LONDON — Throughout Europe, legacy airlines are facing ever-increasing competition from low-cost carriers (LCCs), with the upstart LCCs already accounting for almost 50% of all European flights.
That means that the market leaders in many nations are not the carriers of which you would instinctively think.
The UK’s largest market share of passengers, for example, is held not by British Airways, but easyJet. More passengers in Spain, Italy and Poland fly with Ryanair than with Iberia, Alitalia or LOT. The most common operator seen in much of Eastern Europe is Hungary-based LCC Wizz Air. (Hungary no longer even has a national carrier since Malev, one of the continent’s oldest aviation names, went bust in 2012).
LCCs have a major advantage over legacy airlines: their cost bases are significantly lower. And even when legacy carriers set up low-cost subsidiaries to compete, they struggle to throw off the fiscal shackles of the past.
The LCCs’ lower cost base translates into lower fares – frequently much lower – and, for the vast majority of passengers, money talks. Particularly if the flight they intend to take is only a couple of hours long, which makes restricted leg-room and lack of amenities bearable.
Nor is it just students or those on a budget that are filling LCCs’ seats. UK-based EasyJet, for example, says more than 20% of its passengers are flying on business.
The net effect of all this is that Europe’s major LCCs are filling their cabins and their coffers. The most successful, Ireland’s Ryanair, is on track for a net profit of $1.4 billion in the current financial year.
Ryanair is, admittedly, exceptional. It is running at load factors of 95% and has an astonishing ability to keep stripping out costs; its recent Q3 results saw costs ex-fuel drop by 6% compared to a year previously.
EasyJet and Wizz are some way behind in profitability, but they are similarly siphoning off huge quantities of passengers from full-service carriers. Norwegian’s profits are even slimmer, but that can be largely explained by the carrier’s rapid rate of expansion, with its attendant costs.
Not all LCCs are in such a happy position. That is particularly true of Germany’s airberlin, which has been consistently and heavily loss-making, despite the best efforts of major stakeholder Etihad to turn it around. An ongoing major restructuring is also eating up funds.
Saj Ahmad, chief analyst at Strategic Aero Research, says that even LCCS have found that filling their seats is easy – doing so profitably is much more difficult. Increasingly, the LCCs are prepared to cut fares to the bone to get passengers on board, where they hope they will have a chance to sell ancillary products with higher profit margins.
It may be that the LCCs are prepared to take a hit on yield at present in a bid to instil some loyalty discipline among customers, in the hope they will stick with them if ticket prices start to rise as oil prices climb, he says.
In terms of costs, he adds, Ryanair is well out in front due to its huge economies of scale and its young fleet. This currently consists wholly of Boeing 737-800s, but it should be noted that a new 737-800 is about 12% more fuel-efficient than when the variant was rolled out in 1997.
And with Ryanair soon to start receiving its 737 MAX200s, with 199 seats, its costs per seat kilometre will drop even more sharply.
Not that the flag-carriers are sitting back and giving up without a fight. Throughout Europe, various tactics are being used to compete, notably by legacy carriers setting up their own LCCs.
Air France-KLM has tried to expand its low-cost subsidiary, Transavia. In 2014, ambitious plans were announced to greatly expand its activities and take the fleet up to as many as 100 aircraft.
However, following trade union opposition to the creation of a new leisure-orientated unit, Transavia Europe – the pilots’ unions wanted mainline-level salaries for the low-cost organization – this was pegged back to more modest expansion based on the Franco-Dutch group’s home markets.
Lufthansa, similarly, has gone down the road of creating its own low-cost offshoot, Eurowings. This is intended to be a pan-European airline with a fleet of around 100 aircraft. Like Transavia, however, Eurowings has also encountered staff unrest over wages and conditions.
Iberia has its Iberia Express subsidiary that operates 20 Airbus A320s that fly short- and medium-haul sectors, connecting into the Spanish flag-carrier’s hubs and allowing connections with long-haul flights. Iberia’s parent company, IAG, also has a standalone LCC, Barcelona-based Vueling.
Scandinavian Airlines, meanwhile, has gone down a different route. Increasingly, it makes use of external capacity providers such as Ireland’s CityJet and the UK’s Flybe, to operate shorter, thinner sectors where its own aircraft and cost base would be uneconomical.
British Airways, meanwhile, is trying old-fashioned cost-cutting. From the start of this year it has scrapped free food and drink on its short-haul European services. The provisions on offer may have been decidedly basic – usually a sandwich wrap – but in dropping it BA may discover it has shot itself in the foot.
Business executives have become accustomed to relaxing into their seat on early-evening flights back to London Heathrow and Gatwick, with a much-needed gin and tonic after a hard day of meetings and Powerpoint presentations, and BA cabin crew were notably relaxed about handing out an extra couple of miniatures if passengers asked for them.
A free sandwich and booze may not be enough to make regular flyers switch airlines, but it was one of the few remaining points of differentiation between BA and LCCs such as easyJet and Ryanair. Sure, alcohol and a wider range of onboard food are now available to buy, but will the grumbling and possible damage to the BA brand be worth the relatively small amount of money it will save from scrapping complimentary nibbles?