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A blog about economics in the South Caucasus.

The "Wizz Air Effect" or how Georgia Became Part of the Global Economy

On Monday evening I am taking the express train from Tbilisi to Samtredia with my wife and two kids (business class, 120GEL). We plan to stay overnight in a little family hotel (40GEL), and at 6.30am we’ll board the Wizz Air flight to Katowice, Poland, at the cost €40 a person and €35 per suitcase (one way). Seat reservations, luggage, train and guesthouse included, the roundtrip to Poland will cost my family around €700 compared to €1,500-2,000 using any other, conventional option. A real bargain! (even if we ignore the fact that my wife’s family is actually from Katowice!)

The renovation of Kutaisi airport and entry by a low cost carrier (LCC) are significant events in Georgia’s modern history. Yes, for now the choice of destinations served by Wizz Air is very limited and commuting from Tbilisi to Kutaisi presents a formidable challenge, certainly for the business travelers among us. Because of these limitations, in the first three months since opening in late September 2012, Kutaisi served a miniscule 4,000 passengers per month, as compared with the 2012 Tbilisi average of 100,000/month. Yet, the Kutaisi/Wizz Air option will no doubt have a strong positive impact on Georgia’s economy and its connection to the rest of the world.

Low cost carriers, such as Wizz Air, are a boon for competition in the travel industry. The 1993 report by the U.S. Department of Transportation coined the term “Southwest Effect” to describe the plummeting of fares and increase in the amount of travel to and from destinations that became part of the Southwest Airlines network. Airlines competing with Southwest Airlines resisted its entry fearing for their share and profitability in markets in which they enjoyed a near-monopoly. To some extent, their fears were justified: Southwest Airlines is currently one of the largest US carriers, driving its competitors out of business and enjoying near-monopoly in many markets (which, ironically, implies a reversing of the “Southwest Effect”).

Of course, Kutaisi and Tbilisi are far from being perfect substitutes, which for the time being limits the impact of Kutaisi/Wizz Air on competition. Due to infrequent flights, limited choice of connections, remote airport location and a lack of a convenient train/road link, Kutaisi is not really an option for Tbilisi-bound business travelers. Almost all Asian destinations – an increasing source of visitors to Georgia  – are not yet served by Kutaisi airport. Also, Kutaisi does not yet have sufficient capacity to handle cargo, which is likely to become a subject of fierce competition in the future.

That said, we do already observe competition on some of the most popular routes e.g. to/from Ukraine and Poland. Most directly affected are Ukraine International Airlines (about 10% of Tbilisi airport passenger traffic in 2012), Aerosvit and the Polish LOT, which serve the same destinations as Wizz Air (Donetsk, Kharkov, Kiev, and Warsaw).

The prices offered by Wizz Air are a fraction of airfares on the conventional carriers. Yet, at least for now, the gap appears to persist:

prices

Source: online search, July 2013

In addition to applying (moderate) downward pressure on airfares, Kutaisi Airport and Wizz Air help increase the overall volume of passenger traffic, making Georgia more accessible for European hikers and Ukrainian skiers, on the one hand, and making travel abroad (or back home) more affordable for many young Georgians, on the other. This conforms to the view of Georgian Airports Union’s director Ketevan Aleksidze, whom we interviewed in November 2012. According to Aleksidze, the two airports (Kutaisi and Tbilisi) serve different clientele: “those using Kutaisi airport are completely different, for instance, backpackers from Europe who wouldn’t have come otherwise”.

While perhaps true in the short run, with the further advancement of the East-West highway, and to the extent to which the state-owned “Georgian Railway” wakes up to the new Georgian dream, we are likely to see a significant portion of cargo and passenger traffic diverted to Kutaisi. This will apply strong pressure on airport fees charged by the Turkish monopoly (TAV) operating the Tbilisi and Batumi airports while creating the conditions for additional low cost carriers to enter the Georgian market.

Finally, we should not forget that Kutaisi is the geographic center and historical capital of Western Georgia. The new David the Builder airport thus serves an important regional development function. As discussed on the YFN blog, in addition to supporting the regional tourism industry, Kutaisi airport will add to the limited air freight capacity from Batumi, opening up new possibilities to develop high-value horticulture exports of cut flowers, citrus and fresh herbs from Western Georgia. Importantly, Wizz Air is not the only carrier operating out of Kutaisi Airport. Regular flights and charters are also offered by Ural Airlines, S7 Airlines (Sibir), Belavia and Georgian Airlines, connecting Imereti to Russia, Belarus and even Israel. And this is just the beginning.

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Guest - Mathias on Monday, 15 July 2013 14:25

I am curious to hear about the Kutaisi airport experience. Kutaisi is operated by a government owned company which still hasn't managed to set up a somewhat decent website with basic info, such as how you get to and away from the airport – which is something that incoming tourists would really need.

My understanding is that the high fees for the Tbilisi airport are the result of a not very well negotiated contract between the government and TAV, the company that was given the right to build and operate the airport, which apparently also included a clause preventing the government from having a second airport anywhere close to Tbilisi operated somebody other than TAV. The Kutaisi airport is apparently just outside that non-competition zone.

Does anybody know if the government is directly or indirectly subsidizing budget airlines that fly into Kutaisi? Ryanair, for example, is said to often require local governments to chip in and subsidize their airport fees in order for them to serve a specific destination.

I am curious to hear about the Kutaisi airport experience. Kutaisi is operated by a government owned company which still hasn't managed to set up a somewhat decent website with basic info, such as how you get to and away from the airport – which is something that incoming tourists would really need. My understanding is that the high fees for the Tbilisi airport are the result of a not very well negotiated contract between the government and TAV, the company that was given the right to build and operate the airport, which apparently also included a clause preventing the government from having a second airport anywhere close to Tbilisi operated somebody other than TAV. The Kutaisi airport is apparently just outside that non-competition zone. Does anybody know if the government is directly or indirectly subsidizing budget airlines that fly into Kutaisi? Ryanair, for example, is said to often require local governments to chip in and subsidize their airport fees in order for them to serve a specific destination.
Guest - Eric Livny on Monday, 15 July 2013 16:00

Mathias, thanks for raising these very important questions. I tried to look up the TAV concession agreement but so far was not successful. Information available for TAV's own website is this:
-- concession is of the BOT type, for 20 years (expires in 2027);
-- at US$22 per person the airport fee in Tbilisi is about 50% higher than in any other airport TAV currently operates (about US$15).

(http://www.tavyatirimciiliskileri.com/en-EN/Lists/Presentations/Attachments/34/TAV_Presentation_Jan.pdf).

I could not find any information on any restrictions the concession agreement places on the Georgian government as far as location of other international airports is concerned.

We are looking for information on airport fees, if any, charged by Kutaisi airport. Probably a very low single digit number, according to past announcement by Aleksidze. She was not reachable by email now that we tried to confirm

Mathias, thanks for raising these very important questions. I tried to look up the TAV concession agreement but so far was not successful. Information available for TAV's own website is this: -- concession is of the BOT type, for 20 years (expires in 2027); -- at US$22 per person the airport fee in Tbilisi is about 50% higher than in any other airport TAV currently operates (about US$15). (http://www.tavyatirimciiliskileri.com/en-EN/Lists/Presentations/Attachments/34/TAV_Presentation_Jan.pdf). I could not find any information on any restrictions the concession agreement places on the Georgian government as far as location of other international airports is concerned. We are looking for information on airport fees, if any, charged by Kutaisi airport. Probably a very low single digit number, according to past announcement by Aleksidze. She was not reachable by email now that we tried to confirm
Guest - Daniel on Tuesday, 12 November 2013 09:30

The Kutaisi Airport is somewhat a child of the old, pre-2012 government. Saakashvili wanted to scatter airports around the country, no matter if they make any sense economically: Mestia, Batumi, Kutaisi. Plans to restore airports in Ozurgeti, Poti, Zugdidi and Telavi. And the second runway in Tbilisi.

Of course, as a passenger I am always happy about new connections, especially if they also result in reduced fares. I am using KUT-WAW myself in december and can't wait for it!

But does it make sense to have so many airports in this small region? Batumi Airport is less than 100 km from KUT, the other projects in Guria, Poti and Zugdidi were already kliied (if they were really living at all).

In western Georgia we have 1,8 Million inhabitants. An airport serving western Georgia should be centrally located (KUT has a perfect location for that, btw.). But I don't see more than one airport having the chance to generate enough business to survive, let alone additional projects like Ozurgeti or Poti. Remember, we are talking here about western Georgia, mostly an incoming destination, as the majority of the population cannot afford trips abroad. We are not talking about an urban agglomeration like London here, where even four large airports are not enough.

Although I must say, Batumi Airport makes more sense for domestic flights. Kutaisi is too close to Tbilisi, the travel time (door to door) Tbilisi-Kutaisi would be the same by car as flying. I wonder, why no airline offers good day flights (there in the morning, back in the evening= between Tbilisi and Batumi? Oh wait, there was Air Batumi once, but they went bancrupt.

One more word to the annoying Tbilisi Airport: Why are all flights departing and arriving in the night? Between midnight and 6 am it is a madhouse, the rest of the day it is a cemetary. I already hear about projects of expanding the airport (2nd runway), when all they would have to do is to spread out the traffic.

The Kutaisi Airport is somewhat a child of the old, pre-2012 government. Saakashvili wanted to scatter airports around the country, no matter if they make any sense economically: Mestia, Batumi, Kutaisi. Plans to restore airports in Ozurgeti, Poti, Zugdidi and Telavi. And the second runway in Tbilisi. Of course, as a passenger I am always happy about new connections, especially if they also result in reduced fares. I am using KUT-WAW myself in december and can't wait for it! But does it make sense to have so many airports in this small region? Batumi Airport is less than 100 km from KUT, the other projects in Guria, Poti and Zugdidi were already kliied (if they were really living at all). In western Georgia we have 1,8 Million inhabitants. An airport serving western Georgia should be centrally located (KUT has a perfect location for that, btw.). But I don't see more than one airport having the chance to generate enough business to survive, let alone additional projects like Ozurgeti or Poti. Remember, we are talking here about western Georgia, mostly an incoming destination, as the majority of the population cannot afford trips abroad. We are not talking about an urban agglomeration like London here, where even four large airports are not enough. Although I must say, Batumi Airport makes more sense for domestic flights. Kutaisi is too close to Tbilisi, the travel time (door to door) Tbilisi-Kutaisi would be the same by car as flying. I wonder, why no airline offers good day flights (there in the morning, back in the evening= between Tbilisi and Batumi? Oh wait, there was Air Batumi once, but they went bancrupt. One more word to the annoying Tbilisi Airport: Why are all flights departing and arriving in the night? Between midnight and 6 am it is a madhouse, the rest of the day it is a cemetary. I already hear about projects of expanding the airport (2nd runway), when all they would have to do is to spread out the traffic.
Guest - Eric Livny on Tuesday, 12 November 2013 13:52

You are asking some very good questions, Daniel! The cost of an airport is what it is, but the benefits go beyond whatever fees the airport is charging. They are really sizable considering lower flight prices, the addition of European tourists, and the extra days they spend in western Georgia. There is also a very good synergy between the airport and other investments in the tourism and transport infrastructure in Imereti and other parts of western Georgia.

As for the Tbilisi airport, apparently this has to do with the timing of connecting flights in Europe and the time structure of airport fees, but I am not entirely sure...

You are asking some very good questions, Daniel! The cost of an airport is what it is, but the benefits go beyond whatever fees the airport is charging. They are really sizable considering lower flight prices, the addition of European tourists, and the extra days they spend in western Georgia. There is also a very good synergy between the airport and other investments in the tourism and transport infrastructure in Imereti and other parts of western Georgia. As for the Tbilisi airport, apparently this has to do with the timing of connecting flights in Europe and the time structure of airport fees, but I am not entirely sure...
Guest - Daniel on Tuesday, 12 November 2013 15:39

You are right, but I do not agree 100 %.

Cheap airfares are important for incoming tourism. Also, to make it possible to Georgians to afford trips to other countries themselves (the european visa regime is highly prohibitive, but hopefully this will change one day!)

But I also do not like the other extreme. I have been there with Ryanair (Bratislava-Nyköping for 16 Euro return; Bratislava-Beauvais for 20 and so on). These prices are ridiculously low, so how it is possible? These airlines milk the regions for subsidaries, they milk the airports for low rates, they milk their employees (low wages, minimum turn times, no trade unions and so on). And they blackmail everyone (you will not give me subsidaries? Then we cancel the route). Well, in Georgia worker's rights are non-existent, but is that scenario what we really want? I would prefer to cut down normal rates to a reasonable amount instead of only having the choice between two extremes.

Now concerning the incoming tourism in Imereti: The city of Kutaisi is full of Polish people, at least in summer. So it works out. But will the investment pay off? The season is short, only may till september. I wonder, how is the load factor in winter. I am going Kutaisi-Warsaw in december and will post my experiences here, if there is any interest.

About the night flights to Tbilisi: I always suspected it because of Tbilisi being a "loser destination". Noone is going there for the joy, only people who must go there (business travellers and expats), same with destinations like Yerevan, Almaty and so on. So people do not have a choice, they must take the red-eye. And for european airlines it is convenient, they can use an aircraft which would otherwise be standing around idle, leave at 22:00 and be right back at 6:30 the other day, just in time for the high-profit business destinations like Zurich or Frankfurt. Just my suspicion, though, would be nice if someone with more insight could elaborate on this.

You are right, but I do not agree 100 %. Cheap airfares are important for incoming tourism. Also, to make it possible to Georgians to afford trips to other countries themselves (the european visa regime is highly prohibitive, but hopefully this will change one day!) But I also do not like the other extreme. I have been there with Ryanair (Bratislava-Nyköping for 16 Euro return; Bratislava-Beauvais for 20 and so on). These prices are ridiculously low, so how it is possible? These airlines milk the regions for subsidaries, they milk the airports for low rates, they milk their employees (low wages, minimum turn times, no trade unions and so on). And they blackmail everyone (you will not give me subsidaries? Then we cancel the route). Well, in Georgia worker's rights are non-existent, but is that scenario what we really want? I would prefer to cut down normal rates to a reasonable amount instead of only having the choice between two extremes. Now concerning the incoming tourism in Imereti: The city of Kutaisi is full of Polish people, at least in summer. So it works out. But will the investment pay off? The season is short, only may till september. I wonder, how is the load factor in winter. I am going Kutaisi-Warsaw in december and will post my experiences here, if there is any interest. About the night flights to Tbilisi: I always suspected it because of Tbilisi being a "loser destination". Noone is going there for the joy, only people who must go there (business travellers and expats), same with destinations like Yerevan, Almaty and so on. So people do not have a choice, they must take the red-eye. And for european airlines it is convenient, they can use an aircraft which would otherwise be standing around idle, leave at 22:00 and be right back at 6:30 the other day, just in time for the high-profit business destinations like Zurich or Frankfurt. Just my suspicion, though, would be nice if someone with more insight could elaborate on this.
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