Geoffrey Thomas

November 11, 2005

THE definition of ``frill`` varies from one passenger group to another. The British holidaymaker will typically go for a bargain fare and German business travellers appreciate the option to queue jump for an extra fee. But to an Aussie, the real frill is being able to watch live sport on a seatback screen.

For example, while so-called ``no frills`` airline Jetstar has just introduced Wencor`s digEplayer portable in-flight entertainment (IFE) units and Virgin Blue is rolling out its seatback videos, European counterpart Ryanair scrapped a plan to provide the units earlier this year after a five-month test failed to evoke sufficient passenger interest.

Instead, Ryanair has found non-flight revenue strategies to be more successful, enabling it to maintain a true no-frills, low-fare strategy. Last year, its CEO, Michael O`Leary, likened the airline industry to the cinema industry with more revenue being generated through ancillary sales than tickets.

In 2003, Ryanair`s commission on car rentals was E28 million, in-flight sales earned E23 million, internet revenue was E12 million and non-flight revenue was E35 million.

Ryanair claims to have other revenue options in the melting pot that it believes will keep ancillary revenue growth ahead of traffic growth for the next two years. It is also focused on taking out cost options such as window shades, seatback pockets and seat recline, which will help to give it the low-fare throne of Europe.

While Ryanair ruthlessly strips costs out, the airline consistently tops European on-time statistics, has fewer lost bags and fewer cancellations. For many passengers, that is a frill in itself.

Meanwhile, Europe`s legacy (full service) airlines are fighting back, cutting unit costs by an estimated 15 per cent between 2001 and 2003.

One airline that goes head to head with low-cost airlines (LCAs) on 70 per cent of its routes is British Airways. Outgoing CEO Rod Eddington has restructured the back office and window front website to match the LCAs, while maintaining its premium product on short-haul routes. The results are impressive, with BA reportedly achieving revenues per ASK (available seat kilometres) more than double those of Ryanair and 45 per cent higher than EasyJet.

In Germany, LCAs are aiming to capture business share by adding some targeted frills.

Germanwings gives corporate travellers special customer ID log-in to its website for bookings. Over 40 per cent of the airline`s passengers are business travellers and it has over 500 companies signed up with contracts.

Like Ryanair, Germanwings also targets ancillary commission revenue, with links to hotel chains and car rentals and it promotes special accommodation and car deals. On board, it returns to the strict LCA model, charging for snacks, alcohol and coffee.

LCA Air Berlin offers a comprehensive frequent flyer program with partners such as Hertz, American Express and Radisson, and serves hot meals on flights over 3 1/2 hours.

Chief executive Joachim Hunold attributes much of the airline`s growth to its new Euro Shuttle Service, which expanded across Europe from the original City Shuttle concept, connecting German airports with major European cities.

For the business traveller, Air Berlin`s highest tier frequent flyer card - Top Bonus Gold - provides plenty of frills. These include free seat reservation, extra luggage allowance, priority desks for faster check-in and an exclusive hotline to contact the service centre.

Not surprisingly, more than 100 companies have signed up and Air Berlin appears to be morphing into a legacy carrier while retaining its low-cost structure by embracing technology.

In the US, the opposite appears to be the case. MergeGlobal analyst George Hamlin says: ``Some legacy carriers have performed the extraordinary feat of reducing service levels below the offerings of the LCAs.``

Hamlin applauds airlines like JetBlue, which ``deliver great service, plenty of legroom and a seatback video``.

``What more could you want? On JetBlue and Southwest, you feel as if you are in control and as if you are getting value and that is a frill - and a thrill.``

US air travel consumer reports show that efficient baggage handling is 10 times more important to passengers than fares. Of all recorded complaints, 26.7 per cent related to baggage, while complaints about fares barely made the radar at 2.6 per cent. No surprise that the most profitable airlines - Southwest and JetBlue - have the lowest level of complaints in all areas.

On the other hand, Mr Hamlin expressed little sympathy for the nickel-and-dime approach taken by several legacy carriers that have eliminated minor frills - free bags of pretzels, for example.

``They are nibbling around the edges to save peanuts,`` he laments. And while some now charge for a bag of nuts, JetBlue is adding 100 channels of XM Satellite Radio to complement its 36 free DirecTV channels. ``All of a sudden, some legacy carriers are the no-frills airlines.``

In Asia, the dynamics are different but the need for frills to meet varying market needs is the same. For airlines such as Kuala Lumpur-based AirAsia, the frill for many Malaysians is the chance to fly for the first time, so in-flight frills mean little.

AirAsia has stuck rigidly to the Southwest/Ryanair model and now boasts the lowest ASK rate of US2.22c. The airline is also adding frills of a different kind, claiming the world`s first mobile phone booking service.

Following the AirAsia model is Sao Paulo-based Gol, which offers cheap fares for consumers who would not usually choose to travel by air due to the cost.

Its strategy is to operate point-to-point services at low fares in high-density competitive markets, such as Sao Paulo-Rio de Janeiro, while including multiple stops in non-time-sensitive markets.

The Australian market offers one of the more fascinating illustrations of the frills battle. Qantas, the world`s oldest independent airline, has faced numerous challenges from LCAs since Australia deregulated in 1990.

Today, it offers what is possibly the world`s best domestic airline service, with free hot meals, alcoholic drinks, newspapers and overhead IFE.

Its lowest fares are only marginally higher than Virgin Blue`s, helped by its commanding position in the high-yield business market.

When Qantas launched its own LCA - Jetstar - in 2004, Virgin Blue promptly announced personal in-flight satellite television in seatbacks for all of its 50 737-800s from October and a premium economy dubbed ``Blue Zone`` to lure corporate accounts.

Jetstar responded with digEplayer units, which may be rented for $10.

With legacy airlines in the US and elsewhere - with the exception of Qantas - charging for a packet of peanuts, it is not surprising that more and more frills-seekers are turning to the so-called no-frills airlines to get all the frills they want.