Low cost carriers must evolve to survive
Translate from the French Newspaper L’Usine Nouvelle
The entire low cost airline industry met in Barcelona at their annual conference, World Low Cost Airlines Congress. Nearly 300 people, including the CEOs of most major low cost companies, of few European airports and industry analysts attended the event. The CEOs gathered in successive sessions over two days to exchange on the hottest low cost issues.
Companies are facing a crisis that has forced them to adapt themselves in order to not have to file for bankruptcy as SkyEurope did last September. Ryanair, the largest European low-cost airline, announced a record loss of 101.5 million euros in the third quarter of 2008, and Michael Cawley, its Deputy Chief Executive added: “It is highly unlikely that Ryanair makes any profit this year (2009), unless a “dramatical” fall in oil prices during the fourth quarter. This, is reinforced by the fact that we are entering particularly critical times: the winter season, which signals the end of vacations and holiday trips.” Industry analysts announce that “other low-cost airlines will have difficulties to survive this winter and Michael O’Leary, had already predicted that there would be a “bloodbath” among low-costs.
According to Stelios Hadji-Ioannou, CEO of easyGroup and founder of easyJet, opened the congress with a first session entitled “Low-cost: the business model must evolve to survive”. Price is the key factor for passengers, he underlined, stressing the importance of maintaining one’s margins while offering good deals to customer. This remark was directly aimed at Ryanair, which has seen its margins crumble, and question its business model. According to Stelios, while agreeing to lower its fares (falls of the yield of 15-20%), Ryanair has limited its growth: “growth comes from the capital, not from passenger numbers”.
Ryanair has adopted a “volume strategy” in order to get the highest load factor possible, but to also reach the number of passengers that its airport contracts require. Low cost companies receive grants, including public ones from airports and local authorities based on the number of passengers carried. Thanks to these grants, low cost airlines are able to offer cheap fares.
Ryanair under fire
Ryanair also suffered further criticism from its competitors, including its communication around ancillary revenue. Another source of profit for airlines: food, car rental insurance… Always seeking new revenue, Michael O’Leary had proposed to make passengers pay for using toilets. Once, again, the agitator that is Michael O’Leary succeeded in creating much “buzz” around his company.
However, the leaders of the other companies unanimously expressed their dissatisfaction in regards to Ryanair. Alex Cruz, Chairman of Vueling, got nervous while declaring: “We are there, speaking about auxiliary incomes, which do not exist. All that is unreal. These people use us so that one speaks about them.” Daniel Skjeldam, CEO of Norwegian, continued as follows: “If the passengers hear everyday speak about taxes’ for the toilets on board, this is not good for the low-cost industry (…) customers’ perception is very important”. The other low-cost companies fear that Ryanair’s extravagances will lead to more restrictive regulations in order to protect the passengers. “We must find a good balance and auto regulate ourselves if we do not want that one to make it instead of us”, added Mike Rutter, Flybe’s CEO.
Low-cost airlines seemed more competitive than ever at this last convention, each defending its ‘business model’, as the best to survive the current crisis. The coming months will be decisive, for some more than others, as a difficult winter in a hyper-competitive market prepares itself.
Interesting article.
As a regular traveller, I now have an anybody-but-Ryanair strategy despite not having had a bad experience with them. I’d rather just pay an honest price and not get stung by the extra charges. I also travel alone, as I’m a widower, which means that you’re more likely to make a mistake with the booking. With FlyeasyGo, this might mean a small charge, but with Ryanair, you never know what might happen.
But I’m also using the ferries more, as they offer a real no-hassle experience to and from Holland, where I regularly travel. I use Norfolk Line’s VIP service which from Newmarket to Den Haag is about three hours slower, but relaxing and I can take my bike in the boot.
One issue that annoys me is airline security. Now, I know it is important, but it deters me travelling by plane. Surely, we don’t need to take laptops out of the bags any more. I also find it annoying that no-one has created a very lightweight bag, that fits the limits tightly. Most small bags weigh about three kilos empty, whereas if they had no wheels and were to be worn as a backpack, they could come in at about 1.5. More payload.