No frills and low fares are winning battle of the skies

Budget airlines are proving popular with passengers and forcing traditional rivals to rethink their strategies

With their funny names like Go and Buzz, low-cost airlines have been the butt of many jokes over the years. Now though, they are having the last laugh as they soar skywards leaving their traditional rivals trailing in their wake.

Yesterday saw further confirmation of the trend as both Ryanair and easyJet reported buoyant trading figures. The results came just a day after British Airways reported a near halving of operating profits for the three months to June with the blame placed on everything from the economic downturn to the foot-and-mouth crisis.

The question emerging is why the low-cost airlines appear to be coping with the downturn so much better than their larger counterparts. Secondly, will the trend reach the point where traditional carriers pull out of short-haul routes altogether?

There is no question that the budget brigade is in rude health. EasyJet yesterday reported a massive jump in passenger numbers to 667,000 for the month of July, up from 566,000 in the same month the previous year. Its load factor, the proportion of seats full, also edged up to 86.6 per cent from 85.5 per cent last year.

Ryanair did even better. In the three months to June its passenger numbers increased by 42 per cent to 2.4m with profits up 28 per cent to 23.2m euros (£14.3m). Though the Dublin-based group admitted that the earlier-than-expected launch of some new routes had more than doubled the passenger growth figure, the target growth rate remains an impressive 25 per cent.

Indeed the firm is in such cocky mood that it is sticking two fingers up at Boeing, the US manufacturing giant. It has cancelled five options on new Boeing 737-800 aircraft saying it wants lower prices. Instead it is scouring the second-hand market for 50 Boeing 737s, saying they will represent better value. All this contrasts sharply with BA, which on Monday reported a fall in passenger numbers and load factors slipping below 70 per cent.

There are a number of reasons behind the success of budget airlines which also include Virgin Express, which operates out of Belgium, and Go, the former BA subsidiary which was recently sold to the venture capital firm 3i. A key factor is that lower fares are encouraging people to fly more frequently. A second is that their lower cost structures enable them to make a decent return on relatively modest fares.

Howard Miller, finance director for Ryanair, says we are only just seeing the beginning of the shifts in the airline market. "There are lots of opportunities for growth. Many of the carriers like BA are cutting back capacity and getting rid of [economy] passengers and increasing prices. That plays right into our hands."

Toby Nicol of easyJet agrees: "We have a view that in the next 10 to 15 years the vast majority of short-haul traffic in Europe will be on low-cost airlines, though if you fly long-haul you will still go with a traditional airline. We are seeing the start of that trend now."

There is no doubt that the key driver of growth in the budget airline market is their rock-bottom prices. Ryanair, for example, has grabbed the headlines with its offer of £5 one-way flights on its new route between Dublin and Edinburgh. It has also offered some routes for free and claims to typically undercut traditional carriers by 70-80 per cent. At easyJet the model is "the earlier you book the lower the price". So while a one-way trip to Palma from London might start at £30 several months in advance, it could rise to £200 the day before travel. This compares with BA's efforts to compete with a limited number of seats at £80-£160 return on routes such as London-Paris.

The budget airline prices have expanded the market for short-haul travel. As Mr Nicol at easyJet says: "People are saying things like, 'I would never have flown up to Edinburgh to see my 80-year-old grandmother, I would have got the train or the coach instead.' But now, because it's cheaper, they are taking the plane."

The route structures of the budget airlines is another factor in their success in the short-haul market. Most major airlines like British Airways operate a hub-and-spoke system with a major centre like London Heathrow acting as its principal hub from which all flights radiate. The problem is that this can lead to multiple changes and longer journeys for passengers. EasyJet, by contrast, describes its route map as looking more like a spider's web. It operates 35 routes to 16 cities from a network of four central airports in Luton, Liverpool, Amsterdam and Geneva. This enables passengers to make more direct journeys.

Ryanair's approach is modelled on South West Airlines in the US, which flies to secondary airports in major cities to take advantage of lower landing charges. It also flies on routes that would not interest a larger carrier, such as Trieste in Italy and Esbjerg in Denmark.

But the key to the low prices are the low operating costs. Both easyJet and Ryanair have stripped away airline meals to save money. In easyJet's case this has enabled it to fit in an extra seat in each of its planes as they need smaller kitchens. It has also removed one of the toilets on board. Budget airlines' aircraft fleets also tend to be standardised, trimming off further costs. All Ryanair and easyJet's planes are 149-seat Boeing 737s, which saves money on pilot training and spare parts. Budget airlines also require customers to book direct, saving money on travel agents sales. Internet bookings are higher (89.5 per cent at easyJet) and easyJet has even dispensed with the ticket altogether, issuing passengers with a six-digit number instead.

If all this sounds very downmarket, easyJet estimates that half its passengers are in the business sector. "If you fly from London to Edinburgh or Glasgow, it's all suits and ties," a spokesman said.

But BA claims it still has its place. "We offer quite a different proposition. We are a full service airline which aims to offer value for money."

It seems the battle for the European skies has only just begun. And the big winner will be the consumer.