End of the Free Lunch? The Responses of Traditional European Airlines to the Low-cost Carrier Threat



End of the Free Lunch? The Responses of Traditional European Airlines to the Low-cost Carrier Threat

Authors

N Dennis, University of Westminster, UK

Description

This paper analyses the competitive responses of the traditional European airlines to the growth of the low-cost carriers, including through pricing, scheduling, product and costs. Contrasts are drawn between strategies in different European markets.

Abstract

The established European airlines have all come under pressure in the last few years, with a collapse in profitability and doubt cast over their traditional business model. Meanwhile, there has been huge growth by the low-cost airlines and other new entrants. Although much has been written of the low-cost carriers? performance, relatively little research has taken place on the reactions of the traditional airlines.

This paper aims to assess the extent to which the different airlines are threatened by the low-cost carriers, looking at the major and secondary ?flag? carriers, regional operators with small aircraft and the charter airlines. The various responses are then evaluated. Distinctions are made by European market and detailed analyses will aim to quantify some of these developments.

British Airways, bmi and Aer Lingus led the way in challenging the low-cost airlines by partially matching their fare structures and scrapping minimum stay restrictions on the cheapest tickets for journeys originating in the UK and certain other markets. Other European carriers have selectively matched BA but as with the US airlines, have tried to keep short duration trips midweek at a premium price. Unlike Ryanair or easyjet, most traditional airlines still require the passenger to purchase a return fare to access the cheapest tariffs. This allows greater sophistication in yield management to be retained. Pricing strategy will be assessed for a number of carriers on routes with contrasting competitive positions across their European network.

On many routes, it is feasible for major or regional airlines to survive alongside the new entrants if they can offer a better schedule for business or connecting traffic or the use of more attractive airports. On some services the traditional airlines have moved to smaller aircraft. This enables them to cut capacity but remain competitive in terms of frequency. Elsewhere it is necessary to emulate the low-cost airlines. BA has upped aircraft utilisation on Gatwick routes by tightening turn-arounds and adding more early and late flight to extend the operating day. All its Boeing 737 fleet is being concentrated here. The traditional airlines have surrendered certain destinations to the low-cost airlines or handed them over to franchise partners. The emerging service pattern in different types of markets is analysed.

Some conventional European airlines have moved towards passengers paying for food and drink in economy class (e.g. Aer Lingus, Swiss, Iberia, Maersk, SAS). This can increase complexity and costs however, even although a new revenue stream is developed. Others have down-graded the free food provided or avoid offering alcoholic beverages in economy class. The days of short-haul business class appear numbered. It is shown that there is a limited amount of ?extra value? that can be created on flights of 1-2 hours. Features such as lounge access or food can still be provided by voucher systems to full-fare passengers (e.g. KLM, flybe, SAS).

Two other main areas for cost cutting can be identified: staff and distribution. The majors are gradually renegotiating labour contracts and outsourcing items such as ground handling. Productivity comparisons are made between the airlines. Historic working practices and union agreements pose an obstacle to measures such as increasing pilot hours to the maximum permitted or reducing cabin crew numbers to the safety minimum. A 149 seat 737 of easyJet has only 3 cabin crew whereas BA typically operates with 5. In contrast, distribution has been a relatively easy area for the majors to take an axe to costs once the low-cost airlines had changed the balance of power in the market. BA has cut travel agents? commission from 9% to 1% and intends to phase it out altogether in 2005. Smaller airlines (and major carriers outside their home countries) still struggle however to obtain sufficient direct sales. The Global Distribution Systems remain crucial for complex itineraries. The ability to offer these are one of the differentiating features of the network carriers so cannot be easily scrapped.

Some traditional airlines have gone further and set up their own low-cost subsidiaries. These have a somewhat mixed track record as it is difficult to reconcile conflicting strategies. Some primarily appear to be a spoiler attempt or deterrent. BA was one of the first with go although this was rapidly sold to its management. KLM had buzz (sold to Ryanair) and basiq air. Lufthansa has germanwings and LOT Polish is setting up Centralwings. SAS?s snowflake has only aggrevated losses and meltdown now appears imminent!

Charter airlines avoided the initial burst of low-cost activity which was focused on Northern Europe. In the last couple of years however, easyJet and Ryanair have invaded the Mediterranean destinations offering a more flexible product to independent holidaymakers. The charters have moved into more seat only sales and scheduled services, either in their own right (e.g. Monarch) or through a subsidiary (e.g. MyTravel Lite, Thomsonfly). In Germany, low-frequency leisure routes by holiday airlines (e.g. Condor, Hapag Lloyd) have for some time been sold as scheduled services, accepting independent bookings in addition to tour operator blocks. The shifting balance between scheduled and charter operations is tracked and related to overall market growth.

It is concluded that the major airlines cannot abandon their short-haul networks because of the importance of providing feed to their long-haul services. In volume terms they still dominate short-haul traffic in Europe, although this position is being eroded. Cost cutting is being aggressively pursued but it is important not to undermine the key differentiators in passenger perception. In the US, standards on the traditional airlines have fallen so far that passengers consider Southwest and JetBlue to offer superior service in many cases!

Publisher

Association for European Transport