In their analysis of developments in the German low-cost airline industry, aviation consultants Dinos Constantinou and Thomas Tomkos of Cell Consulting warn of overcapacities in Europe's most important market by 2007.
The expected explosion in growth of low-fare passengers in Germany has led key European players to focus their sights on the continent's largest market for air travel.
While Go and Buzz have met with considerable success flying from their respective hubs in the UK, Ryanair has gone one step further in establishing a base at Frankfurt-Hahn - and plans a second hub in Germany by 2003. At the same time, easyJet has chosen to enter the lucrative German market via an option to purchase DBA from British Airways.
Local participants from both the scheduled and tourist charter segments have reacted to these moves. In particular, the two giants of the German travel industry, Lufthansa (via Eurowings) and TUI, are launching low-cost operations via partly or wholly owned subsidiaries this autumn - under the brand names germanwings and Hapag-Lloyd Express respectively.
As emerging and established airlines draw up ambitious plans to position themselves in this fast-growing segment, the flood of new entrants threatens to outpace expected demand.
We predict a market share for low-cost carriers of 28% by 2007, based on a forecast total market of 157 million passengers. This share derives from three distinct effects:
Market creation due to lower prices - passengers who previously did not travel or used alternative means of transport Appropriation of a significant part of the tourist market - most importantly the current share of independent charter airlines Taking a share of business passengers currently served by full-service, scheduled carriers.By the end of this year some 10 low-cost airlines with a total fleet of around 60 aircraft will already be competing for German low-cost customers (see table). Relying on our market forecasts and the stated plans and aircraft orders of relevant players, we project an increase to well over 80 million available seats per year in the low-cost segment within the next five years. This is in contrast with an expected market for only 44 million low-fare tickets by this time - resulting in the emergence of a dangerous gap between supply and demand. The causes of this imbalance lie in the isolated strategic moves of relevant players, which evidently do not take adequately into consideration their combined impact on total seat capacity in the market.
Comparing projected seats - adjusted by a required load factor - with expected demand, we foresee the risk of significant oversupply developing in the German low-cost market by 2007. Excess capacity of an estimated 20-30% will weigh heavily on prices and margins, jeopardising smaller market participants in particular. Large, focused or innovative players will have the upper hand.
Important success factors will be, on the one hand, cost advantages through size and operational efficiency and, on the other, the ability to differentiate their product from competitors. As a result, market participants will pursue strategies involving a "burst for growth" to reach critical scale and/or a clear focus on selected market niches.
While the new entrants pose a serious challenge to established scheduled and charter carriers, therefore, we will also see the emergence of strong competitive pressures within the low-cost sector. We expect leading players to increasingly accentuate different aspects of their business models to enhance their competitive position. While Ryanair will cement its dominance as price leader in the "lower" fare segment, upmarket low-fare rivals such as easyJet, germanwings, Hapag Lloyd-Express and Buzz will engage in a ferocious battle for leadership in the high-quality part of the German low-cost market. The effects on smaller charter airlines leaping onto the low-cost bandwagon are likely to be especially grim.
Realistically speaking, this consolidation process will begin long before 2007. Excessive expectations in these early days will take their toll over the coming months, following the abandoned German ambitions of Virgin Express.
Cell Consulting is a management consulting company established in Germany in January 2001 and focusing on several market sectors, including aviation and tourism. The forecasts presented in this article are based purely on the calculations of the authors and form part of a not yet concluded broader study of the European low-cost airline market.
| Aircraft in German low-cost sector by year-end 2002 | |||
| Airline | *Fleet | Types | Seats |
| DBA | 16.0 | 737-300 | 2,176 |
| Go | 1.5 | 737-300 | 222 |
| Ryanair | 5.0 | 737-800 | 945 |
| Buzz | 4.5 | BAe146/737 | 504 |
| germanwings | 6.0 | 319/320 | 894 |
| Hapag-Lloyd Express | 8.0 | 737-700 | 1,152 |
| Air Berlin | 14.0 | 737-400/800 | 2,380 |
| Berlinjet | 1.0 | EMB-120 | 30 |
| Otte Air | 2.0 | 737-400/800 | 340 |
| Total | 58 | 8,643 | |
| *Fleet=aircraft operating wholly or partly in the German market | |||
Source: Airline Business
