The Background - The stellar performance of low-cost airlines has turned the travel industry on its head, as the sector has become one of the most successful in the airline business. The concept of low-fare, no-frills air travel first emerged in the US in the 50s and was brought to the UK by Freddie Laker. He introduced his scheduled transatlantic service, Skytrain, in 1977, charging £59 to fly from Gatwick to New York, and $99 from JFK International Airport to the UK. But it is only since the early-90s that the latest generation of low-cost airlines has taken the market by storm.
Low-cost airlines (LCAs) now account for 25% of air travel in Europe, according to Mintel - a remarkable achievement given its share of just 1% in 1991. In April 2006, the sector accounted for 300,000 flights, more than double the 142,000 in April 2001, according to transport information company OAG.
The sector has been a major contributor to the boom in air travel. The number of passengers flying to, from or between UK airports rose from 50m in 1980 to 191m in 2004.
In the UK and Ireland, Ryanair introduced no-frills short-haul flights in 1991 and, alongside easyJet, which launched in 1995, has developed the business considerably - though it was the EU's deregulation of the air industry in 1997 that was one of the biggest factors in the sector's growth.
Budget flights have had repercussions for the entire travel industry. Airports and terminals not previously considered by travellers have grown and other areas of the market, such as car rentals, have introduced similar low-cost, no-frills options. Furthermore, holidaymakers have become more willing to experiment with independent travel, putting together their own European holiday itineraries based on the cheap flights available. New air connections, meanwhile, have brought tourism to formerly neglected regions.
LCAs invariably use secondary airports and have high seat capacity. They generally keep to the short-haul market with no connecting services, sell direct (especially online), have limited or no seat assignments, limited luggage allowance and vary fares according to how long before departure they are bought.
The internet has been the perfect companion to the growth of LCAs. Electronic ticketing helps keep costs down and 75%-100% of tickets are bought online.
As operators of some of the world's youngest fleets, these carriers have bought into technological developments such as the introduction of curved wing-tips on Boeing 737s. Known as Blended Winglets, these help lower fuel costs by reducing the aircraft's fuel consumption and emissions.
As short-haul routes become saturated, some airlines are considering using a no-frills, or at least limited-frills, model on longer flights. A few are operating in the US and Australia, and last year Oasis Hong Kong Airlines started a budget route from London to Hong Kong. Its fares include seat-back entertainment and food, but options such as toiletry kits have to be paid for separately.
LCAs have presented a significant challenge to the major carriers, many of which have altered their fare structures to be more in line with the budget operators. This means the price gap is narrowing, especially if passengers book early.
The inevitable result is that airlines' profitability is falling as the yield per passenger remains low due to strong competition and high fuel prices. Ryanair has a profit margin of more than 20%, but for most budget operators it is 3%-11% - hence their hike in charges for excess baggage, credit-card payments and in-flight food.
EasyJet and Ryanair account for 57% of European low-cost flights. While easyJet favours Luton and Gatwick, Ryanair has opted for Stansted and Luton. Bmi's low-cost service, bmibaby, flies from Heathrow. Beyond London, the regional airports used by LCAs have experienced strong passenger growth.
EasyJet, based at Luton, was started by Stelios Haji-Ioannou; his family remains the major stakeholder. The airline added Stansted to its routes when it acquired Go in 2002.
Ryanair is now Europe's third-biggest airline, based on the number of seats sold, behind Lufthansa and Air France. It flies 400 routes serving 127 cities. Last year it extended beyond Europe for the first time, flying to Morocco.
The element of inconvenience inherent in low-cost air travel means it has long been embraced by younger travellers such as backpackers. However, the market has grown to include families, young urbanites and business travellers, especially those working for SMEs.
Samantha Day, easyJet's publicity manager, says about 20% of its passengers are business travellers, a group it is actively courting. 'We have been developing our product to target them,' she says. 'We offer low fares, attractive main airports, high frequencies, flexibility to make changes, online check-in, generous hand-baggage allowance, speedy boarding, and the option to hop on an earlier flight for free. We are looking at further innovations to target them.'
This sector has experienced significant growth - averaging more than 35% a year over the past five years - and while it is expected to continue to grow, the rate is likely to slow as the market approaches saturation and there is over-capacity in the system.
Wider consideration of the environmental impact of air travel by consumers may also affect the market.
LOW-COST UK AIRLINES BY PASSENGER AND DESTINATION NUMBERS, 2005
Carrier Passengers Destinations
1 easyJet 29,600,000 67
2 Thomsonfly 9,517,000 104
3 Monarch Airlines 5,402,000 22
4 Flybe 4,683,000 47
5 MyTravelLite 4,385,000 20
6 bmibaby 3,484,000 18
7 Flyglobespan 946,000 37
LOW-COST AND ECONOMY-PACKAGE CARRIERS BY 2006 ADSPEND
Advertiser Spend (pounds)
1 easyJet 21,412,736
2 British Airways 19,628,970
3 BudgetAir 8,045,868
4 Ryanair 6,432,695
5 Flybe 6,420,958
6 Lufthansa 6,304,820
7 bmi 5,281,370
8 Jet2.com 5,187,958
9 Flyglobespan 3,216,088
10 Virgin Atlantic 3,131,821
Source: Xtreme Information
SCHEDULED PASSENGER TRAFFIC FROM UK AIRPORTS TO EUROPEAN DESTINATIONS
Airport 2005 2001 % change
1 London Stansted 17,356,116 9,740,204 78.2
2 London Luton 6,214,292 2,808,471 121.3
3 Birmingham 4,393,438 3,033,832 44.8
4 Liverpool 2,858,728 1,213,227 135.6
5 Bristol 2,320,867 909,684 155.1
6 Nottingham/East Midland 1,918,430 435,502 340.5
7 Edinburgh 1,837,146 1,327,825 38.4
8 Newcastle 1,615,281 705,947 128.8
9 Glasgow Prestwick 1,515,805 453,864 234.0
10 Belfast International 566,574 181,687 211.8
Source: Civil Aviation Authority
ANALYST COMMENT - SANDY LIVINGSTONE, DIRECTOR, ENLIGHTENMENT
The act of taking a flight somewhere became more matter-of-fact in the 70s and 80s, and as airline safety records improved, it was surely inevitable that price would become the main deciding factor.
And it became so, even among the relatively wealthy, who, over the years, replaced the single annual trip abroad with multiple sorties to undiscovered cities, to visit friends or travel to their own properties dotted around the continent no more than a couple of hours' flight time away.
Among ABs aged 20-plus - a group that has grown by 60% over the past 20 years - there has been a 250% increase in the number who rate price as the most important factor when deciding which airline to fly with. Such a policy is easy to understand when the data also shows that, among this group, the number who own property or timeshares abroad has quadrupled to almost 1m over the past 20 years and the number who enjoy at least three holidays a year is two-and-a-half times higher than in 1993.
This level of expectation to travel, even among the relatively wealthy, cannot be supported by anything other than low-cost supply; the sheer (and growing) volume of demand makes the whole thing add up. The expectation to travel in comfort and with high levels of service has slightly declined over the past five years - certainly travellers' willingness to pay extra for it has taken a knock as they have become used a to new level of delivery.
The effect of the low-cost sector today is that these prices are no longer perceived as discount - all other operators are having to justify their premium against a new low benchmark, which has become the 'standard' to consumers.