Small economies built around low-cost air service suffer with the airlines
31 August 2008
By Caroline Brothers
GRANADA, Spain: It boasts hillside vacation homes, a ski resort and the 14th century Alhambra palace - one of the most visited monuments in Spain.
But this southern European city, 30 minutes' drive from the Mediterranean, is battling for its economic future alongside some of the struggling low cost airlines it has come to rely upon.
With no industrial base to speak of, Granada is heavily dependent on tourism. And by-passed for now by Spain's high-speed railroad - unlike nearby rivals Seville, Córdoba and Málaga - it is particularly reliant on the discount airlines that brought 670,000 international visitors to Granada last year.
The crisis currently gripping the airline industry, however, has revealed budget carriers as fickle partners to build a future around. Fuel prices that have doubled in a year, and an economic slowdown that is prompting cost-sensitive passengers to think twice before jumping on a plane, are driving all airlines to cut flight schedules and overall capacity.
Budget airlines, with far greater flexibility to eliminate routes and lay off employees, are going even further, sometimes wiping whole cities off their aviation maps.
That reality hit Granada late last year. Monarch Airlines, which began daily flights there from Britain in May 2005, announced in November that it could make more money on its Gatwick to Málaga route, and halted its Granada flights.
That sparked a howl of protest - and a 900-signature petition - from Britons who had depended on it for inexpensive access to their second homes, or who bought farmhouses to rent to their compatriots, or even as residences from which to commute weekly to jobs in England.
"You can't rely on the low-cost airlines - it's very risky," said Bill, a retiree from the northern English city of Nottingham, who was visiting the Alhambra and planning to fly home on Ryanair, the biggest budget airline in Europe. He agreed to talk only if his last name was not used.
Monarch's year-end blow was then compounded for Granada by a city hall decision to stop contributing its 200,000, or $293,00, share of the 1 million payment that Ryanair receives each year for flying into the city and promoting it on its Web site.
Granada is not without air connections, of course. Ryanair, which began services here in 2005, runs 26 flights a week from London, Liverpool and Milan, and plans to have capacity for 62,000 passengers in the fourth quarter, a 15 percent increase from the same period a year earlier, according to the Official Airline Guide, which collates data on global aviation. From March to October, Ryanair also flies in from Frankfurt and Nottingham, England.
But rumors that the carrier, too, might cut back sparked fears that the city's transportation lifeline could be further constricted. And even if Granada's airport manages to preserve the current level of service, its hopes for the future will be dashed unless it can expand to new markets.
Granada's business community has leapt into action, starting a campaign early this year to bridge the fiscal gap left by the city. Airport buses, participating businesses and the airport itself now display the slogan: "We make Granada fly."
Javier Jiménez, who runs the Granada Chamber of Commerce, said during an interview that the chamber now had commitments for more than 80 percent of the total from companies ranging from the dairy business Puleva to family-run restaurants and bars.
If the fund-raising effort can make up the full shortfall by December, he said, the local airport should manage to preserve Ryanair service levels through at least March 2010.
But that is not enough. "To encourage the arrival of more tourists in Granada we have to keep working to connect Granada with foreign cities," Jiménez said. "We will keep insisting on this."
Granada needs continued growth to persuade government officials in Madrid that its single-runway airport is worthy of investment. Improving and enlarging a terminal too small even for a single duty-free shop will allow Granada to attract the international flights it considers the key to its future.
With other carriers following Ryanair's lead, Granada has tripled the number of passengers using its airport since 2005. But unless fuel prices ease further, Ryanair, Transavia of the Netherlands, and Spanish rivals Vueling and Spanair, may be tempted to retreat.
Like the rest of the aviation industry, budget airlines are battling what they see as the toughest economic conditions since the low-cost carriers got off the ground. No-frills airlines, which account for 20 percent to 25 percent of the European aviation industry, are not necessarily the most vulnerable. Those with the strongest balance sheets, like Ryanair and EasyJet, are among the best positioned, say industry experts, who expect them to pick up business as rivals pull out.
But much depends on other variables like the quality of the airline's relations with its work force, which airports it serves, how much its price-sensitive passengers are prepared to pay, and how much of their travel is discretionary.
The low-cost model in Europe is so new that no airline has ever been tested in such circumstances. Most were still ramping up in 2001 when the Sept. 11 terrorist attacks threw global aviation into its last big crisis.
"This is really the testing ground - does that model work when you are potentially facing a recession?" said Penelope Butcher, an aviation analyst in London for Morgan Stanley.
The discount airlines' flexibility may help protect them, but sometimes at the expense of the communities they serve.
Lacking the unionized labor of traditional carriers frees budget airlines to pull out of markets without penalties or strikes; lacking the administrative paperwork common to the legacy carriers lowers their fixed costs.
Budget airlines also have a great deal more flexibility on pricing than the traditional carriers.
"The fuller the plane, the more they can raise prices at the last minute," said Fabio Cannavale, chief executive of the online travel agency Bravofly, which is based in Switzerland. But there is a limit to how far most budget airlines can push their fares before their prime passengers opt to take a bus or train instead.
"If you push up the price, you don't fill the seats - and the point is to have planes that are full," Cannavale said.
The worry for Europe's major low-cost airlines - Air Berlin, Norwegian Air Shuttle, Wizz Air of Hungary, SkyEurope of Slovakia, Vueling of Spain, as well as EasyJet and Ryanair - is that they may be required to raise prices high enough that their increasingly squeezed middle-class passengers may no longer be willing to fly as much.
"A large part of the model is based on keeping pricing quite low, and because fuel prices have moved where they have, by necessity ticket prices have gone up," Butcher said. "It's a bigger part of the budget to buy a weekend away."
Offsetting that, however, is a more efficient use of aircraft that brings discount airlines gains compared with traditional carriers.
Which airports the low-cost carriers use also help position them for advantage. Analysts say that an airline like EasyJet, operating out of the Paris hub airport, Roissy-Charles de Gaulle, and the closer-in Orly, is more likely to pick up price-sensitive traffic from Air France-KLM than is Ryanair, which operates out of the tiny Beauvais airport, 90 kilometers, or 56 miles, from Paris.
Whatever the fallout, Ryanair for one will be shedding no tears for those passengers unable to reach vacation homes as carriers eliminate destinations.
Ryanair's chief executive, Michael O'Leary, in a now notorious remark made during an interview in 2003, made clear that Ryanair offered no guarantees on providing lifetime service.
"Please don't ask me to feel sorry for rich people with second homes in France," O'Leary said.
Copyright © 2008 the International Herald Tribune
International Herald Tribune
Go to top
Print Page
Smaller
