11
Air connectivity: Why it matters and how to support growth
Air connectivity: Why it
matters and how to support
growth
Global air travel has changed
considerably over the past decade.
Thanks to major improvements in
technology, air travel is more efficient,
making distances between countries
seem shorter than ever. Meanwhile,
the continued growth of low cost
carriers (LCCs) and their increased
penetration into emerging markets
has made air travel more accessible,
while the rapid expansion of Middle
East hub carriers has changed
intercontinental travel patterns. As a
result, air connectivity has also
changed.
But what is air connectivity, exactly?
The International Civil Aviation
Organization (ICAO) defines it as an
indicator of a network’s concentration
and its ability to move passengers
from their origin to their destination
seamlessly1.
Air connectivity is key to unlocking a
country’s economic growth potential,
in part because it enables the country
to attract business investment and
human capital. An increase in air
connectivity also spurs tourism, which
is vital to many countries’ economic
prosperity.
By understanding how air connectivity
is measured, how it has changed, how
it relates to economic growth, and
what drives it, key aviation
stakeholders (i.e. States, Airports and
Airlines), can make strategic decisions
on how to enable and unlock the air
connectivity potential of a country.
How is air connectivity
measured?
Air connectivity is measured using a
variety of measures at various levels of
granularity. These measures –
including total passenger movements,
airfares, the number of direct
destinations, and travel time – can
serve as standalone proxies or may be
combined to create a measure
capturing different features of the
air-transport market. (See Figure 1.)
1 ICAO (2013), Worldwide Air Transport
Conference (ATConf/6-WP/20
Hayley Morphet and Claudia Bottini
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PwC | Connectivity and growth
Travellers have different priorities,
depending on the purpose of their
journey. That means different
measures can be used to assess air
connectivity for each passenger
segment. For instance:
• Business travellers tend to be
time sensitive and relatively
indifferent to fare levels. Frequent
and flexible service that enables
passengers to quickly change
flights to a more convenient time,
coupled with easy surface
accessibility, matter most to this
segment. Thus air connectivity for
them could be measured by
frequency of service, convenience
of schedule, travel time, number of
direct routes available and
proximity to the city centre.
• Leisure travellers care more
about fares, with cost-effectiveness
often the most important factor in
decisions about whether to travel
and where, especially for short
breaks. An unacceptably high fare
could cause them to change their
mind about their destination.
Measurements of air connectivity
for this segment should therefore
include fares.
Figure 1: Air connectivity measures
• Direct seat capacity
• Availability of direct flights
• Direct destinations
• Average daily frequency/
route
• Convenience of schedule
• Distance to city centre
• Access to flexible fares
• Travel time
• Passenger movements
• Average seats per movement
• Indirect one stop
destinations
• Country GDP/GDP per
capita
• Route network
concentration
• Airline concentration
• Route stability
• Access to sales channels
• Airfares
• Availability of seats
• Choice of destination
Business
Leisure/VFR
Note: VFR is a subset of leisure travel. However, this segment differs from leisure in that passengers don’t have a choice of destinations and appear to be less
sensitive to price (price, however, may determine how frequently they travel).
13
Air connectivity: Why it matters and how to support growth
• Visiting friends and relatives
passengers are travelling primarily
to see loved ones. In some markets,
this category of travel is
substantial. Passengers travelling
for this purpose tend to consider
fares a major factor in determining
how frequently they travel.
However, unlike leisure
passengers, they don’t have the
option of changing their travel
destinations if fares are too high.
Measure
Description
York Aviation Business
Connectivity Index
Captures economic importance of destinations, measures value of connectivity
to businesses
Netscan Connectivity Index
Captures seat capacity, accounts for both direct and indirect connections and for
transfer time as well as potential delay time when connecting
IATA Connectivity Index
Captures the importance of destinations based on the size of the final
destination airport
World Bank Air Connectivity
Index
Weights value of a route based on the number of onward connections available
reflecting benefits of hubs
World Economic Forum
Connectivity Index
Presents data on scheduled available seat kilometres per week in 2012 for a
sample of 144 countries
Table 1: Air connectivity indices in aviation economics literature
Source: Various
The importance of air connectivity has
led to the development of a number of
indices in aviation economics
literature. (See Table 1.) Each measure
aims to capture a range of factors
influencing connectivity. At the same
time, aviation stakeholders looking to
understand the integration of country
(or city) within the global air network
can tailor their choice of air
connectivity indices to suit their needs
by identifying the criteria most
important to the country (or city)
they’re interested in and by developing
an integrated index which takes
multiple variables into account.
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PwC | Connectivity and growth
Note: The chart only shows international scheduled routes. Central America is defined as Central America and the Caribbean.
Source: Milanamos, PwC analysis
How has air connectivity
changed?
Over the past 10 years, the aviation
industry has experienced the effects of
various shocks (such as terrorist
attacks, natural disasters and
pandemics), a weak economy and
rising fuel prices. The industry has
shown its resilience by adapting itself
to satisfy the needs of an ever evolving
market.
Air traffic growth, which was once led
by North America and Europe, is now
fronted by the Middle East, Asia-
Pacific region and Latin America
which have experienced strong
growth over recent years. As reported
by IATA2, in 2013 revenue passenger
kilometres (RPKs)3 in North America
and Europe have grown at a rate of
2.2% and 4.0% respectively. On the
Figure 2: Number of international routes by region: 2003 and 2013
+32%
+61%
+20%
+68%
+57%
+33%
+31%
other hand, the Middle East, Asia-
Pacific region and Latin America have
shown growth rates of above 6% per
annum, specifically 11.9%, 7.2% and
6.5%. Growth in Africa has also been
remarkable with an increase of 5.1% in
RPKs since 2012. Most of the growth
can be attributed to economic growth
as well as to regulatory changes which
allow for greater market access.
If we consider the number of direct
international routes as a proxy to
measure connectivity at a regional
level, we can see that a significant
increase was observed by the Middle
East and Asia, with Europe’s routes
almost doubling since 2003 as a result
of the increased penetration of low
cost carriers and the subsequent
increase in point to point services.
Assessing direct and connecting
passengers further highlights the
aggressive expansion of the Middle
Eastern hubs, which experienced
larger growth in passenger demand
than any other region around the
world. (See Figure 3.) At the same
time, Europe saw strong growth in the
number of direct passengers, driven
mainly by the significant penetration
of LCCs in that market and a
subsequent increase in the number of
point-to-point services. Asia, Latin
America, and Africa have also shown
considerable growth, as opposed to
the more mature North American
market, which has seen a moderate
increase in the number of passenger
movements.
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Africa
Asia-Pacific
Central America
Europe
Middle East
North America
South America
Number of Routes
2003
2013
2 IATA (06/2014), Fact Sheet: Industry Statistics
3 RPKs are a common industry measure of air traffic which is calculated by multiplying the number of
revenue-paying passengers aboard the vehicle by the distance travelled
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Air connectivity: Why it matters and how to support growth
How are air connectivity
and economic growth
linked?
Aviation generates significant benefits
for the global economy. In 2012, it
contributed US$2.4 trillion to the
global GDP (3.4%). Direct benefits (i.e.
employment and economic activity
generated by the air transport
industry) are estimated at about
US$606 billion; indirect benefits
(generated by employment and
economic activity of suppliers of the
air transport industry) at US$697
billion.45 Aviation also plays a key role
in enabling the economic growth of
countries which rely on major hubs
such as Singapore and Dubai. In
Dubai, for instance, aviation generates
about 28% of the city’s GDP.
Therefore, we can see how improved
air connectivity plays a large role in
creating such economic value.
Obviously, it benefits travellers by
giving them access to a wider network
as well as more frequent and better
connected services. But it also can
strengthen a country’s economy over
the long haul, boosting productivity
through its positive impact on
businesses. For example:
• Increased connectivity reduces air
travel times, giving businesses
access to a wider marketplace.
• Increased connectivity makes it
easier for managers and executives
to oversee far-flung operations,
which infuses efficiency into those
operations.
• Better transport linkages enable
investment and human capital to
flow more freely across borders,
improving returns on investment
for some projects.
0
20
40
60
2003
2013
Pa
x(M)
0
100
200
300
2003
2013
Pa
x(M)
Europe
0
20
40
60
2003
2013
Pa
x(M)
Africa
Middle East
0
100
200
2003
2013
Pa
x(M)
Asia Pacific
+98%
+61%
+126
%
+88%
+110
%
+26%
+176%
+86%
Growth in Connecting Pax
Growth in Direct Pax
0
50
100
2003
2013
Pa
x(M)
North America
+65%
+22%
Latin America
0
20
40
60
2003
2013
Pa
x(M)
+219
%
+116
%
Note: The figure shows the travel patterns of passengers by region. It excludes domestic traffic. Latin America is defined as South America, Central America
and the Caribbean.
Source: Sabre/PlanetOptim Milanamos, PwC analysis
Figure 3: Direct and connecting passenger traffic, 2003 and 2013
4 ATAG (2014)
5 Note: other benefits generated by aviation include induced and tourism catalytic benefits which
in 2012 made up for the remaining US$1,131 billion.
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PwC | Connectivity and growth
With such insights in mind, PwC
conducted an econometric study for
the UK Airports Commission. The
study used seat capacity as a proxy for
air connectivity to estimate the impact
of improved connectivity on the UK’s
economy. The study revealed that a
10% increase in seat capacity could
improve:6
• Short-term GDP by 1%.
• Tourism by 4% within the UK and
3% among UK tourists travelling
abroad.
• Trade by 1.7% in terms of UK
product imports and 3.3% in terms
of UK product exports. UK service
imports and exports would also
improve by 6.6% and 2.5%,
respectively.
• FDI by 4.7% in terms of increased
UK FDI inflows and by 1.9% in
terms of increased UK FDI
outflows.
What drives air
connectivity?
Four main factors enable air
connectivity: geography, airport
infrastructure, airline models, and a
country’s regulatory and economic
frameworks. These enablers all play
an important role in ensuring that a
country can cement or expand its
global air network to enhance air
connectivity.
Geography
Air connectivity is especially
important to countries with isolated
air-travel markets (such as islands and
large geographical areas) where
passengers have few viable
alternatives to air travel. However, a
country’s geographical location can
enhance its ability to develop a
well-connected network. Examples
include Singapore, Hong Kong,
Incheon, the Middle Eastern hubs of
Dubai, Abu Dhabi, and Doha, as well
as the emerging Turkish hub of
Istanbul, all of which have exploited
their favourable position in the global
air-travel network to build strong hubs
with far-reaching spokes.
If we look at Europe, Asia, and the
Middle East, we can see how each of
these regions has capitalised on its
geographical location by capturing
intra- and inter-regional flows:
• Europe – Within a four-hour
radius, the EU’s main hubs can
draw mainly from European and
possibly North African
destinations. On longer haul
routings, the EU is a convenient
intermediate point for (especially)
East Coast7 North American traffic
to Asia.
• Asia – Asian hubs such as
Singapore and Hong Kong have
traditionally enjoyed advantages
with respect to traffic routes
between Europe and Australasia
and with respect to other points in
Asia where traffic to and from
Europe is less developed (such as
Indonesia and Vietnam).
• Middle East – Within a four-hour
radius of Middle Eastern locations
lie the eastern parts of Europe and
Africa as well as the highly
populous markets of the Indian
subcontinent. A range of
destinations fall within the scope
of a 12-hour flight from Dubai,
including China, Southeast Asia,
Australia, and the vast majority of
the African continent. However,
the majority of the Americas lie just
outside this radius.
Middle Eastern countries have
excelled at marrying a strong national
carrier with a route network that
supports it by leveraging on the
advantage that comes from being
located at the mid-point of major
traffic flows. Inter-regional transfer
traffic at Middle Eastern hubs has in
fact grown 15% per year in the last
decade – the largest such growth in
the world. (See Figure 4.) The strategy
adopted by Middle Eastern countries
has catalysed development of hub
services, which provide passengers
with benefits such as more convenient
travel itineraries, more frequent
flights, and a wider range of
destinations available within specific
flight times.
6 Airports Commission (prepared by PwC) (2013),
Econometric analysis to develop evidence on
links between aviation and the economy,
https://www.gov.uk/government/publications/
airports-commission-interim-report
7 Although West Coast North America is also within
the 12-hour radius of Europe, flights can reach
much of Asia direct in the westerly direction.
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Air connectivity: Why it matters and how to support growth
Airport infrastructure
Airports provide the connectivity and
access required for a modern economy,
enabling businesses to capture overseas
opportunities and facilitating the
coming and going of tourists – all of
which fuel economic growth.
Transport infrastructure acts as a
facilitator of growth unlocking latent
demand. Moreover, enhancement of
transport infrastructure, combined
with development of an extensive
network, can decrease general travel
costs for passengers and goods – thanks
to lower fares, shorter travel times, and
more seamless connections.
Analysis of what’s happening in
emerging companies can shed light on
the importance of airport
infrastructure for improving air
connectivity to foster economic
growth. For instance, some countries
– such as Indonesia, India, and Brazil –
have registered brisk growth in recent
years (driven by increases in population
and economic wealth). But
inadequacies in their current airport
infrastructure are preventing them
from fully capitalising on their growth.
Such infrastructure lacks the required
capacity, but boosting that capacity will
require considerable capital
expenditure.
Figure 4: Intercontinental transfer traffic
7m
3m
6m
39m
52m
32m
42m
33m
4m
42m
10m
4m
20m
3m
+2%
+4%
+2%
+6%
+15%
+5%
-
2003
2013
Note: The chart only shows interregional transfer passengers; it excludes direct passengers between regions as well as any passengers requiring more than
one connection and passengers travelling within the region. Turkey has been classified as Middle East.
Source: Milanamos, PwC analysis
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PwC | Connectivity and growth
In the past, LCCs have targeted mainly
the leisure passenger segment. The
low-cost model has traditionally
provided a ‘no-frills’ service that can
create demand by offering very low
fares as well as by serving destinations
that were previously not served or
only connected via a hub. The
availability of low fares has opened
the market to a wider group of
consumers and has enhanced
connectivity by establishing services
to and from secondary airports.
Point to Point
(Secondary Airports)
Short to
Medium Haul Intl
Homogenous
Fleet
Lower
Frequency
One Passenger
Class
One-Way Tariff
Hub & Spoke
Network
Domestic,
Short to Long-
Haul Intl
Multi-Fleet
High Frequency
2-4 passenger
classes
Multiple Tariffs
available
LCC
Hybrid
Network Carrier
Structure of
Network
Fleet
Geographical
network coverage
Schedules
Cabin Class
Fares
Alliances &
Loyalty Programs
No Alliances
Sales &
Distribution
Online Sales
Alliance/loyalty
programs
Agents/GDS,
Online Sales
Figure 5: Three airline business models
Airline business models
Airlines’ business models can directly
affect air connectivity. Indeed, over
the past decade, carriers have adopted
new models to survive in the face of
often unfavourable market conditions.
Such models fall into three broad
categories: low-cost carrier, network
carrier, and hybrid. (See Figure 5.)
Network carriers mainly operate
radial networks centred on their main
base or hubs. Their networks provide a
wide range of destinations and
frequent and flexible services that
meet the needs of both business and
leisure travellers. A hub-and-spoke
model consolidates traffic through a
hub and allows for lower-density
routes to become viable that may not
have been viable as a point to point
service. This helps to provide a
country (or city) with important links
and increased frequency of services to
the global air travel network.
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Air connectivity: Why it matters and how to support growth
With the most recent global financial
crisis, many business travellers have
gravitated toward LCCs for short haul
travel. To capture this new market,
some airlines are transitioning to a
hybrid model, providing reasonable
fares combined with the flexible and
frequent service business travellers
want.
Countries that can rely on strong
network carriers that use their hubs
efficiently are more likely to achieve
greater air connectivity than countries
served only by LCCs. However, this
likelihood also depends on what type
of air connectivity is central to a
nation’s economy; specifically, what
their leisure and business travel
markets want.
Regulatory and economic
framework
Public policy and regulation can
powerfully facilitate air connectivity
– or hinder it by constraining
development of a country’s air-
transport network. Since the 1940s,
international air services have been
governed by a complex web of bilateral
air services agreements (ASAs)
between States. Such agreements
determine the number of airlines that
may compete in any given market, the
routes that airlines may operate,
capacity (in terms of frequency, and
often the number of seats offered) that
airlines may provide, and airfares. In
recent years, some States have moved
to liberalise ASAs; for example,
through so-called ‘open skies’
agreements. Yet despite these open-
access models, restrictions remain.
Most notably, when it comes to
ownership and control of airlines,
most ASAs allow governments to
reject the designation of any airline
that is not owned and controlled by
the designating party. For the
foreseeable future, the prospect of
‘normalisation’ of air transport,
particularly with respect to
consolidation or cross-border mergers
of airlines, remains limited.
Governments trying to decide the
degree to which they want to liberalise
their ASAs would generally take a
number of factors into account. For
example, a country’s geographic
features influences the extent to which
liberalisation will boost air travel and
connectivity. Geography also dictates
the features of a country’s air-travel
market; in particular, whether it is
mainly domestic market, an
international market, or a transit point
for global traffic flows. The
attractiveness of the country to
tourists and businesses also matters,
with population affecting the size of
the potential market. For instance,
geographically isolated countries may
be more likely to see liberalisation as
being in their economic interest,
especially if they’re not attractive to
tourists or they don’t have the
population density needed to build a
competitive air-transport network.
Size and geographic location may also
influence a government’s attitude
toward liberalisation of airline
ownership provisions. Unfortunately,
ownership decisions can’t be made
unilaterally. Countries need
agreement from ALL the bilateral
partners who are most significant to
their markets – or they risk having
airlines with foreign ownership
rejected. This is a problem of growing
significance for governments seeking
fresh capital investment in their
airlines. As former flag carriers
experience distress, the need to
maintain air connectivity will raise
new questions about the role of
public- and private-sector investment
in the industry.
How can stakeholders
facilitate connectivity
growth?
With the exception of external factors
such as geography that are beyond
one’s control, stakeholders have the
ability to influence many of the factors
that enable achievement of greater air
connectivity. For instance:
Emerging countries can achieve
greater air connectivity by:
• Focusing on the development of
aviation infrastructure (such as
airports) – attracting new investors
and ensuring that enough capacity
is created to accommodate
demand.
• Airlines need to continue
establishing and building up their
networks to support the linkages a
country has with the rest of the
world.
• Developing regulatory and
economic frameworks which
reflect the characteristics and
needs of the country, whilst at the
same time, fostering air transport
growth.
On the other hand, more mature
economies will need to focus on
sustaining air connectivity by:
• Maintaining the current aviation
infrastructure (such as airports)
and ensuring any need for
additional aviation capacity is
promptly addressed to avoid loss of
air connectivity to other competing
neighbouring countries.
• Airlines should continue to find
new routes to enhance their
network connectivity which is vital
to the success of an airline. These
opportunities may be found in
emerging markets.
• Mature economies should examine
their regulatory and economic
frameworks to see that these are
continuing to enable growth.
The importance of air connectivity to
a country’s economic prosperity calls
for stakeholders to work together
towards ensuring that the right steps
are taken to improve or maintain the
global position of a country (or city)
within the global air network.
About the authors: Hayley Morphet and
Claudia Bottini are PwC air traffic demand
modelling professionals based in London.
(hayley.e.morphet@uk.pwc.com,
+44 (0) 20 7804 9032 and
claudia.bottini@uk.pwc.com,
+44 (0) 20 7213 5292).