UK airports cater for LCCs while package vacation demand decreases but supply increases

The expression ‘mixed messages’ is often banded around in the air transport business. There is a clear case of it in the UK right now where many airports are behaving as if there is little future for the traditional package holiday delivered by dedicated charter airlines while at the same time the LCCs, who were supposed to supplant the charter airlines with their FIT-friendly offer, are increasingly turning to the package vacation in order to differentiate themselves from the opposition and to appease growing demand from their customers.

Perhaps the best place to begin is Manchester Airport, one of the two principal UK charter airports, the other being London Gatwick, as a marker for what is going on. (The other important airports are London Luton, but not London Stansted, Birmingham and Glasgow. Even so, at the height of the summer season almost every UK airport offers at least a basic package programme to the premier Mediterranean sunshine coastal cities such as Alicante, Malaga and Palma de Mallorca in Spain, often together with the Canary Islands – equally popular in the winter season – and Faro in Portugal.)

Charter in decline for years

Charter traffic at Manchester has been decreasing for years; at one time it was the mainstay of the leisure market accounting for 60% of the airport’s business. But times have changed. As the chart below demonstrates, charter capacity has fallen to just 14.3% of the total in Oct-2011, while LCC capacity has risen to 32.4%. A similar story can be found at most other UK airports, with even less charter capacity in some cases. While overall traffic increased by 6.5% at Manchester in Oct-2011 that increase was driven by scheduled international service increases (+13.08%), rather than the charter (+1.12%) or domestic (-8.18%) segments.

Manchester Airport seat capacity by carrier: 10-Oct-2011 to 16-Oct-2011

Any charter growth is good

Even so, that tiny growth in charter passengers is a landmark event. In only two other months this year has there been an increase in charter passengers, namely April (+15.74%) and May (+0.05%), both of them influenced by the Icelandic volcanic ash cloud of 2010. In most months there has been a decrease of between 4% and 6%, with -2% (least) and -13% (most) also recorded.

Manchester Airport has gone out of its way to protect its charter traffic in several ways. Firstly, its distaste for LCCs during the late 1990s and early 2000s was almost certainly influenced at least in part by this protectionist philosophy, one that lost it a lot of traffic to neighbouring airports until charges were eventually dropped across the board and LCCs grudgingly welcomed. Moreover, Manchester went out of its way to convert first the T1 airside retail area (GBP50 million) and subsequently the area in T2 (GBP11 million), mainly for the benefit of long-haul charter passengers, those with the most money to spend and expressly the type of traveller the LCCs eschew. And it remains the case that Manchester’s mid-long haul charter business remains quite solid. If you want to visit an exotic place like Cuba, (in fact anywhere in the Caribbean), Male, Goa, Mombasa, Egypt or the Cape Verde islands, charters are the only way to go there directly from Manchester, and often act as de facto scheduled services for business.

It should also be noted that Thomson, the biggest charter airline at Manchester, presently offers the greatest number of weekly seats (56,298), closely followed by Monarch (47,018), which is moving away from charter operations to focus on its scheduled services.

Ryanair back with a 26-city network, and a friend at Manchester airport

Despite the protectionism, there has been a sea-change in the last two months following the announcement that Ryanair would make its second attempt at developing a critical mass of services. The first attempt, in 2008/09, was thwarted by a disagreement over the charging regime, causing the carrier to exit almost completely, and as recently as this year Ryanair was threatening to reduce capacity on its only remaining service, Dublin. Now Ryanair is back with a 17-city network from the commencement of the winter 2011/12 season, rising to 26 for summer 2012. Further service enhancements are promised if these routes are successful. Manchester is also now a base.

On top of that has come the curious announcement this month that, as part of a wide-ranging revamp of the management team, Ryanair’s New Route Development Director, Ken O’Toole, will be joining Manchester Airport Group (MAG) (Manchester, East Midlands, Bournemouth and Humberside airports) as chief commercial officer with a brief to conduct negotiations with airlines on terms and conditions such as airport charges. Questions regarding conflict of interest are at the forefront.

There is no great track record of aggressive airline negotiators successfully swapping roles in this manner and several instances highlight the failure of to make the transition.

Furthermore, almost immediately after Ryanair’s return was announced, CEO Michael O’Leary launched a verbal assault on the other LCCs already operating at Manchester, most notably the charter airlines, warning he had them in his sights, like some latter day Wild West lawman on the trail of outlaws.

So, with the return of an aggressive Ryanair that has thrown down the gauntlet to the charter carriers, and with the apparent backing of the MAG management (and an increase in services by easyJet as well), it appears Manchester is changing its approach to the charters, at least those operating into the Mediterranean.

The issue that is unclear is why this should be a strategic decision that is undertaken now, having been resisted for so long and while the business model of some of the LCCs has been changing to accommodate those tourists who prefer prepaid and all-in vacations.

Jet2.com takes the risk with a return to the package concept

The leading airline in this respect is Jet2.com, the Leeds Bradford Airport-based carrier that has its second largest base at Manchester. Jet2.com turned back the clock in 2007 when it introduced Jet2 Holidays (www.jet2holidays.com), offering package vacations that incorporate Jet2.com flights with private taxi transfers and hotel accommodation. Package holidays are now offered from all its UK bases to over 25 regional destinations and may be booked online or through travel agents, who receive traditional brochures for their racks. Until recently (see below) this remained a unique development amongst British budget airlines and cut right across their entire ethos – ‘do it yourself’ seat + extras, not formal packages. In several on-line promotions, 20,000 packages have been given away.

While Jet2.com and its parent, the Dart Group, remain coy about the value of these packages to the business, it is believed they amount to around 25% of the total sales volume.

Such has been the success of the product that it influenced British Airways, which was trying desperately to enhance its own vacation product a couple of years ago as it steered away from a premium to economy focus in the absence of any discernible premium product demand following the credit crunch.

Another airline to jump on the bandwagon was easyJet, which, apart from its increasing focus on business travellers (it is trying to reposition itself as “Europe’s flag carrier”) is equally ramping up its package vacation offer. In 2010 it expanded in the package holiday market through easyJet Holidays, a collaboration between the carrier and the UK-based online travel company, Lowcosttravelgroup. Prior to the launch of its website it indulged in (deliberate?) irony by even using old fashioned TV-based Teletext technology for promotion, in a throw-back to the 1990s.

Monarch, transitioning from charter carrier, perpetuates the Cosmos brand

Yet another airline that has affiliations with tour operators, and even though it is better known for its scheduled services, is Monarch, the quasi-LCC that is undergoing a transition away from package vacations towards scheduled services. Even so, it retains a close co-operation with Cosmos Holidays, one of the longest survivors in the package vacation business, though no longer on the same scale it once was, and part of the same group as Monarch. Monarch Scheduled and Cosmos frequently assess potential new tour destinations jointly.

The latest airline to clamber aboard the package vacation movement is bmibaby, the LCC arm of bmi (British Midland International). bmibaby has recently undertaken a strategic review and will quit its bases at Manchester (where it faces extreme competition – none of its top 10 routes are Manchester routes) and Cardiff (where its share of traffic has fallen sharply) this winter, in favour of enhanced operations at East Midlands (where the airport is at one end of seven of those top 10 routes) and Birmingham.

bmibaby launches Midlands Co-operative to avoid Manchester competition

Apparently in conjunction with this decision bmibaby has just announced it will launch a low-cost Air Tour Operators Licence (ATOL) protected package holiday service (www.bmibabyholidays.com) that will include flights, accommodation and optional ground transfers to holiday destinations in Europe. They will be sold in association with Midlands Cooperative Travel out of Birmingham and East Midlands Airport (where there is less competition than that provided by Jet2.com at its main bases) and also Belfast City. In the short run Manchester and Cardiff are retained as departure points. Prices to Spain start from GBP189 for a four-night break on the Costa Blanca (Benidorm and Alicante).

The airline’s managing director Julian Carr said: “We are well known for our low cost flights and have a loyal following of regular holidaymakers who fly frequently with us. It made perfect sense for us to extend our offering and give our customers the chance to book their complete holiday package with us.” The packages are similar in nature to those offered by Jet2.com.

The Co-operative Movement’s (Manchester) retail travel division, of which Midlands Co-operative Travel is a separate autonomous unit, is the largest in the UK since a recent merger with Thomas Cook (Peterborough) that was ratified by the Competition Commission in Aug-2011. Out of a total of 1240 shops or in-store branches, Thomas Cook has 780, while 360 are currently run by Co-Op Travel, with the Midlands Co-op – the entity that has done the deal with bmibaby – owning a further 100.

It is rather intriguing that Thomas Cook should have hitched up with a Manchester company. Some observers even go so far as to believe they are the ‘real problem’ for Manchester Airport, that their "demise" runs almost in line with that that of MAN over the last few years and ask if that is why the LCCs now see their opportunity?

Passengers, demanding value, can grow segment

Can this trend develop further, even though some airports appear to be mitigating against it? Guardedly, the answer must be yes, and the driving force is the passengers themselves. Much gloss has gone off the LCC business in the UK, partly because of pricing policies and the imposition of additional charges, partly because of the plethora of reality television programmes that paint the LCCs in a poor light, and partly because the budget airlines simply are no longer new, fresh and trendy.

But more importantly, cash-strapped UK vacationers, crushed under the weight of direct and indirect taxation (the latter including APD, of course) are demanding value for money. With the pound sterling (GBP) inexplicably stuck at a low value relative to the euro (EUR) despite Britain’s much healthier economic position in relation to the euro zone and even allowing for the very low interest rates in the UK, consumers are tired of being short changed on the exchange rate, both before they leave the country and in transactions abroad. Suddenly, the appeal of having the majority – perhaps all – of a vacation pre-paid in sterling has risen dramatically. Where vacation travel is concerned it is almost all one way: few tourists will travel from the Spanish Costas to Birmingham or Belfast for a holiday, so they do not have to be taken into account in the equation. The ailing Flybe does not yet offer package vacations, although it does offer links to do-it-yourself hotel and car rental facilities on its website. Perhaps it should offer packages.

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