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You really can’t be an eagle in crow’s feathers. They don’t look very good and can fall off in-flight.
IAG adopted Vueling, Lufthansa is stretching its Germanwings, and Air France/KLM and SAS veer closer to the low-cost carrier operating model with each passing day, but are these moves by Europe’s proud eagles enough to ward off the biggest of the low-cost carrier crows feasting on their crops?
Ryanair reported record profit after tax growth of +152% for its first quarter 2014, carrying 23.2 million passengers and maintaining 86% load factors. The airline cautions that these impressive figures were boosted by a strong Easter, but—these impressive figures were boosted by a strong Easter. Easter is a key holiday period for Europeans.
For Ryanair—popular with millions of holiday-makers because of its cheap fares—to feast in this season is to be expected, but their large share of this market is at the heart of the legacies’ troubles. In the Easter month of April 2014, Ryanair carried 7.8 million passengers, maintaining 84% load factors.
By comparison, the Lufthansa Group (Lufthansa Airlines, SWISS, Austrian) 8.6 million at 79.5% load factors. Lufthansa Regional and Germanwings combined 6.8 million at 78.1% load factors. Lufthansa Group posted €252 million losses in its first quarter. IAG (British Airways, Iberia, and Vueling) doesn’t report these numbers individually or for the group by month, but at the end of their Q1 in March, IAG airlines were carrying a load factor of 76.7% with €150 million losses. Air-France KLM carried 6.7 million passengers on their combined international network and maintained 64.8% load factors, carrying losses of €485 million.
Here are the top three strategies the European Legacies have tried so far to squash this Ryanair threat:
Debate: The legacy carriers have made strong arguments to enforce new laws in the EU to establish policies designed to work against Ryanair and the other LCCs in Europe. Many laws have passed which hurt Ryanair, but these have also backfired against the legacies. The EU261/2004 Passenger Rights Bill has had just as much impact on the larger players—to the point that Tony Tyler Director General and CEO of IATA recently asked the European Civil Aviation Conference (ECAC) to revoke it.
In doing so, Tyler pointed out that infringements which caused the need for the rule were attributable to “a small but high-profile number of incidents, often resulting from new model carrier operations or severe weather.” Ryanair has been forced to compensate passengers because of this regulation, paid them, and moved on profitably.
Litigate: Ryanair has recently been told by the EU that it must repay nearly €10 million in French state aid which was granted to the airline, earmarked for improving services in three French regional airports. Air France filed a formal complaint that Ryanair was receiving what constituted illegal subsidies from French regional airports in 2010. Unfortunately, for Air France/KLM, the same ruling which asks that Ryanair pay back those €10 million, also asks that Air France/KLM’s own low-cost carrier, Transavia, repay €400,000 for the same reasons.
Ryanair has already had such rulings against overturned for a number of regional airports and believes that the arguments against it on this claim are equally weak, saying: “All of Ryanair’s airport arrangements comply with the EU State aid rules and Ryanair has therefore instructed its lawyers to appeal these rulings to the extent they erroneously allege otherwise.” Air France/KLM surely did not intend to raise inquiries which would find fault with one of its carriers in the process.
Emulate: Slowly, the Legacies are themselves moving LCC, with mixed results. KLM has unbundled fares, establishing fee structures in Europe similar to those of its LCC competitors with separate charges for picking more comfortable seats, and checking-in bags—leaving only carry-ons free of charge in Economy. In fairness, you get a nice sandwich (made with artisanal bread baked with wind-milled flour, with either cheese or egg filling) a beverage and a cookie.
No such niceties on Ryanair.
SAS’s LCC-like Go service allows you to check one bag free of charge, gives you free coffee (no free water, sorry) and has a paid menu for everything else—just like Ryanair. SAS comes close to matching KLMs fares sometimes, but neither match Ryanair or easyJet. Lufthansa’s Germanwings unbundles too, charges for luggage, and charges for everything, including coffee, unless you buy a premium service ticket.
Their fares are fair, but undercut by the true LCCs. Vueling is likewise fully unbundled with a nice menu of selections onboard you can pay for if you like. Vueling is competitive and popular, but can still be undercut by those who have been around longer.
The main advantages the majors have are the routes they fly, and those are also at risk. Some regional airports are close enough to popular destinations that many don’t mind a drive out of the way. False economies perhaps, but passengers look at fares when they book. International advantage is at risk not only from Norwegian, but also by the increasing involvement of Gulf Carriers in the EU market. Again, Debate, Litigate, Emulate is the Legacies’ solution. But you can’t emulate an LCC and a luxury carrier at the same time.
Emulation through acquisition of an LCC, or branching out as a low-cost look-a-like, has another downside: Ted (just ask United about that one).
LCC is a business model, not a marketing model alone. Operating an LCC under a legacy infrastructure weighs it down and builds-in losses.