Claus Berger from Air Scoop discusses reinvesting low-cost carriers.
When low-cost carriers appeared on the stage of European air transport's industry, few would have guessed the impact they'd have had. In less than ten years, low-costs companies struck an old, aristocratic model to the bone and introduced new rules in a sector that had become rigid and fusty. This injection of flexibility was undoubtedly beneficial for European travel industry that learnt to reinvent itself. Today, it seems the tables are turning: although successful, low-costs have stopped being innovative and may be on the verge of a slump. It is now time for them to infuse change again: but can they?
Low-cost model challenged
Although it seems that good days are ahead in terms of passenger traffic, the same cannot be said of the core of low-cost airlines' business model: low fares. Low-cost's fares, which distinguished them from legacy carriers and smashed the unaffordability myth of the air travel industry, are currently in danger.
The biggest peril ahead is definitely the rise of fuel cost. Despite the effort to waste less and less, the price of fuel has already caused a general, drastic increase of fares among all the low-cost companies and in an extremely short amount of time (for the doubtful lots, see the table below from the latest article from the Telegraph, on the luggage and booking fees).
(Source: The Telegraph)
In the meantime, several other threats to low-cost airlines are clouding the horizon: the infamous EU261 (or its sister, the EU ETS scheme), the growing reluctance towards ancillary revenues or subsides all around Europe, a social regulation from the UE and in many European countriesâ€¦ All of this poses a challenge to the traditional low-cost model, which, despite being flexible and agile, remains extremely sensitive to price variations.
These small changes are signs that the ground on which low-cost industry stands is shaking. What is at stake is a progressive merging of legacy carriers and low-cost airlines that would be more profitable to the former than the latter.
Renew with new: time for innovation
Ryanair's case is, for many reasons, relevant to understand how the low-cost model may be jeopardized in the coming years. What determines Ryanair is its ability to always provide the cheapest ticket prices. No frills, no tendering, no business class but "ultra-low costs." The ticket price has always been the signature of the Ryanair system. It is the "bait" that hooks so many passengers. As soon as the Irish airline is certain that its air passenger traffic was the biggest in Europe, it could subsequently offer deals to local airports for subsidies in exchange of tourists, collect money from ancillary revenues and secure the loot thanks to an elaborated plane buying/ plane leasing mechanism.
But as pressure grows in Europe on airport subsides, tax evasion or its hidden costs, the Irish operator could find itself under the obligation to change its price policyâ€¦ at the risk of getting less attractive.
However, even if Ryanair's success may happen to be disrupted in the coming years, the airline could still be able to withstand the shock, thanks to a solid treasury and growing passenger traffic. The same cannot be said from others, like Wizz Air – which is currently considering an IPO – or even Norwegian Air Shuttle, which momentum could be ultimately stopped by the emergence of a disputing context. All of these Ryanair-inspired companies may face the same turbulence that M. O'Leary seems to have foreseen and tries to avoid by changing its image and diversifying his airline's revenue streams (if not, how else could one explain the personal data selling which is being envisaged by Ryanair?).
Alas, with the EU's increasing regulation and the merging between models pacing up, innovation will not be attained with ancillary artifices and fancy gimmicks. Low-cost carriers have to think ahead and think fresh, as they always did. Renew with new. Strip from the "no-frill" image that became old-fashioned. Adapt to the digital era we've entered in. And manage to mix the low fares and premium services, like Vueling did.
This is the issue that the industry will have to address at the next World Low Cost Airline Congress. And the challenge that low-cost carriers must rise up to.
Stay up to date with Blue Sky, click here to subscribe to our enewsletter.