Is there any stopping the low-cost carriers?
Although the low-cost carriers (LCCs) have attracted huge attention from industry and investors, they still occupy barely 10% of the intra-European market. If they maintain their 25% a year growth rate for another decade, however, they will own around one-third of the market. How likely is this and what challenges will no-frills airlines have to face in the next 10 years?
Buzz commercial director Tony Comacho says it is "logical to ask: 'When will Ryanair take 50% of the European market?' The UK leisure-travel market has moved from being package-oriented to become more independent. The key to further European growth is whether the French and Germans are also going to do that."
As in the USA in the 1980s, the dramatic growth of the European low-cost sector in the past decade resulted from the start of airline deregulation. Close airline-airport links and the prevalence of state ownership and state aid have slowed the move to a truly free airline market - as has the multinational nature of Europe, contrasted with the single US market. However, as deregulation continues and the market becomes freer, it will be easier for no-frills airlines to start second and third hubs in other countries.
Already, EasyJet believes, low-cost airlines are engaged in a "scramble for Europe", with Go in Spain, EasyJet in France and Ryanair in Germany staking claims to the newly opened markets. Here they will face immediate competition from established full-service carriers - Lufthansa's struggle with Ryanair is a good example. For decades, flag carriers have regarded the domestic market as basically captive and short-haul services as essential "feeders" for their long-haul flights, typically more profitable than short sectors.
They will soon be under pressure to axe less lucrative services to preserve profits, as well as facing competition from low-cost carriers and high-speed trains.
The land-grab is happening now because it could not have happened earlier. To leave it later would put no-frills airlines based outside mainland Europe at a serious disadvantage compared to the mainland LCCs which will soon spring up. The structure of European aviation is still changing rapidly. Brussels, for example, has seen a 40% drop in traffic since the collapse of the Belgian national airline Sabena. If other flag carriers cut back drastically, or even collapse, the problems of the airport operators will represent opportunities for no-frills airlines.
Surface transport could also replace air travel over short sectors. Long-distance high-speed rail links, very rare in the USA, are being pushed hard by European authorities - meaning that, for sectors of less than 3h by train, even LCCs will be unable to compete. In the short term, too, these routes will almost without exception be operated by state-owned and state-subsidised rail companies.
Rail/air competition
But the high-speed rail links do not only represent direct competition for the shorter sectors. Rail/air links are becoming increasingly popular in Europe and a carrier with a feeder network composed of subsidised rail links, with platform check-in and co-operation on timetables, will have a huge advantage over its competition. Flag carriers, rather than upstart airlines or incomers, will probably receive the readiest help from the state rail networks.
High-speed rail is not a serious competitor in every sector. Across the English Channel, the high-speed service is limited and runs only between London, Paris and Brussels. The UK has no high-speed links and is unlikely to build significant numbers in the near future - indeed, many analysts regard the slow and unreliable UK rail network as an important reason for the growth of the UK low-cost carrier market. There are other barriers, such as mountains and borders, to universal high-speed rail service. All the same, warns EasyJet chief executive Ray Webster, LCCs will have to be careful: "Using scarce slots to compete against short high-speed train routes is nonsensical."
Pulling out of the unprofitable short-haul market must be tempting for many full-service carriers. However, the unhappy history of other airlines - such as Pan Am and TWA - which followed the same strategy into collapse, is not encouraging. Equally, there are few good examples of full-service carriers successfully operating low-cost subsidiaries.
British Airways sold its Go subsidiary before it could prove the point either way, although KLMremains optimistic about its Buzz and Basiq Air operations. Allying with low-cost carriers to obtain feeder services is possible, but no airline in either category so far appears interested. An alliance - or a merger - would be easier than attempting to cut costs from full-service to low-cost levels, however.
Too much of the low-cost base of an LCC depends on the point-to-point short-haul strategy for it to be easily reproduced by a full-service carrier. Offering an improved service for a higher price is, effectively, what the full-service carriers are already doing - but the cost/benefit trade-off is not appealing enough to passengers. The growth of alliances between international full-service carriers will increase their standards of service further and may allow them to keep their intra-European customers.
The full-service airlines themselves tend to treat the no-frills airlines with a certain disdain. Air France chief financial officer Phillippe Calavia said late last year: "EasyJet chief executive Ray Webster says that the low-costs will have 80% of the market - he is wrong. I do not think anyway there is any room in Europe for several low-cost operators. They will face consolidation." At an Aviation Club of the UK address last year, Air France chairman Jean-Cyril Spinetta said: "I am often asked: Does Air France feel threatened by the [LCCs'] success? We are not in the same business. The flexibility, service and frequencies offered by major carriers cannot be compared with what low-cost airlines have to offer."
LCC customers were initially similar to the passengers on their predecessors, the charter services. However, as the sector grew, businesses increasingly began recognising the value of low-cost travel and the European market is now divided roughly 50-50 between leisure and business travel. It is likely that LCCs will themselves start to specialise. The business low-cost carriers - possibly including EasyJet and Virgin Express - will provide a rather more expensive, flexible service between primary and secondary airports, while the leisure carriers - such as Ryanair - will provide cheaper services to tertiary destinations.
Both areas have their own challenges. Keeping costs low while flying frequent services into some of Europe's most congested and most expensive airports will be a challenge for the business carriers, which will also have to resist the temptation to provide "business-class" type services, so losing customers either to the full-service regionals or to lower-cost rivals.
No turning back
It seems unlikely, however, that the current dramatic growth of low-cost traffic represents only a temporary benefit of tightened travel budgets during an economic recession. Once the economy starts to pick up again, companies are unlikely to switch straight back to more expensive full-service travel for their employees. The leisure carriers, for whom low prices are the brand image, will face losing a customer base with little brand loyalty to any rival that manages to undercut them, as Deutsche BA's former chief executive Carl Michel points out: "If your brand is only having low prices, then nobody really owns the market."
Buzz commercial director Tony Comacho differentiates Ryanair from Buzz, Go and EasyJet: "These airlines are relative value low-fare carriers, but Ryanair is an absolute value carrier. Ryanair's prices are not just lower than other carriers' fares - they are simply cheap. EasyJet is not always cheap, it is just lower than the rivals," he says.
British Airways chief executive Rod Eddington believes the consolidation of the US sector will be mirrored in Europe: "There will be a consolidation process with some airlines closing and others merging, leaving just one or two players," he says.
BA unveiled its Future Size and Shape restructuring in February, and made clear its intention to address the growing threat from the low-fare sector by restructuring its European short-haul business. Part of the effort involves an overhaul and simplication of the carrier's fare structure and online sales.
Room to grow
"Within five to 10 years, the normal mode of travel will be to go on to the internet and book a no-frills airline," says Go chief operating officer Ed Winter. "There are huge areas of continental Europe that don't have access to low-cost carriers. For example, there are something like 94 low-cost destinations available from the London airports, compared to around five for Paris." This leaves plenty of room to grow.
Most no-frills airlines rule out formal alliances among themselves and the point-to-point operation does not lend itself very well to codesharing, unlike full-service carrier networks.
As the LCCs increase in size there may be problems confronting them. Already EasyJet is considering abandoning its common fleet and may purchase Airbus types as well as - or instead of - Boeing aircraft in its latest expansion. The price advantage of Airbus may mean the loss of an important low-cost element in EasyJet's operation. To maintain a good bargaining position between the two airframers, other LCCs may follow suit.
Many, also, are starting second and third hubs on mainland Europe, again losing one of the elements - simplicity - that has made them successful. If they cannot restrain costs while continuing their dramatic growth, they will gradually lose the low-cost position - as their predecessors in the USA did - and face more and more of the problems of their higher-cost rivals.
Meanwhile, the low-cost niche will become available for yet more contenders. This continuous instability in the market would make planning ahead difficult for anyone in the industry. But fortunately, it seems more likely that some of the present carriers will survive and retain their position as low-cost operators, with a healthy stable share of the European airline market.
Finally, the high profile of LCCs has proved a disadvantage before. In 1996, the US low-fare carrier ValuJet suffered a serious crash, and the public reaction was so great that the airline underwent a reverse merger, adopting the name of AirTran Airways, a company that it had purchased in 1997. No European low-cost carrier has yet suffered a single fatality - but, in the long run, an accident is inevitable.
And the backlash may be far more serious than any criticism from competitors.
Source: Flight International
