Europe's charter carriers are joining the low-cost boom in an attempt to find new growth beyond the sluggish package holiday business
Europe's traditional travel giants have watched on with envy as the new low-cost carriers produced startling growth rates. That is in clear contrast to their own inclusive holiday businesses, which has continued to shuffle slowly along. So far the two have sectors have rarely clashed. Although budget airlines have come to dominate leisure travel to Europe's cities, the charter groups have maintained their position in the traditional beach resort market. However, any such distinctions are rapidly blurring.The UK's low-cost carriers have already begun to encroach on the main Spanish holiday destinations such as Alicante, Malaga and Palma de Mallorca. While it may have been slow in coming, this year the charter sector has finally made its response.
The vertically integrated travel groups, such as MyTravel, TUI and Thomas Cook dominate the European charter airline sector. All are starting to test the water with their own low-cost products. MyTravel (formerly Airtours) has launched budget carrier MyTravelLite, while in Germany, Europe's largest leisure travel conglomerate TUI has teamed with Germania to launch Hapag-Lloyd Express. Thomas Cook has not launched directly into the budget sector and neither has Lufthansa, its 50% owner. However, it is experimenting through the back door as German carrier Eurowings, in which Lufthansa has a 24.9% stake, launches a new German Wings operation out of Cologne/Bonn airport. Europe's largest independent charter operator, Air Berlin, is also launching into the low-cost city break market.
Charter carriers have good cause to look to the budget model for future growth. As a recent report from the World Tourism Organisation warns, the traditional package tour is looking increasingly dated, as travellers create their own holidays, choosing their own accommodation and the duration of their stay.
Tim Jeans, chief executive of the new MyTravel-Lite operation, insists that the decision to become the first UKtravel group to launch a dedicated low-fare scheduled operation was prompted more by a desire to cash in on interesting new growth opportunities, rather than from fear of losing the traditional business. "It was a truly strategic decision," he says. "The low-cost market is growing significantly faster than the core business."
MyTravelLite is using two Airbus A320s from the MyTravel Airways charter fleet out of Birmingham Inter-national Airport, and will serve the Spanish resort destinations of Alicante and Malaga, with a substantial expatriate community; Belfast, with its visiting-friends-and-relations traffic; winter sports destination Geneva; and the low-cost Paris Beauvais airport.
Ryanair pedigree
When MyTravel announced its low-cost intentions, there were plenty of raised eyebrows in the financial community, with doubts expressed about the group's ability to venture from its core package-holiday business into an already crowded market dominated by Ryanair and easyJet. The appointment of Jeans, former sales and marketing director at Ryanair, to head the new concern, has somewhat helped soothe these fears.
He is under no illusions about the likely extent of competition, but argues that the link with the MyTravel charter operation will provide key strategic advantages. He believes he can successfully marry the low-cost and charter cultures to provide a profitable operation by the end of the financial year 2003.
Jeans cites the Paris market as a clear example of the benefits of being linked to a travel group. MyTravel owns the 400-bed Explorer hotel in EuroDisney near the French capital, providing MyTravelLite with an opportunity to offer accommodation to customers on its Birmingham-Paris Beauvais service. They can provide the independence and flexibility offered by the airline schedule but also the convenience of a pre-booked hotel. This type of co-operation - "dynamic packaging" - will also see other MyTravel products, such as the Autos Europe car rental business offered on the MyTravelLite website.
Although the Internet will be the key distribution channel, seats will also be sold through the 750 MyTravel-owned town centre travel shops, and co-operation with group tour operators such as Airtours, Bridge and Cresta will help to boost load factors. As can be expected from a former Ryanair man, commissions are firmly ruled out.
The main advantages, however, may come on the cost side. Jeans estimates that MyTravel gets an average of 4,000h flying a year out of its aircraft, compared to 2,600h at Ryanair, and is confident that MyTravelLite will comfortably be able to beat his former employer in aircraft utilisation. He has been particularly impressed by the 24h work ethic at the airline, and points out that MyTravelLite can take advantage of the back-up aircraft from its sister charter operation. MyTravelLite will be getting four rotations on each of its two Airbus A320s.
The backing of the parent group also means the new carrier is not saddled with huge entry costs. "We are not a typical two aircraft start-up," Jeans points out. The aircraft and flightdeck crew are supplied by the charter airline, while cabin crew will work across both products. By using aircraft from the charter operation, the start-up avoids the need to obtain a new air operating licence, requiring only new livery and uniforms.
Notwithstanding, there is no doubt that MyTravelLite is entering a crowded UK marketplace. Europe's low-cost revolution more or less began in London, with Ryanair, Buzz and Go (now acquired by easyJet) dominating Stansted, plus easyJet at Luton and growing at Gatwick. Already bmibaby and flybe (formerly British European) are bringing low-cost service to provincial UK airports, and MyTravelLite will accelerate that trend. Jeans says that there is still uptapped growth in the regions which could be stimulated by the availability of low fares as it was in the capital. He admits, however, that the potential for inbound traffic at some of the remaining airports pursuing low-fare service is somewhat limited.
By and large, low-cost carriers have avoided going head-to-head on city pairs. A notable exception was Go's decision to take on Ryanair on the Dublin-Glasgow/Edinburgh routes last year - a move widely seen in the industry as ill- conceived. It was quickly abandoned and Go has anyway since been absorbed by easyJet. But as Jeans readily admits, as the sector grows, competition will inevitably become more intense, bringing with it the possibility that one of the big players will take on the newcomers.
"We have quantified this as a business risk, and we are going in with our eyes open," Jeans says, adding: "Our unit costs are lower than our competitors', and we are just as capable of sitting out a price war." He believes, however, that Ryanair and easyJet are more concerned with establishing themselves in the rest of Europe than fighting domestic battles. Indeed, they are starting to make waves in key European markets.
German response
TUI's Hapag-Lloyd Express will operate out of Cologne-Bonn, wet-leasing eight Boeing 737-700s from independent charter airline Germania. Eurowings, meanwhile, is transferring its charter fleet of five A320s to a new operation that rekindles the German Wings name.
Eurowings part-owner Lufthansa has kept a close eye on the budget sector in recent years, although chairman Jürgen Weber has always said that it would only enter the market if it thought it could make a profit. "This move allows Lufthansa to experiment," says professor Borislav Bjelicic, senior vice-president at German transport bank DVB. "They have always been looking to establish themselves in the low-cost sector. The easiest way is to test the market through Eurowings." A key problem for Lufthansa has always been keeping the unions on side if it went down the low-cost road.
Bjelicic points to the tendency in Germany for the larger independent charter carriers to move over to the low-cost model. They have been squeezed in the middle. On the one hand the low-cost carriers are expanding rapidly, and on the other, the major travel groups now have sizeable, vertically integrated charter operations of their own.
Berlin-based Germania has been heading away from the pure charter model for a couple of years, but the strategy is now much clearer through the deal to provide capacity for Hapag-Lloyd Express. Like the new Eurowings operation, it is also based at Cologne-Bonn, an airport that is rapidly becoming the German equivalent of London Stansted. The recent decision by Virgin Express to abandon plans to set up there are perhaps a sign of how fierce the competition there is likely to get.
Cologne-Bonn has a number of attractions, including a large catchment area (including Düsseldorf and the Ruhr region), good transport links and - like Stansted before the budget boom - plenty of capacity to spare. There are few, if any, other German airports which can offer these advantages, although Leipzig in eastern Germany is seen by Bjelicicas as a potential low-fare base with its relative proximity to Berlin.
Meanwhile, Europe's largest independent, Air Berlin - which has mainly carried leisure traffic to the Mediterranean - is launching services to London Stan-sted, Barcelona, Bergamo (for Milan) and Vienna, from various German regional airports, operated by Boeing 737s.
Charter cost advantage
As with MyTravelLite, the cost of entry for these newcomers is relatively small, with aircraft and crew largely transferred from existing operations. However, it remains to be seen whether they will be able to compete with the likes of easyJet and Ryanair in the long term.
"Charter carriers might have lower wages than mainline carriers, but the question is, are they lower than Ryanair's?" says Bjelicic. He points out that the likes of Hapag-Lloyd may be able to charge a slight premium because they are a domestic brand, but the fact that Ryanair is able to operate with Irish wage costs and taxes is a significant advantage.
A similar dilemma faces Europe's third-largest charter market, Scandin-avia. The region's dominant carrier, SAS, is exploring the possibility of entering the low-cost sector, but will face similar issues to Lufthansa when it comes to labour costs. Ryanair already has a strong presence in the region, and is known to be keen on setting up a base there, probably in Stockholm.
Significantly, MyTravel Airways A/S, as the former Premiair is now known, provides the MyTravelLite parent with a sizeable presence in the area. Sources close to MyTravel make no secret of the fact that, should their budget offering prove a success, it could form the backbone of a similar exercise to take on both Ryanair and SAS.
Clearly there has been a significant amount of activity in a relatively short space of time in this sector, and Bjelicic is not alone in predicting a shake-out somewhere down the line. It also remains to be seen whether the other charter carriers will respond in kind. In the UK,Britannia Airways, now part of the TUIgroup alongside the sister Thomson Holidays business, recently launched its Britannia Direct seat-only product. "We've introduced more flight-only options with Britannia this summer in response to demand for more flexible travel," says Chris Mottershead, managing director at Thomson Holidays. "Lots more people are buying holiday homes abroad or timeshares, so it's important that we offer competitively priced flights to cater for this growing market."
Rivals are quick to point out that Britannia is bound to see load factors suffer as it loses control over when its passengers fly. For instance, customers are far more likely to opt for weekend rather than mid-week flights.
Yet seat-only products are just another part of a changing landscape in which passengers are given more choice over when and how they travel, and in which the old distinctions between charter, mainline and low-cost airlines may be much less relevant.
REPORT BY COLIN BAKER
Source: Airline Business
