Low Cost Carriers To Drive Traffic
IATA’s assessment on profitability for this year points to an interesting set of numbers.
Irrespective of the breakout between regions and their potential profit/losses for 2010, the one common feature all will have is that of traffic growth from low cost carriers.
Stalwarts like Ryanair have already started to see passenger revenue fall, despite the double-digit growth in traffic and that’s a trend that will likely be the barometer for the bulk of the year. Low cost carriers have the advantage of their lower cost base to drive efficiency into their business - and being less susceptible to premium traffic volatility, many of the full service airlines will struggle to stem losses, let alone make a profit.
The debate over whether the production rates on the Airbus A320 and Boeing 737 have to come down depends largely on the propensity by many of these low cost carriers to induct jets, control capacity growth and also if they’re able to generate revenue to combat the expected rises in oil/fuel costs.
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The balancing act between maximising passenger revenue without decimating yields is an art that no one can master successfully - this of course was one of the many reasons why Ryanair elected not to pursue a deal for as many as 200 new 737’s.
Consumer travel patterns in the wake of the global financial crises has also directly impacted the propensity to fly, and at what cost. Premium, high fare traffic is a thing of the past - particularly as the growth in communications has complemented many boardrooms to cut back on business travel.
The saving grace of course, is that when some of these low cost carriers reach the point of physical saturation, they’ll have a difficult decision to make. Do they make the leap forward to trying to bring low cost to long haul travel, or do they buy out a weaker long haul operation and reinvent the business on a cheaper footing?
“The allure of what used to be known as “low-cost” airlines in Europe faded fast in 2009, with the reputation of the entire sector tarnished by the PR nonsense and customer-unfriendly policies of industry-leader Ryanair. In the US, the business operates on a far more sophisticated level, with Southwest Airlines and JetBlue considered airlines to choose rather than to suffer from as in Europe with Ryanair in particular the worst example.
“Low-cost” airlines are here to stay but the “low” element of the overall total will become less and less evident in Europe (competition in the US will help keep fares down there) although passengers will still seek out the lowest fares wherever they can. Whether or not so-called “low-cost” airlines will still offer those lowest fares in 2010 is highly debatable once all the sums are done. As a result, EasyJet can be considered to be sitting pretty in Europe and is worth keeping an eye on,” says Arran Aerospace MD, Doug McVitie.
Either way, the customer is unlikely to lose out.
By the same token, cheap fares will be the dark knight for full service carriers struggling to keep afloat, while their low cost rivals snare business away from the bottom end of the market (just ask Jetstar and Qantas!).
Many, if not all low cost operators fly around 4-8 hours from their bases - and with the Middle East positioned within easy reach of almost two-thirds of the world’s population, it’s easy to see why the big three Arab carriers in Emirates, Etihad Airways and Qatar Airways have all honed in on O&D traffic - we’ll likely see Qatar Airways finally launch a low cost arm of its own, having suffered passenger defections to Air Arabia, Jazeera Airways, Bahrain Air and FlyDubai.
If nothing else, the growth in competition in the low cost sector is one that will be far more interesting than at any time before now.
The only question is whether oil price rises in 2010 delivers another round of bankruptcies in the same way that the much vaunted and equally idiomatic Skybus(t) operation became the laughing stock of the low cost sector and a headache for the lost orders at Airbus.
Junk credit-rated airlines will be the ones to avoid…both Airbus and Boeing have a great deal of exposure here in respect of their narrowbodies, particularly as financing too will be a key component of how the year shakes out.
19 comments January 4th, 2010
