Until now, startup carriers have tended to provoke no more than a bemused glance from Europe's old timers. But the latest breed of eager entrants is sending shock waves throughout the industry with a new set of tactics which are threatening to redirect the incumbents' future strategies.
Whereas European startups have traditionally been satisfied with niche routes not deemed worthy of attention by the majors, many are now offering lower-priced alternatives between significant city pairs.
The newcomers are using entrepreneurial expertise acquired from sources ranging from previous airline experience to the music and shipping industries. They are starting from a lower cost base than the majors, cutting out layers of expense such as travel agents' commission and distribution systems, and thereby placing the majors under increasing competitive threat.
In addition to this external competition, the incumbents are facing internal pressures, as they endeavour to lower their fares while maintaining the same level of internal costs. Consultant Richard Bond of Arthur D Little predicts that incumbents will soon be forced to copy their US counterparts and set up their own low-cost subsidiaries, using a single aircraft type and recruiting in existing pilots on a lower wage-scale.
Major airlines will, however, risk being wrongfooted by their unions, as demonstrated by the resistance being shown by unions at carriers like Air France Europe when faced with similar changes. 'Employee groups will have difficulty understanding that the airline needs to adapt to ensure its long-term future, while airline management will find it hard to adjust to a low-cost mentality,' predicts Bond.
While the startups' endeavours have previously been blocked by regulation, liberalisation is now giving carriers the necessary freedom to pursue their cut-price operations and seize upon growing passenger disillusionment with national carriers, particularly in France and Italy.
According to consultant Andy Hofton, the completion of the deregulation process next April will enlarge the market by stimulating a new tier of passengers, formerly unable to afford to travel by air. 'Deregulation will allow new carriers to provide sustainable offers within more people's price range, thereby generating new traffic,' he predicts. Chairman of EasyJet Stelios Haji-Ioannou maintains that his operations 'will make flying as affordable as a pair of jeans', while Virgin Express has an overall aim of 'making flying affordable for everyone'.
Saturation at the major airports will increasingly push carriers to establish their operations at less familiar airports, which will develop as hub bypass operations. These airports will, in turn, be forced to become more competitive as they develop the facilities and business environment needed for airlines to start up their operations. 'Airports, notably London/Luton and City, are acting as marketing vehicles for startups and offering reduced landing fees to help the carriers establish long-term successful routes,' says Simon Tudge, external relations manager at the European Regional Airlines Association.
But the new carriers will remain continually threatened by the major airlines' prowess. Consultant Chris Partridge of Avmark International warns that 'once a market grows sufficiently, the larger airlines will step in and take over'. He also points out that if startups are to continue developing their routes they will need to graduate to additional, larger aircraft and thereby move away from their original low-cost proposition.
Still, the newcomers will be left with a plethora of alternative routes to develop. As EasyJet's chairman, Stelios Haji-Ioannou, says: 'Europe is full of exciting places and high fares'.
Easy come, easy go
A lurid orange telephone number painted on the fuselage of EasyJet's aircraft personifies its cheap, cheerful and rather cheeky persona. The telephone number is the most important feature of the airline's marketing campaign, prompting passengers to book direct and thereby enabling EasyJet to be the 'only airline in the world to have never paid commission to a travel agent', while also serving 'as the biggest billboard that money can buy', boasts chairman Stelios Haji-Ioannou.
Indeed, marketing is EasyJet's greatest expense. Twenty-eight year old Ioannou, a newcomer to the airline industry, prefers to think of EasyJet as a marketing organisation - 'a bums-on-seats factory' - as opposed to an airline.
Ioannou is adamant that the whole personality of the airline should more than compensate for its lack of frills. No food is served, as 'there's no such thing as a free lunch'. For in-flight entertainment, the airline's magazine comes complete with spelling mistakes and a reminder that this is 'EasyJet's only freebie - get it while you can'. The magazine invites passengers to 'sit back, relax and close you[r] eyes, remind yourself how little you paid for your EasyJet flight . . . and laugh at the other suckers who are travelling with other airlines'.
EasyJet is targeting this formula 'at everybody who pays out of their own pocket', aiming to attract an estimated 1 million passengers by the end of 1996 on services between Luton and Glasgow, Edinburgh, Barcelona, Nice and Amsterdam. It hopes to start flights to Geneva in September, with services to Madrid, Munich, Berlin, Hamburg, Copenhagen, Oslo and Stockholm planned for next year.
EasyJet keeps its costs low by not issuing tickets and not using computer reservation or revenue accounting systems. The airline packs 148 seats onto each of its three Boeing 737s and carries the minimum safety requirement of three cabin crew, clad in jeans and tee-shirts. It contracts the cargo charter airline, Air Foyle, to operate its flights, engineering and crew rostering under the latter's air-operator's certificate.
A lack of slot restrictions at EasyJet's London/Luton base enables a turnaround time of just 30 minutes, which it aims to reduce to 20 minutes.
EasyJet has already attracted the attention of one major. KLM has started offering fares that undercut EasyJet by DFl8 ($5) on Amsterdam-London. EasyJet does not intend to match KLM's offer, but at presstime it was threatening to report the Dutch carrier to the European Commission, alleging predatory pricing and abuse of a dominant position (see Newsline). Ioannou is keen to stress that EasyJet can sustain its discounts, as unlike other start-ups 'its pockets are deep' - support comes from Ioannou's former shipping company and his wealthy father.
While admitting that he originally modelled his airline on US-based ValuJet, Ioannou emphasises EasyJet's approach to safety. He has opted for relatively young, modern aircraft, but still plans to replace his Boeing 737-200s with B737-300s next year. EasyJet has no pending safety issues and welcomes the tightening of safety regulations. 'If you think safety is expensive, try an accident,' Ioannou points out bluntly.
Debonair is fast learner
After only a couple of months in the business, Debonair claims to have speeded up the deregulation process in Europe by becoming the first EU carrier to gain ninth freedom rights - between Munich and Düsseldorf Express - although in practice the service will be linked to the carrier's London/Luton base. However, the airline is restricted to filling only 50 per cent of its capacity between the two German points.
Debonair is operating one daily service from Munich to Düsseldorf and then on to Luton. A second service runs from Luton to Düsseldorf, then on to Munich and continuing to Barcelona, returning on a reverse routing later that day. Other destinations include Madrid, Newcastle and Copenhagen. The airline plans to develop Munich as a secondary hub to supplement Luton and is looking for a third hub in southern Europe, with likely candidates being Rome, Madrid or Barcelona.
Evidence supporting Debonair's assertion of being 'an innovator, not an imitator', include an activity related 'power by the hour' arrangement, whereby the airline pays for maintenance of its engines and airframe and ground handling services on a flight-hour basis.
By contracting out services, Debonair is able to offer low fares, though chairman Franco Mancassola, a veteran of the airline industry, denies it is a 'low-cost, no-frills' proposition. 'We don't compromise on comfort - other airlines' passengers pay higher fares for a lower quality product,' he protests.
A Debonair flight does not include food, as a 'meal on an airline is a sad affair', though from October the carrier plans to feature in-flight entertainment, offering movies, games and a casino on a system costing $7.4 million. However, to be consistent with the airline's cost efficient policy, Debonair passengers will have to pay to play.
The carrier's one-way fares are structured on a four-tiered basis, with prices increasing in line with demand. A ticketless reservation system lets passengers book directly using Debonair's Loyalty Card. Passenger booking details are kept on computer, allowing Debonair to provide a personalised service and offer a free flight for every ten booked without the use of a complicated cost-mileage system, explains Mancassola.
Debonair expects ú60 million ($90 million) in revenue from its first year of operations, increasing to ú90 million in its second year, with profits targeted by the third quarter of 1997. In Mancassola's opinion, today's economic environment offers favourable conditions to start an airline in Europe. 'We wanted to position ourself before deregulation and next year's strong expected recovery in the UK and Germany,' he says.
Virgin plans more cuts
Virgin Express is characterised by its new aircraft and US management, provided by Virgin Atlantic, which acquired 90 per cent of the airline from City Hotels in April. The Belgian-based carrier, formerly EBA Express, claims to carry more passengers than any other low-cost carrier in Europe - it transported 240,000 people in the first half of 1996 and targets 600,000 passengers by the end of the year.
Fares are offered at a 50 to 80 per cent discount to other carriers' lowest fares. Virgin Express plans further price reductions to match any rival low-cost promotions, confident that cuts will incur 'huge losses at rival carriers, while Virgin Express falls back on its huge profits,' asserts commercial director Alain Skowronek. The carrier generated profits of BFr200 million ($6.5 million) last year, achieving profits within its first six months of scheduled operations.
According to Skowronek, profits result from a simple, low-cost structure. The airline has opted for ticketless travel; leases its aircraft; and offers just one class, without a meal or an airport lounge.
Still, the carrier's low-cost, no-frills formula appears to conflict with the quality hallmark associated with Virgin Atlantic. 'I already feel tempted to incorporate some of Virgin Atlantic's advantages and services - we've got to protect the Virgin name,' says Virgin chairman Richard Branson. Skowronek, meanwhile, maintains that the carrier complies with the Virgin image by 'removing public preconceptions' and offering a quality product 'at the cheapest possible price'.
Virgin Express chief executive officer, former Continental Express and Mesa Air executive Jonathan Ornstein, is planning rapid expansion, including daily flights from Brussels to Geneva and Copenhagen.
Italian job's a good One
Air One is one of an emerging breed of Italian startups, born out of customer dissatisfaction with Italy's struggling flag carrier. 'Passengers feel that Italian carriers' prices are too high for the value offered,' says commercial director Paulo Rubino.
Air One chose to initiate its operations on the busy Rome-Milan route. It maintains that its Boeing 737-200s/300s are more comfortable than the MD-80s which Alitalia operates on the route. Air One's fares are 23 per cent cheaper than Alitalia's, owing to Air One's lean staff structure, comprising young employees with low salary expectations; its low maintenance costs due to fleet commonality; and its outsourcing of marketing and ground handling services, says Rubino.
The airline, formerly a tiny regional operator, graduated to jets after it prompted an investigation into underutilised runway capacity at Milan/Linate, which led the airport to increase its slots from 22 to 55 per hour.
Fellow Italian startup Noman has opted instead to serve the lucrative Rome-Milan market from Rome/Ciampino. Chairman Julio Lastarza, former general manager of charter company Unifly, points to Ciampino's faster check-in and turnaround times. These factors, along with the 20 per cent lower handling costs compared to Fiumicino, result in fares 10 per cent cheaper than those offered by Air One.
Future objectives include a codesharing and commercial agreement likely to be formed with Swissair over the next few months. 'Swissair sees north Italy as a good market in the EU,' says chairman Julio Lastarza.
Meanwhile, Alpi Eagles prides itself on being the first Italian startup to provide a business class service on a domestic route, following the launch of its Rome-Venice service. Alpi Eagles also offers two economy fares, the highest of which allows passengers to alter their reservation up to two hours before departure. Although Alpi's lowest economy fare is 40 per cent cheaper than Alitalia's, the startup offers 'a economical, high quality service, previously absent due to Alitalia's monopoly on the Italian market,' states commercial director Michael Harrington, an ex-Alitalia manager.
Alpi's ticketless travel system translates into rapid check-in times. 'We loaded 51 passengers in 95 seconds on our last Venice flight,' boasts Harrington.
Welcome to his World
The fact that World Airlines is owned by music entrepreneur, Nick Stolberg, owner of World Records, is the first vindication in its assertion of being 'The airline that dares to be different'. Other evidence supporting this claim include World's decision to allow smoking on its flights and a check-in deadline of just 10 minutes before take-off at its London/City base.
Despite offering both economy and business classes, World is principally targeting the business passenger. 'World aims to pamper today's business traveller with a first class service offered at business class fares,' says general manager Tara Hawkins. The upper-class image is created through leather seating, vintage wines and china service, with a bright sunflower logo which is intended to 'break the mould of boring seventies style livery'.
According to Hawkins, this makes World's product entirely different to the 'lower class standards' offered by Air UK - World's only competitor on its sole route between London/City and Amsterdam.
Edelweiss is in full bloom
Edelweiss was set up by disgruntled ex-Balair pilots, who opted to form the mainly charter carrier rather than transfer to Crossair when Balair faced closure. Edelweiss operates as an independent organisation, although Swissair carries out its maintenance.
Kuoni Travel, a 33 per cent shareholder, handles sales. Costs on the airline's Zurich-Luton scheduled route are reduced by using aircraft that are already used for charter flights.
Greek drama
Skybus' dramatic entry into the Greek market has forced Olympic Airways to reduce its domestic fares for the first time ever, lowering prices between Athens and Thessaloniki by 40 per cent.
Despite the drop in Olympic's fares, Skybus' prices on the route remain 25 per cent cheaper. According to chairman Constantinos Piladakis, Skybus keeps its costs down by wet-leasing its aircraft from Greek charter airline Venus Airlines, and by using a general sales agent with a monopoly on the Greek travel industry.
Skybus means to further weaken Olympic's dominance via future collaboration with Crete-based turboprop operator, Air Greece. The two airlines are presently discussing their future relationship in a bid to 'compete effectively against Olympic', confirms Piladakis.
Auld story
Air Belfast's strategy is to offer services between under-served city pairs. 'There's no point in flying up a major's tail-pipe,' says managing director Tony Auld. The carrier abandoned its initial London/Stansted-Belfast service when other carriers started competing between London and Belfast, opting to fly instead on the untouched Shannon-Gatwick route.
In future, Air Belfast means to introduce services from Shannon to the rest of Europe. For additional revenue, the airline falls back on its charter business and a shuttle service for British Aerospace employees, operating from Bristol and Liverpool to Toulouse.
Cano's edge
Centennial manages to offer low scheduled fares largely as a result of its existing charter operations. The Palma-based airline has low advertising costs as it has already established its name via its charter services, and uses the same aircraft. 'Centennial holds an advantage over other European startups by already operating at low costs,' maintains managing director Thomas Cano.
Although charters account for some 97 per cent of Centennial's business, the carrier is determined to increase the scheduled side of its operations. It aims to increase its Palma-Gatwick service from three to five flights a week in 1997 and to operate daily on the route in 1998. Centennial will continue to offer business class on its scheduled route.
Jetsetter
Air Jet has wholeheartedly rejected the low-cost image which has become the mantra of most European startups. Fares for its 'almost first-class' champagne and caviar service between London/City and Paris/Charles de Gaulle exceed Air France's business class fares between Paris/Orly and London/City.
The airline further distinguishes itself by being the 'only known' scheduled operator to operate a 'quick changeover' system: the 68 passenger seats on its BAe 146s are removed each night to allow 100 tonnes of freight to be carried.
Air Jet passengers can show up 10 minutes before take-off and pay with one of three types of smart cards. The first is credited with two flights and the second with six; the third invoices executives for their flight at the end of the month.
Irish highs
Ireland's Ryanair set up a separate UK registered company to handle its UK operations in October 1995, and now offers five daily flights from Dublin to Prestwick and on to Stansted, using Ryanair's aircraft, crew and line-maintenance teams.
Ryanair UK matches EasyJet's lowest fare between London and Glasgow, yet offers more availability and twice the capacity. It achieves a 70 per cent load factor 'without stooping to the gimmicks', says chief executive Tim Jeans. The airline's link-up with the Scottish rail network means discounted rail fares for Ryanair UK passengers in Scotland; those originating in Scotland can have free rail tickets.
In the wings
Azzurra Air aims to launch 'a competitive, not cheap' business class operation in December to serve the business population around its Bergamo base. Air Malta has taken a 49 per cent stake in Azzurra - the maximum it can own in a European Union airline - seeing the start-up as a way to gain a direct route into the EU.
Azzurra is determined to be a market-orientated airline, amending timetables up to the last minute in response to changing customer demand, following market research. It also plans to introduce localised meals on-board and a smart card booking system.
Meanwhile, Paris-based Fairlines has postponed the planned September launch of services from Paris/CDG to Nice and Rome until next year, as the airline hunts for European backers.
Source: Airline Business
