COLIN BAKER LONDON
The performance of Europe's low-fare carriers paints a stark contrast to that of their mainline cousins
In contrast to the gloom and doom surrounding most other carriers in Europe, the low-fares sector has been brimming with confidence of late. As some of the region's national carriers struggled for survival, easyJet chief executive Ray Webster was claiming that the low-fares experiment had so far only taken up 5% of its potential penetration into mainland Europe. Days later Michael O'Leary, Ryanair's chief executive, announced that Frankfurt Hahn was to be the carrier's second hub in continental Europe after Belgium's Charleroi in April 2001.
It is true that low-cost yields have been under pressure as mainline carriers offer heavy discounts to fill empty aircraft. However, Chris Avery, analyst at JP Morgan, warns that mainline carriers will not be able to continue this strategy for long, and says the yield pressure on low-cost carriers is already easing. Wide-ranging capacity cuts by the majors, have presented an abundance of market openings for low-cost competitors. EasyJet, for instance, hopes to set up a base at Paris Orly and expand its toehold at London Gatwick. "In time, many other national airlines will follow British Airways' example at Gatwick and begin to retrench from some of Europe's busiest airports," predicts easyJet founding chairman Stelios Haji-Ioannou.
Meanwhile, Buzz, KLM's low-cost offering, is planning to add another nine new routes from London Stansted to France and aims to launch a handful of domestic French services this summer. At the same time, Go, after posting its first financial results since its management buy-out, announced plans to launch a third UK hub at East Midlands Airport, home of bmi british midland. That will sit alongside London Stansted and Bristol when it launches in May. However, Go is dropping destinations to Dublin, Edinburgh and Glasgow after a battle with Ryanair, still the lowest cost of the low-cost carriers. Buzz too will drop services from Stansted to Milan and Helsinki.
If anything, Ryanair is talking up the need for further aggressive action on cost after 11 September. "The only change is that opportunities for cost reduction are even greater," says O'Leary. Ryanair has had around 2,500 replies to its advertisement for unwanted Boeing 737s. O'Leary, in typically pugilistic form, accuses Boeing of "screwing around" with prices and "being too expensive".
O'Leary makes no secret that Ryanair aims to squeeze airports, ground handlers and all aspects of its cost base. It has even taken back management's mobile phones. Marketing and distribution costs have fallen at an annual rate of 30% to the end of September 2001, despite a 37% increase in volume. This is mainly thanks to the Internet. Against this background, he believes that the carrier will ride out the deteriorating yield environment, predicting that although operating margins of around 28% or so may be unsustainable in the near term, they will remain above 20%.
Hahn move
Ryanair's move into Hahn had been widely anticipated - the German airport was only narrowly pipped to the post by Charleroi last time round. Even so, the move has attracted much interest. Taking on Lufthansa and the German charter industry (where about 20% of capacity is seat-only) is a different proposition from vying with Sabena at "Brussels South". Yet Ryanair has said that the real competition is the car. Initial destinations include the south of France, an area to which German holiday-makers often drive.
Dr Keith Mason of Cranfield University's college of aeronautics, notes that remarks from various local commentators along the lines that "Germans will never drive to Hahn" are eerily similar to those made in the UK about Stansted and Luton before Ryanair and easyJet established themselves at the little-used airports and revolutionised the UK air travel market.
For certain, Ryanair's seat costs are considerably lower than those of Lufthansa. Research from US-based financial institution Raymond James & Associates claims that Ryanair's unit cost is 4.4¢ per seat kilometre (7.1¢ per mile) compared to 10.6¢ for Lufthansa.
Ryanair is planning a razzamatazz launch on 14 February, when it will start operations from Hahn with two Boeing 737s. These initial two will be joined by an extra 737 early in March and another later on in the year, bringing the total to four. With around 5,000 seats available every day, Ryanair is likely to fill a large proportion of the airport's 1.5 million passenger annual capacity. The airport, which has already been enlarged once, is likely to expand again, bringing its capacity to the 2 million mark.
Hahn's marketing manager Maria Benesch estimates that 15% of German passengers and 30% of UK traffic will be business-orientated. She points out that not all business passengers head for Frankfurt, citing the presence of industrial centres such as Ludwigshafen and Ford's presence in Saarlouis. Perhaps Ryanair's presence at Hahn could finally mark the spread of the low-cost experiment to central Europe.
Source: Airline Business
