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Inexpensive travel
Air travel in Europe is affordable thanks in part to deregulationImage: picture-alliance / chromorange

Bumpy ride

June 8, 2011

As operational expenses rise, many low-cost airlines are struggling to defend the market share they won by consistently undercutting major carriers over the past decade. Budget-sector growth appears to be stalling.


European airline deregulation in the 1990s made the region something of a playground for individuals with a taste for travel.

Ever since low-cost carriers like Ryanair, Germanwings, EasyJet and Air Berlin burst onto the scene, fares like 12 euros ($17) one-way from Dusseldorf to Venice, and 189 euros one-way from Berlin to Dubai have become commonplace.

But fuel prices have skyrocketed since then. The European emissions trading scheme planned for next year is expected to be costly. And airlines remain vulnerable to expensive disruptions like the volcanic eruptions in Iceland, which resulted in temporary flight bans this year and last.

As a result, low-cost airlines have been levying fuel surcharges and charging passengers for common tasks like checking bags or printing out boarding passes.

Still, according a spokesman for the United Kingdom's Civil Aviation Authority, the amount of consumer complaints the agency receives is about equal between low-cost and full-service airlines.

"We've often wondered why that was, and we've speculated that it is because people expect less when they pay less for the ticket," the spokesman told Deutsche Welle. "About 70 percent of our complaints are about delays and cancellations."

Profits slashed

Oil barrells
With oil prices going up, low-cost airlines have less room to maneuverImage: picture-alliance/ dpa

On Monday, the International Air Transport Association (IATA) reduced its 2011 profit forecast for the entire industry to $4 billion (2.7 billion euros) from the $8.6 billion it had forecast in March.

It cited disaster in Japan, political unrest in North Africa and the Middle East, plus "a sharp rise in oil prices." Oil is now expected to cost an average of $110 per barrel this year, 15 percent more than initial predictions of $96.

Moreover, inbound IATA-chief Tony Tyler said in Singapore Tuesday he wants more low-cost airlines to follow Air Berlin's lead and join the 230-member association.

"Our members represent 93 percent of passenger traffic," Tyler said. "It would be even better to get all airlines on board, regardless of their business model."

Signs that the low-cost sector is atrophying include plans by Ryanair to idle 80 of its 280 planes this winter, and Air Berlin's reduction of flights from Cologne to Sardinia from 10 per week to less than five per week, the Wirtschaftswoche magazine reported Tuesday.

According to Jürgen Pieper, an analyst with Bankhaus Metzler in Frankfurt, the days when low-cost airlines captured large portions of market share from their conventional counterparts and "generally had growth on their side" are over.

"They aren't likely to gain further market share, because for many customers there are just too many disadvantages, such as thinner networks with less connections at less advantageous times," Pieper told Deutsche Welle.

Full-service airlines have the advantage of being able to net the loyalty of entire companies, binding their business travelers through incentives programs, he said. They also profit from the convenience of their international networks.

Wedged between business models

Air Berlin's Joachim Hunold
Air Berlin's Joachim Hunold is confident his company will be profitable againImage: AP

The fare difference for short-haul flights doesn't vary as widely as it once did, especially when the extra fees many low-cost airlines charge are taken into account, according to Pieper.

"Established airlines have let themselves in on this price competition to a certain degree," he said. "They tend to make special offers when flying to airports where Air Berlin, for instance, has established itself."

But Air Berlin is an exception in that it is wedged between two business models. Known as a low-cost carrier, it has nothing comparable to Lufthansa's worldwide network. Nevertheless, it is Germany's second-largest airline.

The company has struggled to generate profits for years, but CEO Joachim Hunold said plans to join the Oneworld Alliance – which includes British Airways, Qantas, American Airlines and Iberia – will help the carrier back on its feet.

Air Berlin is also betting on the new Berlin-Brandenburg International airport and a planned code-sharing agreement with British Airways. That would give it some access to the British carrier's international network.

"We will profit this year and next," Hunold told the Frankfurter Allgemeine Sonntagszeitung on Sunday. "We've invested a lot in our route network. We'll reap the benefits in coming years."

Company spokesperson Sabine Teller said in a statement that Air Berlin sees itself as a "hybrid carrier."

"The fact that the model is functional can best be seen in the fact that our competitors have started to copy us," she said.

Doubts remain

Ryanair CEO Michael O'Leary
Ryanair CEO Michael O'Leary uses an agressive business model to stay profitableImage: AP

Pieper, however, is convinced Air Berlin is in trouble – with or without a code-sharing agreement with British Airways.

"There aren't likely to be that many customers willing to fly to London with Air Berlin, and then continue to New York or Tokyo with British Airways," he said. "There are significant differences between Ryanair and Air Berlin. While Ryanair is classified as a low-cost airline, it's actually a very profitable company."

If Air Berlin can't profit at the moment, it's sure to flounder when hit by two or more of the problems soemtimes faced by the airline industry, such as further fuel price hikes and prolonged disruptions caused by natural disasters or other safety concerns, according to Pieper.

The Brussels-based European Low Fares Airline Association (ELFAA) wasn't available for comment when contacted by the Deutsche Welle, but in April it issued a report that said it was optimistic about the future growth of the sector.

The association expects the share of passengers traveling on low-cost airlines within Europe to increase from 38 percent to 53 percent by 2020.

“Whilst other airlines continue to beg for government handouts in order to remain solvent, low fares airlines are bucking the trend by carrying more passengers than ever before and to an ever-increasing number of destinations throughout Europe,” ELFAA secretary general John Hanlon said in a statement.

Author: Gerhard Schneibel
Editor: Sam Edmonds

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