Low-cost carriers may have created a structural change in the market, but travel patterns are far from settled cautions Chris Tarry of CTAIRA
The term "low-cost" has become one of the most overworked terms in the airline industry and, indeed, that has been the case for a while now. This column has often cautioned against the hype that surrounds the sector, seemingly at times as something of a lone voice.
Certainly, any airline needs to have an appropriate cost base for the revenue stream that it hopes to capture. The lower the costs, the greater the opportunity to make profits and, more importantly, to produce the returns that are attractive to providers of capital. What the customer cares about is not airline costs, but value for money.
The recent Future of Air Travel conference run by Airline Business in November in conjunction with the World Travel Market show, helped to provided a number of reinforcing insights over trends in traveller and customer behaviour which have a significant bearing on the performance of the airline industry, especially with reference to Europe. It is worthwhile focusing on some of the issues that were raised and contemplating the consequences.
The conference certainly reinforced the argument that the market is not homogeneous. There is not a one-size-fits-all operating model nor a single size airline that meets the needs of travellers.
The fact that network, schedule and flexibility appear to come before price and product in the selection criteria of corporate travel buyers has clear implications for those new model airlines that wish to become a close substitute for the incumbents. Furthermore, corporate travel managers increasingly need to be able to track their travellers and to feed travel and entertainment expenditure into their financial systems. That potentially provides a further barrier to a seamless switch to new entrant carriers, although some have recognised this and are responding.
Certainly, in a European context the reaction in the UK to the new model airlines by British Airways and bmi has changed the "rules of engagement" with fundamental downward changes in the fare structures. In 2002, according to American Express, economy fares between the UK and western Europe fell by some 30% for the mainline carriers. The recognition at the conference that this is a structural shift and that there is unlikely to be a recovery to the previous environment even as the economies improve is a clear indication of where the focus of attention for all airlines must be. Amex stresses that 2000 can no longer been seen as the base year. Those days, it argues, have gone forever.
Looking beyond the business travel segment, Lufthansa's latest results lamented the effects on their performance of 11 "no-frills" carriers. However, it is not only the effects of the new airlines in an individual country that will have an effect on the incumbents. The exportation of new fare structures by BA and bmi out of the UK and Aer Lingus out of Ireland also has an effect as travellers in the non-home countries of these airlines gain equal access to the lower fares. At the same time, there have been reactions by other European airlines such as Finnair and SAS, in respect of new fare offers.
A further catalyst for change has been the improvement in information flow and here the Internet, together with a range of search tools, has been a key element in improving the knowledge of prices in the marketplace. In fact, we are close to what economists would call a perfect market, at least in respect of information and to an extent in the relationship between supply and demand - other than where tickets are deemed fully flexible.
What is of importance here is the likely outlook for demand. While the generally improving economic environment in Europe and the USA should give grounds for a degree of optimism regarding volumes, it is interesting to re-examine the relationship between consumer expectations and short-haul air travel. For example, in the USA, the relationship appears to have become disconnected. At a corporate level, although the expectations may have improved, not only are travel budgets likely to lag the recovery, but there is unlikely to be any relief from travel restrictions, particularly for short-haul air travel.
A key message from the recent past is that no matter how cheap the ticket, there must still be a reason to travel. Price stimulation clearly works to an extent, but there comes a point at which there is no more demand. Indeed, prices will only rise if the excess seat supply is reduced and that appears unlikely. This sequence of events is also increasingly evident for the new model airlines and given their paths of supply-led growth, they arguably have the greatest pressure to find new markets.
Against the background of a structural downshift in fares and a corresponding behavioural shift in the price expectation of buyers, the pressure must remain on the cost side.
Source: Airline Business
