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1 Air - Sea Transport: Competitiveness or Complementarity in the Greek insular market? International Conference on Air Transport-University of Patras 2002 E. Sambracos Associate Professor in Transport Economics Dept. of Maritime Studies University of Piraeus sambra@unipi.gr Abstract This paper deals with the air and coastal shipping industries in the Greek insular market and the relationship they have developed in the passenger transport area. This specific geographical region is characterized by a large number of islands that need regular transport services for the passengers mobility all year round but especially during the peak summertime season, covering a high level of demand. There is a considerable number of small regional airports in the islands that operate as an alternative solution against sea transport, that today has the biggest transport market share. The article focuses on the notions of competitiveness and complementarity that may or may not exist between these two transport means. The above notions are approached through surveys that have been conducted by the Laboratory of Transport Economics of the Maritime Department of the University of Piraeus. The market analysis that resulted from the research studies on the users of both air and sea transport is presented as well as their impact on the operational policy of the air carriers. 1. Introduction Sea transport has always been the main way for the transportation of both passengers and cargo in the Greek insular market. Since the mid of last century the rapid development of air transport has caused many changes in the transport market of insular Greece. Can the present situation in the aforementioned region be characterized as competitive or complementarity between the two modes? In this question we reply through a survey that took place in three main routes for both sea and air passengers. In order to format an answer to the above question it is essential to develop the passenger's profile and therefore the needs that form the demand for each transport mode. 2. Coastal shipping and air transport passenger market in insular Greece 2.1 A market analysis

2 Up until the beginning of 1990, the Greek air transport market was a monopolistic one served by the national air carrier Olympic Airways. On July 1991 the internal air transport market was liberalized for airbuses, goods transport and charter flights. Civil Aviation stays responsible for the provision of licenses. Since the liberalization new private companies have entered the market, while in the same year the market share of O.A. was 69% (52% in 1999). Today, the domestic air transport market has the oligopoly characteristics, since there are very few operators that are interrelated and depended regarding their decision making and are offering homogeneous products. Referring to the competition base air carriers focus on price levels. The price competition strategies, the air transport companies have developed, have been in favor of big carriers that have economies of scale and consequently can afford low cost operation. Coastal transport in the Greek region could be characterized as a diverse, regulated oligopoly for two main reasons. First of all it posses the two main characteristics of an oligopoly, that are: the existence of a small number of enterprises offering tonnage that are highly interrelated and depended regarding their decision making the offering of homogenous or diverse products [1] The notion of the diversified product lies within the preferences of its consumer, whether they are real or deceptive ones, towards the specific product the oligopoly offers [2]. The main objective for the oligopoly is how to diversify the offered product always in comparison with the competition. In coastal sea transport, the involved enterprises are avoiding any price competition and choose to compete through diversification strategies. The aim is to attract more passengers focusing on quality factors [3], such as speed, improved areas for passengers, trained personnel etc. Secondly, the Greek coastal shipping industry is characterized by intense state intervention and regulation that has to do with the route scheduling, the fare, the license to enter the market [4]. This situation is about to be altered after the liberalization of the market on November 1 st 2002, according to the E.U. directives on fair competition. 2.2 The structure of the market Until the beginning of 1990, the Greek market was serviced by the Olympic Airways company covering a network of 35 destinations-airports, 9 of which are in the mainland and 24 are in the islands (figure 1). The network is a radial one, with every airport having connection principally with the Athens airport ans secondlarly with Thessaloniki airport [5]. Generally, the connection between the major urban and tourist centers is adequate, apart from some small exceptions. The main problem is congestion and inadequate service especially during peak hours. On July 1991 the internal air transport market was liberalized and more carriers are involved in the market. Yet O.A. holds the largest market share since more than 3,5 millions of passengers traveled with the national carrier in Coastal shipping undertakes the greatest part of the passenger flow to the island regions, whether for domestic tourism, or for foreign visitors. Especially for the smaller islands, that have no airports and ships constitute their only means of transportation, the frequency and regularity of calls is a decisive factor in being

3 chosen as a destination (Table 1). The coastal shipping transportation network appears especially complex [6], since it includes over 100 islands to serve, 190 passenger ports, 150 of which service coastal shipping lines, 1200 direct connections between ports with a frequency of at least once a week and satisfies a demand of over 15 million passengers per year (figure 2). Table 1: Passenger movement to the main coastal shipping routes islands in 1994 Main routes By air By sea Total traffic Athens - Kos 47,5% 52,5% Athens - Rhodes 52,9% 47,1% Athens - Kassos 1,5% 98,5% Athens - Karpathos 39,4% 60,6% Athens - Astipalaia 26,3% 73,7% Athens- Leros 16,4% 83,6% Athens - Syros 9,2% 90,8% Athens - Myconos 26,0% 74,0% Athens - Santorini 34,9% 65,1% Athens - Milos 20,1% 79,9% Athens - Paros 7,5% 92,5% Athens - Naxos 4,8% 95,2% Athens Chania 22,5% 77,5% Athens Heraclio 31,3% 68,7% Athens Siteia 15,4% 84,6% Athens Limnos 67,1% 32,9% Athens Mytilini 41,0% 59,0% Athens Chios 43,5% 56,5% Athens Samos 46,5% 53,5% Athens Skiathos 32,2% 67,8% Athens Skiros 14,9% 85,1% Athens Kithira 75,0% 25,0% Total 30,4% 69,6% Source: Hellenic National Statistics Services, Statistical Tables of Greece

4 Figure 1: O.A. Air transport network Figure 2: Coastal shipping network

5 The existing coastal shipping network is a radial one with the port of Piraeus being the most important point in the transportation network. This means that the majority of the coastal shipping lines starts and ends at the port of Piraeus, which causes important congestion and delay problems to the port, especially during peak traffic periods Transport demand structure Demand for transport is considered to derive from the demands for the goods or services that transport helps to produce (derived demand). Therefore passenger transport derives from the need of passengers to travel for professional reasons, recreation etc. The main determinants of sea transport demand [7] in our case are: the price of the ticket (fare) the existence of substitute transport means (air transport) the population of the region the income levels of the population the quality of the offered transport product the preferences of the consumers and the seasonal character of Greek coastal shipping (peak and off peak seasons) For air transport, the determining factors of demand are identical to those of the coastal passenger shipping, except the income that plays a more important role in air transportation since fares are more expensive related with the sea fares and require higher incomes. Another common characteristic of the air and sea transport is the seasonality of demand, that in the case of air transport shows smaller peak periods and vice versa. According to the Olympic Airways data, passenger transport shows maximum on August (50% higher of the mean traffic) and minimum on February (43% lower of the mean traffic). 2.4 Comparing the two sectors By examining the data regarding the development of both sectors, it is concluded that coastal shipping and air transport have shown unequal development over the last years. It is also undeniable that competition, and there are markets where the two transport modes are competitive, should be in favor of the airplane, due to its favorable characteristics on quality. But why did sea transport showed a higher level of development? What is going to happen after the liberalization of the coastal shipping market? There are questions that we will try to answer with the use of a survey conducted by the Laboratory of Transport Economics that reveals the Greek passengers' profile and the way they perceive these two alternative ways of travelling.

6 3. Towards a typology of the users profile The survey In order to understand the profile of the user of sea and air transport services a survey were conducted, using questionnaires [8]. The survey took place in the Western Airport of Elliniko and at the seaport of Piraeus on February 17 th The passenger sample was taken for three main destinations: Athens Mytilini, Lesvos Athens Rhodes and Athens Heraclion, Crete The above-mentioned destinations were chosen for the following reasons: They are the biggest islands in the regions of southern and northern Aegean sea They show major passenger flow during all seasons They have both sea and air ports, in contrast with other smaller islands The dates of the surveys were chosen due to the fact that they represent an off peak season with people moving not only for recreation or holidays as during the summer high season. A total number of 100 questionnaires were gathered for each mode of transportation. The composition of the questioned passengers in both cases is presented in the following table: Table 3: Composition of Passengers Destination By Sea By air Male Female Total Male Female Total Athens - Mytilini Athens - Rhodos Athens - Heracleon % 30% 65% 35% 3.2 The passengers profile In order to determine the passengers profile four factors were taken into consideration: The age of the passengers The Occupation of the passengers The reason for the trip Whether they travel alone or with family/friends Whether they need private cars in their movement The total results that form the passenger profile for both transport means is presented in the following table 4.

7 Table 4: Passenger profile Coastal Passenger Shipping Air Transport Sex 70% male, 30% female 65% male, 35% female Age years old (50%) years old (42%) >50 years old (6%) <18 years old (2%) (58%) years old (24%) >50 years old (18%) <18 years old (0%) Purpose of trip professional reasons 43% military reasons 29% recreation/holidays 12% educational reasons 15% health reasons 1% Traveling status Need of private car professional reasons 33% military reasons 24% recreation/holidays 23% educational reasons 12% health reasons 8% With family, friends (69%) Alone (60%) Yes (83%) Yes (70%) As observed from above, there are similarities between the demographic characteristics, although air transport is preferred mostly by young people aged 18-30, and all other ages (>30) have almost equal percentages. In sea transport on the other hand, people aged cover more than 90% of demand. The main difference between the modes lies in the travelling status, where the majority of air travelers, travel alone, apparently for cost reasons. The last question had to do with the importance of road transportation and the development of a combined passenger transport. 3.3 Passenger's perception towards air and sea transport In order to understand the passengers preferences towards the sea and air transport as well as the reasons for choosing the one against the other mode, three questions were addressed. The first one deals with the reason for choosing the specific mode of transport. The factors affecting their decisions categorized as following: the cost of the trip (c) the existence of a substitute means of transport (s) the quality of the service (q) the time the trip involves (t) the feeling of fear towards the mean (w) and whether the route was appealing (r) Therefore demand for transport is a function of all the above parameters, that is D = f (c, s, q, t, w, r) Passengers are using the seagoing vessels mainly because of the lower cost (64%) secondly because they can take their car with them (20%) and thirdly because the

8 specific route suites their needs. A small percentage of them (6%) pointed out fear for the airplane as the main reason for not using air transport (Table 4). As for passengers using the airplane, the big majority of them (60%) prefers air transport mainly because is less time consuming in comparison with the sea vessel. The second reason is the route the vessel follows (22%) and then comes the quality (11%), the fear for sea traveling (9%) and the cost (3%) (Table 5). Table 4: Reasons for using seagoing vessels and not the airplane Sex Cost Fear Car need Quality Route Athens - Mytilini Male Female Total Athens - Rhodes Male Female Total Athens - Heraclion Male Female Total Total Table 5: Reasons for using the airplane and not the seagoing vessels Sex Cost Fear Time Quality Route Athens - Mytilini Male Female Total Athens - Rhodes Male Female Total Athens - Heraclion Male Female Total Total It is therefore concluded that cost and time are the two main factors that passengers take into account when traveling. Air passengers consider time as the most important demand factor while sea travelers consider cost when choosing their transport mode. Their preference can be quite justified if we consider the following two tables showing the elements of time and cost for both transport modes as of February 2000.

9 Table 7: Cost and travelling time by sea and air transport Sea transport Travel Time Cost (in GDR) Economy Class Cabin Athens - Mytilini 13h Athens - Rhodos 15h Ath. - Heracleon 10 to 13h Air transport Travel Time Cost (in GDR) One way Return ticket Athens - Mytilini 45' Athens - Rhodos 55' Ath. - Heracleon 50' Source: Ministry of Merchant Marine Moreover, as to whether passengers would prefer the other mode of transport if there were reductions in its cost, sea travelers were in favor of the idea of a cheaper airfare, while air travelers showed little interest in lower sea fare. More specifically, 76% of sea travelers would choose the airplane it was cheaper while only 31% of air travelers would chose the ship. 4. Implications for air carriers The survey showed that there is not substantial competition between the two modes mainly because passengers have different perceptions, that mainly derive from their income status. Those who value cost as the most important factor, travel by sea and those who prefer quality in terms of time, prefer the airplane. Thus there are certain differences in the profile of the passengers. It is concluded that for an air carrier to attract customers, the notion of different cost levels should be well considered, while forming the appropriate pricing policy. Since there are customers with different elasticity of demand there should be a policy that would attract new customers from the sea transport area and also consider the so called "producer surplus", i.e not lose income from those who can pay higher fares. Price discrimination policy [9] is the one that could be applied, that includes different pricing levels according to the elasticity of demand. Such a policy is of great importance today due to the changes in the coastal shipping organization. More specifically, in view of the liberalization of the coastal shipping market (cabotage) in November 2002 and the upcoming internal competition, maritime companies are already introducing new quality standards in the market. The main breakthrough, is the building of new high speed vessels, in order to satisfy the demand for low travelling time in a competitive price [10]. The new status in coastal shipping will affect the existing relationship between the two markets. Questions therefore rise and thoughts for the developing of a competitive relation between the modes in the insular market of Greece and the way it will affect the decision making process in the air sector. The airplane is loosing its eminence in terms of travelling time and now has to compete with the

10 ship in terms of price. It is therefore essential now and mainly after the liberalization of the coastal shipping market for the operator to adjust his operational policy according to the level of competition with sea transport. 5. Conclusion The liberalization of coastal shipping market is expected to affect radically the operation of the whole system, since price, routes and entering in the market will be subject to free competition. Apart from the changes in the maritime system itself, a new era will commence also for the high cost air transport sector. The intense internal competition between maritime companies has already shifted competition to quality with emphasis on the travelling time, through the introduction of high speed vessels. Therefore the predominance of air transport in terms of travelling time is now under consideration. The non competitive but rather complementary traditional relation between sea and air transport has already started to change since both modes are now competing on time and price as well. This situation will be more apparent in the after - cabotage years and will have a great effect on the operation of air carriers. References [1] Gamaletsos Th. Theoretical Economics, Vol. B, 3 rd Edition, Stamoulis, pp. 136, 1992 (in Greek) [2] Ibid. pp 138 [3] Sambracos E., Gatzoli A. Quality characteristics of passenger coastal transport. Essays in honor of late Prof. B.N Metaxas, pp , 1997 (in Greek) [4] Goulielmos A. Greek coastal passenger shipping in front of liberalization, International Journal of Transport Economics, Vol XXV No 1, pp , 1998 [5] Sambracos E., Gatzoli A., The coastal shipping problem and the consequences from the competitivenes between modes, 2 nd One Day Conference on Transport Economics "Maritime Transport and Air Transport: Competitiveness and Complementarity", University of Piraeus, pp , 1996 [6] Basdani H. Coastal Shipping Transport and tpurist development of small islands 3 rd One Day Conference in Transport Economics: Transport and Tourism, University of Piraeus, pp.35-49, 1999 (in Greek) [7] Sambracos E. Introduction in Transport Economics 2 nd Edition, Stamoulis, pp , 2001 (in Greek) [8] Kokolia E. Air and sea transport service in the Greek insular Market, University of Piraeus, Department of Maritime Studies, Bachelor Essay, 2000 [9] Sambracos E. Introduction in Transport Economics 2 nd Edition, Stamoulis, pp , 2001 (in Greek) [10] Goulielmos A. The economic process of the Greek Coastal Shipping transition ( ) 2 nd One Day Conference on Transport Economics "Maritime Transport and Air Transport: Competitiveness and Complementarity", University of Piraeus, pp 28-52, 1996 (in Greek)