Airline wars

Low-Cost Boom Hurting Airport Owner Fraport

  • Why it matters

    Why it matters

    Budget airlines are growing much faster than traditional airlines, forcing major hubs such as Frankfurt to woo them by offering discounts.

  • Facts

    Facts

    • Ryanair has encroached on Lufthansa’s home turf by starting flights from Frankfurt, Germany’s main hub.
    • Frankfurt airport operator Fraport offered discounts to lure Ryanair because it wants to tap into the booming budget airline market.
    • The price of a budget airline ticket fell to between €40 and €70 by last fall from between €50 and €130 in early 2015, according to calculations by the DLR German Aerospace Center.
  • Audio

    Audio

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Startendes Flugzeug
Fraport has upset Lufthansa by offering lower take-off and landing fees. Source: DPA

Michael O’Leary, the flamboyant head of Irish budget airline Ryanair, has a crazy-sounding vision. “One day I want all the air fares on Ryanair to be free,” he told Handelsblatt in January. He’d make money from additional travel services such as catering, hotels or auto rentals instead.

That may be music to passengers’ ears but it highlights a threat to traditional airlines and big airports like Frankfurt, consultants and analysts warn.

Budget European carriers including Ryanair, Wizz Air and Lufthansa subsidiary Eurowings have launched an all-out assault on the German market this year by aggressively adding routes, forcing even the big airports to grant them more slots. And these are being offered on more favorable terms than those given to the established carriers like Lufthansa.

They’re doing so to halt an exodus of passengers to smaller airports that offer more budget flights, said Stefan Schulte, the head of Frankfurt airport operator Fraport.

“Lufthansa didn’t have any budget competition for years. The arrival of Ryanair hurts them. I understand that.”

Stefan Schulte, head of Fraport

“We in Frankfurt have lost up to one million passengers on average per year to rival airports such as Cologne or Stuttgart in the last two to three years because they have a strong low-cost presence,” he said in an interview. ‘“We can no longer ignore the market upheaval.”

Mr. Schulte said budget airline travel had grown by 16 percent per year on average over the last 15 years and accounted for 41 percent of the continental European market. “The network carriers [established airlines] grew by 2 to 3 percent per year in the same period. That shows the dramatic change.”

Budget airlines are also starting to offer services traditionally provided only by established airlines, such as long-haul flights and transfer options.

Bjørn Kjos, the head of Scandinavian budget airline Norwegian, this week aired the idea of offering long-distance flights from Frankfurt, Germany’s main hub and Europe’s fourth-largest airport. His airline is already offering trans-Atlantic flights from Scandinavia, the UK, France and Spain. And Ryanair wants to try out connecting flights in a shift to the hub model.

Predictably, Lufthansa is concerned, and it’s furious at Fraport for luring Ryanair to Frankfurt with what it believes were unfair discounts.

“There’s a lot of emotion involved,” Mr. Schulte conceded. “Lufthansa didn’t have any budget competition for years. The arrival of Ryanair hurts them. I understand that.”

Until now, the rise of the budget airlines has mainly hit the traditional airlines. But now the big airports are also starting to suffer.

Mr. Schulte said Fraport had lost business because Lufthansa’s budget unit Eurowings was offering flights to Cologne and Stuttgart instead of Frankfurt.

These days, airports that bar the likes of Ryanair are depriving themselves of growth. “Fraport is doing the right thing,” said Philipp Goedeking, the founder of airline consultancy Avinomics. “It can’t allow the strongest growing segment of the airline business to bypass Germany’s biggest airport.”

Until now, Lufthansa, Fraport’s biggest customer, has been able to drive rivals out of Frankfurt by temporarily lowering ticket prices on the Frankfurt routes they offered. That’s how it chased off Air Berlin a few years ago when Germany’s second-biggest airline dared to offer flights between Hamburg and Frankfurt.

But that strategy won’t work against Ryanair. Michael O’Leary will base seven planes in Frankfurt this coming winter and will offer flights to 24 destinations. He might increase his Frankfurt fleet to 20 planes in the medium term. Lufthansa can’t respond to that with price cuts without hurting its own bottom line.

“Ryanair flying to Frankfurt is partly an attempt to test Lufthansa’s strength,” said Gerald Wissel of Hamburg-based firm Airborne Consulting.

But this cut-throat competition is risky for everyone involved. Fraport will have to make the discounts it’s offered to Ryanair available to all other budget airlines including Eurowings.

That will reduce its profit margin, analysts warn. It could also put the wages of Fraport staff under pressure because Ryanair may demand cuts in fees or even think of processing passengers itself, said Mr. Goedeking of Avinomics.

In addition, smaller airports will likely lose business as budget flights shift to the bigger hubs. “It’s getting increasingly difficult especially for the smaller airports to grow profitably,” said Mr. Goedeking. “That will only work in niches and by specializing on certain tourism offers.”

And Lufthansa will have to brace for further declines in income. Ryanair’s relentless advance will at some point cast doubt on the viability of the hub model of offering customers the ability to connect from one flight to another.

That’s traditionally been the domain of the core Lufthansa brand, whereas it’s long since surrendered short-haul services to destinations other than its hubs of Frankfurt and Munich to its Eurowings unit.

In future, Lufthansa will have to consider handing Eurowings its entire short-haul and medium-haul business, said Mr. Goedeking.

That discussion could gain pace soon because Eurowings is about to get a new boss. The former head of the German business of Spain’s Telefonica, Thorsten Dirks, will take charge of the airline in May. He’s unlikely to feel any particular loyalty to the Lufthansa brand. His focus will be squarely on growing Eurowings.

 

Jens Koenen leads Handelsblatt’s coverage of the aviation and space industry. To contact the author: koenen@handelsblatt.com

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