Airlines: Finding the perfect balance between full service and low cost

The news that Jazeera Airlines was interested in Kuwait Airlines was interesting. My quote in the article that broke the story made me look quite negative. But on balance, given a week or so to reflect on the potential transaction, I remain open to being convinced that it is a good idea.

Or, perhaps more accurately, I can foresee a number of very significant issues with the transaction and the on-going operation of the combined entity that will need real, hard, thinking to solve. If a combined Jazeera-Kuwait airline can address these issues then the sky is the limit.

The fundamental issue is that the underlying business of long-haul, full service aviation is not the same as that of a short-haul, low cost operation. That sounds so simple as to defy logic, but sometimes, it is the simple stuff that catches you out. And some of the issues that it raises are very simple but fundamental.

In a long-haul operation the aircraft will occasionally wait for passengers arriving from a connecting flight. In a low cost operation, the passengers wait, not the aircraft. The reason for this is simple when you think through the economics, but it is hard to explain to passengers that have missed a connection.

For a full service airline that offers connections from short-haul flights to long-haul flights — the classic network carrier model — the connecting passengers are the raison d’etre of the operation. A low-cost carrier is point-to-point. It makes money from flying aircraft, not from leaving them sitting on the tarmac waiting for passengers. The economics of a low-cost operation require rapid turnaround at airports and getting the aircraft back into the sky.

By forcing that rapid deployment it is possible to get more sectors into each day of operation; again, increasing the potential to make money. That benefit is lost as the sector length increases, probably the underlying, but often overlooked reason why long-haul, low-cost operations are so rare.

The second big difference between these two business models is product. Full service carriers offer to transfer your bags for example. Low cost carriers expect you to make your own connections, including do your own check-in and to collect your bag and recheck it in if you are building your own connection. Passengers on full service airlines rather like being fed, and some, bless them, want to travel in more space in business or even first class.

Each of these business models is fine, and there are a number of very successful examples of each in operation around the world and in the Gulf in particular. Passengers understand what they are getting when they buy one or the other product. When they are separate, and resolutely so, there is no issue. The big risk is hybridisation.

That said, there is a trend to a new category of airline, the hybrid model, around the world. Easyjet, for example, in Europe, now offers allocated seating — an anathema to the fiercely cost-conscious low-cost carriers such as Ryanair. It requires a system to do the allocation for a start, and risks slowing down the boarding process.

Jetstar in Australia offers something resembling a business class product. This is necessary to allow for transfers from their full service brother Qantas. It is necessary, but it adds cost. Jetstar will also transfer baggage — another cost item.

In fairness to both of them, and notwithstanding my concern about the risk of operating the two business models side-by-side, both these airlines are successful. But, Easyjet operates just one, focused, business model and Qantas, the full service airline to Jetstar’s lower cost model, has struggled in recent years, as Jetstar has gone from strength to strength.

On the other side of the ledger, in the United States, Republic Airlines, the holding company for two very different business model airlines, Republic, which operates regional connection services for network carriers, and Frontier, a low-cost carrier based in Denver, continue to disappoint the market. It is clear that it is very hard to find significant cost synergies. Consequently, Frontier is now for sale.

It is much too early to abandon hope, or to write the proposal off, but the lessons seem clear. There will need to be some very serious focus on what happens next. Options might include creating one single hybrid entity, or retaining two entities with the vigilance of a hawk to be sure that there is no leakage of cost additions from full service to low cost, and no leakage of product diminution from low cost to full service, whilst finding cost synergies and other benefits behind the scenes.

What is clear is that it will take clear, focused, out-of-the-box thinking.

— Andrew Charlton is managing director of the Europe-based strategic advisory, government and public affairs firm, Aviation Advocacy