The first ever Airline Business low-cost survey demonstrates just how far the sector now reaches, and it shows no sign of any let up
If you thought they were growing incredibly fast, you were right. The first ever Airline Business low-cost airline ranking shows that the top 25 budget carriers by passengers carried saw volumes up by 23% last year.
In the USA and Europe, low-cost carriers now account for a quarter of intra-regional traffic, and Ryanair has overtaken Lufthansa to become the largest intra-European carrier. In the USA, Southwest is not too far behind American, Delta and United Airlines. The low-cost phenomenon is in its infancy in Asia, but it is growing rapidly despite the problem of restrictive bilaterals.
And while the growth rates in the recent past may look pretty spectacular, there is no sign of any let up in the immediate future. The sector has an order backlog of around 800 aircraft, with Ryanair's recent 70-strong order for Boeing 737-800s the latest in a string of similar orders since the beginning of the downturn earlier this decade. With mainline aircraft orders pretty thin on the ground during this period, budget carriers have been able to drive a hard bargain with manufacturers and leasing companies.
These new aircraft are likely to further increase market share at the expense of the mainline sector. In the USA, Raymond James and Associates analyst Jim Parker says he expects low-cost market share to increase to above 45% in 2009. In Europe, Mercer Management Consulting predicts that by the end of the decade, low-cost market share will be at least one-third. This compares with just 5% in 2000.
While much of this growth has come through budget carriers established in the 1990s, there has also been a spate of start-ups, and Mercer estimates that there were 54 low-cost carriers operating in Europe in the summer of 2004, compared with just 12 in 2000.
"The demand crisis of recent years and the allegedly solid prospects of the low-cost business model function like an incubator for new low-cost airlines and have accelerated developments enormously," says Dieter Schneiderbauer, head of travel and transport practice at Mercer.
Many of these 54 carriers are very small. The Airline Business low-cost ranking suggests there are just 13 low-cost carriers in Europe with volumes in excess of 1 million passengers last year, although start-ups such as Wizz Air will be added to this list when the 2005 ranking is published next year.
Will there be any airlines leaving the list? Germania Express will be one, as it will be rolled into the larger DBA following Germania's takeover of DBA. Danish budget carrier Sterling has also agreed to buy Iceland Express, while elsewhere there has been a jockeying for position, with various carriers striking up relationships, mainly focusing on marketing agreements. For instance, germanwings has struck up deals with bmibaby and centralwings, while Air Berlin has developed a close relationship with Austrian leisure carrier Niki.
Europe's most mature low-cost market, the UK, underwent a wave of consolidation a few years ago, with easyJet buying Go in 2002 and Ryanair following with the acquisition of Buzz in 2003. Consolidation in the wider, somewhat fragmented European low-cost sector has long been talked about, particularly in the crowded German market. In Germany speculation is rife that TUI, Europe's largest leisure group, is interested in buying Air Berlin – something that TUI has strenuously denied. The two already work closely together anyway, as TUI is Air Berlin's largest single customer for its charter business. Stefan Kick, airline analyst at ING Financial Markets, says that agreeing a price acceptable to both sides might prove tricky.
TUI is bringing Hapag-Lloyd Express and its Hapag-Lloyd charter arm closer together – a move that prompted the budget carrier's chief executive Wolfgang Kurth to quit late last year. Kick says that TUI has achieved one of its main aims in setting up Hapag-Lloyd Express – putting pressure on the pilots in the chartered fleet by threatening to channel future growth through its low-cost arm.
Merger momentum
Despite the apparent momentum building towards consolidation, Kick cautions that the merger of DBA and Germania will not necessarily be the start of a process of consolidation in the German market, noting that it is effectively a pact between two of the weaker players, putting them on a level footing with their peers. DBA's three million passengers, combined with around one million from Germania Express, will make the combined entity the third- largest scheduled carrier in Germany behind Lufthansa and Air Berlin.
Although Air Berlin has made some headway in becoming a third force in Europe, the market is dominated by Ryanair and easyJet, with 25 million-plus passengers each – and growing. Air Berlin carries about half this number, with the next biggest being Virgin Express, some way behind on just over two million.
Mercer's Schneiderbauer sees easyJet and Ryanair as the clear winners in the European low-cost battle due to their first mover advantage and consistent low-cost business model. But he notes that the winter season saw average ticket prices in the sector 20% lower than in 2000. He predicts that recent entrants will not be able to compete with Ryanair's low-costs (which see a 20% return on sales on average sector prices of €40 or $50). "We can expect to see massive consolidation in the low-cost sector. In 2010 this market will be dominated by three or four low-cost companies. Small carriers will only survive in niches at best."
The much talked about "winter bloodbath" in the low-cost sector was not as bad as some had predicted, but still saw Volare (of Italy), V-Bird (of Germany) and Air Polonia (of Poland) go out of business, while Basiq Air was merged back into parent Dutch charter carrier Transavia.
In the USA, the low-cost carrier phenomenon is no longer a phenomenon but a fact of everyday travel. Business travellers rely on low-cost carriers as a habit, and at one, AirTran Airways, account for nearly 40% of revenues. In a quality ranking by the JD Power market research firm, JetBlue Airways achieved first place and Southwest Airlines came in second, leading a Power official to note that they "listen to what's important to passengers".
The low-cost carriers are the single largest source of aircraft on order, but the sector has distinguished itself in added service amenities such as enhanced frequent flyer loyalty programmes and direct connections to its customers. Building on its well-established brand loyalty, for instance, Southwest recently added a feature it calls DING, that automatically e-mails customers its short-term sales such as an eight-hour promotion.
AirTran, representing a sector-wide trend, has made itself an easier booking for the corporate customer through direct connection into its fares using the Cliqbook corporate-booking technology from OutTask. The sector is heavily selling itself to corporate customers and most low-cost carriers have a corporate sales website.
Network growth
It is perhaps in the area of network expansion that the low-cost carriers have changed the game most this year. They are finally going deep into primary airports in major business centres, which they had held off from doing for years. Emboldened by Southwest's daring foray into Philadelphia International last year, JetBlue is building up Boston Logan, while AirTran is entering Charlotte and Southwest is also attacking Pittsburgh, both US Airways-dominated hubs.
AirTran, which has had a Logan toehold for years, is playing its expansion cautiously, holding off on a major move into the Dallas market as Delta contracts there. AirTran's Boeing 737 fleet, now at 11, is growing at a rate that will see it double in size by 2008.
But the game changes even more later this year when the first of JetBlue's Embraer 190 100-seaters enter service, bringing its fares and services to secondary cities. By 2011, it will have 100 of the Embraers, enough to saturate the eastern half of the country and overcome the added costs of having a second fleet type.
JetBlue has led another major incursion by the low-fare carriers. They are eating deeply into the cross-country markets that had long been the exclusive – and lucrative – domain of the network players. By this summer, JetBlue will operate nonstop service to nine West Coast cities from its New York JFK hub, with other cross-country routes linking its focus cities of Washington Dulles and its just-added focus city of Boston.
It is adding Portland, Oregon and Burbank, its seventh city in California and third in the Los Angeles area. As Parker of Raymond James notes: "The legacy carriers did not stop JetBlue's growth in the transcontinental market and they, along with America West, have since retreated." Even struggling Independence Air is in the cross-country markets with flights between its Washington Dulles base and Los Angeles, San Diego, San Francisco, San Jose and Seattle.
The majors have not totally surrendered, however, and the two low-cost off brands, Delta's Song and United's Ted, are fighting back. Each is expanding its separately branded low-fare unit, with Ted now having 49 Airbus A320s. Ted will be focused on routes from United hubs in Chicago, Denver, and Dulles to Florida and other leisure destinations. In Chicago, United's hometown, Ted serves not only the O'Hare hub but also Midway, the city's low-fares mecca that is dominated by Southwest.
Song, which many expected to die under Delta's new management, will instead grow, adding one-third more Boeing 757s this summer to make it a 36-strong fleet, with 12 more due to join them. Song, in particular, is defending Delta's routes across the country, taking over mainline service between JFK and Los Angeles. Song is doing so not just with fares but with amenities, adding in-flight entertainment options such as films, live television and choices of digital music, in part to compete with JetBlue, the first carrier to offer Live TV. AirTran, however, backed off any live type of TV and added satellite radio.
Low-cost airlines are continuing to increase their presence in parts of Asia, particularly in South-East Asia and the Indian subcontinent. The going has been difficult for some in the international arena, given restrictions in bilateral air services agreements, but the momentum for liberalisation appears to generally be on their side and the key players are bullish about long-term prospects.
Asian pioneer
Hoping to emulate the success of fast-growing Asian low-cost pioneer AirAsia of Malaysia, last year several new airlines were established in Singapore and Thailand. In Thailand, new players One-Two-Go, Nok Air and Thai AirAsia have focused primarily on domestic routes, while in Singapore, with no domestic market, Jetstar Asia, Tiger Airways and Valuair have been fighting for international traffic rights.
China is another market that should see developments this year. Start-up carrier Okay Airways started operating early in March as the first privately owned airline in China. It is sub-leasing Boeing 737-900s from Korean Air and is currently operating domestic charter services, although it aims to offer scheduled domestic no-frills services.
Several more privately owned airlines are, meanwhile, now being established within China, such as Air Spring and Eagle United, and it is thought that all the new players are planning to focus on the low-cost business model.
The biggest potential this year, however, is seen coming from the Indian market, where the government has been easing restrictions to allow for the establishment of new airlines. The low-cost model was introduced to India by Air Deccan in 2003, and its phenomenal success has led others to try to copy it. Many new airlines are planned within India for launch this year, some with deep pockets such as the United Brewery Group's Kingfisher, and the Wadia Group's Go Air.
Asia-Pacific carriers may be thin on the ground in this year's ranking, but will undoubtedly make more of an impression next year as some of the start-ups reach cruising altitude. There is little certainty in the airline industry, but few would bet against more sector-wide stellar growth in next year's table. And there is a fair chance of some casualties, particularly in Europe, as the industry starts to mature.
COLIN BAKER LONDON, DAVID FIELD WASHINGTON AND NICHOLAS IONIDES SINGAPORE
Source: Airline Business
