Civil aviation may be going through its most turbulent spell since the Wright brothers lifted their biplane off Kitty Hawk, but you wouldn't know it from the wisecracking of Ryanair chief executive Michael O'Leary. In the last month, O'Leary placed an order for up to 150 new Boeing 737s, announced eight new routes in Europe, and unveiled plans to open a new German base, its second on the Continent. By summer, the Dublin-based discount airline will be flying 75 routes to 13 European countries. "Ryanair (RYAAY
) is going to be a monster in Europe within the next 10 to 12 years," O'Leary says.
Indeed, Ryanair's rapid expansion signals an epochal shift in Europe's skies. National flag carriers are facing their own D-day invasion--D as in discount airlines. Ryanair and London-based easyJet Airline Co. (EJETF
) are taking over several of Europe's short-haul routes by offering no-frills service and fares an average of 60% less than those charged by old-line carriers. And they're making money. Ryanair, which has about $550 million in sales, is the only European airline to make a profit every year since 1990. Pretax income for the year ending this March should hit $137 million.
The discounters began attacking the British market back in the early 1990s. But the huge plane orders--easyJet is shopping, too--trumpet a new, dangerous aggressiveness. As Ryanair and easyJet move more deeply into Europe, flag carriers such as British Airways (BAB
), Lufthansa (DLAKY
), and Air France risk losing much of the intra-European connecting traffic that feeds into their lucrative long-haul networks. "The long-term profitability of European airlines is under serious threat," says Chris Avery, airline analyst for J.P. Morgan Chase & Co.
Of course, Europe's 12 national airlines are already bruised. Even before the events of September 11 crippled the global travel industry, Europe's high-cost flag carriers were suffering from mounting losses and rising debt. Belgium's Sabena has gone bankrupt, and Swissair has had to be recapitalized. Also starving for capital, Italy's Alitalia faces losses of $436 million for 2001.
Those airlines, however, were the second-tier players, the losers with storied pedigrees but little in the bank. Until recently, few expected the big three--British Airways, Air France, and Lufthansa--to face any major problems. But now, with competition from the discounters, even Europe's heavyweights are feeling the heat. Rod Eddington, CEO of British Airways, is expected to abandon a big chunk of BA's European short-haul routes--primarily less profitable flights to leisure destinations--to O'Leary and the discounters.
O'Leary's next target is Lufthansa. Ryanair has been ratcheting up its service out of Frankfurt-Hahn, a former U.S. fighter base 60 miles west of Frankfurt, for the last two years. On Feb. 14, the airport will become the carrier's second European base, after Brussels-Charleroi. Ryanair will base four aircraft at Hahn and increase the frequency of its service with more than 30 daily flights to ten European cities. O'Leary is in discussions with another eight German airports and plans to offer several domestic flights within Germany next year.
Since Ryanair's arrival, Lufthansa has ditched its competing services from Frankfurt am Main and Hamburg to London's Standsted--the hub airport for Ryanair and fellow discounters Buzz and Go. More recently, Lufthansa has taken Ryanair to court to prevent the Irish airline from using the Frankfurt-Hahn name in its advertisements, claiming Frankfurt-Hahn isn't really Frankfurt. Even though a Lufthansa spokesman says Ryanair's arrival hasn't had any impact on the German airline's routes, the suit indicates the Germans are getting nervous. Meanwhile, on Jan. 22, Lufthansa found itself accused of predatory pricing by Germany's cartel office, which claims the airline's cheap flights between Berlin and Frankfurt are aimed at driving regional carrier Germania out of business.
O'Leary's biggest rival, easyJet, is taking on another Continental power. The British discounter is negotiating for some 20,000 slots at Paris' Orly Airport, adding to its existing bases in Geneva and Amsterdam's Schiphol. So far, Air France says it isn't worried. "It's not a big problem for us," says Air France CFO Philippe Calavia. That may be so. Air France boasts a geographically well-diversified network and a solid global alliance led by its U.S. partner Delta Airlines. It's also benefiting from the poor financial health of its main European rivals, a situation that has cut competition on routes representing 45% of Air France's sales, says Yan Derocles, airline analyst at Crédit Lyonnais.
But no airline is invincible. Passenger growth for the discounters is expected to average 25% to 30% for the remainder of the decade. That compares with a measly 5% for the European flag carriers. The question is how healthy even the three main players can remain. BA is in the worst financial shape by far, having endured a decade of bruising low-fare competition in its own backyard and on transatlantic routes. Since November, it has been hemorrhaging $2.8 million a day. Since then, it has cut 7,200 jobs, reduced operations at London's Gatwick Airport, and eliminated over 25% of its short-haul routes.
But with more than $9 billion in debt, BA is finding that even this triage hasn't worked. On Jan. 25, it was forced to abandon its planned alliance with American Airlines Inc. to coordinate schedules, pricing, and capacity on transatlantic routes rather than give up the 224 slots at Heathrow that U.S. regulators demanded. Analysts expect BA will retreat upmarket, focusing on business travelers and eliminating all but the most lucrative short routes. BA also is beginning to use much smaller planes, enabling it to reduce capacity while increasing frequency. "It will be a smaller airline but more profitable," says J.P. Morgan's Avery.
No doubt, the rest of Europe's airlines will be paying close attention. If BA's experience is any indication, Europe's flag carriers are in for a rough ride. They could embark on a prolonged and painful period of restructuring, which only works after great effort, or they could do a quick revamp. Either way, they could find the likes of Ryanair still breathing down their necks, chipping away at their profits and never giving them a moment's rest. Not a pretty picture--and not a great industry to make money in, unless your name is Ryanair.
By Kerry Capell in London, with Carol Matlack in Paris and Christine Tierney in Frankfurt
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