BestJet B:

The European budget airline industry: origins, growth,

market and competition
May 2006
__________________________________________________________________
Allan Kinross prepared this case. It is intended to be used as a basis of class discussion rather to illustrate the
effective or ineffective handling of an administrative situation
1

Introduction to the European budget airline industry
After 9 years of spectacular growth and success, at the beginning of 2006 the European low cost
budget airline sector still faced a number of challenges. Though the industry had consolidated with
easyJets ac!uisition of "o and #yanairs ta$eo%er of &u'', e%ery month in the new millennium
seemed to see the start up of new budget airlines and new routes or bases being announced.
There were o%er () in autumn 200*. +eading players, easyJet and #yanair, had orders between
them for o%er ,00 aircraft re!uiring both to more than double in si'e in the face of growing
competition from new entrants, a fight bac$ by established airlines and powerful tour operators. -n
the two and a half years to .ctober 200*, a%erage seat prices had continued to fall, and #yanair
had not managed to sell all of its /free seats on offer in special promotions. #e%enues were under
attac$ from e0treme o%ercapacity and costs were hit by high fuel prices. -n the future, would there
be enough 1profitable2 growth for all, and where would that growth come from3 &y early 200) the
decline in a%erage fares had stabilised and #yanair and easyJet announced encouraging financial
results. 4espite the continuing rise in the price of fuel in 200) and 2006 few budget airlines went
ban$rupt and low cost airlines e0panded their networ$s.
Market size and growth rate
The initial e0plosi%e growth of low cost airline passenger numbers reflected the unsatisfied demand
for a range of leisure acti%ities which was not met by either high5fare traditional airlines or infle0ible
charter firms.
Most passengers who fly with low-cost airlines arent defectors from the incumbents. Rather, lower
prices encourage people to fly when they would otherwise have gone by road or railor not at all. Most
of these passengers are on vacation; some are workers or self-employed business people commuting
on a regular basis. he overall air traffic in a market typically rises sharply when a low-cost carrier
breaks into it, our analysis shows.
6

4espite fi%e earlier years of phenomenal growth, budget airlines continued to grow spectacularly in
2002 and 200,, despite the fact that this was a time of e0treme difficulties for traditional airlines
after the trauma of 7eptember 66, and the effects of recession, particularly on business tra%el, the
outbrea$ of 7A#7 and the -ra! conflict. -n these two years, budget airline seats increased by ()8
on routes within, and to and from, the 9:, and 6()8 in the rest of Europe.
2
&y 4ec 200,, budget
airlines accounted for nearly )08 of seats on 9: domestic flights, and *08 of seats between the
9: and mainland Europe. ;hat started off as the 9: phenomenon had in 200, spread to
mainland Europe. <!cross "urope the sector is still in a phase of e#plosive growth= commented
one obser%er
,
. +ow cost airlines were e0pected to carry around >0m passengers in Europe in
200*, up from *(m in 200,.
Not eerything is rosy
As one commentator noted, <$ow cost airlines have almost had too many opportunities in the last
year and it is difficult to sustain growth at these levels.=
*
The &ritish Airline ?ilots Association said
that these growth le%els had led to the situation where, <among a lot of low-cost airline pilots there
is a %uiet concern that they are being over stretched and that safety could suffer =.
)
The success of
low cost airlines has also brought criticism from the en%ironmental lobby, particularly that the e0tra
flights encouraged by low fares are damaging the en%ironment, and there ha%e been calls for an
en%ironmental ta0 on all flights or a ta0 on a%iation fuel. -n late 200* the European 9nion agreed to
1
Hyped hopes for Europes low-cost airlines, Urs Binggeli & Lucio Pompeo, he !cKinse" #uarterl", $%%$, &o '.
Passenger numbers bet(een )dinburgh and *lasgo( to Belfast gre( b" +$,- and $+,- respectivel" after *o and eas".et
started fl"ing on routes, /%- of them on the lo( cost airlines. 0ource1 http122(((.go3fl".com2templates2&e(s0tor".
$
Budget airlines take off across the Continent, Amos 4ohen, 5inancial imes, 1621$2$%%+
+
Flying high, around the world, Kevin 7one, 5inancial imes, '2112$%%+
'
ilots to de!and "etter safety at low-cost carriers, !atthe( .ones and Andrea 5elsted, 5inancial imes 1%282$%%$
,
ibid
$
wait three years before reconsidering these ta0es. The European 9nion also dismayed the budget
airline sector with a proposal that all passengers unable to tra%el because of cancelled or
o%erboo$ed flights would be entitled to compensation ranging from @200 to @600, well in e0cess of
some budget airline fares. Early summer 200, also saw stri$es in Arance and other countries by
public sector wor$ers o%er pension reforms. <Regrettably these types of strikes are occurring
across "urope more fre%uently than wed like=, a &A spo$esman was reported as saying after the
cancellation of >08 of Arench international and domestic flights.
6
+ow charges at secondary
publicly5owned airports were being challenged as illegal subsides by both the Arench courts and
the E9.
The main market segments
Bore so than traditional airlines, the main mar$et segment for low cost airlines is the leisure
mar$et. Bany low cost airlines passengers, #yanairs in particular, are tempted by low prices into
ma$ing Courneys they would otherwise not ha%e considered ma$ing at full fare. < hey are not part
of the e#isting market that has been lost to flag carriers but part of a new market summoned into
e#istence by bargain basement fares=.
(
The leisure mar$et brea$s down into a number of
categories. The main mar$et segments are sunshine flights, s$i flights, city and culture brea$s, and
the holiday homeDsecond home mar$et. .ther significant segments include the business mar$et
>
,
the student mar$et
9
, the e0patriate mar$et
60
, the day5trip mar$et
66
, and the sports mar$et.
62
+i$e
charter airlines, budget airlines ha%e de%eloped the mar$et for direct flights to and from regional
airports. The ideal route for a budget airline is one that caters for more than one mar$et segment.
Additionally, on these ideal routes there are as many people wanting to tra%el from 1originate from2
the destination as those who want to fly to it.
!ompetition in the European budget airline industry
-n the early days of the European budget airline industry, low cost carriers were not to any great
e0tent in direct competition with either each other or established carriers. &y 200) the competiti%e
en%ironment loo$ed !uite different. 7cheduled airlines and some powerful charter groups, who had
stayed on the sidelines as the low cost sector de%eloped, had entered the fray to grab a slice of, or
a%oid missing out on, what appeared to be the only maCor growth area for the ne0t fi%e to ten years.
;hat would the impact of this be for the low cost sector3 ;ould the budget airlines start to directly
compete with each other as they added more planes to their fleets3 ;ould the fight bac$ from
traditional carriers persist and would it succeed3 ;ould powerful charter airlines successfully
de%elop their own low cost airlines into serious challengers to the current budget airlines3 ;hat
would happen in the "erman battlefield where many low cost airlines had sprung up3 7ome of
these issues will be considered in the e0ploration of the three main categories of competitionE
competition between budget airlines
competition with charter operators
competition with traditional carriers
6
#et another strike could "ring France to its knees, he 9bserver 182,2$%%+
:
Easy$et takes a difficult route, Peter !artin, 5inancial imes, /2,2$%%$
8
hough catering for both leisure and business segments (hich have competing priorities is not eas" as !cKinse" point out,
some budget airlines have successfull" managed to target certain segments of the business mar;et. In particular, )as".et, and
<irgin )=press seem to target the time3sensitive, price3sensitive segments of the business mar;et b" fl"ing to primar" cit"
airports in )urope. 9n certain flights bet(een London Luton and Amsterdam, *lasgo( and )dinburgh the ma>orit" of
passengers at certain times of da" are fl"ing on business, and this reaches 8%- on the London to Amsterdam route.
/
0tudents traveling to and from home to Universit" or college e.g. *reece 3 UK, London to *lasgo( or )dinburgh
1%
In )urope, man" people do not live in their ?home@ countr" or cit", though man" travel bac; regularl" to their ?home@
countr" or cit"A in turn friends and relatives ma" visit them. 5or instance, man" British and *ermans live in 0pain, 5rance and
Ital".
11
Lo( fares have made it more possible, for e=ample, for people from *lasgo(, )dinburgh and &e(castle visit London for a
da"@s shopping or visiting e=hibitions, galleries or museums.
1$
0ports fans fl" to support their team in 4hampions League, U)5A cup, the Bundesliga, or for other sporting events.
+
Fompetition is not Cust with other airlines. .n some routes in Europe, high speed rail ser%ices
represent direct competition to airlines on Courneys up to * hours in length, along with, to a lesser
e0tent, cars and buses. ;ill business tra%ellers in the future prefer a first class rail ser%ice from city
centre to city centre, a%oiding traffic to and from airports and security5related delays3 -n 200*,
some "erman train fares were slashed to compete with cheap flights.
!ompetition between budget airlines
"#
.ther low cost airlines represent direct competitionG howe%er by the end of 200, the different
strategies pursued by low cost airlines continued to result in little head to head competition.
Fonsolidation was howe%er ta$ing place. EasyJets ta$eo%er of "o in 2002 had combined the
number two and number three players and it had ended competition between the two companies
with the most similar strategies, which had led them into head to head competition on some routes
1> routes in all2. -n early 200, #yanair surprised the industry by announcing that it was to ac!uire
the loss5ma$ing, fourth largest player, &u'', from its parent, 4utch national carrier :+B.
At the beginning of 200*, out of some ,00 routes ser%ed by o%er (0 budget airlines, only 6) to 20
or so routes saw direct competition between one low cost operator and another. As #ay ;ebster
of easyJet said, <heres no reason why a low-cost airline has to go stamping on the patch of
another. he market is immense.= According to industry obser%er 7imon Falder, <Ryanair and
easy&et are hardly the best of friends, but neither wants to take on the other. heir real targets are
the established full-service airlines=
6*
. ;hether this will continue as the mar$et consolidates and
matures is a maCor issue, and new routes ha%e to be found for all the planes orderedG howe%er
e0perience has demonstrated that where there is head to head competition on smaller routes there
are generally winners and losers. Fompetition is most pre%alent on routes from Hottingham East
Bidlands in the 9: where &B-baby and easyJet fly to the same > destinations. -n 200) #yanair
also commenced flights form Hottingham East Bidlands. -n Ho%ember 200* both easyJet and
#yanair started flights from 7tansted to Ialencia, though easyJet declined to compete directly with
#yanair on the +ondon to #iga route. -n late 200* easyJet announced it would challenge #yanair
on the +ondon to 7hannon and For$ routes where it said #yanair had been charging high prices.
&erlin 7choenefeld loo$s set to for direct competition with "ermanwings establishing a base there
in direct competition to easyJet.
The main European budget airlines
The main budget airlines to be co%ered in this section includeE
EasyJet $yanair BMIbaby %lybe&com 'irgin E(press )'irgin*
EasyJet
EasyJet+s deelopment
+aunched in Ho%ember 699) by 2> year old 7telios JaCi5-oannou, with the help of a K) million loan
from his father few thought that the brash, bright, orange5li%ered airline would ma$e it. 4oubters
suggested that passengers would hate the /%ulgar orange colour, people would not want to fly from
+ondon +uton, and that &ritish Airways would crush them. &ut 7telios, as he li$es to be $nown,
pro%ed them wrong. &A tried to buy them out a year after they started, and &A set up its own
budget airline "o, some say in a direct attempt to cripple easyJet. -n 7eptember 200*, easyJet flew
92 aircraft on 669 routes between *) European airports. &y 7ep 200( it would ha%e 6*9 aircraft.
;here would these e0tra aircraft be deployed3
EasyJet+s strategy
1+
)stimated passengers carried in $%%+ b" budget airlines in millions B C"anair $1.+, eas".et $1.1, Air Berlin '.+,
5l"be +.,, B!Ibab" +.%, *erman(ings $.6, <irgin )=press $.,, <olare $.%, Dapag Llo"d )=press 1.8, BasiE 1.6,
&or(egian 1.+, !"travellite 1.$, 0no(fla;e %.' %ource &errion stock"rokers '()*)'++,
1'
he battle of )urope, 4harlotte Dindle, 0unda" imes, +2112$%%$
'
EasyJets strategy had been !uite different from its fellow competitors #yanair and &u'' who had
steadily e0panded organically the number of destinations they ser%ed. 7ince 6999, EasyJets
strategy had been to concentrate growth on increasing fre!uency on e0isting routes to e0isting
destinations and <infilling between e#isting destinations= 5 <'oining the dots=. EasyJet ac!uired new
bases, routes and destinations with the ac!uisition of "o and this increased the possibilities for
<'oining the dots=, meaning that easyJets medium term strategy would be concentrated on this
approach and that no new cities would be added. 4epartures from this strategy were the
establishment of a new base at ?aris .rly in late 2002, and two new bases in the low cost
battlefield, "ermany, with one at &erlin 7chLnefeld and one at 4ortmund. &y the middle of 200)
there were flights from &erlin to 2> e0isting and new destinations and 60 from 4ortmund. Hew
200*D200) destinations from the 9: included &ratisla%a, :ra$ow, ;arsaw, #iga, +CublCana, Tallinn,
&asel, Turin, Almeria and Ialencia
EasyJet+s business model
Bost airline industry obser%ers agree that there are important differences in the business models of
Europes biggest low cost carriers. ;hile #yanair was e0tremely focused on low costs, easyJet
and "o were in more direct competition with established airlines. EasyJet flies to established
airports and their route networ$, flight timings and fre!uencies, and their o%erall approach is
designed to appeal as much to budget5conscious business tra%ellers as it is to price sensiti%e
leisure tra%ellers.
6)
The difference between the two models is emphasised when one compares the
operating profit margins of the two airlines in 2002. 4espite lower a%erage fares, #yanair managed
to achie%e twice the profit margin of easyJet. EasyJet had unit cost per a%ailable seat $ilometre
1as$2 of *.)2 pence whilst #yanair has unit costs per as$ of 2.9> pence. -n contrast, 97 low cost
leader 7; had unit costs of (.2 pence per as$. EasyJets re%enue is higher than #yanairs at ).60
per as$ compared to #yanairs ,.9( pence, gi%ing easyJet a profit margin of 62.>8 compared to
#yanairs 2*.98. -n 2002 and 200,, much of easyJets organic growth was centred on more
e0pensi%e primary airports. Fompared to #yanair, easyJet has significantly higher input costs,
particularly passenger charges, landing charges and other airport related costs associated with
flying to maCor rather than secondary airports.
Input costs and process costs
-t is also thought that #yanairs staff costs are lower than easyJets due in part to higher
producti%ity and easyJets higher e0penditure on customer ser%ice related staff. -n 2002, there
were some labour relations problems at easyJet and pilots complained about long hours. EasyJet
were pioneers of internet boo$ing and e0ploiting the benefits of yield management systems and
pricing models. -n 2002, distribution costs fell further as the percentage of seats sold on the
internet increased )8 to 96.*8. -ts decision to purchase Airbus ,69s instead of &oeing (,(s
pro%o$ed concerns about increased aircraft related costs with a split fleet. -n spring 200*, easyJet
e0perimented with a fully automated chec$5in system.
,erice -uality
After the operational problems in the summer of 2002, a newspaper article suggested that / many
passengers who said they were on the whole happy with easy&et nonetheless complained about
the attitude of staff.
66
Jowe%er, on balance for e%ery negati%e comment there seems to be a
positi%e one and easyJet do seem to ha%e ta$en some steps to impro%e ser%ice performance by
deploying more aircraft on stand5by, by in5sourcing some acti%ities, and by employing more chec$5
in staff at their main base +uton and at other airports. EasyJet claimed that the 200, 7$ytra0 airline
!uality sur%ey found that there was %ery little difference between easyJets ser%ice and traditional
airlines economy class ser%ice and that it beat traditional airlines on the friendliness of cabin crew.
7ome problems with crew shortages, delays and cancellations continued in summer 200,, though.
-n July 200* a significantly larger cabin baggage weight allowance was introduced.
!onclusion
1,
Easy$et takes a difficult route, Peter !artin, 5inancial imes, /2,2$%%$
16
assengers e-press anger "ut not surprise, !arianne Brun3Covet, 5inancial imes , 1%282$%%$
,
The announcement of a K*> million half year loss in Bay 200,, prompted <e#perts to say that
easy&et runs the risk of being s%uee(ed between Ryanair and full-service airlines which had
lowered their prices=.
6(
200* was a difficult year. The airline issued two profits warnings 5 one in
the spring and one in June 5 when little growth in earnings was forecast for the year because of
fierce competition. A trading statement in 7eptember indicating that fares would remain under
pressure into ne0t year saw shares hit an all5time low 5 () per cent below their high of )0*p in
2002. As a result, the company scaled bac$ its plans to increase its fleet of 9, planes. -n .ctober
-celandair ac!uired a sta$e of o%er 608 in easyJet. -n early 200), the airline confirmed that winter
200* had not been as tough as e0pected. -ts share price rose significantly in 200).
Ryanair
4espite its outstanding growth rate and profitability, which ma$es it one of the worlds most
profitable airlines, #yanair faces a number of issues. -t has the absolute cost leadership position in
the European low cost mar$et but it had seen criticism in the press and from public bodies for its
response to a large number of customer ser%ice problems. #yanair is Europes largest low fares
airline with 6) bases and ,0, low fare routes across 22 countries. The airline suggested that this
could rise to 22 bases by 200(5200>. At the end of Barch 2006 #yanair operated an entire fleet of
60, new &oeing (,(5>00 aircraft with firm orders for a further 6,6 new aircraft 1net of planned
disposals2 to be deli%ered o%er the ne0t 6 years. #yanair made a profit of @26> million on re%enues
of o%er @6.,, billion for 200*5). 7ome commentators ha%e suggested that in 200) it was probably
the most profitable airline in the world. -n 4ecember 200), #yanair had cash pile of K6.6) billion.
$yanair+s strategy
#yanairs strategy and public face is inseparable from the persona of its chief e0ecuti%e, Bichael
.+eary. There are contrasting %iews about the ma%eric$ Bichael . +eary. -n 2002, Bichael
.+eary said that he was determined #yanair would stic$ to the template of its role model,
7outhwest Airlines, cheap point5to5point flying from secondary airports, rather than shadowing and
undercutting the maCor carriers as, he said easyJet increasingly seemed to be doing
6>
. Je belie%ed
that #yanair would )wipe out) point5to5point competition in Europe within fi%e years. Je belie%ed
#yanair would dominate the low5cost sector, and there would be four maCor carriers in the top
echelon 5 &A, Air Arance, +ufthansa and easyJet, which by that time would ha%e e0panded into
long5haul and airline partnerships.
69
The fact that #yanair generally fly to secondary airports
means that they are not often in direct competition with established carriers. There seems to be
further opportunities for them to e0pand on this strategy without facing direct competition. A $ey to
#yanairs success is that many of #yanairs passengers are tempted by the price of its seats,
ma$ing trips that they would not otherwise ha%e considered or made.
$yanair+s business model
#yanairs cost leadership position is based on a completely no frills approach and ruthlessness with
respect to costs. -n particular, #yanair sa%es costs by flying to cheap secondary airports from
which they normally e0tract %ery cheap landing charges and passenger fees. According to one
report,
20
#yanair recei%ed si'able inducements to set up bases in continental Europe, particularly at
its first continental base at &russels 7outh Fharleroi. At small secondary airports, aircraft can be
turned around in 6) to 20 minutes and there is little or no congestion. Fabin crew collect boarding
passes at the gate. Aor a number of years #yanair operated elderly (,(5200 aircraft. These are
now being replaced and supplemented by new, larger, fuel efficient (,(5>00s, which ha%e lower
operating costs per seat mile than A,20s and (,(5(00s. #yanair had managed to buy its new (,(5
>00s at record low prices at the bottom of the aircraft mar$et
26
. -n the report for the half year to
7eptember 2002, Bichael .+eary emphasised the benefits of the new aircraft, <he fact that the
1:
Easy$et slu!ps .,/! into the red, Andre( 4lar;, *uardian, 82,2$%%+
18
ibid
1/
ibid
$%
Cevealed1 ho( C"anair did Belgian deal, 4onal Falsh, 7ecember 16, $%%1, he 9bserver
$1
Lo(3cost carrier sho(s ho( it@s done, Kevin 7one, 5 11262$%%$.
6
maintenance, fuel performance, and technical reliability of the *+*-,-- has e#ceeded even
.oeings initial estimates, means that our costs will continue to decline over the coming years as
we take delivery of /-+ more *+*-,-- aircraft.0 .%erall, it is claimed that #yanair has reached a
position of critical mass that /has loc$ed5in lower future unit operating costs.
22
-n late 200*, #yanair
announced that it would introduced in flight entertainment at a cost to passengers of between @)5(.
-n 200) it intensified its direct challenge on Alitalia by starting up domestic routes within -taly, and it
indicted that it may do the same in other European countries such as 7pain.
2,
Marketing and yield management
#yanair generates significant income from the sale of snac$s and be%erages at prices 2)5,)8
more e0pensi%e than ri%als li$e easyJet. 7ubstantial additional re%enue 1almost 608 of re%enue2
also comes from the sale of tra%el insurance, hotel and car hire boo$ings through its website.
,erice -uality
The 9: Airline 9sers Founcil, which collates airline passenger complaints, report for 2002 branded
#yanair as the worst airline for customer ser%ice to which #yanair responded by calling them <a
bunch of half wits=. This was widely publici'ed in newspaper articles. The press and angry
passengers ha%e complained that #yanairs lean and mean approach to flight operations also
applies to customer ser%ice. -n the middle of 2002, there were concerns raised about internal
!uality issues. There were allegations that /the low cost carrier is e#ploiting a legal loophole to
force pilots to work beyond the recommended limit of flying hours. .ne pilot was reported as
saying, <1f we complain or refuse to work more than 2-- hours we fear we will be sacked=.
2*

2)
At
the end of 2002, there were, howe%er, signs that one of the root causes of ser%ice problems,
technical delays, was being resol%ed as deli%eries of new (,( >00s significantly lowered the
a%erage age of their fleet. #yanair claimed in August 200, that the Association of European
Airlines ran$ed #yanair number one European airline in terms of punctuality, least cancellations
and fewest lost bags. -n 200) it claimed to be the most punctual maCor airline in Europe.
!onclusion
;hen as$ed about the future of #yanair, Bichael .+eary said, <1m absolutely convinced that
nothing will stop us, unless we screw it up ourselves through self-inflicted stupidity or arrogance, or
we start to think we can walk on water=.
26
According to one report, Bichael .+eary said of the
growth strategy, <1f we are aggressive now, we are going to make a bloody fortune=, and that his
earlier estimate of 2)8 growth for 200, was li$ely to be conser%ati%e.
2(
After the 20025, results
and the Bay 200, traffic figures, there was a different %iew from another respected obser%er. <he
airline is flying into a headwind; to maintain its growth rates it will have to deploy increasing
%uantities of capital and keep wielding the price cut weapon. Mr 3$earys basis for confidence
looks shaky.=
2>
Another analyst was also cautious about the short term, but added <its a super
company and the long term business model is still intact.0
29

bmibaby
&ritish scheduled carrier, &B- &ritish Bidland, started &mibaby in 2002.
,0
The airline recognised
that the large population catchment area in Fentral England and Horthern England was
underser%ed by low cost airlines. As a result, &B-baby launched as a no5frills airline flying from
$$
C"anair & eas".et, !errion 0toc;bo;ers, +12,2$%%$
$+
0pain, including the 4anar" islands is )urope@s biggest domestic mar;et, follo(ed b" 5rance, *erman" and Ital".
$'
C"anair pilots face the sac;, LiG )d(ards, he 0unda" imes, $,282$%%$
$,
C"anair pilots@ hours under scrutin", !ar; 9dell & !atthe( .ones, 5 $+282$%%$
$6
0he "attle of Europe, 4harlotte Dindle, 0unda" imes, +2112$%%$
$:
1yanair out to a2oid growing pain "attle, Cussell Dotten, he imes, 12$2$%%+
$8
0he unfriendly skies, Le= 4olumn, 5 '262$%%+. Coute cuts and a further drop in fares in &ov $%%+ seem to confirm this.
$/
.ohn !attimoe at !errion 4apital Euoted in 3e will o2ertake B4 says 56eary, he *uardian '262$%%+
+%
0A0 o(ns $%- of B!I and Lufthansa +%- minus 1 share.
:
Hottingham East Bidlands Airport to destinations including &arcelona, Hice, ?alma, Aaro, Balaga
and they soon added routes to "ene%a, Bunich, Bilan 1&ergamo2, +yon and Alicante. &B-baby
was also the first budget airline carrier to fly from ;ales, and it initially based two &oeing (,(
aircraft at Fardiff airport. "o, who easyJet too$ o%er, also had set up a base at East Bidlands and
in middle of 200,, &B-baby and easyJet were in direct competition on routes to &arcelona,
"ene%a, Aaro and ?rague.
Aor the 200) summer season, &B-babys e0pansion means that it flew 66 aircraft from ) bases
1Hottingham East Bidlands, Fardiff, Banchester, &irmingham and 4urham2 on a total of *9 routes
to 2) destinations 1including 9: domestic ones, of which Edinburgh was one2. 7ee E0hibit 6 for
details of routes. Ho separate results were a%ailable for &mibaby and the parent company has not
disclosed whether it is still loss5ma$ingG howe%er the parent company, after ) years when the
highest profit margin recorded was ,.*8, suffered its worst e%er performance for the 2002 financial
year, with an operating loss of K26.(m, following an operating loss of K29m the pre%ious year when
it was hit by e0ceptional charges of K6(m. -t lost K62m in the 200, financial year. -n June 200,,
&B- and Iirgin Atlantic admitted that they had been in tal$s about a merger, that both groups had
conducted due diligence in%estigations but that there had been /insurmountable barriers o%er
%aluations and go%ernance.
,6
BaCority shareholder 7ir Bichael &ishop has an agreement with
+ufthansa that they will buy his maCority sta$e in the airline at an agreed price should he wish to
sell. -n 7eptember 200), #yanair announced that it would set up its 66
th
base at Hottingham East
Bidlands, gi%ing this airport three low cost carriers with bases there.
flybe
&ritish European, or flybe as it re5branded itself, is a relati%ely small pri%ately owned regional airline
that has been forced change due to the huge shift in the airline industry brought upon by the budget
airlines. Alybe has adopted some of the features of low cost airlines, a K) online boo$ing discount,
tic$etless tra%el, and a K,.)0 credit card fee, and tic$et changes for a fee. -t offers headline
discount K69 to K29 one way fares from and to mostly 9: regional and secondary airports such as
Jersey, "uernsey, E0eter, &irmingham, &ristol, and Hewcastle. Their main bases are at
&irmingham, 7outhampton 1increasingly so2, E0eter and &elfast Fity, with Horwich added in 200).
They rarely 1* routes2 compete on routes directly with low cost airlines. They mainly fly the more
e0pensi%e5to5operate &Ae 6*6s or A%ro regional CetsG howe%er their lower passenger capacity
means that they ha%e fewer seats to fill on less popular routes. They are not single class but offer
Alybe Economy ?lus for business tra%ellers and they ha%e partnerships with Air Arance and
Fontinental Airlines. They also sell through tra%el agents. -n 200,, they introduced further new
routes and destinations, mainly from regional airports to destinations in the 9: and mainland
Europe. &y summer 200, they had added routes to Bilan, "ene%a, 4ublin, -bi'a, &ergerac and
Toulouse. They lost K2> million in the 2 years to Bar 2002, but made a profit of K0., million in the
year to Barch 200,. K22.) fresh capital was inCected to support the mo%e to a low cost airline and
$eep the airline afloat and a trade sale or stoc$ mar$et flotation of the airline was being sought by
200(. A K2 to K, million loss was forecast for the 200,5* financial year as the airline sought to
replace its fleet of regional Cets with &oeing (,(5(00s or Airbus ,69s. Jow the airline could fill
these planes from small regional airports was an unanswered !uestion, yet it restructuring seemed
to ha%e paid off and it managed to ma$e a profit of K60.*m in the half year to 7ep 200*. -n the end
it decided on >05seater &ombardier M*00 turboprop aircraft which it claimed were fuel efficient and
en%ironmentally friendly. &y 200) its route profile had changed, with 9: and -reland domestic
routes accounting for only *68 in 200) compared to >08 in 200,. -n 200) Arance and 7pain
accounted for 2,8 and 6(8 respecti%ely.
Virgin Express
+1
B&7 pours cold water o2er 8irgin 4tlantic !erger, Kevin 7one, 5 6262$%%+
8
Iirgin E0press was part of #ichard &ransons airline stable that included Iirgin Atlantic and Iirgin
&lue, the low cost Australian airline. Iirgin E0press operates 66 1mostly2 6** seat &oeing (,(5
,00s and flies from the main &russels international airport and claim to ha%e one of the lowest
costs per a%ailable seat $ilometre of European airlines. They also claim to ha%e one of the best
punctuality records in Europe with o%er 908 of flights lea%ing and departing on time. -t has a
business model which has seen the growth of business passenger traffic, with o%er 608 of
passengers on many routes flying on business, with an a%erage of )08 o%erall. -n many ways
they are more similar to traditional airlines, and they are different from other low cost airlines in thatE
flights can be boo$ed through tra%el agents 1who are paid 98 commission2
seating is assigned at chec$5in
they code share with other airlines
recently, howe%er, the airline stopped offering a free sandwich, coffee and soft drin$
The Iirgin E0press mission statement is /reat everybody as you would like to be treated yourself ,
which seems to be supported by its approach to customer ser%ice, problem resolution and
customer retention. Fustomer 7er%ice seminars are organised three or four times a year for all
members of the Iirgin group of companies in order to ensure that /e%ery Iirgin product and ser%ice
meets the customer ser%ice e0pectations of the Iirgin brand.
,2
They ha%e had a turbulent 65year history, finding it difficult to be consistently profitable. -n 2006,
after a loss of K*6m they were forced to cut bac$ flights and routes significantly, though there was
a resurgence in 2002, with June 2002 re%enues 9(8 higher than the pre%ious year as they focused
on the busiest and most profitable routes.
,,
-n summer 2002 they forced to ma$e a swift retreat
from the "erman mar$et after their announcement that they were to set to set up base at
:LlnD&onn airport was followed by similar announcements by the much more powerful players.
They announced disappointing figures for the three summer months in 200,, with profit down from
K*.6 to K6.(m, the airline saying that it was being s!uee'ed by low cost ri%als and a price war
instigated by traditional carriers. #e%enue was down 68, despite an increase in passengers flown
of (8. #e%enue per passenger $ilometre was down 228. They lost K62.(m for the full 200, year
+i$e easyJet, Iirgin E0press flies 66 aircraft to maCor European destinations, 66 in all from &russels
international airport. -n the middle of 2002, they announced a logo change from Iirgin E0press to
Iirgin, so that Iirgin Atlantic, Iirgin &lue and Iirgin E0press would all ha%e similar logos ma$ing
the concept of <best value for money more recogni(able throughout the world=.
,*
;hat their
strategy will be after ha%ing to abort their plans to set up a base in "ermany at :Lln5&onn will be
interesting to obser%e, though in early 200, they started new routes from Amsterdam to #ome and
Bilan. -n early 200, they had obtained slots at ?aris .rly, though by the beginning of 200* these
had not been ta$en up. After months of tal$s, in .ctober 200*, they announced that a merger with
7H &russels Airlines, who emerged from the ban$rupt &elgian national airline, 7abena, had been
agreed. -t was e0pected that both brands would continue to operate separately but that there
would be rationalisation on routes where they competed directly.
,ustainability o. the low cost business model as traditional carriers
.ight back
A $ey uncertainty for the budget airline industry is the e0tent to which established carriers can
replicate some of the features of the low cost model and compete better against it. They ha%e
already reduced what they offer for free, they are already trying to bypass tra%el agents by selling
on the internet and they are also gradually reducing their dependency on the hub and spo$e model
by flying direct, point to point, flights using smaller regional Cets. .thers argue that some aspects of
the budget airline product and process design are hard for traditional airlines to replicate since they
may re!uire changes in employee attitudes, s$ills and systems, and they may compromise other
+$
<irgin (eb site, (((.virgin3e=press.com
++
ibid. he" made H%., profit in $%%1.
+'
1edHot, <irgin )=press magaGine, 0ep3&ov $%%$
/
features of their ser%ice such as connecting flights. .n the other hand, as budget airlines grow
they may ha%e to replicate some of the national carriers characteristics such as larger si'e, wider
geographical co%erage, and increased fre!uency of flights N all without adding the comple0ity,
costs and bureaucracy of the national carriers.
,)

According to :e%in 4one, traditional airlines belatedly wo$e up to the pent5up demand in the leisure
mar$et by changing their fare structure to ta$e account of what they see as <recent changes in the
"uropean market, including the 4sharp increase in the leisure traffic=.
,6
The fare changes ha%e
included the selecti%e introduction of one5way fares and scrapping of 7aturday night stay
re!uirements for the cheapest fares. They also may want to simply fill more seats on their planes.
-n 2002, for instance, +ufthansas load factor was only 6,8. Traditional carriers in their ad%ertising
and pricing strategies ha%e started to fre!uently target destinations flown to by low cost airlines
such as Edinburgh, "lasgow, &elfast, &russels, Badrid, Hice, and Bilan. Jowe%er, many
traditional carriers still lost considerable sums of money on European routes
,(
with most of the
abo%e mentioned carriers ma$ing all their profit on long5haul routes.
%uture prospects .or the low cost sector: the debate
4espite good short5term growth proCections, some analysts see storm clouds on the hori'on for the
budget airline industry. There were some worrying signs in 200,. Another ongoing concern was
whether the commercial pressures of the low cost business model was causing unacceptable flight
delays, alienating passengers and employees due to poor ser%ice !uality and whether pilots and
crew were being pushed too hard. The media had gi%en front page co%erage to stories about the
tendency for low cost pilots to /challenge and sometimes ignore instructions from air traffic control
/in an effort to save time.
,>

-n one of #yanairs free seat sales 1customers only paid the ta0 and passenger charges2, between
6)0,000 and 200,000 free seats 16)852082 were not ta$en up by customers. Fhris A%ery, airline
analyst at J ? Borgan was !uoted as saying, <there are 'ust some locations in the depths of winter
that even free seats wont attract people to=
,9

*0
. The challenges for the long term are highlighted
by the Bc:insey report,
<5here could long-term growth come from6 3ur analysis suggests that it would re%uire the low-cost
airlines to take market share from the big incumbents and charter companies. .ut the no-frills will find it
difficult to overcome the structural limitations and competitive challenges in these markets.=
*6
Hot e%eryone is pessimistic. Borgan 7tanley forecast that low cost carriers will ha%e 2>8 of the
intra5European mar$et by 2060, compared to 98 in 2002.
*2
-n late 2002, :+B forecast an annual
growth rate in the European low cost sector of between 20 to 2(8 for the period 2002 to 2006, with
a 9 to 668 annual growth rate in the ne0t 60 years to 2066. -n 200,, only ,.) million of "ermanys
>2 million populations too$ low cost flights, compared to 26 million trips by the 9:s )9 million. &y
late 200* the number of routes operated by low cost carriers in "ermany had grown from four in
2002 to ,00 while the number of no frills airlines had increased from two to 6).
+,
easy$et takes a difficult route, Peter !artin, 5inanical imes , /2,2%$
+6
96& cuts fares to !eet no-frills co!petition, Kevin 7one, 5inancial imes, /2:2$%%$
+:
In the financial "ear to !arch $%%+, BA reduced its operating loss on )uropean routes from H$$'m to H11:m. BA had debts
of H'.8bn at the end of $%%+. BA cut 1:- of )uropean capacit" bet(een $%%% and $%%+. 0(iss (as in ?deep trouble@ and in
earl" $%%, it (as in advanced tal;s (ith Lufthansa about a ta;eover. Alitalia and Austrian (ere also struggling.
+8
Budget airlines fly on a knife edge, Andrea 5elsted, 5inanical imes 1%282$%%$
+/
1yanair could not find takers fro! :,+++,+++ free seats, )d(ard 0imp;ins, he 0cotsman, 1$212$%%+. he same happened
over )aster in $%%+, (hen C"anair@s ?free@ seat offer (as ta;en up b" onl" ,$%,%%%.
'%
his author fle( from 5ran;furt Dahn to *lasgo( Prest(ic; on $+2$2$%%+ for I1+.$1, including all charges and from Pisa to
5ran;furt Dahn for I1'.66 in 5eb $%%'.
'1
Hyped hopes for Europes low-cost airlines, Urs Binggeli & Lucio Pompeo, he !cKinse" #uarterl", $%%$, &umber '
'$
European 6ow-Cost 4irlines1 0his is a "uying opportunity, !organ 0tanle" )Euit" Cesearch )urope, 1/2/2$%%$
1%
Although Bc:insey say that /viable new routes from $ondon are scarce,
*,
7imon Falder an
e0perienced tra%el Cournalist,
**
predicts further e0pansion after liberalisation in Bay 200* into
countries Coining the E9 such as Jungary, ?oland,
*)
Fyprus and, perhaps later, e%en Tur$ey. The
huge aircraft orders by easyJet 16202 and #yanair 16,02 certainly seems to suggest optimism and
that both will continue to pursue aggressi%e growth strategies.
-n late 200*, there were concerns about e0treme o%ercapacity, falling fares and rising costs.
;inter 200* was forecast to be a /bloodbath as marginal carriers were forced into ban$ruptcy
though the e0pected se%ere price war ne%er materialised and a%erage fares actually rose at
#yanair. Jowe%er there were concerns that the sha$eout or restructuring of the industry may be
delayed between 62 to ,6 months particularly since some new entrants 1notably in "ermany2 were
bac$ed by well capitalised parents or supporters who could ride out any difficulties in the short to
medium term. 4espite the continuing rise in the price of fuel 200) was a relati%ely calm year in the
budget airline industry and the industry continuing to grow strongly particularly within and from
"ermany. 4e%elopment continued outside the E9 with new routes started to Horth Africa, Tur$ey
and #ussia.
'+
Hyped hopes for Europes low-cost airlines, Urs Binggeli & Lucio Pompeo, he !cKinse" #uarterl", $%%$, &umber '
''
;o Frills< the 0ruth "ehind the 6ow-Cost re2olution in the skies, 0imon 4alder, <irgin Boo;s, $%%$
',
In 1//8, Poland, 4Gech Cepublic and Dungar" (ere the ,
th
, 8
th
and 1%
th
most visited )uropean countries
11
E(hibit " Main $outes o. the main low cost carriers at /ugust 0112
EasyJet & Go BMIbaby Ryanair Virgin
Austria
0alGburg *raG, Klagenfurt, 0alGburg, LinG
Belgium
Brussels Brussels CharleroiJ Brussels*
Czech Rep
Prague Prague Brno
Denmar
4openhagen Aarhus, )sb>erg 4openhagen
!rance
&ice, L"on, Paris 47*,
Paris OrlyJK/ routesL,
oulouse, !arseilles
Paris 47*, &ice,
oulouse,
Bordeau=
BiarritG, 4arcassonne, 7innard,
!ontpelier, &antes, &imes, Paris,
Pau, Perpignan, Ceims, 0t. )tienne,
0trasbourg, oulouse, La Cochelle,
Limoges, CodeG, Bergerac, Poiters,
ours, *renoble, oulon
&ice, Bordeau=
Germany
Berlin*($8 routes),
Dortmund* (1%) ,
!unich, 4ologne2Bonn
Frankurt !ahn* 3 K+6 routesL ",
Damburg KLubec;,L, Berlin,
5riedichshafen, LeipGig &iederrhein
K7usseldorfL, )rfurt, LeipGig
Damburg
Greece
Athens " rom O#t 2006 Athens
Irelan"
Belfast, 0hannon and
4or;, Knoc;
4or;, 7ublin,
Belfast, Knoc;
4or;, 7err", Du$lin (2% routes)*,
Kerr", Knoc;, &hannon ('()*
Italy
Bologna, !ilan, Come,
<enice, &aples
!ilan
KBergamoL,Pisa
Ancona, Alghero, Bologna K5orliL,
Brescia, *enoa, Milan * K1: routesL
Pescara, Pisa())J, Cimini, *ome*
($%) rieste, urin, <enice
KrevisoL, Brindisi, Palermo
!ilan, Come
#etherlan"s
Amsterdam, !aastricht Amsterdam )indhoven,
#or$ay
9slo, Daugesund
%olan"
Kra;o(, Farsa( B"dgosGcG, *dans;, Kra;o(, LodG,
PoGnan, CGesGo(, 0GcGecin,
Frocla(
%ortugal
5aro 5aro 5aro, Porto 5aro& Lisbon
&cotlan"
Aberdeen, )dinburgh,
*lasgo(, Inverness
*lasgo(,
)dinburgh
+las,o- Prest-i#k* K16 routes=
&pain
Barcelona, !adrid,
!alaga, !allorca,
Bilbao, Almeria,
Asturias, Alicante,
<alencia
Alicante, IbiGa
Barcelona,
!alaga, !urcia
!allorca,
0antander, MaragoGa, <alladolid,
<alencia, +irona(') routes)*, Ceus,
Almeria, !urica, 0antaigo de
4ompostella, .ereG, 0eville, !alaga,
*ranada
Barcelona, !adrid,
!alaga, !allorca
&$e"en
*othenburg, Kristianstad, !almo,
0toc;holm <asteras & &ka.sta* K1$
routes==
*othenburg,
0toc;holm
&$itzerlan"
+ene.aJ K11 routesL,
Murich, Basel
*eneva
'nite" (ing"om
O $epresents
a base
/ondon /uton* ($,
routes) /ondon
&tansted* ($6 routes)
/ondon +at-i#k* ($'
routes) /i.er0ool*
(1+ routes)
Bristol*1 ($' routes )
2ast Midlands*(8
routes ) 3e-#astle*
(1'routes)
3ottin,ham 2
Midlands *
Cardi* (''
routesL
Man#hester*(4L
5eeside *
K8routesL
Birmin,ham* K8
routesL .erse"
Birmingham, Blac;pool,
Bournemouth, Bristol, 4ardiff,
7urham, Leeds3Bradford, /ondon
/uton(''routes)J /i.er0ool (16) J,
!anchester, &e(Eua", &ottingham
2ast Midlands K,L, eesside, hese
are primaril" destinations from
7ublin. /ondon &tansted
(4)routes)*
C"anair also flies to Ciga KLatviaL,
Kaunas KLithuaniaL, Bratislava
K0lova;iaL
3 $epresents a
base
0ources1 (((.eas".et.comA (((.C"anair.comA (((. <irgin3)=press.comA (((.bmibab".com
1$
E(hibit 0: !omparatie reenues, costs, load .actors and pro.it margins in 011245
*yanair
year to
Mar#h
200(
2asy6et
year to
&e0 200(
(2007)
&outh
8est
200(
(2007)
6etBlue
9ear to
De# 200(
(2007)
:;
#harter
irms
76
British
<ir-ays
7%
200(
:nit re.enues
(0) 0er ask
$./6 '.1:
K'.$/L
+.%1
K$./1L
$.'$
K$.$6L
'.%, '.,1
:nit #osts (0)
0er ask
$.+1 +./$
K'.%'L
$.68
K$.6+L
$.+,
K$.%:L
+.:+ '.$$
/oad a#tor = 8'- 8,.$-
K8+.8-
:%.:-
K6/.,-L
8,.$-
K8+.$-L
88- :'.8-
Proit mar,in
(0) 0er ask
%.6, %.$,
K%.$,L
%.++
K%.$:L
%.%:
K%.1/L
%.+$ %.':
O0eratin,
0roit mar,in =
$$.1%- 6.6-
,.8-
1%.8-
K8.,-L
$.8-
K8.8-L
:./- 6./-
3um$er o
0lanes
1%+
!arch $%%6
1%/
K/$L
'',
K'1:L
/6
K6%L
$/%
>nternet
$ookin,s
/:- /6./- 6,-
K6%-L
::.,-
K:,.'-L
lo( rising
<.era,e are H$:.,8 H'$.'+
K'$.$8L
H,%.6+
K':.8:L
H,/.6$
KH,:.,6L
H181
Passen,ers
millions
$:.6 $/.6
K$'.+L
::.:
K:%./L
1'.:
K11.:L
+,.:
0ources1 !errion stoc;bro;ers, C"anair.com, eas".et, C"anair, 0outh(est Airlines and .etBlue annual
reports, Association of )uropean Airlines, KA)AL and author@s estimates. N2H at 1.8,
>nit 1e2enue per a2aila"le seat kilo!etre 3 this represents the total revenue earned from fares divided b" the
total number of seats multiplied b" the total distance flo(n. his ratio gives one a ver" good idea of the
pricing po(er of the airline@s offering, overall and on particular routes.
>nit Cost per a2aila"le seat kilo!etre 3 in combination (ith the previous t(o this is another ;e" ratio. his
demonstrates the relative cost effectiveness and efficienc" of the airline, and it often reflects the basis of their
lo( cost business model and ho( (ell the" implement it.
#ield or a2erage load factor B this represents the number of passengers flo(n as a percentage of the number of
seats available or, in other (ords Ohow full the plane was on a2erageP. his is an important ratio since
services li;e airline seats cannot be stored and sold later. Budget airlines use their sophisticated "ield
management s"stems to tr" to ma=imise their load factors since (ith the no3frills, nothing free approach,
provided that passengers pa" ta=es, and landing and securit" charges, the marginal cost of carr"ing additional
passengers is fairl" small.
42erage %ector length is the average length of routes flo(n b" an airline. his is important because, generall"
spea;ing, the longer the route Ksector lengthL the lo(er are the costs per ask. British Air(a"s operates man"
long haul flights reducing unit costs despite providing a full service. .etBlue had an average sector length of
$1'$;ms, lo(ering its unit costs significantl". 0outh(est@s average sector length (as /:1;ms and eas".et@s
88';ms. .etBlue used its aircraft for 1+., hours per da".
7nternet "ookings ? he - of internet boo;ings is important as commission (ill not be paid on these to travel
agents and the costs of handling them are significantl" lo(er than through call centres or compan" outlets.
'6
Authors estimates
':
British Air(a"s Annual Ceport and Accounts, Association of )uropean Airlines, $%%' and Authors estimates from
Association of )uropean Airlines data. (((.aea.be
1+