View Full Version : Swing low, Sweet chariot (How Low can they go)

1st Dec 2003, 16:44
Swing low, Sweet chariot

A budget airline war is set to take off in Australia. But how low can fares go , asks John Wright. And will we one day fly for free?The theory is that lower fares, as in Europe, must inevitably create a self-feeding demand for air travel

EVEN BY Michael O'Leary's standards, the pronouncement was extraordinary. The controversial and abrasive Irish boss of the giant, low-cost European airline Ryanair had called a press conference in London, and what he told journalists seemed hardly believable . . . in the not-too-distant future, every airline traveller could be flying for free.

In fact, he said, airlines could be paying people to travel with them within a few years.

"There's no end in sight to how low fares can go," he said.

But was this all pie in the sky, even for a man who already had cut the price of flying on some routes to less than the cost of a parking space at Heathrow ; the man who had taken a small, family-owned Irish airline and in a few years transformed it into one of Europe's biggest ?

Less than a fortnight ago, O'Leary's prophesy came true: Ryanair announced that for a limited time passengers could book to travel one-way on any of the airline's routes and not only pay nothing for the fare, but also receive pound stg. 1 ($A2.40) from the airline towards the cost of airport and government taxes.

Ryanair's online booking service was swamped.

"The demand for our crazy offer, where we pay passengers pound stg. 1, has been phenomenal," trumpeted Ryanair's head of communications, Paul Fitzsimmons. "Ryanair.com, Europe's largest travel website, had its busiest day ever yesterday with more than 200,000 seats sold in a matter of hours. "

Promotional stunts like this (earlier this month Ryanair was offering a pound stg. 1 fare from Glasgow to Gothenburg, Sweden, and a pound stg. 1.99 fare from London to Frankfurt and other destinations), on top of a low-cost philosophy which already has revolutionised European air travel, has made Ryanair the first choice of millions of travellers and the most highly valued airline in Europe. It has a market capitalisation bigger than mainstream giants British Airways and Lufthansa.

In 1996, according to airline industry figures, about 2 million European travellers chose low-cost airlines.

In October, Ryanair alone carried 2.07 million passengers, bringing its total for 12 months to 20 million. That was achieved, the company says, with a passenger load factor of 82 per cent, or just over four out of every five available seats occupied, and with a 50 per cent growth in business over October, 2002.

Figures like these, even for a UK-based market which has become used to cheap air travel and which has been offered rock-bottom overseas air package holidays for years, seem staggering, and they point to a seemingly inexhaustible demand from a travelling public which, having discovered ultra- cheap air travel, can't get enough of it.

"For years flying has been the preserve of the rich," O'Leary told one British journalist. "Now everyone can afford to fly. "

A question now being pondered in Australia, which could be on the verge of a new airfares war with the planned introduction by Qantas within months of a low-cost domestic airline to take on Virgin Blue, is this: Could it happen here?

Europe's Ryanair-led revolution has been built on a huge population base, big passenger volumes, surgical operational cost-cutting by the carriers, the rapid and universal adoption of online booking (itself a big cost-saver to airlines) and the realisation by an enlightened travelling public that flying is no more special than catching a bus or a taxi.

Will Australians come to think that way, too, seduced into abandoning traditional in-flight service and notions of airline loyalty by whichever operator offers the lowest fare? And can fares drop to a level which might spark a major change in Australian travel habits ?

This week, low-cost operator Virgin Blue, which in three years has captured about 29 per cent of the domestic air travel market and sparked the Qantas low -cost challenge, was offering one-way, online booked fares between Brisbane and Cairns for as low as $129, Brisbane and Proserpine for $129 and Brisbane and Sydney for $99.

On Thursday, the operator announced a future Gold Coast-Perth service with a promotional one-way fare of $149 and standard mid-week fares from $199, for the first time making the Gold Coast a significantly cheaper holiday than Bali for West Australian travellers.

Qantas, through its online Red e-Deals booking service, this week was advertising a fare between Brisbane and Cairns for as low as $152, Brisbane- Proserpine for $139 and Brisbane-Sydney for $103. These fares, and Virgin Blue 's, are subject to charges for changes or cancellations and other conditions, but represent a significant discount on standard, fully flexible fares.

According to industry analyst Peter Harbison, however, these and other low fares on the lucrative Melbourne-Sydney-Cairns tourist route, which Virgin Blue has penetrated for a 40 per cent market share and on which the airline plans more flights next year, are likely to be discounted further after Qantas starts its low-cost offshoot.

"Fares might not change a whole lot, but they are likely to fall, yes," says, Harbison, the managing director of the Centre for Asia-Pacific Aviation. "We have had a cosy duopoly in the past year, and they (Virgin Blue and Qantas) have not been pricing as aggressively as they could have done.

"Virgin Blue has had a distinct interest in maximising its profits. It could have priced lower than it has and still maintained viability. It made $150 million profit. The past 12 months have been the most profitable ever for airlines in the Australian domestic market.

"The way for Qantas `Skimpy' to win back (national) market share will be to concentrate on the discretionary tourist routes, but the crucial thing is not how much lower the airlines go, but how many seats they make available at the lowest prices. "

Analysts like Harbison and tourism industry leaders believe the domestic airline industry is set to change dramatically, with low fares reshaping the travelling public's habits. The theory is that lower fares, as in Europe, must inevitably create a self-feeding demand for air travel -- especially on the more lucrative leisure-focused routes -- from travellers who will take to the air either more often or even for the first time simply because it will be so cheap.

"Putting it simply, the more value fares that are in the market, the more likely Australians are to travel domestically and spend up big when on holiday ," said Christopher Brown, managing director of national tourism industry body , TTF Australia. "We have seen the pivotal role that Virgin Blue has played in delivering low-cost options for Australia's airline passengers and expect the entrance of a second domestic value carrier to continue this trend. "

The Queensland Government agrees, predicting the low-cost Australian revolution-in-the-making will have a significant impact on both the aviation industry and consumer travel trends.

"First, there will be an increased number of carriers satisfying more sectors of the market, and this greater segmentation will offer more choice for consumers," says Tourism Minister Merri Rose. "Lower air fares means that domestic air travel will compete for consumers' discretionary expenditure and become a more viable option for an increased number of travellers.

"It is also expected to create shifts in modes of transportation used by some travellers, encouraging people to consider air travel instead of buses and rail. Competitive airfares and increased frequency of flights will most likely stimulate latent travel demand. However, for the long-term survival of any low-cost carrier, the pricing must be sustainable in the long to medium term. "

Sustainability, in the case of European low-cost operators like Ryanair and American budget-fare airlines like Southwest, has meant reorganisation and operational cost-cutting on a scale never seen before in the global industry.

Ryanair's low-cost model, for example, involved a brutal approach to staff cuts, longer working hours but better pay for the surviving employees, the use of only one aircraft model (the Boeing 737), allowing for increased efficiency and savings on servicing and parts and, importantly, a switch from selling tickets through travel agents to selling them directly online, thereby avoiding agents' commissions. Ryanair also earns money through services or goods sold through its website by other providers and even has a dedicated Ryanair shopping site.

The trade-off for the customer, apart from lower fares, means flights without meals, no assigned seating, strictly enforced and lower baggage limits and a policy of no refunds under any circumstances. If the customers are unhappy about that, they aren't showing it. Could Australians get used to that ?

"It has all been predicated by getting their costs down by 30 per cent-plus," said Brisbane Airport Corporation's airline and cargo commercial manager, Cam Macphee.

"It's all about filling planes. Some traditional companies put customers on top of the pyramid; they (low-cost operators) put cost-per-customer on top of the pyramid. Low-cost airlines, as an example, focus on turnaround times, typically using `stand-off' positions at the terminal instead of air-bridges. If you can get a turnaround down to 20 minutes, say, you can have that plane in the air for an extra 90 minutes a day. "

MACPHEE, in common with others in the industry, is cautious about predicting an air-travel revolution in Australia of the magnitude of that which has overtaken Europe and the US.

Passenger volumes, after all, are nowhere near comparable to those which sustain those markets. But Brisbane Airport, which last financial year handled 9.3 million domestic passengers, expects that a flat growth rate since 2000/ 2001 will accelerate as lower fares put air travel within the reach of more people.

Australians might get a peripheral taste from next year, though, of the new aviation world being driven by low-cost operators.

Virgin Atlantic, which flies between London and Hong Kong, is planning to take on Qantas and British Airways on the "Kangaroo Route" by extending its services to Sydney with daily flights that would be "pro-consumer" and "pro- competitive".

And in mid-2004, a Brisbane-based entrant into the industry, Backpackers Xpress, plans to run scheduled Boeing 747-400 services from Manchester and Munich to Melbourne via New Delhi and Bangkok, with a fully flexible return fare of between $1500 and $1700. But the price isn't likely to be the most remarkable thing about the service.

The jets, festooned with advertising which could include engines painted to look like beer cans, will have an inflight bar or "pub" at the front, live entertainment which could include karaoke and Aboriginal dancers and didgeridoo players, rentable DVDs and a snack service selling pies and pizzas.

"The UK long-haul market is growing at 40 per cent a year . . . it is huge," said Backpackers Xpress managing director Glenn Millen.

"Backpackers are basically travelling for fun and adventure, and the strength of our product is that we will deliver a lot of fun and flexibility for that specific market while operating, obviously, to a very high standard. "

Perhaps this is just the beginning. Fully packaged air holidays into, out of and around Australia at hitherto unheard-of prices could flow on from the low- fare climate, and one industry player, Brisbane-based travel retailer Flight Centre, already has announced its entrance into the charter holiday trade with a proposed seven-night, twin-share package to Cairns for less than $400.

Travelling by air will be a matter of price over loyalty, taking a short air package holiday no more remarkable than driving to the coast for the weekend. As analyst Peter Harbison says: "We ain't seen nothing yet. "


1st Dec 2003, 17:11
When they go as low as they can, the competition will be decided by the cabin staff on hand. I flew on QF570 Per/Syd last Saturday. It was as comfortable as one can expect, jammed into an EY seat half way down the full cabin of a B737-800. Can not complain about the service which was very professional in every respect but did pity the F/A in my section, a very pretty face and kind but having trouble walking straight in the narrow aisle due to a rather wide empennage. Virgin Blue has a distinct advantage in this respect and so will Virgin Atlantic when they start operating into Oz.

Sheep Guts
2nd Dec 2003, 07:14
How low they can go, and for how long, will be determind by their StartUp Capitol and running capitol, and how leveraged the Company is . IE how much of their Gross Profits go to paying off loans and leases. If a Company is too highly leveraged, it very unsteady and can tumble with the slightest disruption, eg. economic downturn.


compressor stall
2nd Dec 2003, 08:27
They can go as low as we pilots prostitute ourselves. :ouch:

3rd Dec 2003, 08:00
Comp Stall, pilots salaries will have very little/no effect on fares. They will have a positive effect on the company's bottom line if they are reduced. They hqve never been more than a few % of the operating costs, so by halving them, only ever knocked a $ or 2 off a SYD-MEL fare anyway. That's the argument the AFAP used back in 89, and it's probably one of the only truths they did use during that time.
Pilot salaries are inconsequential in the overall costs of fares. They only improve profits when the management succeeds in screwing the pilots.

Sheep Guts
3rd Dec 2003, 08:20
VB Capt.
Maybe pilots wages by them selves are inconsequential, but that means baggage handlers, Customer Service agents, Engineering,Sales Staff, Management, etc etc. are even more inconsequential, but are still labour costs and need to be included in Direct Labour Costs per Revenue Hour of the Aircraft. Surely it is all relative in the end, and in the end its the bottom line and the bean counters that determine your future. Getting the right mixture of Low Fares and reasonable wages is very important. They go hand in hand actually. Its when Airlines seperate these issues, that they become undone.


Luke SkyToddler
3rd Dec 2003, 15:58
Ryanair pilots are actually on pretty good coin, it's a lot better deal than many of the long-established full service airlines up here in pommie land.

Anti Skid On
5th Dec 2003, 06:46
Ryanair pilots are actually on pretty good coin

That is after they have paid to apply and paid for their own type rating.....