Kuwait’s Jazeera Airlines recently announced second-quarter results seemed in line with the great trends in recent airline history — the low cost carriers (LCC) can make sustainable profits. This is having a profound effect on the air transport business.
Some of the world’s most successful carriers, including SouthWest in the US and Ryanair in Europe are LCCs. At a time when many legacy carriers are struggling to operate profitably, the LCC is here to stay.
That is not to say that LCCs, too, if not properly managed and focused, will not struggle. We have seen LCCs come and go in the last few years — just as we have seen full service carriers come and go. In the case of Ireland’s Aer Lingus, we saw a legacy carrier come as a full service carrier and go as an LCC.
For a time, LCCs were considered as a flash-in-the-pan; likely to come and go without comment. Those days are gone. LCCs are a fact of life; part of the airline eco-system. It is the legacy carriers that need to take note.
All parts of an eco-system are required to adapt to establish and maintain equilibrium. Each must contribute, as LCCs do.
First, lower fares develop markets never previously able to fly. The economics of air transport are straightforward. If the price is low enough, people who previously never flew, or took the bus, fly.
The European aviation market is a classic example. Studies by OAG (Official Airline Guide), a company that publishes and analyses airline schedules, show that LCC market share went from three per cent to 16 per cent of all seats in the five years 2001-2006. The size of the total market also grew in that time.
The second positive role of the LCCs is to open new, lower cost, destination airports. This is based in part on the relentless search for cheaper alternatives. A certain economy with the truth about the naming of airports helps; Pisa being suddenly renamed ‘Florence’ for example.
Furthermore, LCCs realise that for a holidaymaker, sun and sand are fairly interchangeable. When you are lying on beach, what is the difference between Spain and Croatia? That is positive for Croatia, at least until lower cost alternatives emerge.
Thirdly, the LCCs have turned the airline conversation to costs. The LCC habit of charging a base fare and then charging for all other services; checking-in a bag, food and drinks — known as ‘unbundling’ — is now part of the industry’s vocabulary. Additional charges and fees are now a part of life for many of the world’s airline passengers.
Of course, all carriers want to be low cost. That goes without saying. Which is why LCCs themselves use expressions like ‘low fare airlines’ to describe themselves — it sounds nicer.
It may not sound as good but it is a good starting point to understand how the LCCs can consistently make money. For all the discussion about other cost savings — not having window blinds, not having reclining seats — the single most valuable asset in an airline is its fleet. Aircraft can only make money in the air.
Hence the LCC focus on boarding. If an aircraft flies 90-min sectors, taking 30 minutes on the ground, instead of 45 minutes, will over the course of a day create the time needed to fly more sectors. It quickly adds up.
This is why the more successful LCCs tend to fly shorter sectors, and to stick to shorter sectors. This is not only because there is a limit to how much time people are prepared to spend in a cramped aircraft. The longer the sectors, the harder it is for an airline to save time. Airspeed is set by external restraints. History is littered with failed long-haul low cost operators.
It also explains why the loading process is so beastly. You are herded into holding pens before the aircraft arrives and then released as soon as the previous passengers have disembarked. The CEO of Ryanair recently said he was interested in airframes with wider doors, to facilitate loading and unloading.
Spare part inventories
The second cost focus is also airframe related. By focusing on one aircraft type alone, LCCs can reduce their engineering related costs. They do not need complex spare part inventories. They can simplify training and other costs.
LCCs are here to stay, but legacy carriers are struggling to adjust. The competition has intensified, and the stakes, huge.
Network carriers lose short-haul passengers that historically subsidised their ‘spoke’ services to their long-haul hubs. Airline seats are perishable, so lower cost operators put incredible pressure on other carriers to meet their prices.
A balanced eco-system has many sorts of organisms. Network carriers can co-exist — look at the Gulf for inspiration. Network carriers must do what they do best, and LCCs what they do best.
Andrew Charlton is Managing Director of the Europe-based strategic advisory, government and public affairs firm, Aviation Advocacy