Over capacity in the Low Cost Sector - Discuss

[jmc-man]

CRANFIELD UNIVERSITY has published its second report into the low-cost scheduled airlines which have revolutionised short-haul air travel in recent times, particularly in the UK and Western Europe. The report says rapid growth of budget scheduled carriers in Europe is in sharp contrast to the charter airlines who have seen traffic stagnate or even decline. As the no-frills sector matures, however, a potential over-supply of airline seats means that some no-frills airlines will struggle to survive.

as quoted Here (http://www.abtn.co.uk/)

Comments or views

[Neo]

I can't see all of the newer airlines surviving. It's hard to believe that there are so many at a time when the industry is supposed to be in recession.

[Dewdrop]

I think this is an interesting arguement. Low cost routes often create new markets as they begin their operation, I think it makes perfect sense that this new market can reach saturation, and once this occurs the market as a whole will be very vunerable to any downturn in the industry.

[Anti Skid On]

Have a look at the many threads on D & G reporting points about trans-Tasman routes, where there is a potential bust up between established carriers (QF and NZ - who have reduced the inflight perks to emulate low cost ops), Freedom Air (low cost branch of Air NZ), the Asian airlines (SQ, MH, EK, TH, etc) who offer capacity too, and the ptential entry of Virgin under the guise of Pacific Blue.

It'll end in tears!

[AJ]

Yes, I think the bubble will evetually burst in the sense that many of the low-cost airlines with us now will either close up shop or be absorbed by someone else - it's already happened in the UK with Go and Buzz.

Having said that, I still think:

1) There is still plenty of market left - especially with eastern Europe, and the enlargement of the EU next May to incorporate 10 new countries

2) The low-cost market is here to stay - some airlines will disappear, but a few strong players (perhaps some of those existing now) will continue to be immensely profitable and popular

I can't help comparing the situation now with what occurred in the US after deregulation. Of course, Europe still has its state-owned players, but these are struggling.

I wouldn't like to put any figures on it, but I'm fairly certain some downsizing will occur in the future.

[FlapsOne]

AJ

It's not downsizing any more..........it's 'a period of negative growth!'

[Nerik]

Yes some low cost airlines will be killed off, but not by the big national/large carriers but by other low cost airlines and the limits of the market in itself.

It is clearly obvious that there are too many low cost players in the UK market and some (Buzz, Go, Virgin Express) are already suffering. In other markets there is room for great expansion.

What is for sure is that these airlines (the good ones e.g. Ryanair and Southwest) know how to keep their costs down very well and the only wayforward for airlines is to try and reduce wastage and extra costs in a bid to compete. However national airlines always find it difficult to make a transition from inefficient, over-staffed enterprises into lean, mean companies. Sadly most fail. In fact most low cost spin offs of major airlines ended up disastrously as it has been rpoven that the best low cost companies are those that start off with a low cost mentatility.

[Golf Charlie Charlie]

AJ, while I agree Eastern Europe has some potential, I think the populations of these countries are not yet at a level of prosperity to support such flights. I'd have thought that, while the UK may now have reached saturation, there is still some good growth potential in Italy and Spain, and probably Germany too. And I don't mean between these countries and the UK, I mean domestically within these countries and between each other.

In another part of the world, maybe Mexico as well, where there is a 'de facto' monopoly between Aeromexico and Mexicana.

[Grandad Biggles]

There is also tremendous potential in France except that the French government seem intent on protecting their own. A la Ryanair's recent situation
And I am not biased or have interests in any low cost operation.
Eastern Europe flights already seem to be on the cheaper side as they try and attract business and investment

[Spartacan]

It is my firm belief that the low cost model is here to stay. However, the sector is vulnerable to a hull loss. In that event the public will lose confidence (for a while) and the carrier concerned will be affected.

The low cost carriers that will survive will be those which have a single low cost product. Airlines which are mixing other business models with low cost will not survive; fundamentally their cost base is highter than true low cost rivals.

Of the pure low cost airlines there may be some consolidation. The issue is that the market will have to reinvent itself having reached saturation with the original product.

Something new is required. Either better, cheaper, or more user friendly to the customer.

I believe we are a long off there being over capacity in the market as a whole.

[HZ123]

There is potential within mainland EU and former eastern block. Surely much of the continued sucess or possible expansion is dependant on the pertinent economies and the condition of the recession or growth. This moning there was a report on Slovenia (re Popes visit) and the economy is in a dire state as it is within many of the eastern block so it may be some time before real growth is seen.

There must be a point at which the LC market customers cannot or do not wish to travel so frequently. The outcome must cause a period of negative growth which a previous contributer has already stated. The problem comes when in this condition what do you do with specific routes and a surplus of staff/ aircraft that cannot be gainfully utilised.

Future issues will arise with the protectionism of the French market and the eventual privitisation of AF, that will see a huge battle within mainland EU for customers and no doubt AF swamping the market when it has to work a lot harder for its business.

Finally I see no reason to doubt that within the next ten years there will be duty on aviation fuel and VAT or an eqivalent tax on airline tickets and this must impact on the industry, not forgetting that one day the railways will get their act together. The loss of a hull or magor terrorism is also ever present.

[Flap Sup]

Ahh, finally a thread without bashing. Interesting too.

Once the railways will loose their gov subsidiaries, the LC market should be able to pick up some of their traffic. Do the railway in the UK still get gov money?

There is still plenty of potential growth left, also in Europe, although the UK domestic market looks af if it is close to saturated. However, the regional market is still open to the LC.
My only concern is, that the smaller airports will in time only be served by LC that dosn't offer connnection services. These airports will offer only a few big cities and the very most popular mediterranian beaches.

Although TV is not making money, they really have an advantage: they offer connex services. Once FR or EZY start offering that, other LC should be concerned.

Just a few thoughts
FS

[avoman]

Yes Flap Sup, the railways in Britain get gigantic taxpayers subsidies. Meanwhile our own successful public transport industry is taxed and has few friends in government. I believe the railways will never get their act together.
On the topic of the thread, overcapacity in the Low Cost sector?Long term the answer is no, far from it. It is my belief underpinned by no research other than gut feeling and watching the growth in road traffic without end that the sector will grow and grow and grow. If convenient people will fly across the country to have lunch.
Naturally there will be individual failures and successful outfits not yet born.

[Groundbased]

I’d be interested to know what percentage of Low Cost passengers are business users these days. I think that this may represent the major opportunity to sustain current yields and possibly grow. Up to now the Low Costs have been ideal for people taking long weekend breaks, but it doesn’t matter if the flights are cheap if accommodation, trains, taxi’s meals etc push up the cost of a weekend break to such an extent that people think twice about going in the first place, especially if consumers are forced to rein in their spending over the coming months/years.

You won’t find many companies that aren’t looking to reduce their costs these days and one major area is in travel. In a climate where jobs aren’t so easy to come by people won’t just leave because the company changes its travel policy, they will have to put up with it. The one downside is airport location. A friend of mine travels to Brussels fairly frequently. His company policy changed to say that low cost carriers had to be used. The subsequent flight from, I think, Stansted to Charleroi was cheap but the associated time and expense of travelling from London to Stansted and Charleroi into central Brussels negated any savings made, and took longer.

In summary I think the model may have to evolve a bit to survive and it will be the airlines that can be bit flexible that will keep on growing.

[Eurekadelta]

The original growth of the low costs in the UK was largely due to the large numbers of people commuting between mainland Britain and Ireland.

Being a foreigner in the UK myself, I know how easy it is to rely on low cost carriers to cross the channel in order to visit friends and family. Without the loco's I would probably only be able to afford 1 or 2 visits a year!!

So - if European integration continues - and more and more people start working outside their home countries, there will be an ever growing requirement for cheap, reliable air transport.

[Nerik]

Do not underestimate high speed rail's possible impact on pax numbers on short routes. If transport eventually gets taxed according to the pollution it produces then high speed rail could become more and more attractive to customers. Also if airport capacities reach saturation delays will be more frequent thus lenghtening journey times. The rail industry still has a lot of re-organization to do, but the potential is there. Do not write it off.......

[LGS6753]

Interesting thread.

I see the locos in three separate sectors:
1. Challenging majors on business routes, EZY seem to do this (ie LTN to CDG, ATH, EDI, GLA, BFS etc)
2. Opening up new destinations essentially for leisure, a la FR model (Newquay, BLK, Pau, Dinard, etc etc)
3. Taking over from the charter airlines on seaside flights (they all do this, but look at destinations like AGP, LEI, FAO, TFS etc)

Some locos dabble in all these market types, others concentrate on one or two. I can't see FlyBE taking on majors on key routes, and I can't see EZY flying to Timbuctoo. Perhaps the most consistent is FR, who won't fly anywhere without a 'deal' from the airport operator (unless it's to extinguish a weak competitor like MYTL at BHX).

If you look at the market this way, there's a huge amount of further growth opportunities. The ones that fail will be those who choose their markets wrongly, get their pricing wrong, or are under-capitalised. The ones who should fail are the dinosaurs like AF, but I can't imagine M Chirac would allow that...

[Say again s l o w l y]

The only over-capacity in the market at the moment is not in the LCC sector, but with the traditional carriers like BA and AF etc. The LCC's have created a market for themselves that simply didn't exist in the past.
There will be a few casualties along the way, but overall I feel the Lo cost market will only get stronger.

Michael O'Leary said recently that it would be very difficult to sustain their current growth, but with his airline being not only cash positive but also earning margins of up to 36% this is not an enormous problem, and probably more due to reducing percentage points rather than numbers of pax as they are now so large.

The city seem to agree, with analysts value Ryanair significantly higher overall than the behemoth that is BA.

Many pax with all LCC's are now business passengers. Companies now ask their staff to travel no frills in return for a larger pay packet.

[Spartacan]

Just when you thought it couldn't get any biiger here comes another one from Britannia.

London Evening Standard. Read on . . .

http://www.thisislondon.co.uk/news/business/articles/timid67813?source=

[PAXboy]

If I may place my points in points?
The charters have little choice - they must develop a LoCo wing or they will lose market. If I can book an hotel in Palma and a flight to PMI, all online in a few minutes - then I do not need Brittania for an IT. Their market model will have customers for many years but it is now out of date and they stand to lose as much as the the full service companies already have.
The market will balance between full service and LCC but I suggest that it is too early to say what the percentages will be.
Whilst I agree about the expansion with Eastern Europe, to what extent is ATC congestion going to constrain that? Will we see LCCs having to run 767 sized a/c on some routes, as they cannot get enough slots to run multiple 737 rotations?
Further mix-and-matching between companies is a foregone conclusion. Which ones will merge and take-over others, will occupy much time in bars and Pprune!

[Dewdrop]

At first sight the expansion into Eastern Europe looks attractive, but the average Eastern european doesn't have the disposable income to make it worthwhile at present.

[FlyLowCost]

"The charters have little choice - they must develop a LoCo wing or they will lose market. If I can book an hotel in Palma and a flight to PMI, all online in a few minutes - then I do not need Brittania for an IT. Their market model will have customers for many years but it is now out of date and they stand to lose as much as the the full service companies already have."

Is it really cheaper??

I don't think so.

Your own holiday is not only accomodation and flight, but add the cost of the ground trasports at your destinations plus the holiday insurance and at the end it will be more expensive.

Just tried.

[PAXboy]

FLC: Interesting, must be why I'm broke. ;)

One of things that I have noticed is that many families are now established in France/Spain/sundry islands. When they go over, they already know the territory and which cab company to call etc. Also, if they own property, then it's a natural for flights only. They often lend the property out to friends or rent it commercially, again it'll be flights only. I should have separated those points.

With regards to trains: Someone was griping about the subsidy in the UK. Don't forget that the majority of European countries subsidise rail travel. For commuting and medium length journeys it is the most efficient way of shifting people. Not always the cheapest (when total cost is considered) but the easiest.