Two Industry Veterans Discuss the Low Cost Carrier Business Model and the Challenges it Pose for Legacy Carriers
The Low Cost Model Arrived in Nearly All Markets in the MENA Region… Is
it All Bad and what can Legacy Carriers do?
By Mike Halper & Sascha Feuerherd*
Some years ago when
one of the writers of this article was Group Marketing/Commercial Director of
Ryanair, he was asked at an airline conference, by the director of a very
large and successful European carrier, to give him advice on how to start a
LCC. His answer was short “Do Not!” the Director was somewhat taken aback.
After all, this
carrier already had regional subsidiary companies and therefore he was
perplexed with the negative answer that was given. However it was quickly
followed up by an explanation. And it is appropriate that the answer be given
here in full. “You as a large and successful legacy carrier, a world airline
have thought processes, regimes and methods of operation which are a total
anathema to a LCC. You focus on such areas as passenger comfort, service
reputation, class separation, airline reputation etc. You normally take major
decisions based on a board decision, which may inevitably take some time to
formulate, or needs to be in conformity to these pre requisites.”
The decisions of a LCC
are fabricated on very few pre requisites, they are "How cheap can our
fares be whilst still making a small profit on a large number of passengers and
what else can we sell them". The writer suggested to the legacy carrier
that this was exactly the opposite way that his airline formulated their
policies. The Legacy carrier took the advice and did not form its own LCC but
formed a quasi-independent carrier that had its own board, made its own
decisions, sort its own markets and even competed with the lower end of the
existing market of the legacy carrier. Only in very major decisions such as
major capital expenditure, such as aircraft acquisitions was the legacy carrier
consulted." This advice was taken and now the LCC subsidiary is a thriving
but still independent airline which compliments the policies of the Legacy
The first low cost
carrier was Southwest Airlines in Dallas, Texas with flights turning profitable
as early as 1973. Legacy carriers were aghast that it only gave it passengers a
packet of peanuts. It only operated 60 to 90 minutes sectors with very quick
turn-around times. The first European LCC was Ryanair, which one of the writers
joined in its very early years. The great advantage was that there was
therefore no history of the methods, policies and thought processes of its
major competitor Aer Lingus (who have now effectively become a “hybrid”-
offering traditional legacy carrier service on their Trans-Atlantic, whilst
competing with LCCs in Europe).
Today Ryanair is
constantly one of the most profitable airlines in the world. Known for its
innovative fare structure (one of the writers developed the highly regulated
but well publicized 1 POUND FARE). Ryanair in its first few years operated
short sectors and charged for everything. It also had the advantage of being
born when the World Wide Web was making its entry and fundamentally changed the
way that bookings were made and what other products could be sold on its web
pages. From the US via Europe, the low cost business model went to Asia (with
Air Asia probably being the best known example) and to the rest of the world.
We are now seeing the
birth of “hybrid” carriers, a good example is JetBlue in the USA. It has, like
RYANAIR and easyJet, extended its sector lengths from the original 60-90
minutes to 3-5 hours, this being the range of its equipment (either Airbus 320s
or Boeing 737/800s). JetBlue, like RYANAIR/easyJet and other successful
LCCs, follows the "KISS" principle but is now developing
interline agreements in order to capture more of the business market. The
business market is now a market that LCC’s are more and more targeting. A good
example is easyJet which recently announced that some 20% of its traffic are
business passengers, who are in ever increasing numbers looking for value for
money with little or no extras.
Another business model adaption from the original low cost model are the
longhaul low cost carriers like AirAsiaX or Jetstar. This business model has
its own peculiarities, which still need to prove successful.
POSITIVE SAMPLE FROM THE LOW COST AIRLINE BUSINESS AND THE EFFECT IT CAN GENERATEFor years and years this route was only operated by BA/AF. Annual traffic varied from circa 30-40,000, mostly wealthy people visiting 5 star hotels and or friends on the Côte d’Azur.
(Sample Market Liverpool/Manchester – Nice)
EasyJet approached Manchester airport to set up its second base there (after Luton) and was told by the airport management that there is no interest. So they approached the nearby airport at Liverpool-just 35 miles away, thus in the same catchment area as Manchester airport. EasyJet in its first year at Liverpool launched services to Nice-in its first year it carried 120,000 pax on this route whilst Manchester traffic stayed the same-i.e. it produced an entirely new market. Latest CAA figures show that annual Liverpool/Nice now fluctuates around 90,000. Manchester traffic has remained static. In other words EasyJet produced a totally new market for this destination.
If you visit the French regions of Provence, Dordogne, Aquitaine you will find that almost 100% of the property purchases in the last 10 years, have been made by Brits- indeed some villages are almost totally British .There is a simple reason for this. It can be traced to the entry of RYANAIR and EasyJet into the provincial airports in these areas. They have therefore contributed billions to the economies of these regions.
Prior to EasyJet moving to Liverpool, the Airports annual passenger numbers were circa 700,000 p.a. it is now circa 5million! Nearly all of this traffic is LCC generated.
The question is often
asked" what is to become of the mega legacy carriers and those carriers
which still adhere to the format and modus operandi that pertained
to the 1960s and 70s". Perfect examples are carriers that the authors are
regularly advising. Let’s call one of them carrier X; it operates a mixed class
configuration on its aircraft, it has several different type of aircraft in a
small to medium size fleet, it boasts it's long years of operations; it has a
massive board of non-executive directors; it operates from expensive city
center premises, it has interline agreements with a multitude of other
carriers and it is constantly losing market share to LCCs as well as
losing money…. You could go on and on and many carriers will find themselves in
many of the listed attributes.
question that we need to ask ourselves is: “is there any protection from LCC
carriers”? And the answer is: “There is no need for protection, but a need to
constantly check the business environment and to question if it might be
necessary to improve / change the own business model. Any attractive market
between A and B with a minimum passenger volume and supposedly weak competitors
being active in this market will rather earlier then later attract competition.
LCC airlines are famous of “smelling” such opportunities and take action very
quickly. This can well be seen in the Eastern European markets, where for
example Wizz Air is very active and bases aircrafts at various airports. These
low cost market entrants “create” new passengers (see box), but also “steel”
passengers from the established airlines. Since the authors of this article are
convinced, that the market entrance of low cost incumbents is a trend that
cannot be stopped, it is mandatory for the established legacy carriers to
consider their options.
There are several
- it could become a LCC or separate part of the business into a to be founded LCC
- it could become a “hybrid carrier”
- it could head for a performance enhancement exercise, question all cost and investment while at the same time increasing revenues wherever possible to ensure lean processes while keeping a full service concept
- it could carry on as it was and risk failing on single routes or in their entirety (not a real option!);
Since the typical
ostrich behavior (to put the head in the sand in case of danger and thus not to
do anything) is not a viable option from the point of view of the authors,
there are basically only three options (again with all different shades of grey
Within a short period it is probable that some existing LCC’s will
become hybrid in that they will no longer just go for the cheap and cheerful
but will adopt some of the policies of the legacy carriers but keeping to the
Similarly, some legacy carriers implement more and more of the lessons
learned from the low cost industry. The result is, that there is no black and
white anymore, but hundreds of different shades of grey. In parallel, the mega
carriers / alliances will further develop (but this does not necessary mean
that they grow in numbers of participants) and several carriers will simply go
out of business, as was seen in the past with carriers like SpanAir or Malev.
Shareholders and Governments alike are less and less willing to support
loss making legacy carriers in their constant rejection of the need to take
action. Who will be next to join the carriers that recently went out of
business? Who will actively approach this challenge and prepare for the future? * Sascha Feuerherd a leading aviation industry professional with over two decades of experience specializing in airline restructuring and implementation of cost reduction programs. Feuerherd was Senior Director with Lufthansa Consulting in charge for airline restructuring, more recently headed all airline consulting projects for IATA Consulting and now runs a boutique airline consulting company.
Mike Halper, a leading airline and airport professional and entrepreneur with over three decades experience; involved in a number of successful airline start-ups, held senior and advisory positions with leading airlines and an airport authority. Halper is currently a senior management consultant focusing on developing low cost airline operations and generation of ancillary revenues
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