No-frills airlines capture key slice of market but others miss out on benefits of open skies

Date: 04/05/2000

By Bruce Barnard

THERE is only one yardstick by which to measure the success of the liberalisation of air transport in the EU: has it spawned competition and lower fares on flights within the Union?

The answer varies according to country: yes in the UK, less so in the Netherlands, not yet in France or Italy.

The UK, which unilaterally pioneered liberalisation and privatisation, is home to some of Europe's most successful low-cost, no-frills airlines, led by Ryanair and easyJet, which have revolutionised scheduled air travel. And neither is British - Ryanair is Irish and easyJet is Greek-owned.

These two carriers have created a domino effect across Europe: first, linking liberalised markets such as the UK, Ireland and the Netherlands; then moving into Germany, Belgium and France; and finally breaching Scandinavia, probably the most expensive and protected market in the world.

Their success forced established carriers to follow suit to prevent a mass desertion of passengers - British Airways set up Go and KLM followed with Buzz. Admittedly, they only operate on the main routes served by the original low-cost airlines and there is no sign yet that carriers such as Lufthansa and Air France are about to follow suit. But that could change.

The established carriers underestimated the staying power of the upstarts and their appeal to the business market. Backpackers and businessmen mingle in equal numbers on Ryanair and easyJet planes.

Having established themselves on high-volume tourist routes such as London, Amsterdam and Paris, the low-cost carriers are now targeting business destinations such as Milan, Hamburg and Helsinki, with flexible tickets that do not require a Saturday night stay-over - the bane of the small businessmen.

The newcomers are now pushing beyond the UK, trying to break into third markets. EasyJet is establishing a hub in Amsterdam and is working hard to implant itself as a low-cost option on routes out of Switzerland.

Ryanair plans to add a new hub in continental Europe to expand its network within the next two years. But the going is getting tougher as the established players defend their markets. Not that it has ever been simple: easyJet faced a hostile reception in the Netherlands and successfully complained to the European Commission about KLM's spoiling tactics and the Swiss authorities tried to block its arrival at Geneva.

One of the newcomers' main contributions to the campaign for liberalisation is that they have not only survived but are also extremely profitable, putting the yields of the established players to shame.

Ryanair, which is expected to report pre-tax profits of €86 million for the latest fiscal year, plans to boost traffic from about 5.8 million in 1999 to 12 million in 2004, making it the fifth largest airline in Europe, ahead of KLM and Sabena. EasyJet, meanwhile, is preparing for an Initial Public Offering later in the year which is expected to value the carrier at up to €850 million.

There have been casualties like Debonair, a British-based carrier quoted on the Easdaq in Brussels, but the dropout rate is slowing as carriers build up niche markets.

Despite these successes, air travel within Europe remains relatively expensive, although long-haul flights and charters, by contrast, are among the lowest in the world. British Airways' bid to set up independent airlines inside other EU markets has not worked out. Its French carrier, Air Liberté, is being sold to Air France after running up heavy losses and its German airline, Deutsche BA, is only now breaking even after playing safe and avoiding a fares war with Lufthansa.

There is no doubt that cheap air travel is here to stay. But it is not certain that all Europeans will benefit in the near future - and that is the acid test of liberalisation.

Article forms part of a survey 'Industrial liberalisation'.