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Low Cost Airlines Achieving Rapid Growth in Central
and Eastern Europe; Budapest Hotels Adjusting
Service Offerings to the Needs of this Emerging
Segment, the Budget Airline Passenger

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Budapest, 23 March, 2005 

Low cost airlines have achieved and still face rapid growth: according to a new survey by the Travel, Leisure and Tourism Group of KPMG in Central and Eastern Europe, about 14% of Hungarians who plan to travel abroad in 2005 will use budget airlines, compared to 5% last year. “The market share of budget airlines is projected to reach 35 % in Hungary by 2010 (with 4 million passengers), from the current 15 %,” Andrea Sartori, partner and head of the KPMG TLT group in CEE said, revealing the findings. “Our research proved that budget airline passengers are not necessarily budget travelers and the money saved on air fares is often spent on other tourism services, such as hotels,” he added.  

Hungarian air traffic has been recovering since the bad years of 2001-2002. In fact, in 2004 Ferihegy airport became the third busiest airport in Central Europe after Vienna and Prague, with 6.5 million passengers registered, a record number, which is more than a 28% increase compared to 2003. Budget airlines have contributed to this growth significantly by focusing on a new passenger segment. After only one and a half years of operation, the budget airlines flying to Budapest already account for over 15% of the total market share at Ferihegy airport, with 5 low cost airlines in the top ten at the airport, based on numbers of passengers. 

The KPMG survey confirms that the appearance of the low cost airlines did create new traveler segments in Hungary. “About one quarter of leisure travelers and 8% of business travelers would not have traveled if there had been no such low fare opportunity”, Andrea Sartori said, quoting the findings of the survey. 

While most travelers obviously choose low cost airlines for their low fare, 24% of respondents preferred the more flexible schedule of a low cost airline to other airlines and 9% found that only a low cost airline had service to the required destination. Some business travelers also mentioned that a growing number of their business partners get located close to the airport which low cost airlines use. Big companies, on the other hand, still tend to prefer traditional airlines: respondents mentioned that the top management of large companies expect high quality services (e.g. more flexibility in booking flights, business lounge, on-board catering, etc.) Furthermore, low cost airlines often use airports relatively far from major city centers. 

Nevertheless, since both leisure and business travelers are very price-sensitive in Hungary, low cost passenger traffic is expected to further grow in the coming years. “We assume that the gap between the market share of Malév (currently about 49%) and other traditional carriers will narrow and by 2010 low cost carriers are expected to reach about 4 million passengers, which is a 35% market share,” Sartori said 

It is also important to note that, contrary to common belief, low cost carriers actually grow the entire air passenger market, rather than “cannibalizing” form traditional airlines. Since the appearance of budget airlines, the frequency of weekly flights grew significantly while ticket prices fell, even for traditional airlines on certain routes. 

According to Sartori, in a more and more competing air travel market the customer is only clear winner. The increasing competition forces Malév and all other traditional airlines to re-think their pricing strategies and business models. Due to market pressures, major international carriers have already started to transform their operations and either focus on the service-conscious passenger segments (e.g. British Airways and Lufthansa with premier services for their business class travelers; SAS introducing three classes of travel), or become more competitive by simplifying the product they offer (e.g. Aer Lingus eliminated business class and now targets budget travelers).

Among other factors, the improved accessibility of Hungary by air undoubtedly also contributed to a record number of visitors in 2004. Hotels in Hungary had an excellent performance in terms of international tourism arrivals and guest nights last year. Occupancy rates in 3, 4 and 5-star hotels increased by 4.6%, 6.2% and 9.8% respectively compared to 2003, while revenues also increased by almost 11% compared to 2003.

The KPMG survey demonstrated that Budapest hotels have indeed experienced the impact of low cost airlines: according to interviews performed with hotel executives

  • check-in and check-out times have extended significantly in hotels (clearly due to late arrivals or early departure times of low cost airlines)
  • for some hotels 2004 was an outstanding year in terms of the number of guests arriving from the U.K. and Scandinavia – countries where budget airlines are most popular. 
  • demand during the low season (November-February) has increased in 4 and 5-star hotels and occupancy levels have been more evenly spread, as a result of the improved accessibility of Budapest. 
The KPMG survey concludes that hotels and other stakeholders of the tourism sector will have to focus more on travelers of budget airlines and adjust their service offerings to the needs of this emerging segment. Furthermore, hotels could push their value proposition through joint promotions with low cost airlines.

“The growing competition among airlines will increase the pressure on airport developments as well: both Ferihegy airport and the accessibility to the city centre will need to undergo major developments in order for Budapest to successfully face the challenges of a growing air travel market. Regional airports, which could offer their services at a lower fee, have a great potential to capitalize on this market opportunity,” Andrea Sartori commented. 

Methodology of research study
The KPMG study is based on a series of primary and secondary research. Primary data was collected during January-February 2005 and included: 

  • Telephone survey of 1000 people on a national basis, representing the adult population of Hungary;
  • Questionnaire-based personal interview with 400 passengers of low cost airlines, arriving or departing at Budapest Ferihegy airport;
  • Questionnaire-based survey and in-depth interviews with hotel managers, travel agents, top companies and airlines.
In performing our analysis KPMG has also considered statistics provided by national and international tourism organizations, the Central Statistical Office, low cost airlines and passenger traffic figures from the Budapest Airport.

KPMG is the global network of professional services firms of KPMG International. Our member firms provide audit, tax and advisory services through industry-focused, talented professionals who deliver value for the benefit of their clients and communities. With nearly 94,000 people worldwide, KPMG member firms provide audit, tax and advisory services from 717 cities in 148 countries.

KPMG in Hungary employs 400 staff, with KPMG Hungária Kft. offering audit services and KPMG Tanácsadó (Advisory) Kft. offering comprehensive advisory services for Hungarian and multinational companies, government entities and inward investors.
 
© 2005. KPMG Tanácsadó Kft., a Hungarian limited liability company is a member of KPMG International, a Swiss cooperative. All rights reserved.

Contact:

Scheibelhoffer Miklós
Media Relations
Tel:  887-6536
Fax: 887-6531 
e-mail: miklos.scheibelhoffer@kpmg.hu    

Also See: Budapest Upscale Hotel Rooms - Is It an Over Supply Situation? / Andrea Sartori / April 2003
Four Seasons Hotel Gresham Palace Budapest Opens After a $110-million Restoration / June 2004

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