Transport Airlines

Why Low-Cost Carriers Are Still Making the Aviation Industry Nervous

Jun 24, 2014 6:30 am

Skift Take

IATA may be right that Europe poses special market challenges to airlines, but the ongoing success of LCCs in the market proves that IATA members may need to look inwards for the answers to their woes. And much as Tyler might want it to, the infrastructure argument just doesn’t hold water.

— Marisa Garcia

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Mats Hagwall  / Flickr

Passengers at London's Stansted airport. Mats Hagwall / Flickr


In his official remarks to attendees at the International Center for Competitive Studies in the Aviation Industry, Rome this June 17, Director General and CEO of IATA Tony Tyler expressed frustration that European market conditions do not foster the success of legacy carriers in the region.

At the SITA IT Conference in Brussels this week, he also told attendees that low-cost carriers (LCCs) competing against legacy carriers “are taking advantage of the infrastructure [legacy] airlines have built.”

The two points are not unrelated and form a part of a greater argument which reveals how IATA members feel about the continued growth and profitability of low-cost carriers, particularly in Europe.

The success of low-cost carriers in the European market weakens and in some cases contradicts IATA’s arguments that infrastructure in Europe is inadequate to support growth, and that regulations and taxes imposed on airlines by European governments are the root cause for weak profitability in this market.

“European aviation is financially the weakest amongst the world’s major regions,” Tyler said in his June 17 remarks. “Witnessing first-hand the plight of Alitalia—among the worst cases—this should not come as a surprise for you here in Italy. We expect European airlines to realize a post-tax net profit of $2.8 billion this year, for an average net profit margin of just 1.3%. Put another way, they will make about $3.23 per passenger. That’s less than a third of the $11.09 per passenger that their counterparts in North America will earn.”

He also described European infrastructure as needing great improvement saying: “How is it that Europe’s airlines are not more successful? I believe that it is because of the competitive disadvantages that Europe’s governments place in their way. The industry here is over-taxed, onerously regulated and suffers from a chronically mismanaged ATM system, insufficient airport capacity and overall costs for infrastructure that are too high.”

Tyler’s argument in full details the flaws IATA has identified in the European aviation system, including matters of Taxation, Regulation, and Infrastructure. He also attributed the troubles at Alitalia to these factors saying: “European aviation is financially the weakest amongst the world’s major regions. Witnessing first-hand the plight of Alitalia—among the worst cases—this should not come as a surprise for you here in Italy.”

These remarks came just a week after Ryanair celebrated a June 10 release of IATA’s own World Transport Statistics (2014 edition) which ranked Ryanair first among global carriers in passenger traffic by a wide margin, carrying 81.3m passengers in 2013.

To aggravate matters, the second slot, globally, at 52.79 million passengers carried, went to easyJet. Ryanair made a meal of these statistics, with the headline-grabbing announcement: “IATA Confirms Ryanair is the World’s Favourite Airline,” then did the math on the rankings and pointing out the significance of their lead as follows (presented here in bullets as in the Ryanair Announcement):

  • EasyJet, Iberia and SAS combined (< 76m)
  • British Airways, Air France and Alitalia combined (< 77m)
  • Lufthansa and Air Berlin combined (< 74m)
  • Over 8 times more passengers than Irish regional carrier Aer Lingus (9.6m)

Ryanair also included a table of the rankings for the top 30 in their announcement which we include here:

Rank Airline Thousands
1 Ryanair 81,395
2 easyJet 52,787
3 Lufthansa 50,739
4 Emirates 43,335
5 British Airways 33,803
6 Air France 33,118
7 Turkish Airlines 27,407
8 KLM 26,581
9 United Airlines 25,002
10 Delta Air Lines 23,086
11 Air Berlin 22,946
12 American Airlines 21,719
13 Cathay Pacific 21,420
14 LAN Airlines 21,172
15 Qatar Airways 18,737
16 Singapore Airlines 18,666
17 Korean Air 16,223
18 Thai Airways 16,029
19 Swiss 15,268
20 Qantas Airways 15,253
21 Scandinavian Airlines 15,052
22 Norwegian 14,704
23 Wizzair 13,500
24 Air Canada 12,763
25 China Airlines 12,606
26 Aeroflot 11,991
27 Etihad Airways 11,519
28 Asiana Airlines 11,384
29 Malaysia Airlines 10,785
30 Avianca 10,155

Source: Ryanair

Passengers carried alone are not a sign of success, and Ryanair has recently shown some weakening in its historically high profit margins. At the same time, the number-two-ranked easyJet has shown some strengthening in their performance. But both Ryanair and easyJet, as well as many other European LCCs continue to perform well. Indeed, the issues Tyler raised in his remarks also affect these LCCs.

For example, this February, both easyJet and Ryanair were fined a combined one million Euros by Italian Regulators at the Autorità Garante della Concorrenza e del Mercato (AGCM), after being found guilty of unfair and misleading practices on the sale of travel insurance. And the issues of Taxation and Regulation also affect LCCs in the European market.

On Tyler’s most recent claim that LCCs are at an advantage when it comes to infrastructure, by capitalising on what traditional carriers have built, there is strong dispute both from Ryanair and Airports.

Ryanair tells Skift: “LCC’s have demonstrated how airport infrastructure can be used efficiently and economically without the need for bloated and wasteful Taj Mahals, so beloved by monopoly airport operators and their erstwhile monopoly legacy high fare airlines.”

To illustrate their point, Ryanair adds: “A good example is Stansted Airport where Ryanair’s efficient operations has effectively doubled the capacity of the existing terminal.”

Skift reached out to easyJet for comment, but did not receive a reply in time for this story.

The airports themselves also take issue with claims that existing infrastructure should be credited to legacy carriers.

Robert O’Meara, Director, Media and Communications for Airports Council International (ACI) Europe tells Skift:

“While there are a couple of exceptions (the partnership between Munich Airport and Lufthansa on Terminal 2, as an example) for the most part, airlines–regardless of their business model–do not invest in airport infrastructure. Indeed, the charges they pay do not cover the cost of the infrastructure they use.”

“In 2012, charges paid directly by airlines to airports were only 14% of airport revenues (down from 21% in 2008). The total aeronautical revenues at European airports (including passenger charges), are around €4 billion less than their operating costs, so the capital costs associated with infrastructure are untouched.”

O’Meara adds: “While basing an aircraft at an airport entails a degree of investment, the cost of that varies depending on the business model of the airline. Ultimately, if the routes serviced do not perform, the airline can–and usually does–move to base the aircraft elsewhere. In 2013, there were 2296 new routes set up at European airports, but 2045 routes scrapped.”

O’Meara points out that even the LCCs can have leave airports in the cold, telling Skift: “Behind all its new route announcements Ryanair has actually scrapped a net 86 routes this summer.”

“Ultimately,” O’Meara concludes, “the airport funds investment in its infrastructure, additional airport capacity and it bears the risk of its infrastructure not being used–the real risk associated with investment.”

Skift reached out to IATA for clarification on these statements by Tyler, in order to obtain a reply to the statements from carriers and airports, but did not receive a reply.

Marisa Garcia has worked in aviation since 1994, spending 16 years on the design and manufacturing of cabin interiors and cabin safety equipment. She shares insights gained from this experience onFlight Chic and Tweets as @designerjet.

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