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Can a normal airline still compete with a low-cost pure player ?

After SN Brussels Airlines announcement to launch a low-cost alternative, Air France tried to do the same but the plan was stopped by 2 weeks of strike (which may have cost up to 300m€ according to newspapers). Yet what you observe on the market is that low-cost has become the dominant business model. Ryanair had been the undisputed leader for years (in terms of profit) and became the #1 airline in Europe. This year EasyJet took Ryanair over and became the most profitable airline in Europe.

Is there another possible business model ?

Logically “normal” airlines (read non-low-cost ones) have tried to adapt to survive. Customers have witnessed changes in the past years in the pricing of normal airlines : payment by credit card became subject to an additional fee, some special seats got sold for an additional fee, meals and drinks became paying, … The low-cost recipes got applied to the economy class but, as O-Leary once said, the DNA of normal airlines will never change and they will never be able to transform into a low-cost business model.

That’s why some older airlines found out that it may be easier to start a separate company which will be given this “low-cost DNA” from the very beginning. Air France wanted to go this way but faced the opposition of pilots. Now they are trying to start their low-cost company, Transavia, once again.

Market polarization

But more generally the question deserves to be asked whether there is still a future for “normal” airlines in Europe. Like in many markets (automotive is a good example) we witness a polarization of the market : low-cost on the one hand, premium or luxury on the other hand. Airlines are no exception. The growing airlines are low-costs players like Ryanair, Easyjet and Southwest; on the other end of the range you’ll find Middle East and Asian players that have decided to go the premium way : Singapore Airlines of course (one of the pioneers in premium in-flight experience), Emirates and Etihad which has enormous ambitions (in particular with individual 50000 US$ suites called Residence that are available on Airbus A380 and that are just above everything you can currently think of).

Middle-East investors taking equity in European airlines …

The future of “old” European airlines may well be find on Middle East. The budgets available for the developments of hubs and airlines in the Middle east seem to be unlimited. Dubai invested billions in a hub that can welcome up to 120m passengers a year. Etihad’s hub has only a capacity of 20m but the little emirate wants to compete with Emirates (the national airline of Dubai) and has started an aggressive strategy of acquisitions. The latest “pray” it captured was Alitalia which it took 49% of.

… before closing European hubs ?

In the last decades the US debt was financed by Saudi Arabia and money earned with Middle East oil served other various purchases made by Arab billionaires and investment funds. Five-star hotels (especially in Paris) are only the top of the iceberg. With European airlines’ debts now being financed by the Middle East, it may only be the starting point of an even larger and more visible acquisition move that will leave Europe with few if any assets left.

Photo : copyright Yakusa77 via Flickr
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Dr. Pierre-Nicolas Schwab is the founder of IntoTheMinds. He specializes in e-commerce, retail and logistics. He is also a research fellow in the marketing department of the Free University of Brussels and acts as a coach for several startups and public organizations. He holds a PhD in Marketing, a MBA in Finance, and a MSc in Chemistry. He can be contacted by email, Linkedin or by phone (+32 486 42 79 42)

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