For the low-cost carrier segment, 2011 saw a further spread of the model. Double-digit growth continued, with passenger numbers at the 75 biggest carriers jumping by 11.6%. Revenues among 30 of the leading carriers increased by a quarter.
Profits, however, struggled to keep pace with 2010 as no carrier - whatever the model - is spared the pain of higher fuel costs. Operating profits for the same 30 airlines were down by around a fifth to $3.3 billion, while net profits were halved to $1.3 billion.
Air Berlin and Brazil's Gol were among the strugglers in 2011, but elsewhere there were solid, if unspectacular, profits from most. Overall the top 10 low-cost carriers were profitable again in 2011, continuing a steady run of profits during a period in which their network rivals yo-yo between red and black. Ryanair, which posted net profits of $500 million for the year to March 2011, is set to lead the pack with expected profits of around $600 million for the year to March 2012.
More eye-opening aircraft orders, such as the big commitments from Norwegian and Lion Air, show continuing ambitions in this part of the market. And alongside the wave of new low-cost ventures in Asia, the April launch of ambitious Volotea underlines that even in financially-stretched Europe, there remains investor appetite in the sector.
NO FINANCIAL PANACEA
However, head of LEK Consulting aviation and travel practice John Thomas argues the low-cost model is not in itself a panacea for economic success. "Running an operationally excellent airline is totally insufficient on its own in terms of generating an attractive return to shareholders. You have to do more than that."
For him, the key area to develop - and opportunity to differentiate - lies in ancillary revenues. He argues the airlines that have been the most profitable are those that have done the best job on this income stream and that low-cost carriers are best placed to exploit it. "We think they have the opportunity to take advantage of ancillary revenues because of the mindset of the passengers," says Thomas. "There is a customer expectation they have to pay to have an enhanced experience."
"What we have seen are airlines like JetBlue and others using ancillaries as a sell-up opportunity," he adds. JetBlue itself says it see ancillary revenues as an important stream, but adds from a customer vantage point it's about new opportunities to add value "rather than charging for things they are currently receiving for free today".
Things like bag fees or moves to airport check-in charges - while attempting to change consumer behaviour are punitive in nature. But Andrew Cowen, managing partner of Mango Aviation and former head of budget carriers Sama Airlines and Jazeera Airways, believes the emphasis is shifting to positive areas. "We've had a bit of an era where it was about how you could invent a charge. I personally felt it to be a bit short-term. It was good for profits but it just invites the regulator back in. But I think we are moving away into services that add value," he says. "The trick is to find the ones that have good positive customer benefits with no, or negligible costs or [those] that can be passed on the passenger."
Peter Morris, chief economist at Flightglobal's data and consultancy division Ascend, also sees plenty of scope for ancillaries. "What's interesting is how some of the carriers, such as AirAsia, have a very flexible business model, right the way down to getting involved in credit cards and frequent-flyer miles, on a basis that suits them, so they don't add cost with these things, but do add functionality. If you add value and functionality to your product and it costs you very little, why not do it?" he says. "You've really got to be quite belligerent to say: 'No, we don't do that as a matter of course.'"
One of the big drivers in ancillary revenues for low-cost carriers - particularly in the mature markets - has been the attempt to win higher-yielding passengers using network carriers. This has seen many carriers willing to look at elements of their operation and service that were previously off limits.
In Europe carriers like Ryanair and Wizz have begun selling reserved seating, while EasyJet is testing allocated seating whereby passengers pay to reserve specific seats.
EasyJet chief executive Carolyn McCall says the move is aimed at de-stressing the current boarding process. "We know passengers will like it; we know there might be some extra revenue in it. [But] if we don't think we can get it right operationally we won't do it," she says. "We are doing it in a very EasyJet way, so we will not compromise the operation - that is what the trial is about - and we don't intend to layer in any cost whatsoever."
It demonstrates the way low-cost carriers - whether it be using global distribution systems, operating frequent-flyer programmes, codesharing or even alliance membership - have evolved the original model and are themselves viewed differently by network peers. Who a few years ago would envisage Emirates putting its code on JetBlue flights or Air Berlin joining Oneworld for example.
"I've never entirely believed in a rigid inflexible model," says Mango's Cowen. "There's got to be some variance in how it is applied. The model that came out of Southwest and Ryanair just doesn't entirely work in all markets. There does need to be some flexing, especially on the commercial side."
Yet as the model evolves, so too does the competitive environment. Some of the advantages low-cost carriers have enjoyed over their peers come under scrutiny. For example, low-cost carriers' historical advantage of operating younger fleets has been eroding as network carriers ditched their oldest aircraft.
Two reports from consultants Oliver Wyman further highlight the pressure on their cost advantage. Its MRO Industry Landscape 2012 report suggests low-cost carriers' big advantage on aircraft maintenance costs could disappear over the next decade. While maintenance costs have risen for both legacy and low-cost over the last seven years, the report says the rate of cost growth for legacy carriers has slowed by 50% over the last four years. "If these trends continue, we believe that the [low-cost carriers'] long-held advantage could evaporate over the next 10 years," the report says.
Similarly, its fourth annual Airline Economic Analysis report found the cost gap between US network and low-cost carriers has declined for a fourth year and is at its smallest level ever. It cites flat labour costs at network carriers and improved fuel efficiency as a result of fleet renewal programmes.
This was evident in the warning delivered late last year by Gary Kelly - chief executive at low-cost carrier founding father Southwest Airlines. "The sloth-like industry you remember competing against is now officially dead and buried," he wrote. "Now, the enemy is our own cost creep, our own legacy-like productivity, and our own inefficiencies." Southwest, which saw profits slump 80% in the first quarter, is embarking on a programme to regain a historical cost-advantage eaten away after a decade of network carrier bankruptcy-protected restructuring.
"I think the territory is continually moving," says Ascend's Morris on costs. "There can never be any sitting back thinking you are there. It's eternal vigilance." And what comes next for low-cost carriers is tricky.
"You might describe the existence of low-cost carriers as a kind of black swan event," he says. "But now there is nothing but black swans around. So you've got to do something a bit different other than being black and being a swan in order to be recognised as significantly different."
He notes the challenge for these carriers is that having broken down barriers in distribution, airport deals, productivity and hubbing, is what can they do next? "They broke down all those doors and so the question is: what doors actually remain in which you can gain some kind of competitive advantage?
MATURE MARKETS CHALLENGE
But the opportunities to grow in the relatively untapped markets like Asia or Latin America differ widely from the maturer markets of Europe and North America.
Even within these markets there are different dynamics. LEK's Thomas highlights the impact of consolidation in the US market, which has seen carriers take out various hubs. "A lot of structural capacity came out. The result in the USA was capacity discipline, which should result in high economic returns. The problem with a financially strong North American industry is that it could encourage low-cost carriers to come into the market on a point-to-point basis. I think the USA is a potential danger, with capacity coming into the industry not from existing low-cost carriers but from new players."
However Thomas notes the situation in Europe is different. "While there has been consolidation, they haven't taken any capacity out," he says. "You still have hubs in London, Paris, Amsterdam and Madrid.
"Fuel may be the one thing that limits the growth of low-cost carriers in Europe," he adds. While low-cost carriers point to the ability to target trading-down travellers during times when fares are raised, Thomas says high fuel prices do impact their advantage. "Fuel price is a significant challenge for low-cost carriers. It does compress the differential."
Ascend's Morris believes growth among European low-cost carriers will be more about stealing market share than generating new traffic. He points to the impact of high oil prices lifting fares at a time of weak GDP growth. "What that gives you is not a lot of optimism in stimulating new markets, so you are talking about moving the furniture around between the various players - and that's going to be a challenge."
But in the emerging markets, notably Asia Pacific, the opportunity is very different. Asia has spawned a host of new Asia-Pacific start-ups, in contrast to Europe and North America, where new-entrant carriers have almost completely dried up.
"As Asia is opening up, it's easy to under-estimate how much Europe has already opened up," notes Mango's Cowen. "Asia is really only in the first half, maybe first third, of opening up. Deregulation is only at the start."
Cowen himself has been working on the recent low-cost start-up Peach Aviation, one of several attempts to bring this part of the business to Japan. Cowen again says this reflects deregulation in the region. "Japan has for so long been so heavily regulated, but it is now embracing deregulation. They are opening up Haneda and Narita, maybe a bit slowly for some, but it is happening."
Osaka-based Peach was created by All Nippon Airways as a joint venture. This forms part of a trend in the region where network incumbents have turned to low-cost partners in a bid to address the market - and even seen rivals Malaysia Airlines and AirAsia tie-up. This contrasts with the strategy seen previously in Europe and North America, where network carriers launched - and universally saw fail or fold - low-cost subsidaries.
"So much has to do with the people," says Cowen. "The flair carrier tends to take some of the best and brightest people to set up the low-cost carrier. But they have no previous experience to focus on the cost side rather than the revenues. So they struggle to keep costs down as they end up making compromises.
"What ANA has done is to learn from the industry - this includes only taking a minimum stake in the airline and recruiting specialists, in this case Mango," he says, noting that this is why ANA also tapped AirAsia to work on Tokyo-based AirAsia Japan.
Ascend's Morris says: "I think they have been a lot more open to the idea that 'we need to be part of this'. The way in which they have responded, or tried to be part of it, may have various plus or minus points, but nonetheless they have recognised the strengths of that particular business model.
But for all this, Cowen believes the model is not fully recognised in parts of the industry "The denial still exists," he says. "Many don't accord any legitimacy to the low-cost carrier model, despite it comprising 30-35% of the market over the last 10 years."