Europe's low-cost carriers may continue to grab the headlines, but one sector remains resolutely unimpressed. The traditional charter airlines point out that they were running low-cost leisure services decades before these scheduled upstarts arrived. They tend to refer to the newcomers as "low-frills", pointing out that none can hope to rival charter-style costs. But as the the newcomers continue to grow, will the boundaries between the two begin to break down?
While the low-cost carriers may not be expressly targeting the traditional package holiday markets, they are increasingly eating into the traffic composed of a growing number of independent travellers who either own their vacation accommodation or already know exactly where they want to stay. In doing so, they claim some distinct advantages over charter rivals, many of which are tied to tour packages by the advanced stages of vertical integration that exist in the largest markets of the UK and Germany.
The UK market is typical. The top five largest charter carriers are each owned by a major tour operator and three of those also own a major travel agency chain. In Germany the picture is similar with logistics group Preussag controlling charter carrier Hapag Lloyd and the leading tour operator TUI.
Battle in costs
In both markets, most charter capacity is pre-sold through tour operators, giving charters little leeway to develop an independent strategy. Seat-only charter sales exist only on a small scale and, since that too is sold by tour operators through their travel agency retail outlets, most charters have little or no idea how much of their capacity is sold as part of a package and how much is seat-only.
The real battle between the charters and the low-frills is over cost. As long as the traditional package holiday remains more cost-effective than the purchase of a scheduled flight with separate accommodation, a large chunk of the leisure market will remain firmly charter, believes Stefan Helsing, vice president of alliances at the SAirGroup, who has overseen the formation of the European Leisure Group, a charter grouping sitting alongside the scheduled Qualiflyer alliance. "We have to take the low-frills seriously, but we are still very, very slim on the company structure," says Helsing. "As a client you are silly not to take the package."
All the major European markets are still dominated by the charter sector when it comes to leisure traffic, says Helsing, but he admits that the trend towards individual travel must be taken seriously. At the moment, however, the charters are not really threatened. "The low costs have to attack the traditional trunk routes with origin and destination travel. I do not think the focus of these carriers is the charter destinations.", says Helsing. However, he is not a supporter of vertical integration which, he says, is not possible to the same degree in smaller markets like Switzerland or Belgium. Outside the UK and Germany, France is the only other country with a significant amount of vertical integration in the form of tour operator Nouvelles Frontieres and French charter carrier Corsair.
The concept of the European Leisure Group completely contradicts the principle of vertical integration by grouping together a small number of both charter and scheduled carriers. These are LTU (now 49% owned by Swissair), balair/cta, Sabena's charter operation Sobelair, Air Europe and Volare Airlines. The resulting mix of scheduled and charter - 90% of LTU's operation is scheduled while Volare, for example, operates one third of its flights in scheduled mode - gives the European Leisure Group maximum flexibility to respond to the marketplace. "We are more flexible than the vertically integrated systems," says Helsing.
The distinction between charter and scheduled is not relevant, he says. The real difference is whether or not an airline has a full charter guarantee from a tour operator. "If not, you have to sell yourself and to operate in scheduled mode," says Helsing. The charter mode remains the most cost effective means of operation and should be preferred whenever possible: "Where we can do full charter we will do so. Elsewhere we will look for other options," he adds. "But it is madness not to be present in the scheduled market for leisure travel as well. If you are not present in this business then you have problems."
Within the European Leisure Group most of the capacity - both charter and scheduled - is therefore sold to tour operators. Even LTU sells some 60% of its capacity to tour operators while Balair and Sobelair sell all their capacity that way, and Air Europe fills around 80% of its seats this way. Volare, which operates five Airbus A320s and is based in Northern Italy, balanced its charter with a scheduled component which is principally made up of domestic flights between Italy and Sardinia.
Overall, the European Leisure Group's strategy makes enormous sense. It recognises the growth in the leisure market and the need to offer both a charter and a scheduled product where appropriate.
According to Helsing, the five member airlines aim to take this further by streamlining their operations and working towards a standard operation that will allow them to exchange crews and establish a virtual joint network. Between them balair/cta, LTU, Sobelair and Air Europe operate a fleet of 20 Boeing 767s which can be taken together and planned as one fleet. "The second step would be to share the aircraft whereas at the moment LTU aircraft fly the German routes," he says.
The European Leisure Group can also rely on the competence of Swissair to help when direct sales are required. So, balair/cta's scheduled Mauritian services are sold by the Swiss scheduled carrier. This enables charter carriers like balair/cta to remain lean while benefiting from direct sales when needed.
Charters look at schedule
Other charter carriers are equally quick to highlight the traditional advantages of charter versus scheduled and to dismiss suggestions that some charter markets may fall prey to the low cost operators. But, like the European Leisure Group, those that are not completely vertically integrated with a tour operator and/or travel agent have been more successful in developing a coherent scheduled product which responds to specific market needs.
Monarch, the UK's third largest charter operator is owned by tour operators Cosmos and Avro, but the latter take up only around 25% of Monarch's capacity. The rest is sold to independent tour operators. "Monarch is unique in that we have our own inhouse tour operator and we do sell to the larger tour operators as well," says Monarch's managing director, Danny Bernstein.
But, at the same time as operating in the traditional charter market, Monarch has responded to a demand for an improved and upgraded product in the scheduled market sector. The Crown network, based at London's Luton airport, offers scheduled services and greater levels of service on sector lengths of two to three and a half hours' journey time.
Crown recognises the demand from a growing villa-and apartment-owning community for access to seat-only services all year round. Most tour operators offer seat-only deals in off peak periods and, in peak times, seats on charters tend to be reserved for package holidays, says Bernstein.
Monarch currently operates scheduled Crown network year-round services eight times a week to Malaga from Luton, from where it also serves Alicante, Minorca and Tenerife. Luton was selected as a base for the Crown network because it is relatively underserved by charter carriers, says Bernstein. From next May, Monarch will also launch Crown services to Malaga and Alicante from Manchester Airport. The carrier also serves Alicante from London/Stansted.
The Crown service offers seat allocation at the time of booking, on board newspapers, complementary drink and four course meal, free headsets for film viewing and the same fare regardless of when the seats were booked. Fares are flexible and bookings can be changed for a simple £10 ($15) fee.
Bernstein follows Helsing's doubts about the threat from low-cost start-ups , at least for sectors of more than 3h, which make up the core of the traditional charter business. "I believe they are doing the damage on shorter routes where there is a cost-conscious businessman and a demand for short breaks."
He points to Dublin as an example of a less than one and a half hour sector which has experienced enormous growth, notably in visiting friends and relatives traffic, due to the expansion of low-cost carrier Ryanair. The package holiday accounts for about half the market, believes Bernstein. "The other half is the ordinary British Airways or British Midland type carriers. That's the market that Go and easyJet are eating into," he says.
Aggressive statements
While it may be true that the larger scheduled operators are under threat largely from the low-cost scheduled airlines, charters like Monarch recognise that they cannot be complacent. Particularly in the light of recent aggressive statements by low-cost operators like easyJet, which claims to have forced Monarch's Crown services off the Palma route. "As we go onto routes like Palma we are seeing a very quick uptake in those markets," says easyJet's managing director Ray Webster. In a direct reference to Monarch's Crown network, he says: "Carriers that have been focusing on seat-only are very vulnerable."
He believes that easyJet can compete directly out of Luton on any Monarch scheduled route and can do substantial damage on some charter routes. "People who have not travelled much before may be inclined to travel the first time on an inclusive tour package. But the next time they are more likely to choose us and they are more likely to know where they want to stay," says Webster.
The easyJet sales are run in tandem with an independent company, Travel Extras, which offers hotels and car rentals that can be combined with a low-cost easyJet flight. While Webster admits that buying independently can wind up being more expensive, he believes that the quality is likely to be superior to the typical package holiday.
Like Monarch's Crown network, easyJet is targeting the point-to-point independent traveller. "These are the people who would normally have travelled on seat-only charters especially on routes like Malaga and Palma where people go regularly," he says.
Competition intensifies
Monarch admits to having dropped some routes in its Crown network, including Malta and Palma, but says it was because they were "built around tour operator requirements". Mean-while, competition on services to Malaga between Monarch and its low-frills rivals will intensify when Monarch launches its new Manchester service in May 2000.
BA's low-cost operation Go began serving London Stansted-Malaga this year, but Bernstein says the Crown network's bookings remain as strong as ever. "Either they are two distinct markets or growth markets," he says. Go also serves Alicante from Stansted and is launching a new Malaga service from Luton while easyJet serves Malaga from Liverpool.
When they are in direct competition with the low-frills, charters like Monarch believe they have greater cost efficiency and quality of product on their side. With its one price strategy, Monarch fares are also considerably cheaper for late bookers than the equivalent fare on a low-cost carrier, but early bookers are likely to get a better deal from their low-cost rivals.
It seems that the low-cost scheduled airlines, still relatively in their infancy, are only just beginning to challenge the might of the European charter carrier. But as the low-cost operators develop so will their presence on many of the leisure routes traditionally dominated by charters.
In the meantime, the charters continue to dwarf their would-be low-cost scheduled rivals. According to Bernstein, Go, easyJet and Ryanair are "nowhere near the size of the five big charter carriers", namely Britannia Airways, Airtours International, Air 2000, Flying Colours/Caledonian Airways and Monarch. The UK charter sector represents 1.5 billion passenger round trips a year and operates a fleet of 150 modern jet aircraft, he adds.
With the exception of carriers like LTU, most charter carriers continue to operate only a small portion of scheduled routes. Monarch's crown network represents only 7-8% of its flying programme in terms of available seats. The general consensus of the charter operators is that the charter mode still has a good life expectancy. "We have seat-mile costs that would be the envy of the low-cost carriers," says Air 2000's head of industry affairs, Simon Buck. "It is much easier for a low-cost carrier to undercut a large scheduled carrier because they cannot, we believe, compete on seat-mile costs," he adds.
Debonair's Michael Harrington echoes the view that the low-costs compete most effectively over short ranges. In so doing they can take advantage of the shortage of seat-only charter seats. "Ten or so years ago, a lot of companies would supplement their packages with seat-only sales. My impression is that this activity has become a lot less," he says. He confirms that Debonair has taken a large number of group bookings on its Malaga and Palma routes that would normally have been made on charters. Debonair also competes with charter carriers on its Rome, Madrid and Barcelona routes.
While scheduled remains a small portion of most charter airlines' business, the same is true of the low-costs for charter. Debonair, for example, operates around 5% of its capacity in the charter mode in off peak periods.
European low-cost operators have undoubtedly begun to chip away at some of the short-range leisure markets long dominated by the charter carriers. But until they achieve greater critical mass and unless they branch onto longer sectors, the charters believe they are right to feel that their core markets will not be in too much danger from the newcomers.
Source: Airline Business
