ISET Economist Blog

The "Wizz Air Effect" or how Georgia Became Part of the Global Economy
Monday, 15 July, 2013

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 6.30 am we’ll board the Wizz Air flight to Katowice, Poland, at the cost of €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 minuscule 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 the 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, Kharkiv, Kyiv, 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:


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.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.