We have all got used to budget airline’s low fares, aggressive marketing, and constantly evolving route networks. And while they sometimes have challenges and service issues, increased competition and lower fares are always welcome. However, one thing that does stand out is the difference between low-cost airlines in Europe and the US. Despite a long history in the US market, they generally offer lower fares in Europe. Have you ever wondered why?
Low-cost in the US and Europe
The concept began in the US market in 1971 with Southwest Airlines, but it was not until deregulation in 1978 that competition really picked up. This opened up the market, with more low-cost airlines moving in, and ultimately several well-known legacy carriers collapsing.
Europe deregulated its aviation later than the US, delaying the start of low-cost. Just like in the US, though, moving early proved to be an advantage. Ryanair was the first airline (it started in 1985, but did not start expanding across Europe until 1997). And today it is the largest airline in Europe by passenger numbers (as of 2019), with 152 million passengers. The second-largest low-cost airline, easyJet, trails behind it (and the three dominant legacy airline groups) with 97 million.
Tracking fares is not easy, though. As we all know, fares with low-cost airlines vary greatly between routes, time of booking, and many other factors. European airlines are certainly more aggressive with extremely low fares during sales. We occasionally see €1 promotion fares, and fares as low as €10 are quite common. Simple Flying looked at these extremely low fares with Ryanair in 2020.
On average, though, fares in Europe work out substantially lower. Airfare comparison website Skyscanner looked at this in 2018 and noted that the average one-way flight with Southwest Airlines costs $149, while the average one-way flight with Ryanair is just $60.
Why are fares lower in Europe?
Why then, despite the later start, have Europe’s fares ended up lower? It’s not simply that the airlines were better at lowering costs. Ryanair was especially aggressive at lowering costs right from the start. It focused on cutting costs onboard as much as possible, selling extras, and speeding up boarding turnaround. But there is much more happening in Europe than just airline determination.
The more competitive legislative framework in Europe
The key driver of low fares is increased competition. And much more competition is permitted in Europe. EU legislation allows airlines from any EU country to operate flights in another country (domestic and international). In the US, foreign airlines are not permitted to operate domestic flights. Protectionism so far has won over opening up competition.
The ‘open skies’ agreement has been a key part of EU aviation regulation for many years. The regulations have developed further in the 2000s with the agreement of a European Common Aviation Area (ECAA). This liberalizes the airspaces of all EU countries, plus Albania, Bosnia and Herzegovina, Croatia, Iceland, Montenegro, North Macedonia, Norway, Serbia, and Kosovo.
This means that airlines in any country have to compete not only with only airlines in that country but from other EU states. Whether or not airlines choose to expand into other countries, just the threat is enough to keep fares lower.
Europe’s largest low-cost airlines, Ryanair and easyJet, have certainly taken advantage of this. Although they are based in Ireland and the UK, they can operate flights between other European countries and have built their extensive networks by doing exactly this, competing with many other regional airlines as they have expanded.
Non-airline competition
Competition is the biggest driver of low fares, and this doesn’t just come from other airlines. Europe has a well developed and improving passenger rail system. There are excellent high-speed connections within and between many countries, as well as night trains on longer journeys. This provides strong competition on many journeys, further pushing down airfares.
Low-cost coach travel in Europe has grown too in recent years, with companies such as Megabus and Flixbus providing more competition through extensive low-cost route networks.
Of course, rail and coach competition exists in the US, but it is much less utilized. Apart from a few keys routes (such as between east coast cities), rail travel remains slow and unpopular.
That is not to say the US has a poor rail system. It is, in fact, much more utilized and efficient for freight than in Europe. An interesting study in 2018 (from blog MasterResource) looked at this and showed how privatization has helped the US rail system focus on profitable freight operations. Railroads in the US carry over ten times the freight (per person) each year compared to Europe.
Larger population and potential market in Europe
More passengers should give airlines more chances to drop fares (and fill aircraft). And Europe offers more potential passengers than the US. At the most simple measure, its population is more than double (748 million in Europe and 332 million in the US, according to United Nations estimates). This is much more complicated when considering routes and other competition, but it gives a guide.
Population density also favors Europe. Overall the two regions (based on UN statistics) are similar at 36 and 38 per square kilometer. But this rises to a huge 181 per square kilometers for the western European area. Again, translating this to routes is more complex than this, but a higher population density should indicate more opportunity for shorter and more profitable flights.
Use of smaller airports and local subsidies
The more dense geography in Europe has also had another advantage. There is a higher density of cities and airports. This includes many smaller, under-used airports, sometimes further (but not that far) from cities. Low-cost airlines were quick to realize the potential of these and offer flights to these smaller and more distant airports.
They can avoid the intense slot competition, and higher airport fees, at busy main airports. This makes a big cost difference. This has not happened to the same extent in the US, where low-cost airlines often use the same large hub airports.
It has gone even further in some European locations, with airlines being paid by local regions to bring in passengers. In the early days of low-cost in Europe, this was more common but has decreased since then.
The UK AirportWatch group looked at the use of subsidies in 2014. It showed that in the years leading up to then, around 20% of Ryanair’s revenue came from airport subsidies, or reduced taxes and ground handling rates.
This practice has changed somewhat over the years. But a 2019 report by the European Federation for Transport and Environment showed that airlines still benefit hugely from subsidies given to the airports they operate at. In the case of Ryanair, it showed that up to 52 Ryanair airports were receiving subsidies (with around half of these in France), allowing airlines to benefit from lower airport charges.
Even in the lows of 2020, discussion of new subsidies continued. Simple Flying looked at the case of Wizz Air negotiating for significant subsidies in Bosnia and Herzegovina. It has agreements with Tuzla Airport, and it has become the busiest airport in the country even though it is only served by one airline.
More acceptance of low-cost in Europe
This is a difficult point to prove, but it is argued as a leading reason in analysis in The Washington Post, for example. This suggests that passengers in the US have had higher service expectations than in Europe. This allows European low-cost airlines to cut even more services and push fares lower.
This view is supported by the airfare search engine Skyscanner. It notes that US low-cost airlines have much higher staffing ratios (Southwest employs five times more staff than Ryanair, for example, but flies to just over half the destinations). It cites a main reason for this being that passengers in Europe will accept less staff interaction. Much more is handled by the website rather than airport agents, for example. Anyone experiencing a flight cancellation or delay in Europe will see this in action.
It also seems that passengers in Europe are open to paying more for extras. Again, this is hard to quantify. But looking at recent changes, it is clear most European airlines have moved more and more to a charging model for services, again helping them to potentially lower base fares.
Seating is one example. Both Ryanair and easyJet used to offer open seating but have dropped this to offer paid seat selection. Southwest Airlines still has open seating.
Baggage is similar. Southwest still includes standard-sized hand baggage (plus an additional smaller item). The three largest European low-cost airlines have all now dropped this and charge extra for standard hand luggage. easyJet held out on this until December 2020, but it too has now switched to a charging model.
Less frequent flyer benefits
European low-cost airlines tend to offer much less to frequent travelers. This may seem like a strange decision when almost all airlines worldwide utilize such schemes to attract and retain customers. But anything like this has a cost, and by not offering it, European airlines can drop fares lower.
Consider the largest low-cost airlines in both regions. Southwest Airlines offers its Rapid Rewards program, with points earning and redeeming for free flights and status benefits for regular travelers (including priority check-in, security, boarding, bonus points earning, and free Wi-Fi). It also has a popular ‘Companion Pass’ for top flyers (or credit card spenders), offering free flights for accompanying passengers.
In comparison, Ryanair and easyJet offer very little. easyJet offers a ‘Flight Club’ for frequent flyers, but is invite-only and offers increased flexibility rather than airport or flight benefits. It also has paid ‘easyJet Plus’ service (many European low-cost airlines have something similar), but it is not loyalty based. Ryanair has looked at introducing a similar paid-for service, but as of March 2020, this was confirmed as still some way off.
Fuel is not taxed in Europe
A big cost difference enjoyed by European airlines is untaxed fuel. Airlines in the US pay tax on aviation fuel (the tax varies by state).
Aviation fuel has long enjoyed a special status over other fuels. Since the 1940s, many countries (including those in Europe) have not levied a tax on it. This originated with the Chicago Convention, which prohibits the taxation of aviation fuel.
In fact, though (as discussed in this paper from the European Federation for Transport and Environment), this only prohibits the taxation of fuel already onboard an aircraft when it arrives in another country, not the taxation of fuel loaded onto the aircraft. Since then, many countries have introduced aviation fuel taxation, but not in Europe.
Over the years, there have been moves to introduce taxation in Europe from various parties, including environmental groups. New regulation was introduced under the Energy Tax Directive in 2003, allowing EU countries to tax aviation fuel under a bilateral agreement between individual countries. As of 2019, though, only the Netherlands had introduced taxes, and only for domestic flights. Norway and Switzerland also have similar taxes only on domestic flights.
There is more work ongoing within the EU to look at such taxation. With the growing focus on carbon emissions, this is not unexpected. It would also, of course, raise significant tax revenue. According to Euractiv, the European Commission conducted a study with a test taxation rate of 33 cents per liter of jet fuel. This showed that revenue from such a tax imposed across the EU would amount to €27 billion per year.
What effect does this have on prices? The Financial Times discussed this, based on a leaked EU report. This suggested that a tax of 33 cents per liter would lead to a 10% rise in ticket prices. It would also reduce passenger numbers by 11%.
The future of low-cost
One thing is certain; the gaps between low-cost and legacy airlines are narrowing. The legacy airlines, though, have probably made the bigger changes to keep up with the competition, suggesting the low-cost, point to point model may be winning out overall.
It is worth keeping in mind though the market share of low-cost airlines. In Europe, for example, this is around 30%. Despite impressive growth since the 1990s, low-cost airlines still share only around a third of the market. According to research from Statista and CAPA, the Center for Aviation, this has been much the same for the past 10 years (it peaked at 35.5% in 2017). The share in the US is around the same.
There have been some significant airline collapses in recent years, mostly from the low-cost sector. We have recently seen the collapse of WOW Air and Thomas Cook Airlines, amongst several others. Norwegian has avoided collapse but remains in a difficult financial situation. Simple Flying looked in late 2019 at the idea that the market in Europe may have peaked, with support from several industry voices. It remains a low margin business and very competitive.
More Consolidation
Coming out of the pandemic in 2020 and as aviation starts to recover, some airlines will be better placed to expand and fill these gaps. With the margins between them blurring, this could be the leading low-cost airlines or the legacy airlines. Consolidation and purchases are a distinct possibility as well. Whether we will see new airlines try to find a way in remains to be seen.
Consolidation could happen in the US or Europe, but there is surely more likelihood in Europe with the fragmented market in Europe. In the US, the four largest airlines (Delta, United, American, and Southwest) account for around 90% of the market share. While in Europe, the top 10 share around 50% of the market.
In late 2020, both Ryanair’s Michael O’Leary and Carsten Spohr, CEO of Lufthansa, predicted more consolidation. O’Leary particularly expects more of this in the low-cost market, pointing to easyJet and Wizz Air as two potential candidates.
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What about fares?
As for fares, certainly in the short term, we are likely to see a lowering of airfares as the industry recovers from the pandemic. Especially in Europe, where international travel has been so badly hit in 2020. In an interview in November 2020, Ryanair’s CEO Michael O’Leary predicted a return to up to 80% of capacity during 2021, boosted in large part by even lower fares.
But longer-term, any consolidation and lessening of competition would drive up prices. Europe seems more at risk of this happening. There are also potential changes in the near future to local subsidies and taxation of aviation fuel. Both of these have supported airlines’ low fares for many years but may not continue as they have before.
Would you like to share any thoughts on the differences between low-cost airlines in Europe and the US? There is a long history here and many differences faced by airlines. This article has discussed some of the main ones, but there are plenty more. Feel free to raise these and discuss them in the comments.