FLUG REVUE July 2002: Low-Cost carriers attack in Europe

LOW-COST AIRLINES GAINING GROUND

By Volker K. Thomalla

The news that the British low-cost airline easyJet was on a buying spree was not unexpected. Having signed an option to buy Deutsche BA, only a few days later it concluded a deal to take over its English competitor, Go. To acquire Go, the company had to put Euro 600 million on the table, but its absorption of Deutsche BA will cost only around Euro 40 million, assuming that the option is exercised.

EasyJet Boeing 737-800

This take-over means that easyJet is expanding into the biggest no-frills airline in Europe, even overtaking Ryanair, which itself is not exactly cautious in its growth plans. In the long term there will only be two big low-cost airlines left in Europe, although Germania and Buzz are also romping around in the same market segment.

For both easyJet and Ryanair, the German market plays a central role not only on account of its size. Its geographically favourable situation in the centre of Europe makes the country a good base for point-to-point connections, which are essential for low-cost carriers. It has a relatively good infrastructure. Moreover, the Germans are top of the international travel league.

Ryanair's experience on German routes confirms the requirement for low-cost connections from and to Germany. Whether the system will function inside Germany remains to be seen. For example, there are problems with Berlin, the biggest market for cheap flights in Germany. The capital city and its hinterland do not have a suitable airport. The three Berlin airports of Tempelhof, Tegel and Schönefeld cannot offer any concessions on charges, and other airfields are too far away and therefore too difficult to get to from Berlin. In addition, the governments of Brandenburg and Berlin want to have a single Berlin airport and are not supporting any possible upgrade of other airfields. This means that an important element of the success recipe of the low-cost carriers is missing.

For one of the factors behind their success is strict cost control, both in flying operations and also in the other parts of the company. Any airline that plans to offer cheap tickets needs to operate out of airports which have modest charges and offer short turnaround times. Having a uniform fleet reduces maintenance costs, and up to now all the European no-frills airlines have concentrated on the Boeing 737. Point-to-point traffic instead of a hub system avoids passengers having to make expensive transfers or luggage having to be sent along behind them.

The service provided on board is modest, everything being charged as extras. Cabin crew are little more than cleaning ladies. Pilots who apply for a job in the cockpit at Ryanair even have to pay a processing fee before their application will even be considered.

Aggressive marketing is also of paramount importance. On this point, Ryanair CEO Michael O'Leary is a world master. He chatters happily and not very diplomatically about his competitors. Lufthansa even did him the favour of taking him to court over some of his statements. From a marketing point of view this was quite a coup – for Ryanair.

The last and most important ingredient in the success of the low-cost airline is a yield management system that is carried to extremes. Revenue management on individual flights is quite ingenious. Passengers who are able to book long in advance or will accept less popular travel days are offered ticket prices that are little more expensive than local train fares. On the other hand, anyone who books only a short time ahead or wishes to fly at certain times that are much in demand pays an almost normal ticket price. Low-cost airlines offer passengers a quite different product from the traditional airlines. They enrich air traffic. Whether the concept can be maintained in Europe in the long-term, only time can tell.

From page 4 of FLUG REVUE 7/2002

Last updated 3 June 2002

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