the emergence and growth of no frills, low-cost carriers have radically altered the nature of...

Competitive Strategy for Low Cost Airlines

Chapter-3

• The emergence and growth of no frills, low-cost carriers have radically

altered the nature of competition within the industry

• Those major LCCs have exploited different operation methods to lower their

cost base and provide lower average fares

• In terms of strategic positioning, in order to provide low-fares the LCC

business model focuses on its distinct low cost strategy

• However, not all LCCs carriers are profitable, only the market-leading

operators are able to produce a consistent level returns above their cost of

capital


Introduction

• The term “low-cost airline” is for the first time used in the United States in

1949

• The first successful low-cost carrier was Pacific Southwest Airlines, which

pioneered the concept

• Often, this credit has been incorrectly given to Southwest Airlines, which

began service in 1971, and is the only one airline to have been consistently

profitable in every year of operations since 1973

• Today, Southwest Airlines operates more than 3,100 daily flights to 62 cities

across the United States, and registers yearly more than 80 million passengers

• What began as a small Texas airline, Southwest now has grown to become

one of the largest airlines in the United States


Origin of LCC – United States

• European history of low-cost airlines is much younger, but those airlines are

for sure trendsetters of the 1990s

• The expansion of LCCs in Europe coincided with the final deregulation of

the market during the 1990s

• Genuine low cost operations began in Great Britain in the 1990s with the

Irish company Ryanair (founded in 1985 and started operating flights in 1986),

which was patterned on American Southwest Airlines

• Following Great Britain, LCCs have successfully developed on the Continent

• In the year 2005, there are 60 low-cost airlines operating in Europe


Origin of LCC - Europe

• Prior to 2002, there were no significant low cost scheduled carriers

operating in the Asia Pacific rim• The initial slow development was in part due to the perception that the low

cost model adopted in the United States and Europe could not be replicated

in Asia, because of the longer aircraft stage lengths, lack of secondary airports

and regulatory restrictions preventing access to international markets• The latter being particularly relevant given that the bulk of traffic and

revenues are drawn from international markets in Asia• Thus, the low cost experience is a relatively new phenomenon in the Asia

Pacific rim with much of the necessary management experience brought in

from outside the region, for example, from Ryanair• Asian LCCs accordingly are in the initial growth phase of their development,

while many of their American and European counterparts are approaching or

have reached maturity


Origin of LCC – Asia Pacific

• Airline business models is shown in the following diagram• As this chapter aims to focus on the business model of LCCs, the origins and key features of LCCs business model are introduced in this section

Competitive Strategy for Low Cost AirlinesOrigin of LCCs

• According to the Statistics and Forecast (STATFOR) Service of Euro control, there is no

single best definition of low-cost carrier• However, it is general accepted that a low-cost airline, also known as nofrills or

discount airline, is such carrier, which offers generally low fares but eliminate most

traditional passenger services• The “low-cost carrier” business design could be defined by the following three key

elements as shown


Key Features of LCC Business Model

(a) Simple Product: No frills, Catering on demand for extra payment;

planes with narrow seating (but bigger capacity) and only a single class; no

seat assignment; and no frequent flyer programmes.

(b) Positioning. Non-business passengers, esp. leisure traffic and price-

conscious business passengers; short-haul point-to-point traffic with high

frequencies; aggressive marketing; secondary airports; and competition with all

transport carriers.

(c) Low Operating Costs. Low wages; low airport fees; low costs for

maintenance, cockpit training and standby crews due to homogeneous fleet;

high resource productivity: short ground waits due to simple boarding

processes, no air freight, no hub services, short cleaning times; and high

percentage of online sales.



There are two LCCs models: 1. Independent Airlines (e.g. Southwest, Jetblue, Ryanair, and Easyjet)2. Subsidiary of a legacy airline (e.g. Go, Buzz, Jetstar, Jetstar Asia, Valuair, and Tiger)In summary, the LCC model comprises:



• Low fares

• High frequency flights

• Point-to-point service

• No free meals or drinks on board

• No seat pre-assignment

• Short flights

• Flights using secondary airports.

• The first major problem that the low-cost sector had to face in the period

after 2004 was the dramatic surge in new capacity which was creating

substantial overcapacity in the market

• As mentioned earlier, There are over 30 LCCs have been launched since

2002 worldwide


Challenges for LCCs

• The second challenge being faced by low-cost operators after 2004 was the continued decline in yield or average fare• This was an inevitable consequence of over-capacity on an increasing number of routes• But it was also due to the new pricing policies of most of the conventional airlines as they fought back to hold on to their market share• Airlines such as British Airways introduced some very low aggressive fares in 2003-4, especially on routes or markets where they competed with low-cost carriers• This forced the latter to maintain lower fares than would otherwise have been the case• Price competition became most acute in markets where new-entrant low cost carriers tried to compete head-on with the established low-cost operators such as Ryanair or Easyjet• The result was that yields on the larger low-cost airlines declined steadily after 2000• Ryanair's average fare per passenger dropped from around €60 in that year to €46.50 in 2003, a decline of 22.5 per cent


Challenges for LCCs

• Controlling costs is the third problem area faced by low-cost airlines

• Rapid growth places an airline's management and organisation under strain, and

controlling costs becomes more difficult


Challenges for LCCs

• The fourth challenge, which also has cost implications, is whether and how low-

cost carriers should develop their bask model• While increasing competition between low-cost carriers will be creating downward

pressure on costs, such competition will also push airlines to try to differentiate their

product. This may well mean higher costs

• With so many players in the European low-cost market and with aggressive pricing strategies by conventional carriers, low fares may no longer be a sufficient differentiator• Low-cost operators will increasingly try to brand themselves and differentiate their product as they have done in the United States

the emergence and growth of no frills, low-cost carriers have radically altered the nature of...

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