ANALYSIS: Europe's low-cost segment stakes business case

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It is nothing new to see low-cost carriers in Europe muscling in on the short-haul business traffic previously the domain of network carriers.

The ground between the two has been blurring for some time as several European low-cost carriers have gently shifted their positioning upwards, while network carriers have moved the other way in order to be better compete on short-haul with their budget rivals.

But a glance through recent announcement illustrates just how far this shift has gone. Spanish carrier Vueling for example has just unveiled a new business product on its flights and its recent Barcelona route expansion includes a service to Lufthansa's Frankfurt Main fortress. EasyJet which is itself now rolling out assigned seating across the network, has just beaten Virgin Atlantic to the rights to fly a sector as long as London-Moscow and as short, but fundamental business route, as Rome Fiumicino to Milan's downtown Linate airport. While Lufthansa has fully embraced the Germanwings brand for its shake-up of short-haul non-hub flights.

During the unveiling of its large route expansion and new business class product in Barcelona, Vueling chief executive Alex Cruz described the airline not as a low-cost airline, but an airline that has low operating costs. This illustrates the subtle shift seen as many carriers that were born out of the low-cost segment are increasingly looking at wider horizons.

"We have a commitment to address the premium market, and that means offering the same product as the traditional airlines," said Cruz, speaking at the recent Airline Business-organised World Air Forum in Amsterdam. Vueling's new Excellence class includes differentiated cabin seats, access to VIP lounges, priority boarding, snacks and refreshments, ticket flexibility and extra loyalty points.

"Its business class without a curtain," says Cruz. "We want to focus on less capital intensive things, and more on services valued by customers." That includes things such as individually greeting its premium passengers. "We'll find ways to make it more premium, but it has to deliver value," he says.

Vueling has already made plenty inroads into the business market. "We are at about 39/40% [business traffic]," says Cruz, adding the carrier is hoping to lift this to 50%. "Setting the challenge is not about the numbers, for us it's the road to get to the numbers," he says.

The Spanish carrier is far from alone in better positioning itself to cater for business travellers. Highly-utilised, modern aircraft operating on fast turnarounds are central to the low-cost model, but also well suited to delivering the high frequency and punctuality appealing for business travellers. And this higher-yielding traffic helps those from the low-cost segment to lift their average seat revenues at a time when fuel has driven up overall costs.

"They go where the business is. For a long while they focused on the low-hanging fruit," says Peter Morris, chief economist at Flightglobal's Ascend. He notes this leisure market focus initially tended to attract business traffic only at the margins - for specific point-to-point needs - but have become more relevant to this sector as they built up their networks and frequencies. "They started with the low-hanging fruit and are working their way up the tree," he says.

"It's a kind of changing of the guard as the frequency goes up and up," he adds, noting that on some routes network carriers have gradually cut back or pulled competing services altogether, enabling low-cost carriers to consolidate with more frequencies. "Another thing that appeals to low-cost carriers is the business market is a year-round market, rather than seasonal," Morris adds.

While the low-cost model has never been one size fits all - carriers like EasyJet having long operated out of primary airports - it is clear the extent to which operators from the low-cost segment have stepped outside of the world of secondary airports. Analysis of the ten largest airports in Europe in 2011 by passenger number, none of which were traditional low-cost carrier strongholds, shows a strong presence from the segment at all but a few of the major hubs.

Airport

Pax 2011

LCC share

Biggest LCC

London Heathrow 69.4m 1.3% Germanwings
Paris CDG 61.1m 7.9% EasyJet
Frankfurt 56.4m 3.1% Air Berlin
Amsterdam Schiphol 49.8m 15.0% EasyJet
Madrid Barajas 49.6m 25.9% Ryanair
Munich 37.8m 13.4% Air Berlin
Rome Fiumicino 37.7m 16.5% EasyJet
Istanbul 36.0m 1.0% Pegasus
Barcelona 34.4m 58.0% Vueling
London Gatwick 33.7m 51.2% EasyJet
Source: low-cost carrier share based on weekly frequencies for week of 10-16 October 2012 in the Innovata schedule database

Weekly flights data for the week of 10-16 October from the Innovata database, show low-cost operators accounting for more than half the flights from Barcelona and London Gatwick. Vueling and Ryanair continue to grow at the former, while Gatwick already has EasyJet as its largest operator and will see Norwegian opening a three aircraft base there next spring.

The data shows double-figure shares for the low-cost segment at four other leading airports. Ryanair and EasyJet for example hold 9% and 7% share of flights at Madrid Barajas.

That leaves only London Heathrow, Frankfurt Main and Istanbul Ataturk out of Europe's 10 biggest airports still to be significantly served by carrier sector.

This share of low-cost carriers seems certain to continue to grow, especially as network operators turn to their own creations in the sector - such as Lufthansa with Germanwings and Iberia with Iberia Express - to tackle their short-haul network challenges.