Can low-cost airlines be beneficial to incumbents? February 1999

As low–cost airlines increase their presence in Europe, strategists at established carriers are uncertain as to where the low–costs’ traffic is obtained from. Is it diverted from other airlines and, if so, which are the most vulnerable? Or can low–costs generate new traffic, and if so what are the implications for established airlines? Here Dr Nigel Dennis, senior research fellow at the University of Westminster’s Transport Studies Group, tries to answer these questions by looking at some of the available evidence.

The table below considers the short–term impact following the spate of new routes introduced by low–cost airlines in the summer of 1998. These have been divided into two groups for the purposes of comparison. All airports in the vicinity of each new route have been included to assess the impacts on traffic.

The table analyses the major routes between London and Milan (new entry by Go), Rome (Go), Oslo (Ryanair) and Geneva (easyJet). It shows that the low–cost carriers took 11% of the market in their first summer (up from 1%, which was an existing Debonair service to Rome). The total market for these destinations grew 16% — well ahead of the European average. Conventional scheduled services still enjoyed growth of 8%, suggesting that there was no net loss to the new entrants — although this may partly be achieved by established airlines launching cheaper fares to compete with the low–cost operators. A closer study suggests that Heathrow services grew by only 5% while Gatwick and London City saw a marginal decline. Other scheduled services from Stansted grew by 75% mainly due to expansion by KLM uk and partners. Hardest hit were the charter airlines, who scaled back to only 3% of the market in 1998. In terms of airports, Stansted forged ahead of Gatwick when all services are included.

Secondary success

The table also considers the secondary routes — all by Ryanair, to Lyon/St. Etienne, Toulouse/Carcassone, Venice/Treviso and Florence/Pisa. These have seen more dramatic growth — up 38% year on year, which may be because they are less mature markets and also because some of the airports Ryanair is using are so distant from the main city that they practically count as new destinations from London! It is also likely that fares were higher on average from these places than in the dense markets, hence the price differential of the new service is greater. Ryanair has captured 21% of the market, but not at the expense of Heathrow where traffic has also grown by a handsome 26%. Gatwick has again fared less well and the charters have lost ground badly.

Gatwick appears particularly vulnerable because unlike Heathrow it is not the airport of preference for most users, and once a cheaper service becomes available from Stansted some users will be readily diverted. Heathrow also enjoys a degree of protection from its hub traffic that is not available to the low–cost airlines, and although British Airways has been developing a hub at Gatwick this is of a much smaller scale. Apart from charters, the most vulnerable airlines are those without a hub at either end of the route. Air France has already given up on London–Nice and KLM uk on London- Copenhagen, for example, and similar pressures would be expected to apply to Swissair on London–Geneva.

It is difficult to draw conclusive findings on the generation of traffic because these markets may have been targeted by the new entrants since they were seen as having the right conditions to grow rapidly — regardless of any low–cost service. It would also be premature to sound the death–knell of the charter airlines. In these markets (France, Italy etc), charters were never the major players and with a lot of independent holiday–makers the traffic is ideal for capture by low–cost scheduled airlines. Where inclusive tours dominate — as in much of Spain, the Greek Islands etc — the charters have little to fear, as their integration with tour operators will ensure their dominant position.

The table on the right considers the development of low–cost operations introduced around 1996. It can be seen that the low–cost market share is typically around 10% although additional low–cost carriers will boost this (20% on Barcelona and Glasgow). Nice has also been an unusual success story for easyJet. This suggests that by raising capacity through more flights or larger aircraft, the low–cost airlines can do better than initial market shares tend to suggest. In all cases except Nice, the total market growth has been much greater than average, implying that the low–cost carriers have not led to traffic being lost from the conventional services.

The Ryanair effect?

The only European market that enables a longer term study of the impact of low–cost airlines is that between the UK and Ireland, where Ryanair has been an essential part of the scene since liberalisation in the mid 1980s. Traffic on the London–Dublin route has quadrupled since 1985 (see page 12, Aviation Strategy June 1998), propelling it to the position of busiest international route in Europe. This is quite an achievement when one considers that the number of people carried on this route each year is not much different to the entire population of the Republic of Ireland!

It is instructive to consider the development of the total UK/Ireland market over this time period (1984–1996), compared with other markets such as UK–Germany and UK–Netherlands (which entail similar sea crossings). Data shows that UK–Ireland has grown faster than these other markets, with about an extra 1m trips per year in 1996 than would be expected on the basis of its historical position.

As for modal split, whereas only 30% of UK–Ireland travellers went by air in 1984, this rose sharply to 53% in 1990 as the numbers going by sea actually declined. Since 1990 there has been strong and almost equal growth in both air and sea modes, supported by a wider range of ferry services, including new high–speed craft. The Dutch and German markets have also seen a growth in air transport’s market share but from a higher base. Again, most of this occurred during the 1980s. The Channel Tunnel has since captured a modest share of these markets but it appears to be at the expense of sea rather than air services.

The overall implications of this are that an additional 1m air trips on UK–Ireland appear to have been generated by low–cost air services and there has been no net impact on the traffic moving by sea. The low market share of air in 1984 to Ireland does beg the question as to whether the base point in this market was artificially suppressed, perhaps by air fares that were out of line with other destinations.