BOOM OR BUST?

The future of the low-cost airlines in Europe

Dr Nigel Dennis Senior Research Fellow Transport Studies Group University of Westminster dennisn@westminster.ac.uk

TRAFFIC OF LOW-COST AIRLINES

2002

Airline Ryanair easyJet go Virgin Express buzz

Passengers* (million)

14.5 8.8 6.0 2.4 1.8#

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* on scheduled flights # estimate Source: IATA, CAA, Virgin Express (some figures provisional)

DIFFERENCE IN COST LEVELS

British Midland 7.4p per seat km easyJet 4.5p per seat km Ryanair 2.8p per seat km This enables low fares to be offered

Source: Calculated from CAA/IATA Statistics 2001 Costs are in sterling

REVENUES AND COSTS PER PASSENGER

British Midland 108/110 (lf 65%) easyJet 49/43 (lf 81%) Ryanair 37/28 (lf 74%)

Source: Calculated from CAA/IATA Statistics 2001 Average length of haul: bmi 965 km, easyJet 830 km, Ryanair 718 km Costs are in sterling

FAST TURN-AROUND TIMES BENEFIT PRODUCTIVITY

Block time Stansted-Hahn London City-Frankfurt Heathrow-Frankfurt Gatwick-Frankfurt 1:15 1:30 1:35 1:50

Turnaround 30 min 30 min 45 min 45 min

Output per 14 hour day 8 sectors 7 sectors 6 sectors 5 sectors

all timings with jet aircraft: 737 (STN/LHR), Avro RJ (LCY/LGW)

INCENTIVES TO RYANAIR AT CHARLEROI

For 1 million passengers on 12 routes Ryanair pays Charleroi Airport 2m Euros airport charges and handling fees Ryanair receives from Charleroi Airport 1.9m Euros new route incentives 2m Euros marketing support 1.5m Euros staff and infrastructure support NET COST TO AIRPORT 3.4m Euros
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Source: Aviation Strategy, July/August 2001, P3

GROWTH OF LOW-COST AIRLINES IN THE UK MARKET

1998-2001 (13 million extra low-cost passengers in 2001)
Growth diverted from charter airlines* (1 million passengers)

New generation (5 million passengers) Growth diverted from traditional scheduled airlines* (7 million passengers)

* compared to expected growth rates

PASSENGERS COME FROM FURTHER AFIELD

When Stansted had only traditional airline service it effectively acted as a regional airport for people in East London and East Anglia Now it taps into the much larger traffic base south and west of London Many people drive past Heathrow or or Gatwick to obtain a cheaper flight
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PASSENGERS COME FROM FURTHER AFIELD

Sample of Ryanair Passengers at Charleroi - Residential Location

Region Brussels Area N Belgium S Belgium Netherlands Luxembourg France Germany

Proportion of traffic

25% 19% 18% 17% 8% 7% 6%

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CATCHMENT AREAS CAN CONTRACT AGAIN

Leeds/Bradford Liverpool East Midlands Liverpool East Midlands

Birmingham Luton
Catchment area for East Midlands - Barcelona service Spring 2002 (bmibaby)

Luton
Catchment area for East Midlands - Barcelona service Spring 2003 (bmibaby and easyJet)
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LOW-COST CARRIER TRAFFIC BETWEEN LONDON AND NORTH WEST ITALY

Thousand Passengers 1999 2000 2001 2002

Bergamo Brescia Genoa Milan Linate Milan Malpensa Turin TOTAL

70 122 192

85 130 148 202 179 744

189 154 230 23 190 786

186 189 150 124 144 793

Source: Compiled from CAA Statistics

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LOW-COST CARRIER TRAFFIC BETWEEN LONDON AND SOUTH WEST FRANCE

Thousand Passengers
1999 Bergerac Biarritz Bordeaux Carcassone Marseille Montpellier Nimes Pau Perpignan Rodez Toulon Toulouse TOTAL 43 90 133 2000 87 56 109 57 6 44 56 9 424 2001 110 105 122 91 2 156 98 5 689 2002 49 116 94 119 81 84 154 109 54 39 899
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2003

* *

+ + * *

* routes discontinued by Ryanair + new Ryanair routes Source: Compiled from CAA Statistics

SERVICE CAN GO DOWN AS WELL AS UP

London-Salzburg Summer 1998 1xLGW (Lauda) CRJ London-Turin Summer 1998 2xLGW (Alitalia) ARJ 1xLCY (Azzura) ARJ Summer 1999 No service Summer 1999 2xSTN (Alitalia) 146 2xSTN (Ryanair) 73S Summer 2003 2xSTN (Ryanair) 738
Source: OAG

Summer 2003 1xSTN (Ryanair) 738

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CHALLENGES IN MARKET STIMULATION

London is an easy market compared to other European cities - large traffic volumes to anywhere - tourist destination as well as generator of outbound traffic - limited competition from surface modes - suitable secondary airport available (Stansted)

Paris meets the first two criteria but not the second two Other bases are more patchy - low-cost route networks dominated by leisure services to former charter destinations - difficult to stimulate traffic e.g. bmi baby drops East Midlands-Brussels and returns it to bmi regional Without hub flow, locations such as Frankfurt or Amsterdam 14 have limited traffic potential

SOUTHWEST AIRLINES
Example of linkages via Baltimore

Providence dep 0700

Baltimore arr 0820

Baltimore dep 0855 0900 0910 0920 0920 0925 0950 1010 1020

Destination Phoenix Norfolk Columbus Buffalo Nashville Raleigh Jacksonville Albuquerque West Palm Beach
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THE GREATEST SAVINGS HAVE BEEN FOR BUSINESS PASSENGERS

London-Frankfurt/Hahn booking MON 11 JUN, 2000

OUT TUE 19 JUN BACK WED 20 JUN Ryanair 205.20 Lufthansa/bmi 500.30

OUT TUE 19 JUN BACK TUE 26 JUN Ryanair* 35.20 Ryanair 65.20 Lufthansa/bmi 74.30

* requires return at 2325 hours fares are the cheapest available for return travel and include taxes

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2002 - THE EMPIRE STRIKES BACK!

Day Return Trip (Fixed Reservations): London - Edinburgh () Airline Airport BA - LHR bmi - LHR Scot - LCY BA - LGW easyJet - LGW easyJet - LTN go - STN Ryanair - STN/PIK 1 Day Ahead 104-234 63-74 238-344 68-163 105 105-205 98-118 39-69 1 Week Ahead 64-234 63-139 238-344 88-173 75-80 75 98 23-41 1 Month Ahead 64-119 63-104 238-344 63-83 35-55 40-65 98 23-28

Fares for travel on Wed 1st May, Wed 8th May and Wed 29th May 2002 17 Fares include all taxes and charges but assume debit card payment and e-ticket

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CAN THE COST ADVANTAGES BE MAINTAINED?

RAPID STAFF TURNOVER AND PILOT SHORTAGES (eg Virgin Express) WITHDRAWAL OF OLD AIRCRAFT AND INVESTMENT IN NEW LARGER EQUIPMENT (eg Ryanair) INCENTIVES ON AIRPORT CHARGES UNWIND OR DECLARED ILLEGAL (eg Ryanair) 'FRILLS' CREEP BACK IN AN ATTEMPT TO IMPROVE YIELDS (eg Debonair, go, easyJet?) MAJORS RENEGOTIATE LABOUR CONTRACTS AND REDUCE DISTRIBUTION COSTS ADVANTAGES OF HIGH SEATING DENSITY, HIGH UTILISATION AND LOWER OVERHEADS REMAIN
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LONG-HAUL LOW-COST AIRLINES

Less scope to increase utilisation Difficult to match the marginal cost of economy class seats in a mixed configuration aircraft of major carriers Hub feed is crucial for long-haul operations; there are few dense routes Some former charter airlines operate low frequency services eg LTU (Dusseldorf-Orlando) Martinair (Amsterdam-Barbados)

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FUTURE FOR LOW-COST AIRLINES

20% of market in domestic US
Within Europe only currently 12% (but 35% in UK and Ireland) Some convergence of costs likely but cheap purchases of new aircraft More competition between low-cost airlines Consolidation and elimination of weaker players

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US LOW-COST CARRIERS
THE SUCCESS STORY Southwest Airlines Started June 1971 262 Boeing 737s 24,000 employees 45 million annual pax FAILED OR TAKEN OVER Peoplexpress Western Pacific New York Air Morris Air JetTrain Air South Pan Am (Mk II) Reno Air Continental lite etc etc!
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FINANCIAL SUCCESS
Ryanair *** easyJet * (go *) Virgin Express ? (buzz ?) bmibaby ? Air Berlin ? MyTravelLite ? Color Air ceased operations Debonair ceased operations AB Airlines ceased operations

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BOOM OR BUST? The future of the low-cost airlines in Europe

Dr Nigel Dennis Senior Research Fellow Transport Studies Group University of Westminster dennisn@westminster.ac.uk

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