The fortunes of Big Air - the prestige national carriers - have dived since 9/11, while their flexible and efficient no-frills rivals win ever-higher passenger numbers.The fightback is on, but has it come too late?
It has been a bad year for Big Air. Twelve months on from the grim events of 11 September 2001, which grounded entire fleets of airliners and brought demand for air travel to an all-time low, national airlines have seen passenger numbers plummet and profits vanish over the horizon faster than a speeding 747 with the jetstream behind it.
Worldwide, the airline business lost an estimated dollars 6.5 billion last year.
Once-proud flag carriers are now waving their national emblems at half-mast. German flagship Lufthansa lost pounds 400 million last year, Italy's Alitalia pounds 570 million and BA - once dubbed the World's Favourite Airline and now facing imminent eviction from the FTSE-100 if its share price continues nosediving - pounds 210 million.
But it's an ill wind, and while the big guys are hurting, smaller, leaner and above all cheaper airlines have stepped into the breach and are enjoying an unprecedented boom. So-called no-frills operators like easyJet, Go! and Ryanair are flourishing, offering seat-only services to destinations typically less than two hours' distant. Bound for hitherto unheard of airports like Dinard, Ancona and Klagenfurt, a new breed of first-time fliers has taken to the skies tempted by fares so low that even hitchhiking starts to look like an expensive alternative. When the flight costs less than 50 quid, nobody seems to care that they have to pay pounds 1.50 for a cup of tea or a fiver for a sandwich. Not even Tony Blair, who flew Ryanair with Cherie and the kids on holiday last year.
The figures speak for themselves. While BA sheds passengers at around 10% per month, easyJet flights carry 50% more people than a year ago, about 1 million a month. Add newly acquired rival Go! and it's more like 1.7 million. Ryanair shifts about 1.24 million in the same period. After years of being ignored or ridiculed by their flag-waving rivals (Jurgen Weber, chairman of Lufthansa, has described no-frills flying as 'like holidaying in a tent'), the cheap 'n' cheerful brigade are enjoying their sudden prosperity.
'Last year our average fare was 80% less than BA's. When we go head to head we absolutely murder them,' says Michael O'Leary, the fast-talking, hard-selling chief executive of Dublin-based Ryanair, by common consent the cheapest of the cheap operators and the most bereft of frills. He has good reason to sound confident. From very modest beginnings (one 15-seater aircraft flying from Waterford to Gatwick) back in 1985, Ryanair now has a stock market valuation of pounds 1.8 billion - pounds 30 million more than either BA or easyJet/Go! - and the company posted a 69% leap in net profits (to pounds 24.5 million) in the first quarter of this year.
Flying off-peak and booking about six weeks in advance (at the time of writing), you can go London Stansted to Rome Ciampino for about pounds 80 return on Ryanair, about pounds 90 return on Go!, and around pounds 169 Heathrow to Fiumicino return on BA. The simple explanation for such big variations in price is that you get what you pay for, and on a no-frills flight you pay for a lot less. But the absence of complimentary newspapers and free food and drink is only a small part of the story. 'How do we do it?' says O'Leary. 'It's like the difference between Tesco and Fortnum & Mason. We pile it high and sell it cheap.'
That means making your assets sweat. So how do you make a plane perspire?
The payments on a dollars 30 million airliner are the same whether it's gathering dust in a hangar or packed full of paid-up 'self-loading cargo' (industry slang for passengers). Starting early and finishing late fits a few more productive hours into each day, and turning round smartly at either end wastes less time on the ground. On a typical two-hour flight, turnaround times can make a big difference. 'We do it in 25 minutes, but it takes BA or Lufthansa an hour. That gives us two more flights a day,' says O'Leary. 'We have more seats too: our biggest planes seat 189 compared to 150-160 on other airlines.'
To make money, those extra seats need bums on them, and Ryanair's loading factor (the proportion of seats sold) is currently 93%, compared to a typical full-service airline figure of 70%. By the time O'Leary's team have sold just over half the seats on a plane they've covered costs and the rest is profit.
It's a newcomer in comparison, but thanks to its brash orange logo, in-your-face marketing and larger-than-life founder Stelios Haji-Ioannou, easyJet has become the poster child of no-frills flying since it took to the skies for the first time in 1995. Modelled closely on the business of South West Airlines - the Dallas-based outfit started by Herb Kelleher in 1971 that pioneered cheap short-haul flying - easyJet made a profit of pounds 1 million on revenues of pounds 194 million and a fleet of 30 or so aircraft in the six months to March. Even more impressive is the fact that it managed to pull off a successful pounds 93.3 million flotation in October, only weeks after the events of 9/11, and that its strong market performance enabled it to finance the purchase of arch-rival Go! in August.
Founded in 1997 as the low-cost arm of BA, Go! was sold first to venture capitalists 3i for pounds 100 million in 2001 and then to easyJet for a cool pounds 374 million only a year later. Says chief executive Ray Webster: 'We paid a strong price, but I'm confident we can make it work. The two networks are highly complementary and the deal creates Europe's largest low-cost airline.' The prospect of this new, joined-up competitor with operations at Stansted, Luton and Gatwick must be about as popular with the beleaguered national carriers as red-wine filled rock stars on the loose in first class.
Highlighting one of the biggest differences between full-service and no-frills airlines, easyJet's Webster points to his company's low-cost culture - no expensive head office, no company cars, minimal administrative staff. 'It's easy to build that culture from scratch, very, very hard to impose it retrospectively,' he says.
Budget operators stick to one type of aircraft to minimise complexity and maintenance charges, and to ensure their flight crew are interchangeable.
The low-cost plane of choice is the Boeing 737, as used by South West's Kelleher for more than 30 years.
The plane is cheap, simple and ubiquitous, and so far no major low-cost airline has chosen anything else. Although easyJet has recently shown an interest in the Airbus A300 series, this may simply be an attempt to screw a better deal out of Boeing for the 120 new planes it plans to purchase.
The best airliner bargains are to be had second-hand, where you can pick up a 737 for about dollars 15 million - Ryanair's fleet includes 21 ex-Lufthansa 737-200s from the early '80s. A hundred brand-new 737-800s are on order but some of the old planes will remain in service until 2006.
Staffing levels and productivity are issues for Big Air, most airlines having started out as inefficient publicly owned monopolies. 'We'll carry 15 million passengers this year with a staff of around 2,000. BA will carry about 35 million with a staff of 55,000. What are they all doing?' asks O'Leary.
To save even more money, no-frills operators use out-of-the-way airports. These secondary and tertiary locations are uncongested and keen to attract scheduled traffic. They offer great deals on landing charges, ground staff and baggage-handling to get it. As passengers who have faced a 40-mile cab ride to their final destination know all too well, Ryanair is king of the ultra-economical tertiary location. But some rivals do not agree. 'Our policy is shifting. If you want to fly high-yield business travellers you need frequent flights out of major airports,' says Webster. EasyJet picked up slots at Gatwick after 9/11, despite misgivings about congestion and charges. 'It's now one of our best-performing locations. Passengers will pay a premium to use Gatwick.'
The final piece of the low-cost jigsaw is booking and sales - doing away with tickets and travel agents' commission and selling seats direct over the internet. Virtual sales pioneer easyJet now does very nearly all its business online, and Ryanair recently saved an estimated pounds 25 million by following its rival onto the web. Internet sales also allow the use of sophisticated yield-management software, which matches price with demand - explaining why no two people on a low-cost flight ever seem to pay the same fare.
Big Air stalwarts can still rely on their lucrative long-haul routes, but will they let the no-frills upstarts dominate the short-haul market?
BA may have been slow to react, but it has woken up. Its new Future Size and Shape initiative is intended to save pounds 650 million and bears more than a passing resemblance to the South West template of simplified operations and minimal overheads.
'We're combining the best bits of BA and of the no-frills model,' explains Martin George, BA's director of marketing and commercial development.
'Our customers like the BA product - convenient airports, high frequency, good level of service - but they want it at the right price, and that's what we'll give them. It's about changing our business model to allow us to compete profitably.'
So: a boost to online sales - the target is 50% of all business by next year - and slashing commission to travel agents to pounds 5 on a return flight.
That's a potential saving of about pounds 200 million on its own. 'We've got 50,000 cheap off-peak seats available every month across 108 routes and it's working. We've already seen a 15% rise in passenger numbers on those flights,' adds George.
Despite their undoubted popularity, not everyone in the industry is convinced that low-cost operators are as cheap as they could be. 'The real kings of low-cost flying are the UK charter airlines,' says Nigel Addison-Smith, CFO of online travel agent e-bookers and former CFO of two such businesses, Air 2000 and Viking Aviation. 'easyJet has a 12-hour flying day, but charter operators fly 17-hour days for six months of the year. No-one does it cheaper than that.' Britain's newest low-cost airline, MyTravel Lite, owned by package tour group MyTravel, will test this theory.
There are also muttered doubts that easyJet and Ryanair will struggle to maintain the 30% annual growth they need to fill the new aircraft they have on order and reach their targets for the end of the decade. Both Webster and O'Leary see huge untapped potential for intra-European operations - Ryanair has its new hub at Frankfurt Hahn and easyJet has planes in Paris at Charles de Gaulle and Orly airports. But they may find it hard to take business from the superb European rail network, a much more attractive alternative to flying than Britain's clapped-out old puffers.
They've had clear skies so far, but there are signs of bumpy weather ahead for the budget airlines. After a hectic 12 months, easyJet in particular is struggling to keep up with increasing passenger numbers. It was forced to cut four flights from its daily roster last month, after a spate of cancellations and fears that pilots working for low-cost airlines may be overstretched.
There's no doubt that BA is serious about taking on the low-cost operators, but it may have left that too late. 'We lost pounds 244 million on the short-haul business last year, which shows you how serious the challenge is.
We're determined that short-haul should be profitable in its own right, and going low-cost is the way we'll do it,' says George. How long will that take? 'We're committed to breaking even by 2004.'
By which time O'Leary and Webster will be flying 40 million passengers a year altogether. The new skymasters? Probably.
TALES FROM THE TARMAC - a day in the life of two 737s
FLAGSHIP 06:30 Manchester Hilton. After an overnight stop thanks to a diverted return flight yesterday, senior stewardess Mandy boards the Flagship crew bus back to her base at London Heathrow, hoping to catch a few more zzzs before the day's first flight, the 10am to Rome. At 37, Mandy's an old hand with more miles under her belt than an unlicensed minicab, is fluent in French, and can get by in Spanish. Working part-time, she earns pounds 22,000 a year plus generous allowances and a copper-bottomed pension - a lot less than she got on long-haul, but since the birth of her second child Toby she's traded down to a less demanding schedule.
09:15 Terminal 1, Heathrow. Mandy and her five colleagues have 45 minutes to prep the aircraft's three cabins. Mandy is in the middle one working business class, with first up front, where it's quiet, and economy bringing up the rear. Flagship's 150-strong European fleet includes four aircraft types - this one is the latest Boeing 737-800, costing about dollars 30 million.
10:20 Five thousand feet over Croydon. Pilot Nigel, 15 minutes late, picks his way across the busiest skies in Europe, keeping a weather eye on the collision-avoidance system in case another aircraft gets too close. At 32, he earns pounds 65,000 a year and, despite his underwater share options, he's sticking with Flagship. A 737 - the Ford Escort of the air - may be no match for the RAF Tornado he was flying two years ago, but Flagship will pay for him to convert to 747s, opening the door to the exotic beaches of SE Asia and a potential six-figure salary.
12:30 On the tarmac at Fiumicino, Rome's main airport. With 31 inches of legroom, even economy passengers have had a comfortable flight, helped by the fact that more than a third of the plane's 142 seats were empty. Mandy is grateful for her executive charges - a well-behaved lot who enjoy collecting frequent-flier miles, although they keep her busy with their three-course breakfasts and numerous free drinks. Now she shepherds them off the plane, collecting unwanted complimentary copies of the FT and Corriere della Sera and directing connecting passengers to the transfer desk. A team of contract cleaners come aboard to help prep the plane for the inbound leg.
17:00 After returning to Heathrow and making one more short-hop to Brussels (only half full on the inbound leg), Mandy arrives back at Heathrow after six and a half hours on duty. She picks up Toby from the childminder and heads home to Sunbury-on-Thames, looking forward to a couple of days on the ground before her next stint. Pilot Nigel is off for a quick nine holes and a G 'n' T at sundown before a couple of hours' swotting up for his conversion exams.
NOFRILLS.COM 05:00 Romford, Essex. Bleary-eyed Shelley, 20, cabin attendant for budget airline nofrills.com, crawls out of bed to face the train-and-bus-ride to Stansted airport, 35 miles outside London. She's volunteered for two extra flights, which means a 12-hour day, but on pounds 10,000 basic she needs all the help she can get.
05:30 Stansted. Shelley and her three colleagues hastily prep an ageing Boeing 737-200 for the first flight - the 6.15 to Tortellini, a secondary airport 40 miles from Rome. Bought second-hand for only dollars 15m a few years ago, it's as old as Shelley, having been 'previously enjoyed' by a German charter operator. Crew and passengers will all be happy when the new aircraft arrive in a few months.
06:15 The airport is quiet first thing in the morning so they depart on time. The plane is full - more than 85% of the 150 seats squeezed into the undivided cabin are occupied. Seats aren't allocated, so passengers make for seats by the emergency exits, which have valuable extra legroom. Among the mass of eager, T-shirted holiday- makers there's a handful of business travellers. The money they save flying nofrills.com means they can afford a decent meal out on exes without raising the boss's blood pressure.
08:55 Arrive at Tortellini, where, thanks to the accommodating local authorities, nofrills.com has yet to pay any landing fees. They're a few minutes late, but there are no connections to miss. Shelley breathes a sigh of relief - she's had a run-in with a Roman cabbie, angry because the guy next to him had only paid a fiver for his seat. She tried to explain to the irate Italian that the earlier you book the cheaper it is (and that his pounds 85 return fare was still half what Flagship charges), but languages aren't her strong point and she didn't get far. She's got plenty to do cleaning the aircraft with her colleagues.
09:20 Back to Stansted with a 92% load, and back on time, thanks to a lightning turnaround. Italian pilot Gennaro, 40, swapped glam dreams of flying 747s for short-haul 'bus driving' after his English wife Laura had twins six years ago. At pounds 58,000 a year, the money isn't bad, and the share options he got on joining are shooting up. He likes getting back to Stansted in time to read his kids their bedtime story and enjoy a glass of Barolo with Laura.
17:00 Barcelona, and they've missed their slot. Gennaro suspects the Spanish air traffic controllers have given it to a delayed Iberia flight 'by mistake'. The passengers are getting hot and bothered, but margins are everything so there are no free drinks.
19:30 Rome is a distant memory for Shelley, who arrives back at Stansted exhausted. She feels more like a treadmill trolley dolly than a soignee stewardess: the early starts are ruining her social life and she's seriously thinking about going back to her old job at the nail bar.