Death of the low-cost carrier in Europe?
Over the past decade, low-cost carriers around the world made huge strides in capturing more and more of the domestic and international markets in their respective countries. AirAsia, Ryanair, Southwest Airlines (LUV) have become some of the most formidable forces against their full-service competitors. Some competitors even responded with low-cost carriers of their own, including Vueling (International Airlines Group (IAG) ), Jetstar (Qantas), and Eurowings (Lufthansa (LHAB) (LHA) ), as an example.
Independent low-cost carriers rose to the top mostly after the financial crisis of 2008, when full-service airlines suffered from their high operating costs and the unexpected rise in fuel prices. Ryanair, for one, managed to increase its yearly passenger traffic from 50.9 million in FY2008 to 66.5 million in FY2010, increasing its fleet from 163 to 232 during the same period. In 2009, Wizz Air grew by 22.4% compared to its result the previous year in terms of weekly capacity. A year later, the Hungary-based low-cost carrier scratched the surface of 10 million passengers, achieving 9.6 million in 2010 – considering that it carried 0.9 million in 2005 and that it had to weather a big financial crisis, the achievement is quite impressive. easyJet was also not lagging behind. From 43.7 million passengers in 2008 to 48.8 million in 2010, the British airline showcased resilience and ability to grow in a stable and profitable manner.
The European Union’s annual analysis of the European Air transport market in 2009 summed up the situation:
“Although the economic crisis happened in 2008, its full impact first reached airlines in 2009. Overall demand – with regard to passenger traffic as well as cargo traffic – decreased and this caused strong turbulences with regard to the financial performance of many European airlines. This applies particularly for the established Full-Service Network Carriers,” stated the report.
Crises provide opportunities
Crises can provide great opportunities to take a step back and to innovate. Or to go out on a limb and try to kick your competitors in the gut while they are down. At the end of May 2020, Wizz Air announced four new bases in Europe, namely in Milan-Malpensa, Italy (MXP), Larnaca International Airport, Cyprus (LCA), Lviv International Airport, Ukraine (LWO) and Tirana International Airport, Albania (TIA). At first glance, this could look like low-cost carriers are attempting to capture more of the market within Europe while their full-service carrier competition is suffering.
No-frills airlines have largely avoided applying for state aid in their respective countries to increase their liquidity, as they met the coronacrisis with some of the strongest balance sheets in the continent. Meanwhile, full-service carriers had to plead their governments to throw out a helping hand in order to get back up on their feet in the short-term. Air France, Alitalia, Finnair, Iberia, Lufthansa Group and Scandinavian Airlines Systems (SAS) are some of the full-service airlines that pleaded and received state aid.
It seemed like the scenario of the late 2000s could once again repeat itself, as the pandemic swept the big boys in Europe off their feet. However, governments of various European states might have other ideas.
Taxes and environmental concerns
The first lawmakers to kick off the domino effect was the Austrian government. As the legislators in the country announced a rescue package worth up to $680 million (€600 million) for Austrian Airlines, they also included measures to incentivize the reduction of the country’s CO2 emissions as well. A new taxation system for flights into and out of Austria is being introduced, including an anti-dumping policy.
If previously flights were taxed according to whether they were short, medium or long-haul, as the tariffs ranged from $3.9 (€3.50) to $19.7 (€17.50), all flights now will be taxed equally at $13.50 (€12). In addition, flights with a distance fewer than 350 kilometers (217 miles) will be taxed at $33.7 (€30).
Most importantly, airlines will not be allowed to sell their tickets below their charges and taxes. The anti-dumping policy will result in round-trip tickets being sold for at least $45 (€40) per person, according to the Minister of Transport of Austria Leonore Gewessler. The new policy essentially undermines a low-cost carrier’s position, as the number one advantage they have over legacy airlines is the price. They can afford to offer tickets for as low as $11 (€10), as they stimulate yields in other ways and acquire ancillary revenue.
Ryanair’s latest financial report highlights that its average fare per passenger is around $41 (€37), while it earns $22 (€20) on average in ancillary revenue. Excluding fuel, it costs $35 (€31) for the airline to lift a passenger into the air and get them to point B. Including fuel and the new taxes, flights into the Alpine country could hike in price, undermining a low-cost carrier’s main strategy of attracting as many people onto its aircraft as possible and making up the difference in fare and costs in ancillary revenue.
After all, the Irish low-cost carrier averaged a whopping 95% load factor in FY2020.
The domino effect, set off by the Austrian government, resonated in Switzerland as well. On June 11, 2020, the National Council of Switzerland approved a law whereupon flights would be taxed between $31 (CHF30) and $126 (CHF120), depending on the type of aircraft. The new law, introduced after a 13-hour debate, much like in Austria, has already been seen before. However, the difference is that the Swiss parliament shot down the environmental laws in December 2018.
Following the Union
When the French government granted Air France a $7.9 billion (€7 billion) state aid package, strings were also attached. One of them included a clause stating that if travelers could reach a domestic destination within 2 hours and 30 minutes with a train, Air France was ordered to drastically limit its capacity on the connection.
“Frankly, it should be limited for a transfer to a hub,” stated the French Minister of Economy Bruno Le Maire.
A lot of noise is coming out of the German unions as well. Agreeing to Austria’s new policy, the chairman of the flight attendant union UFO, Daniel Flohr, stated that the aviation industry would “only come out of the crisis economically and ecologically if a minimum price for plane tickets is also introduced in the rest of Europe.” The point of view was also apparently shared by Lufthansa (LHAB) (LHA) . For governments around the European Union, new taxes and charges aimed at the price of an airline ticket could help save face during an unprecedented economical and health crisis. Indicating that they have not forgotten about the environment could earn politicians extra points in the eyes of the voters.
In a monumental shift in policy, France and Germany shook hands to save the European economy with a proposed $565 billion (€500 billion) emergency fund.
“The Franco-German relationship epitomizes ultimately what the E.U. is about, crystallizing the arguments of different sides, and if they agree, it creates a critical mass for the others,” Nathalie Tocci, an adviser to the European Union and head of Italy’s Institute of International Affairs, told the New York Times. If the leaders could agree on such a monumental emergency fund, could it also indicate that they would be willing to work together and raise their concerns about the environment?
If EU-wide legislation is introduced, the low-cost carrier model as we know it might be long-gone in a post-COVID-19 world, as taxes and charges increase the pressure on an LCC’s yields. For full-service airlines, the change in policy, especially the fact that lawmakers are exempting hub transfers, could push their intercontinental side of the business into a Golden Age. Yet short-haul connections, especially during low-yield months, are also important. The importance of leisure yields during the summer months must not also be forgotten, as Europeans from up north travel to various Spanish and Italian resorts along the coast of the Mediterranean Sea.
What kind of damage or good an EU-wide increase in flight charge could do is hard to predict. Despite their bullish behavior to their competitors and less than desirable passenger experience, low-cost carriers have allowed people from various economic brackets to see the wider European continent. Whether that would be taken away or be replaced by rail, could be at the forefront of the issue: despite the environmental drawbacks, flying has its social advantages, connecting families, friends and holidaymakers with their favorite hotels.
Whether someone is willing to play the devil’s advocate in the current environment, where climate change is at the forefront of almost every political debate, is another question that only a fortune teller with a crystal ball could answer.
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