The rapid development of low cost no frills airline travel has been the most significant development of new business in recent years. Pioneered in the USA by South West Airlines, it developed rapidly in Europe through Ryanair, easyJet and Air Berlin and then moved into Asia with Air Asia, Tiger Airlines and others creating a new market segment. This change has made air travel available to a much wider proportion of the population and also affected the traditional full-service airlines forcing them to review their offering and cut costs to be able to offer lower fares whilst growing, or at least, maintaining, their critical market share.

The rapid development of low cost air travel has catalysed growth for airport capacity, especially at the second and third tier regional airports which offer lower cost and sometimes easier access on and off aircraft than the slot congested major hubs, where capacity at desirable times is often severely limited. Operations at smaller airports also allow easier and faster aircraft turnarounds, essential to the low cost airline model of higher utilisation. As a consequence of this change many regional airports grew traffic very significantly faster than traffic at major hubs over the last 10 years.

At the major European hubs traffic continues to grow where possible but for many airports (especially in SE England) the refusal or slow acceptance by governments of the need to build additional runway capacity has slowed development. In general the development of the major hubs in Europe Paris (CDG), Amsterdam and Frankfurt has progressed at a much faster pace than in the UK.

The funding of airport development has generally been directed towards the marginal development of existing facilities and, where a major expansion has been agreed, it has been generally supported by government or local government guarantees. Commercial banks are generally unwilling to accept prospective traffic risk without additional support of pledges against existing revenue streams or guarantees. Many regional airports have been expanded as a result of their acquisition by private property companies that have been willing to take the risk. Lack of funding generally has held back the development of many regional airports and this in turn may be inhibiting their potential traffic growth.

Efficient management of airports is critical to the success of the industry especially at the major congested airports which have been affected by long-standing organised labour practices that have often inhibited reform and performance improvement. Traditional airport management has been subjected to radical change with the injection of senior management with varied business experience gained outside conventional aviation sectors. The emergence of airport retailing as a significant generator of additional income has, to some extent, cushioned the impact of competitive and regulator pressure for airports to improve performance. Customer service excellence developed first in SE Asia has now spread worldwide and all airports are under increasing pressure to improve the customer experience of passengers using their airports.

Secondary and tertiary airports in Europe have always been under much greater pressure to perform efficiently as their airline customers have been much more price sensitive than airlines using the major hub airports. Commercial opportunities remain to be developed at many smaller airports in Europe and this is an opportunity that needs to be significantly developed over the next few years.

In Europe many civil airports have been developed on the site of a former military base and as a consequence the sites directly or indirectly have been owned by governments. Sometimes the airports have been owned directly by the military while others have been owned by local governments that have acquired the former military bases converting them over time to civilian use. Funding for the development of these airports has often been a problem for local authority governments which periodically come under pressure from Central Governments on spending restrictions. This situation has encouraged the partial or full sale of airports to private industry in the form of property companies, groups of financial institutions and sometimes initial public offerings (stock market flotations) as was done by the UK Government for BAA. These privatisations have been seen as a way of bringing in more entrepreneurial management into airports as well as private capital for development. There is some evidence that this process has been successful at achieving better value for money for capital projects and improved customer service for passengers using the airport. The main drawback of privatisation seems to be reduced government support for major airport projects and a preference to develop airports on a marginal basis rather than tackling fundamental issues with major projects.

In the airline sector most of the major airlines such as Lufthansa, Air France-KLM, BA-Iberia, Ryanair and easyJet are publicly quoted companies with share prices subject to daily change on the European stockmarkets. Lufthansa is in the DAX30, Air France-KLM in the CAC30 and BA-Iberia in the FTSE100. Government investment in these airline groupings is less than 50%. However many other European airlines remain under partial or full government control and there remain some opportunities for privatisation through trade sales or initial public offerings (IPOs).

Environmental taxation of civil air travel has become a live and controversial issue amongst governments and intergovernmental organisations. Some governments in Europe (notably the UK) and now Australia have imposed so-called environmental taxes in the form of Air Passenger Duty in the UK and a carbon tax in Australia. There is no doubt that unilateral imposition of these taxes places the airlines based in these countries at a competitive disadvantage compared to those in neighbouring countries without such levies. There are signs that major intergovernmental agencies such as the EU are seeking a common approach on the imposition of emission taxes on civil air transport that will affect the UK Air Passenger Duty levy. There is some evidence that environmental levies are having a modest impact in reducing the demand in growth for air travel. In the case of the UK a number of airlines have recently switched longhaul flights from the UK to continental Europe where there are no or lower environmental taxes.

Mergers and acquisitions have been a very significant factor in both the airport industry and the airline industry. In Europe the major airport groups Fraport and Aeroports de Paris have been investing heavily in other airports in international markets, while in the UK a substantial proportion of the airport sector has now been bought by foreign investors. This trend can be expected to continue as the major indigenous groups with the notable exception of the Manchester Airport Group seem to have a low appetite for purchasing additional airports in their domestic market. Acquisition of equity stakes in the major European hub airports (Amsterdam, Charles de Gaulle and Frankfurt) is likely to remain restricted for some time to come as there is an unwillingness amongst these governments to see control of their major airports pass into foreign hands especially since the acquisition of BAA by Ferrovial has led to a number of problems in the UK.

In the airline sector the merger of airlines has accelerated significantly over the past 5 years and three major groups are now emerging amongst the traditional full-service sector led by Lufthansa in clear first place followed by Air France-KLM and very much in third place BA-Iberia. Most of the remaining independent full service airlines have joined one of these groupings as alliance partners and it is probably only a matter of a relatively short period of time before they are acquired outright by the relevant parent company.

In the low cost airlines sector Ryanair and easyJet are the clear leaders followed by Air Berlin. easyJet and Air Berlin have been active in acquisitions, while Ryanair has grown through the expansion of its own services. It is likely that further mergers will take place in the low cost airline sector.