Numerous studies have indicated that the entrance of low-cost carriers (LCCs) has a significant impact on lowering airfares, not only in their own network, but across the whole aviation market. This has in turn stimulated traffic, with routes often experiencing a many-fold growth in passenger numbers. However, the effects of reduced fares from LCCs reach far beyond increased passenger traffic: there is a well-documented correlation between LCCs’ entrance into the market and a positive impact on the tourism sector as a whole.
The European Low Fare Airlines Association groups LCCs’ benefits to tourism into four categories:
- Reduces fares.
- Increases the number of tourist destinations due to usage of secondary airports. (For example, the London-Strasbourg route, previously used primarily for business, has proven to become a popular tourist destination with the entrance of Ryanair.)
- Distributes traffic more evenly throughout the year, reducing “seasonality effects” (passengers limiting their travel to traditional peak periods).
- Lowers off-peak fares, which have enabled mid-week holiday travel. This development distributes traffic more evenly across the week and reduces congestion at airports.
Empirical evidence suggests that when a low-cost carrier enters a market, prices fall by an average of 20 percent over the first four years, resulting in traffic increasing by about 50 percent over the same period. In the European market, for example, the entrance of LCCs has had a significant impact on tourism demand for the major six Comunidades Autonomas (autonomous communities) in Spain. One study forecasts that a 10 percent rise in the number of visitors using LCCs would increase tourist per capita figures from similar EU countries by 0.2 percent. Since LCCs’ share of passenger traffic has risen from 10 percent in 2000 to 53 percent in 2009, that projected impact is substantial.
Similar findings exist in other EU countries. One study that estimated the impact of Ryanair on the rural area around Frankfurt Hahn (known as the Hunrueck region) found an increase from 2.17 million of total number of overnight stays in 1998 to 2.34 million in 2002.
Less isolated islands
Island tourism has been particularly affected by the entrance of LCCs, especially in the areas of employment and accommodation revenues. The government of Malta’s decision to “incentivize” the entry of LCCs in 2006 is seen as a key driver for the country’s increased tourism figures in 2007. Tourism had experienced very little growth prior to 2006.
A separate study, which looked at the Korean island of Jeju, attributes the growth in number of tourist and accommodation revenue between 2005 and 2008 almost entirely to the entrance of Jeju Air, a low-cost Korean carrier. This research shows that LCCs accounted for 35 percent of total passengers in 2009 on the Seoul-Jeju Island route, corresponding to an average growth rate of 161.7 percent between 2005 and 2009. This stands in contrast to a -0.3 percent growth rate for full-service carriers.
The stimulation of new demand from reduced fares is especially important to the tourist economy. (“New demand” refers to passengers who have, due to a variety of reasons, never flown before.) Research confirms that the traffic generated by LCCs is a result of demand stimulation rather than cannibalization of existing carriers’ traffic.
These first-time flyers are also taking advantage of the host region’s service economy—hotels, restaurants, museums, and attractions. As this demonstrates, the emergence of affordable air services can have a crucial impact not just on
the aviation market, but on the entire economy of a country.