European 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 asked, 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: [more]

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 businesses 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 and peak flights and increase fares on those services that are popular (good timings, etc.) up to the highest level you can get away with. Then you 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, move these charges to a grey area described as "admin fees." On top of this, 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!

This post was republished with permission from the blog of former managing director of HRG UK Mike Platt.