Low-Fare Carriers Evolve As Sector Increases Global Footprint
When asked about the future of the low-fare airline industry, Vueling Airlines CEO Alex Cruz has a simple answer: “We will grow and the legacy carriers will shrink.” But that is only the short version of a more complex story.
While most low-fare carriers are continuing to grow, strategies and behavior patterns are changing, particularly in Europe. EasyJet is introducing assigned seating and has started selling its tickets through global distribution systems (GDS). Vueling, Norwegian Air Shuttle and others are actively pursuing connecting traffic, and Norwegian plans to launch long-haul flights next year.
“We are evolving the low-cost model,” said Ali Sabanci, CEO of Turkish low-fare carrier Pegasus Airlines, on the sidelines of the World Low-Cost Airlines Congress last month in London. “Only two years ago, ‘GDS’ was a swear word.”
By introducing new possibilities for the model, airlines are trying to gain access to a broader customer base. EasyJet’s drive to GDS cooperation, for instance, is aimed at attracting more business travelers. Vueling has enough frequencies at its Barcelona base to enable a large number of natural connections—passenger streams to which it would otherwise not have access.
EasyJet’s decision to introduce assigned seating also can be seen as a move to draw corporate travelers. Trials on selected routes have shown that the boarding process does not take any longer than the previous open-seating procedure, says EasyJet’s customer and revenue director, Cath Lynn. But the airline now can achieve higher yields and ancillary revenues by offering seats at the front of the aircraft to passengers buying the most expensive tickets.
Some changes also are being forced on low-fare carriers. The industry has always reduced capacity in the winter, but not to the extent it does today. Whereas previously it tended to fill seats by reducing fares, that is now often no longer a viable strategy, given the sharp rise in fuel prices. Instead, airlines park more aircraft in the winter.
Ralph Anker, who runs the network analysis website anna.aero, says Ryanair reduced capacity last winter by 38% from the preceding summer season. The reduction had been only 30% a year earlier. Other low-fare carriers cut winter capacity further as well—EasyJet lowered its capacity last winter 34% from summer levels, compared with 28% in 2010; Vueling cut capacity by 44% last winter from 40% the year before; and Norwegian dropped its offering by 28% in 2011 from 27% the previous year.
As networks grow, the low-fare airlines find themselves in more direct competition with each other. When Hungarian national carrier Malev collapsed in January, Wizz Air immediately widened its already significant presence at Budapest Airport and Ryanair opened a new base. Following the closure of BMIbaby in September, Monarch Airlines, FlyBe, Ryanair and Jet2.com picked up abandoned routes at East Midlands Airport.
One current low-fare success story is Spanish carrier Vueling, which is thriving in spite of its home market’s economic weakness. Vueling benefits greatly from industry consolidation. At its main base in Barcelona, its biggest competitor, Spanair, went bankrupt in January and ceased operations. EasyJet has announced the closing of its Madrid base and Ryanair has reduced capacity into Spain, albeit from a very high level.
Cruz says Vueling had a watch list of airlines that might pull out of the market and reaction plans in place in case that occurred. “We cannot afford not to respond fast,” he says. As a consequence, the airline has seen traffic expand by more than 20% in recent months. Cruz says Vueling has lower unit costs than EasyJet and he sees “more room to cut.”
Vueling expects more growth potential as it develops its Barcelona base. Cruz also is keen to build connecting traffic there, the share of which was about 10% before the summer and is rapidly increasing. He argues that it is fine to offer connections for low-cost carriers as long as the schedule is built on point-to-point traffic and the airline takes advantage of natural connections only. But he will not tolerate new routes that are based on connecting-traffic revenues.
As Vueling opens up more bases in European countries outside of Spain, Cruz sees it becoming more pan-European. “We have to start connecting the dots,” he says. As part of its expansion plans, Vueling is seriously considering an order for the CS300, the larger version of the Bombardier CSeries. “The CSeries will be the new narrowbody in town for a long time,” Cruz believes. “It is a very attractive aircraft.”
Vueling is in the process of placing an order for at least 60 aircraft; it will decide in the next few months if it will order the Airbus A320NEO, Boeing 737 MAX or Bombardier CSeries.
Bombardier is offering a 160-seat version of the CS300, which is designed for 149 seats in a legacy airline layout. The manufacturer might have to add a second overwing exit on each side of the aircraft to accommodate rapid disembarkation regulations in emergencies. Cruz believes the CS300 will still be a comfortable aircraft with 160 seats, though. Vueling, which has given the three manufacturers clear specifications for cabin and seat configuration, has been very pleased by the response.
The Vueling CEO also points out that the Canadian government is eager to help with the financing of Bombardier’s aircraft.
Vueling operates a fleet of Airbus A320s and when it began the order campaign last year, Cruz thought it would choose between the A320NEO and the 737 MAX. Bombardier’s offer came to the table later.
Another European LCC about to reveal a major aircraft order is Turkey’s Pegasus. “We are already there, but I would like to announce it in my own country,” CEO Sabanci says. The carrier is deciding between the A320NEO and the 737 MAX, he says, and it will buy more than 40 aircraft, the size of its current fleet.
Pegasus, originally a charter airline, turned to scheduled flying in 2005. It has averaged 41% annual growth in the past five years. Sabanci thinks the airline has much potential for further development in the Turkish domestic market, as the middle class and disposable income are growing. It can triple capacity on domestic routes in the next few years and still not offer too many seats, he says.
Internationally, Pegasus is focusing on Russia and the Commonwealth of Independent States (CIS). “We need to send the low-cost virus to these countries,” Sabanci says. But he complains about government protection, of which incumbents, such as Turkish Airlines and Aeroflot, are taking advantage. “We would like to fly to Moscow and St. Petersburg, but they are a no-no for us. The regulators still have a romantic relationship with the national carriers,” Sabanci says.
Also enjoying growth in the Middle East, Air Arabia has nonetheless been forced to alter its strategy due to the uprisings in the region, particularly in Egypt. The airline, based in Sharjah, the UAE, is shifting capacity growth away from its two bases in Morocco and Egypt as it waits for the market to return. “Our focus will be on Russia, the CIS and Africa,” Air Arabia’s CEO Adel Ali says.
The airline opened a base in Alexandria, Egypt, several years ago. The Egyptian operation comprises three aircraft, two of which are flying out of Alexandria and one out of the Red Sea resort towns of Sharm-el-Sheikh and Hurghada. Air Arabia Egypt was supposed to have grown to seven aircraft as part of the initial ramp-up and was planned to grow to about 20 units within five years.
Air Arabia had planned to set up a subsidiary in neighboring Jordan, but it shelved those efforts with the outbreak of the Arab Spring last year, and Ali says the decision will not be revisited soon.
Other markets have proven more lucrative than expected. Saudi Arabia has opened its air transport market significantly in the past several years, and Air Arabia now serves six destinations in the country with 70 weekly frequencies.