Issue 2, 2012. April-May



George Welton

By any calculation flights to and from Georgia are growing at an impressive pace. While passenger numbers to Tbilisi International Airport dipped slightly from 2008 to 2009, there was 17 percent growth in 2010. The 29 percent growth in 2011 took passenger numbers to over one million for the first time.

The number of airlines is also increasing dramatically. The Airport Operator TAV lists 26 airline companies currently active in Georgia including three entrants in 2010 and four entrants in 2011.

In 2012 Qatar Airlines has already joined this group with Estonian, Alitalia and Aegean Airlines all expected to open in the coming months.

As Andy Ricover, a transport and logistics consultant for the USAID financed Economic Prosperity Initiative (EPI) project, says this has happened because "the market is completely liberalized."

This liberalisation has occurred, Ricover argues, because of strenuous efforts by the government to set up the right institutional framework for Georgian Aviation. "You cannot get a completely liberalized market without the right institutional framework because if you have conflict of interest between policy maker, market regulator and operator, you cannot ensure the independence in their judgment," he said.

Everyone agrees that this liberalization has pushed prices down. Ricover points out that prices from Armenia are significantly higher because the market is not liberalized.

For Levan Elizbarashvili, the general trade representative for Pegasus in Georgia, the difference in pricing is clear. "No matter what kind of airlines, they have all been dropping their prices. In 2010 no one could ever have imagined that Lufthansa would sell tickets for 300 Euro."

In addition, new airlines coming in from Dubai and Qatar have cut prices on flights from Tbilisi to destinations like Columbia and Thailand, according to Tina Zaldastanishvili, the managing director of Levon Travel. "Qatar Airlines are currently advertising prices of 300 Euros to Thailand, that ticket was 550 Euros before they entered the market," she said.

Competitive Pricing. How low can you go?

While prices generally have gone down significantly, both Levon Travel and Intercontinental Tour Agencies agree that flights to the US and western Europe have largely stabilized over the past four or five years.

This comes as a surprise to most people, who perceive that the high number of new airlines flying into Tbilisi would cause prices to continue to drop.

"New entrants always seem to be cheaper," said Iali Beshkenadze, General Manager of Aerosvit. "They enter the market with discounted prices to gain some attention and market share, but prices soon go up."

This highly discounted pricing is already a problem for some people. Roland Beridze, the vice president of Georgian Airways, for example, argues that some of the lowest cost tickets amount to price dumping, which hurts the market long-term. "What will happen in Georgia is that the company with the deepest pockets will win and the local market will be killed," he said.

To many, however, it is still unclear why flights to Georgia remain much more expensive than they are in the EU, where return tickets under 100 Euros are routine. Sector analysts and airlines agree that the issue is not airport taxes: at around $22 per person per flight, the taxes at Tbilisi International Airport are marginally higher than the regional average but not by much.

The problem is also not the availability of flights. "The bottleneck is not aviation anymore," noted EPI's Ricover, adding the policy of liberalization has helped. "If you have more demand then you can put in more flights immediately."

Three other factors, however, create expensive obstacles for Georgian flights: distance, volume and price differentiation. Georgian airlines cannot benefit fully from any of these three. The first is fixed. In terms of distance at 1,318 km (819 miles), Tbilisi to Istanbul is twice as far as London-Frankfurt.

The second, volume, is improving. With greater volume one can save on administrative costs and planes are more likely to be full.

Third, pricing structure is more complicated. In essence, in the ‘hub and spoke' system that makes up most of aviation market, flights between hubs and major destinations are cheap, but flights to more exotic destinations are more expensive. One of the reasons for this is that the airlines can charge more for business-class seats and tickets booked last minute by business travelers. In a market with fewer of these high-end consumers, tickets need to be closer in price, so the cheapest flights have to be more expensive.

All of this does not mean prices will stay where they are forever. As volumes go up we can expect prices to drop as economies of scale kick in and ticket prices become more varied. But price drops will almost certainly be more gradual than we have seen in the past.