Cheap Airlines Reach the Sky's Limits

Say what you will about Michael O'Leary and his Irish discount airline, Ryanair, there is no getting away from the fact that he will go down in history as an aviation trend-setter.

In dispensing with the luxury and frills of flying, he was scorned by the likes of major-league elitist players such as British Airways and Lufthansa, but that didn't stop him from opening the skies to millions of mortal Europeans and spawning a whole fleet of airlines eager to follow his lead. Now the taunting has stopped.

There are some 65 discount airlines, 15 of them in Germany, whose paths now cross mid-air as they make their daily runs to destinations all over the continent.

Last year some 20 million passengers took advantage of the cheap seat offers, and the number this year is expected to rise to some 30 million. The statistics all point in a positive direction for this booming industry, but McKinsey management consultants, who presented a study on the discount airlines boom in Frankfurt on Thursday, say the upward trend is made of fragile stuff.

Creating demand

"Their big plus has been that they are operating in newly created markets. They went to markets when there was no demand and they created a demand. Only about a third of customers have come from more established airlines, all the rest come have been pulled off the street, so to speak. They are people who wouldn't otherwise have flown," Lucio Pompeo of McKinsey said.

But nonetheless, that era of more than 50 percent growth is likely to come to an end. McKinsey says the coming years will see an annual growth rate of 13 percent, which is not bad, but not enough to keep all the airlines soaring.

"There is of course, still growth potential, especially in the markets which haven't been saturated. And we see a clear fall in prices which is related to the competition battle between the discount airlines and the more established ones," Pompeo said.

Gradual decline

Slow growth leads to over capacity, and McKinsey says it's only a matter of time before that takes its toll on the industry and wipes out all but two or three of the low cost airlines currently circling the continental skies.

The management consultancy study predicts that the market will be occupied by the two current dominant forces, Ryanair and the British company easyJet, which only entered the German market last year. It was a profitable departure for the company, which doesn't think the situation is yet as drastic as McKinsey suggests.

"The market won't get any easier for the airlines. It will be up to each low-cost airline itself to establish its own place on the market. They're already beginning to offer different products and pricing systems in a bid to attract a particular customer segment," Pompeo said.

Low-budget airlines no longer only offer flights, but increasingly try to lure money out of travellers' pockets with special hotel, car rental or insurance deals. And one airline has already pledged to give away seats for a couple of years on the basis that it can remain profitable with such sideline businesses. No prizes for guessing which Irish airline that might be.