Times are tough for budget airlines, with rising fuel costs and new competition from traditional companies joining the price-cutting game.
( Mikel Ortega)
By Ernst August Ginten
BERLIN – A young woman wearing a fluorescent yellow-green safety vest looks slightly aloof as she monitors the security line at Berlin-Schönefeld airport. But when a passenger with a large travel bag approaches, she immediately snaps to attention. She asks him to squeeze his bag into a narrow 55x40x20 cm metal cage, but it does not fit. The young woman informs the passenger that he'll have to check his bag for the flight – and it's going to cost him.
Employees like these for the Irish budget airline Ryanair ensure that no one with a too heavy or too large piece of carry-on luggage is allowed to board. Every extra kilo drives up the airline's fuel consumption, and Ryanair is forced to pass these additional expenses onto its customers.
Thanks to this iron discipline, the Irish – with their roughly 250 aircraft – have become market leaders in Europe. Customers can incur extra fees at all stages of their trip. For example, Ryanair's passengers must check-in electronically if they are flying to Britain, and those who fail to do so must pay high fees at the airport. Despite its ruthless practices, Ryanair serves more than 72 million passengers (up 10 percent from last year) and remains Europe's leading low-cost airline.
However, there are many signs that the recent proliferation of budget airlines has reached saturation – both economically and psychologically. Prices can only drop so low, and the costs of air travel, the bulk of which come from fuel and government fees and taxes, continue to rise.
Even Ryanair customers are beginning to rebel from the often tough conditions that come with such low prices. Recently, fog forced the re-routing of a Ryanair plane from Beauvais, France, to Liege in Belgium, nearly 350 kilometers (217 miles) away. When the plane landed in this alternative destination, already several hours late, 100 passengers refused to exit the aircraft to be taken to Beauvais by bus. The crew left the airplane, and the pilot switched off the lights and locked the toilets. Airport employees and members of the local fire department were left to calm the ensuing storm of protest.
Ryanair spends an average of 39 euros per seat per flight. Revenue is about 45 euros per seat, which comes not only from tickets but from additional passenger transportation and the sale of coffee, sandwiches and lottery tickets. With these figures, the company has mercilessly warded off all of its competitors. Remarkably, revenue for Ryanair has continued to grow over the past two years, even though the average ticket price, at 35 euros, has actually dropped by 5 euros.
Micheal O'Leary, the hard-charging CEO of Ryanair, can sense that this period of rapid growth is coming to a close. Despite the relative success the company has seen, its stocks have suffered.
"Many low-cost airlines will soon reach a limit in growth," predicts Tanya Wielgoß, consultant at AT Kearney. For most lucrative European routes are now served by at least one cheap company. And because the price of crude oil has reached the 95 dollar mark again, it is too expensive for airlines to open new routes or try to undercut competitors with lower prices.
The Traditional Airlines Fight Back
In addition, established carriers are increasingly copying the low-cost model – adopting both the prices and the stripped-down service models of their budget-oriented peers. Many major network companies "have adapted to the economies of the low-cost airlines, and in many cases, the service they offer is no longer that different," says Wielgoß.
"It's going to get tight in the middle," says a British industry expert, outlining the development of the industry. "Other than Ryanair and Wizz, there aren't any purely low-cost airlines left in Europe," adds Gerd Pontius, head of Prologis management consulting. "The market has reached its zenith, and further growth cannot be expected."
These changes are forcing many airlines, such as Easyjet, to set their eyes on new target groups. The second largest European low-cost airline is now hoping to attract more business travelers. Currently, the percentage of business travelers is only at 18 percent. The company is even thinking of offering assigned seating – an option which was until now unthinkable for a low-cost provider.
Easyjet has already decided to offer a new flexible ticket, which customers will be able to transfer up to two hours before their departure. There will be extra perk options as well, such as "Speedy Boarding," which will allow customers to board early, and one free checked bag.
Ryanair Turns to Major Airports
Even more amazing is that Ryanair is beginning to provide service to more and more major airports, a move that can also be seen as a nod to business travelers who may want to save a bit of money but don't want to travel through remote airports. Because of high landing fees at major airports, the Irish company had until recently avoided these destinations as much as possible, often choosing landing sites up to 100 kilometers away from the major cities their passengers were flying to. Michael "O Leary has been under pressure to change this policy in recent years. Many small airports were built for the needs of low-cost airlines with taxpayer money, as these airports are often operated by the state because they cannot support themselves economically.
Ryanair now flies directly to Barcelona, and will soon add direct services to Seville and Valencia. There are murmurs in the industry that the company now also has six Boeing 737-800 aircraft stationed in the Canary Islands. With these planes, the Irish budget flyer could begin to compete with established charter companies there or with Air Berlin, the so-called hybrid airline.
Air Berlin has grown significantly in the past years through the acquisition of many of its competitors, but it has earned almost no profit thus far. This is partly because its business operations are so complex: the company offers long-distance routes as well as packaged tours. There is a frequent flyer program, and tickets do not need to be booked online. Snacks are free even on short and medium haul routes, coffee is refilled often, and magazines and newspapers are distributed to passengers – even though paper is heavy and adds to the rising fuel costs that the airline must face. However, Air Berlin is still considered a low-cost provider, and provides by far the most flight options of any airline in Germany.
And increasingly, the established airlines of Europe are joining the low-cost fray. These companies will never offer the pure budget services that Ryanair does, but they are lowering prices and adjusting services accordingly. Even the great Lufthansa offers some routes to Europe that are cheaper than its low-cost subsidiary German Wings. This may just be clever marketing, but it is also a sign that the old guard is finally learning from its low-cost competitors.
Read the original article in German