Fly the Frugal Skies
How low-cost airlines have transformed Europe--and what it means for America.
Every Friday afternoon at a Heathrow Airport bar, there is an informal gathering of the "Pojkv?n Club"--a group of London men who jet off every weekend to visit their far-flung girlfriends. (Pojkv?n is Swedish for "boyfriend.") "Of my six closest friends from Glasgow University, four of us now have European partners," Pojkv?n Club member Fraser Nelson wrote in The Scotsman last April. "The low-cost airline revolution has changed lives."
In Prague, where just about the only foreign languages spoken 15 years ago were German and bad Russian, there are English-language signs in the windows of bars all over town warning: "No stag parties." In Bratislava, where traveling to next-door Vienna was verboten until 1989, Slovaks who still can't afford the 200-mile train trip to Salzburg are now excitedly comparing notes on their recent weekend forays to Venice and Mallorca. In the lovely southwest France region of Dordogne, locals now refer to the area as "the Dordogne-shire," due to all the Brits buying up local vacation homes. Every summer, Spanish golfers swarm the Welsh countryside to enjoy their sport away from the hometown heat. Dreary industrialized corners of Europe--Stansted, England; St. Etienne, France; Hahn, Germany--have become improbable boomtowns, while secondary travel destinations such as Edinburgh and Cardiff have been transformed into sizzling tourist magnets, with boutique hotels, Irish pubs, and youthful commerce galore.
In less than a decade, the Southwest Airlines revolution has swept through sclerotic Europe like a capitalist hurricane, leaving a fundamentally altered continent in its wake. Low-cost airlines have grown from zero to 60 since 1994 by taking Southwest's no-frills, short-haul business model and grafting on infinitely variable pricing, aggressive savings from the contemporaneous Internet revolution, and the ripe, Wild West opportunities of a rapidly deregulating and expanding market. Europeans, fed up with costly train tickets, annoying motorway tolls, and Concorde-style prices from national "flag carriers" such as Air France and Lufthansa, have defected to the short-hoppers in droves--200 million, nearly 45 percent of the entire E.U. population, took a low-cost flight in 2003 alone.
These airline upstarts are run by swaggering young CEOs whom the European press treat like rock stars, living up (or down) to the billing by issuing manly predictions of price war "bloodbaths" and pulling off daring publicity stunts, such as Irish carrier RyanAir's post?September 11 sale of 1 million tickets for "free" (before taxes). Their companies have been rewarded with dot-com-bubble-like stock valuations--and the volatility that comes with them--while their long-haul counterparts dodder toward cutbacks, bankruptcy, and worse. (Switzerland became the first European country to lose its national airline when Swiss Air and Sabena folded in 2001.) In less than a generation, one of the Western world's most notoriously regulated and distorted markets has become a poster child for unified Europe's 21st century ?lan.
In the process, Europeans have changed not only their travel choices but the way they behave. "We aren't just teaching our customers about our brand," says Stanislav Saling, the twentysomething Slovak public relations director of SkyEurope, a new Bratislava-based low-cost carrier. "We're selling tickets to people who have never flown before, and showing them how to use the Internet." Brits, who have led the low-cost charge with RyanAir and easyJet, are now the world's biggest owners of foreign second homes as a percentage of population. Across the 25-country, 458-million-resident European Union, marriage between different nationalities is at an all-time high. Residents of post-communist countries, who not long ago were more than happy to take any handouts from their far richer Western neighbors, are now leveraging the low-cost revolution to compete with them instead. Old Europe's postwar business culture, in which CEOs of highly regulated "National Champions" were virtually interchangeable with their schoolboy pals in government, has been battered by entrepreneurial mavericks of hard-to-define provenance, such as easyJet's 37-year-old founder Stelios Haji-Ioannou, who was born in Greece, owns houses in four countries, and (as The New York Times put it in April) "feels Greek when he is in London, English when he is in Greece, and European when he is in America."
Amazing what a little deregulation can do. And as Europe's low-cost flood reaches what analysts are predicting will be a high-water mark in 2004, it's worth marking how dynamically even statist societies can react when given the chance--and wondering how the United States, with its 19-year head start, has squandered its lead in airline innovation.
Set My Prices Free
The U.S. airline market was deregulated in 1978. The virtues of the move, though long debated, had become more than self-evident by the mid-1990s: With the government no longer dictating ticket prices and in-flight menus, airfares dropped 40 percent in real terms between 1978 and 1997, saving travelers an estimated $20 billion a year and more than doubling the total number of passengers. (Accident rates, meanwhile, were cut in half.) Hundreds of new entrants flooded the market, and though most eventually failed (or were bought out), one folksy little Texas operation called Southwest Airlines became emblematic of the deregulation era.
Southwest--which actually jumped the gun on deregulation by seven years, taking advantage of Texas' enormous size to avoid onerous interstate commerce regulations--ushered in the low-cost revolution with four revolutionary insights:
1) Flying just one type of aircraft will save a company millions on maintenance and bulk purchasing.
2) Point-to-point flights between smaller airports, rather than hub-and-spoke operations centered on a single large airport, allow each airplane to be used for several more flights a day, and more cheaply.
3) Passengers will appreciate the elimination of perks such as business lounges and free meals if the savings are passed on directly to them (and with a smile).
4) Air travelers will flock to the lowest prices, period.
By the late 1990s, Southwest was the world's richest and most profitable major airline, inspiring successful copycats (such as JetBlue) and even forcing money-bleeding behemoths like United Airlines to launch low-cost hopefuls like TED.
Despite these two decades of happy evidence, it took Europe until 1997 to deregulate its own air travel. Countries much smaller than the U.S., with single, dominant, state-owned airlines (not to mention a more statist version of capitalism), had a much harder time visualizing the benefits of exposing their National Champions to the cruel winds of competition. As in just about every other major European industry, it took the creation of the European Union in November 1993 to pry loose the stranglehold of government interference and introduce the radical new concept that National Champions can, and sometimes should, fail.
Like most decisions in Brussels, airline deregulation was telegraphed years in advance. The pre-E.U. European Commission laid out a three-stage liberalization process in 1993, with the final step--opening up domestic routes to foreign competitors--coming on April 1, 1997. So entrepreneurs had plenty of time to prepare, which is precisely what Haji-Ioannou (known on the continent as "Stelios") did. The son of a Greek shipping magnate, the London School of Economics?educated Stelios vowed to out-cheapskate even Southwest (by, for instance, charging money for peanuts and water) and add a strong dose of Richard Branson?style flamboyance to build his bright orange brand. With an initial investment of just $7.5 million, Stelios engineered a series of publicity stunts: convincing British television network ITV to launch a reality show called Airline; wearing a comical orange jumpsuit and handing out free easyJet tickets on the inaugural flight of the British Airways?backed low-cost competitor Go (since swallowed by easyJet); offering free flights to anyone who would come down to a Greek courthouse to support his legal fight with local travel agents; and so on.
Stelios' showmanship, combined with a few of his low-cost maxims ("Consumers behave in a rational way when confronted with a value judgment; give them a product at the right price and they will take it"; "Think how can we transfer the workload to the customers"), helped turn easyJet into the fastest-growing of the top 150 airlines in the world, according to Airline Business magazine, and even introduced a new word into the lexicon. "On 28 April, Ljubljana joins easyJet's destination list for an irresistible ?80 return," London's New Statesman noted in April. (Travel features on new airline destinations have become a staple of British newspapers.) "All over the capital, Slovenes are bracing themselves for the onslaught of British weekenders. The easyJetters, it is acknowledged, will drink too much and talk loudly about how cheap everything is."
Stelios has stepped back from the day-to-day management of the airline, and now the self-styled "serial entrepreneur" is taking his low-cost "easy" brand and online purchasing model into car rentals, Internet caf?s, cruise ships, and even pizza delivery. "I think easyJet was instrumental in convincing people it was worthwhile to understand how the Internet works," he told The Independent in April. "It's been a watershed decade, an amazing period," he told the Times of London in May.
If Stelios and easyJet were the John the Baptist of European low-cost air travel, RyanAir and Michael O'Leary are Jesus himself--or perhaps the Antichrist. O'Leary, a foul-mouthed, jeans-wearing college dropout of an Irishman, took over RyanAir a decade ago, when it was a minor if profitable Irish airline serving 700,000 passengers a year, mostly between Dublin and London.
In business since 1985, RyanAir got the low-cost religion in 1991 and started aggressively hitting the newly liberalizing European market soon after Stelios popularized the no-frills concept to the masses. Unlike easyJet, however, RyanAir refused to take on popular routes at congested and expensive airports, sticking to a strict diet of cheaper regional flights to keep its prices the lowest in Europe. And unlike Stelios, who projects a friendly, go-getting cosmopolitanism, the 44-year-old O'Leary is a street brawler who has alienated swaths of the U.K. by brashly banning unions, hounding the Irish government to break up its state airport monopoly Aer Rianta, cadging subsidies from desperate airport towns, routinely referring to the European Commission as "the Evil Empire," and responding to his critics with a blanket "bollocks."
RyanAir is notorious for finding inventive ways of "penalizing" its passengers, such as setting absurdly low 15-kilogram (33-pound) baggage limits and charging four euros (nearly $5) for each additional kilo. (I once observed--and suffered heavily from--this practice at sleepy St. Etienne airport in France, where every penalized passenger I talked to said the limit had not been enforced on the flight out from London, where they could have easily switched airlines.) Even wheelchair users were charged an extra ?18 ($33) fee, until a British court ruled the practice discriminatory in February. (RyanAir, which says it was simply passing along the standard British Airports Authority surcharge, announced that all tickets would be raised a half-pound to cover the difference.)
Still, the company makes up for customer grumbling by leading Europe in flight punctuality and keeping prices at absurd lows, which it (unlike most of the new low-cost competitors) can afford because of its massive cash reserve. Since O'Leary has taken over, RyanAir has become the most profitable major airline in the world (it had a 19 percent margin in 2003) and has the fourth-largest market capitalization ($4.7 billion as of June 3, just behind British Airways' $5 billion and Lufthansa's $5.5 billion).
From 1998 to 2003, thanks in part to RyanAir and easyJet, low-cost air traffic grew by 600 percent in Europe, compared to just 10 percent growth for full-service airlines, according to Tourism News. Forty new airlines have debuted since the September 11 massacre alone. (More than 100 have been launched in the last decade, but many of those have disappeared.) Europeans who not long ago used airplanes only to cross the ocean are now taking them to visit girlfriends, scope out real estate, and turn the E.U.'s theoretical freedom of movement into a reality.
Doing It for Themselves
A Slovak actor/playwright friend of mine marvels at his industrious college graduate son, who works a good white-collar job in the booming industrial belt adjacent to the Bratislava airport and spends as much free time as possible abroad. "He just flies to Spain or Western Germany like it's no big deal," my friend says, laughing.
Slovaks' freedom of movement has been no laughing matter since Czechoslovakia split up in 1993. Bratislava, whose city limits (and cheap domestic prices) end less than 20 miles from the borders of Austria, Hungary, and the Czech Republic, has been ill-served for decades by the microscopic Stefanik Airport, which makes JetBlue's home in Long Beach, California, look like O'Hare in comparison. "There was no major scheduled airline operating in Slovakia," Saling, the P.R. director for SkyEurope, says. "There was not a single carrier that would connect Bratislava with major European destinations."
No more. SkyEurope, founded in 2001, has brightened Stefanik's dark little corner, operating flights to 13 international destinations for as low as 17 euros. "It's a business, but at the same time it's a mission," says Saling, who did P.R. for three years in the Slovak prime minister's office. "We are giving the people the opportunity to fly. Many of our passengers are going to their destination for the first time. And on the other hand, we've put Bratislava on the map of the low-fare destinations, so people from London, Paris, Milan, and the other cities are flying to Bratislava for the first time."
For the first time in the 13 years I've been visiting Bratislava, there is a year-round presence of tourists, noticeable even in the bleak days of early January. The spruced-up Old Town is teeming with good restaurants and live music venues where a few years ago there were none. Locals are palpably proud of their city, whereas a few years ago they were embarrassed. (A friend of mine once remarked that if Prague was the Left Bank of the '90s, Bratislava was surely the Cincinnati of the '70s.) And everyone I met wouldn't stop talking about how packed the caf?s were with foreigners in the summer of 2003. "It was really a boom of foreign tourists," Saling says. "It was very different than other years."
SkyEurope is not only doing well for itself. The company is making Stefanik in Bratislava a legitimate low-cost alternative to Vienna's nearby Schwechat Airport. (Airport traffic at Stefanik has nearly doubled since 2001.) SkyEurope is hoping to do for Central Europe what easyJet and RyanAir have done for the West. "It is a low-cost airline based in a low-cost country," Saling says, "which means it has an advantage over any airlines based in a Western country, whose cost base is higher."
There are now 10 SkyEurope flights a day out of Budapest (where it competes with the energetic new entrant Wizz Air); two new regional hub airports, probably in Poland and the former Yugoslavia, will be selected sometime soon. Meanwhile, Austrian Airlines and Lufthansa recently have moved into Stefanik, and Slovaks who rarely used credit cards or the Internet are getting a crash course in both.
"Part of our everyday work is the revolutionizing of the local market," Saling says. "To tell people what are low-cost airlines, how they can bring value to their lives, and change the way they travel."
When Good Markets Go Bad
The financial pages on Fleet Street were filled all last spring with ominous talk of a low-cost market collapse. Fuel prices, already one of the largest fixed costs in the airline business, are going through the roof, just as the price-slashing "bloodbath" RyanAir's O'Leary warns of drives tickets ever closer to free. A competitive shakeout, predicted by the experience in North America, has long been forecast. But there is a new threat on the horizon: the E.U.'s stifling bureaucracy.
Early last year, the E.U.'s Airline Commission, after hearing complaints about suddenly canceled flights, thin compensation, and poor customer service, passed regulations forcing all European airlines, low-cost or otherwise, to compensate stranded passengers with up to 250 euros per canceled flight, in addition to providing hotel, meals, drinks, and taxi service. The rule, currently scheduled to take effect in February 2005, is being challenged at the U.K. High Court in London. "This would be a disaster for the industry and for consumers," warns Wolfgang Kurth, president of the new European Low Fares Airline Association, a group that includes RyanAir, Sky Europe, and Wizz. "The prerequisite of our business model --namely, low operating costs--is at risk." Mike Ambrose, director general of the European Regions Airline Association, estimated that the ruling "will add 1.5 billion [euros] a year to air fares." EasyJet estimated its damage alone would amount to 120 million British pounds a year.
This is not the only threat facing Europe's most dynamic sector. Residents near the booming low-cost hub of Stansted, England, are hopping mad about a major planned airport expansion, and similar protests are being heard in communities that 10 years ago would have begged for the problem of overcapacity. Complaints of noise and air pollution abound, putting more draft regulations on the table in national capitals and in Brussels. "The skies above Europe," Newsweek warned in May, "are getting dangerously congested," and all it takes is one major crash (see ValuJet) for a "hot" airline or sector to go cold overnight. EasyJet and RyanAir are constantly battling state-owned airports to privatize and/or reduce fees, while attempting with limited success to protest the preferential treatment some regional airports give national airlines (especially in strike-addled France). On the other side of the coin, staggering flag carriers like Italy's Alitalia continue to be propped up by taxpayers' money instead of being left to die in the wilderness. "It is high time," International Air Transport Association Director General Giovanni Bisignani said at the organization's annual meeting in Singapore last June, "that European Union regulators took the trouble to learn about the industry they are busy misregulating."
Of course the same meddling push has been felt in the U.S. for decades, deregulatory success be damned. Congress holds hearings on tinkering with ticket prices usually once per session, and the important job of finishing deregulation--most notably, by privatizing airports (which England did back in 1987) and opening the domestic market to foreign competition--has been left undone. Meanwhile, 9/11 ushered in a new round of security rules and a whopping $15 billion airline bailout, which, notably, low-cost airlines like Southwest and JetBlue didn't even need.
"Evidence in Europe and the U.S. indicates that the leading LFAs [low-fare airlines] fared significantly better than their full-fare rivals in the wake of the terrorist attacks on the U.S.," wrote Thomas Lawton, author of Cleared for Take-Off: Structure and Strategy in the Low-Fare Airline Business, in the November 2003 Irish Journal of Management. "While established rivals cut staff, grounded aircraft and even collapsed into bankruptcy, the LFAs continue to open new routes and order new aircraft….LFAs are more resilient than traditional airlines to market downturns."
Which is why they should be enabled, not blocked. Yet blocking them is precisely what U.S. lawmakers have done. American negotiators have failed to budge in a series of "Open Skies" discussions with European trade officials, scotching the two sides' intention to announce a major new deal at a June 26 transportation summit in Dublin, and postponing any further substantive discussion until after last November's presidential election.
Would this endlessly delayed agreement allow RyanAir and other upstarts to finally fly purely domestic routes, a liberalization that Alfred Kahn, the architect of deregulation in Jimmy Carter's administration, told reason in 1998 is "our main hope" for greater competition? Alas, no. The only reform the Bush administration has even contemplated is increasing the cap on foreign ownership percentage of domestic airlines from 25 percent to 49 percent, thereby perhaps allowing Virgin's Richard Branson to launch his long-awaited American carrier, and not much else.
Sen. Trent Lott (R-Miss.), chairman of the Senate Commerce Committee's aviation subcommittee, told Aviation Daily last February that he had "security concerns" about foreigners owning domestic airlines, while the Transportation Trades Department of the AFL-CIO claimed, in a zero- sum flourish, that competition "would devastate an already ravaged U.S. aviation industry and its work force." The House Aviation Committee, meanwhile, is trying to extend the government's $700 million annual "war risk" insurance subsidy for another five years, and United Airlines is sniffing around Washington for yet another bailout, which analysts have warned could be the largest since the Savings and Loan scandal of the 1980s. And with no Open Skies deal in the offing, the struggling American carriers may face a future ban from operating between European capitals, which current bilateral agreements allow.
As painful as it may be to admit, it looks like the United States, which blazed the global trail of airline deregulation nearly three decades ago, will be choking on the exhaust of Old Europe for years to come, denying Americans the benefits that have transformed the way Europeans behave. Amazing what a little political cowardice can do.
