Passengers lose out in low-cost airline rivalry

Business Opinion: Airlines have become confirmed advocates of "transparency". The cost of flying is now broken down so that customers can see the "great value" ticket price offered by the carrier.

Of course, passengers also get to fulminate about those anything-but-optional extras, such as airport charges, fuel surcharges, wheelchair levies, post-9/11 airline insurance levies, government taxes and handling fees.

And in an era where airlines increasingly appear to be tailoring their pricing structure to mollify the stock markets and commercial investors rather than to simplify things for passenger, the decision last week by Aer Lingus to follow Ryanair's lead and introduce baggage charges on short-haul routes shows that trend is likely to continue.

It's all a long way from the days when the passenger contacted a travel agent who sourced the best deal to the desired destination and returned with a ticket price that included all charges and the sort of free inflight service that is now but a fading memory.

Measuring passenger loyalty is a difficult business. Since former chief executive Willie Walsh first took the scalpel to treats such as on-board meals or cuppas in an effort cut costs and allow the State airline to compete better with its nimble low-cost rival Ryanair, much has been heard about Aer Lingus's treatment of loyal customers.

The fact remains, of course, that those customers were not prepared to pay the cost of the now fondly remembered frills, especially with Ryanair offering a lower-cost, if stripped-down, alternative.

Certainly, Ryanair, and possibly Aer Lingus, will argue that the growing numbers using their services confirm their view that low cost is the only route to go. However, there is a limit and Aer Lingus might do well to remember that.

Michael O'Leary, the Ryanair chief executive who has made a virtue out of irreverence towards corporate convention, has previously stated that the day might come when airline passengers would pay nothing. He alluded to Wal-Mart's relentless drive to lower prices.

Evidence is emerging the there is a limit even to Wal-Mart's global reach. The company has just been forced to concede defeat after an eight-year battle to establish a profitable presence in Germany, with the company selling its 85 stores to rival retailer Metro at a loss.

One of the major factors undermining its business was the fact that Germany already has a very competitive market and established players at the low-cost end of the spectrum.

Ryanair seems to have discovered the same message. For all the advertising about free flights and underpricing competitors, the truth is that Ryanair passenger yields are rising. Putting that in plain English, passengers on Ireland's vaunted low-cost airline are paying more, not less, than they were a year ago.

In the three months to the end of June, Ryanair, on average charged every passenger a fare of €45.94 to fly with it, compared to €40.50 in the same period last year. That's a rise of 13.4 per cent. Even including the well-publicised increase in fuel charges that Ryanair had to contend with during the period, that average fare is well ahead of the airline's €34.12 average cost per seat. And all that is before growing "ancillary revenue" - a catch-all heading that includes, among other things, baggage charges.

As a result, Ryanair's profit margins are growing. In the three months to the end of June, the airline enjoyed margins of around 17 per cent on its passengers, up from around 12 per cent this time last year.

So Ryanair's charges to passengers are rising just as Aer Lingus is making a virtue of going down the same low-cost route.

The baggage charges, which Ryanair is ramping up to €4.50/€10 (depending on whether they are booked online or on arrival at the check-in desk) from November are expected to add €2 per passenger to Ryanair's revenue - over €70 million based on the last full-year passenger figures.

Aer Lingus expects its charges of €4 (or €8 if notified at time of check-in) to raise up to €30 million a year for the airline.

Leaving aside for a moment whether these charges by both airlines - and interestingly introduced no other airline in Europe - are merely a means of introducing fuel surcharges by other means, there remains the question of whether Aer Lingus is wise, commercially, simply to ape its rival.

The State airline may have woken up to some of the realities of modern aviation following the crisis of 2001. But it should remember that, to date, Ryanair has seen off every challenge to its status as Europe's best-run and most innovative low-cost airline. That seems unlikely to change any time soon. If Aer Lingus has a future as an independent airline, it needs to find its own niche - and that means, in part, capitalising on the somewhat bizarre national sense of loyalty to the State airline, not throwing it away.

Enda Corneille, Aer Lingus's commercial director, says fares will drop as the cost benefits to the company of the introduction of baggage charges come through. The evidence from Ryanair seems to be that, at the bottom line, it is likely to be the post-flotation investors in Aer Lingus, including its staff - already being handsomely compensated - who will ultimately see that benefit, not the passengers.