Trends & Predictions for 2010: Part II

As promised, here is the second part of Airline Bulletin's discussion of trends and predictions to examine in the coming year.

Prediction #1: Industry Consolidation, Especially Abroad
While U.S. carriers have made efforts to reduce their capacity and form strategic partnerships with other carriers, it does not appear likely that we will see a full-fledged merger or buyout in the U.S. in the coming year. This is not to say that such consolidation is impossible, rather that it's simply unlikely. There aren't a lot of perennially weak airlines left to consolidate. Frontier (which has recently showed signs of strength) and Midwest have been combined, Sun Country, to my amazement, seems to be hanging on, and small LCCs like Spirit and Allegiant that have defined business models and solid market niches don't appear to be losing buckets of money either. That being said, anyone is a possible takeover target or buyer. Even Southwest, which has historically avoided growth by acquisition (with a few exceptions), has signaled of late that it is open to potential mergers.

US Airways Deals?
One carrier that still mystifies me is US Airways. The airline has been very aggressive in implementing ancillary revenue-generating programs and cutting costs/capacity. CEO Doug Parker seems to know what he's doing in this regard. But, US Airways may not be very poised for future business travel growth. It operates by far the smallest international route network of any of the 5 legacy carriers in the States, and has actually cut some of its European routes recently due to poor loads. Growth in Asia has taken something of a hiatus, as US Airways let its Philadelphia-Beijing route authority expire after the airline wanted to avoid opening the route due to the recession. And the carrier's position in Star Alliance has been weakened due to Continental's recent entry, and due to the announcement of a strengthening of reciprocity between United and Continental frequent flyer programs. The conventional wisdom has been that American would make a bid for US Airways, since American has avoided much of the consolidation activity within the past 7-8 years, and as a result, has watched its market share decline, while US Airways needs an available suitor. But American and US Airways have almost no fleet compatibility--American is mostly Boeing, US Airways is mostly Airbus. And another merger would only further complicate the labor troubles that have hampered US Airways recently, particularly with its pilots union having trouble integrating seniority between old US Airways pilots and former America West pilots. On the plus side, the route networks of American and US Airways would align somewhat, with US Airways having hubs in the Southwest, Southeast, and Northeast, all regions where American lacks hubs (American's Miami hub, mostly geared towards traffic to/from Florida or Latin America notwithstanding). However, both carriers are relatively weak in Asia and the Middle East, areas where they will need to ramp up capacity if they hope to compete in these increasingly important business markets.

What seems to be a more plausible idea, actually, is a buyout of Spirit by US Airways. US Airways as noted above has been very aggressive, perhaps the most aggressive of any legacy carrier in seeking out new ancillary revenue opportunities, and transforming itself into an LCC which can effectively compete against the likes of Southwest, JetBlue, and AirTran on the ultra-competitive routes along the eastern seaboard. A buyout of Spirit would have very strong fleet complementarities--both carriers fly A319 and A321 aircraft, as well as strong route network complementarities. US Airways tried a few years ago to open a mini-hub in Fort Lauderdale--Spirit's biggest base, with routes to Caribbean destinations, but was fended off in part due to Spirit's competition. There is clearly money to be made on these routes, but US Airways lacked the cost structure several years back to adequately compete. Now the carrier has realigned its costs, and a buyout of Spirit would make accessing such routes much easier.

It would also do something else which is pretty important. The two slot swap deals announced earlier this year, which (if approved) will strengthen legacy carriers at slot congested airports while helping to keep out low-cost competitors. US Airways, even though they are starting to act like a low-cost carrier, is not a low-fare carrier, unless it is forced to be through competition. US Airways would rather stifle demand with higher fares (and higher profits) than lower fares which stimulates demand but reduces yields, which is what Southwest tends to do. Keeping slots in the legacy carrier "family" prevents potential low-cost competition at slot-congested airports (see also Prediction #2). Spirit is one of the few LCCs to have slots at both LaGuardia and Washington National (even though it has relatively few slots in both). A buyout of Spirit would help diminish low-fare competition at these airports, and allow legacies to charge higher fares to business customers. However, I still think that this deal is somewhat improbable, only because Spirit is presumably a money-making carrier with a good market niche, while US Airways is a money-losing carrier with lots of problems that could make a merger tricky. It could be an easy buyout, or it could just be an obstacle to US Airways doing what it needs to do to revamp itself to compete against LCCs while expanding its international network.

European Consolidation
In Europe, the picture is much simpler. I don't anticipate many state carriers to go out of business, however I do imagine that governments will work even harder in the next year to privatize or revamp the following state carriers, named yesterday in Part I:
CSA Czech Airlines
Croatia Airlines
LOT Polish Airways
MALEV Hungarian Airlines
TAROM Romanian Airlines

After additional research, I also want to add the following carriers' names to this watch list:
Aer Lingus¹
Air Malta²
Bulgaria Air

Given the obligation of these governments to maintain positive images, it appears extremely unlikely that they will suddenly pull the plug on these carriers' operations, stranding passengers (voters) and angering the public, a la the recent FlyGlobespan fiasco. However, such airlines are definitely at risk of being purchased by larger airline conglomerates or of being privatized. 

Notes:
1. Aer Lingus may be at risk for another Ryanair takeover attempt in the new year. The carrier has struggled to compete against Ryanair, and has gotten push-back from its unions as management tries to contain costs. Efforts have been made to diversify the carrier away from Ireland, opening new routes from London Gatwick. While the carrier may avoid a Ryanair takeover, serious reforms are needed to make the company profitable once again, and these do not appear forthcoming.
2. Air Malta may also be in need of further reform due to the recent arrival of LCCs in Malta after the airport lowered passenger charges. Air Malta had effectively been protected from LCC competition due to these high charges, but this is no longer the case. As a result, the carrier must find ways to diversify and compete. But since the vast majority of Malta traffic is holiday-oriented, and thus, price-sensitive, it appears unlikely that unless Air Malta can turn itself into a bare-bones LCC, the carrier could face extinction. Another possibility would be a buyout, perhaps by another LCC like easyJet, which would reform the carrier, much as it did with GB Airways, while maintaining most of the its routes.

In terms of LCCs, there are simply too many out there, and too few of them have such well-defended market niches that they can't be attacked by market leaders easyJet, Ryanair, Wizz Air, and Norwegian. I believe that the following carriers are in trouble, and are at risk of potential sudden shutdown. As a traveler, I would do some research before booking with them, and then only with a credit card:
bmiBaby_³
Cimber Sterling⁴
Niki
SmartWings
Vueling⁵
Windjet⁶

3. bmiBaby is unlikely to engage in a sudden shutdown, now that the carrier is owned by Lufthansa. If bmiBaby is closed, it will likely be in a controlled fashion, or if it is sudden, passengers should anticipate far fewer inconveniences than when FlyGlobespan shut down (ie. Lufthansa will likely offer alternate flights, etc.). However, bmiBaby is under heavy competition from easyJet and Ryanair. And while the carrier is growing--it recently expanded at East Midlands which easyJet vacated due to poor yields--it is unclear whether the airline, with relatively old, inefficient planes and infrequent service on many of its international routes, will thrive in the coming years. Lufthansa may use its recent acquisition of British Midland mostly for its aircraft and slots at Heathrow, taking the airline's good routes and using British Midland to help feed into Lufthansa's long-haul routes, while scrapping much of the rest of the company. As British Midland's low-cost subsidiary, bmiBaby doesn't have very much to offer Lufthansa, and a sale or suspension of services appears likely.
4. Who knows what's going on with Cimber Sterling? The carrier seems bereft of a coherent strategy, flying both business and leisure routes with a bizarre mixture of aircraft. Most of Sterling's core routes were taken over by Norwegian and Transavia immediately after that carrier's demise, and Sterling's new namesake has been left with relatively thin routes and little room to grow. I see Cimber as extremely vulnerable to shutdown.
5. Vueling is probably not going to shut down immediately, but will be increasingly vulnerable to competition from easyJet and Ryanair in Barcelona and Madrid. It is unclear whether the combination of Vueling and Clickair has really made the company more financially stable, and due to this lack of information, I am concerned about the carrier's future. However, Vueling has potential to thrive and grow within the coming years. It has a large fleet, a relatively low cost structure, and by operating from primary airports, including Heathrow, can attract higher-yielding business travelers. Thus, it is less vulnerable than most of the other carriers named on this list, but is vulnerable nevertheless.
6. Same issue as with Cimber. It's hard to know what's going on with this carrier. It's privately owned, not discussed much in the press, and it seems hard to believe that they have a real competitive advantage in the marketplace. Now maybe they're like Spirit Air in the U.S., and have a relatively undisturbed market niche on thin routes to/from Sicily. And given Ryanair's recent announcement that it may close domestic routes within Italy, WindJet may benefit through expansion of services. But without clear evidence that WindJet is a profitable LCC with competent management, I have to place them in the same category as Cimber--extremely vulnerable to shutdown.

Prediction #2: Continued LCC Growth
As the economy continues to suffer, expect more businesses to shop around for travel, and send employees on LCCs when necessary. LCCs will try to respond to this growing demand. In the U.S. in particular, LCCs will likely make more efforts to enter or expand services at airports that are dominated by legacy carriers and which are the few remaining bastions of high fares in the U.S. While virtually every large metro area in the U.S. has low-fare airline service, many large, primary airports in these metro areas lack much low-fare service. Examples include Dallas Fort-Worth, Miami, Chicago O'Hare, Newark, Washington National, Cincinnati, Charlotte, Houston Intercontinental, and Atlanta (obviously, AirTran has a large hub here, which keeps fares lower than they otherwise would be, nevertheless, the lack of Southwest, JetBlue, or other LCCs in the Atlanta area at all is problematic and allows a Delta/AirTran duopoly to set prices). Although some of these airports are more congested and delay-prone, they are often preferable for business travelers, as they are easier to access, are located closer to where companies are situated, have better facilities and connections to other airlines, etc. In the coming year, expect expanded service from AirTran, Southwest, and JetBlue to the airports above. While new leisure-focused service will be added, particularly to/from the Caribbean, don't count out future expansions at these key airports for business travelers. Leisure demand has actually held up better than business demand, and so while LCCs will do well in leisure markets, because they are already strong in California, Florida, and the Caribbean, less of the growth in their operations is likely to be concentrated in those regions, since little added LCC capacity is needed to handle this traffic.

In Europe, while it may seem like business routes would also see expansions in service, this does not seem to be the case. Ryanair has announced minimal service of late that will be attractive to business travelers, mostly because it is concentrated in very distant and inconvenient airports. EasyJet, which has aimed to take business customers away from BA and other full-service carriers, has instead recently announced that it will add new service to a host of leisure destinations next summer, mostly in Turkey. Such moves seem to place easyJet and Ryanair in closer competition with European charter carriers such as Monarch than legacy carriers like BA. It will be interesting to see whether carriers like Wizz Air, Norwegian, and Air Berlin follow suit and concentrate growth mostly on leisure routes, but that would be somewhat counterintuitive, given the growing demand of businesses to trim travel costs.

Prediction #3: Increasing Focus on the Environment
While there are other interesting predictions to be discussed, it's getting a bit late and I need to get this out. So I'll conclude with my third prediction, which is something that will be of increasing importance not just in 2010 but in the coming decade. Expect more airlines to highlight their "green" credentials whenever possible, through marketing campaigns, press releases highlighting environmental initiatives (such as this recent announcement highlighting airline participation in a jet biofuel scheme), and programs to offset emissions. Such efforts will be reinforced as Boeing delivers the fuel-efficient 787 Dreamliner to its first customers next year, and as the U.S. Senate debates a cap-and-trade bill to combat climate change. Although we're in a recession and customers are price-sensitive, more and more consumers are going to make what they perceive to be environmentally-friendly choices, given growing awareness of environmental concerns. While airline efforts to address the issue are mostly greenwashing, since the benefits of getting customers to recycle soda cans on the plane or powering one engine with 50% biofuels aren't diddly squat compared to the effects of contrails fully-loaded commercial jets spew out at high altitudes, such efforts will likely succeed at winning customers over since most people don't know any better. What we won't see, however, are serious efforts to make the industry more environmentally-friendly through new technologies. V-shaped aircraft ("flying wings") or better yet, high-altitude airships would radically alter the airline industry as we know it, but they would also make a substantial dent in the industry's pollution levels. But because such technologies aren't compatible with current air transport infrastructure, are not seen by consumers or regulators as safe, and in some cases are slower than conventional aircraft, don't expect Boeing to announce production of such aircraft anytime in the near future. This is not to say that such technology won't be commercialized, but significant steps aren't likely to be taken within the next year due to the recent air travel slowdown and manufacturers' focus on the latest generation of fuel-efficient planes.

In 2010, as the airline industry globally continues to struggle, it will likely once again continue to make headlines as it tends to do, and Airline Bulletin will be here, whenever possible, to offer commentary on these events. Until then, have a wonderful new year!

Air Scoop Article: LCC Contrast: The trend is fuller flights, so why are some carriers flying empty planes or using fake passengers?

I recently authored this article, published in the October 2008 edition of Air Scoop, a European newsletter devoted to the low-cost airline industry. I'll have a post or two out later this week about US carriers, but in the interim, I hope you enjoy this piece.

LCC Contrast: The trend is fuller flights, so why are some carriers flying empty planes or using fake passengers?

As fuel prices rise, LCCs have an even greater incentive to fly fuller planes with passengers paying higher fares. Ryanair and easyJet operate with the highest load factors in the industry (near 90% over the summer), and are increasing yields through higher ticket prices and higher ancillary charges. However, some smaller LCCs have chosen to fly emptier planes with passengers using free tickets. Earlier this year, Flybe was implicated in a scandal when the carrier hired actors to achieve a threshold passenger count on a route, thereby receiving a subsidy from the airport. Some carriers are even operating empty flights. With all the problems LCCs face, why do some companies engage in these behaviors? Two words: airport subsidies.

Arguably, part of the problem lies with the airlines themselves. The airline business has low margins, and airlines are desperate for competitive advantage and additional revenue. In order to survive, carriers want to extract the best possible deals from airports, leading to higher-than-necessary subsidies. However, airports are mostly to blame. Many airports, and the local governments that support them, need LCCs to improve passenger levels and generate tourism. Subsidies are often needed because the barriers to receive airline service, in this era of higher costs, are increasing. However, oftentimes subsidies are handed out without sufficient assessment of a route’s viability. Therefore, airports sometimes dole out large cash amounts for relatively few passengers, especially on routes not specifically focused on generating tourist traffic. Moreover, airports all too frequently cross the line between legal and illegal aid, privately negotiating with one carrier, while refusing to offer comparable aid to other carriers.

This is not to suggest that all LCCs are created equal in terms of their attitudes towards receiving subsidies. Ryanair has been more successful than others in using subsidies to successfully launch new routes from small airports. Often, these facilities lack international service, and Ryanair is a boon for the small communities that receive an influx of valuable tourist dollars. In most situations, Ryanair will typically launch flights to London, and then if those are successful, to other bases. Many of these routes have become commercially successful for Ryanair and the airports, enabling airports to withdraw subsidies over a period of time.

But, there have been occasions when Ryanair has opened a new destination, only to find that its expansion prospects are limited, as few of its other bases outside of London can support its services. Ryanair has withdrawn flights on many routes because of low demand, or because of an unexpected increase in the airport’s costs. This strategy, while somewhat ruthless, has helped the airline minimize losses on new routes. Often, the most successful airlines are those that know when to cut their losses early, and Ryanair has learned this lesson well.

Flybe, on the other hand, has tended to use subsidies from airports not to necessarily foster creation of a long-term, sustainable route, but rather to improve the bottom line. Subsidies are more effective in markets with large potential for traffic increases, such as tourist markets that have not yet been exploited. Markets that have a higher proportion of business traffic generally see slower gains in traffic. Moreover, airports that need to offer subsidies typically lack significant demand from business travelers because they’re typically distant from major trade centers.

Airports can be seen as subsidizing airlines in two ways, through direct subsidies and inefficient slot appropriation. By offering cash to carriers that add new routes or meet specific passenger count totals, airports can spur the creation of new services. Through poorly managed subsidy programs, airports can end up in a very undesirable situation, having to pay a subsidy to a carrier that did not fly passengers benefiting the airport in any way, such as what Flybe did in Norwich. Norwich, like any airport, should consider using subsidies, but should work closely with carriers to develop targets that are meaningful and realistic, on routes that will actually produce tangible gains in passenger totals. This means airports must carefully select routes to subsidize.

Simply because a carrier is able to or interested in serving a route does not mean that it is the best use of airport dollars. If a facility is looking for significant passenger gains, targeting subsidies at carriers like Flybe, which operate smaller planes shorter distances, on routes flown mostly by business travelers, may be less attractive than working with Ryanair or easyJet to bring in more passengers from greater distances to tourist markets.

Unfortunately for airports, given the high fixed costs of the airline business, LCCs will need subsidies to take the risks associated with a new route. Until the EU more stringently regulates this practice, subsidies will continue to exist. However, more careful and conservative route analysis, along with consultation with airlines about ways to increase passenger totals, will help airports ensure their investments.

Moreover, airports can artificially limit passenger counts through antiquated slot arrangements that limit competition. While this is a non-issue at most facilities, larger airports like Heathrow are grappling with carriers such as BMI, which intends to fly empty planes this winter in order to maintain slots. The slot restrictions, which require airlines at Heathrow to use the slots at least 80% of the time in order to keep them, are inhibiting the ability of new carriers who want to fly into Heathrow (with paying passengers) and introduce competition into the market. Since the introduction of Open Skies, Heathrow has become enormously popular for foreign carriers. Few low-cost carriers have been able to obtain slots there, because of high price and scarce availability. Many foreign carriers are willing to pay much more for a slot than LCCs are, since intercontinental flights can generate more revenue with larger planes and longer sector lengths. Regulation will be needed to ensure that slots are distributed more equitably, to carriers who fly paying passengers. Governments need to work with airlines and airports to ensure that the standards for keeping a slot are very high. Not only should airlines be required to use a slot at least 90-95% of the time, but also, there should be a combination of regulations ensuring high load factors, as well as minimum plane size.

My suggestion would be for airlines that fail to achieve an average 70% load factor on a given flight over a three-month period would lose the slot for that flight. Airlines would be required to use aircraft with a minimum of 100 seats. This would force airlines to fill larger planes, more efficiently using the valuable runway space at Heathrow and airports like it. Moreover, to ensure such a high load factor, airlines might be forced to discount some seats, benefiting passengers and encouraging competition.

However, these regulations would need to be implemented in careful consultation with airlines. A 70% load factor on early-morning flights sometimes is not feasible, and some carriers should be allowed exemptions on certain flights, but a target like this would ensure efficient movement of passengers using the least number of aircraft during the vast majority of operating hours. This regulation alone does not mean that many more LCCs will be able to operate from Heathrow, but it will make fares more competitive and ensure greater efficiency.

Most LCCs are guilty of taking excessive subsidies from airports desperate to see new services. During this time of duress for carriers, airlines are under pressure to seek a competitive advantage in any way possible. This does not absolve carriers of their shortcomings, but it will require increased vigilance from governments and airports to ensure airlines don’t exploit public bodies. Airports need to do a better job of holding LCCs accountable for their investments, ensuring that routes are well chosen and are bringing in the desired passengers. Moreover, airports also need to work with governments and airlines to update outdated regulations addressing slot allocation, improving facility utilization and encouraging added competition to crowded airports like Heathrow.

Legacy Airlines Making Cuts To Deal With Record Fuel Prices

As evidenced by yesterday's Delta announcement that the carrier will trim 2,000 jobs and reduce its domestic flying, many airlines are feeling pressure to shrink in the face of high fuel prices. Moreover United and Northwest have issued warnings that legacy carriers may need to shrink in order to survive by trimming routes that simply aren't profitable with such high fuel prices, especially those on higher-cost regional jet aircraft. Carriers are starting to feel the pinch. The question is, will these cuts be enough?

Perhaps the greater uncertainty that carriers face is not what the price of crude oil will be tomorrow, but rather what demand will be for air travel, particularly from business travelers, in the coming months and years, given a slowing economy. While the rise in oil prices hasn't helped the economy, most of the reasons for the recent economic slowdown are independent of oil prices, and so airlines are feeling a double-whammy from the economic slowdown and the recent rise in oil prices. What airlines have been able to count on in recent years is that demand is still strong, both from business and leisure travelers. But with a slowing economy, many businesses may try to reduce travel expenditures. Many travelers who work for small businesses or others who have unmanaged travel accounts provide lucrative yields to carriers. But their employers could be hit hardest by an economic downturn, and may have less of an ability to keep funding pricey travel. This would challenge airlines, especially because business travelers have a greater ability than leisure travelers to deal with the fare increases that airlines have had to impose due to rising fuel prices. As a result, many legacy carriers, are looking to expand abroad, where they feel demand will pick up more in the near future. Whether this is true or not is unclear, but there are two key drawbacks that carriers need to be aware of with regard to this expansion.

The first is that many of these long-haul flights, while offering higher yields, also have higher fuel bills to go along with them. Many of the new destinations that carriers are adding, in East Asia for instance, have 12+ hour flight times, which burn a tremendous amount of fuel. Moreover, many legacy carriers are operating these routes with older 767-variant aircraft, which are less fuel-efficient than the newer 777s. And with only 2 US carriers placing orders thus far for the fuel-efficient 787 aircraft, it may be awhile before US carriers can significantly reduce their international fuel needs. While legacy carriers can afford these fuel bills for the time being, because the yields are higher, many of these routes could be cut too. Many legacy carriers are expanding to new markets, markets that have little nonstop service to the US. Adding service to a market that has little nonstop service to the US offers greater risks and rewards than would a flight on an already-established route. With the heavy demand on fuel resources that international flights require, many carriers may not allocate a sufficient amount of time to let their new flights gain enough demand to a point where they can be profitable, because the initial losses will simply too severe due to high fuel costs. Any route takes time to gain demand and become profitable, but in this environment, airlines may be more risk-adverse. This may have good short-term implications for airline balance sheets, but if the new international markets airlines tout really do warrant service to the US, then other carriers, foreign carriers, may make the leap to start service and get a valuable head start on US carriers in terms of gaining market share.

The second drawback is this expansion of service by foreign carriers in US markets. In many cases, these foreign carriers have higher product and service standards than their US counterparts, especially in first and business class, allowing them to gain additional high-yield passengers, even if they start service on a route after a US carrier starts service. Moreover, foreign carriers often offer nonstop service where US carriers offer hub-and-spoke connections (though this works both ways, depending on the routes, since passengers can connect in the US on American carriers or abroad if flying on foreign carriers). Many passengers would prefer to spend five hours in Frankfurt than five hours in Chicago. US carriers have tried in recent years to upgrade their cabins to compete with foreign carriers, but sadly, they have fallen behind in many areas, and this could impact their ability to make international routes as profitable as they desire.

Legacy carriers have done nearly all they can to reduce costs. There are no major cost cuts they can make, and any further cost cuts will either shrink the size of the carriers, or trim operations that shouldn't be trimmed for the long-term benefit of the company. What will need to happen now is that these carriers will need to look into the future and see how they can best position themselves towards these new realities. As much as legacies would like to believe that fuel prices will dramatically decrease, oil over $80 is a new reality that carriers need to adapt to. This means that carriers need to rethink their expansion as well as their new aircraft purchases and timing. Expect increased pressure from airlines around the world on aircraft manufacturers to create an aircraft that can deliver dramatic fuel efficiency gains. Moreover, airlines may exert continuing pressure on government to offer better solutions to energy policy. This isn't a problem we can drill our way out of, but rather one where established alternative energy solutions need to be implemented (such as electric vehicles) so oil can be used for industries where serious alternatives do not yet exist (such as aviation). By reducing the pressure on oil prices from automobile drivers and other oil users, airlines will see lower crude prices. But that will only come when airlines and other large companies lobby for a comprehensive national energy policy that takes renewables seriously. If the airline industry is to thrive, oil prices will have to come down, and the only way to do this is to reduce demand. Ultimately, this is where the solution lies.

Air Scoop Article: LCC Web Sites Under Investigation

This article was recently published in the European low-cost airline newsletter Air Scoop. It discusses the recent EU investigation of airline Web sites to make them more transparent. Readers in the States should note that our government has not done anything like this yet, which means that, for better or worse, Spirit Airlines will be able to continue advertising its $1 fares without taxes and fees included for the time being. If you have questions or comments about the article, please leave them in the comments section below, or email them directly to samsellers@gmail.com.

LCC Web Sites Under Investigation

Recently, the EU Consumer Protection unit launched an investigation into improper displays on airline Web sites. After a ruling that forces airlines to advertise prices in full on their sites, airlines had to change the way prices, as well as terms and conditions are displayed. Airlines also had to ensure that customers were not being “tricked” into purchasing products they otherwise wouldn’t.

If airlines fail to comply with the EU directive, they could face fines or the closure of their sites. As Web sites are now the primary way passengers in Europe book tickets, such a closure would affect carriers dramatically. No airline has the resources to scale up call centers and airport ticketing operations quickly enough and any airline would certainly suffer if its Web site were shut down, even temporarily.

While some LCCs have recently made moves to diversify the number of booking outlets for customers (most notably easyJet’s decision to offer its fares over a GDS network), their Web sites are still the primary booking locations because they provide the lowest fares to customers, the lowest costs to carriers, and the most opportunities to generate ancillary revenue. The shutdown of the Web site of a major European LCC is very unlikely. The EU is giving carriers ample time to adjust their sites, and the EU plans on imposing fines before any site shutdown.

The Scope of the Probe

This most recent investigation by the EU occurred in late September, and focused on 447 airline and travel booking Web sites. Of the 447 sites investigated, 226 were found to be in violation of EU law. The results varied considerably depending on the country investigated. For instance, in Belgium, 46 out of 48 sites investigated were found to be in breach of the law whereas in Austria, none of the 20 sites investigated violated the law.

The investigation, conducted by consumer protection organizations in each of the 27 EU member states and Norway, cited sites with unfair pricing, hidden charges, tick boxes checked by default, luring customers to purchase unwanted items, and terms and conditions not translated properly into the language of the customer’s country of purchase or not given at all.

However, the investigation did not publicly name companies, preferring instead to comment about its overall findings, though an EU spokesperson noted that in four months, they intend to “name and shame” the companies involved. Companies that are found to have violations will be contacted by local EU enforcement authorities to either delineate their stance on the violations or to rectify their sites. The EU has stated that they initially will impose monetary penalties on violators and only close sites as a last resort.

The Rationale for Creating Violating Web sites

As fuel costs rise for LCCs, increases in fares are often not keeping up with the added costs. As a result, LCCs have increasingly sought to grow their ancillary revenue streams. Most of these Web site violations stem from pressures to grow ancillary revenues by tricking customers into purchasing services that they do not necessarily want. For example, many of the violations occurred when airlines pre-selected travel insurance for their customers, a violation of the EU’s policy that customers must select the product, not the other way around. Since travel insurance is a very profitable product for LCCs, this has helped airlines increase ancillary profits.

Another common problem was either misstated or missing terms and conditions. This is especially a problem on LCCs that have strict ticket reissuing and baggage policies, since passengers are likely to look to the airline’s terms and conditions on those two issues. For instance, buried in Ryanair’s terms and conditions is the mention that passengers who check bags will be charged an excess baggage fee if any single bag goes over the 15 kg limit, even if the pooled baggage weight among a group of passengers totals less than 15 kg per bag.

Ryanair has been very successful at charging excess baggage fees to passengers who don’t carefully read their terms and conditions, making it one of Ryanair’s leading ancillary revenue streams. Other LCCs have engaged in similar tactics. If the EU has found that Ryanair or other LCCs have improperly displayed terms and conditions, then it could expose those carriers to considerable penalties. If restricted in these ancillary product offerings, LCCs will likely see slower growth in this revenue stream, since a significant percentage of ancillary revenue is generated from customers who unwillingly purchase the product.

Moreover, as LCCs know, price is everything, and some carriers may have been deliberately slow to transition to all-inclusive pricing. With a lumbering EU bureaucracy, carriers that continue to advertise fares without taxes don’t have any immediate threat of sanctions, and so if they can make their fares appear cheaper than their competitors’ for a few more months, it helps them gain a competitive advantage.

It’s probable that LCCs that operate in more countries and which have more complex Web interfaces are more likely to be subject to penalties. Therefore, I suspect that easyJet and Ryanair are most likely to have violations. Easyjet currently automatically selects and prices a customer’s flight with a hold bag and travel insurance included. Customers must remove these items to receive the price of their ticket only, something the EU prohibits. EasyJet will need to change this practice in the near future to avoid penalties. Ryanair currently advertises flights on its home page with taxes and fees included, but when a customer goes to book that flight, he or she may see a price much lower than that, as low as .01 EUR. Ryanair then adds the taxes and charges on the following page, possibly misleading customers who thought that the flight cost .01 EUR, and a potential violation of the EU policy.

The Potential Effects on LCCs

Obviously, a Web site shutdown would have disastrous consequences for any airline, not just an LCC. Since many LCCs do not offer tickets through travel agencies, passengers would have either the option of booking via phone or booking at the airport, neither of which are very convenient or desirable for either airlines or passengers. If its Web site closed, an LCC would quickly lose market share and money, as it could not arrange bookings for enough passengers to fill its airplanes.

The effects would be immediate and dramatic, and even with a temporary site closure, the effects could last for months: A carrier could see lower load factors months after a Web site closure. Moreover, the airline’s reputation for quality would likely suffer if its site closed, leading to suspicions about other areas of the airline’s operation.

Yet the possibility of an airline’s Web site being taken down is very real, even if a rogue hacker succeeds where the EU doesn’t, and needs to be taken more seriously by carriers. As the expression goes, “Don’t put all your eggs in one basket”. LCCs put all their eggs in one basket in a number of facets of their operations, including fleet makeup (since many LCCs operate only one type of aircraft, and most operate no more than two) as well as distribution method (since many LCCs sell virtually all of their tickets through their Web sites).

Putting their eggs in one basket has led to enormous efficiencies; however, consolidating baskets also increases risks for carriers if their basket breaks, leaving carriers exposed and vulnerable. In this ultra-competitive marketplace, just a few things have to go wrong to lead to disaster. The EU probe will likely succeed in forcing LCCs to make the necessary changes to their Web sites to make their sites more transparent, easy-to-use, and consumer friendly. These changes will cost LCCs some ancillary revenue, but they will also help make LCC sites more attractive for consumers, helping to build brand loyalty and strengthening the ability of LCCs to generate repeat business.

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Air Scoop Article: Safety and Security Worries Reemerge for European LCCs

I wrote the following article, which appeared in the November edition of the European low-cost airline newsletter Air Scoop. It discusses the potential safety and security concerns of many European LCCs, especially in the wake of the SAS announcement to indefinitely ground its Q400 fleet due to mounting questions about its safety.

Safety and Security Worries Reemerge for European LCC

Some Flybe cabin crew and pilots recently reported being sickened by fumes on the company’s BAE-146 aircraft. On ten flights over the past fifteen months, noxious air leaked from the engines into the cabin, causing at least one flight to be aborted. Some crewmembers are so furious that they are boycotting the aircraft. While these incidents involve an older aircraft type that is quickly being phased out of Flybe’s fleet (Flybe plans to remove all BAE-146 aircraft from its fleet by February 2008), the problems revive past questions about how much LCCs are doing to protect the safety and security of passengers.

Critics charge that the LCC business model that aims to keep costs to a minimum has led to inadequate pilot and cabin crew training, more aircraft breakdowns, and increased pilot and cabin crew fatigue. All these factors have contributed to a number of close calls over recent years. For instance, in 2002, the Number 2 engine of Ryanair flight 296 caught fire upon landing at London Stansted. While the fire was put out, and the plane evacuated within 90 seconds, confusion and chaos during the evacuation prompted an investigation by air safety authorities. Ryanair was criticized for having inexperienced cabin crew, many of whom trained in Eastern Europe with questionable quality control.

Overall, European LCCs have a very good safety record, but because LCCs want to cut costs, they are seen as more willing to sacrifice passenger safety for the bottom line. Already, public concern for the environment, anger over a swath of new baggage charges, and frustration over variable service standards has made the European public rethink LCCs. A single accident could significantly damage the reputation of an LCC and the entire sector.

If a major accident by an LCC occurs, it could lead to a tremendous amount of pressure from regulators and the public. The harshness of the reaction will likely depend on the severity of the accident, the carrier’s problems that led to the accident, and the response of the carrier to the accident. The carrier has to appear sympathetic and take responsibility for its mistakes. And if it is discovered that the carrier has preexisting problems that led to the accident, then its reputation could suffer tremendously.

For example, in the year 2000, an MD-80 aircraft owned by US LCC Alaska Airlines crashed into the Pacific Ocean, killing all on board. In subsequent investigations, it was discovered that there were serious oversight lapses in Alaska’s maintenance operations. As a result, Alaska’s reputation for safety suffered, which will likely continue until Alaska removes the MD-80 type from its fleet, which it plans to do in 2008, eight years after the tragedy.

The nuance that carriers need to remember is that the public will make assumptions about why the airline was involved in the accident. If an LCC is involved, often the first explanation will be that the root of the problem is excessive cost cutting, leading to maintenance and safety lapses. If a legacy carrier is involved, the likely explanation will be human or mechanical error. LCCs need to combat this misperception by communicating that maintenance is done in accordance with Part 145 and other EU maintenance regulations. LCCs have done a very good job of making safety and security their number one priority in the past ten years. But if LCCs start de-emphasizing safety for cost or business reasons, then the industry is at risk.

Concerns about how an accident would affect a carrier’s reputation aren’t limited to LCCs. SAS has taken dramatic action after the third gear collapse on one of its Q400 aircraft in less than two months. After a landing incident with SAS flight 2867 on October 27, SAS decided to permanently ground their entire 24-aircraft Q400 fleet. SAS’s dramatic action, while potentially very costly, emphasizes to the public that they’re not taking any chances when it comes to safety. Even if the accident were the fault of the aircraft manufacturer, it is the airline that is seen as liable in the public’s eye.

Q400 aircraft make up the bulk of Flybe’s fleet and will comprise even more once their BAE-146 planes have been removed. With a low-cost business model that necessitates high aircraft utilization, would Flybe be as willing as SAS to ground its Q400s if it discovered a technical problem with the plane?

Part of the problem LCCs have in making such a decision is that they typically only operate one or two aircraft types, whereas legacy carriers like SAS operate many. Q400s comprise almost half of Flybe’s fleet; so such a grounding could be devastating to the company. Moreover, if a grounding occurred with 737- or A320-type aircraft, low-cost carriers around the world could suffer, and legacy carriers could use their advantage to take market share.

However, other safety lapses, including pilot and crew fatigue could jeopardize a LCCs reputation. On Channel Four’s Dispatches program about Ryanair, one pilot stated that the airline flies him just under or exactly 100 hours a month, the EU maximum. Flying this way for many months straight left him exhausted. While Ryanair argues that rosters are manually set to minimize the risk of fatigue, it appears that in at least some cases, rosters are set to maximize the utility of pilots, which also maximizes the risk of fatigue. Moreover, cabin crew are not subject to such strict work limits, so they are at an even greater risk of fatigue. For example, one of the Dispatches undercover reporters discovered a cabin crew member asleep on the job, making it difficult for her to respond in an emergency.

But perhaps more pervasive throughout European LCCs have been security concerns. The Ryanair Dispatches program uncovered some serious lapses in Ryanair’s security practices and argued that these lapses were a result of cost cutting on the part of Ryanair, particularly its policy of 25-minute turnarounds.

In one instance, one of the undercover reporters was chastised by supervisors for taking too long to board passengers, because she followed procedures and verified that the name of the passenger in the passport matched that on the ticket, and that the passenger’s face matched the passport photo. Her actions prevented Ryanair from making a 25-minute turnaround on that flight. Moreover, many Ryanair employees used temporary security passes without following the stipulation that they be accompanied by a permanent pass holder, a security flaw, that if exploited could let a dangerous person on the tarmac or on the aircraft.

Fortunately for LCCs, if they are laxer in complying with these requirements, the effects of doing so aren’t as significant. Security incidents are rare and typically aren’t as dangerous as safety problems. Moreover, most security incidents don’t create the same levels of negative publicity for LCCs that accidents do. However, that doesn’t mean LCCs shouldn’t do more to improve security. It can be argued that LCCs face a greater risk than legacy carriers of a security threat, because they often operate from small, rural airports with laxer security.

If a major publicized security incident occurs involving LCCs, it could threaten not only their reputations, but it could threaten the way LCCs do business as security would be ramped up in the resulting weeks and months.

If airports or governments are unable or unwilling to pay for tighter security at airports with only a few commercial flights a day, then LCCs could be forced to move operations to other, larger facilities, adding additional costs from higher airport charges and a greater likelihood of delays. Even if LCCs don’t have to move operations, they could be inhibited from doing 25-minute turnarounds if they are forced to do stricter passport checks, leading to greater boarding delays and lower aircraft utilization.

LCCs have had a remarkable safety record over the past decade, with a very low rate of accidents. However, as the Dispatches expose demonstrates, many LCCs operate in ways that are not as safe as their legacy counterparts, and are running a significant risk of an accident. It is uncertain what the effects of a major accident would be on the European LCC sector, but suffice it to say that the failure of one LCC has the potential to damage the entire sector.

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Ryanair’s Profit Projection Motivations

I wrote the following article which was published in the European low-cost carrier newsletter, Air Scoop, regarding how Ryanair has taken advantage of some earnings projections it made earlier this year to gain an advantage in the marketplace. Enjoy!

Ryanair’s Profit Projection Motivations

Many analysts were concerned on June 5 when Ryanair, citing higher fuel costs and airport charges, projected sharply lower coming-year profit growth. Although Ryanair projected profit growth of a mere 5%, its recent results have far exceeded that figure, which poses the question: Why were Ryanair’s projections so far off, and were they deliberately off to give Ryanair a strategic advantage in the marketplace? While we will never know for sure, Ryanair has exploited its projection to further its lobbying, public relations, price-cutting, expansion, and value creation efforts. This has particularly hurt medium-size LCC competitors, including Jet2, Vueling, and SkyEurope, in the process.

Ryanair’s lowered projections created a more positive environment for the company’s lobbying efforts. Ryanair has traditionally engaged in fights against regulatory and airport authorities and the company has been known to take drastic measures to prove a point because it feels that if it loses any battles against these authorities, it will have a weaker negotiating position when it fights against future restrictions and rate increases. A lowering of projections generated media sympathy, providing Ryanair with more negotiating power.

But the lower predictions were also followed by some dramatic actions by Ryanair, perhaps partially intended to influence press coverage, which furthered the company’s lobbying and public relations efforts. Ryanair has been engaged in battles with BAA, Aer Rianta, the EU, as well as the UK Government. Ryanair’s most recent highly publicized fight was against BAA for doubling Stansted airport charges, resulting in Ryanair grounding seven Stansted-based aircraft. Instead of continuing to fly aircraft with a slightly higher cost base (keep in mind that Ryanair still has by far the lowest costs of any European carrier) the airline simply grounded the planes, enabling the media to publicize the story and the apparent victimization, generating public sympathy for Ryanair and animosity towards BAA. But Ryanair may have exploited this situation to cleverly to turn media attention away from service issues. No media outlet wants to spend too much time and effort covering one company, and the battle with BAA provides the media a Ryanair story that is positive for the company and a good story for the media since it’s new, different, and engaging—unlike many of the Ryanair traveler “horror stories” that are often covered instead. However, while the company’s public relations may have been boosted by this move, the company still isn’t winning the lobbying battles it wants to, and the company’s unilateral negotiation approach seems to be proving rather ineffective, so good press, while helpful, hasn’t done everything. 

The lower projections provided a logical explanation for Ryanair subsequently drastically cutting prices on most of its routes, including offers of 10 Euros each way including taxes and fees, as a way of stimulating lower load factors. This became a Ryanair-led price war. EasyJet was unable to match many of these fares, but trimmed fares where they could to maintain competitiveness. Air Berlin, with a higher cost structure than either Ryanair or easyJet, could not match Ryanair’s deals. (However, Air Berlin’s ongoing acquisitions will enable that airline to offer fares much closer to Ryanair’s in the future.) The carriers who really suffered were those who were unable to cut fares without hemorrhaging cash. Vueling is a prime victim of Ryanair and easyJet’s expansion into Spain. Because the company has higher costs than either carrier, it lost money when it was forced to cut fares to compete with Ryanair and easyJet. Ryanair’s price cut strategy worked brilliantly to further destabilize Vueling, and as a result, that carrier is now reconsidering its business strategy.

The lower projections also provided Ryanair with an understandable excuse to cut unprofitable routes and launch routes that compete more directly with easyJet, especially for the future. Ryanair will soon need to become more active and aggressive in higher-density city-pair markets if it hopes to meet passenger growth targets. As a result, Ryanair will continue to pressure carriers such as easyJet, Vueling, SkyEurope, and others who have high-density strategies. When Ryanair reshuffled routes this summer, the company positioned itself to compete more directly with easyJet, especially on routes to or from Spain and Italy. As Ryanair expands further there, it will compete more intensely with easyJet, which could alter easyJet’s strategy of targeting large, high-density markets as its primary growth strategy. 

As the industry leader, Ryanair sets the trend, so its poor projection hurt LCC stocks across the board. That provided Ryanair several opportunities. With its own share price lower, the company could buy back stock and likely increase the share price. Ryanair’s competitors, with their shares down, had to be more careful about their expansion plans. But most importantly, it made some of Ryanair’s smaller competitors more susceptible to takeover, which might cause them to exit markets where they compete with Ryanair. Takeover rumors have been swirling concerning Vueling and SkyEurope, in part because of the immense pressure that Ryanair has put these carriers under, and a lower share price makes them more attractive to potential suitors.

On June 5 Ryanair announced its annual results and a share buyback. Ryanair stock closed at 5,36 EUR the day before earnings were announced, while the stock headed lower in successive days and on June 26, Ryanair commenced the buyback, purchasing shares at a price of approximately 4,95 EUR. Ryanair was able to purchase its stock at a very attractive price, triggering a temporary increase in the share price. This in turn benefited Ryanair shareholders, including senior level executives. But this strategy hasn’t been too successful at creating lasting value for shareholders thus far, as Ryanair’s stock has since fallen to approximately post-earnings levels.

Ryanair’s move affected the share prices of other companies in the industry, causing pain for investors and concern for executives about future competitiveness. While easyJet’s stock took a steep dive this summer, declining from 563 pence on June 4 to as low as 453 pence on July 30, it has since regained some of its lost value. EasyJet, Vueling, Jet2, and many other Ryanair competitors have all seen declines in share performance since the June 5 announcement, raising questions about whether these companies will be able to maintain competitiveness with Ryanair in the future as they lose market value.

On most fronts, Ryanair’s strategy has been effective. The company exacerbated problems that its medium-size competitors have been facing, while enabling the company to better compete with its larger rivals. Unfortunately, this strategy hasn’t yielded all the potential benefits it could, as the company still is fighting BAA’s Stansted Airport charges, and Ryanair’s stock has had lackluster performance since the earnings announcement. But regardless of whether Ryanair’s earnings announcement was an intentional deception or a happy accident, the company has used it successfully to gain ground in a very competitive marketplace by driving down competitors’ yields and increasing competition on lucrative routes.

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What a Price War Could Look Like in Europe

Ryanair and easyJet both plan to cut prices in the coming months in order to help lure passengers to their airlines. Ryanair announced that in the second half of this year the carrier may lose money. But Ryanair's costs are also rising which worries investors, though it appears to be a temporary increase due to some operational changes as well as higher airport charges. If Ryanair's costs continue to increase, it could signal a shift in dominance in the European low-cost airline industry, since Ryanair might no longer have the lowest costs, although this is rather unlikely in the near future. But even with these cost increases, Ryanair plans to launch an all-out price war, and hopes to damage the competition which cannot afford the fight. EasyJet plans to lower fares to compete with Ryanair, though it's likely Ryanair's fares will still be lower than easyJet's. But the real victims of this price war will be the smaller LCCs which don't have the scale or the cash to withstand a prolonged fight against Ryanair. Wizz Air in Eastern Europe, Vueling in Spain, and Sterling in Scandinavia could all be hurt by this price war. While it's unlikely that any of these companies will go out of business as a result of this fare war, it will no doubt hurt these airlines. It will also hurt traditional legacy carriers, who would be unable to come close to matching Ryanair's lower fares. However, these carriers have diversified themselves enough by attracting a large share of the business traveler market that they will be less affected by a fare war than LCCs. What all these LCCs must do is to find other areas to compete, aside from price. A fare war would encourage airlines to get more creative in their marketing, which could include airlines discussing comfort (since many LCCs have a greater seat pitch than Ryanair), travel convenience (since many of the LCCs listed above use primary airports closer to city centers where Ryanair uses secondary airports more distant from city centers), and booking convenience (since LCCs can advertise their low-cost vacation packages that can be booked all at the same site as airline tickets, saving customers time and money). This last point is critical. LCCs will need to sell customers based on ancillary revenue streams, such as hotel booking, car rental, travel insurance, and other products. If customers are looking for the easiest way to book their vacation, they can find it on the Web sites of many LCCs. Ryanair will win virtually any price war. The company has the lowest costs and the largest operation. And it will hurt many LCCs. But Ryanair doesn't necessarily offer the best value for vacations through its ancillary revenue partners. As a result, if Ryanair's competitors can sell themselves on points other than price, then these airlines can garner higher fares as well as drive more passengers to use their ancillary revenue streams which could generate considerable sums.
A price war is the inevitable result of a slowdown in demand. This is due primarily to the environmental controversy in the UK that has hurt the credibility of low-cost airlines on the environment, as well as higher passenger taxes, and the continuing hassles of air travel due to long lines at security checkpoints and air traffic control delays. These issues will continue to plague low-cost airlines for the indefinite future, as they are related to issues that won't go away anytime soon, the environment, security, and overcrowding of the skies. And since airlines have little control over how the public responds to these issues, airlines are held at the mercy of government and interest groups. These groups could do considerable damage to low-cost carriers in the future, and not just in Europe. For example, if the environment becomes a larger issue in the United States, particularly after the 2008 presidential elections, low-cost airlines could be hurt enormously.

As passengers continue to view air travel negatively, the growth in discretionary trips could subside, particularly from more well-off and educated regions, such as the UK, Scandinavia, and Spain. Regions which are poorer will continue to encourage low-cost airlines to service their countries in an effort to provide their citizens with convenient and cheap access to Western Europe. Poland is the poster child for what low-cost airlines can do to a region. Ryanair offers service to nearly a dozen Polish cities and connects these markets with London and other Western European cities. It offers cheap, reliable, and convenient service for thousands of Poles who need to access work and family in Western Europe, and Ryanair has made millions in the market. Ryanair is now starting to expand its successful Eastern European model to other nations. This is where low-cost air travel is needed. Not in bringing planeload after planeload of tourists to the Balearics, but by helping people who truly need to fly get where they need to go. Low-cost air travel will come under increasing assault in the coming years, and it's imperative that LCCs find ways to diversify themselves in the long-term by elongating average stage lengths and serving destinations that support fewer discretionary trips so that their businesses won't be destroyed by external factors. People who need to fly will continue to fly. People who don't may not.

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(R)evolution of Ryanair's Business Model (Part 2)

This is the second part of an article I wrote for the European low-cost airline newsletter, Air Scoop. The article concerns Ryanair's growth plans over the next five years, which requires the airline to carefully transform its business model. You can read the first part of the article here.

Ryanair is also examining the prospect of expanding into larger airports.

Ryanair, unlike its low-fare rival easyJet, has meticulously avoided many central airports due to high fees and longer turnaround times. Ryanair has avoided central airports in numerous cities where easyJet operates from them, including Barcelona, Brussels, Copenhagen, Paris, and Venice. Ryanair also has large operations in secondary airports near Dusseldorf, Frankfurt, Glasgow, Rome, Stockholm, and of course, London. While it’s unlikely Ryanair will enter Heathrow anytime soon, due to its slot restrictions and very high costs, Ryanair may enter primary airports in other cities where it already has bases at secondary airports. Ryanair will try to target travelers who prefer the convenience of a larger airport, typically closer to the city center, and who are willing to pay a price premium for that privilege. That price premium will compensate not only for the higher fees that Ryanair will pay at the airport, but also for the longer turnaround times that Ryanair may encounter.

However, Ryanair must target its new customer base carefully. Many business travelers who prefer airports closer to city centers are loyal to legacy carriers because of their frequent flyer programs and spacious seating configurations. Ryanair will probably offer neither in the coming years, and as a result, it may not attract the legions of business travelers it desires, even if it offers significantly lower fares than legacies. Therefore, Ryanair must target leisure travelers and others who prefer larger airports, not necessarily business travelers. It’s unlikely that Ryanair will significantly trim flights at secondary airports if it adds service at primary airports, because the new service will augment the old service by enabling Ryanair to target different consumer groups that currently don’t use Ryanair because of the secondary airport issue. Some service may be transferred from secondary airports to primary airports, but Ryanair will primarily grow its passenger numbers from these larger airports, not simply transfer passengers from one facility to another.

Ryanair will need to add longer routes, as well as routes to and from central airports if it wants to meet its five-year growth targets. However, Ryanair must do both carefully, in a way that modifies its business model without destroying its cost advantage over other carriers. If it can do so, it will, without a doubt, be Europe’s leading airline, catering to the majority of passengers with substantially lower costs than its competitors.

If you live in the States, you don't have Ryanair to shuttle you around for next-to-nothing. But, you can get the next best thing, an ebook that gives step-by-step instructions for how to get the cheapest ticket. Take Control of Booking a Cheap Airline Ticket, which has been recently updated, offers instructions for booking domestic and international travel, as well as information about consolidators, vacation packages, and frequent flyer programs. Take Control of Booking a Cheap Airline Ticket is a great bargain, and it can save you more than the price of the ebook with your first trip. It can be purchased here.

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Skybus Announces Its Business Model and Destinations to the Flying Public

Skybus made its first formal route announcement today, announcing its first eight destinations, with service to start to some cities as early as May 22. Skybus also enabled customers to book tickets online starting today, with introductory fares starting at $10 each way excluding taxes. It's clear that whatever happens to Skybus; it will be a difficult battle ahead. The post ahead will analyze different elements of Skybus's announcement, and comment on the viability of the carrier.

First, a discussion on destinations. While some of the new airports Skybus announced service to today were more conventional low-cost airports, such as Oakland or Fort Lauderdale, others were less conventional, such as Bellingham instead of Seattle/Tacoma and Vancouver or Portsmouth instead of Boston. As a result, it appears evident that Skybus will have more trouble marketing some destinations than others.

Living in the Seattle region myself, I know the Bellingham airport isn't an acceptable alternative for Seattle, being over 75 miles away from the city. While it is closer to some of the Northern suburbs, it's still over an hour's drive from the main population centers in the area. Allegiant Air has capitalized on the demand for low-cost service to Las Vegas by offering cheap and frequent flights between Bellingham and Vegas. However, Allegiant has established itself on the route and has a good market in the area of both Americans and Canadians. Allegiant doesn't need the big population centers near Seattle for its route to succeed. Las Vegas is a destination that can support service from smaller airports like Bellingham because it attracts so many visitors. Columbus, Ohio attracts far fewer passengers and is a different story altogether. A daily flight on a 150-seat airplane cannot be sustained between two markets this small. Consequently, I seriously doubt that even with very low fares, Skybus will be able to succeed in the Bellingham market.

Portsmouth is a bit different. Since Boston, like Seattle, lacks a secondary airport close to the city, low-cost airlines such as Southwest have tried to market service to Boston from distant secondary airports in Providence and Manchester. Portsmouth is about the same distance from Boston (roughly 60 miles) as the other two cities, and as a result, Skybus should have less of a challenge attracting customers there, since many Bostoners are already accustomed to driving such distances for lower fares on Southwest. However, Skybus needs to market itself to travelers in the entire Boston-Manchester-Portland, ME area to maximize their brand awareness among potential customers. Southwest is already well-known by travelers in the area, but Skybus means nothing to them right now. With two initial daily flights, it's clear Skybus has high expectations for Portsmouth. Given Southwest's success using secondary airports in the region, there is reason to support that optimism, but Skybus must first market itself well in order to be successful.

Skybus also announced service to Oakland, Burbank, Kansas City, and Fort Lauderdale. These don't concern me nearly as much as Bellingham, but due to competition from Southwest, Skybus needs to be careful about how it expands in these markets. Southwest Airlines, currently the airline with the largest market share in Columbus, serves all four of these cities (though none nonstop from Columbus), with low fares, friendly service, and frequent flights. Southwest has a lot of loyalty in the Columbus market, and many passengers will be hesitant to ditch Southwest for Skybus, even with Skybus's noticeably lower fares. Skybus has done a good job of targeting markets that lack nonstop service from Southwest, but even these markets which lack Southwest nonstop service are well-served by Southwest nonetheless. As a result, Skybus will attract passengers who want nonstop service, but the airline may also face significant competition from Southwest, both on price, but more importantly on service. If Skybus can offer quality service to Columbus passengers who are used to Southwest's hospitality, it will succeed in Southwest markets. However, if Skybus cannot offer the level of service Southwest delivers, then Skybus will be at a significant disadvantage to Southwest, even with lower fares. Given all the hassles flying entails these days, service is becoming increasingly important for customers and Southwest can deliver in this department, even if it can't offer the lowest fares.

Skybus also announced new service to Greensboro, NC and Richmond, VA. I'm a bit skeptical of the Greensboro service, primarily because it is over an hour's drive from the Raleigh-Durham area, and many passengers would rather take advantage of Southwest's low-fare service from the Raleigh-Durham airport, even if it's not nonstop to Columbus. Richmond, on the other hand, still has need from the business community for increased low-cost nonstop service. This is an airport that has lost travelers due to high fares in recent years, and needs another low-fare carrier to help get them back. However, I am unsure whether Greensboro or Richmond can support a daily nonstop flight on a full-size aircraft. I think both these markets are risky, and may be better suited for three to five weekly flights instead of one daily flight. However, if Skybus is able to market itself well and divert traffic to these airports, there is a potential to make both of these routes work.

In addition to their destinations, Skybus announced some of their amenities and charges today. Skybus encloses their policies in this document, which seems to both insult your intelligence and confuse you at the same time. It includes reasons why Skybus lacks in-flight entertainment, assigned seating, and even a call center (it doesn't say what you do if something goes wrong). It also seems to stipulate some rules that will not make passengers happy, most notably that passengers may not bring their own food or drink onboard the aircraft (unless of course you've "brought enough for the whole plane"). I wonder if Skybus's first bad publicity will be when it refuses to allow a woman carrying breast milk onto the aircraft; that might quickly alienate much of their potential customer base. If a passenger does bring food onboard the aircraft, what are the flight attendants going to do, delay the aircraft, costing Skybus a lot of money, in order to kick the passenger off? Skybus can try to enforce this rule, but it will end up causing the airline more harm than good. Rule 10 seems a bit of a stretch as well; given the previous nine points, I doubt individuals will be so happy onboard Skybus planes. Skybus seems to be essentially everything easyJet is in Europe, with a hip brand, new A319 aircraft, fees for everything (although easyJet doesn't charge for checked baggage), and bare-bones service. But unlike easyJet, Skybus may have a tougher time surviving, especially with so many new planes coming online. How can Skybus effectively expand? The simple answer is: beyond Columbus quickly.

In order to create a successful airline, Skybus needs to do more than offer low fares to individuals traveling to/from Columbus. Skybus will inevitably have to create other bases, since Columbus cannot support 65-70 planes, but the best ones will probably be in smaller airports within 60-75 miles of the city centers. These would be similar to the hugely successful bases Ryanair has created in alternate airports within 75 miles of major cities throughout Europe. Larger airports, such as Oakland and Fort Lauderdale, already have enough low-cost service; Skybus needs a facility that has relatively little competition in order to create the best yields and lowest costs. This means Skybus needs to invest in some of the smaller airports it touts as being hassle-free alternatives to larger airports closer to city centers. Out of the destinations announced today, I believe Portsmouth would create the best base, since it's within relatively easy reach of Boston as well as other metropolitan areas. Portsmouth would be a prime location for Skybus to launch flights to Florida. Greensboro and Bellingham are also possible candidates for new Skybus bases, but these two markets have a smaller base of potential customers than Portsmouth does. Skybus should focus on linking these bases with leisure destinations, which is where most price-sensitive customers go. Bases in the West could be connected with cities in California, Arizona, and Nevada while bases in the East could be connected with Florida.

Columbus has a very limited potential market for Skybus, especially given that many business travelers who fly to the city would rather fly on an airline that gives out free peanuts instead of one that charges for checked luggage. If Skybus focuses too much of its growth in a market that cannot support it, then it will ultimately fail. Therefore, in order for Skybus to survive, it must rethink how it's expanding, and focus on linking underutilized airports near city centers, such as Portsmouth, New Hampshire (near Boston), Gary, Indiana (near Chicago) or White Plains, New York (near NYC). If the airline doesn't recognize what types of customers it will attract and cater to them by flying to leisure destinations, it will fail. I wish all the best to Skybus, but if they continue to expand from Columbus, ignoring other bases, I don't see how the airline can survive longer than two years.

Ryanair Announces Plans to Launch New Transatlantic LCC

Ryanair CEO Michael O'Leary made a surprise announcement recently, which made clear the company's plans for a new transatlantic LCC. O'Leary says Ryanair plans to use either Boeing 787s or Airbus A350s to fly transatlantic routes between secondary airports on either side of the Atlantic, such as London Stansted and Baltimore (for service to Washington DC) with fares as low as $12 each way. But as with any announcement regarding LCC expansion, the usual players were out misleading the public and criticizing the announcement. Before I elaborate on the viability of the proposal, I want to dispel two myths which seem to surround this announcement.

The first is that Ryanair is launching this airline to integrate it with its current shot-haul operations. O'Leary says explicitly that this new enterprise will not be part of Ryanair, and will have a separate management team and board. Moreover, he says Ryanair has no plans to introduce code-sharing or baggage transfers between the two airlines, even though they will be under the same corporate banner. While this new transatlantic LCC will look much like Ryanair, it will be separate, which is something the media has a hard time grasping. Unfortunately, many articles in have implied that the two airlines will be closely linked, which is simply untrue.

But the second myth is that this new carrier, just like any new LCC, will be bad for the environment and should be stopped. If this airline is allowed to fly, then people lured by cheap fares will be able to fly day trips to New York with little financial consequence. Any new air travel will hurt the environment, low-cost or legacy, but environmental campaigners fail to keep certain points in perspective. Ryanair's new long-haul LCC will likely be far more environmentally friendly than British Airways, American Airlines, or any other major transatlantic carrier. Unlike British Airways, which offers more space to customers in three premium classes, Ryanair's new airline plans to only have a business class cabin in addition to a tightly packed economy class cabin. And, Ryanair's new long-haul LCC plans to use a new fuel-efficient long-haul model type, which should deliver fuel savings of 15-20% and will reduce emissions by similar levels. As a result, this new airline is bound to be far more fuel-efficient and environmentally friendly per passenger than current operators. If other airlines have to compete with Ryanair's new long-haul LCC, they will need to lower their costs. Many carriers have been hesitant to order the new 787 or A350 because of their high acquisition costs and softening fuel prices. So if Ryanair's new long-haul LCC adopts this technology, then other airlines will see an additional reason to rapidly adopt new fuel-efficient and environmentally friendly planes. As a result the entry of Ryanair's new long-haul LCC could bring environmental benefits that stretch beyond the carrier itself.

If environmental campaigners want the most effective solution to the problem of aviation emissions, the first step is to find the inefficient operators and deal with them. Just because less efficient carriers are established historically on a route doesn't mean that they should be immune from having to change. New players shouldn't be the only ones scrutinized. It is a fair point that Ryanair's new airline could drive up traffic on certain routes and encourage people to travel when they otherwise wouldn't, but then that problem should be attacked appropriately. Environmentalists should be focusing their efforts on encouraging governments to change their aviation tax structure so passenger taxes cover the true carbon cost of one's journey. That would create a real financial burden for people to travel long distances, and it would minimize the kind of quick overseas trips that environmentalists fear would be spurred by this new airline. Growth in aviation can be controlled, and it must be controlled, but hounding every new entrant is ineffective; all players must be dealt with. What we too often forget is that with a challenge like climate change, it's easy to blame certain players or certain industries like aviation that are perceived as easy targets. But we cannot get caught up in anti-new airline hysteria to forget about finding the most effective solution to the problem of climate change.

I'll admit, I didn't predict this announcement to occur. In fact, I said quite explicitly in my recent Air Scoop article (R)evolution of Ryanair's Business Model (Part 1), that Ryanair wouldn't enter this business. And I made that statement because many analysts who predicted that Ryanair would enter this business believed that Ryanair's entry into the market would come in one of two ways. It would either come through an acquisition of Aer Lingus, which still appears unlikely, or through a new aircraft type addition to Ryanair's fleet and the integration of the short-haul and long-haul businesses. I said neither would occur because in both of those scenarios, costs are increased. Ryanair would have to deal with different aircraft types and route structures at Aer Lingus and it would have to facilitate baggage transfers, connecting passengers, and potentially differing amenity systems if the long-haul and short-haul operations were interlinked. Neither occurred. Instead, Ryanair's new long-haul LCC will have few ties with its short-haul partner, which will minimize costs. This makes much more sense for Ryanair as a whole company and it will enable the company to maximize profits from both airlines.

Now, presuming Ryanair's new long-haul airline takes off, it will find itself in an advantageous competitive situation. While open skies will force established carriers to lower fares, few airlines have announced plans to fill a low-fare vacuum across the Atlantic. Already there is plenty of low-cost charter service from Europe, and especially the UK, to Florida and the Caribbean which attracts droves of leisure passengers, but there is little in the way of service linking major business centers. Low-cost carrier Zoom UK recently announced a new route between London Gatwick and New York starting June 21, but aside from that, little low-cost, long-haul activity is taking place. If Ryanair's new carrier is able to lower fares as much as they advertise, then the new carrier will certainly attract customers. However, much of the new carrier's success will depend on five factors.

First is passenger comfort. While many customers are willing to endure Ryanair's less-than-comfortable aircraft for flights up to three or four hours, many would be less than enthusiastic about enduring a long-haul airline with comfort levels similar to Ryanair's for seven or eight hours. As a result, if Ryanair's new long-haul low-cost carrier cannot increase comfort levels for passengers in the economy cabin to levels most customers would consider tolerable (at least 31 inches of seat pitch), then this new airline will have difficulty attracting customers, regardless of how low the fares may be. Also, while many extras such as meals and entertainment will be charged for, if the rates aren't reasonable then many passengers who choose not to pay extra will be uncomfortable and agitated during the flight. If these customers choose not to pay for in-flight extras, they will be less likely to fly again, so the new carrier must be reasonable with what it charges customers for these extras.

Second, many customers don't use Ryanair's short-haul services because they often fly from secondary airports farther away from city centers. If customers cannot cheaply and easily access these secondary airports, then many may choose to use larger airports closer to city centers. Ryanair's new long-haul LCC must be careful about where it launches flights, because some alternate airports (such as Stansted) are relatively easy to access while others (such as Frankfurt Hahn) are far more difficult to get to. Although Ryanair organizes shuttle buses to operate between many of its alternate airports and the nearby city centers, those don't give customers very much flexibility about when or how they access the airport. Also, Ryanair must select airports in the United States which have sufficient transport options. Baltimore is one that does, but Islip on Long Island is one that doesn't. If passengers have to spend more time and money to access secondary airports, it will hurt the usefulness of the new airline for many customers. This is especially true with business travelers who typically value their time more than other types of travelers. If Ryanair's new long-haul LCC plants on courting business travelers, it must be careful about where it launches flights for this reason.

Third, the proposed EU Emission Trading Scheme and the new pushes for carbon taxes on air travelers could have a very damaging effect on Ryanair's long-haul LCC. Even though the new airline will be more efficient per passenger than most of its competitors, it could have difficulty succeeding if new taxes are added to air travel. Since this airline's customers are likely to be more price sensitive, on average, than customers at other transatlantic airlines (since it's likely that a greater proportion of the passengers flying on Ryanair's long-haul LCC will fly for discretionary purposes than on other carriers), any new taxes will decrease the number of discretionary trips taken. If taxes are increased significantly, then there will be a decrease in non-essential transatlantic travel, and low-fare carriers of any nature will suffer. But ultra-low fare carriers where leisure travelers make up the vast majority of their customers, like Ryanair's proposed LCC as well as charter carriers like First Choice, will suffer much more than other airlines.

Fourth, customer service for Ryanair's new long-haul LCC will be much more important than on Ryanair's short-haul flights. Ryanair can get away with dodging customer service on its short-haul flights, since passengers are less reliant on the check-in staff and flight attendants during their journeys. However, on long-haul flights, customer service becomes more important, because passengers are typically less comfortable and under more stress since they are at the airport and onboard the aircraft longer. If Ryanair's new long-haul LCC forgets that it only takes one bad customer service experience to lose a customer, then the airline will fail. This is especially true since the new airline will target business travelers, who expect higher levels of customer service on long-haul flights. Repeat customers are crucial to an airline's success, and low fares aren't enough to drive an airline's success over the long-term. That's why the most successful low-cost airline is also the one that is perhaps most focused on customer service. The founder of Southwest Airlines, Herb Kelleher, says that Southwest is a company in the customer service business which happens to be an airline. Ryanair has been able to get a sufficient number of repeat customers onboard to be profitable, but with an intensely competitive transatlantic market, Ryanair's new long-haul LCC will need to focus on building customer loyalty.

Fifth, Ryanair's new long-haul LCC needs to ensure it can avoid routes with overcapacity, and target capacity effectively to many different city-pairs. Open skies will lead to capacity increases on transatlantic routes, and Ryanair's new long-haul LCC needs to ensure that it adds capacity carefully and methodically. Overcapacity could benefit Ryanair's new long-haul LCC, since it could lead to lower fares that competitors will be unable to match profitably, but it could also hurt the airline since it will take time for it to build up a base of loyal customers. While the market realigns its capacity with demand, other carriers, such as British Airways, may be able to fill planes with loyal customers while Ryanair's new long-haul LCC may have difficulty filling its planes.

If Ryanair's new long-haul LCC starts operations and navigates the five issues above well, then it should succeed. With open skies, competition will force Ryanair's new long-haul LCC to focus on more than fares. Consequently, if the airline wants to succeed and distinguish itself from the competition, it needs to focus on many of the operational, comfort, and service issues which Ryanair's short-haul operation has ignored.