Cheap 'n' cheerful takes off

No-frills airlines are winning passengers, says Peter Robison
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The red seat covers are fraying and the carpets are worn and spotty. They can't be coffee stains because coffee isn't served.

Since no-frills Virgin Express took over Belgian flag carrier Sabena's flights between London and Brussels, complaints have soared - mostly from business travellers unaccustomed to the spartan service.

Why, then, is Virgin so happy? "There's a lot of people getting on these planes," says Jonathan Ornstein, the New Yorker and former Continental Airlines executive who runs the Brussels-based airline.

For Mr Ornstein and Richard Branson, who founded the carrier last year, the measure of its success is the numbers. It is filling 70 per cent of its seats.

The figures have surprised some industry analysts who have long thought European travellers would never accept the type of no-frills service pioneered by American start-ups such as Southwest Airlines after deregulation of the US air market in 1978.

It also has Mr Branson wondering whether he should sell shares in Virgin Express, the latest venture in a business that spans everything from the long-haul airline Virgin Atlantic to trains, music stores and pensions.

A sale would come as small low-cost airlines in Europe make inroads against the big state carriers for the first time, bringing down air fares that are still roughly double those in the domestic US market. Ireland's Ryanair said last week it would sell a third of its shares, the first public offer by the new breed of European carrier.

Mr Branson stressed that he has no immediate plans for a sale and is considering other options, such as linking Virgin Express more closely with Virgin Atlantic, the London-based long-haul airline he started in 1984.

Still, investors might welcome the chance to get in on the ground floor. "Virgin Express is in the vanguard of the fledgling European low-cost carriers, and has the potential to interest the financial markets," said Chris Avery, airline analyst with Paribas Capital Markets.

Founded with Virgin Group's purchase of 90 per cent of EuroBelgian Airlines last April, it now flies from its Brussels base to Barcelona, Copenhagen, London, Madrid, Milan, Nice and Rome. Virgin Express's key selling point is price, just like other new airlines from Ryanair to EasyJet based at Luton. Their fares are the lowest European travellers have seen outside of cut-price charters, and the big carriers have been forced to respond.

Before Virgin Express began flying between Copenhagen and Brussels with a 1,200-kroner (pounds 110) return fare, Scandinavian Airlines System was charging an astounding 4,000 kroner (pounds 370) for the 90-minute flight. It has dropped the price of an economy class return ticket to about 1,900 kroner.

EasyJet, too, spurred others to follow on the Luton-Edinburgh route in 1995 when it began selling a pounds 58 roundtrip ticket, a quarter of the British Airways fare.

Virgin Express saw its revenue jump 25 per cent to pounds 125m last year. It has more than doubled its staff to 800 from 300, hiring flight attendants, pilots and ticketing agents.

But its most important - and problematic - manoeuvre has been the partnership with Sabena. Virgin agreed last year to fly the state carrier's routes to London's Heathrow Airport, Barcelona and Rome with its own aircraft, setting aside seats for Sabena's passengers. Analysts hailed the venture as a pace-setter that could divide the European market between lower-cost upstarts and unprofitable carriers like Sabena, which had a fifth successive year in the red last year.

But it has been a troubled marriage. Business-class passengers complained, because Sabena did not tell them they would be on Virgin Express. Buyers of the Belgian carrier's tickets still are not told they will be on Virgin.

Sabena's pilots and cabin crew are also upset. They forced airline management to pledge not to extend the partnership to other routes, fearing it threatened their jobs as Sabena seeks to cut about pounds 100m in annual costs.

The Belgian airline's staff openly criticise their new partner, saying its quality doesn't measure up. "Yesterday two passengers came into my cockpit, asking how it was possible that two such different airlines could work together," said Patrick Hofman, a pilot who represents Sabena's union, ABPNL. "There is a tendency toward low-cost flying, but the question is whether you serve the passenger."

Unlike downmarket Virgin Express, London-based Virgin Atlantic has grown by offering business travellers extra perks such as massages and door- to-door limousine service. Other Virgin brands are also high-quality. " Branson's problem is that if people start thinking: 'I paid my money and didn't think much of that,' they might not get on his train or buy his vodka," said Chris Partridge, an analyst with London aviation consultancy Avmark International. "He needs to maintain his core image."

Mr Ornstein brushed aside these worries in an interview at the Virgin Express headquarters at Melsbroek Airport near Brussels. "I defy anyone to tell me our load factors have gone down because we don't serve coffee. On a 40-minute flight even the most diehard traditionalist will go without coffee." Cutting it saves $200 per flight, or about 5 per cent of operating costs; a saving Virgin passes on to passengers. "We do have a little problem because of the Sabena passengers, but they'll learn," said Mr Ornstein.

Mr Branson said he had feared that the no-frills venture might detract from his brand's reputation, but decided to go ahead after examining Dallas- based Southwest Airlines. Noted for stinginess - it serves only peanuts, no meals - Southwest is regularly rated by US passengers as best airline because of top ratings in on-time takeoffs, baggage handling and accidents.

"We thought that if we get extremely friendly staff and offer value for money, that was something that was unique for Europe," Mr Branson said. "It would actually help Virgin's image rather than hinder it.''

Mr Ornstein, 39, said more than 80 per cent of Virgin's flights were on time in February - a good record even by US standards, where Southwest led last year with 82 per cent punctuality. It is also converting some of its 15 planes to a smarter red-and-grey leather interior. "Being low-cost is good," Mr Ornstein said, "but you can't be low-cost to the point where you provide a bad service."

Despite problems, analysts believe the carrier could prove attractive if it sold shares. The Virgin name is one advantage, as is the American management team. Virgin Express is hyper-efficient by European standards: Its seat costs per mile of 9 cents compare with more than 20 cents at rivals like Sabena and Spain's Iberia.

"More people will take a look at these low-cost carriers - there will be a market, even if it's purely the backpackers," said Mr Partridge.

Ryanair - part-owned by US investor David Bonderman, who teamed with Mr Branson to buy Britain's MGM theatre chain in 1995 - could set a floor for a sale. Its offer values the Irish airline, which has 13 aircraft, at between Irpounds 261.2m (pounds 270m) and Irpounds 308.7m. Branson paid about pounds 36m for his stake in EuroBelgian.

Mr Ornstein warned that repeating the US low-cost precedent in Europe will take time. The former investment banker said new airlines still have a difficult time getting access to airport landing and takeoff times. State rivals like Air France and Alitalia still rely on billions in state aid, which the European Commission has not yet outlawed. Virgin also has trouble convincing travel agents, who take a 9 per cent commission, to sell tickets.

Mr Ornstein is convinced that upstarts like Virgin Express will eventually prosper. "It's not a flood yet,'' he said, "but when this dam breaks it's going to be so much bigger than the US, because the big carriers have so much further to go to catch up."