Cost conscious

Hapag-Lloyd Express chief executive and European Low Fares Airline Association president Wolfgang Kurth is at the forefront of Europe's low-cost revolution

If the traditional airline industry still needed reminding that low-cost carriers, far from being a passing phase, have matured into a sustainable sector distinct from the legacy carriers, then any last lingering scepticism should have been jolted by the formation last January of the European Low Fares Airline Association (ELFAA). And if any full-service airlines still feel tempted to sneer at this upstart, they would do well not to underestimate the man who heads the association as its president.

Wolfgang Kurth, who is also chief executive of low-fare airline Hapag-Lloyd Express (HLX), is not given to the flamboyant self-promotion of easyJet's founder Stelios Haji-Ioannou, or the shooting from the hip - occasionally into his own foot - of Ryanair's Michael O'Leary. With a professional career spent in airline engineering management, his approach is much more measured and deliberate - but no less effective. He is an eloquent advocate for low-fare carriers and strongly believes the sector is here to stay and it is the traditional flag carriers and charter airlines that will have to adapt. Brussels, too, will have to take the requirements and demands of Europe's low-cost carriers much more seriously than before.

"The unique issues of our industry are not reflected in the rules made by legislators, who are trying to pull back on liberalisation," says Kurth. "Regulations increase our cost base, raise fares and suppress demand. Low-fare airlines have done a great deal for European integration and this fact should also be recognised." He admits that in the beginning, low-cost carriers probably did not do enough to state their case, but feels the growth achieved over the past two years in particular has given low-cost carriers the ammunition to tackle Brussels head-on, and ELFAA should provide a platform to lobby Europe's bureaucrats more effectively. "In our business, one euro [on costs] makes a difference," he says.

While all are agreed on a more strident stance towards Brussels, views still differ among the low-cost carriers themselves about the future direction that their industry will take. Michael O'Leary recently warned of a "bloodbath" this winter from which only a few would survive. Kurth has a decidedly different view over the likely speed of consolidation. "There are about 50 low-cost airlines in Europe and I don't believe they are going to die this winter," he says. "Even if you look at the mid-term - three to five years - there will probably be four or five pan-European low-fare airlines that operate outside their own countries. Ryanair and easyJet have already started. "He adds that this will be the next step for HLX too. There are still some market areas within and from Germany to cover and the carrier will then look at route options from the UK to Spain, UK to Italy, less so Italy to Spain.

Phenomenal growth
Besides these big European carriers, Kurth suggests that there will be "a dozen or so" niche players serving local markets, giving a total of "around 20 low-cost carriers" in three to five years. "I can't take seriously the statement that there will be only one or two airlines in a year's time," he adds. "Our industry is still growing fast and we expect to have around 80 million low-cost airline passengers in 2004, which is a tremendous increase on last year. The difference in capacity from 2000 is quite staggering." Back to June 2000 the sector was carrying 500,000 passengers a week: four years later and the figure has risen to 7.5 million. "Growth hasn't finished yet. We are moving towards a form of air travel that is very similar to hiring a taxi," he says.

Kurth suggests full-service airlines may concentrate solely on feeding their hubs, while "non-hub point-to-point" will be performed by cheaper low-cost operators. "Very few low-cost carriers would dare to move into the traditional carrier's hub," he says, adding that it is noticeable, however, that low-fares carriers are growing into the tourist market. HLX itself is the low-cost carrier for travel giant TUI. "The number of individually booked flights versus package holidays is already high and if seat-only keeps growing, sooner or later low-cost carriers will take over. So, where the two business models overlap today, either the charter airlines will have to offer a true low-cost carrier product, or they will withdraw. But there is still a role for the charter airline. If the percentage of package tour passengers on a flight is above 60%, it is the domain of the charter airline. I also believe there are geographical restrictions and low-cost carriers should not, as a rule, fly more than two hours. The break-even for flights above two hours would average out at €80-90 ($100-110), which many of our travellers consider beyond what they view as a low fare."

While there will be a definite divergence in networks, Kurth says as far as the product is concerned, there will be convergence. "Low-cost carriers are now beginning to offer seat reservations, increased baggage allowances, interlining, partnering with other airlines, links to hotels and car hire. We are offering codeshare flights with Air Polonia, so the traditional low-cost carriers are already in the minority. What we are doing is offering additional features that will not increase fares, complexity or process costs."

Home check-in
HLX is considering online check-in at home as part of a plan to move as many functions as possible to the consumer. "This does not mean we are no longer a low-cost carrier, we are just taking advantage of available technology," says Kurth. "We are also offering extra legroom and are looking at varying fares for different seats, for example charging less for middle seats. Our target date is 1 November. Legacy carriers are also beginning to use the same weapons to reduce costs. So the process of convergence is already gaining momentum."

Kurth is determined not only to help the low-cost sector thrives in general, but also to ensure that HLX, in particular, plays a role in that success. The airline's unique business model already makes it a business to watch. HLX has no aircraft and operates with a small 40-strong staff of yield managers, route planners, internet booking operators and marketing. In fact, the model came about more by accident than design. Contractual obligations forced TUI to continue a wet-lease arrangement with Germania for six Boeing 737-700s at a time when it had planned to start its own low-fare airline, Hapag-Lloyd Express.

Kurth admits that he was not convinced at first, but says the model has many advantages. "We have a very small organisation. We have no one to take care of maintenance, hiring pilots, checking validity of licences, and no one is doing flight planning. We are more or less a marketing organisation. If we want to grow, we can grow within three to four months. We can tailor our fleet contracts for maximum flexibility. If we had the 11 aircraft on our own AOC, we would have to carry all the burden of contracting maintenance, certification processes, and so on. If marketing tells me it needs an aircraft with 100 or 150 seats, we find an appropriate aircraft and an established company that can operate it, and we can still enjoy the economies of scale." Kurth says costs are at 6.0 euro cents per seat kilometre (¢12 per mile), and the aim is to shave them further, aiming for a 15% cut to 5.0-5.5 euro cents.

"The flip side is how to control the business. It is more about controlling the interface between the operator and the consumer and how we can ensure that the employee of a subcontractor acts like an employee of HLX. We are still working on that; we are not where I want to be. We have established, for example, within Hapag-Lloyd Flug, a cabin manager responsible for HLX crews, to train them differently to those operating within the charter company. This definitely is something we still need to improve. I am very conscious of that. I prefer to have a firewall between the two distinct products, but there is room for improvement in the relationship. If it can be made to work efficiently, there is no reason why we cannot continue with that particular business model."

Germany had been lagging the UK in embracing the low-fares culture. Kurth says no one really believed anyone could undercut Lufthansa's prices, and Germans had always travelled expensively and in style. "In October 2002, the media got really hooked on low-fare carriers, generated by the competitive environment created by the establishment of Lufthansa low-fare associate germanwings and TUI subsidiary HLX. These were not unknown organisations, so the serious newspapers and trade magazines started taking notice and talking about low-cost carriers becoming serious business. Flying cheap suddenly became acceptable for all sectors of society. Now going in style meant going cheap."

Expansion mode
HLX started operations on 3 December 2002 and now offers 23 destinations in eight European countries from bases at Cologne/Bonn, Hanover, Stuttgart, Hamburg and Berlin, using eight 737-700s and three -500s. Four more aircraft will be added in 2005. Passenger numbers will exceed two million this year. Fares start at €19.99, with more than 80% of all flights booked online. The main market for HLX is Italy, but 30% of capacity is tied to the internal German market. Flights to Spain's Palma de Mallorca on behalf of TUI account for about 11%. The airline has an arrangement with Volareweb.com, one of Italy's major low-cost carriers, and a codeshare with Poland's Air Polonia.

"The arrangement with Volareweb.com is just a link - it doesn't cost us anything," says Kurth. "We channel the high number of visitors, those who want onward flights in Italy and vice versa` in Germany, to each other's websites, taking advantage of marketing positions. In the last few months, this has generated a high level of income for both airlines. We have 24 million hits a year and Volareweb is not far behind.

"The link-up with Air Polonia was driven by different reasoning. Uncontrolled growth costs money and it would probably take a year to move into the black on a new route. We wanted to expand the network and share the risk with somebody else. Also, in the European market it is very helpful to link up with someone who understands the dynamic of a particular market area. We also realised that the outcome of our negotiations with Polish airports was quite different from those of Air Polonia. In the next five years there will be a cost differential in favour of carriers from the enlarged Europe, especially in the East. If a smart carrier from that region muscles in on, say, our lucrative Cologne-Palma route, we will have strong competition. So why not take advantage of the cost differential and make that airline a partner rather than an enemy?"

On a broader front, Kurth has no doubt that low-fare airlines have revolutionised the industry in Europe. "Low-cost carriers are unconventional and have the guts to challenge traditional values. They are less nationalistic than the traditional flag carriers of the past, and therefore have more chance of becoming true pan-European airlines. Low-cost carriers have helped people discover Europe." n

Low-fares ambassador
Wolfgang Kurth was born in Lübeck in 1948 and went on to study civil engineering, majoring on traffic, at the Technical University in Hanover.

He graduated in 1974 and took a degree in engineering economics at Braunschweig two years later, after which he joined Deutsche Lufthansa in Cologne, working in the central organisation department.

In 1979, Kurth moved to Hapag-Lloyd Flug in Hanover, where he was initially employed as head of the industrial engineering department before being promoted to head of the central engineering department in 1981 and to technical director the following year. He rose to the position of managing director in January 1990. In 1994, he co-founded the Airline Advisory Board (AAB) of Boeing, and also served on the advisory boards of the MRO Conference.

In July 1999, Kurth joined the executive board of Hapag Touristik Union (HTU), precursor of TUI Group, which ran tourism activities within the Preussag Group - now TUI AG. He was put in charge of the airlines department, and later became divisional director of the TUI Airline Management division.

Kurth took up the position of chief executive of Hapag-Lloyd Express, TUI's low-cost carrier, in October 2002, and on January 2004 was named president of the new European Low Fares Airline Association.

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Source: Airline Business