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The Budget Business

4 minute read

Remember not so long ago when the latest crop of low-cost airlines first appeared on the aviation scene? Travelers tisked that the low-cost carriers didn’t have enough planes. They quibbled that the carriers were based at — and flew into — remote airports. They complained that their Internet booking facilities meant little customer contact. Even some of their names — easyJet, Buzz, Go — had an unsettling air of impermanence. And weren’t those prices just a bit, er, too good to be true?

What a difference a few years makes. Despondency may have consumed the aviation sector in general over the past 24 months, forcing some flagship carriers, like British Airways, to rethink strategy and lay off staff, and forcing others, like Swissair, into bankruptcy. But the budget carriers have largely bucked the trend, and in some cases thrived.

In the aftermath of the Sept. 11 terrorist attacks, from which some of the traditional carriers have not yet recovered, the budget sector’s stars are taking advantage of a traveler mindset in which the only thing that matters is price. “There is a massive opportunity for low-cost, whether it’s people transferring for a long-haul flight or just point-to-point,” says Adam Harris, sales and marketing director at Buzz, the U.K.-based, low-cost arm of Dutch airline KLM. “The whole outlook will change.”

He has grounds for optimism. Earlier this year, Ireland’s Ryanair announced a 44% increase in earnings over the previous year, despite a fall in the average fare price. EasyJet has reported passenger growth of up to 43% in year-on-year comparisons. The carrier has just completed a 3590 million takeover of fellow bare-bones airline Go, once owned by British Airways. The deal marks the low-cost industry’s first consolidation and makes easyJet its largest player, operating 81 routes and serving 32 destinations.

Low-cost carriers now account for about 25% of scheduled passenger traffic between Britain and the rest of the European Union, and 7% of European air traffic overall. And with the market on the move, more traditional airlines are developing budget strategies. Last March, U.K.-based BMI British Midland launched its budget arm, bmibaby (get it?), with flights from England’s East Midlands Airport. bmibaby says it met its 2002 sales forecasts in the first three months of operation and come October will fly budget services from Cardiff International Airport to nine destinations across Britain and the Continent.

KLM appears set to merge Buzz and Basiq Air, its Amsterdam-based budget brand, in order to cut costs and streamline management. In retrospect, British Airways’ exit from the low-cost business last year — when it sold Go to venture capital firm 3i for 3158 million, only to see Go be sold again to easyJet for almost four times the price — looks short-sighted indeed.

Some analysts figure the budget trend will continue. Those airlines can anticipate “ongoing steady growth,” says Daniel Solon at the aviation consultancy Avmark, who feels the market is there to be captured. “Look at Southwest.” That low-cost U.S. airline, which launched in 1971, has not had an annual loss for 28 years.

Growth will most likely mean the conquering of new territory. With the British budget market already the best-developed in Europe, observers expect the next growth spurt to come from Germany, a nation of inveterate travelers and Internet users, making sales easier. Certainly, easyJet has staked its claim: it has secured an option to buy Deutsche BA — a struggling full-fare German subsidiary of British Airways — with the apparent intention of turning the 16-plane fleet into a budget operation.

But easyJet will not dominate the discount skies. Ryanair already has an operating base in Germany, at Frankfurt-Hahn Airport. The Berlin-based, former charter airline Germania is also focused on the budget traveler. From December, Brussels-based Virgin Express is planning flights from Cologne-Bonn Airport. Even German flagship Lufthansa appears to be getting the message; last month it gave its blessing to a proposal by German carrier Eurowings, in which it has a key shareholding, to enter the budget fray. Soon, Germans may discover what travelers from Britain now take for granted: for the consumer, no-frills fares are just fine.

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