Is the sky the limit for low cost airlines?

FANCY a trip to Dublin? That'll be £1.99 please. No, you didn't hear it wrong. That's just £1.99. True, that's only one way, and taxes will take the total over the £20 mark - just - but the flight itself could cost you less than the price of a pint.

The rise of the low cost airline has been the travel phenomenon of the last 15 years. Before the advent of Ryanair, EasyJet, Go and their budget brothers, the idea of popping over to Dublin for a night or two, or Rome or Prague for that matter, was unthinkable for most people. Now, we all know someone who's taken a no-frills flight, and a weekend in a European capital is almost compulsory for stag or hen parties.

And so far it's a trend that shows no sign of slowing. Yesterday, Ryanair announced yet another record month for passenger numbers. More than 2.1million people flew with the Irish carrier in August, a 44 per cent increase on August 2002. Although its figures have no doubt been helped by its acquisition of Dutch rival Buzz earlier this year, it seems our appetite for cheap flights - including those £1.99 deals from Teesside to Dublin - shows no signs of waning.

To a large extent, their appeal is obvious: it's because they're cheaper, certainly much cheaper than their rivals when they first came into the market. The likes of British Airways and British Midland have cut costs now, and in some cases are actually cheaper, but when the no-frills carriers burst onto the scene, many of their routes were virtual monopolies, so the traditional airlines didn't have to bother. British Airways could charge £300 from Heathrow to Berlin, safe in the knowledge that the only alternative was Lufthansa, who also charged £300.

"That allowed low cost airlines to take quite a few passengers away from the established airlines, but it also allowed them to get at a new market, people who would otherwise have gone by coach or not gone at all," according to Alexander Campbell, business editor of industry bible Flight International. "The weekend break in Europe is no longer just for the fairly prosperous."

Deregulation in the late 1980s made it easier for new airlines to enter the market, with low prices their unique, some would say only, selling point. But while the 'no-frills' tag famously means no in-flight meals, saving on food is not the reason why they can sell seats so cheaply.

Much of this comes down to operating out of cheaper, non-congested airports, such as Teesside or Stansted. These may sometimes be less convenient - Bergamo, an hour from Milan, or Hahn, a similar distance from Frankfurt, are on the Ryanair list of destinations - but they represent a considerable saving in airport charges. Flying one sort of aircraft makes scheduling cheaper, and a low cost airline will get 11 or 12 hours a day out of each aircraft, when the industry standard is nearer eight.

"Forget about serving in-flight meals, that helps but it is not a major cost. The key is getting 50 per cent more out of an aircraft and cutting turnaround times," says Mr Campbell. "The big carriers, like BA, are now trying to use as many low cost tricks as they can, but there are elements they can't use."

One advantage of the low cost airlines is they don't run a network of flights. If you want to go from Newcastle to London and then London to Paris, they will get you to London, but if that's not in time for your Paris flight, then tough luck. BA doesn't have that luxury. If you buy a BA ticket to Paris, they will guarantee to get you there if they're at fault for you missing your connecting flight.

Budget airlines also operate with the minimum number of cabin crew - helped by no requirement to serve meals - and cut costs further by bypassing travel agents and even minimum wage call centres. Ryanair sells 94 per cent of its seats through the Internet, while EasyJet - which swallowed Go last year - manages 95 per cent. No commission plus minimal administration equals healthy profits.

All this accounts for a dramatic turnaround in the aviation picture. Five years ago, BA carried 35.6 per cent of the 105 million passengers who went through British Airports Authority airports, and none of the budget airlines featured in the top ten. For the 12 months to March this year, BA had 28 per cent of the 127 million passengers, followed by EasyJet with 8.8 per cent and Ryanair with 7.3 per cent.

But the question is, where is this going? Can the low cost market keep expanding, or will the bubble burst? And what does this mean for the full-service carriers? Will they be forced to cut their prices or face being driven, or rather flown, to the wall? Ryanair chief executive Michael O'Leary is on record as saying that low cost airlines will own the European short-haul market in five years, although Flight International's Alexander Campbell says this seems over-optimistic. Some passengers, even for short-haul flights, will continue to use full-service carriers, either because they like it or because they need to get a connecting flight.

It is also easy to exaggerate the success of low cost airlines. Although they are still showing significant growth, they still account for just five to ten per cent of traffic in most countries, Britain being the exception. Ryanair may be the largest European low cost airline, but it is still smaller than most national carriers

There is also the question of how much the airlines themselves can make it happen. Ryanair is predicting continued growth, but is also forecasting falling yield: the revenue per passenger per mile. Thus, while they aim to be carrying more and more passengers, they also aim to charge less and less. How long they will be able to keep this up is a moot point.

But there are also sizeable untapped markets, even within the short-haul arena which is likely to prove their limit. Many Eastern European destinations are as yet undiscovered by the budget boys, as are Greece, the Greek Islands, and the Dalmatian coast.

"There is a lot of room for growth in continental Europe," says Mr Campbell. "And the reason they're going for passenger growth at the expense of financial stability is because they want to stake a claim now. It is very difficult to be a successful low cost operator on a route that has already got a low cost operator."

The future, he says, is likely to see a consolidation of a two-tier fare system. Passengers looking for the best deal on price will have the low cost carriers fighting for their business, but there will remain a market for the traditional airlines. Some passengers will still hold convenience and comfort as worth the extra.

"It is unlikely low cost airlines are going to single-handedly drive the major airlines out of business, although we will see more growth," says Mr Campbell. "The people who might suffer are the charter carriers. People are moving away from charter holidays, although they were doing that even before low cost airlines came along.

"But low cost airlines are keeping passenger numbers going up despite the crisis after September 11, and they're experimenting with ways of making air travel cheaper. That is a very welcome trend for passengers, and it also means people like BA are having to adopt low cost tactics in order to compete." So far at least, it looks like budget airlines are leaving us all quids in.