Fast, Cheap & Out of Control How Europe's deregulated airlines are using cut-rate fares, Web engines, and small airfields to shake up the flying game. by B.A. Warner When I reserved my seat on Ryanair flight 125 between London and Alghero, Italy, a few weeks after the terrorist attacks, I planned on a bit of room to stretch out. Little did I know that I had booked what appeared to be the toughest airline ticket on the planet. The plane was overflowing. Was it the lure to so many rain-soaked Londoners of a sun-baked Italian coast? Nope. It was the price tag. Alitalia charges $300 for the trip. On Ryanair, I paid $35. Thanks to such fares, Ryanair planes are flying at capacity all over Europe. Last August, the Dublin company logged its first-ever million-passenger month. And its biggest low-cost competitor, easyJet, is faring nearly as well. Even more amazing, both companies are making money. Last year, British Airways lost $1 billion on $13 billion in revenue. With $500 million in revenue, easyJet is obviously a much smaller business, but its 2001 profits spiked 82 percent to almost $60 million. Ryanair did even better. It made $117 million, and for a short spell even passed Lufthansa's $4.5 billion market cap to become Europe's biggest airline. The reason for the success of easyJet and Ryanair is partly economic. In a downturn, passengers of course flock to low fares. But profits don't naturally flow from rock-bottom prices. To make money, the budget airlines are outperforming their larger rivals. They've used the recent deregulation of Europe's skies as an opportunity to rethink Southwest Airline's decades-old low-cost template, adding technology and some creative thinking to uncover new revenue streams, master yield management, and minimize time on the ground. Some critics say there's only so much room for the budget carriers to grow. The field has become more crowded with the recent additions of Go, a carrier originally founded by BA that was spun off last summer, and Buzz, an offshoot of Dutch national KLM. Any more players, and the whole lot could soon start to feel the heat of an overserved market. They may also represent merely a transitional model. Once the dying European flag carriers shake out - as Sabena and Swissair already have - those remaining will be in a much better position to compete. The notion of low-cost airlines is hardly new. People Express has been out of business longer than it existed, but it lives on in the memories of many for the way it slashed fares and kept customers lined up for hours in a quest for an unassigned seat. Founded in 1980 with a handful of planes, People Express quickly grew to become the fifth-largest commercial carrier in the US, with 4,000 employees and more than 70 aircraft. But it never saw much in the way of profits - primarily because it suffered from high labor, marketing, and maintenance costs - and as it expanded, things only got worse. Today's budget carriers enjoy two important advantages that People Express never had - the Internet and some lessons gleaned from the rise of Southwest Airlines. Southwest existed in the early '80s, but only as a niche carrier. Since then, it has applied a simple, inexpensive template to become the fifth-largest airline in the US: Fly one class of jet (to save on parts and training) into secondary airports (to save on the large slotting fees charged at bigger airports), and forget about catering (to save meal costs and time on the ground). And the model still works. Southwest continues to do well in the face of its rivals, and it has even inspired competitors in the US, most notably the 2-year- old JetBlue, which turned a profit in the third quarter of 2001. One source of savings comes from the booking process. The budget carriers cater to a young, Internet-enabled clientele, nearly 80 percent of whom use the Web to buy tickets. This allows the airlines to minimize the use of ticketing personnel in favor of Web-based engines with real-time access to seat availability. As a result, Ryanair ditched its ties with travel agents last year and saved almost $9 million in six months. Unlike Southwest, Ryanair and easyJet save by shunning frequent-flier programs. Does that alienate customers? Ryanair has no idea - it doesn't spend on customer research, either. "We don't waste money," boasts Tim Jeans, Ryanair's head of marketing and sales. "One of the upsides of not doing any research: You never get bored." The end result is a 22 percent operations margin for Ryanair - 7 points higher than Southwest's. Perhaps most critically, the low-cost carriers are exploiting an abundance of underserved European airports. Ryanair periodically offers $9 one-way fares from London to Frankfurt. But in reality, the plane never makes it to Frankfurt. Instead, it flies into Hahn, 60 miles to the west. There, Ryanair pays much lower slotting fees. And the lack of congestion allows its planes to get back in the air quickly. There are many remote landing strips like Hahn all over Europe. Many of them have seen little traffic since World War II and are actively courting the budget carriers with enticing packages. In some of the small markets Ryanair serves, which Coyle refuses to name, the airline has managed to do away with slotting fees entirely. It pays nothing when its planes touch down - an unheard-of benefit in the industry. Other airports have been even more aggressive. Late last year, officials in Brussels began looking into whether Belgium's Charleroi Airport gave Ryanair more than $2 million in perks in exchange for having Ryanair name Charleroi a new continental hub. In no position to win a brutal price war - because they're already losing money flying within Europe - the national carriers have begun to concede some short-haul routes. In December, analysts speculated that BA, facing a 10-month decline in traffic and price pressure, would reduce flights from Glasgow to London. Aer Lingus has begun shelving flights from Dublin to Stockholm, Paris, and London. This is truly bad news for the nationals. With passengers shying away from transatlantic travel, the big carriers can't turn to intracontinental flights to bolster their business. They have become airlines with nowhere to fly.
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