The battle is heating up between low-cost and mainstream carriers in Europe. EasyJet argues that low-fares operators will come to dominate on the major routes, while full-service bmi british midland has countered with a call to match the labour flexibility and lower charges.

Low-cost services will become the norm for direct air services between Europe's major centres predicted Ray Webster, easyJet chief executive, during the opening debate at the annual Future of Air Transport conference hosted in London on 12-13 November by UK free-market think-tank The Institute of Economic Affairs.

Although conceding that high-speed rail may take share on shorter journeys, Webster believes that low-cost airlines will come to dominate on mainland Europe as they have started to do in the UK. "The potential of the European market to absorb low-cost services is immense," says Webster, estimating that the mainland market has perhaps seen only 5% of the potential penetration that low-cost carriers could expect to see.

Webster adds that global deregulation will raise competition on core long-haul markets, for the traditional carriers, reducing their ability to continue subsidising "inefficient regional networks". He also notes that easyJet's model includes capturing business travellers. Of the 7.1 million passengers carried by easyJet in its financial year to September around half were on business journeys.

Such figures are supported by Paul Kehoe, managing director of easyJet's base at London Luton Airport and European director for its new owners the investment group TBI. Kehoe says that the socio-economic profile of passengers at Luton, once famous as a cheap charter airport, is now on a par with that at London Heathrow. Around 47% of Luton's passengers are in the A/B professional/managerial category against 49% at Heathrow. That breakdown, adds Kehoe has been achieved despite the airport having no carrier offering a business or first-class product.

Meanwhile, bmi british midland, itself a long-standing champion of free markets, has led with a response to the low-cost threat. "We aren't reinventing ourselves as a low-cost carrier. We are applying low cost principles to our business," says chief executive Austin Reid.

He believes reform of labour practices is the chief target. "Labour productivity and labour relations are the biggest inhibitor to the mainstream airline industry moving forward," he says, also complaining bitterly about the help that low-cost carriers have had from cheap deals on airport charges and aircraft, in particular the Boeing 737. "Other people have made it possible for these businesses to succeed," he says, issuing a thinly veiled warning about "discriminatory" price differentials at some airports.

Reid acknowledges that mainstream carriers also must take some of the blame for allowing their marketeers to go "wild extolling the virtues of business class" and raising the multiples between business and economy fares to 7-8 times on long-haul and 4-5 times on short-haul routes. "Perhaps a gap in the market is being created. Knowingly or unknowingly," he concedes.

Alliance warnings

Despite bmi's much-heralded entry to Star, Reid also acknowledges that global alliances are by themselves not an answer - a theme echoed throughout the London conference. "While alliances have proved moderately successful they are unwieldy, slow and ponderous in their decision-making," he says.

"Alliances must refocus to address the new economic environment or face irrelevancy," said John Laffan, head of the aviation sector at Cap Gemini Ernst &Young, previewing some of the early research findings for the new edition of the latest Future of Airline Alliances, the study carried out jointly with Airline Business. He argues that alliances need much clearer and achieveable objectives and faster decision-making if they are to succeed. CSA Czech Airlines, part of SkyTeam, also added its view that the focus of alliances has shifted from achieving critical mass towards issues of strategy and consistent quality standards It warns that this may make it more difficult for small carriers to join the global groupings in future.

Source: Airline Business