This Research Bulletin has been published in Proceedings of the BIVEC-GIBET Transport Research Day 2005 Diepenbeek, pp. 87-110.
Please refer to the published version when quoting the paper.
Innovative and low-cost carriers have transformed the airline industry on both sides of the Atlantic Ocean in the last decades. The European airline market is since the full liberalisation late 1990s very fast in change. What's the secret behind the success of these new airline companies?
Simple, there is no secret. The low cost carriers can offer cheap flights because they save every single euro they can to give it back to the customer. For example, there is practically no service on board. Moreover, most of those carriers, such as Ryanair reduce costs, because they don't serve the hubs, but secondar (or regional) airports with lower charges, which often are located quite far away from the place of destination, like Frankfurt Hahn, London Luton, Girona Barcelona of Brussels South (Charleroi).
Another important fact is that these airline companies don't set up a network. They have only point-to-point connections, but with a high market potential, esp. for individual private or non-business travellers. They are not interested in connecting flights. The traditional carriers have their hubs where passengers can switch planes, from European to intercontinental flights, for example. It's obviously that it is not so cheap to operate such a network and a hub.
In this article we would like to give the essential background information of the low cost airline companies, followed by a European benchmark and the impact of the European aviation policy, in order to explain the succesful expansion, esp. on the market of tourist destinations.
1. BACKGROUND INFORMATION
1.1. What are Low-Cost Airlines?
According to the Statistics and Forecast (STATFOR) Service of Eurocontrol there is no single best definition of a low-cost carrier.
It is generally accepted that a low-cost airline, also known as no-frills or discount airline, is such carrier, which offers low fares but eliminates most traditional passenger services.
The ‘low-cost carrier’ business design is defined by three key elements:
- Simple product: catering on demand for extra payment; planes with narrow seating ( but bigger capacity) and only a single class; there is no seat assignment; they don’t offer frequent-flyer programms; ticketless travel;
- positioning : non-business passengers, esp.leisure traffic, and budget priced; they have short-haul point-to-point traffic with high frequencies; they are making an aggressive marketing; they are using secondary airports (e.g. regional airports); they have a strong competition with all transport carriers;
- low operating costs: low wages, low air fees; low costs for maintenance; reduced employment (with much lower rates of number of passengers per employer); cockpit training and standby crews due to homogeneous fleet; high resource productivity: short ground waits due to simple boarding processes, no air freight, no hub services, short cleaning times; high percentage of online sales (Internet).
There are also other characteristics, which are typical for low-cost airlines. They all have in theirs fleet a single type of airplane, chosen to reduce training and service costs. Commonly it is the Boeing 737, but it is not always like that, e.g. the Wizzair fleet has only Airbus A320.
All those carriers use a simple fare scheme, and what is distinguishing for it is the fact that fares increase as the plane fills up, what in practise rewards early reservations, known as yield managemen (cf. §3.1.) t. Low-cost airlines policy also emphasizes on direct sales of tickets, especially by Internet, what it is for sure comfortable for (the younger) customers and let them avoid paying fees and commissions to travel agents and corporate booking systems.
Figure 1. Low-cost carrier business design
Source: MERCER Management Consulting, 2002
1.2. The Origins of Low-Cost Airlines Market and the Present International Market
The term ”low-cost airline” is for the first time used in the United States in 1949. The first successful low-cost carrier was Pacific Southwest Airlines, which pioneered the concept. Often, this credit has been incorrectly given to Southwest Airlines which began service in 1971 and has been profitable every year since then. Today, it operates 2,800 daily flights to 60 airports in 59 cities across the United States, and register yearly almost 70 million passengers. According to data gathered in 2003, Southwest Airlines is currently one of the largest domestic airline companies of the USA and it is even world’s third biggest (table 1), just after American Airlines and Delta Air Lines. Around 30 percent of all flights in the USA are realised by low-cost carriers.
Europe's history of low-cost airlines is much younger, but those airline companies are for sure trendsetters of the 1990s. The expansion of low-cost carriers in Europe coincided with the final deregulation of the market during the 1990s. Genuine low-cost operations began in Great Britain in the 1990s with the Irish company Ryanair (founded in 1985), which was patterned on American Southwest Airlines. The European market is without any doubt characterized by the expansion ofthe existing low-cost airlines (e.g. Ryanair, easyJet), new upstarts (e.g. Wizzair, first fligt on 19 May 2004)), takeovers (e.g. easyJet) and bankruptcies with market exits (e.g.AB Airlines, AirPolonia).
Following Great Britain, low-cost carriers have succesfully developed on the Continent (like Ryanair since 2001 from Charleroi). In the year 2005 there are 58 low-cost airlines operating in Europe (www.etn.nl/lcosteur.htm).
Among the World's Top Airlines (table 1), there are two European low-cost carriers – Ryanair (16th rank) and easyJet (21). The airlines are ranked by the number passengers with a minimum of 15 million passengers yearly.
Table 1. World's Top Airlines (2003)
Source: Air Transport World, World Airline Report 2003
Low-cost carriers pose a serious threat to traditional or regular airline companies, since the high cost structure of full-service carriers prevents them from competing effectively on price - the most important factor for most consumers in selecting a carrier.
Since 2001- when the aviation industry was rocked by terrorism (11 September 2001, New York and Washington), war (Iraq) and SARS (Asia) - the large majority of traditional airlines suffered from heavy losses while low-cost carriers generally stayed profitable.
Many carriers decided to launch their own no-frills airlines, such as KLM's with Buzz, British Airways' with Go Fly, and United Airlines with Ted, but anyway they have found it difficult to avoid cannibalizing their core business. An exception to this has been British Midland's b mibaby, which successfully operates alongside its full-service counterpart.
In Canada, Air Canada has found it difficult to compete with new low-cost rivals such as Westjet, Canjet, and Jetsgo (itself stopped operations on 11 March 2005), despite its previously dominant position in the market: Air Canada entered a period of bankruptcy protection in 2003, but emerged from protection in September 2004. Air Canada also operated two low-fare subsidiaries, Tango and Zip, but were both discontinued.
In Finland the competition went in a different direction, as the national carrier Finnair lowered prices so that the low-cost competitor Flying Finn was forced to stop its operations.
Australia's Qantas has recently launched two low cost carriers: JetStar serves the Australian domestic market in competition with Virgin Blue, while Australian Airlines operates internationally to Asian destinations.
In New Zealand, Air New Zealand chose to buy their low-fare competitor, Freedom Air, instead of competing against them.
Singapore's first low-cost carrier, Valuair was launched in May 2004, prompting dominant carrier Singapore Airlines to invest in a new low-cost startup, Tiger Airways, to beat the competition. Not to be outdone, Singapore Changi Airport's second most dominant carrier, Qantas Airways, also started its Asian offshoot, Jetstar Asia Airways based in Singapore and started operations on 13 December 2004.
Malaysia's Air Asia made repeated attempts to setup a Singaporean operation, but its insistence in using Singapore’s Seletar Airport, in addition to other demands to cut airport usage charges, delayed its abilities in gaining the relevant permits from the authorities in Singapore. This set-back may block Air Asia's Singapore expansion ambitions.
As the number of low-cost carriers has grown, these airlines have begun to compete with one another in addition to the traditional carriers. In the USA, airlines have responded by introducing variations to the model; while in Europe, the emphasis has remained on reducing costs and no-frills service. In 2004, Ryanair announced proposals to eliminate reclining seats, window blinds, seat headrest covers, and seat pockets from its aircraft.
1.3. Strategic Comparison Between Regular and Low-Cost Carriers
„Low-cost carriers are not just cheaper. They follow specific and own business model, that is mainly characterised by a complete refrain from making use of network effects.The just deserve point to point routes, starting very often from one main airport” , which is very often a side airport (or secondary airport)(cf. Table 2) of major centres like Standsted for London, Hahn for Frankfurt or Charleroi for Brussels. They are characterised by cheaper costs, reduced delays, shorter turnaround times, and lower distribution costs. (T.Bieger etc., p.71-72).
Table 2. Comparison of the main competive strategies between national and low-cost carriers
Source: P.Keller,2002, p.20
2. BENCHMARK OF EUROPEAN LOW-COST CARRIERS
2.1. General Facts
It is very hard to say explicitly how many low-cost carriers run in Europe at this moment. The reason is very simple because ones appear and the others go bunkrupt. Certain is the fact that the European low cost aviation market is constantly in change.
The leading European budget airlines are continuous Ryanair and easyJet.
The trouble is that the low-cost aviation in Europe faces serious challenges. At present an all-out war rages between airlines in general. Europe has around 58 low-cost carriers in 2005 (see annexe 1) although that total changes from week to week as new ones are launched and others disappear. Low interest rates, using second-hand airplanes, off-the-shelf software and the example of the successful market leaders have lured others into the market.
Another factor has been the expansion of ten new member states in May 2005. In joining the EU, these countries also joined its deregulated domestic aviation market, giving entrepreneurs their first chance to fly in and out of them. As a bonus, the market leaders have so far shown remarkably little interest in Central Europe.
After the fast increase of 2003, the progression of the low-cost airlines, market share stabilised in 2004. Although the low-cost market shown strong growth during 2004, the overall low-cost airlines market share growth slackened. This fact was mostly explained by traditional carriers growing faster than in 2003 and by the bankruptcy of Air Polonia, V Bird and VolareWeb.
Figure 2 . Low-cost carriers, market share (July - December 2004)
(IFR = International flight routes)
Source: Eurocontrol 2005
When comparing (figure 2) the difference of the share in 2004 with the year 2003, the most remarkable fact is the growth of the new member states of the EU. While the Czech Republic consolidated its position, reaching the 10% level, Hungary, Slovenia and Slovakia grew from shares below 1% to shares around 5%. Also Poland had its own share at that time (6%).
Although the distinction between low-cost carriers and others (cf. Table 2) is becoming increasingly blurred, these figures have shown the important contribution of growth of the low-cost carriers
The degree to which the low-cost concept has been implemented can be shown using the predefined strategic success factors. Degree of implementation are be described as:
HIGH, MEDIUM, LOW.
There is also one middle degree written as H/M between medium and high. Table 3 shows four significant European low-cost airlines: Ryanair, easyJet, Virgin Express (founded in 1996 in Belgium) and Buzz and define their level of implementation of the low-cost concept. According to those data just two carriers out of four: Ryanair and easyJet operate as genuine low-cost airlines.
Table 3. Implementation of the low-cost concept
Source: Mercer Management Consulting, 2002
2.2. Low-Cost Airlines Tricks and Traps
Low-cost airline tickets are very often promoted at „naked” prices without fees and charges. In reality the final customer price of a ticket can be ten times more expensive, when airport passenger fees, landing charges, costs for reservations and credit cards, extra fuel cost and even extra security taxes are included! Custumor organisations – such as Test-Aankoop in Belgium – advises to fix a real customer price, but for the moment there is no clear government reglementation.
In Ryanair's case, the advertised fares are obviously low and competitive, but the total cost for the passenger cannot as easily be compared with the competition as it seems. Its policy is not to display the total price upfront, but rather to break it down into service charges, fees and taxes. Ryanair subscribes to this practice, and stretches it in a way that is economically fascinating, but which may reserve unpleasant surprises for the customer. For instance, the invoicing may include a handling fee for using a credit card. Anticipating that some might raise an eyebrow at this last-minute inclusion, Ryanair claims that "Even allowing for these small charges, our fares still represent the best value for money."
Moreover, Ryanair addresses the issue of continuously delivering quality services by implementing processes, metrics and targets. Its’ business model allows taking off and landing mostly on time, but it can also add disappointing constraints that negatively affect customer experience.
Ryanair, as most of low-cost airlines, uses the small airports, which are often difficult to reach without a car, particularly if the passengers want to catch early flights. Besides, getting to those airports means extra costs for passengers, who need to pay either for train and bus or for taxi.
Ryanair’s policy is that passengers can change certain parameters of their flight, like flight dates, times and routes up to three hours prior to departure, for a flat fee of 30 euros, per flight sector per person if made on www.ryanair.com or 40 euros, if made through a Ryanair reservation centre It is very aggressive policy in comparison with traditional tickets with restrictions and it is common that changes in those cases are more expensive than buying a new ticket.
Among all low-cost airlines, there are some, like Ryanair, which are real rising stars in the skies of Europe. Ryanair is a commercial success, at least until today. The airline is still performing well, makes profits (net profit of 32.1 million euro in 2004-2005) and has one of the highest market capitalization of all the airlines in Europe.
At first blush, Ryanair is an extraordinary story and a strong brand. Founded in 1985 in Ireland, it has increased its annual traffic from about 5,000 at the beginning to over 27.6 million passengers for the annual report of 2004-2005 (of which 5.5 for Spanish destinations) and expected figures of 35 million for 2005-2006 and even more then 70 million in 2012!
We refer to annexe 2 for more detailled statistics of Ryanair.
It is now a ticket-less airline and all its sales are essentially done over the Internet.
Ryanair’s direction has a vision of a world where the fare could drop to nothing as local communities would subsidize the airline to bring a steady traffic of business people and tourists to their region. The concept is not entirely new, as the old flag carriers have been state-owned national champions essentially for the purpose of enabling business and tourism. However, the monopolistic position and inefficiency of those airlines often tended to push fares up rather than down. Unfortunately for tax-payers, few profits were returned on their investment.
Ryanair is on a crusade to reverse that trend. Its estimated 4.8 US cents per passenger per kilometer makes the Irish carrier more efficient than American Southwest. As a result, its message could be entirely focused on low fares, but this is not the case:
"In a globalized competitive environment, even cost leaders need to differentiate their message".
Rather than blending its low fares with some emotional benefits, Ryanair packs its brand with functional benefits such as punctuality and efficiency. In Ryanair's words: "At Ryanair we guarantee you the lowest air fares on the Internet. However our success is due - not just to our low fares - but also a winning combination of our No.1 on-time record, our friendly and efficient people and our new Boeing 737-800 series aircraft".
In addition, the Irish-carrier does not hesitate to raise comparisons with easyJet, such as, "Want to see how slow easyJet is? Click here!". In sum, Ryanair's brand positioning seems to be: getting there at the lowest price on time - better than easyJet.
Can a brand such as Ryanair keep the competition at bay on the basis of its functional benefits only, i.e. lowest fares and on time?
Airlines are international service companies selling a commodity. Unlike manufacturers, which can scratch a bad batch that doesn’t meet quality standards, service firms have to deliver the quality target every time, every day. And unlike education or fashion, the airline industry can display no more than marginal differences between air carriers, particularly in a deregulated environment.
Ryanair's message does convey that it is "no frills." It is all about price and getting to destination on time. Ryanair as a leader on the market shows others how to run and how to become successful.
In the meantime easyJet is reporting a better than expected increase in number of passengers. In November 2004 it has registered around 2.2 million passengers, only 50,000 or 2.2% less then Ryanair.At the same time Ryanair’s load factor dropped with one full percent to 82% while easyJet’s load factor dropped only 0.3% to 81.2%.
EasyJet offers great value fares. This is achieved by keeping cost to a minimum by cutting out unnecessary ‘frills’, selling direct to passengers, and using less congested and less expensive airports. Because easyJet sells one way fares, you can go and back whenever you like. EasyJet also does not stipulate a minimum stay for you to qualify for the lowest fares, unlike many other airlines. EasyJet offers you flexibility on all its fares, unlike many other airlines. For an administrative fee of just 10 pounds (online) 15 pounds (through call center), plus any difference in fare, you can change your light. Flying with easyJet is simple and hassle-free. No tickets are issued, so all you need for check is an acceptable form of photographic ID on domestic flights or your passport for international flights.
A benchmark for four selected main European low-cost carriers (Ryanair, easyJet, Wizz Air and Virgin Express) is shown in table 4.
Table 4. Benchmark of some European low cost airlines (2005)
Source: Own research
3. REACTION OF (EXPENSIVE) REGULAR AIRLINES
As reaction from the regular airlines we see now a real war with low-cost carriers. Network carriers such as bmi and British Airways have successfully adopted the internet-selling and yield-management techniques. They are definitely not as cheap as the likes of easyJet and Ryanair, but offers competitive fares to holiday resorts. First of all let’s talk about yield management.
3.1. Yield Management
Some call it revenue management. The strategy appears to be rather simple: sell the right seat to the right type of customer, at the right time and for the right price. The key is to find the tradeoff between selling discount ticketing in order to fill up the plane totally, and selling full fare tickets and only filling up a portion of the plane. Since this process involves consumer behavior and past data analysis, it can be very challenging.
Since one of the purposes of yield management is to smooth the distribution of passengers, to be effective, the airline must be able to segment its market into different passenger categories. A very good example is the comparison between the time-sensitive business person and the price-sensitive customer. One is willing to pay a higher fare in exchange for flexibility (open return, cancellation option, schedule change, etc.) the other is willing to give-up some flexibility for the sake of a cheaper ticket (stay overnight Saturday, not come back on labor day - which is a peak day). Such a strategy allows airlines to fill seats that would otherwise be empty.
Yield management is a tool that can be used to smooth the demand pattern. In peak season, the airline can increase its revenues by increasing the fare on its tickets and in low season, it can increase capacity utilization by offering low prices. Past years data will offer the manager a way to forecast when these peek and low seasons occur. Demand fluctuates seasonally (peak season in the summer and low season in the fall), and also gradually (there is an increase in the demand for reservation until a few days prior departure).
The price sets by airline companies is not only determined by supply side factors. In previous analysis we have seen the competitive advantage that low-cost carriers have to set lower prices. This is due, mainly, to their specific structure of cost and service level.
For example, under a cheaper fare is hidden a reduction of other privileges like in-flight services, direct selling and Internet bookings are encouraged. It is all with the aim to reduce costs. The price of a ticket could be also influenced by external factors, such as the market form, the deregulation, governments and the IATA (International Air Transport Associaton, = represents around 265 airlines, comprising 94% of international scheduled air traffic).
P. De Groote & L. Quintens (2003) pointed out the fact that only a few low-cost carriers are focussing on business travellers, which stereotypes are characterised by:
frequent user of airlines; booking close to departure; willing to pay a high price.
3.3. European Policy
The future evolution of low-cost carriers depends also on the way regulators will direct their policy. Actually, decisions taken by the regulator could change dramatically the cost’s structure of such companies, and could have as an indirect consequence a negative impact on ticket’s prices (cf. 2.2.). As the existence of low-cost companies has been permitted by a deregulation in airline industry, the end of such airlines companies could be the consequence of a regulator’s decision.
In terms of European airline transportation, the regulator (European Commission) has set 6 different targets:
3.3.1. Reducing the congestion in the skies and airports
Congestion today is less important that it was before the 11 September 2001. This could be explained by the drastic capacity cuts for most carriers.
Nevertheless, the European regulator’s ways to reduce again the congestion will be the completion of a Single European Sky. Because they have at their disposals the congestion pricing and they can develop strategies and alliances with other airports; airports themselves can contribute greatly towards a more rational use of their capacity they have available.
So, a country, aware of its congestion problem, could subsidise a secondary airport, to divert segments of the main airport’s traffic. The subsidy could allow the secondary airport to develop for example a lower landing charges policy.The low-cost carriers can benefit from these lower charges to be more competitive or to develop new routes.
3.3.2. Protection of the environment
The protection of the environment is very high on the agenda in the EU. New airplanes will have to comply with lower noise level standards. Now, priority is given into reducing aircraft emissions: it could be by the development of more efficient engines and cleaner fuels.
3.3.3. Safety policy
As air transport should be safe in the first place, the Commission is involved in the creation of a common policy by the EASA (European Aviation Safety Agency), while now safety policies are involved by the member states.
3.3.4. Protection of the passengers
Is it necessary for the Commission to implement a policy to protect passenger’s rights. Most of actions are directives, so that they cannot be implemented as long as they are not incorporated within national law. Nevertheless, the numerous consumer organisations that are active at the EU and national levels are even more confusing. It is because of the fact that consumer protection is hidden in many other policies of the EU, such as competition policy, environmental policy, and recently, even in air transport policy. The protection of passenger’s right in the EU is just a recent copy of the US version. It describes the range of obligations that airlines have towards their customers, passengers complaints, the liability of airlines in case of an accident, compensation with overbooked, delayed or cancelled flights or when loss and damage baggage occurs.
3.3.5. Enhancement of international dimension
It refers to the open skies agreements between the EU and the USA. The main question is to know if the system of bilateral agreements is sustainable or not.
3.3.6. Air regulations
- The liberalisation of air transport -
The early 1980s has been marked by the gradual liberalisation of international air transport. It started with domestic deregulation and regionalization on bilateral services agreements, opening international routes. In Europe a series of agreements were created in 1987, 1990 and 1993. Low-cost, no frills services in Europe had been launched by Ryanair in 1991, but were only spread to European markets like those across the Irish Sea, in the period after 1995. Liberalisation started first with an agreement of 1984 between UK and Netherlands opening the first liberal ‘open market’.
- European Union’s competition rules –
These competition rules were designated to prevent monopolistic practices or behaviour which were anti- competitive or which distorted competition to the detriment of consumers. It cover three areas :
- Rules about cartels which prohibit all inter-company agreements which could restrict or distort competition within the European Union and which may affect trade between members stats. It aims to facilitate the entry of new carriers on the routes operated by the alliance partners.
- State aid or subsidies to producer is prohibit or controlled within certain conditions. State aid had to be used for financial and operational restructuring of the airline through debt repayment, early retirement of staff. It could not be used to support increased competition. Government can no longer guarantee airline borrowing or reduce airport charges but can offer support for the operation of air sevices to meet social service needs with transparancy.
- Finally the EU competition rules reguled mergers. The European Commission can monitors mergers , acquisitions or full functions joint ventures above a certain predetermind size. The threshold levels were reduced in 1997. Mergers or acquisition which exceed the stated threshold in terms of turnover must be first notified to the Commission which will only give its approval if the transaction does not lead to the strengthening or creation of a dominant position. The Commission can ask for demanding conditions to control this kind of linking.
A strong downward trend in fare levels and airline yields in real terms occured in the 1990s considering a huge number of factors which create pressure ( see above ). Liberalisation and open skies bilaterals removed vestiges of tariff controls. It encourage the launching of new airlines and the expansion of existing onto new routes from which they were previously barred by the regulatory regime.
- The arrising of low-cost airlines -
The low-cost approach occured through two distinct models. The traditional low-cost model has been that of the charter or non-scheduled airlines which have been a great success in Europe. The second model intoduced in Europe in the late 1990s is that of the point to point , low-cost ,no frills scheduled airline.
Ryanair’s great success with huge financial performance was an encouragement to the other European entrepreneurs to assess the low-cost, no frills models as a way of entering European aviation markets.
- Cost and revenue advantages -
These kind of new companies succeed too by facilitating the selling of seat- only tickets couple with new form of distribution by opening up direct Internet sales. It conduct to increase the public awareness of the avaibility of seat on many flights.Low-cost carriers are among the first airlines to develop and actively encourage Internet sales reducing by the way sales costs. Such sales make an important contribution to total revenues. EasyJet introduced this method in 1998. A year later they were over 30% of total sales and had hit over 50% during some promotional campaigns.Travel agents were completely cut out. EasyJet also keeps its reservation costs low by paying its reservation staff purely on a commission basis. As a result all these savings ( sales and reservation costs ) are less than half those of British Midland.
Cost can be cut, paying lower airport charges by using cheaper airport. On the other hand en route navigation charges will be the same when charter or low-cost and scheduled airlines are operating the same aircraft. That’s why all the carriers low-cost have based themselves at secondary and less congested airports and fly , as far as possible, to similar airports at the other end of their routes.Debonair and easyJet set themselves up in 1995 at Luton wher they were given extremely favourable deals on airport charges and rentals. Because they generate so much new scheduled traffic , the low- cost are very attractive to smaller airport and as a result can demand extremely low lending and other fees. The smaller and more unknown the airport the greater the concessions that can be extracted from its management.
For example Ryanair position in rather unknown airports of Beauvais , Charleroi... and persuaded in the same time IATA to redesignate respectively under Paris , Bruxelles. Operating like this Ryanair obtain major concessions from these airport but it had nevertheless to provide connections between airports and city centres.
Charter and low-cost companies depreciat costs accelerating rotation of their plane in normal period and flying night and day during unusual hours and during the peak summer month . A high daily utulisation is completed by reducing turnrounds to thirty minutes or less.Average aircraft utilisation of charter achieve between 3 and 6 hours per day more, with up to 50% or so higher annual utilisation , the depreciation cost per hour will be reduced by around oen third.
Low cost airlines complete cost advantages with higher density and higher daily utilisation.By doing away with business class, by reducing or removing galleys and by reducing the seat pitch, that is , the distance between seats, low cost carriers can significantly increase the number of seats available for sale in their aircraft. A 29 in seat pitch would be acceptable in a short-haul lowcost layout , whereas 31- 4 in would be more normal for economy class seating on a scheduled flight. Lowcost tend to increase the floor area on the main deck of the aircraft available for seating by reducing the number of toilets and by eliminating other space uses such as coat cupboards, and so on. For instance, cabin and flight crew costs may be lower per seat-km since staff achieve higher productivity because shorter turnrounds mean they do more flying per duty period.
4. LOW-COST AIRLINE DEVELOPMENTS IN EUROPE AND IMPACT ON TOURISM
Low-cost European airlines have been changing the course of the airline history in and above the continent. The "no-frills" companies, as they are known, such as British easyJet and Irish Ryanair have made middle-destination travel by air as easy and cheap as traveling by bus the same distance. Looking at their strong growth, experts are discussing prices, trends, and how they could influence the other supporting businesses. Low-cost airlines have entered the European market and still withstand the competition forces. More than that, growing by 100% a year, these companies now represent almost 10% of the market on the continent, hoping to increase their share to 25% by 2010. More and more budget companies have been born in the recent months from Scotland in the west to Slovakia in the east. Their most important weapon is low price, starting from as low as $15-20 for a single flight. Their goal is to become for the transport industry what the fast-foods chains have been for urban life since the mid 20th century. Concerning several theses on the development of low-cost airlines in Europe and the transformation of the Airline Sector only purely “low-cost” business designs will be successful. In the long run, only two to three low-cost airlines will survive as major players on the intra-European market.
The aviation market will split in two major customer segments. Customers will choose different airlines for different purposes: flexible holiday and private travellers and price-conscious business passengers will prefer low-cost airlines for short routes, while the big network carriers will focus on intra-European and inter-continental business passengers. Low-cost airlines also compete with European railways (esp. High speed trains), especially on the lucrative, heavily used long-distance routes (roughly 400 to 700 km). The best counter-strategies are to further expand intermodal transportation offerings in collaboration with airline companies (Rail & Fly) and to offer affordable prices for long distance rail tickets. Some airports, especially regional airports and former military bases (e.g. Frankfurt-Hahn), offer low-cost airlines remarkable opportunities for growth. However, only a few airports (e.g. Cologne-Bonn, Hannover, Berlin-Schönefeld, Halle-Leipzig, and Stuttgart) will be able to use their densely populated catchments area, good road and rail connections, and highly flexible systems of charges to attract market leaders. Medium-sized airports that do not serve as transportation hubs (e.g. Düsseldorf, Hamburg, Berlin-Tegel) must face the challenge of providing innovative and differentiated service concepts to major companies (or their shuttle services) and low-cost airlines on an equal basis at a single site. This will enable them to participate in the overall growth of the market. Also the structure of the European airline industry will change fundamentally by 2010 as it is shown on figure 4:
Figure 4. Future aviation structure in Europe
Source: MERCER Management Consulting, 2002
Concerning Network Carriers/Alliances forecast (figure 4) there will be three alliances in Europe, each with a leading carrier (AF = Air France, BA = British Airways, LH = Lufthansa). One-third of all previous flag and second tier carriers will exit the market (poor cost situation, no strategy for future positioning) or will lose their independence. Most regions will join networks or pursue a hybrid business design. Concerning low-cost carriers forecasts show significant market share in intra-European traffic and two to three financially successful low-cost carriers (first mover advantage, critical size). In turn to charters market share losses to low-cost carriers (seat-only and charter) on intra-European routes and Non-integrated charter carriers are in “unprotected” competition with low-cost carriers.
It is relevant to emphasize that the European airline market will continue to grow, but with declining average yields: competition from low-cost carriers, further market entrances from new competitors, surplus capacity, ‘struggle for survival’ among carriers in poor financial straits.
There are also several growth drivers that low-cost airlines will be focusing on in the future:
State of the economy; market stimulation from low-cost carriers; increasing convergence within EU; price cuts; increasing customer acceptance for flying.
Figure 5 shows the obstacles to low-cost carriers expanding across Europe. The comparison illustrates how the London airports are dominated by low-cost traffic, with the sector's share at almost 40%, against only 12% in Paris and less than 20% in Frankfurt's airports. EasyJet and Ryanair have a measly 7% of intra-European flights at Paris Charles de Gaulle, Orly and Beauvais combined. EasyJet has complained about discrimination at Charles de Gaulle, where it pays the same landing fees as Air France, but is relegated to Terminal Three, a bus ride away from the main airport.
Figure 5. Forecast expansion for low-cost carriers in major European airports
Source: MERCER Management Consulting, 2002
Bosses of Europe's leading low-cost carriers are also still trying to customize their formats. Ryanair, for instance, is considering two initiatives that would differentiate its service. At the same time as it is stopping its seats from reclining (fixed seats are cheaper and need less maintenance) it might also equip the seats with high-tech backs that allow customers with credit cards to watch movies or gamble during their journey.
And, more ambitiously, it might try to slash costs again, perhaps by making planes more like trains and allowing only cabin baggage. Figure 6 shows prognosis for number of passengers of Ryanair and easyJet in years 2001-2009.
Figuret 6. European low-cost airline market 2001-2009 prognosis
Source: Monitor Analysis
We finalise this paper with an interesting overview of the AIEST (International Association of Scientific Experts in Tourism) with the impact of different airlines (network/hub; regional airlines; low-cost carriers; charter airlines) on tourism (table 5).
According to the number of researches concerning the airline market in USA and in Europe the low-cost segment has been expanding strongly. Low-cost carriers ‘came from nowhere’ and suddenly started fierce competition with traditional conglomerates.
The new ‘stars’ such as Ryanair and easyJet has built their success by developing new techniques of cost management, proposing innovative products and by using new distribution techniques. The airline market is currently being re-shaped by the expansion of existing low-cost airlines. In spite of that success lot of cheap airlines has failed in this business. For that reason we set up a question whether the low-cost carriers are a successful story? Is this success only temporary?
We are concerned that the huge concentration of the cheap carriers in the airline market shows how rapidly this segment is growing. Every single day new costumers are being attracted by Internet advertisements and special cut-price ticket offers. Cheap tickets are a good offer even for business people. Low-cost carriers will remain a large and growing industry. It has been estimated that they will expand their European market share from 5% to 25% by 2010, establishing themselves on a long-term basis. Realistically thinking, only two or three low-cost carriers will survive as major players on the intra European market.
Nevertheless we generally agreed that low-cost carriers are successful business that will have a big influence on the airline and tourism market.
Table 5. Business Models of Airlines and their impact on tourism flows
Source: Keller P. & Bieger T., 2002, p. 76-77.
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* Prof.dr.Patrick De Groote, Hasselt University (Belgium)
Annexe 1. Overview of the 58 Low-cost carriers in Europe (situation 2005)
Annexe 2. Statistics of Ryanair
Edited and posted on the web on 14th September 2005
Note: This Research Bulletin has been published in Proceedings of the BIVEC-GIBET Transport Research Day 2005 Diepenbeek, pp. 87-110