air turbulence Battle for the Skies

Ryanair, Europe's largest budget carrier, is taking off on a growth plan in Germany aimed, in particular, at grabbing business and economy travelers from Lufthansa.
Everyone knows where I want to push my airlines.

Ryanair's Michael O'Leary is famed among Europe's corporate leaders for his outspoken style. His colorful comments about competitors, environmentalists and management already fill books.

Now the chief executive of Europe's biggest budget carrier is drawing even more attention as he embarks on an ambitious growth strategy in Germany.

"We want to expand our market share considerably," Mr. O'Leary told Handelsblatt.

The goal is to raise Ryanair's 4-percent share of the German market to as much as 20 percent within four years – and bump Air Berlin from second place.

The move comes amid rising passenger numbers and a record-high share price at the airline.

It also coincides with a decision by Lufthansa, Germany's flagship carrier, to expand its own budget subsidiary, Eurowings, which will offer cheaper fares in Europe in the future and also long-distance routes. Its budget carrier has a fleet of about 150 aircraft.

The greater competition between budget and traditional carriers is good news for passengers.

Lufthansa's chief executive Carsten Spohr had hoped this strategy would help him maintain a lead over fast-growing rivals like Ryanair and EasyJet. But it appears to have attracted still more competition, even from traditional full-service carriers. Air France, for example, is expanding its budget airline Transavia.

The greater competition between budget and traditional carriers is good news for passengers, according to Rene Steinhaus of the A.T. Kearney management consulting firm. "These players are finally being attacked on their own territory," he said.

Ryanair plans to lure lucrative business travelers from its competitors by beefing up its service with friendlier personnel and including more big cities in its flight plan.

"We're currently talking to eight German airports, including four to five major airports that aren't part of our network yet. We're growing massively," Mr. O'Leary said. Ryanair recently expanded its operations in Cologne and plans to capture market share at the Hamburg and Munich airports as well.

"That will make us bigger than Air Berlin, which will probably keep getting smaller," he said.

A price war is expected to unfold, and Mr. O'Leary also expects casualties.

"In five years, there were be only five major airlines in Europe: the Lufthansa family, Air France, British Airways – and Easyjet and Ryanair," he said.

 

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Europe's air-travel market is changing radically as low-cost airlines force established carriers to change their business models. Budget airlines already account for a third of all passenger traffice in Europe and Germany, with a steadily growing market share.

The price pressure is also reflected in the annual figures of several airlines. In Germany, Air Berlin faces a record loss for 2013 and Lufthansa has lowered its earnings forecast for this year.

By comparison, Ryanair raised its profit forecast from €810 million, or $962 million, to €830 million for the fiscal year ending in March 2015. Rival Easyjet also increased its pre-tax profit by 22 percent to €745 in its last fiscal year, the fourth record year in a row.

The airlines appear to be swapping stragetgies. While established full-service airlines have begun to copy the budget concept, discount airlines have moved to incorporate more frills to attract business travelers, such as frequent flyer programs and seat reservations.

But Mr. O'Leary will need to be careful. Although his budget carrier has successfully penetrated the market with its low prices, it has also come under fire from consumers for its poor service.

To lure away some of Lufthansa's valued business travelers,  Mr. O'Leary will need to put service back on the menu. That includes offering low-cost packages, like the three offered by Germanwings.

Ryanair celebrates its 13 millionth flier in and out of Shannon, Ireland.

Overall, airfares are slightly on the rise, as all airlines strive for profitability. In 2014, the average price of a one-way flight, including fees, increased from €50-130 to €70-140, according to the German Aerospace Center.

"We've already won the price war," Mr. O'Leary said, in a pointed remark aimed a Lufthansa.

"They can cancel the food and repaint their planes but that's not enough to make them a budget carrier," he said.

Yet Mr. O'Leary should be aware that when it comes to the budget segment, established airlines have never been more willing to change their approach, and many have risked conflict with their own employees to push through their new plans. Despite months' long pilot strikes at British Airways, for example, the carrier held its ground. Today, it operates a lucrative low-cost subsidiary, Vueling, .

Lufthansa knows what is at stake. "Those who don’t prepare for this will not survive," Thomas Winkelmann, chief executive of Lufthansa's low-cost subsidiary Germanwings, told Handelsblatt.

 

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Carsten Herz covers news from London as Handelsblatt's U.K. correspondent. Jens Koenen leads Handelsblatt's coverage of the aviation and IT industries. To contact the authors: [email protected], [email protected]