The explosion in low-cost travel has historical parallels
The boom in European low-fare airlines shares many similarities with the explosion in the UK 30-40 years ago of inclusive tour (IT) "package" holidays. The legacy of today's low-fare airline passenger in Europe originates with the "bucket-and-spade" package market of the 1960s and 1970s.
The birth in the 1960s of charter airlines such as Britannia Airways and Monarch Airlines, as well as the now-defunct carriers Dan-Air and Laker Airways, provided capacity for the embryonic tour-operator business and opened air travel and overseas holidays to the masses. Although those airlines operated non-scheduled flights, they infiltrated and diluted Europe's short-haul market and provided the same thorn in the side of established full-service carriers as today's low-fare scheduled airlines do.
Like the low-cost carriers (LCCs), these airlines flew from what were then secondary airports (such as London Gatwick) and provided incredible value for money - packaging accommodation, flights and transport to resorts for a rather unsophisticated first generation of budget international holiday maker.
Like the current trend, these no-frills, cheap travel providers forced the mainline carriers to spend many hours working out how to tackle them, with several creating their own charter subsidiaries, like UK flag carrier BEA's Gatwick-based arm BEA Airtours, which was set up in 1970.
While the UK was establishing itself as the world's largest charter airline market, the budget airline business was crystallising in a subtly different way in the USA. The sheer size of the continent ensured that air travel had become a way of life much more quickly than it had in Europe. "Air travel had been commoditised in the USA before the low-cost boom there," says Buzz commercial director Tony Comacho. "That was not the case in Europe."
Although Dallas-based Southwest Airlines is the grandfather of today's LCCs, the recognised pioneer of this market sector was another US airline, San Diego-based Pacific Southwest Airlines (PSA), which operated Lockheed L-188 Electra turboprops during the 1960s on high-frequency north/south flights throughout California. Despite its pioneering strategy, the airline disappeared in 1988, following a take-over by US Airways.
Using PSA as its model, Southwest was started in 1967 by Rollin King and Herb Kelleher as Air Southwest before adopting its current name in 1971. It was the beginning of deregulation in the USA in 1978, however, which really lit the blue touch paper for the growth of the independent airlines and Southwest in particular as it established the no-frills "peanuts" image, now so widely imitated, as its own.
Surviving deregulation
However, the gold rush that followed US deregulation was a false one for the vast majority who pursued it. As one industry observer puts it, since deregulation, 500 start-up airlines have emerged - but only 10 have succeeded.
By the late 1980s, the European leisure-travel market was dominated by the tour operators, which underwent a period of consolidation and created powerful in-house flying divisions. This left a few independent carriers to fight over third-party or ad hoc charter work.
In 1987, the Europe's air-transport market began a European Union (EU)-ledre-organisation, just as it had in the USA nine years before. Undertaken through a10-year, three-phase programme, the process did away with the old system where schedules, fares and passenger numbers had been largely controlled by bilateral agreements between European nations. As a result, since 1997 any airline holding a valid air operator's certificate (AOC) in the EU can fly any route within the region, including services entirely within another country.
Irish independent scheduled airline Ryanair, which was the first LCC to put the EU reforms to good use, almost failed to survive long enough to see the package fully implemented. Launched in 1985 offering cheap fares on the Dublin-London route, by the early 1990s it was facing closure after failing to control costs.
A new management team, headed by "company doctor" Mike O'Leary, was put in place in 1990, and Ryanair relaunched as Europe's first "low-fare/no-frills" airline, dropping 14 non-profitable routes and focusing on just five routes from its Dublin hub. Fares were substantially reduced so that 70% of all seats were offered at the two lowest fares. A year later it went into the black for the first time.
In 1997, Ryanair took advantage of the completion of the the EU reforms, setting up a second hub in London Stansted to serve continental Europe with initial services to Oslo and Stockholm. It now flies 41 Boeing 737s and last year carried over 10 million passengers from five hubs throughout Europe.
With Herb Kelleher as professed mentor, Greek shipping tycoon Stelios Haji-Ioannou decided in 1995 that the UK was ripe for the Southwest formula, and established EasyJet at London Luton. The airline fast-tracked its start-up by using the AOCs of Air Foyle and GB Airways, inaugurating services from Luton to Edinburgh and Glasgow with two leased 737-200s in October 1995 - just six months after it was created. The airline secured its own AOC two years after launch.
With the larger-than-life Haji-Ioannou at the helm, its aircraft painted bright orange and the advertising slogan: "Making flying as affordable as a pair of jeans", EasyJet quickly made a name for itself, with the industry and the public alike.
Haji-Ioannou pursued a strategy of selling direct to his customers, much to the chagrin of travel agents, with the carrier's telesales number painted in huge characters on the side of its aircraft. Although it was not until April 1998 that EasyJet became the first European LCC to sell tickets on the web, internet sales now account for well over 90% of business - as it does for most operators in the sector.
Meanwhile, Richard Branson added his Virgin label to the LCC sector in 1996, when he purchased Brussels-based charter and scheduled carrier EBA, renaming it Virgin Express. After flirting with a second hub in Shannon, Ireland, the airline has now retrenched to its main base in Brussels - but is well placed to take advantage of last year's collapse of Sabena.
BA interest
The no-frills carriers were commanding the attention of the then British Airways chief executive Bob Ayling. After an abortive plan to buy EasyJet in 1997, Ayling set up Go at London Stansted. This strategy was stopped in its tracks after the appointment of Rod Eddington, who succeeded Ayling as BA's chief executive in 2000.
He found the stand-alone Go operation a curious annexe to an already embattled airline and quickly decided that there was not enough room for both airlines under the same roof. "I either had to sell BA or sell Go," he says, convinced that an LCC and a full-service airline could not work together within the same group.
The airline was cut free from BA in June last year after the completion of a £100 million ($142 million) 3i-funded management buy-out. Go chief executive Barbara Cassani has since said that BA's disposal of Go came "at the worst possible moment", as the airline had put its start-up losses behind it and was about to move into profit. The shift in market conditions since then has made the airline much more valuable, as BA's own value has tumbled.
Meanwhile, faced with the explosive expansion of LCCs into its London Stansted hub during the late 1990s, UK regional airline KLM uk recognised that it had to reorganise its operations to counter the threat. It created low-fare arm Buzz in January 2000, using a technique frowned upon by the established no-frills operators, transferring eight ex-KLM uk BAe 146-300s along with their crews to Buzz, and leasing two Boeing 737-300s.
KLM recently stated its long-term commitment to the LCC market and is launching a review of its future business strategy in the sector.
After several years of resisting pressure from no-frills airlines, BMI British Midland was forced to join the bandwagon last month after Go announced plans invade to its patch at East Midlands Airport. Flying two 737-300s transferred from its parent, Bmibaby claims to be more than just a rebranded BMI for the low-fare market. The heads of the existing LCCs were less convinced: EasyJet chief executive Ray Webster was adamant that a low-cost carrier cannot be created from a high-cost operation, while Ryanair's O'Leary saw the move as "a late, kneejerk reaction". Go's Cassani warned that this tactic "was tried in the US and failed every time".
Only time will tell if the move signals a major repositioning for the UK full-service airline on its European network.
BA's Munich arm Deutsche BA is repositioning itself with an orange colour scheme and the intent of "returning to our roots" in the German no-frills market. The airline will cut costs in an effort to move into profit and will offer ticketless travel, despite keeping low-density seating and food service. This raises the question of whether it can truly be regarded as an LCC.
Source: Flight International
