US and European low-cost carriers have gained significant market share at the expense of legacy carriers over the last five years and expect growth to accelerate in the next five.
"We're going to kick the shit out of every other airline," says Michael O'Leary, Ryanair chief executive, speaking at the Raymond James Growth Airline Conference in New York. "We're going to double in size over the next 10 years," he promises or threatens, depending on your point of view. And that is despite his prediction of an "awful" 2005. O'Leary maintains that his aggressive, low-cost European carrier gives "people the frills they really want", such as low fares, new aircraft, uncongested airports, internet booking, one-way tickets and low-cost ancillary services. Keeping costs down will mean the carrier can "keep driving fares down".
European bloodbath
Ryanair actually did somewhat better than it had expected during the last quarter, O'Leary says, because of the continuing "bloodbath" in Europe, in which some airlines have gone bankrupt and others have pulled capacity from markets in which they compete with Ryanair. "We're not finding the yield competition to be as bad as we originally thought it was," he adds.
EasyJet, which is also profitable and jostling for the top spot in Europe, alongside Ryanair, plans to increase its fleet by 62% over the next three years as it takes new Airbus A319s and eliminates older-generation Boeing 737s. Although it got a "stunning price" for the new aircraft, easyJet finance director and chief financial officer Chris Walton says the carrier will retain its Boeing 737-700s. "We want two aircraft types for later negotiation," he adds.
Walton says easyJet concentrates on airports in major population centres where it perform fast turnarounds. It has removed hand luggage restrictions to speed up the check-in process and reduce its airport cost base. The airline also expects to continue to increase ancillary revenues from inflight sales and other services. They were up 20% in 2004 to £62 million ($117 million).
Walton also credits the value of the strong "easy" brand, which it rents for an annual fee of £1 from founder Stelios Haji-Ioannou. "The orange is everywhere," Walton says, including easyCafe and easyCar. Even the "docu-soap" run in the UK, which he described as an "atrocious programme," amounts to £40 million of free airtime.
Christian Mandl, chief executive of eastern European newcomer SkyEurope Airlines, says his airline carried nearly one million passengers last year, up four-fold on 2003, while maintaining a 75% load factor. Established in Bratislava three years ago, the airline has become the "de facto" national carrier of Slovakia.
SkyEurope is seeking to make Bratislava, only 50km (30 miles) from Vienna, into another "Stansted Airport", Mandl says, referring to Ryanair's London base. It will offer its passengers free parking and a SkyShuttle bus service. "We're a low cost airline in a low-cost country," he says. Since many in central Europe do not have credit cards, the airline is encouraging air travel by allowing passengers to buy tickets in banks using cash.
Instead of a hub-and-spoke network, the airline also has set up bases in Budapest, Krakow and Warsaw, offering flights to points throughout western Europe. According to chairman Alain Skowronek, SkyEurope's "connect the dots" strategy allows it to "market central Europe." An advertisement carried on the side of London buses offers flights from Stansted to all four of its bases and Vienna. The airline expects its fleet to grow from 18 aircraft this year to 32 in 2009.
Meanwhile in the USA, five-year old JetBlue Airways made a small profit in the last quarter of 2004 – its sixteenth consecutive quarter of profitability – despite high fuel prices, a hurricane-filled October and capacity increases by competitors. Founding chief executive David Neeleman is optimistic that the carrier will be profitable in each quarter in 2005.
Although the transcontinental market was particularly difficult in 2004, it is already improving year over year, Neeleman says, as competitors American, Delta and United airlines reduce capacity, even though Delta's Song is taking up Delta's capacity. Neeleman says passenger loyalty means JetBlue continues to get a fare premium in many of its markets.
JetBlue, which raised the bar as far as frills are concerned with leather seats and free live satellite television at each seat, plans a capacity increase of 27-29% this year as it adds Airbus A320s and takes deliveries of the first seven of 100 100-seat Embraer 190s on order. The aircraft, which will offer wider, two-by-two seating, will be deployed on shorter route segments at fares priced at 50-70% those of its competitors, he says.
The low-cost phenomenon has been quick to spread north of the border. Canada's WestJet, which started out in 1996 in Western Canada, is a coast-to-coast airline, with service also now to eight US destinations. Its foray into the USA last year came as Air Canada reduced capacity by downgauging to regional jets. "When flying against regional jets, we do extremely well," says Clive Beddoe, WestJet's president and chief executive. The carrier plans to expand transborder flights in 2005.
The profitable carrier, which has costs an estimated 38% below rival Air Canada's, operates 55 Boeing 737 aircraft and will take 15 more new-generation 737s this year. It also is seeking to accelerate retirement of its remaining 15 737-200s aircraft, expensive to operate in the high fuel-price environment.
Latin trail-blazer
In Latin America, four-year old Gol in Brazil, which was profitable in its second year, achieved a 24% market share there in 2004 and is set for substantial growth over the next few years. Chief executive Constantino de Oliveira Junior says the carrier's route network is concentrated in the south and southwest of the country because that is where the greatest number of business travellers are located.
However, the airline has sought to bring new passengers onboard by offering night flights at rates competitive with bus fares. Travellers who might have had to travel three days by bus between destinations are filling 95% of the seats during the night flights, Oliveira says. The flights also bring aircraft utilisation to 14 hours a day, operating with 25-minute turnaround times.
Oliveira says Gol, which operates 29 single-class Boeing 737s, primarily -700s and -800s, will expand its fleet to 53 aircraft in 2008. The carrier plans increased frequencies, expanded night operations, and expansion of its budding international network. It plans to add four new domestic markets this year.
Samantha Panella, analyst at Raymond James which runs the conference, predicts the low-cost segment will account for about 45% of both domestic US and intra-European passengers in 2009.
The four primary US low-cost carriers – AirTran, Frontier, JetBlue and Southwest – comprised about 65% of low-cost carrier capacity in 2003 and have firm aircraft orders that will expand their combined capacity by 52% over the next three years.
Legacy pressure
Raymond James believes the continuing inroads by low-cost carriers on domestic routes will cause legacy carriers to reduce further their mainline domestic flying and concentrate on operating widebody aircraft between their hubs and international markets.
"We do not believe legacy carriers will become low cost," Panella says, despite their declining labour costs and other efficiency measures. As a result, they will have to outsource more of their domestic flying; regionals then will become "domestic spokes" for legacy carriers' hubs and point-to-point services, operating with 50-100 seaters, Raymond James forecasts. In 2004, the legacy carriers increased capacity in an unsuccessful effort to recapture domestic market share, the company believes, which worsened their predicament.
Panella says JetBlue's acquisition of Embraer 190s will enable it to grow rapidly and profitably into medium to lower density markets, raising the bar again. "We think the 170/190s will be the next growth platform," she says, forcing legacy carriers to gain concessions from their pilots to enable their regional airlines to operate them.
Raymond James also has an "out of the box" idea for low-cost carriers: the legacy airlines could purchase seats on low-cost carriers' aircraft. It makes economic sense since the low-cost carriers could provide legacy carriers with much lower-cost feed for their international flights, the company says. "This idea, of course, will take many years to evolve…"
REPORT BY CAROLE SHIFRIN IN NEW YORK
Source: Airline Business
