Europe's flag carriers need realistic solutions in their battles against the low-cost, no-frills airlines because doing nothing is not an option
British Airways' decision to cut fares on its domestic flights is the latest in a series of responses by established European carriers to the growing threat of the upstart low-cost airlines. The move is too little, but not, perhaps, too late.
The low-cost carriers have grown over the past decade from insignificance to irrelevance to concern to threat. Although they still carry fewer than one in 10 intra-European passengers, their rapid growth and healthy profits contrast with the stagnant traffic and worrying losses of the flag carriers. The responses of the Big Three have been varied. Air France has chosen to ignore the insurgents, dismissing them as being "not in the same business". Lufthansa, faced with Ryanair's encroachment on its home territory, has been fighting a succession of legal battles to silence the low-cost carrier's siren appeals to the German consumer. And BA has now decided that it can compete head-on with the arriviste airlines by cutting costs and fares on its domestic short-haul routes.
Of these, only BA's response has any strategic respectability. The flag carriers cannot deal with the low-cost advance by pretending it does not exist, nor by fighting rearguard actions in defence of untenable positions.
But BA's approach is not the only answer to the growth of low-cost travel. The UK carrier has already tried another approach - running its own low-cost operation, first by attempting to take over EasyJet, then by setting up Go. No airline in Europe has tried the third possible strategy - simply to leave the field to the new arrivals and concentrate on more profitable long-haul services.
BA deserves credit for recognising that a problem exists. Its attempt to compete in the UK domestic market by cutting fares is a grievous mistake, however.
The low-cost carriers can offer the prices they do, which are still far lower in many cases even than BA's revised fares, because they are highly specialised on a single sort of operation, and have been designed or redesigned with a sole objective in mind: cheap short-haul point-to-point services. BA's Future Size and Shape study called for restructuring and 13,000 job cuts, but this will not be enough. It is fundamentally more expensive to run a network, to maintain a fleet of 11 aircraft types, to operate into every major airport, to keep a pension roll of retired employees and an expensive headquarters division. Put simply, it is very unlikely that BA can compete.
Pulling out from the short-haul market is tempting, but, perhaps unfortunately, pride and bureaucratic inertia, not to mention political influence from national governments, will stop any national flag carrier taking this path. The history of exclusively long-haul carriers such as Laker and Pan Am is not inspiring.
The prospects of a low-cost subsidiary of a mainstream airline are still uncertain. Although KLM's Buzz is making moderate progress, BA chief executive Rod Eddington decided in 2000 that he could not run BA and Go under the same roof. The sale of Go met opposition from some of his own executives and was criticised by industry observers. They were right and Eddington was wrong. While it was owned by BA, Go ran its own operation - and so was able to start from a clean sheet when hived off. Unless BA can reproduce this independence in its short-haul operations, enabling them to cut costs and restructure far more thoroughly, this latest strategy will prove a costly failure.
As before in history, the existence of the English Channel tempts leaders on one side to regard events on the other side with a sort of serene detachment. But, as the UK today, so France, Germany and the rest of Europe tomorrow. Airline deregulation means that the challenges to Air France and Lufthansa by newcomers from London Luton and Stansted airports are mere tokens of the threat they will soon face from home-grown insurgents. The slower pace of liberalisation has given continental Europe a little time in which to prepare itself. It should not squander this respite in vain attempts to preserve the status quo or in Olympian denials that a problem exists.
There is no reason why cheap subsidiaries of the flag carriers should not compete successfully against independent low-cost airlines - no reason, that is, but the inertia, myopia and delusional overconfidence which precede any disaster and which are now both harbingers and root causes of great and unnecessary suffering for the European flag carriers.
Source: Flight International
