Bandeira Thesis

8/6/2019 Bandeira Thesis

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The posit ioning of Low Cost Carriers (LCCs) in

the European short haul business t ravel market.

Joo Pedro Bandeira

M. A. European Tourism Management (ETM)

Bournemouth University

August 2004


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Acknowledgements

First of all, I would like to express my appreciation to my supervisor Prof.

Francisco Serra and my co-supervisor Prof. Paula Martins for their help and

advice in the organization and writing of this dissertation.

This is an important step in my life which finally came true. The fulfilment of this

dissertation has a very significant meaning for me since it symbolises the

overcome of a difficult but very challenging hurdle in this pleasant and

rewarding voyage, which is life.

I want to dedicate this moment to my family which always supported and

incited me during the good and bad times. I love you all.

Personal gratitude to my mother, for giving attention and courage to everything I

do. To my father for being there every time I needed. To my super grandmother

Teresa for giving continuous support and care.

To my sister thanks for being always caring about me.

Special thanks to my uncle Antnio Bandeira for the precious and priceless

support for the writing of this dissertation. Technologies are making distances

shorter, and shorter

My reference to all the wonderful colleagues I had the opportunity to meet andshare unforgettable moments, during the master period in Bournemouth and

Heilbronn.

Finally but not least my thanks for all my friends in Portugal, that gave all the

attention and support during this long period.

Faro, 27.08.2004


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Declaration

I hereby declare that the dissertation submitted is wholly the work

of Joo Pedro Bandeira. Any other contributors or sources have

either been referenced in the prescribed manner or are listed in the

acknowledgements together with the nature and scope of their

contribution.


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3.2. EASYJET THE RUNNER FOR THE EUROPEAN LCC THRONE .........................................................62

3.3. THE ATTACKOF LCCS TO THE BUSINESS AIR TRAVEL MARKET...............................................68

3.4. CASE STUDY CONCLUSION....................................................................................................................79

4. DISSERTATION CONCLUSION ..................................................................................................................81

BIBLIOGRAPHY .......................................................................................................................................................84

ANNEXES (AND APPENDICES) ....................................................................................................................103

Annex 1- Timetables and frequencies of BA, KLM and easyJet, in Route Amsterdam-London .............103


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List of Tables

Table 1-The dist inction bet w een custom er and consum er in business t ravel ________________ 15

Table 2: Scheduled passenger movement in London airports, 1999-2001 ___________________ 28

Table 3: Evolut ion of som e European Short Haul routes air fares, January 1999 and_________ 29

Jan ua ry 2003 ____________________________________________________________________ 29

Table 4- Airlines product__________________________________________________________ 45

Table 5: Passengers Stat ist ics com parison betw een Ry anair and BA - July 2004 ____________ 54

Table 6: Flight frequencies of easy Jet, BA an d KLM from Lon don t o A mst erdam ____________ 72

Table 7: Flight frequencies of Ry anair, BA and Al it alia from Lo ndon t o Mil an _____________ 72

Table 8: Fares difference betw een Ry anair and BA /Iberia on it s new routes ________________ 74

Table 9: Punctua lit y performance of Ry anair and easy Jet compared wit h other M ajor airlines inEurope in January 2004.___________________________________________________________ 75

Table 10: Ai rlines wit h few est lost bags _____________________________________________ 76

Table 11: Airlines w ith few est flight cancellat ions _____________________________________ 77


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List of Figures

Figure 1: The m etho dolo gical approach _______________________________________________ 6

Figure 2: St ructu re of t he Dissertat ion ________________________________________________ 8

Figure 3: Ry anair Traffic num bers (in m illion s) _______________________________________ 55

Figure 4: Ryanair current destinations _______________________________________________ 57

Figure 5: Pass engers grow t h (in percenta ge): __________________________________________ 58

Figure 6: Ryanair Fleet: ___________________________________________________________ 59

Figure 7: Comparison of passenger traffic betw een easyJet and Ry anair___________________ 63

Figure 8: easy Jets current net w ork _________________________________________________ 64

Figure 9: easy Jets Fleet comp osit ion pla n ___________________________________________ 65

Figure 10: R yanai r publicity in it s w eb-sit e against BA fuel surcharges ___________________ 78

Figure 11: R ya nair seat sale Promot ion in its w eb sit e _________________________________ 78


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List of abbreviat ions

AMEX American Express

ATW Air Transport World

BA British Airways

BAA British Airports Authority

BTI Business Travel International

CEO Chief Executive Officer

CWT Carlson Wagonlit Travel

IATA International Air Transport Association

ITM Institute of Travel Management

LCC Low Cost Carrier

LFA Low Fare Airline

MICE Meetings, Incentives, Conferences and Events

TNC Traditional Network Carrier

SARS Severe Acute Respiratory Syndrome

SIA Singapore Airlines

T&TI Travel & Tourism Intelligence

VFR Visiting Friends and Relatives

UK United Kingdom


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1Introduction

1.1.Introduction to the Area of Study

In recent years a lot has been written and said about the emergence of the Low

Cost Airlines. This new breed of Airlines have revolutionised deeply and

decisively the status-quo of the aviation in general and specifically of the so

called Traditional Network Airlines, by introducing a revolutionary low cost

business model which enable these airlines to offer very low fares to their

customers.

The liberalisation of the airline industry in Europe in 1997 was the key moment

for the rise of these very competitive airlines since it allowed any airline

established on a European country to fly between any two EU airports and

determined the end of flag carriers monopoly in European skies. The so-called

democratisation of air travelling was just beginning.

Initially low fare airlines were clearly only focusing on the leisure segment which

was thought to be more price-oriented. However, and contrarily to what most

people would suppose, there is evidence that these airlines have been also

attracting a large number of business travellers (Koumeli, 2002b). In fact

depressed European economies have made Business Travellers more and more

price conscious augmenting the price factor in the choice for their flights (Pels

and Rietveld, 2004).

Having these introductory ideas in consideration the next chapter will discuss

the dissertation aim and objectives.


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1.2. Research Aims & Objectives

This dissertation has the main aim of analysing the positioning of LCCs in the

short haul Business air Travel Market, which has been for many years, the

cornerstone for the revenues and financial health of the Traditional Airlines.

In order to achieve this aim the following objectives have been set:

a) To find out the changes brought in with the emergence of the Low CostCarriers to the Air travel Business in Europe, and specially the effects to

the Business Air Travel Market.

b) To analyse what are the main purchase factors in the European Short-haulBusiness Air Travel Market, and to determine the disposition of business

travellers to fly with low cost carriers in the short haul.

c) To examine how well Low Cost Carriers are doing in attracting BusinessTravellers, analysing their competitive advantages in relation with the

TNCs, in this important market.

d) To investigate the viability of business class on the European short-haul,trying to forecast what is the future of the Business Class in the European

short haul air business.

e) As a conclusion, to assess whether TNCs can retain their short haulBusiness Travel markets by continuing to pamper their business

passengers, or whether to progress into the low cost arena themselves.


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1.3. Methodology

1.3.1. Introduction

The following chapter presents the research methods, which will be used to

achieve the aim and objectives of this dissertation.

The research is carried out on the basis of secondary data sources. This form of

data collection will be explained in the following chapter.

1.3.2. Secondary Research

This study which aims to examine the positioning of LCCs in relation to the

Business air Travel Market will be based exclusively on secondary data.

Secondary data are already existing information which was collected for a

specific primary purpose and can be used a second time in a different project.

The most important advantage of using secondary data is the enormous saving

in time and money. The use of existing sources not only helps the researcher to

formulate and understand the research problem better, but also broadens the

base for which scientific conclusions are highly enhanced (Ghauri et al., 1995).

The secondary data gathered will be used for the literature review and the case

study in order to meet the objectives of this dissertation.

The review of existing literature will focus on analysing the Air Travel Business

Market, the situation of the European aviation industry, LCCs and TNCs.

Moreover, it will supply the theoretical base of this dissertation, and the support

for the analysis of the leaders of LCCs sector, Ryanair and easyJet and their

positioning in relation to the Business Travel Market in the case study.


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A case study can be defined as a detailed investigation with data collected over

time of one or more organizations within organisations (Hartley, 1994).

In this dissertation the case study will help the author to verify in a more

practical way the current positioning of the two most successful LCCs in the

Business Travel Market. Both the literature review and the case study will be

organized and oriented to meet the 5 objectives purposed in the previous

chapter.

Secondary sources used for the research includes aviation specialized magazines,

newspaper articles, industry reports (such as Mintel aviation and Business Travel

reports), Internet articles, aviation conference presentations papers and

textbooks.

Mr Antonio Bandeira, Varig Brazilian airlines manager in USA and authors

uncle, provided many important aviation reports, conference presentations and

various aviation articles which were very useful for the purpose of the

dissertation. Furthermore, its insights and knowledge over the themes covered

were important to understand and clarify various current aviation issues.

Additionally Mr Joao Bandeira, authors father and supervisor of the handling

department of TAP air Portugal which serves various TNCs and LCCs in Faro

airport, supplied valuable information over the differences in ground handling

operational procedures between the two types of airline.

Today is easy to find much information about Low Cost Carriers. The subject is a

very popular theme and it is not difficult to find useful information about LCCs

in magazines, newspapers and Internet articles. Also there is available a fair

number of academic studies or textbooks related with the subject.


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In order to develop the case study about the leading European LCCs much of the

data were drawn up directly from both airlines websites and last years final

reports. These reliable sources gave very important and useful information about

the companies performance in the past as well as their perspectives and plans

for the future.

1.3.3. Analysis of secondary data

When carrying out secondary research, you are not just collecting and

reproducing it in a similar or identical form. (Finn et al 2000). By contraries, the

data needs to be arranged to address the authors objectives.

Secondary data analysis represents interpretations, conclusions, or additional

knowledge about the information collected (Veal, 1992).

The secondary data analysis carried out within this dissertation involves data,

quantitative data, as well as mixed data sets of both types. The approaches used

to analyse the available secondary data are very varied, including the reading

of texts, the examination of theories, the interpretation of statistics and previous

research on the subjects.

To conclude, the methodological sequence used to achieve the aim and objectives

of this dissertation is explained next in a clear way with Figure 1.


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1.3.4. Methodological approach

Figure 1: The m ethodological approach

Source: Authors own.

Secondary

Research

Internet articles

Aviation specialised

magazines

Textbooks

Newspapers

articles

Reports

Literature

Review

Analysis

Conference

Presentations

Case Study: Ryanair and

easyJet


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1.4. Structure of the Dissertation

This dissertation is structured into six main chapters. Below it will be presented

an outline of each chapter:

Chapter 1- Introduction

It includes an introduction about the topic of this dissertation, its aim and

objectives, an explanation over the methodology to be used and the structure of

the dissertation.

Chapter 2- Literature review

The Literature review chapter is divided in 4 sub chapters: Business Air Travel

Market, Background of Aviation Industry in Europe and LCCs. At the end of

each sub chapter will be summarised the chapter key findings.

Chapter 3- Case Study: Ryanair and easyJet

The case study will be the practical part of the dissertation. Has the goal of

examining how the leaders of the European LCC sector have been so successful

and evaluate their positioning in the Business Travel Market.

Chapter 4- Conclusion

Taking into consideration the aim and objectives of the dissertation, this chapter

summarises and evaluates the findings and conclusion of the study.

Following, is supplied a whole view of the dissertation structure in Figure 2.


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Figure 2: St ructure of the Dissertat ion

Source: Authors own.

DissertationIntroduction

Business

Market

Low cost

carriers TraditionalNetwork Carriers

Case Study:

Ryanair and easyJet

Conclusion

Background of Airline

Industry in Europe


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2Literature Review

Introduction

This chapter is one of the main parts of the dissertation. It will offer a thorough

literature review over the three cornerstones of the dissertation: the Business

Travel Market, the Low Cost Carriers and the Traditional Network Carriers. To

achieve the aim of this dissertation is absolutely necessary to understandcomprehensively these three topics and their current situation.

The Literature Review will also give a very important theoretical support for the

practical part of the case study which will examine the two leading European

LCCs and how they are doing in the Business Travel Market.

The Literature Review will begin to examine the main requirements of Business

travellers when flying on short haul and the current situation of the short haul

Business Travel Market and the Business Class in Europe. Next follows an

overview over the Background of the airline industry in Europe and the

liberalisation process which meant new opportunities for LCCs to grow. After

this, will be investigated the emergence, development and LCCs success

formulas in relation to TNCs and also the propensity for business travellers to

use budget carriers. Finally, the last sub chapter will focus on TNCs current

situation and their actions facing the threat of LCCs in the Business Travel

Market.


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2 .1. European Business Air Travel

2.1.1. The demand for Air Travel: The Business market

Broadly in the Tourism sector, and specifically in the airline business, two main

segments are generally identified; business travel market and the leisure market

(Doganis 2002). According to the objectives of this dissertation, the focus will be

made at the Business Air Travel Market, analysing its importance, its specific

characteristics and requirements of business travellers. This will lead to a better

understanding over this theme.

A business travel involves a journey work related and paid by the employer

which, in many cases might be the same person (Doganis 2002). Business trips

include travelling either inside national borders or overseas to meet with: clients,

suppliers, subsidiaries, parent companies and other organisational groups as

well as to visit trade shows and conferences (Mintel Report 2000).

The Business Air Travel segment has been for many years the mainstay of

Traditional Carriers. High fare and high frequency business travellers help

airlines to offset their balance sheets and therefore TNCs long recognising this

fact, make all their efforts to secure this highly profitable market. Business

travellers fly with high frequency and are normally charged a premium in

exchange to full flexibility and certain specific tailored service features offered byairlines to this segment market. Seaton and Bennett (1996) indicate that although

this segment represents a tiny percentage of the total traffic of the airlines it

accounts for a very high percentage of the total airlines revenue.

Nonetheless, the Business Air Travel Market has been changing in the last few

years and business travellers are becoming increasingly frugal, due to the main


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World economies downturn and consequently companies adopting more restrict

Travel and Entertainment regulations for their employees (Max 2003).

This will be discussed more detailed, in following chapters.

To better comprehend the characteristics and requirements of the short haul

Business Air Travel Market, it is important to differentiate the former in two sub

segments. As Shaw (1999) recognizes, there are distinct sub segments in the

Business Travel Market, the corporate Business Traveller and the Independent

Business Traveller. The former, generally works for large companies, is

constrained to corporate travel policies, is less worried over the price issues since

companies are the ones to pay the bills and tends to be more demanding as far as

services standards. On the other hand, the Independent Traveller is normally the

owner of his own business or works for small compan ies and is very price

conscious in the flight choices, since he/she is paying from his/her own pocket

(Mason 2001). For independent Business Travellers price assumes a great

importance and they are willing to trade-off some of airlines product frills

against a cheaper fare (Pels and Rietveld, 2004).

In general, business travellers have the same requirements when travelling by

air. Next follows an explanation of the requirements of business travellers in the

short haul (Source: Shaw 1999):

o Frequency and timings- These are very important requirements for anybusiness traveller that likes to have at disposal many daily flights times to

choose from. Early morning and late afternoon flights allow business

travellers to make day-return flights, hence coming right after the business

affairs to their homes or offices and take more advantage of their scarce

time. An airline which is able to offer high frequency and at appropriate


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timings will certainly have a big competitive advantage towards the

Business Segment.

o Punctuality- This is tremendously important for the business travellers.Flight delays are extremely inconvenient, since they provoke great

disturbance to customers schedules and may signify missing

appointments or important meetings. An airline with very a strong

reputation of poor punctuality has fewer chances to secure a big share of

this Market Segment.

o Seat Availability- Seat Availability signifies the probability of a passengerto be able to book a flight timely close to a flight due to depart. Business

travellers many times require the right to cancel bookings and rebook on

later flights. In many unexpected and sudden occasions business

travellers have the need to fly in a next flight out basis and they will see

no value on an airline offering a very high frequency in a specific route, if

all the flights were totally booked days in advance.

o Frequent Flyer Benefits- To establish and maintain loyalty of theseimportant segment, airlines have long time been offering their customers

Frequent Flyer Programs (Bandeira, A. 1994). This is a marketing tool

which is mainly focused to the business travellers who fly frequently

throughout the year, and has the main goal of encouraging preference and

frequent usage of a specific airline or an alliance of airlines (Bandeira, A.

1994). The rewards to the business traveller is that each time he flies,

receives a certain number of miles, which can be exchanged, for example,

by free air tickets to the very desired nice summer vacations. This is an


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important factor for the choice of an airline since in order to get as many

miles as possible the traveller tend to choose loyally the same company or

alliance of companies to fulfil his transportation needs. Normally FFP

members will require the airline they are travelling with, to be connected

with other airlines, in order to have wider destinations choice without

loosing the FFPs benefits.

o In Flight Service- This is an aspect of airlines service where there is possibleto differentiate and therefore can influence the airline-choice of the

business travellers. In short haul, in-flight service represents a not so

important role, as other services mentioned before. However a good

service can determine airlines to have a high reputation, which is

fundamental to attract new customers and to maintaining the preference

and loyalty of existing ones. Service features like the seating comfort

contemplating a wide seat pitch are appreciated. Likewise a separate

Business Class area with a quiet and cosy ambience is important for

business travellers, since it gives them the opportunity for example to read

important documents before the business affairs. Finally the offering of a

meal and drinks suitable for the time of the day, is a plus when the

objective is to provide a very calm and agreeable time on board for these

demanding customers.

o Airport Location- In the short-haul, business passengers prefer to fly fromthe nearest local and easily accessible airport, rather than from crowded

and distant Hubs. They require loosing as less time as possible with their

business trips. The expression Time is money is extremely suitable

motive to explain this demand.


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o Airport Service- When travelling short haul, the time sp ent on the groundmight exceed the flight time, hence the services provided on the airports

are of major importance for business travellers while choosing an airline.

Requirement of business travellers are normally the possibility to do late

check-in hence maximising their time, to take their luggage on board or

when travelling in business class to use a separate check in and to have a

lounge to take a coffee break or send some e-mails.

Notably not always the business traveller is the person who chooses the airline to

fly with. Companies have usually a very big influence in the purchase decision

making process of business travel. Consequently, it is very important for airlines

to understand the difference between customer and the consumer in Business

Travel (Table 1). Although, in many firms employees may have the right to

choose freely their business trips, this is not always the case (Shaw 1999). More

and more companies restrain their employees with tight Travel Policies, limiting

their freedom to choose the airline to fly with. Additionally, often busy business

travellers delegate these functions to their secretaries or to a travel agent, in a

commissionable basis, to book their flights instead of doing it themselves. In the

above example, the business traveller is the consumer of the business travel

service and the assistant or travel agent who made the buying decision is the

customer.

Many companies also have a distinct travel manager or management department

that has the job of buying and booking the business trips for their employees

(Shaw 1999). These travel managers focus normally on one or two airlines for

their preferred air travel suppliers, committing for a certain travel volume in

exchange to discounts and lower airfares (Farrel 2002).


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Table 1-The distinction between customer and consumer in business travel

Customer Consumer

Employers or sponsoring organisations

that make decisions or give permissions

for employees to travel.

Employees who actually travel and

consume business travel services.

Employers or sponsoring organisations

that usually pay the bill for the travel

undertaken by employees.

Employees who travel but do not

usually pay the bills themselves.

Source: Swarbrooke and Horner 2001

Airlines being aware of the difficulty of knowing who is responsible for the

purchase decision of business air travel tend to use multiple marketing strategies

in order to attract business travellers.

The following are examples of marketing actions are:

o Corporate programs tailor made for the needs of each corporation.o Rewards to the Business Traveller through the aforementioned FFPs

offering companies the supply of all their business travel needs, granting

air fares discounts (Shaw 1999).

2.1.2. The actual Situation of the Business Air Travel Market inEurope

The volume of international Business Travel has increased constantly since the

1990s until 2000. However a combination of events like the effects of the

September 11, in 2001, the world economic slowdown with the consequent

cutbacks in travel expenditure by companies, together with the war in Iraq and


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the SARS epidemic, caused the rate of growth to slow considerably in last couple

of years (Mintel Report 2003c). However, there are signs of a turnover on the

business travellers confidence, with the year of 2003 recording a growth of 3%,

of 4, 5% by the end of 2004 and pre-11 September levels being reached by 2005.

Today the idea that in the Business Market, customers are not concerned about

the cost of travelling and that will pay any price in exchange for ticket flexibility

and high frequency is fading away (Mintel Report 2003c). In fact, the

aforementioned changes occurred in the last few years have been the main

reasons for the change on the priorities for Air Business Travel. Price seems to be

more and more a major concern for corporations and there is an increasing

pressure to hold business travel budgets (Easen 2003a). As Franke et al (2002)

indicated that corporations are tightening their belts by encouraging their

employees to travel only the essential, and to search for lower fares by booking

flights in advance or accepting less flexible tickets by scheduling itineraries that

included a Saturday night stay. Business travellers who have traditionally be

responsible for as much as 60 percent of traditional airlines revenues and well

over 100 percent of their profits (Franke et al 2002), are definitely not longer

going to put up with the high fares that they have been paying before (Koch

2002).

Travel and Entertainment related expenses accounts for as much as 7% of

companies` total operating costs (Day 2000), and is seen as one of the most

controllable cost centre (Zea 2001). Hence, corporations are increasingly

controlling and restricting how much they spend on travel and how frequently

employees ar e leaving the office (Mintel Report 2003c).


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The increasing influence of the Internet in the Travel Business have allowed

business travellers to become increasingly savvy and to look for more effective

ways to obtain savings by getting the best online deals for their air travel needs

(Day 2000). In fact, business travellers are starting to realize that airlines are

building up fences in order to maintain high revenue business customers (Farrel

2002), asking them to pay five times more than leisure travellers (Viles 2001).

Moreover and as a consequence Business Travellers are bypassing negotiated

Airlines Corporative travel programs whose discounts are in fact not always

based on the lowest fares and preferring to use alternative low fare operators

(Velikova 2002).

This major turnaround in the short haul Air Travel occurred at a time when low

fare carriers were emerging and offering cheaper air travel options which were in

line with the intended companies cutbacks on their Travel Budgets

(TravelDailyNews.com 2002). Additionally, this have been forcing traditional

airlines to offer promotional fares or changing completely their price structures

in order to be able to compete with the low cost operators (American Express-

News 2003).

Next it will be analyzed the Business Class and its current situation in the Short

haul Air Travel.

2.1.3. The Business Class

For many years, business travellers were expressing displease to the fact that full

fare tickets were rendering nothing more than a flexible economy class seat and a


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big chance to sit beside noisy families with babies crying or backpackers, who

normally paid much less than they did (Stokdyk 1998). This led to the

introduction of a separated business class in most airlines in the world.

KLM claims to have been the first, in 1978, to provide its full-fare paying

executive travellers a separate catering (Stokdyk 1998).

Basically to differentiate the business class product from one leisure focused

economy ticket, airlines provide with a set of benefits. These benefits comprise,

the offer of a Frequent Flyer Programme that reward frequent passengers among

other things with free flights, a dedicated check-in, a bigger seat pitch rendering

greater leg space, a comfortable seat, a distinct in-flight meal service with free

drinks, free magazines and newspapers, access to airport lounges and big

number of daily flights frequency that gives full flexibility for the traveller to

choose the most convenient time to fly (Mason 2000).

Next chapter will examine the current situation of business class in the European

short haul in Europe.

2.1.4. The current situation of Air travel Business Class in

European Short-Haul

With the recent downturn in the economy, many European companies are

focusing on the reduction of the T & E expenditure. Therefore, companies are

trying to save all the unnecessary expenses with air travel expenses of its

employees, which according to Zea (2001) account for 44% of companies total

T&E spend.

Corporate travel policies are nowadays being used more frequently than ever

before, limiting the class of ticket employees can use and imposing the cheapest


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fare for their short haul travelling needs. In 1999, OAG Lifestyle surveyed 3000

frequent Business travellers of 13 countries (Mintel Report 2000), and showed

that a whopping 80% of business travellers are limited by their corporate travel

policies on class ticket compared with 67% in 1998, and while in 1999 40% were

tied by airline contrasting with 28% in 1998. This clearly shows how corporate

travel policies have been restricting and reducing employees to fly in business

class and the consequent big reduction in demand for this air travel class.

According to Mintel Report (2000) the demand for Business class decreased 6, 3%

between 1997 and 1999.

Inside corporations, is sometimes controversial the decision about the class of

travel in which their employees are allowed to fly. Some years ago, it was normal

companies board members to travel first class, directors in business class and

while the rest of staff in econom y class (Stokdyk 1998). Additionally, as Stokdyk

(1998) and ITM report (in Mintel, T&TI 2003j) asserts, today many companies

have been eliminating this hierarchical privileges and often is possible to find the

junior sales recruit flying between London and Paris in economy class and the

same happening with his chief executive. The most common situation seems to

be the policy of booking economy class tickets for journeys lasting up to five or

six hours and business class tickets for longer trips (Stokdyk 1998).

Stokdyk (1998) adds that there is not a big difference between the product

offered in economy and business class on the short-haul. He affirms that the seat

pitch offered in the short haul business class is almost the same as in economy

and that the marginal service plus offered in respect to the in-flight service seems

not enough to justify such big price difference.


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As a result of this reduction in demand for Business class, airlines are putting the

fares down in the pursuit of attracting back the lost business class travellers. Top

Travel Management Company BTI UK affirms that there has been a big decrease

in the sale of business class seats, especially in intra Europe short haul routes and

in their main market, the UK, which was accompanied with a shift to the

economy class (Mintel, T&TI 2003i). BTI UK adds that there were decreases in

economy fares of 15 per cent in Europe and 11 per cent in the UK. Such decreases

were result of the increasing use of online deals along with the increasing

tendency in the short haul Business Travel Market to use the most cost effective

way possible to travel and also a result of the new fare structures of many TNCs

to face the LCCs threat.

Nowadays with companies trying to control T&E expenditure to a maximum, the

modus operandi seems to be to take advantage of getting the best deals online.

And the interesting fact is that such policies are being applied not only by the

junior management but also by their board directors (Mintel, T&TI 2003j). As

Stone ITM chairman (Mintel, T&TI 2003j) adds, to justify their travel options

business travellers usually say: we are not going to spend a fiver when 1 will

do the job. Clearly this seems to be the generalised motto in the Corporations

environment and airlines are bringing down premium fares in Business Class in

order to regain their business share. Mathew Davis, global director of AMEX`

Global Consulting Services (Mintel, T&TI 2003b), clearly portrayed the situation

in the Business Class: We have seen the price of premium fares come down as

airlines look to special promotional fares and discounts in business class to

stimulate the market. As a profit stream for airlines, it is better for airlines to sell

a business class ticket at a lower cost than to sell no ticket at all.


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Dale Moss, director of worldwide sales for BA affirms that the golden days

where airlines could manage a price premium of 200 to 300 over economy class

have faded away (Business Traveller 2004b). In fact, McWhirter (2003) has

reported that booking with short advance a business class within Europe can

even be even less expensive than an economy class seat.

It is becoming more and more evident the difficulties for airlines to attract clients

to their business class and hence the viability for the maintenance of this separate

class in the short haul has been questioned by the majority of airlines in Europe

(Business Traveller 2003).

In 2002, SAS affirmed its intentions to abolish its business class and slash its

economy class prices by 30% (BBC News 2002). This was a measure taken to

fight against the poor economic and the bad market conditions influenced

mainly by the low cost airlines growing presence and importance in Scandinavia.

SAS has meanwhile opted to maintain business class and like other main airlines

like BA or Air France are trying to offer promotional fares between main

European cities (Business Traveller 2003 and 2004b). SAS CEO Soren Belin

affirmed that there are still people who are willing to pay premium for a special

treatment and hence his airline will be continuing to offer this high class product

(Business Traveller 2004b). He adds that is not possible anymore to sell business

class seats with such price difference comparing to economy class as before and

considers the prices cutting measure as a last option for his airline which still

sees business class as an important revenue source.


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2.1.5. Key Findings of chapter 2.1

This sub chapter analyzed the situation of the Air Travel Business Market in

Europe. Now, it will be summarized its key findings and conclusions:

The Business Market is divided in two distinct sub-segments: corporatebusiness traveller Independent business traveller and the.

The downturn in economy made companies to tighten their T & E expensebudgets, to encourage employees to search Internet for lower fares and to

use budget airlines.

Today not only Independent business travellers are using LCCs but alsobusiness travellers from medium and bigger firms.

Price in the short haul is assuming today for business travellers bigimportance when choosing an airline to fly with. Many seem to be willing

to exchange some of the traditional frills offered by full service airlines for

a lower fare.

The fares differential of Traditional airlines and LCCs is narrowing.Nowadays companies favour price competition since they are increasingly

looking for ways to reduce costs.

Demand for Business Class in the short haul has been reducing. As aresult TNCs are offering much lower fares on this class, to attract back

corporate travellers.

According to sometraditional airline managers think there is still a marketfor their Business Class however not at the level of that airlines have been

charging so far.


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2 .2. Background of Air line Industry in Europe- the

liberalisation of the Sector

The European Airline Industry have been changing tremendously since the 90`s,

due to the deregulation and liberalisation of this sector by the EU countries. In 10

years, from 1987 and 1997, the EU gradually eroded all the rights for its Member

States to regulate the airline industry (Lawton 2002). As a result of the

introduction of the third and last legislative package in 1992, the Consecutive

Cabotage was set, which meant that any European carrier was allowed to fly

between destinations within any Member State, should it precede a flight from

its origin country (Lawton 2002). Finally as a completion of this process, by early

1997 full cabotage was established, giving the allowance of any airline to be

based on any community country and with no restrictions to set intra EU-routes

flights (Sull 1999). Clearly this was a major measure taken to foment competition,

grounded that it therefore would encourage the efficiency and better function ofthe airlines, by offering better services at lower costs and prices. Furthermore this

allowed people which could not beforehand afford to fly, to do so, enhancing the

populations welfare and knowledge of the other Member States peoples and

countries. The steady increase in Air Travel across Europe, by the European

population, was set out in EU`s Transport Policy (Harrington, 2001) as a major

objective and visibly the liberalisation was noticeably the beginning of the

democratisation of the air travel, mainly because of the enhancement of the

competition that it brought about. This time marked the end of the Big Flag

Carriers monopolies, which helped by their governments, were entrenched in

their own national frontiers and furthermore, the stimulus for the entry in scene

of new, very price competitive breed of carriers. It was the sunrise for the so

called Low cost Carriers.


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2 .3. Low Cost Carriers

2.3.1. Their appearance and development in Europe

In the last decade the European Aviation industry has experienced important

changes. As mentioned before, one of the most important changes was with no

doubt the completion of the single market in the EU (Mason 2001). This was the

beginning of the demise of the historical domination of the big flag carriers and

the opening of the market to new low cost and low fare model based airlines

(Kangis and OReilly 2003).

Historically, the European airline Industry has been strongly regulated and each

state used to own and protect their national flag carriers away from the

competition (Kangis and OReilly 2003). These carriers ruled for years their

national domestic travel markets and apart from some few independent

scheduled airlines and from charter-flight operators which were basicallyfocusing on the very seasonal leisure segment market, there was no other

competitors to wrestle with (Sull, 1999). In 1996 an EU report showed how

monopolised the aviation sector in Europe was (Sull, 1999). In staggering 64% of

all routes within the EU were served by only an airline in monopoly status, 30%

served by 2 operators and mere 6% were presented with more than two airlines.

Mason (2000) adds that in 1992 only 4% of European city pair routes had more

than two operators, and that in 1997 this number had only increased to 7%. This

is a very significant sign of the lack of choice in prices, schedules and service

which was offered to customers, some time before the air travel market opened

in the EU.


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Suddenly the aviation environment in Europe changed completely. The

liberalisation program, whose major regulatory changes took place gradually

from 1992 on, was focused on the fulfilment of its main objective of enhancing

the competition in the European skies. One of the main effects of market

deregulation was the increase competition pressures that arose from it, which

forced companies to offer better prices and at same time better service quality

and efficiency (Lawton 2002). This was furthermore the major step to the so

called democratisation of the air travel, which led to the appearance of Low

Cost Carriers.

Such liberalisation led to the entry of many low fare airlines, which were

described as airlines which able to offer fares similar to those of charter airlines

as well as comfort and convenience of scheduled services (Lawton 2002).

Between 1995 and 1996 an impressive number of 80 new airlines entered the

market as a result of the liberalisation process that was carried out (Sull 1999).

The UK was the country where the development of the low fare, low cost concept

began. Ryanair and easyJet were the first and are still the biggest two low cost

airlines established in the UK (Mintel 2004). Although Eire registered, Ryanair

always had it main base in Stansted airport. The success of these two airlines will

be thoroughly examined in the third chapter.

At the beginning there was a focus of Low cost operators on the development of

routes inside the UK and mainly from Stansted and Luton (Morgan Stanley

2002). Recently Western Europe also assisted the set up of this type of airlines

(Mintel 2004) and in the last couple of years there has been a rapid expansion of

the main LCCs to the mainland.

This evolvement in the rest of Europe outside the UK began when the full

cabotage and the full liberalisation were established in 1997. At this time a big


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wave of new routes to continental Europe from these two big UK Low Cost

bases were set and were followed by a spread of other base airports on this

huge and unexplored market (Morgan Stanley 2002).

Moreover, the enlargement of the EU to eastern countries meant new

opportunities for low cost carriers, to explore with no restrictions the possibilities

of these markets. Since the 1st of May 2004 there have been many new routes

openings by new low cost carriers established in new EU member states. This is

the case of the Wizz Air, Air Polonia and SkyEurope, respectively the former two

Polish and the latter Slovakian based airlines (BBC News UK 2003b and BBC

News UK 2004b).

LCCs always tend to argue that they stimulate traffic growth and that by

capturing most of this new market, they create their own market rather than

stealing customers from the TNCs (Mintel Report 2003b). However the situation

is becoming different from the outset with LCCs becoming more and more

important, enjoying a very significant place in the European market and taking

in fact a big slice of the TNCs market. This trend is expected to continue as more

and more passengers show their dissatisfaction by the high fares charged by the

legacy carriers (Mintel Report 2003b).

Tim Robinson, from BBC News Business (2002), clearly asserts about the actual

challenging situation posed by LCCs to the traditional airlines:

Once upon a time, these budget airlines seemed content to nibble away at the big

airlines' market share. Now, though, they are gearing up to take large chunks out of their

rivals. In a decade, low-cost airlines may be the dominant form of air travel in Europe.


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In fact they have been successful in attracting new air customers, away from

other modes of transport like train, bus, ferries, but also from the Traditional

Network Carriers, by competing with very low prices (Lawton 2002). Thanks to

their exceptional business model which enables them to offer very low priced

direct flights, they encourage people who seldom or never fly to do so and on a

frequent basis (Mintel Report 2003a). Additionally they allow the existing

travellers to increase their travel frequency by enabling business travellers to take

more business trips or for many leisure travellers to make the so-called visiting

friends and relatives trips (Lawton 2002).

CAA (in Lawton 2002) acknowledges that the entry in the market of this type of

airline had generally impacted by stimulating new air traffic. Table 2 has the

traffic information of the London airports. From it we can clearly observe the big

traffic increase that occurred in those airports, where Low Cost Carriers have

settled their bases. Stansted and Luton saw very large increases of traffic as the

result of Low Cost Carriers growth, while other airports like Heathrow and

Gatwick maintained more or less the same traffic figures.


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Table 2: Scheduled passenger movement in London airports, 1999-2001

1998 1999 2000 2001 % change

between

000 000 000 000 1999-2001

Heathrow 60,237 61,186 64,121 60,332 *

Gatwick 18,126 1,946 20,959 20,010 +10

Stansted 5,307 8,080 10,548 12,464 +135

Luton 2,734 3,878 4,813 5,132 +88

Source: Mintel Report Low Cost Airlines 2003

The rise of the low cost airlines in Europe in the last three years is even more

impressive if we consider the difficult environment of the world aviation,

affected by the poor economic conditions compounded with the terrorism attacks

of the 11th September, the SARS epidemic and the war in Iraq (Mintel Report

2003a). They had performed and grew in an outstanding way, in spite of the set

of factors which were at the same time depressing the major airlines. This can be

explained as they offer value for money and fares that most of the people can still

pay in a difficult economic period (Mintel Report 2003a). Therefore they even

took advantage of this glooming time to consolidate their market position against

the TNCs by taking the increased demand for cheaper air travel either for

business or leisure proposes (Mintel Report 2003b). Franke (2004) affirms that it

became obvious that LCCs have thrived in a sustainable way, to establish an

alternative business model, which is better prepared to adapt in difficult periods

to the changes in demand for short haul travel. He adds, saying that it took long

for TNCs managers to challenge this new business model which was seen as


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In the last couple of years there were many airlines setting up operations and

competing in the Low Cost arena with the long time emperors Ryanair and

easyJet. In the UK among others emerged: bmibaby, a subsidiary of independent

carrier British Midland Airways, Flybe, developed from the network carrier

British European, MyTravel Lite, a low-cost operator whose parent is the large

My Travel group and formerly known as Airtours, Jet2 or the Scottish

Flyglobespan (Mintel Report 2003a). In continental Europe is where the spread of

LCCs has been lately more intense, as there are still a big number of unexploitedmarkets which are still underserved by a low fare alternative (Morgan Stanley

(2002). Examples of emergent Low Cost ventures in the European mainland are:

Virgin Express, which is one of the longest established in continental Europe and

based in Brussels, Hapag-Lloyd Express, Germanwings, Air Berlin, which are all

Germany based, Wizzair and SkyEurope, based in Polonia and Slovakia

respectively and VolareWeb, from Italy.

With the big number of new entrants, the competition is set to increase as carriers

start to compete head-to-head with each-other in many European city pairs

(Baker, C. 2004). Up to now, European LCCs tried to avoid launching routes

where they would encounter competition from other low cost contenders.

However as LCCs continue to expand and adding capacity it is becoming very

difficult to avoid direct confrontation. A very good example is the last

announcement from Ryanair to strongly invade the up to now stronghold of

easyJet, Luton airport, with the launch of 9 new routes from there (Ryanair

(2004m). At the same time easyJet is expanding its operations from this airport to

Central and Eastern Europe entering in direct battle with some new low cost

entrants, such as SkyEurope and Wizzair.


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The rise of this crowd of LCCs is consequently causing an unprofitable and

unrealistic pricing war, putting pressure on the revenues per passenger and

profits of the giants Ryanair and easyJet (Lavery 2004). OLeary, Ryanair chief

executive predicts a bloodbath in the low cost sector in the next few months,

with many smaller entrant airlines having to leave the business (BBC News

2004k). In fact many analysts foretell that in the medium- and long-term there

will be fewer carriers in the low cost sector, due to the consolidation and only the

financially soundest ones will survive in this industry (Airline Business 2004b).

Nonetheless with more or less number of competitors in the future, there is no

doubt that the LCCs came to stay in Europe and became a major feature of the

commercial aviation. This type of airlines are said to reach this year 20% of the

traffic, and moreover to achieve growth percentages several times higher than

the TNCs competitors (Airline Business 2004a). The main LCCs like Ryanair and

easyJet have achieved impressive growth rates of 20% to 60% between 2000 and2001 and continue to grow in a good pace (Pels and Rietveld 2004). IATA (in

Mintel Report 2003b, p. 20) moreover emphasises the momentum of the LCCs by

affirming: this is not a temporary phenomenon and it will continue to challenge the

full-service carrier.

After analysing the emergence of LCCs in Europe and the general situation of the

sector at the moment, there is now the need to examine what are the recipes and

formulas that led LCCs to success. It will follow in the next chapter, a thorough

study of the formula for success of the LCCs.


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2.3.2. LCC`s formula for Success.

The success of the LCCs in Europe has been unquestionable. The lure of low

priced fares has attracted many new air travellers and enticed those who already

travel to do it in a more frequent basis. They have been able to grow the

European air travel market and also to conquer a big chunk of the long secured

TNCs high yield segment.

Today it may be easier to understand the LCCs formula of success than the idea

of how TNCs have been able to charge so much money for so long time and still

not be profitable. The truth is that TNCs have been victims of the tightly

regulated air market and the consequent low competition environment which

had allowed these airlines to maintain their high fares, extracting maximum

revenues while labouring with very high fixed costs structures (Airline Business

2004a).

The good results and success of LCCs are all about cost advantage which these

airlines have proved to achieve and the question is how LCCs are able to

produce with such low costs? Next their product and process design will be

examined.

Southwest Airlines has been considered the model for all the LCCs in the world.

In thirty consecutive years since this Texas based company was founded, it has

been recording profits and a remarkable performance in such difficult industry

(ATW 2003). At the top of its objectives is to tightly control all possible costs.

Low cost airlines tend to present common characteristics which have the goal of

simplifying the product and to slash all unnecessary costs. Following there is a


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comprehensive explanation about the so-called LCCs product design, which is

to say the characteristics of the product offered by the LCCs and how it

differentiates to the TNCs product:

First these airlines offer very little in terms of amenities and comforts. Oftenit is offered not more than the trip from A to B in a safe and reliable way

(Gillen 2003). Furthermore, LCCs promise very little in terms of their

product offering which can in turn be a competitive advantage in relation

with the Full Service Network Carriers (Gillen 2003). In fact very often, FullService Carriers tend to stress in their marketing promotions their high

service offering, putting very high their customers expectations. Every time

these service level standards are not met, customers will have an idea of

lack of value for money. On other hand by promising very little for their

customers, LCCs put their passenger expectations very low and therefore

are able to surprise their passengers with a simple but very reliable, efficient

and customer oriented service. Customer satisfaction accrued from a high

quality of the service and the perception of good value for money which

accrues from this strategy will result in customer loyalty and therefore it can

become an important competitive advantage (Lawton 2002).

Another strategy normally followed is the employment of a uniformed fleettype, which is in most of the cases the Boeing 737 and that enables to extract

several cost benefits (Gillen and Morrison 2003). This allows first of all,

bulk buying for aircrafts and parts needed with advantageous price

conditions from a single supplier (Kangis and OReilly 2003). Moreover,


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there will be required less training both for cockpit crews and engineers,

which will be able to operate any aircraft of the fleet (Gillen 2003).

The choice of airport is also important in order to cut costs. The use of underused airports in smaller cities or less congested airports around big cities,

enable LCCs to lower their costs and to be more productive (Gillen and Lall

2004). These airports charge less landing and terminal fees due to their more

basic terminal facilities. Additionally these less crowded airports allow a

reduction of in- air waiting time and taxi times and therefore enabling to

perform quicker turnarounds, to increase punctuality rates and to use more

productively staff and aircrafts (Gillen 2003).

Another source of savings is the seat density. By offering just one class ofservice, LCCs are able to provide more seats than in the two classes of TNCs

planes (Gillen 2003). Hence for each flight, there is a possibility to reduce

the variable fixed costs per seat and is therefore possible to charge less per

seat to produce profits. Research of CAA (in Lawton 2002,pp.40) indicates

that the big cost disadvantage of Traditional airlines lies in the provision of

a business class which clearly reduces the seat capacity of their planes and

increases the cost per seat.

Another source of differentiation is the in-flight service. LCCs do notprovide free food and drink service; instead sandwiches, snacks, appetizers

and drinks are sold on board (Gillen and Lall 2004). Stelios Haji-Ioannou,

EasyJets owner (in Sull 1999, pp.23) clearly expresses the philosophy that is


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behind this measure: When someone is on a bus he doesn' t expect any free

lunch... I couldn' t see why we cannot educate our customers to expect no frills on

board. This is an important characteristic of the LCCs product which

enables to transform a before cost source in an extra revenue source.

Moreover as there is no separate Business Class there is a less need for flight

attendants which enable obvious staff costs reductions (Gillen 2003). All

interlinked is the fact that no food and drinks supply make possible to

reduce the number of bathrooms as there is less need for passengers to use

the toilet and also makes possible the increase of the plane capacity (Zea

2001). Additionally is also possible to make quicker turnarounds, as there is

less garbage to clean and besides the catering loading is much simpler.

Another product feature is the elimination of any interlining arrangementand frequent flyer programs (Gillen 2003). The former means that LCCs do

not transfer passengers or luggage between flights. This could delay the

whole turnaround process and take away all the benefits of the simplified

LCCs organisational structure against the TNCs model.

Furthermore the non utilization of FFPs is explained as they take awayrevenue due to the consequent less availability of seats for paying

passengers and in addition to that they are a source of big administrative

costs (Gillen 2003).

Moreover there is no seat number allocation. This is a measure which hasthe goal of urging people to get on planes quicker and to make the boarding

process quicker and with no delays to the company. The rationale is that

when passengers do not have allocated seats, they become anxious to board


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and to make sure they sit together with their friends and relatives. Therefore

they will be willing to board as soon as possible, making the boarding

process quicker and allowing airlines to comply with the fast turnaround

time objective.

Basically, LCCs have tried to reduce to the maximum, the complexity of the

product design by unbundling all the services that are not absolutely

necessary. The specific characteristics of the LCCs product design render big cost

savings, however these airlines are able to extract even higher savings through

their specific process design. In other words process design is the way that the

product is delivered to the customer (Gillen 2003). It will be explained how LCCs

process design differentiates from the TNCs and how the former achieve cost

advantages:

LCCs offer only point-to-point flights, hence focusing on the local anddestination markets in contrary to the hub system of TNCs. This can be

regarded also as a product design characteristic, since passengers always

see much more convenience on travelling directly to their destination rather

than through a hub (Gillen 2003). The Hub and spoke system used by TNCs

require that many flights arrive at the same time in order to connect the

passengers to their following destinations. Normally this provokes

temporary congestions and a significant operational cost with the payment

of extra staff needed (Franke 2004). LCCs with the point-to-point system can

spread their flights during the day, and require much less staff to prepare

each flight (Gillen 2003). Beyond that, the resultant less congestion will

mean more productivity and punctuality performance of the airlines.


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Another advantage for airlines by using the point-to-point system is thatthis allows a better utilisation of the airplanes. With the elimination of the

problems associated with connecting passengers and their luggage of the

Hubbing system and the use of less congestioned secondary airports,

airlines can avoid delays and spend much less time on turnarounds (Gillen

2003). This enables airlines to maximise the utilisation of the most expensive

capital assets, their aircrafts, and therefore to reduce their linked operational

variable costs (Gillen and Lall 2004). As an example, British Airways has a

time of utilisation of 7,1 h a day of its Boeing 737-300, whereas easyJet uses

the same plane for 10,7 h per day (in Mason 2000 Civil Aviation Authority,

1998b)

Other LCCs process design characteristic is the outsourcing of all thepossible services, like the aircraft maintenance or ground handling. This

permits carriers to choose the best firms for those services at the best prices

and furthermore to reduce costs by maintain their staff numbers to a bare

minimum (Gillen 2003).

The distribution process by LCCs is defined to be simply and the most costadvantageous possible. These carriers urge passengers to book their flights

by Internet rather than through travel agents or any other middlemen.

Ryanair claims to have reached an Internet sales percentage of 97% in

March 2004 (Ryanair Site 2004). Also is being generalized the use of e-

ticketing. This measure was firstly used by Southwest and allows LCCs to

save in costly ticket production costs (Gillen 2003).


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Another simpler procedure in LCCs is the check-in process. LCCs use re-usable or very cheap boarding passes and the boarding card issuance

process is designed to be the quick and efficient, therefore reducing the

number of staff required to perform the process (Gillen 2003). There is no

pre-assigned seat scheme which makes the check-in and boarding easier for

both airline and passengers, that guarantees that planes depart on time and

that there is no time spent on queuing. EasyJet (2004a) announced lately to

be doing trial tests at Nottingham airport (East Midlands) on automated

self-check-in, which is intended to be a step further in order to speed the

process of check in and to reduce costs with staff.

All these LCCs product and process design aspects explain somehow the

differences over TNCs and the various sources of savings. However there are

also important organizational factors that further accentuate the differences.

The most successful LCCs like Southwest or Ryanair, bind their companys

success with their employees personal success, whether through shares

ownership or profit distribution (Gillen 2003). Basically the success of these

airlines bases on their internal organisational culture and this measure makes a

big contribution in the stimulus and motivation of the workers, resulting in gains

of productivity. Additionally, the big motivation together with the simpler

product and process designs enables the use of a flatter organizational structure,

with less need for management and consequently savings in staff expenses

(Gillen 2003). In fact LCCs need much less employees per aircraft than TNCs and

this means considerable savings in operation costs. For example Ryanair employs

32 workers per aircraft in contrast with BA, a traditional full-service airline that


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need to operate 159 workers for each aircraft (calculations based on Ryanair

2004o and Cisco Systems 2002).

Additionally, together with the highest priority of reducing costs LCCs normally

focus their efforts in providing a very good customer service, which is

considered to be essential for any airline that is willing to get a long term

competitive advantage (Lawton 2002).

A last and important characteristic that LCCs share is discipline in organisational

strategy. Is very important in order to become a successful LCC to adhere with

the strict principles of the Low Cost system and hence to grow in a consistent

manner. Many companies collapsed as they tried to divert their product, process

and organisation design strongly from the Low cost formula. This was the case of

Debonair which departed from the truly low cost strategy by offering two

separate classes of service and collapsed by failing to become profitable (Mintel

Report 2003a).

2.3.3. Propensity for business travellers to use low cost carriers in

the short haul flight distances.

After having studied in previous chapters the situation of the short haul business

market, it will now be analysed the actual disposition of European Business

Travellers to use Low Cost Carriers for their business travel needs.

It was verified how well LCCs are able to outperform in terms of efficiency and

cost control traditional network carriers. They have been undoubtedly successful


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by offering very low fare tickets, which together with a good service more and

more European travellers have been testifying and considering very good value

for money.

LCCs have been usually regarded as budget airlines with a focus on the low

yield and price sensitive non-business market sector. The anecdotal situation is

that today reality seems to contradict this perspective, as increasingly low fare

airlines succeed in appealing and attracting big number of travellers from the

Business Market sector (Pels and Rietveld 2004). Many European low cost

airlines have been declaring to successfully attract many business travellers

(Mason 2001). EasyJet claims that in some of their routes business traffic reach a

proportion of at least 50% (in Mason 2000). Furthermore in a recent survey,

Barclaycard indicated that easyJet occupies the third position after BA and KLM

on UK business flyers top option, and is followed by another no-frills airline BMI

baby in the 4th

position (BBC News 2004d).

The appeal for business travellers to use LCCs seems to be exacerbated due to the

following factors (Pels and Rietveld 2004):

Firstly, as seen in previous chapters this can be explained because of theeconomic downturn that made companies in Europe reduce their T & E

expenditure budgets and therefore to look for cheaper alternative airlines

to travel or even reduce their business travel frequency (Mintel Report

2003c). Coincidently this happened in a period of time in which

liberalisation was in effect and allowed the rise of many new very

competitive, low fares, low cost airlines, which were a cheaper option to

fly.


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Furthermore, the big awareness increase of European customers about thisnew type of airline was very important. Slowly, business travellers started

regarding LCCs product as a better value for money alternative in relation

to TNCs, for their business travel needs. According to a Company

Barclaycard survey (in Mintel T. & T. I. 2002a) two thirds of all business

travellers had used a low cost airline, comparing with just 28 percent two

years before. Additionally, from those who have not tried yet, 86% said

they would consider in trying out these low fare airlines. This evidently

shows that the opinions of the business travellers towards the LCCs are

good and that these airlines are really being capable of seducing this

market segment.

Pels and Rietveld (2004) affirm that LCCs can be considered as real competitors

and real threat for TNCs in all market segments, since it seems evident that they

are able to attract not only leisure travellers but also to lure the business segment

market, which was considered for a long time a more or less secured high

revenue source for the TNCs.

A survey in UK (in Mason 2000) showed that 40% of passengers flying with

LCCs from Luton and Stansted, traditional Low Cost Carriers bases, were

travelling for business purposes. Moreover, Carlson Wagonlit (in Mintel Report

2003c) affirms that Low Cost Carriers routes accounts for 8% of the total business

travel. From these figures seems to be obvious that LCCs are succeeding in

taking away business travellers from TNCs. Even though in some markets there

may be no direct competition from LCCs to TNCs due to the fact that they often

fly to faraway secondary airports rather than to main airports, main carriers still


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Additionally, a 2003 BTI UK client survey (in Mintel T. & T. I. 2003i) showed that

79% of its client companies were authorising their employees to use Internet to

take advantage of the best deals online and almost 90% were allowing using

LCCs for their travel needs. Mason (2001) affirms that business travellers that fly

with TNCs also use LCCs and vice versa, which is a signal that they have no

problems to use LCCs if the price is better.

The scenario is clearly changing with companies opting to buy their fares online

rather than through corporate deals. Farrel (2002) affirms that Corporate

travellers are feeling deceived because airlines are excluding the cheapest fares

from corporative travel programs and therefore it is often cheaper to spot buy

on the Internet. The BTI UK survey (in Mintel T. & T. I. 2003i) concludes that

there is a big change towards online buying and a continuing death of the system

of corporative rebates programs.

Clearly, the development of the Internet as a form of distribution is the

responsible for these changes which allow business travellers to look the best

deals and hence to bypass travel agents or airlines corporate deals (Farrel 2002).

This situation is causing apprehension to TNCs, which were convinced to have

tightly secured the business market segment through the offering of corporate

deals (Mason 2001). Mason (2000) indicates that LCCs have been quite successful

in attracting business travellers from small and medium sized companies, but

have more difficulties to attract those from big companies. This is due to the fact

that many big firms have travel corporate deals with major traditional airlines for

all their worldwide travel needs. Although this still might be somehow true, the

situation is inverting and LCCs are nowadays also making inroads in the big

companies market (Mason 2001). The German LCC Germanwings for example is


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investing in building in its website an area dedicated for companies (Business

Traveller 2004i). There companies have the opportunity to book, change or cancel

flights. Like some others LCCs, the airline has invest ed in hiring b usiness travel

sales teams which have the goal to negotiate with important companies like

those already contracted such as Deutsche Telekom or chemicals group Bayer.

The traditional view of business travellers is that they have specific requirements

when flying short haul, namely flexibility, punctuality, frequency, frequent fliers

programmes and in-flight awards (Lawton 2002). But in fact nowadays, the

usage of LCCs by business travellers contradicts in some extent this view and

hence can be regarded as a sign that some of the benefits given when flying in

business class are nowadays less appreciated or simply considered has not

providing value for money (Mason 2000). An IATA study (1997, in Mason 2000)

revealed that business travellers see in-flight comfort followed by nothing

differentiates business class from economy as the main difference of business

class from economy class in short haul flights. Moreover in several studies,

Mason 1995, OAG 1996 and Carlson Wagonlit Travel 1998 (in Mason 2000),

factors like convenience of schedules, speedy check-in or sufficient legroom,

were praised by corporate travellers far in front other factors that would

normally be thought more important, like in-flight catering or airport business

lounges.

LCCs are able to provide what most business travellers seem to value most, such

as high punctuality performance, a fast check-in process and a reliable, safe and

efficient service (Lawton 2002). For LCCs the pursuit in quality of service, is

followed along with the continuous focus on cost reduction. This is considered


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imperative to guarantee total clients satisfaction and consequently obtaining a

sustainable competitive advantage.

LCCs believe that in order to satisfy their customers, the service standards which

are cost justifiable and considered important to satisfy their clients needs are the

core service standards (in Table 4). All others, called ancillary service standards,

are not offered or supplied for an extra charge to customers, like food and drinks

or newspapers. This way, airlines are able to cut costs without endangering the

overall product service quality by offering what customers regard as most

important and have furthermore the possibility to obtain some extra revenues.

Table 4- Airlines product

Core Service Standards Ancillary Service Standards

Safety Reliability Punctuality Baggage delivery Customer support Problem responsiveness

Complimentary food andbeverages

Free newspapers Frequent flyer programme Access to airport business

lounges

Source: own author, based on Lawton 2002 pp.82

2.3.4. Key Findings of chapters 2.2 and 2.3

Having examined the appearance, evolvement of LCCs in Europe as well as the

current propensity of business travellers to use budget carriers, following there

are the summarized key findings:


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The liberalisation of the airline industry in 1997 in Europe was the mainstep to foment competition and allowed the development of the low cost

airlines. This was the beginning of the so-called democratisation of air

travel.

LCCs enjoy today a very significant position in the European market andare taking away a big share of the TNCs market.

LCCs are expected to become the dominant form of air travel withinEurope within a decade.

LCCs took advantage of the bad economic conditions in the last couple ofyears to grow and consolidate their market position against TNCs.

LCCs competitive pressure made TNCs to restructure their cost structureand to reduce considerably their fares.

Increased competition from new low cost carrier entrants in themarketplace.

Only 2 or 3 financially strong LCC will stay and continue to develop in agood pace due price wars.

LCCs business model focus on a simple product offering and eliminate allunnecessary expenses.

The low cost product based on the pioneer Southwest consists genericallyon: short haul routes, no frills service, standardised fleet, use of cheaper

secondary airports, online reservations and ticketless system.

LCCs are attracting business travellers successfully. Such travellers aremore and more willing to use such airlines, considering their offer as a

very good value for money.

LCCs are able to attract business travellers working for companies that arelocated in regions outside the main cities and near the secondary airports

which they serve.


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Corporate business travellers are having their autonomy in business traveldecision making diminished, constrained by corporate travel policies and

also authorised to buy online.

LCCs seem to attract today business travellers from small, medium butalso from big companies as they start employ like TNCs dedicated sales

teams to negotiate corporate deals with firms.

Business travellers top requirements when flying short-haul havechanged. Today the most appreciated factors are convenience of

schedules, speedy check-in and punctuality.

Service standards offered by LCCs such as excellent punctuality, a quickcheck-in and a reliable, safe and efficient service seem to fulfil more

important business travellers needs and demands.

2 .4. Traditional Network Carriers2.4.1. The current situation of TNCs in Europe

Europes main airlines have been struggling in the last 3 years to recuperate from

a series of events that continuously affected passenger traffic numbers. The

terrorist attack of the September 11 in 2001, together with the downturn of the

main world economies, the SARS and the Iraq War have been the main causes for

the severe passenger traffic slowdown to the majority of worlds TNCs (Mintel

Report 2003b). Main European airlines that heavily relied in the transatlantic

flights with the US had serious problems with the aftermath of the catastrophic

terrorist event of 2001, which made many people to simply refuse to fly (BBC

News 2001f). In the meantime the rise of a new breed of very price competitive

low cost airlines were taking advantage of the vulnerable times for TNCs,


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challenging the long secured short-haul traffic markets within Europe (Clark

2001). These series of simultaneous events caused a big turmoil for TNCs which

became threatened both on their short and long haul markets.

The roots of this situation is undoubtedly the revenue boom after the first Gulf

war that lead to historical airline profit years and big airline capacity

developments (Franke 2004). The end of the golden economic years of the 90`s

together with the terrorist s threats, originated a generalised overcapacity of the

major Network carriers, and forced yields to decline enormously.

Notably, these series of events gave a massive push to LCCs. Their very cost

effective business model was able to offer very competitive fares, which were a

very attracting alternative for many passengers that were seeking for ways to

evade paying the high fares of TNCs (Franke 2004).

However the latest international passenger figures from IATA clearly show that

the worse period seems to have ended. They present positive numbers for the

first five months of 2004 with an increase of 19.4% in relation to 2003 (BBC News

2004e). Giovanni Bisignani director-general of IATA (in BBC News 2004e)further

adds : "Not only have we recovered from the impact of SARS and war in Iraq, all major

regions of the world are reporting traffic levels above those of 2000, the last normal year

for our industry."

In the last couple of years there has been a consolidation of the airline industry,

with TNCs forming a number of big alliances, normally led by a main US airline

and a main European airline (Lawton 2002). The alliances between TNCs offer

many benefits to the participating members, among other things: they render


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Hence, main European TNCs have been trying to fathom out how to respond to

this new challenge and have adopted different strategies to combat the low cost

competition:

One of the options taken by TNCs is to enter themselves into the low cost arena.

With the democratisation of the short haul travel, consumers more and more

regard air travel as a commodity and their choice is primarily influenced by the

price. John Baker from Air Canada (2004) defends that it is very difficult for

TNCs to defend their domestic and short haul markets with their full service

model and that TNCs to succeed need to establish a lower cost alternative to

focus on the more budget conscious travellers. British Airways in 1997, right in

the early stages of the rise of LCCs, tried this option by starting operation of its

own Low cost subsidiary GO (Lawton 2002). This launch had the objective of

hindering the increasing pressure from Ryanair and easyJet in BAs fares.

However the strategy did not result has expected because instead of capturing

its rivals markets, it started to take away passengers from the mainline and to

become a real BA competitor itself (Lawton 2002). As a result of this failure BA

finally sold GO in 2001, arguing that a low cost airline does not fit with their full-

service strategy (Mintel 2002a). Another rather successful example is BMI,

another UK carrier which started in 2002 its own no-frills subsidiary BMI

baby. Up to date has been quite successful by complementing the operations of

its mother carrier and helping its mainline to compete face to face with the

strongest Low cost operators. BMI baby was considered the third biggest low

cost carrier in Europe (BBC News 2004a) and at the end of 2002 claimed to be the

fastest growing LCC in Europe (BBC News 2003a). Another TNC, SAS, have

established a low cost subsidiary, named Snowflake. This launch of this LCC

subsidiary by SAS has the goal of counter attacking the big threat of LCCs in its


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home market, mainly by Ryanair that established a base in Sweden and has

many flights to Scandinavia (Mintel Report 2003a).

Besides entering in the low cost battle with their own low cost subsidiaries,

many main traditional carriers have chosen to take radical measures to

restructure their business model and hence to compete more cost efficiently with

LCCs (BBC News 2004f). John Baker (2004) defends that in the short haul

markets, TNCs need to lower their operating costs structure and adopt a

different product strategy with smaller planes focusing on point to point routes

in order to compete more efficiently.

BA the biggest European airline has been restructuring its European Operations

and adopted some of LCCs practices, in order to cut costs and offer a more

competitive product (Mintel 2002a). With its "Future Size and S

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