Budget airlines soaring on back of ‘aggressive drive’ to boost demand

While the European aviation industry has been reeling from the slowdown in the world economy, budget airlines appear to have bucked the trend.

Burdened with fewer costs, budget airlines have been able to launch an all-out price war – and turn in handsome profits. The ambitious newcomers insist that their success is down to a positive reaction to the flagging fortunes of the travel industry,  rather than their merely being a cheaper option in recessionary times.

“Immediately after 11 September, we mounted an aggressive drive to stimulate demand,” Enda O'Toole, spokesman for Europe's largest budget carrier, Ryanair, told me. “We were proactively encouraging people to fly, while flag carriers were grounded, cutting back flights and increasing fares.”

O'Toole said his airline ran a ‘let's fight back campaign', offering a million seats at knockdown prices and 300,000 seats for free. The policy seems to have paid off. The Irish carrier reported a 34% year-on-year rise in traffic in June and a record profit of €172 million last year.

In contrast, one of Europe's largest airlines, German flag carrier Lufthansa, carried 9.3% fewer passengers in the first six months of 2002 compared to the same period last year. However, this represents a rise on the first quarter figure during which bookings had dipped by 11.4%.

High overhead costs are one of the main reasons why traditional flag carriers cannot match the prices offered by the budgets. The big boys fly a diverse fleet, run sophisticated ticketing procedures, have expensive slots at major airports and offer their customers high-cost perks.

But national carriers insist that they have not been taking their competitive challenges lying down and are trimming down for the fight. “We, as an airline, have been taking tough decisions,” says Andrew Cahn, British Airways' (BA) director of government and industry affairs. “We've cut our capacity by 20% to bring down costs and are offering low prices to get people back in the air.”

Although Ryanair famously referred to British Airways as an expensive expletive in one of its advertisements, Cahn, former chief of staff to Commission Vice-President Neil Kinnock, is rather more charitable in his assessment of his new rivals. “We're learning from no-frills airlines. We recognise they are a new challenge in the market place,” he acknowledged. But the BA man warns that although budget airlines offer a ‘no-frills' service, they are often not as cheap as they first appear.

He said that passengers who did not book well in advance could find themselves paying just as much for their ticket as they would with a national carrier.

Critics also point out that budget airlines frequently use out-of-the-way airports to keep their costs down. Passengers are often faced with a long journey to their destination, while on-board food and drinks can be very expensive.

And, in the event that things go wrong, the solutions rarely match those offered by the big carriers. For example, passengers on a recent Ryanair flight from London Stansted to Brussels Charleroi found themselves diverted to Paris-Beauvais due to fog.

They then faced a two-hour wait for coaches to take them to their destination, followed by a four-hour journey on to Brussels. But most of their passengers are unperturbed by such experiences and are queuing up to take advantage of the budget prices. “When we offer the fares that we offer, of course we stimulate demand,” Ryanair's O'Toole insists.

Although low-cost airlines make up only 6% of the European aviation market, O'Toole points out that in the US their equivalents have a 20% share. While in their infancy, the European budget carriers were largely content to carve out a new niche by getting more economy fliers to take short-haul flights, they are now working hard to poach customers from flag carriers.

One airline that is trying to straddle the divide between the budgets and traditional carriers is Virgin Express. Operating out of Brussels, it flies to main airports and offers snacks on flights. “We use the techniques of low-cost airlines but we compete directly with traditional carriers,” says spokesman Yves Panneels. A key area in which Virgin is going head-to-head with national carriers is in the lucrative ‘executive' market.

Business travellers now make up half of Virgin's passengers compared with a third two years ago. “A few years ago, low-cost airlines were seen as a cheap way to fly. Now they're seen as a smart way,” Panneels said.

As the competition over Europe's skies hots up, the experts predict more convergence as price becomes a key factor. Although budget airlines will be expanding their networks and offering a wider range of deals to appeal to the upper end of the market, national carriers will be shedding dead weight and lowering prices to retain profitability.

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This article first appeared in the 18-24 July 2002 edition of The European Voice.