Low cost airlines still have a long way to go

Despite the inroads made by cheap airlines, large parts of Europe remain the protected domain of national flag carriers - to the cost of business travelers, as Tim Jones reports from Brussels

Low-cost, no-frills airlines may finally be eating into the long-captive market for European business travellers but swathes of the corporate continent remain untouched by competition for the flag-carriers.

Thirteen years after the EU kicked off its 'open skies' campaign, Germany is still a no-frills no-go area, French domestic carrier Air Liberte may be about to fall into Air France's clutches and Brussels-based Virgin Express is fighting the Belgian authorities to keep its licence.

The truth is that, however much continental small businesses are crying out for cheap and flexible air-fares, they are only to be found in bulk in the UK and Ireland where they are starting to make serious inroads into the corporate market.

Leisure travellers only go skiing or to the beach once or twice a year but business travellers will fly once or twice a week so it makes sense to target them, says Dan Solon, an analyst at aviation consultants Avmark International.

More than a quarter of respondents to the recently published Company Barclaycard 'Travel in Business' poll revealed that they had flown on a low-cost airline in the past year and, of these, 86% said they would do it again. For the first time, the poll featured a low-cost carrier, Stelios Haji-Ioannu's EasyJet, in its list of the top ten airlines most frequently used by British business travellers.

This is not a strategic shift, says company spokesman Toby Nichol. EasyJet doesn't market to anybody in particular, he says. If we happen to attract small businesses because of our cheap fares, then fine but we do not relationship-market and think airmiles are a bribe.

Last year's Barclaycard poll found 53% stating that larger airlines provide better service and quality than their low-cost counterparts but this had shrunk to 40% this year. Support for the no-frills carriers was most marked among business travellers whose companies turn over less than ({@denom})16 million every year.

A glance at American Express' Corporate Travel Barometer explains why. This shows that travel expenses account for as much as 7% of a company's total operating costs and corporate travel is rising, with some executives expecting to take up to 15 or more trips in 2000 than they did last year. With intensified pressure on finance directors to stretch their travel budgets, corporate travellers are being asked to fly over weekends.

The impact on the British/Irish market has been seismic. US investment bank Salomon Smith Barney forecasts that the European no-frills market will double in passenger numbers to around 20 million by 2002: a forecast that was too much for incumbent flag-carriers to resist.

Last autumn, KLM Royal Dutch Airlines launched its low-cost carrier Buzz, operating from Stansted airport north-east of London. KLM's move was prompted by the arrival at Stansted of Dublin-based Ryanair - the world's most profitable airline - and the launch of BA's no-frills arm Go. The impending merger between KLM and BA will either see Go and Buzz combined into a serious competitor to Ryanair in terms of scale or the forced sale of the low-cost carriers under European Commission instructions since the two flag-carriers will account for more than 70% of the London-Amsterdam market.

The experience of Go has been at once unhappy and instructive. When BA Chief Executive Bob Ayling was asked to walk the plank in March, it was at least in part because of Go's disastrous launch. The company, which took over several of BA's high-volume, low-yield European routes, sucked up ({@denom})13 million ( ({@denom})41 million) of BA's launch capital, lost ({@denom})13 million ( ({@denom})21 million) last year and looks set to shed more this year. Yet Go did show how willing business travellers were to fly no-frills - Buzz's business model was built on Go's success in commanding 30% business traffic - and the lengths to which incumbents will go to protect their routes.

Go "suspended" its London-Munich flights from 25 March under fierce competition from Lufthansa. Indeed, so fierce was it that Go has filed a complaint with the European Commission that Lufthansa deliberately drove down its prices to predatory levels to force them off the route. Go Chief Barbara Cassani says the day after they came off the route, Lufthansa banged up its minimum fares from ({@denom})58 ( ({@denom})95) return to ({@denom})129 ( ({@denom})211).

This is not the first time Lufthansa has been charged with such actions. In 1997, the German federal antitrust office forced the company to cut fares on its Berlin-Frankfurt route to match those on the Berlin-Munich service where it had to compete with BA's German subsidiary, Deutsche BA. SAS and KLM have been accused of similar behaviour by Virgin Express and EasyJet.

The Commission will be slow to respond to individual complaints but does regret that it did not do more to prise open the captive, high-priced markets between Germany and Scandinavia, and Brussels and Switzerland when SAS/Lufthansa and Swissair/Sabena sought its approval for their alliances.

The conditions attached were not sufficient to lead to the entrance of new operators on the hub to hub routes, admits antitrust official Enrico Maria Armani in an internal Commission newsletter. In both cases, not only did no new operators show up but also the level of prices on the routes concerned seem to be significantly higher than prices on comparable routes where competition exists.