the number two factor is the total time of the journey. If a passenger chooses to fly via some hub, he or she does not want to stay for half of the day or eight hours somewhere, but you also have to feel comfortable that you will not lose your next flight,” the board member reiterated the importance of a seamless passenger experience when transferring.
Furthermore, competitive connection times are also a key factor when proposing a business case. And airlines that operate in RIX do have very attractive landing slots at big European hubs. For example, airBaltic Flight BT651 leaves for London-Gatwick (LGW) at 9 AM Local Time (UTC+2) or 7:45 AM, depending on the day of the week, and arrives at the British capital at 10 AM Local Time (UTC+0) or 8:40 AM. Frankfurt Airport (FRA), another European hub, has an early morning flight operated by Lufthansa (LHAB) (LHA) , which lands at 7:45 AM Local Time (UTC+1) in the German city.
So, while Helsinki Airport (HEL) has to juggle Finnair’s interests due to its competitiveness against said Asian airlines and their passenger’s time needs, RIX wants and actually can offer the best landing times for incoming long-haul flights that would let passengers connect onto flights to other European destinations, severely reducing their travel time.
Solving passenger demand issues
While the population sizes of Finland and the Baltic States are very similar (5.5 million versus 6 million, according to Eurostat data), the purchasing power of the two are very different. Eurostat data indicates that a Finnish person, on average, had a nominal expenditure of $45,842 (€42,503) in 2018. Combined nominal expenditure of the three Baltic States was $55,028 (€51,029) in 2018, meaning Finnish consumers first and foremost can afford long-haul flights, as also evident by Finnair’s network. The carrier, excluding Asian destinations, also flies to several cities in North America. Currently, the Baltic States’ longest commercial scheduled flight is the aforementioned route to Abu Dhabi (AUH).
However, the nominal expenditure is slowly rising in the three countries:
Nevertheless, while the demand to occupy seats onboard an aircraft can be questioned, flights can also be supported by cargo in the belly of the aircraft. And with the growth of e-commerce, especially of various retail websites from China, the cargo could be transferred on commercial flights and not only freight-dedicated ones. Artūrs Saveļjevs argues that the addition of parcels to the belly of the aircraft can make a flight feasible even if load factors onboard are subpar. And the percentage of EU-based individuals making e-commerce purchases have been growing the past five years:
In 2014, 50% of the total population within the European Union has purchased something online within the last 12 months, while in 2019, the number has increased to 63%. While the average growth within the EU was 13%, Estonians purchasing items online increased by 19%, Latvians by 13% and finally, the percentage of Lithuanians that made a purchase online increased by 22% during the same period, overshadowing the EU-wide growth percentages. Thus, the demand to transfer parcels is definitely there.
The demand is solidified even more considering the fact that in 2017, Riga International Airport (RIX) started handling the Chinese e-commerce giant’s Alibaba mail cargo. The airport’s 2019 statistical data indicates that it handled 27,265 thousand tonnes of cargo, which means that “almost half of all air cargo in the Baltics was handled in Riga,” according to the company that manages the airport. Furthermore, RIX will cut the red ribbon on a cargo-dedicated apron in July 2020, according to Saveļjevs, providing further detail that the apron will be able to serve aircraft up to the Boeing 747-8.
Riga International Airport (RIX) also builds its business case around the fact that it has an underground fueling system, which means that it takes up much less time to refuel an aircraft: the board member highlighted that if a Boeing 747 arrives, the system can fill it up within an hour. If the airport were to use trucks, the process would take up to three hours.
The business case, seemingly, attracted the first customers in November 2019: DHL signed a deal with the airport for the latter to become a logistics hub for the Baltic States. While Riga’s great geographical location is one of the factors why, according to Artūrs Saveļjevs, DHL chose the airport to become the logistics hub, the underground fuel system combined with very low airport charges also helped in sealing the deal.
In fact, the landing and take-off fees are “pretty much below the operating costs,” explained the board member. However, that does not mean the airport is loss-making: it's 2019 unaudited net profit is the highest in the company‘s history.
Sustainable business growth
And it can afford to offer the sub-operating cost fees due to the fact that RIX utilizes the Single Till economic model.
“The till is like a bucket, you put everything (aviation income and non-aviation income) in a bucket and you use this money to develop the aviation side of the airport and set the charges,” explained Saveļjevs, adding in that the model allows to cross-subsidize the charges from the non-aviation business part, strengthening the competitiveness of the airport. The cross-subsidies also allow the airport to heavily invest in its infrastructure and not only physically, but also implement technology-driven solutions to improve capacity without expanding the airport’s facilities.
As mentioned, the airport is focusing on peak-time capacity to offer a better experience when connecting in Riga. With the expansion of airBaltic, the carrier’s main hub also needs to expand – while there are plans to do so physically with a new terminal that is set to open in 2024, “it is the technology that needs to kick in,” noted Saveļjevs. Such initiatives as the automatic baggage drop-off system, Automatic Border Control (ABC) gates and an Artificial Intelligence-driven queue monitoring system, which predicts the queues based on historical data and can alert either the check-in agents or security agents to help out their colleagues even before a queue has formed.
“If the queue is too long then you lose money elsewhere, like in the duty-free shops because then people do not have the time for shopping,” reasoned the board member, adding in that in a worst-case scenario, a passenger can miss a flight.
But the airport plans to expand its capacity aircraft-wise by upgrading its taxiways, which will allow more aircraft movements per hour. RIX has one rapid-exit taxiway and it plans to finish another one by the end of 2020. While a second runway is planned in the airport’s long-term future, the board wants to delay that process as much as possible: after all, the process of building a new runway is costly, which will negatively impact the fees and in turn, one of the main advantages of the airport for airlines that are looking to fly to the Latvian capital.
If a person were to ask, 2019 also showed that the airport is not fully a smooth operator: bottlenecks capacity-wise impacted its operations negatively, stated Saveļjevs. However, the airport aims to fix the issues, which are landside, within three years with the expanded terminal.
But will the expanded terminal allow Riga International Airport punch above its weight and truly become an established hub in Northern Europe?
Only time, persistence and the financial health of the industry will tell: after all, the current short-term outlook is not good. Considering the outbreak of the coronavirus has resulted in airlines losing billions of dollars in revenue, the main potential long-haul entrants into Riga will need time to recover, as the travel restrictions have slashed capacity and in turn, revenues in Asia.
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