REPORT BY GUNTER ENDRES IN LONDON
UK budget airlines have taken Europe by storm. So far, however, there has been little response from would-be "no-frills" competitors on the other side of the Channel
The advent of the budget airline in the UK has resulted in a fundamental change in travel patterns there. However, low-cost carriers in continental Europe have not fared nearly so well. What are the reasons for their relative lack of success, and what can they do to jump-start their own development?
The low-cost concept in the UK met with success almost from the start, and the growth of these airlines shows little sign of abating. Latest figures indicate that budget airlines in the UK have doubled their share of the market to above 15% over the last year.
And it is not only the country's leisure travellers who have signed on. While low-cost travel appealed initially to the cost-conscious holidaymaker, more and more business people are taking advantage of the big savings to be made by-passing the high-cost major carriers.
A report earlier this year by UK credit-card operation Barclaycard found that over the past two years, the number of UK business travellers using low-fare airlines has almost doubled. The survey shows that more than half of all business travellers used a budget airline last year, and 96% of those said they would do so again this year.
Simon Chick, head of marketing with Barclaycard, says: "We know from our survey results that the majority of business travellers believe business class on traditional airlines does not represent value for money. This may explain why so many are now looking to the cheaper carriers as a solution." A biennial survey in Holiday Which, a magazine published by a UK consumer watchdog, came to much the same conclusion, suggesting that low-fare airlines are "soaring ahead of charter airlines and existing short-haul scheduled airlines". Interestingly, the airlines scoring the highest marks were all UK-based. The lack of "frills" is certainly not proving a disincentive to the business traveller.
European impact
While thriving in the UK, the concept of the low-fare airline has made little impact in Europe's other prime markets: France, Germany and Italy. Figures from the OAG schedules database suggest that despite its massive growth, the no-frills sector made up only 5% of total intra-European scheduled seat capacity in summer 2001. So excluding the core UK market, it accounts for perhaps no more than 2% in the rest of Europe.
A shortage of home-based airlines serving this relatively new market is obviously a sign of a lack of progress on that front. While it could be argued that British Airways subsidiary Deutsche BA offers lower fares in the intra-German market, its cost structure means it can hardly be classed as a low-cost airline in the traditional sense.
Flag carrier Lufthansa once toyed with setting up a carrier based on a low-cost model, but pulled out upon realising that it could not reduce its cost base sufficiently to make it viable.
The aforementioned dearth of low-fare carriers partly explains the shortfall, but differences in market dynamics, in approach and in travel patterns in mainland Europe are perhaps more material.
"We sometimes forget that Britain is an island," says Ryanair director for sales and marketing Tim Jeans, "and we have a stretch of water to cross. The Channel tunnel has not fundamentally altered access to Europe, except to Brussels and Paris, which Eurostar serves directly."
"What that means," he adds, "is that the UK market has a higher propensity to fly than the continental European market where people can still drive. What is often not realised is that, for low-cost airlines, the biggest competition is not trains but people using cars. So, on the continent, they are excluded from the very short flights, having to fly from northern Europe to southern Europe, and back to the UK or Ireland to make air travel competitive with other forms of transport."
"Market dynamics," he adds, "are somewhat more testing than they are in the UK, which has, historically, punched above its weight in aviation, and this has been replicated in the low-fare market." Commerzbank airline analyst Chris Tarry echoes this, pointing to the more highly developed, efficient and heavily subsidised surface transport modes in Germany and France, particularly the high-speed trains. Because of this, he believes, there are limits to the growth of low-fare airlines on the continent.
Dr Borislav Bjelicic of Deutsche Verkehrs Bank argues that Germany has a strong charter airline sector with a high proportion of seat-only sales. These airlines could, he says, be classified as low-fare carriers, although their routes - while operated on a scheduled basis - are mostly to leisure rather than business destinations. Others point out that lack of frequency in markets - most charter carriers make one daily flight to each city - also keeps them from competing effectively with scheduled airlines.
Bjelicic suggests that if charter consolidation in Germany continues apace, smaller carriers such as Air Berlin, which has a low-cost base and common fleet structure - the formula made popular by US low-cost paragon Southwest Airlines, the standard against which all low-fare spirants are judged - could play a role.
However, an Air Berlin spokesman has ruled out any intention of entering the low-fare scheduled business travel market, saying it does not fit its business model. It would also be a courageous step to take on the might of Lufthansa, which is regarded as an aggressive defender of its home patch, using "several instruments" to retain its customers, including a highly effective frequent-flyer programme.
Lufthansa's flight pattern and pricing levels on the Munich-London Stansted route at one point forced Go from the market (though the UK carrier announced in mid-October it would return) and is providing serious competition for Ryanair.
German challenge
Virgin Express and the now-defunct Debonair also tried to launch business routes within Germany or from Germany to the UK. But, at the time, ticketless flying was a new concept for the German market. An Air Berlin spokesman says German business travellers also have higher standards than those in the UK. Apart from punctuality, they "like to have a ticket and a sandwich in their hands", he adds. Yet, most of Ryanair's tickets in the Germany-UK market were purchased in Germany, indicating that German travellers do have an appetite for low fares - one which has not yet been satisfied.
A shortage of enough suitable low-cost airports may be another reason why Germany has not produced any budget airlines. The same does not apply to France, however, where many airfields lie close to the main population centres, and many more serve secondary cities.
Offering long-term incentives to new entrants is also an accepted practice in France. This illustrates, according to Jeans of Ryanair, that the French market has developed differently from Germany's, creating a comprehensive network of third-level services from regional airports all over the country.
Also, Jeans adds, the French fly abroad much less often than Germans and Britons. Within France, the TGV high-speed rail network has also taken a large share of domestic traffic. This has been further boosted by the extension of the high-speed line to the country's Mediterranean coast.
Tarry at Commerzbank adds that labour laws are much more restrictive in France, making it difficult to set up a truly low-cost operation. Air France has taken control of the market through expanding its influence to all areas with the acquisition of various regional airlines, leaving little scope for new entrants. It has been helped by the failure of Air Liberté/AOM and Air Littoral to mount effective challenges.
All this is not to say that Ryanair would not consider setting up a hub in either France or Germany. When the airline set up a hub in Brussels Charleroi last March, airports near Paris, Frankfurt, Stockholm and in northern Italy had also been in the running, but could not match the balance of cost and commercial opportunities offered by the Belgian facility. Problems at Sabena and local low-fare airline Virgin Express further made the case for Brussels.
For its part, London Luton-based easyJet's next move will be into the French market, provided it can obtain slots at Paris Orly. It is confident that this can be achieved by the end of the year, with operations expected to start from a new Paris hub in March. EasyJet believes the French Government no longer has the stomach to fight against the low-fare tide. The carrier plans to minimise the threat from the TGV by choosing routes that "are sustainable" and do not face heavy competition. It will be interesting to see if it will have the market to itself for any length of time.
EasyJet has already made a decisive move into Amsterdam, throwing down the gauntlet to Dutch flag carrier KLM and its subsidiaries, KLM uk and Transavia. The latter quickly responded with its own Basiq Air brand, which is little more than a "virtual airline", using the same cost structure as the main operation. EasyJet also identified an opportunity in Switzerland, where it invested in struggling charter carrier TEA Basel and turned it - after a regulatory battle - into a low-fare scheduled airline under the name easyJet Switzerland.
Austria, whose aviation market is totally in the hands of Austrian Airlines, is possibly the least fertile market for a home-based budget airline, although Ryanair and buzz both run services there from the UK. Italy, however, has possibilities. Ryanair's experience shows that traffic is strong to its 10 Italian destinations in the busy holiday times, while many Italians fly north in in the off-peak winter season, especially from island locations.
| Low-cost carriers in Europe - passenger operations 2000 | ||||||||||
| Airline | Passenger Traffic (RPK) | Seat capacity | Load factor | Passenger numbers | Yield/unit revenues | Unit cost | ||||
|
| million | change | change | percent | change | million | change | ¢/RPK | ¢/ASK | ¢/AKS |
| easyjet | 4,730 | 79.4% | 67.9% | 80.8% | 5.2 | 5.60 | 80.6% | 8.65 | 7.01 | 6.42 |
| Ryanair | 4,656 | 37.5% | 31.8% | 69.9% | 2.9 | 7.00 | 27.3% | 8.44 | 6.65 | 5.09 |
| Virgin Express | 4,016 | -5.9% | -7.6% | 73.3% | -3.3 | 3.82 | -5.8% | 6.35 | 5.19 | 6.30 |
| Go | 3,081 | 51.0% | 31.3% | 72.5% | 9.5 | 2.76 | 46.8% | 7.94 | 5.75 | 5.61 |
| TOTAL | 16,483 | 33.7% | 26.3% | 75.2% | 4.2 | 19.18 | 32.0% | 8.28 | 6.23 | 5.83 |
| Southwest Airlines | 67,966 | 15.7% | 13.3% | 70.5% | 1.5 | 63.68 | 10.7% | 8.05 | 5.86 | 4.80 |
| Note: Yield, unit cost and revenue figures are nominal, calculated from the latest group financial results and airline operations, RPK = revenue passenger km ASK = available seat km 1 mile = 1.609km. EasyJet includes Swiss subsidary | ||||||||||
| Low-cost carrier fleet sizes | |||
| Carrier | In-service | On Order | Main Types |
| buzz | 8 |
| Bae 146 |
| easyJet | 25 | 26 | 737-300, -700 |
| Go | 18 |
| 737-300 |
| Ryanair | 36 | 13 | 737-300, -800 |
| Virgin Express | 11 | 1 | 737-300, -400 |
| Source: Airclaims' CASE database | |||
| Low-cost carriers in Europe - financial performance (S million) 2000 | ||||||||
| Airline | Group revenues | Operating result | Operating margin | Net result | ||||
|
| $ million | change | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 |
| Easyjet | 442 | 31.7% | 103.6 | 81.5 | 23.4% | 22.7% | 94.9 | 70.8 |
| Ryanair | 410 | 88.6% | 34.4 | 2.1 | 8.4% | 0.9% | 34.4 | 2.1 |
| Virgin Express | 267 | -0.2% | -57.0 | -7.8 | -21.3% | -2.5% | -60.1 | -6.0 |
| Go | 245 | 58.7% | 5.9 | -35.1 | 2.4% | -21.7% | 4.1 | -24.5 |
| TOTAL | 1,365 | 29.0% | 86.9 | 40.7 | 6.4% | 3.8% | 73.2 | 42.4 |
| Southwest Airlines | 5,650 | 19.3% | 1,021.1 | 781.6 | 18.1% | 16.5% | 625.0 | 474.4 |
| Source: Airline Business World Airline Ranking | ||||||||
The road ahead
It is true that someone always benefits from adversity. As major carriers reacted to the 11 September attacks by shedding staff and capacity, Europe's budget airlines went on the offensive, offering even more special fares. The result has been increased passenger loads. Also, with the majors reducing frequencies or dropping routes altogether, slots which were jealously guarded in the past may also be freed up, giving a further boost to low-fare airlines. Although, like their full-fare counterparts, they are not insulated against increased insurance charges and the effects of more stringent security measures at airports, insiders believe they are better placed to ride the storm.
Furthermore, if Europe follows the USA into recession, low fares offered by the likes of Ryanair, easyJet, buzz and Go will look even more attractive to both leisure and business travellers. It may also encourage investors on the continent to follow the UK/Irish lead and mount a campaign for their share of the low-fare market.
So far, for mainland Europe, it has largely been a case of missed opportunities. But, while it will be difficult, there is no doubt that air traffic will bounce back - and now may be a good time to stake a claim. "Every market," says Tim Jeans, "responds to low fares."
Source: Airline Business
