Europe's no-frills airlines take off

A new generation of low-cost airlines means better deals for fliers - and more heat for the bigger firms.

HAHN, GERMANY

It's not your typical location for a regional hub. But this airport, located 90 minutes from bustling Frankfurt, has been key to the success of one of the world's fastest-growing airlines, Ryanair - and many say this may be a picture of the European airport of the future.

Nestled between rolling vineyards of the Moselle Valley on a former US military base, this airport has free parking, no traffic jams, no lines at security gates, no running from one terminal to another, and lower operating costs, allowing for lower airfare.

"It means flying cheaper and faster and going to different places without the hassles of the bigger airport - and the expense," says Anne Coin, an American living in Germany as she waits for her flight to Shannon.

Dubbed the Southwest Airlines of Europe, Ryanair leads the pack in a new breed of airlines that have been shaking up the old ways of Europe's airline industry since the continent liberalized its skies in the early 1990s.

The Sept. 11 terrorist attacks in the US gave Ryanair its greatest push, while plunging Europe's major aviation industry into a financial crisis that "bears no relation to anything we have ever seen," says Carl Heinz Neumeister, head of the European Aviation Association in Brussels.

Between Sept. 11 and Nov. 4, North Atlantic air traffic fell 35 percent, and European traffic by 10 percent for major European airlines. If sustained over 12 months, according to the association, the October losses would amount to 10 billion euros ($8.9 billion) - far more than the industry's biggest ever annual loss of $2.4 billion after the Gulf War.

To counteract falling passenger volume, Europe's major airlines cut flights, raised fares, and axed jobs. Instead Ryanair, which only flies within the European Union, lured passengers back to flying by lowering fares and increasing flights. The Dublin, Ireland-based company reported a 39 percent increase in after-tax profit. Europe's second-most successful low-cost airline, Luton-based EasyJet, also recorded record increases in profit.

"The market after Sept. 11 has never been better," says Ryanair CEO Michael O'Leary. Starting in February, Ryanair will operate 30 daily flights to 10 destinations from its new Frankfurt/Hahn base, versus three now.

But the European aviation industry's troubles aren't new. Fragmented and financially fragile, the industry was reeling from rising fuel prices, rising labor costs, and a bloated structure long before Sept. 11. The attacks merely underscored the urgency of an industry-wide restructuring - and sped the industry's evolution toward a system with two groups of airlines: huge networks dealing with international flights, and smaller, point-to-point carriers competing for the European market.

"There will be no space for any company in between," says Gilles Gantelet, a spokesman for European Transport Commissioner Loyola de Palacio.

The boom of low-cost airlines after Sept. 11 "shows that there is a market for airlines offering cheap air fares and will force companies that haven't restructured yet to adapt," says Gantelet. "Sept. 11 made the process more obvious, it accelerated it."

Many of the continent's 14 money-losing "flag" carriers are headed toward bankruptcy, mergers, or takeovers, experts say. "There won't be any room for this type of airline anymore," says Gantelet. "In the future, you'll only have half of those."

Sabena, the Belgian government-owned carrier, was the first flag carrier to die. Likewise, prestigious Swissair is being kept aloft only by government-backed loans.

"Europe's major airlines may not admit to it, but they'll be forced to become more efficient because of the Ryanairs of Europe," says Anthony Velocci, senior business editor of the New York-based Aviation Week.

Before Europe liberalized its skies about a decade ago, flying schedules, fares, and the numbers of passengers European national airlines could carry were negotiated between governments in bilateral agreements. Allowing airlines to fly anywhere within the EU's 15 countries paved the way for Ryanair's growth.

Europe's response to the terrorist attacks underlines its commitment to having competition rule the European aviation market. Whereas the US offered airlines a big package, the European Commission, resisting lobbying pressure from industry representatives said it "can't accept measures that would create distortions between countries and between companies, nor could it allow the present situation to be used as a pretext for delaying essential restructuring."

Like Southwest Airlines, Ryanair started small, in the Ireland-UK market. It has two bases in continental Europe - one in Charleroi, south of Brussels, and here in Hahn, near Frankfurt. With plans to open new destinations in Germany, Ryanair is stepping up its competition with Lufthansa.

A low-costs, no-frills business model is what gives companies like Ryanair an edge over major airlines.

At Ryanair, you don't even get peanuts on the plane. Internet booking saves agent fees. Labor costs are also much leaner, accounting for 10 percent of Ryanair's total revenues this year, compared with 23 percent for British Airways, says James Parker, an airline analyst with Raymond James Associates in St. Petersburg, Fla.

Europe's major airlines recognize the low-cost sector is growing fast. "But even if they double, they don't pose a threat to us," says Mr. Neumeister, of the European Airline Association in Brussels.

The inter-European aviation business has two markets. One offers point-to-point service and caters to bargain seekers, and it makes up 5 percent of the market. But there'll always be sophisticated travelers who need networks, says Neumeister.

"The US majors were saying the same thing when Southwest was introduced. They dismissed Southwest out of hand," says Velocci of Aviation Week in New York. "Today, Southwest is eating their lunch."

The boom of Europe's Ryanairs, experts say, is slowly altering European travel habits. "What you'll see more of in Europe is businesses resisting the high fares of major airlines," says Parker.

After years of flying Sabena business class, Struan Stevenson, a Scottish member of the European Parliament, turned to Ryanair when Sabena went bankrupt. And now he's sold. "It's crazy that when we have a single market with a single currency, we still have a macho need for as many flag national airlines," says Stevenson.

Although the market is free within Europe, it isn't at the international level. Lufthansa, for instance, can only fly to New York from Germany, not from France or England. And British Airways can't fly to Dallas from Paris. That, experts say, remains the major obstacle to the mergers necessary to fully liberalize the market.

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