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At your Leisure - 01 March 2004
Low Flying Fares: An End to Cheap, No Frills?
Low cost flying throughout Europe is a reality. Hunt around and you can get a return flight for under £50; at times, airline seats are as cheap as bus tickets. How has this happened and what costs are there to us as consumers or to society as a whole?
You can also view the low cost airlines industry as a Mind Map.
How did it all begin?
In 1971, Southwest Airlines started the first low-cost services, operating in the USA between Houston, Dallas and San Antonio, Texas. More on the development of this pioneering approach can be found at the company's Web site (http://www.iflyswa.com/about_swa/airborne.html).
Main Budget Airlines (Operating from UK and Ireland)
- Air Scotland (http://www.air-scotland.com)
- BMI Baby (http://www.bmibaby.com/bmibaby/en-gb/index.aspx)
- easyJet (http://www.easyjet.co.uk)
- MyTravelLite (http://www.mytravellite.com/skylights/html/home2.htm)
- Ryanair (http://www.ryanair.com)
easyJet and Ryanair: The Two Market Leaders
In Europe the two dominant 'no frills' airline firms are Ryanair and easyJet.
easyJet:
- In November 2003, the company carried 1.7 m passengers, an increase of 15% on Nov 2002.
- The firm's Load Factor (the ratio of passengers to seats available) reached 81.5%, up 1% on Nov 2002.
- easyJet's profits for the full financial year to the end of September 2003 fell 28% to £52m.
- More information about easyJet can be found in the Biz/ed easyJet Business Profile (http://www.bized.co.uk/compfact/easyjet/easyindex.htm).
- Balance sheet and profit and loss account data for the company is located in the Biz/ed Database of Financial Information (http://www.bized.co.uk/cgi-bin/ratios/ratiodata.pl).
Image: Reproduced courtesy of easyJet airline company limited.
Ryanair:
- In November 2003, Ryanair carried 2m passengers; the first time ever that the firm has carried more passengers in Europe than British Airways (BA) who flew 1.8m passengers in the same period. The Irish-owned company aims to become Europe's largest short-haul carrier by 2010, overtaking BA, Air France and Lufthansa in the process. Its fleet of planes will rise to 149 aircraft in 2008/09, from a total of 68 at the end of Sept 2003.
- Ryanair's Load Factor in November 2003 was 83%, down 1% on November 2002.
- The firm plans to increase passenger volumes by more than 100% in the next 5 years, from 24m to 50m.
- In December 2003 they announced their 10th and 11th European bases in Rome (Ciampino) and Barcelona (Girona).
- Ryanair's profits for the six months to the end of September 2003 were up 16% to £120m.
Image: Copyright Anders Presterud, airpics.com.
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Growth in Passenger Numbers using UK Airports
Numbers of passengers using UK airports have grown steadily in the past twenty years:
| Year | Passengers (m) |
|---|
| 1980 | 50 |
| 1990 | 90 |
| 2000 | 180 |
UK air traffic is predicted to rise to an annual total of 500m passengers by 2030.
How do Budget Airlines charge such Low Prices?
Clearly, budget air travel and the companies that offer cut-price flights are a big success story, but how do they do it?
Low cost flights are possible because of low operating costs for the airlines that provide them; otherwise they wouldn't continue to do so. What they do is to cut the cost of operating the flights on their chosen routes by:
- Flying to and from airports that offer cheaper take-off and landing fees
- Flying more often than other carriers
- Using online and telephone booking systems to eliminate travel agent commissions
- Using a ticketless booking system
- Ending free meals and drinks during flights
- Not allocating specific seats to passengers
- Accepting less central check-in desks
Image: easyJet's website - the company sells around 90% of its seats online
Not all the budget airlines use all of the above methods, but many of these cost cutting measures are commonly used.
Each low cost airline also has its own price system that is much more sensitive to demand for tickets than the system used by standard airlines. An interesting exercise is to use the Web sites of a budget airline to watch the price of flights move as you change the dates of travel. In addition, these airlines release ticket prices at cut prices, for a limited period. After that time, prices increase quite steeply, then fall again as the flight date approaches.
Incentives to Airlines
The authorities who run airports often offer subsidies to some airlines. They hope that, by attracting flights, the local economy will benefit from the extra money spent by visitors. Ryanair is a good example of an airline being offered such incentives. Information about this practice emerged when Ryanair suspended its flights from Stansted to Strasbourg. They were forced to take this action whilst the courts decided if the subsidies paid to the airline by the airport's owners, Strasbourg Chamber of Commerce, were illegal. Ryanair's Brussels-Charleroi service is attracting similar attention from the European Commission.
European Regulation
The European Commission is investigating Ryanair's financial arrangements for using the airport at Brussels-Charleroi. In essence, the Commission is concerned that the market is being 'rigged' by airports offering 'sweeteners' to airlines wanting to locate their services there.
If these airports were privately-owned there would be less of a problem; but as Brussels-Charleroi and many French airports are state owned, they can be accused of abusing state funds.
Ryanair believes that the outcome of the investigation will be a ruling against the airline. They might then be required to repay financial inducements paid to them by the regional government of Wallonia (French-speaking Belgium), equivalent to about £3m per year.
The Commission may well also target financial incentives paid to airlines by privately owned airports. If the deals made on airport taxes can be shown to favour particular companies, then they could be ruled as illegal public subsidies.
In the event of a negative ruling, Ryanair could:
- Appeal to the European Court of Justice
- Ask the Wallonian regional government to privatise Charleroi airport
- Close their base at Brussels-Charleroi
Taxes and Subsidies: Threats to Budget Airlines
It is tempting to believe that the growth of 'no frills' airlines will continue in the future, with more competitors entering the market in years to come. But there are significant threats to the whole of the aviation industry that pose the greatest danger to the budget operators.
The forecast growth in the air travel industry is a major public concern. The Government is worried that, without action, the impacts of the expected massive rise in passenger numbers by 2030 could have negative effects on:
- Air pollution
- Noise pollution
- Public safety
- Traffic congestion
But what action can be taken to avoid these damaging results? The aviation industry is heavily subsidised by the public. Removing these subsidies could reduce demand for air transport by making the market in transport more equal. Train travel, for instance, is less subsidised and as a result, many UK rail routes cost more than equivalent flights.
Image: The impact of noise pollution - a plane flies over residential homes near Heathrow Airport.
Title: Possible Additions to Heathrow. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig)
Estimates of the total subsidy to the UK aviation industry are in the region of £6 billion per year. This comprises the following subsidies (or negative taxation):
- Aviation fuel is exempt from tax
- If a fuel tax was applied, the Department for the Environment, Transport and the Regions (DETR) estimates that there would be only a small impact on demand (100% tax leads to a 10% fall in demand).
- 75% of flights are for leisure purposes. Compared to car use, which is essential to many people and is taxed heavily, leisure travel is a 'discretionary' activity.
- Air fares are VAT exempt
- 17.5% VAT applied would generate £2.5 billion per year and cut demand by 22% to 268 million flights.
- Duty Free for flights outside the EU
- Removing this subsidy would yield approximately £400 million per year and cut demand by 1% to 266 million flights.
- Cap on Landing Charges
- The Civil Aviation Authority (CAA) sets a cap on airport landing charges. Airports can charge below this level, but are prevented from going above the price cap. This allows airports to charge lower costs to airlines than they would charge otherwise.
It is, of course, highly unlikely that all of these subsidies would be reduced at a stroke. One can only imagine the bitter campaigns that would be launched by the whole aviation industry, let alone the budget operators and middle class second-home-on-the-continent owners in the UK.
But the UK Government could tax this industry and get away with it on grounds of fairness and the environment. As the Government is looking for ways to close the gap between what it spends and what it earns, the budget airlines must be concerned. Changes to the lightly taxed current approach might be expected to have the greatest impact on the low cost carriers' business models.
Activities:
- Use the list of 'no frills' airlines' Web sites to research into the pricing of budget air travel. Try to find the price of a ticket to a European destination of your choice, for the following days:
- Tomorrow afternoon
- Two weeks' time
- Two months' time
Compare the prices and availability for the days shown and make comments about what you find.
- Use the following Web resources to find arguments against increased air travel:
- Draw up a list of benefits and costs for the budget airline industry. Use the information you obtained for Task 2 above.
- Ryanair axed 9 unprofitable routes in 2003. These included all three of its services within Scandinavia (Stockholm to Oslo, Tampere and Aarhus). Also affected are 4 routes from London Stansted to Ostend, Maastricht, Reims and Claremont Ferrand. Finally, services from Frankfurt to Malmo and Brussels to Liverpool have also been cut. This has angered many regular passengers using these cheap routes to get to their second homes in Europe.
- Scandinavia is the name of a number of 'Nordic' countries. Find out which countries within this region are affected by Ryanair's decision to cut services.
- The services withdrawn by Ryanair are unprofitable for the airline. What alternative measures could the company take if it wanted to keep its customers on these routes satisfied?
- What alternative forms of travel could the angry second home owners use to get to their overseas properties?
- Why might the budget airlines be badly affected by changes in taxation levied by government?
- Use a map to find out why some Ryanair passengers have complained that their flights to European cities have actually left them many miles from their expected destinations. What impact does this have on customer expectations of low cost travel? An article from the Guardian 'Ryanair flouts watchdog ruling' may help (http://media.guardian.co.uk/advertising/story/0,7492,1104179,00.html).
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