Low-cost airlines are all the rage in Europe. With rock-bottom fares that entice travelers from the chillier north to places like Barcelona, Nice, and Rome, such carriers have introduced Europeans to a cheap, fast mode of transport—a tangible benefit to consumers in the fitful march toward deregulation. As bookings pour in, the low-fare carriers are making ambitious expansion plans and placing large orders for new planes. Some are even earning profits that defy the cyclical nature of the airline business. Long-protected national-flag carriers are beginning to respond to the low-cost airlines, and capital markets are paying close attention to their business strategies, which many believe foretell the future of intra-European air travel.

It is easy to see why. In 2001, while most traditional players reported losses and some succumbed to the competition, Europe’s leading low-cost carriers were more than merely profitable: Ryanair and easyJet boasted operating margins of 26 and 9.5 percent, respectively—results that traditional airlines only dream about. In June 2002, Ryanair had a market capitalization of €4.9 billion ($4.82 billion), 45 percent more than that of British Airways (BA), which has revenues that are 20 times larger.

Expectations are high among some financial analysts, investors, and industry...