The Rise and Rise of Low Cost Airlines

14th May 2003

The state of the airline industry is in grave crisis that has been deepening for the past three years and now there is an emerging pressure from the low cost carriers, which continue to thrive despite unstable circumstances.
In the last two years, the industry has lost 31 billion dollars and The International Air Transport Association (IATA) has estimated that the industry stands to lose a further £5bn this year as the passengers have been scared off by disease, terrorism and economic uncertainty.
Following the first Gulf war, Pan American, Midway and Eastern disappeared and now it seems as though we may witness a repeat scenario, with many US carriers at the centre of this particular storm.
Hong Kong has been the worst hit destination recently, with the outbreak of the deadly SARS virus prompting a 65% collapse in passenger numbers. In an attempt to stem the decline, Hong Kong’s airport recently slashed its parking fee for airlines by 75% and allowed carriers to defer payments by 3 months.
Cathay Pacific has reported further temporary cuts to its scheduled passenger services in a response to a plunge in passenger numbers by two thirds, with losses running at about £1.9m a day across its entire network. This is the fourth round of cuts the airline has made since 31st March 2003.
North America, still the number one aviation market in the world, is in ruins. Two major US carriers are in bankruptcy protection. The top six US airlines have one hundred billion dollars of debt but a market capitalisation of only 2.5 billion dollars. Most observers point to a broken business model and the need for change.
American Airlines , the world’s largest carrier, recently avoided imminent bankruptcy. The airline reported its system wide traffic for April decreased 4.8 percent from April 2002, on a capacity decrease of 6.5 percent. This has come only a few months since United collapsed.
In Europe, on the other hand, the top airlines, such as BA and Lufthansa are performing well thanks to a decade of massive re-structuring. Drastic cost reductions and flexible fleets, combined with a new approach to distribution are all part of this success.
But nowhere is change more needed than in West Africa and in Latin America. There, the industry is practically in its final stages. A third of the Latin American airlines are technically bankrupt.
In his speech at the ICAO Pre-Conference Seminar in Montreal, Giovanni Bisignani, IATA Director General and CEO called for a drastic change in government regulation policy. He commented: “The air transport industry is going through its worst crisis since the Wright Brothers flew one hundred years ago. All continents are affected in one way or another by this crisis”. He added: “Our industry needs change. Government regulation keeps our industry from changing. This ICAO conference may well represent the last chance to set our industry on the right regulatory track.”
Giovani continued: “Competition is tough in our industry. Some of it comes from the so-called “low cost” carriers. They do represent healthy competition and genuine change in the US, in Europe and even now in Asia. They also operate in single markets, free from the limitations imposed by the three pillars of stagnation!”
Unaffected by SARS and wavering uncertainties caused by the war, the emerging low-cost airlines continue to flourish, increasing pressure on the bigger carriers, who are trying to compete offering prices that are beyond their limits, whilst at the same time paying record rates for fuel, labour and insurance.

In the US, Southwest airlines , the pioneer of discount flights has reported an increase in revenue for 1Q despite the uncertainty caused by the war. Meanwhile Ryanair and EasyJet, its European counterparts are still growing.
After five years of growth, it has now been estimated that low-cost airlines in Britain account for 43% of seats on domestic flights and 32% on routes to continental destinations.
An easyjet spokesperson told Internet Travel News: “The low cost industry is here to stay. Once passengers have tried low cost on short haul flights they realise there is simply no need to pay high costs, for a free lunch, when your flight is only an hour”.
In a move to increase fares distribution, no-frills fares have recently been added to online booking engines so users can compare published, negotiated and no-frills fares - further bumping up the competition for bigger carriers. And there is much expected growth for low-cost carriers within Europe over the next few years. easyJet commented: “So much of Europe is yet untouched by the low cost product, there will be a great deal of further expansion in this sector over the next few years and in the foreseeable future”.

Although expansion into Europe may not be as simple as it appears. Ryanair describe the low cost as a “culture which few, if any airlines are capable of emulating”. Confident that they will have the monopoly, Ryanair continued: “To build a successful European network, low cost airlines require a strong competency in cost management, a cost-conscious culture that permeates the organisation, a competency in managing operations and a portfolio of European bases from which it can begin to build a route network”. Adding: “There is only one airline which meets these criteria”. Demand for cheaper flights certainly seems to be catching on. Apart from the savings that can be found, the internet continues to grow as a major source of travel information and purchases. No-frills are a big catalyst towards online bookings addressing and furthermore generating a changing consumer behaviour pattern.



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