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!

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.