Budget airlines look to exploit the crisis

Easyjet is picking up business passengers

by BBC News Online's Emma Clark

Amid the turmoil in the airline industry, one breed of airlines has continued to prosper, attracting passengers against formidable odds.

These airlines, known as no-frills or discount airlines, are seizing the initiative while most other carriers are losing their heads.

They were designed from the start to be low cost

Gerald Khoo
BNP Paribas

Their advantage is a low-cost ethos that is enabling them to ride out the economic slowdown and the fall-out from the attacks on the US last month.

And in a corporate culture where cost-cutting has become a watchword, budget airlines are ahead of the game.

"They were designed from the start to be low cost," says Gerald Khoo, an airline analyst at BNP Paribas.

Quick turnaround

The low-cost strategy centres on limited turnaround times at airports - usually 20 to 25 minutes on the tarmac, says Andy Chu, an airline analyst at Merrill Lynch.

Quick turnarounds at the airports save costs

This means the airlines can squeeze more flights out of a day - eight versus the normal six.

"The whole premise is cut costs and build volume," says David Magliano, sales and marketing director at Go.

Some of the airlines, such as Ryanair, also use secondary airports with much lower charges, as well as less congestion, which minimises the chances of delay.

Low-cost culture

Paperless ticketing, and sales over the internet and the phone - rather than through a travel agent that charges commission - also keep costs down.

Often the penny-pinching culture permeates the whole organisation, meaning that head offices remain small and that the growth of the company is controlled.

"They are careful not to over expand," says Mr Chu. "Ryanair for example has capped its annual growth at 25%."

The companies also negotiate aggressive pay deals with staff - and until recently employees usually lacked union representation.

Contrasting fortunes

So while British Airways slashes its workforce, cuts capacity and delays orders for new aircraft, no-frills Easyjet, for example, is adding routes and flights to its schedule.

In September, Easyjet's load factor, which measures the number of passengers on the seats of its aircraft, was 83.16%, slightly higher than the 83.03% a year ago.

Traditional carriers are finding the crisis more challenging

Similarly, Ryanair, Europe's largest low-fare airline, says it is on course to make $130m of profit this year.

By contrast, flag carriers such as Swissair and Sabena are on the verge of collapse after the events of 11 September compounded long-term problems at both companies.

Of course it is simplistic to attribute the contrasting fortunes of these airlines to their cost structures.

British Airways and the like have suffered considerable loss of revenue from a dramatic drop in demand for transatlantic flights, as well as the temporary closure of US airspace after the attacks.

A level playing field?

Nevertheless, low-cost airlines have griped for years about how international airlines subsidised their loss-making routes in Europe with profits from the long-haul flights.

Mr O'Leary: 'Fly our way out of this problem'

Now it seems the airlines are competing on a more level playing field, and the low-cost contenders are keen to press their advantage.

When asked if the current crisis was grave for budget airlines, Go's Mr Magliano replies: "It's an opportunity. 'Grave' is the last word I would use."

Ryanair's chief executive Michael O'Leary is also full of fighting talk.

"Ryanair has responded quickly to the recent crisis by lowering air fares and trying to keep the market moving, keep the seats full and the staff employed - basically fly our way out of this problem," he says.

Strong marketing

Within days of each other, many of the low-cost airlines recently launched strong marketing campaigns to win back passengers with ludicrously low prices.

Ryanair, for example, is advertising one-way tickets to at least 11 European destinations for £1 and has a million seats on sale for just £9.

Ryanair is aggressively marketing cheap seats

Naturally, not all seats on the flights are so low. But once the fixed flight costs are covered, the airlines are canny enough to generate good publicity with a few cheap seats.

"As the other airlines have faded, they can see their opportunity, the gap in the market," says Mr Khoo from BNP Paribas.

Some analysts even conjecture that the budget airlines are deliberately putting the squeeze on their traditional rivals at a time when they are most vulnerable.

As a sign of the times, even stellar investment banks are starting to encourage their staff to abandon business class for Easyjet, which services many of the major European airports.

Industry risks

However, the low-cost airlines are not immune from the usual risks in the industry, such as fuel costs, volatile earnings and increases in airport charges.

Also, the airline industry is in a state of flux, and if merger regulations are relaxed, there could be new airline giants around the corner to challenge the budget upstarts.

Already a limited package of measures from the European Commission this week has thwarted the hopes of some discount airlines to pick up extra landing slots abandoned by other carriers.

The no-frills airlines may be genetically engineered to keep costs down, but they don't yet have the clout to take over the European skies.