Low-cost airlines can go the distance

Flying the friendly European skies has never been cheaper or easier as low-fare, no-frills airlines compete to cut prices, fill seats and find a niche in the booming short-haul air travel business.

In recent weeks, savvy travellers have been able to book one-way flights from as little as £5 (€6.40) Dublin to Liverpool, £6 Dublin to London or £7 Shannon to Brussels, excluding taxes and airport charges, as carriers tried to fill seats during the low season.

It's all a far cry from the mid-1980s when return flights from Dublin to London could cost £200 or more. But while consumers have benefited from deregulation of the industry, analysts predict turbulence for the cyclical airline sector.

Two UK-based low-fare carriers, Debonair and AB Airlines, collapsed recently. Analysts say both fell victim to a woolly strategy that tried to combine low fares with the perks usually associated with high-paying business travellers.

Go, the no-frills subsidiary set up last year by British Airways, is also in the doldrums. It recently announced a £20 million operating loss in its first 17 months.

On the other hand, Dublin-based Ryanair, Easyjet, the London-based low-fare carrier run by Greek shipping magnate Stelios Haji-Ioannou, and Brussels-based Virgin Express, part of Richard Branson's Virgin empire, all appear to be doing well.

"Low fares have made air travel accessible to the masses and as a result, air travel has become a commodity," says Philip Molloy, a senior analyst with ABN Amro Stockbrokers. "It's very difficult to charge premium prices for something that someone else can offer for far less."

But to offer low fares and still make a profit, carriers must keep their expenditure to a minimum. Most use a combination of tactics to shave costs.

Ryanair, for example, is the largest no-frills carrier in Europe although most of its flights operate out of Stansted, not Dublin. To keep costs low, it operates a standard fleet of Boeing 737s. This reduces crew training costs and the need to hold a range of spare parts.

Turnaround time or time needed to land, unload passengers and baggage, refuel, reload and take off again - is kept as low as possible, allowing more flights per plane per day. It also flies into secondary airports, often at some distance from the destination, which offer lower landing and handling charges.

Passengers seem happy with this. In the year to March 31st, Ryanair reported that passenger numbers rose by 24 per cent to 4.9 million, operating revenues grew by 28 per cent to £232.9 million while adjusted profits after tax were £45.3 million, a 20 per cent increase on the previous year.

"The low-fares business is not an easy one. You have to watch costs all the time," says Elaine Power, Ryanair's communications manager. "We would have predicted where Debonair and AB were going. They were trying to offer all the frills and also lower fares. It doesn't work that way."

National flag carriers have followed the low-fare operators down market, but only on routes where they directly compete and usually only for leisure travel involving a Saturday night stopover.

But some have gone further. KLM, the Dutch national airline, announced plans in September to set up a low-fare subsidiary, after Go's arrival. Lufthansa, the German flag carrier, is rumoured to be considering a similar move.

British Airways has been particularly hard-hit by competition from both the low-fare carriers, most of which have either been based in London or focused their efforts on routes into and out of London, and by the long-haul carriers. In the past year, BA has cut capacity by 12 per cent and repositioned itself to serve the more lucrative business and first-class segments of the market. Even so, its fortunes have nose-dived and it is set to take a loss for 1999, its first since privatisation 12 years ago.

Aer Lingus has also changed its positioning. In the early 1990s, it competed head to head with Ryanair for every seat. Now, it concentrates on the business and high-value leisure traveller willing to pay a premium for service, reliability and punctuality, says spokesperson Declan Conroy.

THE strategy has paid off with traffic, turnover and profits up, although this may be due more to the buoyant Irish economy than to efforts by Aer Lingus. Nevertheless, passenger numbers in 1998 rose by 10 per cent to 5.8 million; turnover topped £901 million compared with £802 million the previous year; and profits before tax, interest and exceptionals hit £52.4 million, up from £46.1 million in 1997.

"We're not knocking no-frills services. Competition has been good for us, we've sharpened up," says Mr Conroy. "But we've pitched our tent to the quality mast. Ryanair have pitched theirs to the price mast and customers are saying there's room for both."

Aer Lingus is also in discussions with British Airways and American Airlines to join the Oneworld alliance. Alliances are becoming increasingly popular as the major airlines attempt to reduce costs, streamline operating practices, increase yield (the number of seats filled on each flight) and stave off competition. But whether they can halt the erosion in the flag carriers' market share or provide real benefits for consumers remains to be seen.

According to ABN Amro's Philip Molloy, the alliances could reduce competition on certain routes and push fares up. "The jury is still out on the benefits of alliances for the consumer. But in such a scenario, the role of the low-fare carriers will become increasingly important in ensuring that the market remains competitive."

Meanwhile, the future for the lowfare carriers looks bright, provided they can keep costs low. To date, only about 2 per cent of Europeans travel with low-fare operators compared to about 28 per cent in the US, suggesting a large market waiting to be tapped.

But to what extent will Irish consumers benefit from this growing trend? Ryanair has said it will offer no new routes from Dublin until Aer Rianta lowers its airport charges. On the other hand, Virgin Express which entered the market late last year with a Shannon-to-Stansted service, begins flying from Shannon to Brussels in December. According to marketing director Gus Carbonell, Virgin is also looking at offering services out of Dublin and Cork. To the extent that it does, Irish consumers can only win.