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Low-fare airlines take off
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September 22, 1999: 11:49 a.m. ET
KLM launch of low-cost carrier in U.K. is only the start of a revolution in Europe
By staff writer Mark Odell
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LONDON (CNNfn) - When a struggling Irish airline adopted the U.S. low-fare, no frills concept at the start of the 1990s, there were plenty of doubters who said it would never work in Europe. Now almost a decade later, Ryanair is leading a revolution that has made the established players sit up, take notice and get worried.
It came as little surprise to analysts when Dutch carrier KLM announced Wednesday it is setting up a low-cost operation, called "buzz", in a restructuring of its current U.K.-based operation.
KLM UK plans to spin off a fleet of eight aircraft to create a so-called "no-frills" airline operating from London's Stansted airport.
KLM is only the second major carrier in Europe, after British Airways, to take the plunge and embrace the low-cost concept.
"The low-cost carriers are obviously having an impact on the major airlines in terms of pricing," Jonathan Wober, airline analyst at Deutsche Bank in London, told CNNfn.com.
Low-fare start-ups tend to expand any market they enter rather than take share from any incumbents, airline analysts say. But the lower prices can have a damaging effect on the larger, higher- cost carriers. Any attempt to match the cut-price fares will quickly eat up any profits the major airlines might generate on a route.
KLM UK had little choice but to respond, as its base at Stansted increasingly has become the focus of the low-cost boom, which is starting to spread to Europe from the U.K.
KLM UK had no choice but to respond with "buzz"
Dublin-based Ryanair, now firmly established as the leading European exponent of no-frills air travel, founded its U.K. base at Stansted four years ago, and has been growing at an average rate of 25 percent a year.
British Airways eventually decided to act last year, feeling it no longer could sit back and watch as its home market led the low-fare revolution in Europe. It also used Stansted as a base for its stand-alone subsidiary Go, which grew from nothing to 13 Boeing 737 aircraft in less than a year.
Now easyJet, which is widely recognized as the third major low-cost carrier alongside Ryanair and Go, also plans to launch operations at Stansted.
"This is more of a defensive move [by KLM UK]," Wober of Deutsche Bank told CNNfn.com.
But Floris van Pallandt, chief executive of KLM UK, denied it is a knee-jerk reaction to protect the carrier's market, insisting the airline is merely reacting to the changing demands of passengers.
"It's not a defensive move. Any product needs to be geared to the needs . . . of the consumer. Now there is clearly a shift in consumer behavior . . . as opposed to a couple of years ago," van Pallandt told CNNfn.com.
"We see that trend [toward low-cost carriers] is going to continue and that the market will grow rapidly and we need to participate in that market," he added.
KLM aims to stir things up with its low-cost carrier
Forecasts and estimates of the size of the low-cost market in Europe vary widely, but all foresee rapid growth in the sector.
Salomon Smith Barney estimates the market is set to double by 2002 from 11 million passengers in 1998. Market research company Mintel forecasts a tripling of the market to 15 million by 2003.
At the moment, competition is limited between the main players in this sector as the low-cost carriers are content to carve out new routes and benefit from the rapid growth.
The U.K. so far has led the way in Europe, as the British government was much earlier in embracing the deregulation of its aviation industry than the rest of Europe.
Van Pallandt wouldn't comment on his expansion plans, but analysts widely agree that the three more-established U.K. carriers -- Ryanair, easyJet and Go -- will lead the development of the low-fare sector in the rest of the continent.
"Those guys will take their aircraft into the continental European markets and build another base," said Martin Borghetto, airline analyst at Morgan Stanley Dean Witter in London.
Indeed, easyJet already is in the process of establishing its second base in Geneva. Ryanair has plans for a third base beyond Dublin and Stansted, and analysts suggest Go could move into Munich, Germany.
"We think the low-cost market is set to explode in Europe," Michael Cawley, chief financial officer at Ryanair, told CNNfn.com. 
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