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Tuesday, 11 June, 2002, 12:38 GMT 13:38 UK
Low cost, big profits
Ryanair flight prepares for takeoff
Soaring profits and exponential growth await Ryanair

The low-cost airline business is at a turning point, as record profits of 172m euros (111m) at Ryanair and Easyjet's recent buyout of former rival Go demonstrate.

Once upon a time, these budget airlines seemed content to nibble away at the big airlines' market share.

Now, though, they are gearing up to take large chunks out of their rivals. In a decade, low-cost airlines may be the dominant form of air travel in Europe.

But while the old-school carriers may complain, the industry as a whole has the low-cost sector to thank for some of the recovery in traffic since 11 September.

By slashing fares to the bone, they helped passengers regain their confidence.

The fear of terrorism proved nowhere near enough to overcome the thought of a weekend away if the flight cost less than the taxi to the airport.

Pushing forward

Nine months on, the low-cost airlines have gone from strength to strength.

Ryanair founder Michael O'Leary
O'Leary promises more aggression from Ryanair

The big players have not yet recovered their poise, and a depressed economy has made business travellers more price-conscious, putting yet more market share the low-cost airlines' way.

The growth in this sector looks set to continue.

In Europe, no-frills travel accounts for only 5% of European air travel, but it is likely to grow to claim a 12-15% share in the next decade.

The low-cost carriers - Easyjet/Go, Ryanair, Buzz and the US airline upon which they are based, Southwest Airlines - are all therefore preparing to raise their game still further.

Ryanair's growing ambitions, for example, are demonstrated by the order for 100 Boeing 737s placed in January.

Easyjet, meanwhile, is looking at a potential order for 75 new aircraft and has been talking to both Airbus and Boeing.

The Luton-based airline's strategy is also to seek acquisitions.

In the wake of Go, it has also taken an option to buy British Airways' ailing German subsidiary, Deutsche BA.

That bold move could give Easyjet a head-start on Ryanair in the valuable German market, which - unlike the now saturated low-cost sector in the UK - is ripe for low-cost airlines.

Risks

But these rapid expansion plans also pose major challenges for the low-cost sector.

The main test for Ryanair and Easyjet will be managing this growth lest it expand too fast, too quickly.

Go tailplane
Consolidation begins as Go goes to Easyjet

Going from a fleet of 41 to one of more than 100 will bring Ryanair its own problems.

In Easyjet's case the dual acquisitions could reduce the risk of safety issues that might arise from adding too many aircraft and pilots too quickly.

Nonetheless, integrating the new fleet and staff will inevitably cause friction.

Fighting back

Furthermore, despite serving the extreme price sensitive part of the market, low-cost airlines will also need to be careful not to take their passengers for granted.

With bigger and bigger fleets and more routes, bases and profits there is a limit to how long the low-cost carriers can successfully play the underdog.

And the big players will not stay supine for long.

There are signs that the major airlines have finally woken up to this low-cost threat and are beginning to fight back.

Some are operating their own budget brands or taking the fight directly to the low-cost carriers.

Easyjet founder Stelios Haji-Ioannou
Stelios is seeking acquisitions

BA, for example, is streamlining its internet booking facility, and highlighting fares which compare favourably with low-cost ticket prices - trying to educate the consumer that the lowest price might not be with the low-cost airline.

BMI British Midland started its own low-cost brand, bmibaby, in March to stop further poaching of its passengers.

And Dutch flag carrier KLM has reaffirmed its commitment to its low-cost subsidiaries UK-based Buzz and Amsterdam-based Basiq Air by combining their management and announcing plans to merge them.

Growing up

In other words, the trials ahead for the no-frills brigade are mostly down to growing pains.

Managing the change from being nimble, fast-moving opponents of big airlines to being big airlines themselves, while keeping costs down and retaining an informal corporate culture, is going to take some doing.

Logo for bmibaby, BMI British Midland's no-frills airline
The old-school carriers are fighting back

Ideally, the low-costs want the big players' size, frequency and geographical spread without their hideous costs and levels of management.

Even so, it is easy to forget that some of those costs are there for very good reasons.

Safety, for one.

While there is no evidence to suggest that low-cost means less safe - Southwest Airlines has had only had one major accident and no fatalities so far in its 30-year history - any low-cost incident might be seized on by the media as evidence of corners being cut.

The low-cost carriers will find that they will need to develop a robust crisis management strategy and start participating in more industry forums on safety, security and infrastructure the larger they get.

The message is one of convergence. As the low-cost outfits get bigger, their established rivals ape their techniques.

Within a decade, the former will probably dominate the domestic market in most countries - and who will then come to challenge them?

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