The Guardian

London, May 10:

As Britain sheltered indoors last week and looked forward to another weekend of rain, those spending a few idle minutes in front of their computers had plenty of excuses to dream of the sun. Ryanair would fly you to Milan for 99 pence sterling. Easyjet would get you to Venice for 31.49 pounds. BMIbaby boasted that a third of its seats, to some 21 European destinations, were available for 23.99 pounds, while Mytravel light (owned by the tour company) would get you to Barcelona for 29 sterling pounds. It is not just those seeking to leave the UK. Swiss could leave Geneva on Flybaboo and hit Venice for 60 pounds.

Germans could leave for 19 sterling pounds on Air Berlin. Across Europe, the list goes on, and on, and on. For most consumers the cheap fares and proliferation of budget airlines — some 40 low-cost operators have sprung up since 11 September — is great news. But for intended passengers who chose airlines that are no longer in business when they come to travel - like the 1,400 stranded when Birmingham-based Duo collapsed this month after less than a year’s trading - it is not so good.

And for the airlines that remain, it is getting rather nasty. Last week Easyjet - one of Europe’s two leading budget carriers - saw its shares fall by a quarter after forecasting a slowdown in demand. It was not that Easyjet is fending off administrators as Duo is. Its interim pre-tax loss fell from 48.1 million sterling pounds last year to 27.3 million sterling pounds this, and it is expected to make increased year-end profit. Passenger numbers increased by 15.9 per cent to 10.8 million. The average number of planes it used went from 65 to 78 and they were 83.3 per cent full. Its average fare was higher than arch-rival Ryanair, (which, although it announced good traffic figures last week, was quiet about how much it made from each passenger). The problem for Easyjet was that the numbers looked worse for April, and will be down this month. This is all containable. But chief executive Ray Webster added, “We are currently seeing unprofitable and unrealistic pricing by airlines, across all sectors of the European industry, seeking to grow their market share.” Easyjet said there were 50 low-cost airlines in Europe. All may not survive.

A week earlier, Ryanair’s Michael O’Leary had warned of a bloodbath and “the mother and father of all fare wars”. Ryanair had its moment of reckoning with the markets in January, with profits this year expected to be down. Analysts say there has been an overreaction. Ryanair margins, after all, have merely declined from 29 to 20 per cent, and Easyjet’s results were good. Projections are for continued growth in low-cost traffic. But currently there are problems, chiefly, as Easyjet says, competition from new entrants, many of whom are taking planes from flagging network carriers and operating parts of their old networks. Both Ryanair and Easyjet have increased capacity precipitously, having merged with rivals: the former with Buzz, the latter with Go. Ryanair has boosted capacity by 50 per cent over the past two years, with 20 per cent planned this year, and Easyjet is growing at 20 per cent, down from 50 per cent last year. But capacity is also growing elsewhere. In the UK BMIbaby has 13 planes flying and new ventures, such as MyTravel light and Flybe, are springing up. In key markets such as Germany, Air Berlin has built up a fleet of 45 planes since 1998 and plans more.

At the same time, prices are staying low. Inevitably, says Avery, “there will be some consolidation. Those who are not covering their cost of capital will withdraw”. That is what happened to Duo, though Easyjet does not expect it to happen to it. Meanwhile, the flag carriers have got their costs down by shedding staff and copying low-cost techniques such as internet booking. Like British Airways is expected to have broken even on its European routes in 2003 for the first time in years. Anthony Concil of the International Air Transport Association says, “Full service carriers have shed 200,000 jobs since September 11. We are expecting them to make a profit of $3 billion this year, having made a $30 billion loss since September 11.