In June 2009, Michael O'Leary (Ryanair chief executive) has predicted a disastrous upcoming winter for airlines. "Next winter could be terrible. We are gearing up for it to be terrible. There will be a bloodbath in the industry, and we want to cause some of that bloodbath" he told reporters. Even if Michael O'Leary already made such "bloodbath" announcements two years before, it is now clear that this winter season will be tough on low-cost carriers.

Difficulties time for the "Big Three"

EasyJet had half-year losses hit 148.32 million Euros following a 102.84 million Euros increase in fuel costs. In the first quarter 2009, the carrier had lost more than 40 per cent of its value and had committed to reining in some services in order to cope with heightened operating costs. Recently, easyJet announced plans to close its East Midlands Airport base in 2010. Worst, the orange carrier also said it will reduce capacity at London Luton Airport by 20%, about 360 flights a week. Hard news as easyJet used to call Luton Airport their "spiritual home"! This decision to cut capacity could affect about 100 jobs at the airport, and about 250 employees could lose their jobs with the company.

EasyJet also faces social tensions, like with the ground-handling staff in Spain about a pay dispute for a 25% rise this summer which affected few Spanish airports. In France, easyJet faces charges of breaching labor regulations. Under investigation since December 2006, easyJet has 170 staff working at Orly airport with British employment contracts. Since November 2006, a government decree requires foreign airlines with staff based in France to comply with French employment law. If the carrier is found guilty, it could pay millions of Euros in social security and health insurance contributions.

Ryanair, the leader of low-cost carriers in Europe, is also in difficulty. Indeed, last June, Ryanair posted its first full-year loss in two decades: the carrier dived into the red by 169.2 million Euros in the year to March after being hit with a 59% hike in its fuel bill. As Ryanair does not disclose monthly yield data, it is hard to understand the profitability of the traffic numbers. Investors were disappointed with the carrier outlook and especially with an important loss on the value of its investment in Aer Lingus. Moreover, in September 2009, an investor group attacked Ryanair for failing to publish the results of annual general meetings. It is said this results could have shed light on the popularity among shareholders of Michael O'Leary, who has been aggressively pursuing a takeover of Aer Lingus.

To face recession, Ryanair has implemented a strict cost cutting strategy. On passengers' side, since October, passengers checking in two bags will have to pay 100 Euros extra per flight. Ryanair decided to increase its baggage charges by 50%. This year, Ryanair has increased many other extra charges, such as 10 Euros credit card fee when booking a flight for instance. On airports' side, the carrier puts a huge pressure on them. Like easyJet, Ryanair cuts many routes or threatens to do so, if airports don't reduce their flight charges and air passenger duties. For instance, Riga airport CEO Krisjanis Peters told Baltic Business News, there have been indications that the company could cut flights. In the UK, the situation appears to be worst, when Ryanair cut its flights between Inverness and East Midlands Airport last July, reduced the number of planes based in Dublin and Shannon in June (Dublin lost 44 flights a week while Shannon lost 36), or closed nine of its ten Manchester routes to airports in East Midlands, Leeds Bradford and Liverpool last October.

For many years, Ryanair has been accused of unfair competition because of public subsidies received through airports. In most of European countries, Ryanair has been involved, like recently in Spain with SEPLA, in France with many French Regional Audit Courts (i.e. Pau airport), in the UK with millions of public pounds spent in subsidies, in Malta fighting Air Malta, in Germany with Frankfurt's Hahn airport, or in Slovakia with Bratislava airport…

However, some airports fight back, like Shannon Airport which is expected to pursue Ryanair for financial compensation of at least 2 million Euros for breaching the terms of a five-year contractual agreement. Signed in 2005, that agreement stipulates that Ryanair had to carry 1.9 million passengers though Shannon in the fifth year, which was not the case following cutbacks in services in March and in October.

The German low-cost carrier, Air Berlin, is not in good shape either. In May, Air Berlin said its first-quarter net loss widened to 88.4 million Euros, and its passenger levels fell 8 percent on the year. Its passenger levels kept falling in June (5 percent) and in August (3.7 percent). The carrier also had to face the German pilot association Cockpit about issues concerning the integration of airline LTU, acquired in 2007, and wages of LTU's pilots. Protests of these 336 pilots caused flight delays in the midst of the travel season in August.

A bloodbath among smaller carriers?

These three leaders still have some financial assets to face the winter, but it won't be the case for all low-cost carriers. Three low-cost carriers have recently disappeared: CentralWings, MyAir and SkyEurope.

Really considered as a low-cost carrier in October 2008, CentralWings, a subsidiary of LOT, ceased its operations in March 2009, because it was not profitable. The Italian MyAir ceased operations in July 2009 after Italian authorities revoked its operating certificate, citing ongoing financial difficulties at the company which inhibited the airline from running a smooth operation. SkyEurope from Slovakia has been declared bankrupt in September 2009 and now faces legal action (including its chief Nick Manoudakis) from the FMA, the Austrian Financial Market Authority for hiding the disastrous state of the group's finances.

According to analysts, like Yan Derocles of Oddo Securities, other low-cost carriers will disappear during the winter. "SkyEurope will not be an isolated case. There will be other low-cost carriers who are going to find it hard to get through the winter" said Yan Derocles. Still hard to tell from Flybe, Vueling, Centralwings, Jet2, Jet4U, GermanWings… which one will be next…

Clear and present danger ahead

I believe low-cost carriers in Europe will face two clear and present dangers. The first one concerns the European Union's emissions trading scheme (ETS). Airlines could face a shortfall of 77 million metric tons of carbon dioxide that would cost over 1 billion Euros. Ryanair alone would face a 2.8 million ton shortfall in 2012, while EasyJet would be 1.8 million tons short, according to Peter Hind, Managing Director of RDC Aviation.

The other threat will come from train in the UK. In August 2009, the Government announced it will "progressively replace domestic flights with a 250mph train network". Lord Adonis, the transport secretary, declared: "For reasons of carbon reduction and wider environmental benefits, it is manifestly in the public interest that we systematically replace short-haul aviation with high-speed rail". This project has a direct impact on carriers, especially those providing domestic short haul flights, like Flybe. Analysts agree that, "even if easyJet and Ryanair are less concerned, it could have a significant impact on their business too".

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Matthias, WhichBudget Airline Market Analyst