First published in ITIJ 95, December 2008
What do America’s JetBlue and Sun Country, Africa’s Atlas Blue and SA Express, Asia’s Air Deccan and One-Two-GO and Europe’s Air Berlin and Flybe have in common? – They are all low-cost airlines and see travel insurance as a useful component of their bottom-lines, as Roger St. Pierre explains
A simple £1 coin – or rather the internet equivalent thereof – took me to a blind date in Sweden. For the same price I took another flight to Bilbao to see the Guggenheim. The advent of budget, or low-cost airlines has been a phenomenon that has revolutionised the way in which people travel.
It all started with America’s highly successful South West Airlines, back in 1971. That pioneering company, with Rollin King and Herb Kelleher at its helm, turned its first profit within two years and carried its millionth passenger in 1974. It’s still the largest low-cost operation in the US, with 57 million passengers a year and more than 2,600 flights every day, but now has more than a dozen copycat rivals for its nation’s airspace, including Allegiant, Airtran and America West.
Asia, where the low-cost business model has been most keenly adopted in recent times, has 24 airlines at this end of the market while in the UK more than 80 million low-cost seats are now sold each year.
The business model is simple: cut the frills, encourage people to book online (easyJet have attained a 90-per-cent usage rate for that cost-saving process), charge for add-ons like food, drink and even luggage, fly into secondary low landing fee airports, get the aircrew to clean the plane to speed up turn-around times and, above all, keep those aircraft in the air.
But given some recent high profile collapses, including XL, Sterling and Zoom, and a predicted 2009 loss of more than £60 million and a savage cutback of routes for Ryanair, which has till now boasted the must extensive network, is the bubble about to burst?
The advent of budget, or low-cost airlines has been a phenomenon that has revolutionised the way in which people travel
“No!’ avers the Irish-based company’s controversial and never less than aggressive boss Michael O'Leary, adding, “Mounting fuel costs and landing fees mean we have to look increasingly for not only cost reductions elsewhere but for peripheral revenue streams that can make all the difference.”
This is where bolt-on travel insurance enters the picture. Says Ben Smart, head of business development at Mondial Assistance, which provides the insurance products for easyJet, Ryanair’s big rival: “We played an important part in helping easyJet to attain record profits in 2007, with a hike of 48 per cent to £180 million.”
Adds Aimee Charlwood, who heads the contract for Mondial: “The quality of products and services that Mondial Assistance offers mean we have been able to build a strong partnership with easyJet, offering online insurance to its customers. Travel insurance has been one of the drivers of the growth in ancillaries for easyJet and we have been able to ensure that they can offer their customers quality cover across Europe.”
There’s plenty of potential business to be drummed up. A recent American Express survey reveals that 24 per cent of Britons travelling abroad do so without any form of travel insurance cover and the figure is higher for many other nationalities.
Comments Chris Rolland, head of AmEx insurance: “As the credit crunch bites, the cost of living rises and there is ever less money left over at the end of each month, travellers are reducing their expectations and, rather stupidly, travel insurance is one the things too many opt to do without.”
It’s likely that the more prescient of such travellers will opt for cover as part of their airline deal, though, while this is usually cheaper, it too often provides insufficient cover or, some claim, no real cover at all, thanks to a raft of often Draconian exclusions.
Ryanair offer single trip cover for from £6.50 (€6-50) for their own flights and £10 (€12) for non-Ryanair flights, with coverage of up to 80 days, and annual policies at £39 (€54). However, are such policies always worth the paper they are printed on? (if you should print them out, that is!).
Travel insurance has been one of the drivers of the growth in ancillaries for easyJet
Despite the fact that travel insurance is automatically offered with every Ryanair ticket sold – and most of those transactions now take place online – it seems that only UK and Irish residents are actually covered. Many of those who do not qualify are effectively being misled into taking out and paying for a non-valid policy through failing to uncheck a tick box during the online check-in thread.
That’s a scam which originated with Frontier Airlines, in the States, and has been the cause of much customer complaint on both sides of the Atlantic.
Colorado-based Frontier, whose policies are issued by AIG Travel Guard, switched its online ticketing process from an ‘opt-in’ to an ‘opt-out’ action.
Comments a correspondent on the complaints.com website: “This is a sneaky little change that you are not aware of until you print out your receipt and it informs you that you have purchased travel insurance. If you call the Frontier Airlines’ customer service department the rep agrees it’s a bad change but says the policy cannot be cancelled over the phone to them. You have to call the insurance company directly. When you call their 800 number you are informed that you have to send an e-mail with the policy number.” The customer continued: “However, your Frontier receipt does not give the policy number and you have to wait for the AIG confirmation to arrive before you can take any action to recover your money.” Given the relatively low cost of US$10.95, most customers simply shrug and put it down to experience.
Traveller Geoff Jones, of Cambridge, spotted another anomaly: “Ryanair offer a policy that purports to cover ski hire and my own equipment. However on reading the small print, I discovered that it states ‘there is no cover under the policy for any activity that requires a degree of skill or entails a greater risk’. “This would seem to mean that the minute I use skis, an activity that involves both these things, I am no longer covered. Does this mean that if I break a leg while skiing I get nothing? Similarly, it could be argued that driving requires a degree of skill, so would a motoring accident not be covered, even under the company’s Gold policy, which includes collision damage waiver, though only for vehicles hired through Ryanair.”
It’s not surprising that the budget airlines want a slice of insurance revenue: “Ancillary revenues are a key aspect of the business models of all low-cost airlines,” says an easyJet spokesman, adding, “We make an average £3.32 profit per seat filled, so obviously our margins are very tight and we have fought hard to maximise the add-on potential of such earners as travel insurance. Between 2004 and 2006, we grew our annual ancillary revenues from £61.7 million to £131.3 million.”
Ryanair had even greater success, raising its ancillaries from £101million to £176 million over the same period. Their aim is to keep their headline ticket prices low, a sure-fire way of attracting customers and make their profit on add-ons that are often far from being bargains, Ryanair, for example, offers a Ford Ka for 24 hours from Hertz at £37.31 that can be rented for £13 less if you go to Hertz direct, and wants £267.65 for a Thistle Hotel room that can be booked for just £130 if you go through the hotel’s own website.
With a bag check fee of £16, £8 in personal check-in fees and an £8 fee for paying by debit card, Ryanair really pile on the extras, making the actual ticket cost almost an inconsequential item.
“Travellers are concerned at such add-on costs but these days are even more worried about airline and tour operator failures, all of which spotlight the need for adequate travel insurance,” says Paris-based travel organiser Pierre Maisonneuve,
Moving with the times
Responding to the concerns highlighted in UK government and Civil Aviation reports into airline failures and their effect on the general public, easyJet and Mondial introduced Scheduled Airline Failure Insurance (SAFI) in their policies. Says easyJet’s spokesman: “The airline industry is increasingly competitive and the current economic climate is not encouraging. Customers need as much protection as possible and SAFI helps.”
Airline bankruptcy is an all too present danger these days, Danish-based Sterling, which collapsed in October, flew to 40 destinations across Europe, with a fleet of 27 Boeing 737 aircraft hubbed out of Copenhagen, Oslo and Stockholm. The company’s Icelandic owner, Palmi Haraldsson, had injected 444.5 million Danish crowns (US$74.6 million) into the company but ever-rising fuel and expansion costs and the Icelandic economic meltdown grounded the operation.
Travellers are concerned at such add-on costs but these days are even more worried about airline and tour operator failures
Things are tricky in Eastern Europe too. Air Polonia has already gone, unable to pay US$800,000 in aircraft leasing bills, and Jozsef Varadim, president of Hungary’s Wizz Air, has given a stark warning: “Air Polonia has been the first to go down but I predict it will not be the last to fail this winter. All the region’s low costs are currently running on losses and only the companies that are the strongest financially and have the best cost structure will survive while the rest will die. Happily, thanks to a €25-million cash injection, my own company is operating on a stable cash basis.”
Over in America, ATA, which was responsible for 39 per cent of the 17 million passengers flying out of 14 dedicated gates at Chicago Midway Airport, has failed for Chapter 11 bankruptcy protection.
But with people still wanting to travel yet anxious to contain their spending, the demand for low-cost flights shows no sign of abating and passengers can now buy for £4 an InsureFor policy that will pay out up to £5,000 in the event that the airline they have booked with goes bust.