The Rise Of Low-Cost Carriers

With front-page headlines and online forums clogged with airlines announcing everything from new routes to code sharing to lower fares, the airline industry seems to be permanently in the news. But lurking behind these glitzy PR exercises is the fight for air space, which is getting tougher with airline companies bogged down by shrinking profits, economic uncertainties, risings costs – particularly of fuel – and the entry of new players – specifically low cost carriers (LCCs).

Just 25 years ago, state-owned hub- and-spoke carriers (HSCs) dominated the aviation industry and few were familiar with LCCs. Things slowly changed,
especially after 2008, when the global debt crisis led to the emergence of cost- conscious consumers, thus fuelling the popularity of LCCs.

Evidence of this is everywhere. Even in the Middle East, low-cost travel accounted for just seven per cent of the region’s total passenger traffic in 2009 and now – three years later – has grown to represent 10 per cent of the market, according to low-cost player flydubai.

This not only shows that the demand for LCCs is on the rise, but is also reflective of the change in perception of low-cost services and its long-standing disassociation with safety and quality of service. In the current market, passengers on LCCs are not necessarily those of a lower income bracket, but also those who want to make the most of their money. With more and more passengers – including business passengers – choosing low cost travel solutions, LCCs have gained wider recognition as a viable alternative to traditional airlines.

Telling of this development and traction are LCCs such as Air Arabia that continue to outperform the market. In Q2 this year, for instance, the airline served 1.3 million passengers, a 15 per cent increase from last year.

So is LCC growth sapping the profitability of 20th-century’s dominant aviation companies and diminishing their importance?

BIRD’S EYE VIEW

The central premise of the answer lies in how low-cost carriers actually work. HSCs have inherited high costs due to their salary structures, frill-services and the hub airports they operate from. Since new entrants need to compete with already established incumbents, their initial point of departure is lower costs. This can only be offered if LCCs manage costs effectively, by flying short-haul routes, focusing on point-to-point traffic, flights to secondary airports, fast turnaround time, using a single type of aircraft, a single passenger class, one cabin, and processing a large share of sales via the internet and call centres.

Secondary airports, for instance, enable LCCs to maintain costs that are on average 20 per cent below those of traditional airlines, partly because of lower operating expenses associated with their location outside major metro areas.

In North America, Europe and Asia there has been an ongoing expansion of such secondary airports, which not only help LCCs maintain low fares, but also support the economic development of the cities in which they are located.

Adel Ali, group chief executive officer of Air Arabia says, “Our approach of using secondary airports around the region to maximise the range of our fleet of Airbus A320s has translated into more market coverage, thereby expanding our routes.”

Even in terms of airfares, while traditional carriers offer an all-inclusive rate, LCCs tend to operate an unbundled proposition. A case in point is
flydubai whose fares cover basics, such as the price of a seat, taxes and hand baggage, while everything else, such as checked baggage, extra legroom seats, in-flight entertainment and refreshments on board, are offered as optional extras.

This allows passengers more flexibility and choice over the services they want and, ultimately, control over the final ticket price.

There is also a huge product differentiation between LCCs and HSCs.

For example, the three big Arab airlines – Emirates, Qatar Airways and Etihad have fleet sizes better suited for international services, as compared to say flydubai and Air Arabia, which are more frequency driven and serve 50-plus cities in smaller fleets. Local LCCs thus target destinations within a five-hour radius of Dubai, whereas traditional carriers mix regional destinations with long-haul routes.