Is the low-cost bubble about to burst?

15th June 2004, Comments 0 comments

Two of the biggest low-budget airlines showed signs that the industry faces a crisis this year. And as many expats can only live and work in Spain thanks to cut-price fairs, what could happen if the bubble bursts?

EasyJet warned of lower-than-expected profits this year

It is Monday morning and Rita Rowe is back in front of her desk in London.

Her route to work, though, does not involve fighting her way through the Tube, sitting in traffic or waiting for a train.

She flew in the night before from her home in Majorca – a trip she makes every week.
Rowe travels 1,250 miles to get to her desk in London from her spacious home on the Mediterranean island.

She and her husband John Williams were tired of life in London so they decided to exploit the budget air fares revolution and commute to work from Majorca to London, clocking up about 5,000 air miles a week.

The couple fly back to Spain on Thursday night, work at home on Friday, then get back on the plane to Luton on Sundays.

For John Williams, who works with his wife in a PR firm, all this is possible thanks to the fares.

*quote1*He said: "The flights to and from Majorca, 1,250 miles each way, cost between GBP 25 (EUR 36) and GBP 60 (EUR 86).

"The rail fare to Manchester, less than 200 miles away, is GBP 175 (EUR 251) and it is, of course, slower, dingier and far less reliable."

They are part of a small army of  'Tempats' or – temporary expats – for whom Spain has opened up thanks to budget airline fares.

But for Rita Rowe and John Williams and many like them, all that could be about to change after two of the biggest low-budget airlines warned the industry faced a crisis this summer.

EasyJet said last week that its pre-tax profits for the year to September 2004 might be a third less than expected and added that it would cut fares by an average of 10 percent this summer.

Ryanair's Michael O'Leary predicted many low-cost airlines would go bust

The news that the original EUR 112 million (GBP 80m) profit forecast had been lowered to EUR 72.8 mi (GBP 52m) sent EasyJet shares falling 37.25p to 163.5p at the end of trading on the London Stock Exchange on the day of the announcement.

This followed a 25 percent plunge in May when the airline warned its business was being damaged by "unprofitable and unrealistic prices".

To add to this, Michael O'Leary, chief executive of Europe's biggest low-budget carrier Ryanair, predicted that the low-budget airline industry faced a crisis this year.

O'Leary had already forecast gloom and doom in March when he said smaller carriers would go to the wall because of a fares war and rising fuel costs.

Earlier this month, Ryanair announced its profits fall by 14 percent during the last tax year.

O'Leary has already been proved right. Irish budget carrier JetGreen went out of business last month — just a week after starting flights to Spain.

*quote2*Several hundred passengers were left stranded at airports in Alicante and Malaga.

The Wall Street Journal Europe predicted firms like JetGreen could be the first of many small operators to go out to the wall as competition hots up this summer.

Its Breaking Views column said: "EasyJet is now taking a more belligerent stance and says it will defend its market 'vigorously'.

"In other words, it plans to slash its own fares to drive other carriers out of the market."

But aside from all the high-powered wrangling in airline boardrooms, what would this really mean for consumers?

Clearly, despite promises by EasyJet to cut fares this summer, the very presence of smaller firms in this already full market has undoubtedly forced fares down.

Without them, it can only be assumed, fares could steadily creep up once more.
If this 'worst-case scenario' occurs, who will it affect?  

An obvious target will be those foreign property owners who have not taken the leap and moved to Spain but still want to make the most of their cottage in a Costa Brava fishing village or finca in an Andalusian pueblo.

And then there is the huge tourist market.

Last year, Spain officially overtook France as the favourite holiday destination for Britons.  Many enjoy affordable summer holidays or even just come to Barcelona or Madrid for stag-night weekend trips, thanks to the likes of EasyJet, Ryanair or their competitors.

It seems unlikely fares will go back to what they were before the low-budget carriers changed the market forever.

But if the bubble is about to burst, perhaps this can only mean higher prices – with all the knock-on effects this will bring.
June 2004

[Copyright Expatica 2004]

Subject: Low budget airlines face crisis, Living in Spain

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