European Low-cost Airline Bubble May Burst
European Low-cost Airline Bubble May Burst
20 December 2005
By Aude Lagorce
LONDON (Dow Jones) -- With more than 50 players, the European low-cost airline sector is set for a shake-up that will clip the wings of all but a few.
Analysts say the experience of the United States, where most low-cost airlines have failed, suggests that Europe cannot continue to support the slew of operators currently taking off from its runways.
"At last count, there were about 50 low-cost carriers in Europe, which is totally unsustainable," said David Stewart, head of the European office and co-founder of aviation consultancy AeroStrategy.
That total changes from week to week, as some carriers go belly up, while low interest rates, a glut of second-hand airplanes and the success of the market leaders continue to entice new entrants into the market.
Stewart, meanwhile, believes only three or four big low-cost carriers will still be flying in a few years.
The winners are likely to include the top three players: Ireland-based Ryanair Holdings PLC (RYAAY), the United Kingdom's easyJet Â and Germany's Air Berlin. In the latest financial year for which traffic figures were available, Ryanair carried 27.6 million passengers, easyJet 24.3 million and Air Berlin 13.8 million.
In recent years, these three have eroded the turf of Europe's three largest legacy carriers, Air France-KLM (AKH), British Airways Plc (BAB), Germany's Deutsche Lufthansa , forcing them to shift their focus to their medium and long-haul operations.
Ryanair's shares are up over 50% year to date, while easyJet shares have added more than 91% in the same time frame.
In addition to these three, the survivors may include some of the low-cost subsidiaries of traditional airlines, such as BMI's BMI Baby. "Some will still be around because they have parents with robust businesses," Stewart said.
It's among the 30-odd players who share about 20% of European capacity that the bloodbath long forecast by Ryanair's fiery Chief Executive Michael O' Leary is expected to take its biggest toll.
"Most of the smaller carriers who are not supported by a rich parent are really skating on thin ice," said Doug McVitie of consultancy Arran Aerospace.
The strength of the balance sheet will largely determine which players, if any, keep flying, Stewart said.
But some niche players may come out on top. London-registered Wizz Air, for example, is seeking success by developing a niche in its own special airspace over Hungary and Poland.
But even that can be tricky, says McVitie, who warns that Ryanair and easyJet's competitors must remain small and fly low under the radar if they're to survive.
"If Ryanair notices a route that is really profitable for another carrier, they will go for it. And there's no chance the other airline will win," he said.
Tim Coombs, managing director for consultancy Aviation Economics, agrees.
"It would be suicide to compete head to head against Ryanair because nobody enjoys a cost base as low as they have," he said.
Ryanair saves money, for example, by having its cabin crew do double duty in keeping the aircraft clean.
In the end, most of Europe's low-cost airlines are likely to suffer the fate of Poland's Air Polonia, Dutch carrier V-bird, Italy's Volare and Ciaofly, for example, all of which have vanished from the radar.
"The market is seasonal, so unless you have a wide network of routes, you can't spread your costs during the slower season," said McVitie.
And compared with a few years ago, salvation is unlikely to come in the form of a takeover for these smaller carriers.
"There's no incentive for Ryanair or easyJet to buy anybody. It might have made some sense in Eastern Europe before some countries joined the E.U., but now there's really no point," said Stewart.
"As the big players can fly pretty much anywhere they like in Europe, why do they need to buy and suffer the pain of integration?"
Ryanair's O' Leary constantly emphasizes his preference for organic growth. The airline hasn't bought any rivals since it took out KLM-owned (AKH) Buzz in 2003, partly to acquire cheap aircraft.
The only takeover rumors in the industry stem from Germany, where DBA and Air Berlin are reported to be holding negotiations.
Some analysts warn that market leaders must be careful not to grow too fast.
The three largest European low-cost carriers, Ryanair, easyJet and Air Berlin, have a combined 300 medium-haul aircraft on order for delivery by 2010, with options for an additional 350.
Based on the industry calculation that each aircraft needs 250,000 passengers a year to break even, these three airlines will have to find 75 million new passengers just to cover these firm orders.
"It will be hard to generate such growth, that's for sure. But the challenge remains for traditional airlines to compete effectively with the low costs," said Stewart.
Some believe they may be taking on more than they can handle, especially as some airports continue to favor their nation's flagship carriers by limiting runway access to the low-cost airlines.
Low-cost airlines represent 40% of traffic at London airports against only 12% in Paris and 20% in Frankfurt. EasyJet and Ryanair have a mere 7% of intra-European flights at Paris Charles de Gaulle, Orly and Beauvais combined.
When the collapse of second-ranked French airline Air Lib in 2003 freed slots at Orly airport, most went to Air France rather than to low-cost carriers.
McVitie is more optimistic about the low-cost prospects, noting that even though growth is slowing somewhat, the European regional market has been so underserved for the past 30 years that Ryanair can still add many profitable routes to its network.