Low Cost Airlines - Honeymoon Over?

The other day I spoke to a friend who had always been a massive supporter of European low cost/no frills airlines. He looked pretty annoyed and moaned about the fact that many of the deals that used to be around no longer exist. He also could not understand why he now has to do a lot of the work for them such as online check-in etc yet pay for almost every extra you can think of. Why, he said should I do all the work yet more often than not have to pay an administration fee.

It seems to me that more people than just my friend are falling out of love with these airlines. One person put it quite emotionally by saying he felt ‘betrayed by these so called ‘people's champions’. Having been in the business for many years I was surprised that folk could believe that these airlines were working in anything else but self interest but I guess if one looks at some of their past marketing and newspaper publicity one might understand.

I have my own views on this sector of the market and, as he asked my opinion I gave it. This is what I said:

OK, this is how I think the low cost airline model works:
They start a route on the stack them high and sell them cheap basis. They cut their costs to the bone and undercut the prices of any competition from the big boys. This works for a year or two until they have got hold of as many passengers they can on that route. Then their problems start.

You see, like all business they need to generate increased year on year profits but where is that increase going to come from? After all, their costs have already been stripped to the basics. They struggle to increase passenger numbers because they have already cornered their share of the market. Also this share is being attacked by the major carriers who have adjusted their prices to compete on the same ‘net plus extras’ model.

So the only way to please their investors is to enter new markets (they are already established in the best ones) and get more money from existing passengers. How do you get more money from them? Well you check your stats, booking patterns, peak flights and increase fares on those services that are popular (good timings etc) up to the highest level they think they can get away with. Then they look elsewhere amongst ancillary costs such as credit card fees, airport service 'frills' and start charging for them. When the authorities catch up with those they feel unacceptable they move these charges to a grey area described as 'admin fees'. On top of this they try to sell their customers non airline services like car hire and hotels and then go to these suppliers and negotiate special commissions for giving them business.

So the issue is that they have to keep growing in order to keep their share price up. Great in the old days but hard now they are established. The only good thing about this is that, as a result prices are finally becoming much more transparent so you can choose what you are going to get i.e. you can pick poor timings on less popular routes and still pay a low fare. As mentioned earlier these companies sell through big time marketing campaigns which mean they will still offer the occasional mega headline grabbing deals here and there.
The thing to remember is these airlines work on the basis that they do not want you to pay less than the maximum you are prepared to spend and they are finding out what that sum is in all sorts of clever ways. One could argue they are more pirates than charities!

What the Customer Really Wants? – Part 1

OK, I know I am becoming a grumpy old man. As my appointment with the ‘Grim Reaper’ gets closer the more things in corporate travel seem to rankle. For example my pet hate at present is the strap line used by ACTE to promote itself.

It seems the three key things that most attract new and current members are to ‘be smart, be hip and be seen’. Now I can go with the first one but I think there are a few other worthy aspirations slightly ahead of being ‘hip’ and ‘seen’. I mean what is all that about? But I digress!

My diatribe today is all about ‘the customer’ and what they truly want. Now this is not easy as, depending where you dip into the supply chain, you get a different definition of customer. It becomes clear that each definition of the customer is more linked to who we want them to be rather than who they really are.

If you go to an airline like say American they are likely to say the traveller. Go to an international corporation and they would say we, the company are. Go to a TMC and they will say either or both depending on who makes the decision to appoint us and who has the strength to get us sacked. Go to the GDS and they will say ‘we buy/sell segments from and to airlines and TMCs so we don’t need to know. However I think they do as the traveller is far more likely to book outside their service on direct websites.

Now let us assume for one moment that the traveller is the decision maker. In many cases this is fact. They may get influenced either strongly or weakly by their budget holding employers but hey, they can usually find a way around that. So what do they want? Simple you may think but I contend otherwise.

If you read the papers, magazines etc what everyone is interested in price. How do I get this cheap, who can give me the best price package, how can I get lower fares but better perks? The low cost carriers came along and thrived by undercutting the big established boys and the glory of cheapness became a reality. But hold on a minute, those low cost flights were on high density short haul routes and every time a transatlantic model was launched it failed. Does that say something?

It says to me that people are prepared to put up with most kinds of discomfort on little commuter routes but not when they are going any distance. Then the cabin gets cramped, the service poor and the food practically inedible. But despite all this the media and corporate hype is all about how all travel should be cheap and fares stripped down to their component parts.

The result is that although the truth of low fares is that they are in reality getting less available, the call for them is getting greater. It is also now on all routes not the one hour local shuttle service. So how do the mainstream airlines cope with this demand? They simply give the customer what they think they want in a base price but ‘nickel and dime’ the price up on ancillaries. Result? They are probably better off because they have also stripped out a load of service costs.

Unfortunately these extra services that have been removed out are the very things that differentiate them in the market place. They have also had a major impact on how they are perceived by ‘the traveller’. To me British Airways is a fine example of this although there are many more. BA has shed cost like a snake sheds skin. With all these customers supposedly wanting lower prices they either had to re-register as a charity or strip to the bone. They chose the latter and it is bearing dividends for them…in the short term, as the backlash is growing.

My mood was not improved last Sunday when I was reading the Sunday Times Colour Supplement. In it there was an article that was hugely critical of British Airways and its Heathrow hub. It self righteously condemned BA on everything from staff attitude to catering. I did not get a proper traditional English afternoon tea one interviewee bleated; another was depressed about meagre snacks and miserable staff.
Come on guys, you killed the airline BA was in order to create the one you say everyone wants.

BA simply charged too much for the modern world to stomach so what did they do?
They made themselves competitive by taking on the unions to reduce overheads, shed unprofitable routes, cut back on catering, and started charging for previously free services. And what do we do now they have become lean, mean and cheaper? We criticise them and mourn the demise of those dear little things we took for granted.

So is there a moral behind all this? I think there is. And the answer, in part was in the final paragraphs of that idiotic article. The piece listed all the things that passengers are supposed to want from an airline like BA (most were what BA used to do) and then it said on behalf of the traveller ‘We’ll pay – provided it’s good’ Wow!

So the traveller wants service after all? Maybe it is not universally about price? Could people really be prepared to ‘pay – provided it’s good? Your guess is as good as mine but in the meantime I suggest we could all take a good look at what we are turning this industry into and whether we are willing to pay to put part of it back together again – if it is good.

Better to never have something than see it taken away?

I wrote a few comments in my blog not that long ago about corporate entertaining. I tried to both entertain and inform but there was one particular argument I tried to put across. It was ‘never give someone something and then take it away’ i.e. once you invite someone somewhere regularly and then stop the reaction is worse than the initial benefit. This is exactly what is going on in travel at the moment but in a much broader sense.

Have you wondered why ‘low cost’ airlines like Ryanair manage to sell tickets much cheaper than say British Airways? Simple you might say, Ryanair is much more restrictive in timetable, booking conditions, departure airports etc. Plus they do not have the enormous cost infrastructure the big global giants have. Of course you would be right but it is far more than that, which brings me back to my entertaining analogy.

Nobody gets anything from a low cost carrier unless they pay for it. They never have and never will. What you get is a low cost and a menu of add on prices for everything from bags to card payment to seat reservations. That is the key reason for the low lead price and they absolutely depend on income from ancillary costs.

The big airlines are the complete opposite to this. Their prices are historically all inclusive but now they have to change rapidly to stem the flow of lost revenue to their new ‘low cost’ competition. So what do they do? They start looking at every distribution cost they incur and try to eradicate them. Things like free card usage, credit periods, use of agents and access to special fares. They will in fact ultimately end up pretty close to becoming low cost carriers themselves which is, to me, as worrying as it is welcome, in fact more so.

So the national airlines are starting to take away things they used to give away. Well actually they never gave them away. Instead they built the costs into those high prices they cannot compete with these days. As I implied in my heading, taking away something people are used to breeds discontent and intransigents. Pity the poor big airline, they are getting attacked for taking things away that their low cost competition never gave in the first place and get kudos for not doing so!

The travel world can be a cruel place sometimes. You only have to have a look at what is going on between all the supply chain intermediaries as the pain of this particular change is going on. Have a quick look at the rest of this blog if you want to see what I mean.

Would you believe it? Ryanair accepts facts of life.

I promise I am not becoming obsessed with Ryanair or Michael O'Leary but I just had to share this with you if you missed it first time around. The article is a direct quote from TTG and was written by their excelent reporter called Rob Gill so the credit for it (as well as acuracy or otherwise) goes direct to him and his publication.
Who would have ever thought he would utter such words and how much humble pie will he need to eat? It is probably correct too and has wider implications for other similar low cost airlines. After all how else can he grow except by entering new market sectors like business travel. Despite all their noise Ryanair has only around 3% of business people on their routes.

O'Leary sees end to low fares


Monday, September 13, 2010


Rob Gill



The era of low airline fares could soon be coming to an end according to Ryanair boss Michael O’Leary.

The outspoken chief executive of the no-frills carrier said the company had to move away from its “pile it high and sell it cheap” strategy because current average fares of £33 were unsustainable as costs increased.

O’Leary, who last week suggested that aircraft should be allowed to fly with a single pilot instead of two, admitted that Ryanair would have to look at a more “sophisticated” business model in the coming years.

“We have to move away from being obsessed with having the lowest fares in the market,” he said.

O’Leary admitted the airline might need a less controversial chief executive as the business matures over the next few years. But he added that he was unlikely to leave until the carrier doubles in size to around 400 aircraft.