<B>Quo Vadis Airline?</B>

José Mario Álvarez de Novales. Professor. Instituto de Empresa

9 January 2006

In recent years many new low-cost airlines have sprung up. They are cost effective yet offer quality customer service. Even though the traditional companies still dominate transatlantic and business traffic, it’s not clear for how long. In other words, will low-cost carriers continue to fulfil an ever growing market need?

The maturity and democratisation of the airline sector has increased cost competitiveness. The expensive operating structures of many airlines are tailored to clients who hardly look at the price. But what is the real difference between a low-cost company and a traditional one? Is a flight on a traditional airline worth the price difference?

The most noticeable difference between the two is the time factor. Many low-cost companies use airports that are far from main towns and cities, and their flight schedules are often more inconvenient. It is clear, then, that traditional companies have a tight grip on the slots of the main airports. The fact that many travellers have increasingly varied timetables has benefited low-cost companies. Passengers may need to fly out on the first plane in the morning, which doesn’t always mean that the flights offered by traditional companies meet the traveller’s needs. On the other hand, if the traveller is on vacation and can exchange time for money, the low-cost company is easily his best option.

Traditional companies face a slew of problems that often render certain routes unprofitable. The need to keep timetables and flight frequency schedules may mean that many planes fly with empty seats. Taking off at peak hours causes problems with flight coordination, leading to accumulated delays and baggage loss. What’s more, low-cost companies aren’t required to fly unprofitable routes, while certain flagship carriers have inherited less them from their time as state-owned companies.

A traditional air carrier can’t easily abandon a capital city without creating a scandal in the media or political arena. Traditional companies also are limited when it comes to acquiring aircraft. They are restricted in the kind of aircrafts they can buy and also from whom they can buy. On the other hand, low-cost companies don’t have to worry about buying from Airbus or from Boeing. Indeed, it is much cheaper to buy a few aircraft models from one single manufacturer than to buy a great number of models from various companies.

It is also cheaper to buy recently manufactured aircrafts that weren’t acquired by the company that ordered them. The discount for volume purchases isn’t all that is important; maintenance, spare parts and training are also crucial. The larger the number of people who can fly the carrier’s different aircraft—including the large jets used for intercontinental flights--the weaker the negotiating power of pilots. What’s more, many low-cost airlines prefer to operate in one single region of the planet in order to optimise routes. A study carried out by the IET (the Institute of Tourism Studies) with data provided by Spain’s AENA (Spanish Airports) indicates that, in international passenger transport into Spain, EasyJet was the most popular company after Iberia, with almost half the number of passengers of the Spanish carrier. Other companies such as AirBerlin and Britannia Airways were next, with almost 40% of Iberia's volume, followed by Ryanair, with one third. There are eight other companies with more than one sixth of the total volume, including Spanair and Air Europa. Farther down the list are the companies that were once ranked at the top, such as Air France and British Airways.

Furthermore, there are companies (Britannia, Air Europa, Spanair) that form part of tour-operator groups that help boost sales. In addition, many low-cost companies have no difficulty selling tickets online. They also encourage other time-saving policies such as self-check-in and the on-board sale of only a few products, which saves the flight crew from having to clean up and speeds up the time for takeoff. Savings means saving everywhere, with the exception of safety. A low-cost airline is not a third-world airline selling cheap tickets.

How effective are low-cost companies? Let’s take a closer look at information provided by Ryanair. This company transports 10,050 passengers per employee and EasyJet 6,293. Iberia is very well situated among traditional companies and transports 978 for every employee while the figure for British Airways stands at 758. With regards to punctuality and baggage loss, there is no clear evidence that the low-cost companies have a worse record than the traditional carriers. When all is said and done after including taxes, duties and additional travel, the low-cost companies still come out on top with slightly lower prices than the traditional carriers. All this leads to the unstoppable advance of low-cost companies which, in turn, makes them more economically efficient. In addition, they receive income from the sale of other services, advertising, etc.

It is not a question of traditional airlines losing a part of the market to low-cost airlines, but rather their ability to keep a hold on business travellers and transatlantic passengers. The true top executive has a jet or uses a flight share system. The others are more limited by budget concerns than they would like to admit. The issue isn’t a question of traditional companies creating small low-cost units or price-cutting by charging for meals.

In the future low-cost companies could dominate the market and some may even own units that fill a market need in novel ways. Whether low-cost companies replace today’s traditional companies will depend on whether these low-cost companies will know how to complete their transformation.

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