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Uster, 18. September 2002 European Low-Cost The European Low Cost market is in change. Right now, it looks like new competitors are announced on a weekly base, especially in Germany. And again, the large network airlines are building up their own subsidiaries to get a piece of the no-frills cake. A short review of the situation by Michael Meier. Update: European Low-Cost, Part 2 is now online!
Low Cost History
A business model that works so successfully in the States, should also work on the old continent. That's certainly right in this case. It took some more years until deregulation came within the European Union, but since some years, the low cost carriers have gained impressive market shares and are growing very fast, even in times of cutbacks. So, what's the secret behind this new airlines?
Simple, there is no secret. The low cost carriers can offer these cheap flights because they are saving every Euro they can to give it back to the customer. As we all know, there is practically no service on board, you don't have to expect a meal during a flight. Some carriers, such as Ryanair are saving more costs because they don't serve the hubs, but secondary airports, which often are in the middle of nowhere. Another important thing is that these airlines don't offer a network. They are just flying routs with a high market potential for point-to-point travel. They don't want all the connecting passengers on their flights. The traditional carriers have their hubs where you can switch planes, from European to intercontinental flights, for example. It's obviously not that cheap to operate such a network and a hub. But anyway, the low cost airlines are making air travel possible for people with lower budgets, which wouldn't travel on the more expensive network carriers as British Airways, Air France or Lufthansa.
In 1985, Ryanair took off for the first time as an Irish low cost carrier, offering nothing but cheap flighs. Today, Ryanair is the second biggest low cost airline, just behind easyJet, which took over the first place after the merge with GO. Ryanair has a fleet of more than 40 Boeing 737 aircraft and offers flights all across Europe, from its hubs in Great Britain, Germany and Belgium. Ryanair is only flying to secondary airports where they don't have to pay high landing fees (if any) and where they can profit from a lot more cost-saving amenities. Ryanair is a commercial success too, at least until today. Even after the events of 9/11, when the airline industry went into a crisis, Ryanair could fill their planes by giving away tickets at crazy low prices. The airline is still performing well, makes profits and has one of the highest market capitalization of all the airlines in Europe.
Another competitor in this field of airlines is Virgin Express, founded in Brussels by British billionaire Richard Branson. Beside Virgin Express, Branson did also launch Virgin Atlantic in Britain and the low-cost airline Virgin Blue in Australia, which is the only left real competitor to Qantas after the collapse of Ansett. Brussels' Virgin Express offers flights to about two dozens destinations all across Europe.
But the most interesting things are happening in Germany right now. Earlier this year, the British Airways subsidary Deutsche BA got a new strategy and image. The airline is now called deutscheba (dba) and became a low cost carrier. The strategy for this renewed airline has been done by easyJet, who owns an option to take over the airline after a certain time.
So, there are Germania and deutscheba, the first low cost carriers. Next in the row is Germanwings, a no-frills airline owned by Lufthansa. Through their partnership with Eurowings, a European regional airline, they have launched Germanwings within the last days. A first Airbus A319 has already been painted, with more to follow. The airline will start its operation as a low cost carrier soon, serving cities in Germany and in Europe. But there's one more competitor in the pipeline. Hapag Lloyd Express, which has been announced by TUI, a large travel operator who does also own various charter airlines across Europe. The paint-scheme of Hapag Lloyd Express is looking like a US cab (taxi). And that's exactly the message of the airline. It should be as easy to use as a cab. But hopefully, the prices will be less expensive than in a real cab…
Lufthansa's Germanwings is no surprise too. When Germania started domestic flights and Ryanair opened a new hub in Hahn near Frankfurt, the market came in move. There were plans for a low cost operator since a long time, but Lufthansa didn't go on with that project - until now. They have to face new competitors in their home market, they have to fight them. At least, the German domestic market is the biggest one in Europe, and therefore very important to Lufthansa.
It's a very interesting situation in Germany right now. There are four new airlines in the same segment, will all of them survive? Lufthansa will fight hard for their domestic market. But the other ones won't leave the country because of that, they all want a piece of the case. The winner is the customer, flying in Germany will get less expensive as there is more competition and seats will be available at much cheaper rates. But not only in Germany, al over Europe, the low cost carriers are becoming more and more important. Industry professionals believe that they will achieve market shares of 20-25 percent in the medium term. Some of the market will be grabbed away from the traditional network carriers, but another portion of the market share is surely coming from people, who wouldn't fly if it weren't that cheap. We will see how the future looks for the low cost carriers. We will keep an eye on them for sure. Michael Meier
Update: European Low-Cost, Part 2 is now online!
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In
the United States, Low Cost carriers have a long history. It was
Herb Kelleher's Southwest Airlines, who was the first real no-frills
airline, offering tickets that were even cheaper than a ride in
your car or in a coach bus. Southwest started in Texas in the 1970s,
and since the deregulation act in 1978, the airline is spreading
its wings all over the country, offering cheap flights with a fleet
of 366 Boeing 737 aircrafts (as of June 25, 2002).
There
is a whole bunch of low cost carriers in Europe these days, and
new ones are launched within short periods, especially in Germany.
But we will have a look to that later, let us go back to the early
days first.
As
mentioned, the first in the row is easyJet. This airline was founded
in England by Greek millionaire Stelios, who has built up a whole
group of "easy"-companies by now. EasyJet gained a lot
of size through mergers. Years ago, they acquired the Swiss charter
airline TEA Switzerland and made it to its subsidiary easyJet Switzerland,
based in Geneva. Recently, easyJet bought low cost carrier GO, who
was originally founded by British Airways many years ago. With this
merger, easyJet became the largest low cost operator in Europe.
Its strategy is a little bit different from Ryanair's, as they don't
only fly to secondary airport, but going directly into the big hubs
such as Amsterdam, Zurich, Paris Orly and many more. That way, they
can offer the convenience of the large airports but still offering
good prices. 
Then
we have Germania Flug. An airline with a fleet of Boeing 737 aircraft
who used to be a charter airline so far. They were serving popular
travel destinations out of Germany. Earlier this year, Germania
started low costs flights from Berlin to Cologne and Frankfurt in
Germany. They are now a direct competitor to Lufthansa. Price wars
have already started, also in the courts. 
So,
within one year, there are quite a few more low cost carriers in
Germany. What happened? Well, Deutsche BA was making a loss since
it has been established and something had to be done, sooner or
later. British Airways was not willing to pay the bills anymore.
The airline must make money now. So, that's why the low cost strategy
has been chosen. |
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