The impact of no-frills carriers on the airline market and on traffic growth

No-frills carriers have also innovated on fares, and so radically altered how the airline market works. They have changed both the structure and the level of fares for short-haul travel, not just in terms of their own offering, but also reflected in the subsequent response from incumbent airlines. Saturday night stay rules are now a thing of the past, and the “book early – get it cheaper” philosophy extends across the sector.

It is unarguable that there is now a far more competitive environment in the UK for short-haul air travel than before liberalisation of the EU aviation market, and that no-frills carriers have been a very significant factor in enhancing that competition. Their focus on reducing costs and fares, and achieving high levels of efficiency and productivity, has forced other airlines to change the way they operate and seek out similar efficiencies, so as to be able to compete. All short-haul airlines in the UK now operate in a market where consumers expect low fares for European and domestic travel.

But it is less clear that the growth of the no-frills sector has significantly affected overall rates of traffic growth. There is an apparent conundrum here. Despite the spectacular growth of no-frills carriers in the UK, and the perceptions about the impact they have had on travel habits, there has been little change in long-term aggregate passenger traffic growth rates, as Figure 2 shows. Since 1996, annual growth rates have averaged around 5 to 6% — strong growth, but not very different to the rates achieved in previous decades. Growth might have been lower had no-frills carriers not entered the market. But the CAA’s analysis, including of some individual routes, suggests that, in fact, much of their growth seems to have been at the expense of full-service scheduled carriers, and, even more so, charter carriers.

Whilst on particular routes there appears to be considerable stimulation of new traffic, this is not uniform and whilst stimulation will be contributing to the annual growth figure, it is harder to discern a change in the rate of growth at the level of the market overall.

Figure 2 UK to EU and UK domestic traffic – combined growth between 1976-05.

Source: CAA Airport Statistics

Figure 2 also suggests that aggregate growth in traffic may have become less volatile over time. Part of this may be due to a more stable macroeconomic environment. However, it may also be attributable to no-frills carriers’ tendency to adjust their fares to maintain high load factors on their aircraft, compared with the previous practice of fares remaining relatively fixed, and passenger traffic varying with economic circumstances. Volatility in demand may have been replaced to some extent by greater variance in price.