Lecture Outline Background The Low Cost Airline Market Basic Business Model for Low Cost Carriers Developments in the Business Model Conclusions Air transportation Week6 Low cost revolution Dr. PO LIN LAI The Pioneer Background Pacific Southwestern Airlines were the pioneers, flying on high frequency in California. Southwest used them as their model. PSA was taken over by US Airways in 1988. In the US, deregulation sparked the no frills growth Southwest Airlines has led the way Deregulation has also been important in other regions Europe South East Asia However, the business model is increasingly being adopted globally Origins of Low Cost Airlines New Entrant Airline company established as a low cost airline E.g. easyjet, Southwest Airlines, Air Asia Scheduled conversion Scheduled airline converted to low cost airline E.g. bmibaby, ryanair Charter conversion Charter airline converted to low cost airline E.g. Hapag Lloyd Express Subsidiary A conventional scheduled airline sets up a low cost division E.g. Go, Song, Kulula, Germanwings Product features Fares Distribution In flight Frequency Punctuality Southwest Airlines Model Low Simple Point-to-point No interlining Travel agents and direct sales Ticketless (E-ticket) Single-class, high density No seat assignment No meals Snacks and light beverages only High Very Good Doganis (2001) 1
Southwest Airlines Model Operating features Aircraft Single type, three variants, high utilisation (11hrs/day) Sectors Short to average below 800km (500 miles) Airports Secondary or uncongested 15-20 minute turnaround Growth Target 10% per annum Maximum 15% Staff Competitive wages Profit sharing since 1973 High productivity http://www.airliners.net/search/photo.search?album= 5273 No Frills to Some Frills Loyalty scheme Automated check-in Airport lounges Premium cabin Free food/drink In-flight entertainment JetBlue Southwest easyjet Ryanair Virgin Blue Air Asia (Not Air Asia X) Kulula Doganis (2001) Source: Adapted from Rose (2004) Consolidation and Partnerships There has been some consolidation within the industry easyjet has bought Go and GB Airways Clickair and Vueling have merged Southwest and Air Tran merged in 2011 There are also signs of co operation between low cost and other airlines JetBlue and Aer Lingus, Lufthansa, SAA Virgin Atlantic and Virgin America Low Cost Long Haul The low cost model has been tried to transfer to long haul flights as well Do offer a basic level of service Key to delivering cost advantages is likely to come from higher load factors and lower wage costs Success has been mixed however Successful Jetstar, Unsuccessful Skytrain, Oasis Hong Kong, Zoom, Air Asia X Future operators V Australia, Ryanair Several factors work against the business model on long haul More uncontrollable costs get involved, such as en route costs and fuel burn yield drops dramatically with distance, especially in long haul. Scheduling freedom evaporates as airlines become subject to curfews, unsocial hours arrival/departure limits Crews need to be scheduled in different ways Airlines have to enter non core markets such as airfreight to generate revenues Several factors work against the business model on long haul Fleets need to introduce other aircraft types, raising complexity Legacy airlines can compete on price, as there is always an inventory at the back of the plane to deep discount Traffic right issues become obstructive Few long haul markets require and can deliver traffic on a regular, year round basis A feeder market starts to become essential when you enter smaller, more seasonal or directional markets. 2
Comparison between LCCs & regular airline The Low Cost Market Airline Ranking Apr-2010 Ranking Apr-2011 Passengers Rank Change Southwest Airlines 1 1 3,086,639,173 - Ryanair 2 2 1,958,531,669 - easyjet 3 3 1,206,703,963 - JetBlue 4 4 1,113,745,791 - Air Berlin 7 5 699,800,576 +2 GOL (brazil) 5 6 873,275,349-1 AirTran 6 7 744,217,440-1 WestJet (Canada) 8 8 597,642,887 - Jetstar Airways 9 9 548,116,604 - Virgin Australia 10 10 530,156,399 - Lion Airlines 12 11 389,514,849 +1 AirAsia 11 12 433,784,191 - Thomsonfly 14 13 341,367,538 +1 Condor 13 14 372,915,410-1 Norwegian 15 15 332,304,829 - Step 1: Choose where are you fly and the date Step 2: Choose how to pay your ticket Step 3: Many options for you Select your seat and how many bags you are going to check in 3
Step 4: check in 24 hrs ago Step 5: check in on the counter in the airport Step 7: try your best to get a good seat Step 7: try your best to get a good seat Low cost carrier in Asia Asian Market Share Open sky just start from early 2000 from Southeast Asia. In these 5 years, in North Asia. Another reason is airport competition Asia differs from Europe or the US is the lack of airport competition. Asia has few out of town airports. Even secondary airports can be much smaller than those of a primary city, as urbanization is heavily focused on capital cities. So, inevitably, LCC operations go head to head with national carriers. 4
LCCs in Asia Southeast Asia LCCs in North Asia In Japan, domestic LCC operations have followed a stuttering but upward trend in capacity, which will continue with LCCs expansion in the country. Skymark started from 1998 LCCs in North Asia South Korea s domestic and international markets have grown exponentially, and although domestic expansion has faded over the last three years with the availability of high speed train services, the international market still seems hungry for LCC operations. First one Hansung in 2004 (T way) in 2010 First LCCs Jeju air 2008. Conclusions Low cost airlines have grown as a result of the deregulation of air transport Their expansion has radically changed travel habits The sector is also categorized by a high failure rate Over time, the business model has evolved as airlines look to differentiate themselves 5