The Low Cost Carrier (Airline) model is heading towards a level of maturity, and new low cost airlines continue to start-up all over the world; although many should not be classified under the true definition and are doomed to failure from the start.
Is an LCC really a “low cost” model or a “different revenue” model. I would argue it is a different revenue model is the primary basis.
A true Low Cost Carrier model (LCC) has proved to be a very successful means to establish a new airline and looking for market share and growth. Price is always a good mechanism to attract volume growth. The biggest risk though for an LCC is not about strong competition from incumbent airlines but rather what to do when the growth slows.
A good start-up approach for an LCC is to look at either non-served or underserved origin and destination (O&D) markets. Southwest found plenty of market opportunity in the USA with the Hub and Spoke network design of US airlines.
The LCC model has proved to be one of the most profitable airline business models operating today. Many airlines struggle to understand how a low fare model can be profitable. The answer has many components for a successful LCC airline:
- Ancillary revenue
- Young aircraft fleet
- Fleet type commonality or single fleet type
- Strict fare rules
- Strict control of overheads
- High aircraft utilisation
- Airline growth
- Economies of scale
- Optimal use of flight and cabin crew
- Often use secondary lower cost airports
Many of the above points are not exclusive to LCC airlines and the Full Service model could learn a lot despite being considered a completely different market segment by some.
Despite the LCC model being around for many years with some very strong players, it doesn’t seem to stop the attractiveness of the airline business. Many people have a “I can do better” view which is often misplaced. There is no particular reason that airline businesses as a whole are marginal at best. The excuse of volatility in both demand and supply side are often the reasons given for the lack of good performance. It’s my opinion the biggest factors are a lack of good strategy and business planning and understanding and control of costs. To be successful in the airline business you need to be brave and have the necessary funding for the growth path, but above all else you need to have a good plan and know when to change that plan.
Many legacy airlines failed against the introduction of new LCC’s for no other reason than they didn’t know how to respond. As with any business maintaining market relevance and growth are fundamental characteristics to on-going success.
The term “Low Cost” is probably not a good way to describe this airline model remembering significant cost components such as aircraft, fuel and crew are fairly consistent across all airline models. LCC’s essentially have a different revenue model, and often being new businesses are not lumbered with legacy overheads.
Full service airlines typically have an all-inclusive fare structure and offer network connectivity. LCC’s on the other hand have a componentised fare structure where almost everything you expect from a full service airline is a chargeable add-on with an LCC. It is these ancillary revenue strategies that low cost airlines fill the revenue gap between a very low upfront seat cost and the cost of operation. LCC airlines typically don’t sell connecting flights, or if they do it’s at the passengers’ risk. The complexity and cost of providing connections I don’t think is well understood in the full service airline world. The risk of missed connections, mishandled bags, passenger re-accommodation onto other flights or into hotels are a big cost burden for full service airlines. Achieving good on-time performance is just as important for an airline to minimise cost as it is to get the passenger to their destination on time.
Low cost airlines keep their overheads low and charge extra for every add-on. This not only provides additional revenue but also establishes a discipline of managing cost at a componentised level. Extra service elements and costs aren’t added in the LCC model if a business case can’t support it. This is providing a culture of cost management.
Examples of Low Cost Airline add-on fees:
- Booking charges for use of call centres
- Booking charges for using travel agents
- Charges for requesting a specific seat
- Charging for baggage
- Charging to use check-in facilities
- Charging for in-flight entertainment
- Charging for in-flight food and beverages
- Strict “use it or lose it” fare rules
Using the above revenue tools combined with selling simple point to point journeys and lean overhead structures these LCC’s are often able to make greater margins over many full service airlines.
Many of the early LCC’s airlines are entering a maturity stage where they are now the “legacy airline” and are contending with a series of new start-up airlines testing the boundaries even further.
Full Service and Legacy airlines have struggled to contend with low cost start-ups. Although many of these full service airlines consider themselves in the “premium” market segment, they fail to recognise that they have a much larger mix of revenue. Losing the bottom 10% of economy/coach passengers to an LCC is often more than the margin these airlines achieve which asks the question “who is the most profitable customer?” if the losing bottom end results in negative earnings? The answer is that every customer and every dollar of revenue is important.
In my opinion there are some new airline models waiting to be discovered that will change the industry again and will bring much needed improved profitability to the industry.