Low-cost airlines: They changed the world – but what next?

CNN  — 

The pioneers of low-cost air travel took the industry by storm.

But now, when nearly half of air journeys in Western Europe and the U.S. are on budget carriers, is there room left for growth?

Across the world, low-cost airlines have become not only a fixture of the travel industry but an essential element of contemporary life.

The first budget carriers shook up a market that was ripe for disruption after decades of over-regulation, lack of competition and growing costs.

But now the market has matured, is a long-term balance between low-cost and legacy airlines possible?

It’s a conundrum that may well redefine the air travel experience for years to come.

Meeting in the middle

For a while after budget airlines emerged it was easy to draw a line between low-cost and full-service network airlines, since each offered a distinctive value proposition.

Low-cost carriers stripped their product to the bare minimum: a single cabin where all seats were the same, no free food, no free baggage allowance, no flight connections.

In fact, they got rid of virtually all non-essential extras and frills.

This practice, called “unbundling,” makes it possible to fly from A to B for ridiculously low prices, while more comfort-conscious passengers have to pay for any additional services.

Meanwhile, legacy carriers found it increasingly difficult to change their cost and operational structures fast enough to face such formidable cost-killers.

Instead, they retrenched to areas of business that were safer from low-cost competition: the corporate market and long haul.

That market split isn’t necessarily the end of the story.

The competitive landscape is, again, changing fast.

Pere Suau-Sanchez, from the Centre for Air Transport Management at the UK’s Cranfield University, says the recent economic crisis has acted as a catalyst for upheaval.

Low-cost airlines have tweaked some elements of their business model in order to encroach on markets that’ve so far been the preserve of legacy carriers.

“We have seen how in Europe low-cost airlines such as Ryanair have dropped routes to low-margin secondary cities and started to fly to major airports in an attempt to move upmarket,” Suau-Sanchez says.

“At the same time, cost-cutting businesses, particularly small and medium sized firms, have eagerly embraced low-cost air travel.”

One by one, many of the dogmas of the low-cost airline industry have been cast aside.

What the industry is witnessing is a significant shift in the business model of some low-cost airliners, to the point that many in the industry talk already of a new type of airline.

Enter the “hybrid” carrier: halfway between the pure no-frills low-cost carrier and the traditional full service airline.

Chasing the business traveler

For example, many low-cost airlines have gone through a re-bundling exercise.

Instead of buying services one by one, passengers can now opt for branded fare packages, each including a range of services – better seats, larger baggage allowance and lounge access – that are more typical of full-service carriers, but still quite competitively priced.

With business customers in mind, low-cost airlines have also begun selling tickets through the global distribution systems (GDS), that are used by many corporate buyers.

Some budget carriers have even launched their own loyalty programs.

All this has, obviously, put extra pressure on traditional airlines, that depend on short-haul operations to feed their usually more profitable long-haul routes.

In the face of this challenge full-service airlines have adopted different strategies.

Some large airline groups launched their own low-cost subsidiaries to compete head-on with low-cost airlines.

This is what Air France-KLM has done with Transavia and Lufthansa with Germanwings and Eurowings.

They’ve also been busy further segmenting passengers well beyond the classical business-economy class divide.

We’re not talking just of the introduction of a premium economy product, but of a multi-tiered branded fare structure within economy class itself.

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Free trip comes with one big catch
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This way full-service airlines are able to offer competitive entry-level fares with no frills attached.

Flying on a full-service carrier no longer guarantees a free hot meal and a generous baggage allowance.

The result has been a convergence of sorts.

Whereas the uppermost service level on a low-cost airline may end up resembling that of business class, the most basic fares on legacy carriers may buy a level of service that’s pretty much indistinguishable from that of a budget carrier.

Unlikely partners

Another important development is likely to further redefine our concept of a low-cost airline and continue to blur the borders that separate them from their full-service counterparts.

Low-cost airlines are entering into partnerships with other airlines, even with full-service carriers.

This is quite a significant commitment for airlines that were doing everything to avoid costly complexities in their operations.

Operating within the framework of agreements that allow passengers to seamlessly book itineraries involving several airlines comes with its own set of challenges.

The biggest challenge of all is guaranteeing product consistency.

Let’s say someone books with a full-service carrier that’s renowned for its on-board service, only to find out later that one of the legs of the itinerary is operated by a no-frills airline providing a completely different type of passenger experience.

This is, possibly, one of the reasons that has led Lufthansa to deploy its low-cost subsidiary Germanwings only on secondary point-to-point markets, while keeping most connecting flights that go through its main hubs under its own brand.

But airlines such as JetBlue, in the US, and Barcelona-based Vueling have already been operating connection flights with the likes of Emirates and Qatar Airways for years.

That’s something that would’ve been difficult to imagine in the not-so-distant early days of low-cost aviation.

End of an era

More recently, Irish low-cost giant Ryanair has stated its interest in reaching partnership agreements with Portuguese flag carrier TAP and Norwegian Air Shuttle.

If finally confirmed, it would represent a momentous development for the industry in Europe, since Ryanair is Europe’s largest low-cost airline, while the Scandinavian carrier has the most ambitious long-haul low-cost expansion program in the continent.

The consolidation of a transatlantic long-haul low-cost industry would be a transformative event for the industry.

It would further turn the screws on legacy carriers that, on their eastern flank, are already seeing their long-haul business being squeezed by the rapid emergence of the Gulf carriers as global super-connectors.

Replicating the low-cost success over the long-haul can prove challenging, though.

Proof of that is its failure to happen so far.

Suau-Sanchez explains how it’s particularly difficult to run a long-haul airline without a feeding network.

He points out that in Europe there are few markets able to support a stand-alone long-haul operation.

Even in Asia, where the low-cost long-haul concept is more consolidated, airlines such as AirAsia rely on feeder traffic.

Partnerships, may therefore hold the key to the development of a proper long-haul low-cost airline industry in Europe.

The increasing availability of new aircraft types – such as the Boeing 787 Dreamliner, designed to operate efficiently on long-haul routes – and the new route opportunities brought about by the EU-U.S. Open Skies agreement might do the rest.

Miquel Ros is an aviation blogger and consultant. An economist by background, he’s worked for Flightglobal and Bloomberg. He currently covers the airline industry through Allplane.tv and collaborates with luxury travel website Trovel and other online media.