Don't beat yourself up if you missed it, but a low-cost carrier called Now Airlines has just set a record of sorts: it went bust last month before making its first flight. Now was one of several dozen start-ups across Europe hoping to imitate the runaway success — and profits — of no-frills king Ryanair. But the Luton-based carrier went into receivership after it ran into problems completing its funding, and finally left an apologetic note on its website saying that the launch "has been deferred until further notice." It was the second rapid collapse of a low-cost carrier within a month. Ireland's JetGreen Airways, which was offering daily flights to Malaga and Alicante for as little as €1, shut down abruptly on May 12, eight days after its maiden flight.

Both Now and JetGreen came along a year too late. In the spring of 2003, major European carriers such as Air France, Lufthansa and British Airways (BA) were struggling through a slump brought on by the SARS virus in Asia, the war in Iraq and a general economic downturn. Budget airlines were soaring, as more and more consumers took advantage of rock-bottom fares. A report issued earlier this month showed that the cheapest available fares from London to a variety of European cities had dropped by an average of 66% over the past decade. Low-cost traffic grew by a whopping 40% during 2003, and discount carriers were expanding everywhere you looked.

But the tables have turned. Many big established carriers are gaining strength just as the low-cost sector is being squeezed. Some troubled flagship carriers, including KLM and Lufthansa, actually made money in the first quarter, while Dublin-based Ryanair lost j3 million in that period.

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nginx/1.14.0 (Ubuntu) Earlier this month, easyJet warned that its profits this year will be lower than it anticipated because of tough competition and rising fuel prices — news that sent its stock tumbling about 20%. Now is one of five low-cost airlines to have shut down so far this year, and many are predicting a lot more casualties. "There'll be a shakeout this winter," says Ryanair chief executive Michael O'Leary. "A lot of guys who are losing money will go bust over the next 12 to 18 months."

With a market capitalization of €3.5 billion, Ryanair still has by far the fattest profit margins of any European airline, but earlier this month the firm reported that its profits for the year ended March 31 dropped by 5% to €226.6 million, despite a healthy 47% increase in passengers. It was the first time in 15 years that Ryanair's profit had fallen, but O'Leary is relentlessly upbeat. "A rough market means we just make 20% after tax," he boasts. The firm's highly efficient operations ensure planes are filled and constantly flying with a minimum of overhead costs.

The low-cost sector continues to grow. This year it's expected to account for about 18% of intra-European passenger traffic. "There are still underpenetrated markets, such as Italy, France and Scandinavia," says Lucio Pompeo, an airlines analyst at McKinsey who expects annual growth of about 20% this year, or about half what it has been. But recent fuel increases threaten to cut into profits, and ferocious price competition is roiling the sector. Analysts say a 1% drop in the average low-cost fare has an impact of 9-12% on profitability. In its profits warning, easyJet said it was seeing "unprofitable and unrealistic pricing by airlines" that it expected to continue all year.

The major established carriers, by contrast, are benefiting from the worldwide economic upturn. The reason: economic recovery means an increase in the numbers of long-haul business-class passengers — the most lucrative clients. In addition, most big carriers used the downturn to cut costs aggressively, and are now reaping the benefits. Air France and KLM agreed to merge, anticipating that a combination of their operations could save as much as €500 million in costs annually by the end of the decade. Even before that deal was concluded, KLM swung from a net loss of €416 million for the year ended March 2003 to a net profit of €24 million. The turnaround at Lufthansa has also been striking: in the first quarter of this year, it made a net profit of €62 million, compared with a loss of €356 million last year.

There are notable exceptions. Italy's state-owned Alitalia has been burning through its cash and edging closer to bankruptcy. On June 11, auditors Deloitte and Touche refused to sign off on Alitalia's 2003 accounts and warned that the Italian carrier might have to file for insolvency. Swiss International Air Lines, successor to the collapsed Swissair, has lost €1 billion over the past two years. And fuel prices hit long-haul airlines hardest; several, including BA and Lufthansa, have already begun to levy a fuel surcharge.

But for the most part it's low-cost airlines that are bracing for tough times. Some are doing deals with one another to avoid overlaps. Hanover-based Germania Express, which started flying Fokker F-100s to 26 destinations a year ago, recently agreed to pull off routes from Germany to Vienna and Zurich as part of an agreement with rival Air Berlin. But overlapping routes are a small part of the problem: industry experts say that about 4% of routes flown by low-cost carriers in Europe have competition from rival discount airlines. "They are not competing against one another on a certain destination, but competing for leisure euros," says Olivier Fainsilber, director of the global transport practice at consultants Mercer in Paris. That's good news for consumers, but bad news for all the low-cost players. Few insiders believe JetGreen's and Now's spectacular collapses will be the exceptions this year. Warns Ryanair's O'Leary: "It will be very bumpy."

• PETER GUMBEL | Paris
• Europe's big airlines take off again; low-cost carriers get buffeted